The Hurdles at Harley-Davidson

  @FortuneMagazine October 3, 2012: 7:50 AM ET
harley davidson softail deluxe

The Harley Davidson Softail Deluxe

NEW YORK (Fortune)

With a brand-name as familiar as Harley-Davidson's, the company gets second-guessed almost as often as Mitt Romney's campaign strategists. Harley, the critics say (including this one), is too dependent on old white males and isn't diversifying its owner base quickly enough. Nor is it moving speedily overseas, either to establish low-cost factories or find new customers. Finally, Harley isn't keeping up with Asian competitors like Honda and Kawasaki in quality or productivity.

Even when Harley-Davidson (HOG, Fortune 500) reports good news, it gets hammered. The bike maker has been gradually recovering from a disastrous plunge in motorcycle sales that begin in 2007. But after it announced in June that second quarter earnings jumped 30%, the bears pounced and drove its stock price down 5%. Reason: Harley was forecasting slower deliveries for the near future. Wrote a blogger for Seeking Alpha: "While Harley-Davidson has a loyal group of fans, who love to ride their bikes and even tattoo the name on their bodies, it lacks an investment community that adores the shares in the same manner."

Sometimes the criticism is justified. Harley was embarrassed recently when the Michigan State Police announced it was replacing its inferior Harleys with BMW motorcycles. After conducting performance tests, the state cops determined that BMWs were pfaster, handled better, and were safer than Harleys -- by a wide margin. While the BWW screamed to 100 miles per hour in less than 11 seconds and topped out at 131 mph, the Harley needed 31 seconds to reach 100 mph and never got faster than 105. As a consolation prize, the Michigan police allowed that Harley hogs were a "capable vehicle for parade and ceremonial use."

In fact, Harley management is aggressively responding to its critics, trying to do just about everything they have asked for. Chairman and CEO Keith Wandell says the 109-year-old company is on "a journey of transformation." It is engaged in the delicate task of attracting more women, minorities, and younger riders without diluting its bad-boy image. It aims to cut its product development time by 30% to get new models to market faster. And by getting its unions to accept more flexible work rules and consolidating operations, it is making its manufacturing more efficient. Analysts at Moody's estimate that Harley's global breakeven level has declined by approximately 16%, from 190,000 bikes during the 2007-2009 period to a current level of about 160,000 bikes. Although Harley stock has gone nowhere over the last decade, it beat the S&P by 11% in 2011, and the company tells investors it expects to continue to outperform over time.

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Harley is holding on to 56% of the $4 billion market for heavyweight motorcycles, those with displacements higher than 650 cubic centimeters. That's an impregnable advantage to some -- and a source of vulnerability to others, who remember General Motors' fall from its commanding 50% share of the U.S. car market. They see a new threat to Harley arising at Polaris Industries (PII). The upstart maker of jet skis and snowmobiles already owns one motorcycle maker, Victory, which explicitly targets Harley in its advertising. Last year, it acquired a second brand name, Indian, that is nearly as revered as Harley.

Is this crunch time for Harley? Polaris, based in Medina, Minn., 20 miles from Minneapolis, is known for snowmobiles, jet skis, and all-terrain vehicles. A newcomer to motorcycles, it entered the field with Victory just 14 years ago. Yet with aggressive pricing, it has passed Honda, Yamaha, Kawasaki, and Suzuki to become the No. 2 seller of the biggest heavyweights (engines 1400 cc. and up) behind Harley. Analysts were recently shown a presentation comparing two big V-twin bikes, Victory's Boardwalk vs. the Harley Softail Deluxe. The Boardwalk carries a list price $1,650 less than the $17,149 Harley.

Polaris has also demonstrated it understands what revs the emotions of motorcycle buyers. It has created colorful model names for Victory, like Hammer 8-ball, and Vegas Jackpot, and it has attracted prominent customizers like California's Arlen Ness, some of whose flamboyant creations with stretched front forks and wild paint jobs sell for $60,000. It has been encroaching on Harley's turf at the Sturgis Motorcycle Rally in South Dakota and this year featured its biggest display ever.

Last year, Polaris launched a second missile at Harley when it acquired Indian. To motorcycle history neophytes, Indians were manufactured in Springfield, Mass. from 1901 to 1953, and were at one time the most popular motorcycles in the world, with models named Scout and Chief. After the company failed, various entities tried unsuccessfully to resurrect it over the ensuing four decades, the most recent being the Indian Motorcycle Corp. It started production in Gilroy, Calif. in 1999, only to go bankrupt in 2003. In 2006, a new Indian Motorcycle Company, largely owned by a London-based private-equity firm started up again in Kings Mountain, N.C., manufacturing a few hundred bikes a year, before selling out to Polaris.

With its acquisition, Polaris moved production to its Victory facilities in Minnesota and Iowa. It now is redesigning Indian bikes using styling cues from a half-century ago like swooping fenders and the war-bonnet figurine on the front fender but with a modern 105-cubic-inch engine and other components to make the bikes more appealing to today's riders. Polaris will keep Indians focused on exclusivity rather than performance. For instance, it plans to make only 35 units of the 2013 Chief Vintage Limited edition, which features an eye-catching black and white two-tone paint scheme and will sell for nearly $38,000.

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With its two-brand strategy, Polaris is positioning Victory to go after the "performance enthusiast" slice of the heavyweight market (21%), and aims Indian at the 39% it considers "diehards." (Everyday riders, weekend riders, and those it calls "show-offs" make up the rest.) It should make life more interesting for Harley and compete for attention, but it isn't likely to keep anyone in Milwaukee awake at night. Bikes are not the core focus of Polaris -- they represent only 5% of its business, and its sales are a tiny slice for Harley's -- about 0.04%.

What Polaris does do is bring new thinking to the business, with manufacturing savvy, fresh marketing ideas, and experienced dealers -- all of which should keep Harley from becoming complacent and sitting on its lead. After all, back when GM had half the U.S. market, Toyota, Honda, and Nissan started out with zero. Now, Pontiac, Oldsmobile, and the GM brands are gone. No motorcycle enthusiast -- especially the show-offs -- wants to see that happen to Fat Boy, Road King, or Softail Deluxe. To top of page



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