HOW HARLEY BEAT BACK THE JAPANESE Quality was awful, manufacturing a mess, and the Japanese were gobbling market share. The managers who bought the company pulled off one of America's most celebrated turnarounds.

(FORTUNE Magazine) – At the start of the 1980s few people gave Harley-Davidson much chance to survive. The last U.S. motorcycle maker was being battered by the Japanese. Its share of the super-heavyweight motorcycle market had fallen from 75% in 1973 to less than 25%. Yet today the Milwaukee-based company, 86 years old and running full throttle, has nearly 50% of the market. Well-Made in America, a book commissioned by Harley and written by business journalist Peter C. Reid, is the authentic and candid tale of how a beleaguered company beat the Japanese, beat the bankers, and beat the odds (McGraw-Hill, $19.95, to be published in October). These passages are adapted from the first half. In specialized nuts-and-bolts detail, the second half tells how to make use of Harley's lessons. AMERICA WAS WILD about motorcycles in the mid-1970s, which should have been great for Harley-Davidson. The Harley was unique, an American institution with raw power and a ''voice'' -- a basso-profundo thump from its big V-twin engine that made other motorcycles sound like sewing machines. Harley riders were fanatically devoted to their mounts, and the American tradition they represented. But Harley-Davidson, then owned by AMF, was in trouble. AMF had almost tripled production to 75,000 units annually over four years. Quality had deteriorated sharply -- more than half the cycles came off the line missing parts, and dealers often had to fix them up to sell. The virile voice could not disguise an engine sorely in need of modern engineering. It leaked oil, vibrated, and couldn't match the performance of the flawlessly smooth Japanese bikes that were getting most of the growth. Hard-core enthusiasts were willing to fix their Harleys and modify them to perform better, but newcomers had no such devotion or skill. If Harley-Davidson was to expand its market, it had to improve the quality of its machines and update the engine design. In late 1975, AMF put Vaughn Beals in charge of Harley. Beals found an ally in chief engineer Jeff Bleustein, who had felt like a lone voice trying to wake up top managers to the engineering realities they had to face. Beals set up a quality control and inspection program that began to eliminate the worst of the problems, but at a cost -- on one new model, for example, the company had to spend about $1,000 extra per bike to get the first hundred into shape for dealers to sell at around $4,000. Then he took a group of senior managers to Pinehurst, North Carolina, to devise a long-range product strategy -- the first time the company had looked ten years ahead. At the top of the list were engines that would provide better performance as well as meet impending noise and emission rules. Harley would improve its existing power plants and start work on a new family to compete with the faster Japanese high-performance bikes. But upgrading would take years. What to do in the meantime? The answer was a series of cosmetic innovations created by William G. Davidson, Harley's styling vice president. Known as Willie G., this grandson of one of the company's founders is not the only Harley executive who mingles with bikers, but with his beard, black leather, and jeans he's the most convincing. He understands his customers to a rare degree. Says Willie G.: ''They really know what they want on their bikes: the kind of instrumentation, the style of bars, the cosmetics of the engine, the look of the exhaust pipes, and so on. Every little piece on a Harley is exposed, and it has to look just right. A tube curve or the shape of a timing case can generate enthusiasm or be a total turnoff. It's almost like being in the fashion business.'' HE HAD ALREADY created a new model, called the Super Glide, that emulated the look of the choppers Harley fanatics put together in their own garages. This factory-built custom bike was a huge success, and the company developed it at minimal cost by combining modified components of its two principal bikes, the heavy Electra Glide touring bike and the lighter Sportster. After Pinehurst, Beals asked Willie G. to spin out more such variations. Davidson came up with a succession of custom cruiser models -- the Low Rider, with special paint and trim, low handlebars, and a lower seat; the Wide Glide, which took the chopper look even further than the Super Glide; and several other variations. Other Harley executives credit Davidson's skill with saving Harley. ''The guy is an artistic genius,'' says Bleustein, now senior vice president for parts and accessories. ''In the five years before we could bring new engines on-stream, he performed miracles with decals and paint. A line here and a line there and we'd have a new model. It's what enabled us to survive.'' Though Harley's sales remained strong, its market share dwindled steadily as the Japanese continued to pour new bikes into the heavyweight market. By 1980, AMF was losing interest in the company. Early in 1981, Beals persuaded 12 other Harley executives to join him in taking over the company in an $81.5 million leveraged buyout. The group found a willing lead lender in Citicorp, and after several months of tough bargaining with AMF, the independent Harley- Davidson Motor Co. began business on June 16, 1981. Manufacturing was still a major problem. Management had done everything it knew to boost quality and cut costs, but the Japanese were still producing better bikes at lower cost. How did they do it? Though Beals and other managers had visited Japanese plants in 1980, it wasn't until they got a chance to tour Honda's assembly plant in Marysville, Ohio, after the buyout that they began to understand. Says Beals: ''We were being wiped out by the Japanese because they were better managers. It wasn't robotics, or culture, or morning calisthenics and company songs -- it was professional managers who understood their business and paid attention to detail.'' In October, 3 1/2 months after Beals and his group took charge, the manufacturing team began a pilot just-in-time inventory program in the Milwaukee engine plant. When that showed promise, Tom Gelb, senior vice president of operations, called a series of meetings with employees, telling them bluntly, ''We have to play the game the way the Japanese play it or we're dead.'' But when he explained his plan to convert to just-in-time, many managers at the York, Pennsylvania, assembly plant reacted with disbelief. Some workers laughed out loud. After all, York already had a computer-based control system with overhead conveyors and high-rise parts storage -- and the new system would replace all this with push carts. The new owners appeared to be taking the company back to 1930. Just-in-time, however, eliminates the mountains of costly inventory that require elaborate handling systems and at the same time clears away many other manufacturing problems. For example, parts at York were made in large batches for long production runs, stored until needed, then loaded onto the 3.5-mile conveyor that rattled endlessly around the plant. ''Sometimes we couldn't even find the parts we needed,'' says Gelb. ''Or if we found them they were rusted or damaged. Or there had been an engineering change since the parts were made and they didn't even fit.'' IN DESIGNING the system, Harley started with the new wisdom that employees would have to be involved in planning it and working out the details. Management met for months with groups from all departments, from engineering to maintenance. Says Gelb: ''No changes were implemented until the people involved understood and accepted them. It took two months before the consensus decision was made to go ahead. That was a Friday -- and we started making the changes on Monday.'' About three weeks later Beals walked around the plant asking workers on the line how the conversion was going. To his surprise and delight, he says, the answer was generally, ''Well, we have some problems, but it's a lot better than it was before, and we will get those problems fixed.'' Says Beals: ''That reaction demonstrated the true value of employee ^ involvement. Normally, the engineers would figure out how to make the changes. They would have made them with the usual number of errors, and the reaction then would have been, 'Those dummies screwed up again.' And worse yet, the employees wouldn't have lifted a finger to help solve the problems.'' It took more than just-in-time and employee involvement to make Harley a competitive manufacturer -- the company learned that it also had to teach workers the statistical tools for monitoring and controlling the quality of their own work, train skeptical plant managers to become team leaders instead of bosses, and help its suppliers to adopt similar methods. Even today the company says the process won't be complete until employees are thinking perpetually about their own responsibility for doing the job better. But the dramatic quality improvements and cost reductions that resulted were the foundation of the company's comeback. Finally on its way to leveling the playing field in manufacturing, Harley shifted its focus to marketing. The company abandoned a notion held by some senior managers of trying to compete broadly against the Japanese, and threw all of its resources into developing the big-bike niche. And it won protection against the Japanese heavyweights. Extra tariffs were slapped on the biggest ones, adding 45% to the existing 4.4%, and declining in stages before expiring in five years. But the Japanese manufacturers quickly found ways to evade the most onerous duties -- for example, by assembling more heavyweight bikes in their U.S. plants. Harley was still losing market share. One big hurdle was convincing potential buyers that Harley had truly solved its quality problems. To bring home the message, the company in 1984 committed $3 million to an unprecedented demonstration program it called SuperRide. A series of TV commercials invited bikers to come to any of the company's 600- plus dealers for a ride on a new Harley. Over three weekends, the company gave 90,000 rides to 40,000 people, half of whom owned other brands. The venture didn't sell enough bikes to cover its cost, but it made the point nonetheless. Many who rode the demonstrators came back to buy a year or two later when they were ready for new motorcyles. Today SuperRide is the only such consistent program in the industry, and so successful as a sales generator that Harley has a fleet of demo bikes that it takes to motorcycle rallies. HARLEY also spent heavily to bolster its dealers and develop a close relationship with customers. In another industry first, the company in 1983 formed the Harley Owners Group (the acronym HOG, by no coincidence, is the affectionate name Harley riders give their mounts). Today HOG has some 100,000 members and a bimonthly newsletter. Run by Harley-Davidson employees, HOG sponsors some kind of motorcycle event almost every weekend from April to November all over the country. Harley managers participate, along with their spouses. ''We try to run our business by the maxim 'The sale begins after the sale,' '' says marketing chief Kathleen Lawler-Demitros. ''HOG is one way we differentiate ourselves from our Japanese competitors.'' Apparently so. A similar group Honda tried to form soon faded away. After losing $25 million in 1982, Harley edged into the black in 1983 and earned $2.9 million on sales of $294 million in 1984. It was catching up with Honda in the heavyweight market, improving its quality, reducing its breakeven, and marketing more aggressively. Then Citicorp decided it wanted out. The bank's analysts were concerned about the economy, and Citicorp officials began to worry about what would happen when the tariffs on big Japanese bikes ended in 1988. Harley's friendly loan officer was transferred to another division; his replacement took a dim view of the motorcycle maker's future. Citicorp reasoned that it had the best chance of selling off Harley's assets and recovering its money while the company was still on the upswing. In November of 1984, it told Harley that starting early the following year the bank would no longer provide overadvances -- loans in excess of the conservative lending formula -- and that Harley should start looking for another lender. ''Overadvance was our lifeline at that point,'' says Beals. ''Telling us we'd get no more was the same as telling us to hire some lawyers and prepare to file for Chapter 11.'' Beals and the others persuaded Citicorp to extend the privileges for another six months -- though they later concluded that the bank acquiesced mainly because it thought the extra months would be useful in preparing the company for liquidation. Over the summer of 1985, Beals and Richard Teerlink, who was then chief financial officer and later succeeded Beals as CEO, chased fruitlessly after new lenders. Knowing that Citicorp was trying to get rid of the account, other bankers held back. In October, Beals and Teerlink met with their Citicorp loan officer to argue & for more time, but they might as well have been talking to a wall. During a break they wandered into the men's room. ''Look,'' Teerlink told Beals, ''if they want out so badly, maybe they'll take a write-off on part of the loan. Then we have a better chance of inducing another lender to come in.'' Beals was dubious, but back in the conference room Teerlink proposed a $5 million write-off by Citicorp. The loan officer hardly batted an eyelash, and Beals quickly raised the amount to $10 million. Again, the officer was amenable. ''We won't say no to anything if it gets us out of this deal,'' he said. Rather than making it easier to arrange new financing, the agreement turned off potential lenders even more. If Citicorp was willing to take a $10 million write-off, they figured, then Harley must be in a real mess. As payments to creditors stretched out and lawyers worked on a bankruptcy plan, Dean Witter Reynolds put Beals and Teerlink together with Heller Financial Corp. Major events often turn on chance, and it happened that Heller's No. 2 executive, Bob Koe, was a Harley buff. Willing to listen, Koe probed hard for weak points but ended the meeting favorably impressed. After weeks of hard bargaining -- Heller CEO Norm Blake turned the idea down at first -- Harley and Heller struck a deal on December 23, 1985. The new lenders, including Heller and the three secondary banks that participated in the original buyout, would pay Citicorp $49 million -- the bank took an $8 million write-off -- and supply Harley with $49.5 million. Citicorp had badly misjudged Harley's outlook. Management's long struggle -- the manufacturing improvements, the multiple models, and the aggressive marketing -- had transformed the company and secured its niche in the motorcycle business. After rebounding to almost 28% in 1985, Harley's share of the market for super-heavyweight bikes headed on a steady upward trajectory to today's level. By 1986 profits were up to $4.3 million on sales of $295 million. Harley went public, raising $20 million in its stock offering and refinancing its debt (since then, the shares have almost tripled). Cashing in Harley warrants it held, Citicorp recovered $6 million of its loan loss. Harley then acquired a motor-home maker, Holiday Rambler, and in 1987 asked to have the tariffs on Japanese bikes removed a year ahead of schedule. Last year management celebrated Harley's 85th birthday with a party that reflected their unique way of getting close to customers.

$ Every motorcyclist was invited -- even those who didn't ride Harleys. All they had to do was contribute $10 to Harley-Davidson's favorite philanthropic organization, the Muscular Dystrophy Association. More than 40,000 bikers accepted the invitation. Starting from as far away as San Francisco and Orlando, Florida, groups of cyclists headed for Milwaukee. Each was led by a Harley-Davidson executive, including Vaughn Beals, Rich Teerlink, Jeff Bleustein, Willie G. Davidson, and Jim Paterson, president of the motorcycle division. Along the way, the executives auctioned off Harley memorabilia for the benefit of muscular dystrophy. Beals rode into Milwaukee with his pants held up by a rope. The night before he had sold his pewter belt buckle for $100. (In all, the event raised more than $500,000 for charity.) Thousands of Harleys, many flying American flags, rumbled into Milwaukee on June 18, shaking the air with the sound of their engines. Some riders had dogs perched on the back, others their children. Clothing ranged from minimal to a staggering variety of T-shirts and black leather vests covered with Harley buttons, emblems, and other mementos. Riders were all ages, from young gas pump jockeys to octogenarians. Every kind of Harley customer was represented, including a sprinkling of hard-core biker clubs such as the Sinners and the Saracens. The parking lots at the edge of Lake Michigan were agleam with chrome and flamboyant colors. OFF THEIR BIKES, the celebrants spent the day participating in such activities as slow races -- the winner was the last to cross the finish line after riding his bike as slowly as possible without falling over. Beals and Teerlink, among other executives, submitted themselves to the celebrity dunk tank, where they were unceremoniously dumped into the water by on-target baseball throwers.

Music resounded, starting with the Booze Brothers Revue and ending with the Charlie Daniels Band. At the final ceremonies, 24,000 bikers watched videotapes of their ride to Milwaukee projected onto two giant screens. A continuous roar from the crowd was punctuated by shouts of recognition as riders saw their own groups. Thousands of Harley owners rose to their feet, clenched fists aloft, in a clamorous demonstration of product loyalty probably unrivaled anywhere in the world. They were celebrating the rebirth of a legend.