Target of a Trade War
By the middle of 2009, the U.S. economy had already driven off a steep financial cliff, with the rest of the global economy screaming in the back seat.
It was perhaps an odd moment for TGV Partners, a boutique private-equity firm, to think about buying Horton Archery, a leading American manufacturer of hunting equipment swirling down the bankruptcy drain. American consumers were striking non-essentials from their shopping lists. Retailers were locking their doors and turning off the lights for good. International credit markets were iced over.
But TGV’s Geoff Moore and Mitch Vance saw an opportunity. Confronted by declining tax revenue, state and local governments, constitutionally bound to balance their budgets, were looking everywhere to boost revenue. In many states, one piece of that strategy was to extend the deer-hunting season several weeks on either side of the traditional Thanksgivingish start—to extend it only for hunters willing to track their prey in ways mostly recognizable to our ancient forbearers, armed with bows and arrows, including, now, crossbows like those manufactured in Ohio by Horton.
The expansion of deer season for such old-school hunters satisfied environmentalists—who might tolerate a sport that gives the hunted a fairer shot at escape and still controls deer populations. And the expanded-season hunting license offered a new source of revenue for squeaky-tight county and state budgets. Everybody won, it seemed, except for the fur-covered, four-legged guy with the antlers.
TGV was betting that the market for crossbows would boom. And it did—at upwards of 20 percent, Moore figures. “Across the next three years,” Moore says, “we had one state after another extending the special season, and that increased the potential crossbow market by almost 10 million hunters”—hunters who might become potential Horton customers.
“There was almost no other consumer category growing like that,” Moore says.
Then, just as it did for Bambi’s mom, everything went red for TGV’s crossbow business—a victim of global supply-chain problems it inherited but did not immediately grasp and a U.S. trade war it could not have foreseen.
“It was that classic situation where, as you get older and encounter a problem, you say, ‘I’ve dealt with all these situations before and handled them,’” says Vance, one of TGV’s founding partners, “but never all of them at once and for so long.”
IN THE BEGINNING, it was all happy hunting for TGV. Founded in 1990, the boutique firm staffed by brilliant financial guys already had a record of extraordinary investments. One of the firm’s early deals came in 1990, with the $44 million buyout of Manischewitz, the company whose food products including matzo are Jewish staples. When TGV liquidated its holdings six years later, Manischewitz’s valuation had risen to $65 million. TGV parlayed its $42 million purchase of Empire Kosher Poultry in 1992 into a $95 million sale in 1997.
But the deal that had TGV thinking about mounting deer heads on the walls of its Newport Beach, California, office was its 2004 purchase of Thompson/Center Arms, the fifth-largest manufacturer of firearms in North America, and the leading maker of old-fashioned muzzle-loaded black-powder rifles. In partnership with the company’s senior executives, TGV bought Thompson/Center for $40 million; three years later it sold the business to legendary Smith & Wesson Holding Corp. for $102 million.
Horton Archery “was so much like Thompson—the same marketing, the same distribution, the same sales channels,” Moore says. Under TGV, Thompson/Center sold single-shot rifles to the very customers (including such big-box retailers as Bass Pro, Dick’s Sporting Goods and Cabela’s) and consumers (hunters) who would buy Horton’s crossbows. And there was this historical parallel: “About a decade before, the black-powder rifle market experienced extraordinary growth as states added special seasons for muzzle-loading hunters. Now the same dynamic was being repeated in the crossbow hunting segment.”
And TGV had a special weapon in Gregg Ritz, Thompson/Center’s CEO and TGV’s partner in the Thompson/Center acquisition. Ritz is one of those rare men who does not at all look preposterous wearing camouflage and kneeling in a dun-colored field under a slate-colored sky while holding the young-adult-sized antlers of a beast he’s just knocked down or while propping up the apparently grinning, man-sized ram he’s shot through the heart. And Ritz was—you’ll pardon the mixed-animal metaphor—bullish on the crossbow business. He would head the new Horton Archery.
The Wall Street Journal reported the late-2009 sale was about $5 million for a company that produced roughly $15 million in annual revenues.
“When you cut all the way through it, it was a regulatory-driven growth play. And we tried to repeat the success we’d had with Thompson/Center,” Vance says. “It just seemed like a perfect fit.”
Except that it wasn’t.
SOME OF US LEARN THE WRONG LESSONS from our greatest successes. What TGV Partners learned from Thompson/Center’s manufacturing operations turned out to have little to do with the reality of running the 100-percent sourced, supply chain-driven Horton Archery.
Thompson/Center was a vertically integrated domestic manufacturer with a 600-employee plant in Rochester, New Hampshire, and no international supply chain. When TGV acquired it, Horton Archery was down to just 10 employees in Akron, and an unwieldy, recently outsourced global supply chain. While Thompson/Center produced almost every part that went into its rifles, Horton sourced parts for its shockingly complex modern crossbow—with upwards of 150 distinct parts—from scores of vendors around the world.
Says Moore: “We just didn’t appreciate the complexity of working with all those vendors on a seasonal production cycle”—a seasonal cycle that meant designing, prototyping, producing and delivering new models in a very narrow window, just before that extended fall hunting season. “Unlike Thompson/Center, we were totally the hostage—or the beneficiary—of third-party vendors.”
Nor did TGV completely understand the hellishness of the global supply chain it had inherited. Horton Archery was in bankruptcy because its previous private-equity owner had been caught short of cash in the middle of a grand plan to offshore U.S. manufacturing and supply to China. When TGV arrived with cash, expertise and enthusiasm borne of success at Thompson/Center, Horton was still using legacy software to manage its untested global supply chain and, in early 2010, already bumping up against the official opening of hunting season. That season is not, as you might believe, the appearance in fields and forests of orange-jacketed armies of bow hunters in September, but the neon-and-casino-bing-bong of the January trade show in Vegas, or the slightly more sedate February show in Salt Lake City, or the myriad, regional shows from Sacramento to Pittsburgh that launch new products in the outdoor business in the first quarter of the calendar year.
In retrospect, Moore says, it’s clear that TGV ought to have looked closely at Horton’s decision to move production to China. Instead, TGV pushed forward.
AT FIRST, “EVERYTHING went exactly to plan,” Moore says. The market for crossbows turned out to be “stronger and grew more quickly than we anticipated.” The January and February 2010 trade shows produced a bumper crop of sales based on new Horton Archery designs that looked splendid on paper.
And then Horton’s untested global supply chain nearly brought down TGV’s newest investment. The company’s legacy software system couldn’t manage its untried, elaborate vendor network. “Our database was littered with inaccurate parts specs and bad supplier-purchasing parameters,” Moore says. Horton’s half-established “master-sourcing” office didn’t master much. A Chinese GM, a bookkeeper, and a few employees in Changzhou—set up to manage communication and product flows between the new American owners with their new designs and just-in-time delivery demands, on one hand, and new vendors, on the other—broke down.
It was Global Trade 101.
“We immediately started having translation, time and distance problems,” Moore recalls. Language turned out to be more critical than anyone guessed it would be. The vast distances made communication and travel more difficult. The result: Parts were either badly built or arrived late—or both.
“What seemed really obvious, simple challenges became amplified and heightened when you started dealing with literally millions of different parts trying to come into tens of thousands of units to assemble,” Moore says.
Outside, retailers were hungry to feed the growing market for crossbows. “And we were there with 30 percent of our orders unfilled because of our Chinese vendors,” Moore says. “The market is growing up to 20 percent that year, and we couldn’t meet demand.” Missing parts appeared miraculously but late and had to be caught up with otherwise complete crossbows awaiting shipment.
Looking back on it, Moore says, “We should have leveled out the production cycle.” Instead of introducing annual innovations, selling and producing in just a few months before the seasonal sales cycle, that is, maybe Horton should have spread out the process over the course of a year or more. But just as the company learned the wrong—or at least very different—lessons from its wild success with rifles, it didn’t fully vet the mission-critical information system it had inherited and, most critically, failed to appreciate the risk associated with the unproven China supply chain that came with the company it purchased out of bankruptcy.
TOWARD THE END OF 2010, the first full year of operation, vendors began hitting their delivery deadlines. Parts fit and product shipped. “We thought we had China figured out,” Moore says.
And then Horton Archery made its third mistake: it introduced more change into the system.
“We had a better-functioning supply chain,” Moore says, “and then we brought out a new product.” The frantic global supply-chain fire drill began again in earnest—design new crossbows, sell those new designs while they’re still on the drawing board, produce and test prototypes, fix production problems, postpone delivery, play catch up.
“It was as much our fault as the China end,” Moore says. “We had these great designs and specs, with a level of detail that would have been sufficient if we were operating with a one-hour time-zone difference—if you have a problem, you know, it’s a one-hour plane flight or maybe a three-hour drive. But the distance and cultural difference amplified all the problems.”
The problems of 2011 sound like a rerun of 2010, and they killed the introduction of Horton’s state-of-the-art, unprecedented reverse-draw crossbow. The traditional crossbow is like a rifle stock with a horizontal bow at the far end. Because the weight is out there at the end of the stock, the conventional crossbow is a little unwieldy—certainly clumsier vis-à-vis Horton Archery’s new reverse-draw. On the new model, the bow is located on the stock above the trigger—about the middle of the crossbow. Even if you’re a non-hunting vegan pacifist you can appreciate the subtlety of that design, perhaps the most significant change in bow technology since our forebears tracked beasts that no longer roam the planet, or since the devastating deployment of huge numbers of longbows—six-foot monsters—by Henry V’s troops at Agincourt.
“Moving the weight like that created a revolutionary bow,” Moore says with evident and reasonable pride. “We were the first producer, and the leader by a long-shot in that new crossbow category.”
Celebrity hunter and Horton CEO Ritz was convinced the reverse-draw was the future. But the company was undone by its own innovation and subsequent global supply-chain demons. “We crippled ourselves, crushed our supply chain,” says Moore. “We left 50 percent of the demand on the table, simply because we couldn’t ship product. We knew we had great, patented designs, and we knew we had the dominant first-mover position in this new category”—a new category that was growing faster than the rest of the fast-growing crossbow marketplace, a new category that would go hungry for Horton.
EVERYTHING CHANGED AGAIN IN 2012. And because everything changed, you might say, nothing changed.
Horton Archery hired a new chief operating officer, a top exec out of the hospital-supply business, a man who knew supply chain and who came in with a strategy: forget China. Onshore all production in the U.S.—all design, manufacturing and assembly.
“He said, ‘Let’s shut down China. Get out of the wholly-owned subsidiary business, eliminate that layer of cost [and create] a more compressed supply chain,’” Moore recalls.
The company applied the painful lesson of 2011: in 2012, it would limit product innovation. Where possible, it would standardize components across crossbow models.
It seemed brilliant. But if you’re following along at home, you already recognize that, as they entered their third full year under TGV, Horton Archery was introducing more noise in the system, more chaos into its supply chain.
“It was as if we were back to being new again—or maybe more like ‘New Cubed,’” Moore says with perfect hindsight. “The company’s production was newly moved to China when we bought it. In some ways, it was new again in 2011 when over 80 percent of our sales came from new products. And it was new again, for the third time, in 2012 with a new U.S. supply chain. You look at that and you say, ‘Were you out of your minds?’”
Problems quickly emerged with the new U.S. vendors. In testing 2012 post-production models, Horton found bowstrings snapping—literally kertwanging in the process of being drawn back. That led them to investigate the cam—what you and I might call a pulley, a little wheel at each end of the bow’s outstretched arms, around which runs the bowstring. When drawn back to fire, the crossbow generates tremendous force on several key parts—the arms, the cams, the string itself; when released, all that force rockets the arrow at something in excess of 200 miles per hour. Close inspection revealed tiny abrasions on the U.S.-supplied cams. Horton voluntarily recalled several thousand crossbows dispatched to retailers’ warehouses. The company scrambled, ordering immediate delivery of cams from old vendors in China—at a huge markup in manufacturing and air-cargo costs.
Even that wasn’t the end of Horton’s supply-chain terrors. With the re-machined cams fixed and the reverse-draw crossbow shipping out to retail warehouses, internal testing discovered yet another problem, one that “as much as anything,” Moore says, “sank us.”
To understand that problem, you have to understand something about the physics of crossbows and the inexpensive mechanism manufacturers use to keep the weapons from dry-firing—that make it impossible to draw and fire the crossbow without an arrow notched in the bowstring. Dry-firing is a practice which, like nervously clicking a ballpoint point or rapping your knuckles on your desk or dry-firing an unloaded pistol, can produce a kind of comforting, satisfying snap. But dry-firing a crossbow unleashes so much force without any resistance—like a baseball player swinging for the fences and completely missing the ball—that it can shred the bowstrings and even wreak havoc upon the weapon itself.
Consumers who are new to crossbows will often dry-fire their crossbows—regardless of grim industrial warnings about the dangerous practice. So industry has developed a kind of safety mechanism to make dry-firing nearly impossible.
With cams fixed and the crossbows shipping to warehouses, Horton Archery discovered that its $2.50 anti-dry-fire device—Moore describes it as tiny spring inside a little metal box—did not work, or worked so well that when engaged would not unlock for anything.
“The problem came out of a China vendor,” Moore says. “We say it was wrongly installed; they say our specs were bad. They had the spring reversed. That was it.” On a more than $300 product, a $2.50 mechanism made in China with the spring installed backwards had “locked the bow so that it wouldn’t fire at all.”
There was an easy fix, of course, and that was simply to remove the anti-dry-fire mechanism and remind hunters of the dangers of firing an unarmed crossbow. “That proposed fix didn’t satisfy some of our big-box retailers” who, Moore says, worried about a perception of danger—“despite the fact that the dry-fire issue didn’t affect crossbow safety.”
It was already August. Opening day was just weeks away, in September. “And right then, in the middle of the selling season when we’re supposed to be refilling product orders because they’re so hot, we had to actually stop our production line and launch a field warranty repair program on about 20,000 bows.”
They cut a deal with two of their big-box retailers “to send our Ohio production people to these distribution warehouses just to change out a $2.50 anti-dry-fire mechanism.”
SOMETIMES, THE TRADE GODS make playthings of intelligent, honorable, struggling men and women. In the midst of resolving what Moore calls “self-inflicted” wounds to its supply chain, the U.S. government was acting on allegations that Chinese manufacturers were selling solar panels in the U.S. at “dumping margins ranging from 18.32 to 249.96 percent,” according to the Commerce Department.
The Obama Administration struck back with a series of measures aimed at everything connected with solar panels except the sun itself—and including the aluminum that went into the manufacture of Horton Archery crossbows.
There’s an old saying, sometimes attributed to ancient Africans but more recently employed by dramatic pro football, soccer and even cricket commentators: When elephants fight, the grass gets trampled. Moore recalls the day TGV was notified there was trouble at the Port of Los Angeles. A random inspection of Horton Archery’s inbound container of China-made crossbow parts had turned up aluminum covered by the federal government’s bland-sounding but lethal 120-page trade document, “Certain Aluminum Extrusions From China.” Horton, desperate for the $100,000-worth of parts in that container, could have them, Customs officials said, for a price: a “countervailing duty” of 170 percent of the value of the goods—$170,000—plus the same 170 percent duty on all similar products imported by Horton Archery dating back to beginning of hostilities in 2010.
“It’s hard for me to say whether the Chinese were dumping in terms of solar panel pricing—that’s what [the Administration was] going after them for, not the aluminum,” Moore says. But in the Administration’s broadband assault on what it called dumping, Horton was collateral damage—trampled grass, a victim of something no one could have foreseen. And if someone in the U.S. was getting huge discounts on Chinese aluminum products, it wasn’t Horton: “We certainly weren’t getting ‘dumping margins’ on those aluminum parts from China. In fact, for that identical part we had recently secured a second supplier in the U.S. who was quoting about 10 percent cheaper price than the China supplier.
“We just got swept up in a policy decision.”
Horton decided not to pay.
Along with supply-chain problems, Moore says, the Administration’s trade war with China meant “we were toast. We just couldn’t fill orders.” He figures the company failed to fill 25 percent of its booked sales that year. “And, once again, we ended another production season with too few finished goods produced, but millions of dollars of unused parts inventory. “Our bank lender was unwilling to advance further working capital loans,” Moore says, “and we had reached the limit on how much of our own capital we could risk on this business.”
In June 2013, TGV reluctantly let go. Horton’s assets, mostly its huge parts inventory, was sold to one of the company’s primary crossbow competitors.
THE HORTON ARCHERY EXPERIENCE was for TGV “a very painful lesson in what can go wrong in the global supply chain,” Moore says.
But in the middle of getting schooled, Moore and colleagues did at least one thing right, and they did it several times: as new information became available, as reality seemed to shift from moment to moment, they revolutionized their business model instantly—radically, dramatically, courageously.
“It’s true,” Moore says. “We shook up the Etch A Sketch a few times.”
The World Is His Orchard