We’re Going to Need a Better Boat

This is an iHeart Podcast. Guaranteed human. Run a business and not thinking about podcasting? Think again. More Americans listen to podcasts, then add supported streaming music from Spotify and Pandora. And as the number one podcaster, iHeart's twice as large as the next two combined. Learn how podcasting can help your business. Call 844-844-IHEART. Pushkin. One of the really striking things about technological progress is the way one breakthrough leads to another. For example, mass adoption of laptops led people to create better, cheaper batteries. Those better, cheaper batteries made it possible to build affordable electric vehicles. And then the proliferation of electric vehicles led people to create even better, even cheaper batteries. And those better, cheaper batteries are now leading to everything from grid-scale energy storage to flying cars. Of course, those advances, they don't just happen. People have to look at the world and think, I'm going to start with what exists now and build something new. One of those people is Mitch Lee. That very first time I won in a Tesla, my mind jumped forward two steps to this should exist for boats. it makes even more sense in marine applications because gas boats have all these acute problems with them they're loud they've got noxious fumes on them they're pain to maintain they're super unreliable they're expensive to operate and when you go electric you you end up addressing those acute pain points. I'm Jacob Goldstein, and this is What's Your Problem, the show where I talk to people who are trying to make technological progress. My guest today is Mitch Lee. He's the co-founder and CEO of ARC Boats. He grew up boating with his family in Northern California, eventually became a software engineer, and he founded ARC in 2021. Mitch's problem is this. How do you build electric boats that are better than gas-powered boats? And how do you do it at scale and at a competitive price? ARC is currently developing hybrid electric tugboats, and they're already selling electric wakeboats. Boats people can take out on lakes or rivers for fun. To start, I asked Mitch to tell me the first big problem that he and his colleagues had to solve when they started the company. The challenge is that boats consume a lot of power. Water is a thousand times more dense than air. which means that if you want to sustain a full day's worth of activity out on the water, you need to store a lot of energy on board. If you're going to go electric, that means really big battery packs. Those really big battery packs are the first order problem that you need to solve. If we say, hey, we want over 200 kilowatt hours of battery capacity, who can give it to us? We can't go to Amazon and just like buy one. So part of it is, does it exist? And you can't go to like Shenzhen, like there's not just somebody who sells battery packs to everybody somewhere? No. Okay. Because they tend to be very specific to the use case, the geometry that you want. And there are people that are trying to do this, but then the problem shifts to, okay, well, now they're cost prohibitive. And you almost have to bring them in-house to get the cost down low enough to be able to make your product competitive. What we do is we go to automotive suppliers, people that operate at an insane scale and have incredible quality standards because automotive operates at a much higher quality standard than marine. So we get to take advantage of all of those and then bring them into the marine industry. What are the particular challenges of building a battery pack for the water? One is just its size. the arc sport our wake sport boat today is 226 kilowatt hours battery pack that's three or four times the size of an electric sedan's battery pack that's kind of a sense of scale so we're a little bit constrained on mass we're not that constrained on volume we're very constrained on price if you go try to build a 226 kilowatt hour battery pack that can get very expensive very quickly if you are not driving really good economics behind the battery pack. So it's not a technological problem, but it's a techno-economic problem, really, that you're setting out to solve. Now, the mass does come in in the sense that it's not necessarily that you're mass constrained, but you now have thousands of pounds of battery pack that you need to place onto a boat. And where you place that, how you integrate it, how you offset the weight of that, how you support the weight of that yeah that all starts to become the second order problems that you need to solve so step one build really big battery pack it's heavy it's expensive now step two is go build the boat around that and and have it compensate for the weight for the price uh you know for the volume of it in a way that isn't just not compromising on the experience but is actually making the experience better. Same way automotive comes along, they build the car around the battery pack, and suddenly you have a frunk and a low center of gravity and all this performance that you unlock. So where are you now? Tell me about the boat or boats that you're selling now. Yeah. We, as a company, started on the consumer side and started with a product called the ARC-1. We called it kind of a luxury cruiser. It's got a novel seating layout. It's a lot of fun for lakes, rivers, that sort of thing. And that was really our pilot production, our test bed, the product that we use to go develop the technology necessary to make electric boats viable at a larger scale. And we took all those learnings from that program and ported it over to what we are now ramping production of, which is the ARC Sport. The ARC Sport's a 23-foot fully electric wakesport boat. If you go look out at a lake or river today, you're going to see families out there wakesurfing, wakeboarding, water skiing, pulling inner tubers. This is the type of boat that you do it with. We're ramping production of that right now. We've got a months-long backlog for the product. We're really just trying to keep up with the demand that we see for it. Yeah, what did it say on your website? It's something 2026. Is it summer? Like if I try and buy one now, when can i get one yeah we're we're working through uh basically the the last slots before summer of uh 2026 that seems like is that a good problem to have i mean it's better than nobody buying it i don't know is it is it what how is demand working for you yes it's a it's a good problem to have and it's still a problem yeah and and those two things can both be true it's the better problem to have versus nobody wants the product. It's still a problem in that we want to deliver great customer experiences to people and your summer season matters a lot. And so if we slip production targets by a few weeks, that can really impact somebody's experience. Yes. The difference between February and March, nobody cares about, but the difference between July and August is a big one, right? You got to be out there for the 4th of July or whatever. So we really emphasize that as a company and we try to not over promise to customers. And, you know, this is it's a balancing act that we're trying to strike. What's the what's the rate limiting step? I mean, you just have one factory or are you like supply constrained in some way? Yeah, we're supply constrained. One of the things that we're doing, well, from a business perspective here, what we want to make sure that we do in priority order is build a product that people love and want. Build a better boat, deliver better boats to the market. The next thing is make sure that we make money on those boats. And then the third is ramp production of them, ramp supply of them. In order to tackle those last two simultaneously, what we're doing is as the way that we're ramping production is that we're getting more efficient at production. Are you losing money on the marginal boat still? Is that what I'm inferring? No, no. We make money on the marginal boat. This is very different than automotive again. You will see many car companies. You don't have to sell a million of them to have. Exactly. Yeah. Yeah. We can make money even on the earliest units of them. But again, dissimilar to how the automotive industry works, which is very robotic, very automated production lines, boat building is much more labor intensive. It is a bit of a craft. Indeed boat companies have craft in the name sometimes right Exactly It is very much a craft I mean from a business standpoint that seems bad right Like that sounds like high unit cost to me when you say craft It is high unit cost. And you'll see that boats are actually quite expensive. So, yes, your boat is expensive, right? How much does your boat cost? It starts at $268,000 for the wakesport boat. Yes, I don't know anything about wakesport boats. And I was shocked by how expensive that is. That's shockingly expensive. Yeah. And the rest of the market is also there for the premium side of this market. So how many people in America buy a $300,000 boat every year? The marine industry is interesting for a variety of reasons. And in this market in particular, one of the things that you see is that, well, you look at your sedan market and you have your Honda Civics, your Nissan Ultimas, but then you have your Mercedes S-Class, your Model S, whatever it is. And you see the volume really favors that economy class sedan. And then it's a smaller peak of demand at that premium sedan class. In boating, it's the opposite. Well, because nobody needs a boat to get to work, right? Right. And if you have this house on a lake or a river, you care about, hey, I just want the best boat. You're probably rich, right? Yes. So you end up wanting to buy the best one. So the demand is actually at that higher end, which is why you see the prices go. And kind of going back to that roadmap, that business is what ultimately supports everything else that we're doing. We started here for a reason. It's a premium class of boat. It has moderate volumes to it. So we could really scale up to a meaningful business just in that market alone. But what we're doing is we're taking that same technology and copying it over to other sectors. You could look at kind of any car company that uses the same platform to build multiple products. We're doing that same thing at ARC. So that allows us to expand pretty quickly into other consumer segments. We've already announced the ARC Coast. That's a center console boat that is intended for that fishing and leisure market that gets a lot more popular in Florida and the East Coast. And that same technology is also what lays the foundation for us to get into commercial, which is one of our big expansions recently. Yeah, I want to talk a lot about commercial. I mean, that seems from a sort of broader, it seems like a much bigger market, presumably, right? If just in terms of dollars, in terms of emissions, in terms of lots of things, I feel like commercial is a really interesting part of the conversation. But before we get there, just a couple of things like one, tell me about safety. And when you're sort of building an electric boat from scratch, What do you got to think about in terms of safety? We care about making sure that we are moving this industry in a safer direction. Gas boats today are not that safe. Engine fires are pretty common. You end up running these combustion engines in a chamber that traps fumes in it. So the whole of this boat can trap fumes. And so boats come with these things called blowers that eject those fumes. If you forget to run a blower, it can be disastrous and incredibly dangerous. So you're telling me your boat doesn't have to be that safe to be safer than a boat? I'm saying that we are dramatically safer than where the industry is at today. I mean, is there like I take your point and internal combustion engines are just kind of crazy, right? It's crazy that they work by having little explosions thousands of times per minute. But that's actually what's going on. I mean, presumably, like I totally believe that your boats are safer. surely there are some risks associated with putting a giant battery pack on a boat. I mean, tell me about that. Yeah. So you think about safety in terms of redundancy. No system is perfectly safe. And so you're thinking about, okay, if something fails, then how many more times can it fail before it actually becomes a concern? When we think about the battery pack, the obvious thing that you want to make sure you're safe for is water ingress. You want to make sure no water gets into that battery pack. And just to be clear, just like dumb question, why is it bad if the battery gets wet? Yeah. I mean, because if you, in theory, if you take a battery pack and you dunk it in water, it can go into what's known as thermal runaway. It can catch fire. And stopping a battery fire is really hard because those chemicals are good at burning even absent oxygen. That is obviously bad anywhere. And obviously particularly bad if you're out on the water. Classic thing you don't want on a boat. Yes. Yeah. So if you, if you kind of rapidly step through these steps, you're like, okay, you want to get notified about this. Great. You've got leak sensors in there. Then you want to allow as much water into the pack as possible before it actually becomes a safety concern. Oh, interesting. So you design the pack in a way that can actually tolerate a fair amount of water in the pack before it becomes a problem. And then you say, okay, well then if it does, you know, if you just flood this pack with water then what happens uh and how much time do i have to react and you step through all of this and what it comes down to is first off we've designed the packs to be essentially ip67 rated which means you could submerge it in a meter of water for 30 minutes without water getting in which is an insane standard to hold for a battery pack of this size if water does get in you've got time. Those leak sensors are tripping, alerting you on the boat, alerting our systems to give you a lot of notice. And then in the event that you do end up tripping a thermal runaway event, you have a lot of time to get off of the boat. We actually alert you and say, hey, you've got maybe 10 minutes to put on your life jackets and safely get off the boat. All of these things really lend to the safety profile. And compared to gas, it's, you know, incomparable. We'll be back in just a minute. iHeart's twice as large as the next two combined. So whatever your customers listen to, they'll hear your message. Plus, only iHeart can extend your message to audiences across broadcast radio. Think podcasting can help your business? Think iHeart. Streaming, radio, and podcasting. Call 844-844-iHeart to get started. That's 844-844-iHeart. Let's talk about commercial boats. You're building a tugboat, or you're building a tugboat with somebody. right? Is that the place to start? Yes. We are entering the commercial market with hybrid electric commercial workboats. Okay. We signed a deal with Curtin Maritime. They are a major commercial operator. They started on the dredging side. They're also known for moving some of SpaceX's barges around. They are entering the tugboat market. And the way that they are doing this is by buying a fleet of hybrid electric tugboats from us. Okay. So they placed a big order, right? Like you're supposed to sell them a bunch of tugboats. Yeah. It's for eight tugboats, which is a large amount of tugboats when each one of these is on the order of $20 million. Yeah. You have to sell a lot of wakeboats to get that much money. You do, you do. So are you designing a hybrid electric tugboat right now? Like, where are you in that process? So boats are basically two parts to the boat. Maybe three parts if I were to break it down. The first is the thing that floats. That's the steel structure. Okay. You take a bunch of steel, you cut it up into pieces, and then you weld it all together, and you have something that floats. We are partnering with a shipyard to do that. Okay. Then there's the part of this that tugboats are kind of like houses. You have people on board that stay on board for long periods of time doing these jobs, or at least spend all day out on them doing the jobs. So you care about where's the refrigerator and where do they stay and what's the visibility from their control tower or what's known as the house of the boat or the wheelhouse. um where's the winch go how do you push and pull on these other boats so that's kind of the the operating portion of the boat curtain maritime has a ton of experience and how do you go optimize the operating profile okay okay then the last piece of this is how do you make the boat go how do you actually like push it through the water okay that's what i mean when i say powertrain it's the thing that actually delivers power into the water And that goes from well it starts from some amount of energy in our case that is a huge amount of batteries okay six eight to eight megawatt hours of battery capacity a crazy amount of battery yeah then there's all the okay well now you have the energy how do you actually convert that down into a propeller under the water some sort of thruster under the water and that is also all part of that power train. And presumably the integration of this like crazy amount of battery mass you're going to need into the whole boat and what everybody else is doing is going to be something to figure out. A hard part. One of the hard parts. It is. It is one of the very hard parts. You know, each of these parts is super complex. The scale of these vessels is massive. it's it's hard to actually understand the the amount of torque that these things put out yeah that's the whole point of a tugboat right like that's what it's there to do is yeah so there are these massive vessels that are capable of pushing and pulling these cargo ships that come in uh to to dock yeah and that means that each of the components on there is just giant your your thrusters are these these huge components you know way bigger than i don't know uh any any propeller you've certainly seen way bigger than people yeah so each of those comes from different suppliers that have existed for long periods of time and one of the integration challenges is okay great, you've got a really big battery pack on board. You've got good pricing on that battery pack that makes it cost competitive. You still need to go get this entire system, all of these different components talking to each other and all wired up to work nicely together. And that is part of the integration challenge of all of this. Where are you on that project? We have already started construction on the first of the tugboats. Okay. And we expect to deliver that to market before the end of next year. I saw in just my ordinary reading that is it the Daman RSDE Tug 2513 was shortlisted for tug of the year. I missed that news apparently. Did you? You did not miss that news. Surely you knew that. So that's an electric tug, right? You're not the only one doing this. That's why I bring it up, right? That is an electric tug that is new. Like, what's the broader landscape like of people electrifying boats in general? And in particular, this kind of, what do they call them? Harbor vessels? Is that this universal boat? Is that what they're called? Harbor craft, yeah. These are more popular internationally than they are in the U.S. The U.S. has a pretty interesting piece of policy in place called the 1920 Jones Act. And what it means is that if you have a vessel that operates between U.S. ports, it needs to be U.S. manufactured. It needs to be U.S. flagged. And what that means in practice is that if you are the port of L.A., if you're one of these many other ports in the U.S. and you have harbor craft, those need to be manufactured in the U.S. And that limits the number of suppliers that you can go to. While there are electric tugboats and electric ferries internationally, there's only one that I'm aware of in the US in this kind of ship assist market. And it was a heavily subsidized project that was very compelling in the theory of it and what it could deliver to the market, but it wasn't on its own economically viable. And what's so compelling about what we're doing with Curtin and our entrance into the commercial industry is we are entering at a point that is directly cost competitive with making a diesel driven tugboat absent any sort of grants. And it's cost competitive just buy in the boat or it's cost competitive when you figure out the sort of cost of ownership over time? Off the line. So it is cost competitive when you buy the boat. How can that be? Is it just that batteries got cheap enough for it to be possible? Like, I'm surprised by that. Is it that the domestic industry is super inefficient because it's protected by the Jones Act? I'm smiling because you're hitting on some of the things. So I think it's also that we're driving this business in a way that we want to be globally competitive. That is our mission here is to leapfrog in technology and become competitive again on the global stage. Yeah. Now, the things making this viable are actually two curves going on. One is your battery prices are going down over time. Your high voltage electronics, your power electronics, all of those are getting cheaper over time, which drives the cost side down. The other side is when you're looking at the cost of those diesel tugs, those have been going up over time. The complexity has been increasing, honestly, exponentially, because what's happened is over time, there have been increasingly stringent regulations surrounding the engines themselves. compliance standards around how much carbon is allowed to be spewed off of this and how you burn it off and the temperature that that system works at. And you need diesel particulate filters. And it's a very complex system to try to mitigate those negative extra, to try to mitigate the pollution. So environmental regulations like emissions regulations have made diesel tugs in this country more expensive. Exactly. Which is also good for you. Yes. So what might go wrong for you? I mentioned that our focus is building better boats, making sure that we make money on them, and then ramping supply of them. That is a very simple theory. And we are not taking a lot of demand risk. We see incredible demand. We're just delivering better products to consumer market, better products to the commercial market. We're not taking a lot of technology risk because a lot of this exists. We are taking a ton of execution risk. Actually pulling these things together is really hard. And there's so many levels to this. Even the financing side of this is a challenge because you have to go do the construction of these vessels and make sure that you finance that intelligently so that you could actually get these things onto the water and validate the technology to unlock even more of the demand. The integration is hard. The timelines have a way of only moving in one direction. You're not going to deliver it early, let's be honest. I am proud that we have held to the timelines that we have held, and it is a constant battle because one part, I mean, going back to the consumer side of this, you can get everything right about a production system. And if you are lacking a few critical screws, it can halt a production line. And that means that having every piece in the right place at the right time is so critical to the company. And that's this complex orchestration problem. People say, What's hard about producing these boats or any of that? It's no one thing. It's a thousand small things that all of these pieces just need to fit together and hum, which is why we're so intensely focused on execution, on continuing to drive against the plan that we have in place. What are you going to build after a tugboat? But if you think about across consumer, commercial, the products I mentioned, ArcSport, ArcCost, these tugboats, the common thread between all of those is that there is a better technology that exists for the marine industry in electric power trains. It is a fundamentally superior technology to these outdated kind of diesel engines or gas engines. That's our core focus as a company. And we want to get those powertrains into as many vessels as possible. On the commercial side, we're starting with tugboats. Ferries make a lot of sense. You can get into offshore supply vessels. There's all sorts of different harbor craft that you can go electrify. And then there's this long tail of coast guard boats and water taxis and everything else that you want to do commercially out on the water fishing boats on the consumer side it's wakesport boats center console boats it's pontoon boats like every way that you have it sailboats every way that you have of being out on the water we we want to go electrify it We be back in a minute with The Lightning Round combined. So whatever your customers listen to, they'll hear your message. Plus, only iHeart can extend your message to audiences across broadcast radio. Think podcasting can help your business? Think iHeart. Streaming, radio, and podcasting. Call 844-844-IHEART to get started. That's 844-844-IHEART. um let's finish with a lightning round okay i read you and your co-founder argue about ideas which seems healthy and i'm curious what was one thing where your co-founder convinced you that you were wrong never happened it happened so frequently that i'm trying to think of a good example he is i my my co-founder is ryan is this incredible engineering brain and he has this great way of distilling problems down into their their core elements and then just meticulously solving each one and i the memory that comes back to me is is when we first started arc i was shying away from technical challenges and and saying hey we should get you know help here or buy this thing off the shelf or whatever else. And he has at multiple points convinced me that we could do it. And it ended up being way harder than he thought, but we did it. And it was certainly better for the business. And one of those examples was how quickly we integrated the battery pack into doing the battery packs ourselves. I thought that we wanted to work for at least a couple of years before we really decided to bring battery packs in-house. We ended up doing it within months of starting the company, given the challenges that we saw on procuring off-the-shelf options. And he convinced me of that. What's the dumbest thing you ever did on a boat? I am not going to answer that. Second dumbest. We used to, for the 4th of July, we would go out and watch the fireworks from a boat. And you could bring your own fireworks. This was, I think, back at a different time where maybe this was legal. Or maybe you just didn't. I don't know. I don't want to perjure myself here. so you'd go out on these boats and you could watch the fireworks they lit off this incredible firework show in Lodi, California and people would bring their own fireworks and kind of push them out on basically launch them off of their own boat and let's just say that that was some of the dumber things you've done on a boat before. Fair, fair what's one thing you know about boats now that you didn't know when you started the company the thing that i've learned is that boat building is so much more of a craft than i appreciated huh at the time what do you mean when you say craft so their whole construction in particular is is just this art form that there's no no uh a hull being just like the bottom the thing that is there floating in the water um yeah that that's it's such an interesting design challenge because there's no free winnings you can uh-huh you can make a boat more efficient so that you don't have to use as much power to move over the water but you sacrifice something else it gets you know uh bumpier when you're riding it's not as smooth of a of a ride um Or it lets more water in. The wetness of it is worse. Doesn't chop through waves as well. There are all these trade-offs that you're making. How it comes up to speed changes and how high up the bow is when it's going through the water. All of these things are trade-offs that you're making in the design of that. And then you translate that into the construction side. And one of the things I've learned is boat and hull construction in particular is kind of like cooking where you can have this recipe in front of you. And if you're a brand new cook, you've never cooked before, you're going to mess that recipe up somehow. It's temperature sensitive and maybe you get the temperature wrong. It's humidity sensitive. Maybe you get that wrong. You taste it and you're not really sure why it's not quite tasting good. if you're a chef that's been doing this for 20 years you could take a quick glance at the recipe and you don't even need to look at it because you're doing everything by feel and you could look at imperfections in the side of a boat and know even though they look identical to somebody with an untrained eye you know how to fix them and there are two different ways to fix them one is you buff them out the other is hey you need to actually go apply more gel coat to it or something it's such a craft in in that way and it was an underappreciated part i came in thinking, oh, well, you know, we're going to reason from first principles about all of this. And I have a much stronger appreciation for the marine industry. So does that mean on every boat you need a sort of master craftsman, not every model, but like every single one? One of the things we're doing on the production side, so production, I draw the analogy to Ikea furniture that production is run kind of like assembling a piece of Ikea furniture. You have this set of instructions and this set of parts that you come with and you read the instructions and you go put the parts on. If you think about how do you speed up that process? Well, one way is you just get practice at it. If you go assemble the same piece of Ikea furniture a bunch of different times, then you're just going to get better at it. Yeah. Or even different pieces, right? Ikea has certain moves. I've put together a lot of Ikea furniture. I'm like, oh, I know this move. It's the thing that goes into the thing and then you turn it. So some of it is just that. But then you're like, okay, well, but now I need to 10x the number of people that are doing this and I want all of them to do it consistently. They will have lower skill, right? It's the classic production problem. Like how can someone who is not a master chef, who doesn't know the craft, do a good job? So then you go back to the instructions themselves and you're like, oh, well, if I write better instructions, then I can make this process move more quickly. And then you're like, great, now I've got good instructions and people are starting to get reps on it. And then you're like, there's a missing part. Oh, no, everything kind of breaks down. And that's why, you know, sometimes in IKEA furniture, you'll see you end up with a few extra, you know, bolts or something. And it's because they stocked extra because they really do not want you to be short a bolt because that's painful, annoying, frustrating for everyone. We're trying to do that same thing on the whole construction, the craft part of this, but it's a challenge. So the way that to answer your question of do you need that kind of chef equivalent on every boat we produce, the answer is today more or less yes. And what we're trying to do is distill some of that knowledge into better work instructions, better processes that allow us to do this repeatedly, even if you're coming in without a lot of prior experience of doing this. That's a really interesting kind of process engineering problem. problem. It is. And it's a challenge. And we have learned a ton about this and still have so much more to learn. And I like to think that two years from now, we will look back at where we're at today and think, wow, we had no idea. Mitch Lee is the co-founder and CEO of Arc Boats. Please email us at problem at Pushkin dot FM. We are always looking for new guests for the show. Today's show was produced by Trina Menino and Gabriel Hunter Chang. It was edited by Alexandra Gerriton and engineered by Sarah Bruguer. I'm Jacob Goldstein, and we'll be back next week with another episode of What's Your Problem? This is an iHeart Podcast. Guaranteed Human.