Harley-Davidson in 2004 - Indiana Universityhome.kelley.iupui.edu/kwendeln/J402F08/Harley15eCASE20.pdf · Case 20 Harley-Davidson in 2004 Exhibit 1 Photos from Harley-Davidson's Open

Harley-Davidson in 2004John E. GambleUniversity of South Alabam a

Harley-Davidson's management had muchto be proud of as the company wrappedup its Open Road Tour centennial celebra-

tion, which began in July 2002 in Atlanta, Georgia ,and ended on the 2003 Memorial Day Weekend i nHarley's hometown of Milwaukee, Wisconsin . The14-month Open Road Tour was a tremendous suc-cess, drawing large crowds of Harley owners in eac hof its five stops in North America and additional stop sin Australia, Japan, Spain, and Germany. Each stopalong the tour included exhibits of historic motor-cycles, performances by dozens of bands as divers eas Lynyrd Skynyrd, Earl Scruggs, and Nickelback ,and brought hundreds of thousands of Harley enthu-siasts together to celebrate the company's products .The Ride Home finale brought 700,000 biker-guest sfrom four points in the United States to Milwaukeefor a four-day party that included concerts, factor ytours, and a parade of 10,000 motorcycles throug hdowntown Milwaukee. The company also used theOpen Road Tour as a platform for its support of theMuscular Dystrophy Association (MDA), raising$7 million for the MDA during the 14-month tour.Photos from the Open Road Tour and Harley's ne wV-Rod model are presented in Exhibit 1 .

Harley-Davidson's centennial year was also ayear to remember for the company's being name dto Fortune's annual list "The 100 Best Companie sto Work For" and judged third in automotive qual-ity behind Rolls-Royce and Mercedes-Benz byHarris Interactive, a worldwide market researchand consulting firm best known for the Harris Poll .Consumer loyalty to Harley-Davidson motorcycle swas unmatched by almost any other company. As

Copyright © 2004 by John E . Gamble and Roger Schafer. Al lrights reserved .

Roger Schafe rUniversity of South Alabam a

a Canadian Harley dealer explained, "You kno wyou've got strong brand loyalty when your custom-ers tattoo your logo on their arm"' The company'srevenues had grown at a compound annual rate o f16 .6 percent since 1994 to reach $4 .6 billion i n2003 marking its 18th consecutive year of recor drevenues and earnings. In 2003, the company sol dmore than 290,000 motorcycles, giving it a com-manding share of the market for motorcycles in the651+ cubic centimeters (cc) category in the Unite dStates and the leading share of the market in th eAsia/Pacific region. The consistent growth had al-lowed Harley-Davidson's share price to appreciat eby more than 15,000 percent since the company' sinitial public offering in 1986 . In January 2004, th ecompany's CEO, Jeffrey Bleustein, commented o nthe centennial year and the company's prospects fo rgrowth as it entered its second century.

We had a phenomenal year full of memorable once-in-a-lifetime experiences surrounding our 100th An-niversary . As we begin our 101st year, we expect t ogrow the business further with our proven ability todeliver a continuous stream of exciting new motor -cycles, related products, and services . We have set anew goal for the company to be able to satisfy a yearl ydemand of 400,000 Harley-Davidson motorcycle sin 2007 . By offering innovative products and ser-vices, and by driving productivity gains in all facet s

of our business, we are confident that we can delive r

an earnings growth rate in the mid-teens for the fore-

seeable future . '-

However, not everyone was as bullish o n

Harley-Davidson 's future, with analysts pointin g

out that the company's plans for growth were to o

dependent on aging baby boomers . The companyhad achieved its record growth during the 1990s an d

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Case 20 Harley-Davidson in 2004

Exhibit 1 Photos from Harley-Davidson's Open Road Tour and Its VRSC V-Rod

C-35 7

t know:ustom-npany'srate oflion inrecord

ny solda corn-s in theUnitedin the

had ai-)reciatenpany's104, theZted o nects for

le once-10th An -xpect tobility to, motor-we set aa yearl yorcycle sand set-

facet su deliverthe fore-

ish onp ointin g'ere too)mpany90s and

Source : Harley-Davidson Web site .

early 2000s primarily through the appeal its imageheld for baby boomers in the United States . Someobservers wondered how much longer boomer swould choose to spend recreational time touring th ecountry by motorcycle and attending motorcycl erallies . The company had yet to develop a motorcycle

that appealed in large numbers to motorcycl eriders in their 20s or cyclists in Europe, both o fwhom preferred performance-oriented bikes overcruisers or touring motorcycles . Another concernof analysts watching the company was Harley-Davidson's short-term oversupply of certain models

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Part 2 Cases in Crafting and Executing Strategy

Exhibit 2 Summary of Harley-Davidson's Financial Performance, 1994-200 3(in thousands, except per share amounts )

Income statement data

Net sales

Cost of goods sol d

Gross profi t

Operating income from financial service s

Selling, administrative and engineerin g

Income from operation s

Gain on sale of credit card busines s

Interest income, net

Other income (expense), ne t

Income from continuing operations before provision fo rincome taxes and accounting change s

Provision for income taxe s

Income from continuing operations before accountin gchange s

Income (loss) from discontinued operations, net of ta x

Income before accounting change s

Cumulative effect of accounting changes, net of ta x

Net income (loss)Weighted average common shares :

Basic

Dilute d

Earnings per common share from continuing operations :

Basic

Dilute d

Dividends pai dBalance sheet data

Working capital

Current finance receivables, ne t

Long-term finance receivables, net

Total asset sShort-term finance deb t

Long-term finance debt

Total deb t

Shareholders' equit y

Source : Harley-Davidson Inc . 2003, 2002, and 1998 10-K reports .

brought about by the 14-month production run fo rits 100th anniversary models . The effect of theextended production period shortened the waitin glist for most models from over a year to a fewmonths and left some models on showroom floorsfor immediate purchase . The combined effects of amarket focus on a narrow demographic group, the

$4,624,274

$4,090,970

$3,406,786

2,958,708

2,673,129

2,253,81 5

1,665,566

1,417,84 1

167,873

104,227

(684,175)

(639,366 )

1,149,264

882,702

302,271 302,297 302,506304,470 305,158 306,248

$ 2 .52 $ 1 .92 $ 1 .45

2 .50 1 .90 1 .4 3

0 .195 0 .135 0 .11 5

$1,773,354 $1,076,534 $

949,154

1,001,990 855,771 656,42 1

735,859 589,809 379,335

4,923,088 3,861,217 3,118,495324,305 382,579 217,05 1

670,000 380,000 380,000

$ 994,305 $

762,579 $

597,05 1

$2,957,692 $2,232,915 $1,756,283

difficulty experienced in gaining market share in

Europe, and short-term forecasting problems led to a

sell-off of Harley-Davidson shares going into 2004 .

Exhibit 2 presents a summary of Harley-Davidson 'sfinancial and operating performance for 1994-2003 .Its market performance for 1994 through January2004 is presented in Exhibit 3 .

1,152,97 161,27 3

(551,743 )662,50 1

23,088

16,541

17,47 8(6,317)

(13,416)

(6,524 )

1,166,035

885,827

673,445

405,107

305,610

235,709


C-35 9

$2,943,346 $2,482,738 $2,087,670 $1,762,569 $1,531,227 $1,350,466 $1,158,887

1,979,572 1,666,863 1,414,034 1,176,352 1,041,133 939,067 800,548

963,774 815,875 673,636 586,217 490,094 411,399 358,339

37,178 27,685 20,211 12,355 7,801 3,620

(485,980) (427,701) (360,231) (328,569) (269,449) (234,223) (204,777 )

514,972 415,859 333,616 270,003 228,446 180,796 153,562

18,91 5

17,583 8,014 3,828 7,871 3,309 96 1,68 2

(2,914) (3,080) (1,215) (1,572) (4,133) (4,903) 1,19 6

548,556 420,793 336,229 276,302 227,622 175,989 156,440

200,843 153,592 122,729 102,232 84,213 64,939 60,21 9

347,713 267,201 213,500 174,070 143,409 111,050 96,22 1

22,619 1,430 8,05 1

347,713 267,201 213,500 174,070 166,028 112,480 104,272

$

347,713 $

267,201 $

213,500 $

174,070 $

166,028 $

112,480 $

104,272

302,691 304,748 304,454 151,650 150,683 149,972 150,440

307,470 309,714 309,406 153,948 152,925 151,900 153,365

$

1 .15 $ 0 .88 $ 0 .70 $

1 .15 $ 0 .95 $ 0 .74 $ 0 .6 4

1 .13 0 .86 0 .69 1 .13 0 .94 0 .73 0 .6 3

0,098 0,088 0,078 0,135 0,110 0,090 0,07 0

$

799,521 $

430,840 $

376,448 $

342,333 $

362,031 $288,783 $189,358

530,859 440,951 360,341 293,329 183,808 169,61 5

234,091 354,888 319,427 249,346 154,264 43,82 9

2,436,404 2,112,077 1,920,209 1,598,901 1,299,985 980,670 676,66389,509 181,163 146,742 90,638 8,065

355,000 280,000 280,000 280,000 250,000 164,330

$ 444,509 $

461,163 $ 426,742 $

391,572 $

285,767 $185,228 $ 10,452

$1,405,655 $1,161,080 $1,029,911 $

826,668 $

662,720 $494,569 $433,232

care i nled to a

2004 .idson 's-2003 .anuary

Harley-Davidson's history began in Milwaukee ,Wisconsin, in 1903 when 20-year-old Arthu rDavidson convinced his father to build a small shedin their backyard where Arthur and 21-year-old

William Harley could try their hand at building amotorcycle . Various types of motorized bicycles hadbeen built since 1885, but the 1901 development ofa motorcycle with an integrated engine by a Frenchcompany inspired Davidson and Harley to develo ptheir own motorcycle. The two next-door neighborsbuilt a two-horsepower engine that they fit onto a

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Part 2 Cases in Crafting and Executing Strateg y

Exhibit 3 Yearly Performance of Harley-Davidson Inc.'s Stock Price,1994 to January 2004

(a) Trend in Harley-Davidson Inc .'s Common Stock Pric e$60

30

25

20

1 5

1 0

95 96 97 98 99 00 01

02 03Year

addin gcomp<

I rpowe rkeep ito de lthe neangledesigpotat(One A

whe nTherior dfiringan urNevea Haearl yin thi

5 5

50

45

40

35 Stock Price

5

+1000 %

+900%

+800%

+700%

+600%

+500%

+400%

+300%

+200%

+100%

+0%

-100%

Percent Change(1994 = 0 )

(b) Performance of Harley-Davidson Inc .'s Stock Priceversus the S&P 500 Index

S&P 500

95 96 97 98 99 00Year

01

02 03

ducein gprodin 6 "Har iinchandwa sthe (ly in ;thewinit sdes itheDaycanfo uthepan19 4U . Smodified bicycle frame . At first the motorcycle coul d

not pull itself and a rider up a steep hill, but afte rsome additional tinkering, the first Harley-Davidso nmotorcycle could run as fast as 25 miles per hour.Milwaukee residents were amazed as Harley and Dav-idson rode the motorcycle down local streets, and bythe end of the year the partners were able to produceand sell three of their motorcycles . Walter Davidson

joined his brother and William Harley during theyear to help assemble and race the company's motor-cycles . In 1905, a Harley-Davidson motorcycle won a15-mile race in Chicago with a time of 19 :02, and by1907 the company had developed quite a reputatio nin motorcycle racing with numerous wins in Milwau-kee-area races . In 1907, another Davidson brother,William, joined the company and the company began

mamoDaincinGI


C-36 1

theotor-von aid b yatio nwau-rther,iegan

adding dealers . Harley-Davidson's dealers helped th ecompany sell 150 motorcycles in 1907 .

In 1909, Harley-Davidson developed a mor epowerful seven-horsepower motorcycle engine tokeep its edge in racing, an innovation that turned ou tto define the look of the company's motorcycles fo rthe next century. Twin cylinders joined at a 45-degre eangle became a trademark Harley-Davidson enginedesign characteristic and created a distinctive "potato-potato-potato" sound . Harley designed his V-twin en-gine with two pistons connected to a single crankpin,whereas later designs used crankpins for each piston .The single-crankpin design had been called an infe-rior design because it caused the pistons to come intofiring positions at uneven intervals, which producedan uneven cadence in sound and excessive vibrations .Nevertheless, the vibrations and distinctive rumble ofa Harley engine were accepted by the market in theearly 1900s and continued to appeal to motorcyclist sin the early 2000s .

The stronger engine allowed the company to pro-duce 17,000 motorcycles for the U .S . military dur-ing World War I and become the largest motorcycleproducer in the world in 1920, with 2,000 dealersin 67 countries . A number of features that make u pHarley-Davidson's image originated during the 1920s,including the teardrop gas tank, the `'Hog" nickname,and the "Flathead" engine design . Harley-Davidso nwas one of two U.S . motorcycle companies to survivethe Great Depression the other being Indian—by re -lying on exports and sales to police departments an dthe U.S . military. The 1930s saw Harley-Davidsonwin more races and develop additional elements o fits differentiated image, including the art deco eagl edesign painted on its gas tanks, three-tone paint, andthe "Knucklehead" engine rocker boxes. Harley -Davidson's 1936 EL model, or "Knucklehead," be -came its first highly styled motorcycle and formed th efoundation of style elements that remained present inthe highly demanded 2004 Softail Fat Boy. The com-pany suspended production of civilian motorcycles i n1941 to produce almost 90,000 motorcycles for theU.S . military during World War 11 .

The recreational motorcycle market grew dra-matically after World War It, as ex-GIs purchasedmotorcycles and led enthusiasm for riding . Harley-Davidson introduced new models for enthusiasts ,including the Hydra-Glide in 1949, the K-mode lin 1952, the Sportster in 1957, and the Duo-Glide in 1958 . The combination of racing success

(Harley-Davidson riders won 18 of 24 races and se tsix new racing records in 1950 alone) and innovativ enew Harley-Davidson models led to rival compan yIndian's demise in 1953 . Harley-Davidson would re -main the sole U.S . manufacturer of motorcycles unti l1998, when the Indian brand was revived .

Harley-Davidson continued to win races through -out the 1960s, but its reputation began to erod esoon after its acquisition by American Machine andFoundry Company (AMF) in 1969 . Harley-Davidso nunder AMF was known for its leaking engines, un-reliable performance, and poor customer service . A tone point during AMF's ownership of the company ,more than one-half of its bikes had to be repairedbefore leaving the factory. The company attemptedto offset its declining sales of road bikes with th eintroduction of dirt bikes and snowmobiles in th eearly 1970s, but by the late 1970s AMF lost faithin the acquisition and slated it for divestiture . Whenno buyers for the company emerged, 13 executive sengineered a leveraged buyout of Harley-Davidso nin 1981 . Harley-Davidson struggled under the heav ydebt load and came within four hours of bankruptcyin 1985, before then-CEO Richard Teerlink was abl eto convince new creditors to step in and restructureHarley with less costly financing terms . Teerlink alsolaunched a restructuring program that updated man-ufacturing methods, improved quality, and expande dthe model line .

U .S . tariffs imposed on 651+cc Japanese mo-torcycles also aided Harley-Davidson in gainin gfinancial strength and competitiveness in the heavy -weight segment of the U.S . motorcycle industry.Harley-Davidson completed an initial public offer-ing in 1985 and petitioned the International Trad eCommission to terminate tariffs on Japanese heavy -weight motorcycles in 1987 when its market shar ein the U.S . heavyweight category had improved to25 percent from 16 percent in 1985 . In 1998, the com-pany purchased Wisconsin-based Buell Motorcycle ,a performance brand using Harley-Davidson en-gines that began as a venture between Erik Buell an dHarley-Davidson in 1992 . Harley-Davidson opene dits 358,000-square-foot Kansas City, Missouri, plan tin 1998 to produce Sportster, Dyna Glide, and V-Ro dmodels and built an assembly plant in Brazil in 199 9to aid in its Latin American expansion . The newcapacity allowed Harley-Davidson to set productio nrecords each year during the early 2000s to reac h290,000 units by year-end 2003 .

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OVERVIEW OF TH EMOTORCYCLE INDUSTR Y

Demand for motorcycles in developed countries suc has the United States, Germany. France, Spain, an dGreat Britain, grew dramatically at the end of Worl dWar II as veterans who enjoyed riding motorcycle sduring the war purchased their own bikes upon re -turn to civilian life . Groups of enthusiasts began t oform motorcycle clubs that allowed them to socializ eand participate in rallies and races. Two of the earli-est motorcycle rallies in the United States were theDaytona Bike Week and the Sturgis Rally. The firs tDaytona 200, which occurs during Bike Week, wa srun in 1937 on a 3 .2-mile beach and road course .The first Sturgis, South Dakota, race took place i n1938 when nine participants raced a half-mile trac kand performed such stunts as jumping ramps an dcrashing through plywood walls . These and othe rsuch events grew dramatically in popularity begin-ning in the 1970s, with both Daytona Bike Week an dthe Sturgis Rally each drawing over 200,000 biker sin 2003 . The Sturgis Rally was said to be among th emost raucous motorcycle rallies in the United States ,with plenty of public drunkenness and lewd behavioraccompanying the seven days of races . Such behavio rwas common enough that the Rally Web sit e)tur ) provided the fines and bonds associate dwith such offenses as indecent exposure, disorderlyconduct, open container in public, and possession o fcontrolled substances .

The rowdy and rebellious image of bikers i straced to some of the motorcycle clubs that beganafter World War 11 . The outlaw image of cyclist sfirst developed in 1947 when Life magazine pho-tographers captured images of an impromptu rall yat Hollister, California, by a motorcycle group call-ing themselves the Boozefighters . The group becam equite rowdy during their motorcycling exhibition ,but Life reporters embellished the story significantly ,claiming the Boozefighters descended on the tow nand proceeded to terrorize its residents by drag -racing down the main street, tossing beer bottles, an driding motorcycles through the front doors of th etown's saloon . The imagery of the drunken Fourt hof July attack on the town became etched deepe rinto the minds of the world when the story becam ethe subject of The Wild One, a 1954 movie starringMarlon Brando . When asked by a local resident what

he was rebelling against, Brando's character, Johnn yreplied, "Whaddya got?"3 The general public cameto dislike bikers because of incidents like the one i nHollister and because of the Hollywood treatment o fthe event, but the Hells Angels made many peopl efearful of bikers and put motorcycle gangs under theclose scrutiny of law enforcement at local, state, an dfederal levels .

The Hells Angels were established in 1948 i nFontana, California, by a group of young cyclistswho had read of the Hollister rampage and wishe dto start their own outlaw biker group . The Hells An -gels, who took their name and symbols from variou sWorld War 11 flying units, became notorious durin gthe 1960s when they became linked to drug traf-ficking and other organized crime activities . Sonn yBarger, a founder of the Oakland, California, chap-ter in the late 1950s, became the United States' mos tinfamous biker after organizing a disastrous secu-rity effort for the 1969 Rolling Stones concert i nAltamont at which one concertgoer was stabbed an dkilled by Hells Angels members . Barger, who ha dbeen convicted of attempted murder, possession ofnarcotics with intent to sell, and assault with a deadl yweapon, commented in an interview with the Britis hBroadcasting Corporation (BBC) that he pressed apistol into Keith Richards' ribs and ordered him tocontinue to play after the Rolling Stones' guitaristthreatened to end the show because of Hells Angels 'rough tactics with fans . '

The Hells Angels and rival motorcycle clubslike the Pagans, the Banditos, and the Outlaws, rodeonly Harleys, which hurt Harley-Davidson's imag ewith the public in the 1960s . Honda successfullyexploited Harley-'s outlaw image with the sloga n"You meet the nicest people on a Honda" to becom ethe largest seller of motorcycles in the United State sduring the late 1960s and early 1970s . 5 The imageof the Hells Angels had spilled over to the entireindustry and contributed to declines in motorcycledemand in the United States and Europe during th e1960s before a new Hollywood film resurrected in-terest in motorcycles . East/ Rider (1969) portraye d

bikers as less villainous rebels and appealed greatl y

to young people in the United States and Europe .

The movie eventually gained cult status and helpe d

charge a demand for motorcycles that began in the1970s and continued through 2003 . The red-white-and-blue 1951 Harley "Captain America" choppe rridden by Peter Fonda's Wyatt character helped

1948 incyclist swishe d

ells An -various

s duringug traf-

Sonnya, chap -es' mostas secu-ncert i nbed andvho ha dssion of'deadly

Britis h-essed aI him to;uitaris tAngels '

e club svs, rodes imag eessfull y

sloga nbecomed State s

imag ee entiretorcyc lering thected in-jrtraye dgreatly

Europe .l helpe dn in theI-white-choppe rhelped

Harley-Davidson break the outlaw image and cometo represent less malevolent rebellion .

Industry Conditions in 2003In 2003, more than 950,000 motorcycles were sol din the United States and 28 million motorcycles werein operation worldwide . The industry was expecte dto grow by approximately 5 percent annually throug h2007 with light motorcycles, Mopeds, and scootersaccounting for most of the expected growth . A gen-eral increase in incomes in such emerging marketsas China, India, and Southeast Asia was the primaryforce expected to drive industry growth . Demandgrowth for the heavyweight motorcycle categor yhad outpaced smaller motorcycles in the Unite dStates during the 1990s and into 2003, but analyst sprojected that demand for larger motorcycles woul ddecline as the population aged and became les sable to travel on two-wheelers . In 2002, demand fo rheavyweight motorcycles in the United States grewby 17 percent compared to an industrywide growt hrate of 10 percent .

The industry was segmented into various groupson the basis of engine size and vehicle style . Mo-peds, scooters, and some small motorcycles wer eequipped with engines having displacements of 5 0cubic centimeters (cc) or less . These motorbikeswere best suited for urban areas where streets werenarrow and parking was limited or for developin gcountries where personal incomes were limited an dconsumers could make only small investments i ntransportation . Motorcycles used for basic trans-portation or for motocross events were typicallyequipped with engines ranging from 125cc to 650cc .Larger street bikes required more power and usuall yhad engines over 650cc . Large motorcycles with en-gine displacements greater than 65Ice accounted fo rthe largest portion of demand in North America andEurope as riders increasingly chose motorcycle swith more horsepower and better performance .Exhibit 4 presents registrations of 651 +cc motorcy-cles in the United States, Europe, and Asia-Pacific fo r1998-2003 . Even though Europe had fewer registra-tions of 65 1 +cc motorcycles than the United States ,it was the world's largest market for motorcycles ,with 1 .1 million registrations of f25+cc motorcy-cles in 2002 . Registrations of motorcycles with en-gine displacements greater than 125cc in the larges tEuropean markets are presented in Exhibit 5 .


C-36 3

Segmentation withi nthe 651+cc CategoryMotorcycles in the 651 +cc segment were referre dto as heavyweights and were grouped into four cat-egories . Standard heavyweight motorcycles were de-signed for low-cost transportation and lacked man yof the features and accessories of more expensiveclasses of heavyweights. Performance bikes ha dstreamlined styling, low-profile fairings, and seatand handlebar configurations that required the ride rto lean forward; they were characterized by respon-sive handling, rapid acceleration, and high top-en dspeeds . Custom motorcycles ranged from motorcy-cles with a custom paint scheme to highly person-alized bikes painted with murals or other designs ,chromed frames and other components, and acces-sories not found on stock motorcycles . The chopper,among the more unusual custom styles, was limite donly by designers' imaginations but typically had ex-tended forks, high handlebars, a narrow front tire ,and a rigid "hardtail" frame design that lacked rea rshocks and was stretched longer than normal motor -cycles . Another notable feature of custom chopperswas that they were almost always built from stoc kHarley-Davidson motorcycles, sometimes retainingonly the engine .

Custom bikes were the largest segment of th eU.S . heavyweight market for motorcycles and hadbecome a curiosity for noncyclists . The DiscoveryChannel regularly aired two programs dedicated tothe topic of choppers and other custom vehicles .The names of two custom motorcycle shops, Wes tCoast Choppers (WCC) and Orange County Chop-pers, frequently made the Internet search engin eLycos's list of 50 most-searched terms . Jesse James ,a descendent of the famous American Old West out -law and owner of West Coast Choppers, also madeLycos's list of most-searched terms . WCC chargedbetween $60,000 and $150,000 for its custom mo-torcycles, which were usually sold to celebritie ssuch as movie stars, professional athletes, and roc kmusicians .

Touring bikes were set apart from other cat-egories by creature comforts and accessories thatincluded large fairings, storage compartments, C Dplayers, cruise control, and other features typicallyfound on cars rather than on motorcycles . Touringbikes were popular in the United States since manybaby boomers wished to enjoy biking, but with som e

Johnny,is cam ee one i ntment o f

peoplender the:ate, and

C-364


Exhibit 4 Market Shares of the Leading Producers of Motorcycles by Geographi cRegion for the Heavyweight Segment, 1998-2003 (engine displacemen tof 651+cc )

New U .S . registrations(thousands of units )

Total market new registrations 461 .2 442 .3 394 .3 340 275 .6 227. 1

Harley-Davidson new registrations 228 .4 209 .3 177 .4 155 .1 134 .5 109. 1

Buell new registrations 3 .5 2 .9 2 .6 4 .2 3 .9 3. 2

Total company new registrations 231 .9 212.2 180 .0 159 .3 138 .4 112. 3

Percentage market share49 .5% 47.5% 45 .0% 45 .6% 48 .8% 48.1 %Harley-Davidson motorcycle s

Buell motorcycles 0 .8 0.7 0 .7 1 .2 1 .4 1 . 4

Total Harley-Davidson 50 .3% 48 .2% 45 .7% 46 .8% 50 .2% 49.5 %

Honda 18 .4% 19 .8% 20 .5% 18 .5% 16 .4% 20 .3%s i

Suzuk i

Kawasaki

9 . 8

6 .7

9 . 6

6 .9

10 . 8

8 .0

9 . 3

9 .0

9 . 4

10 .3

10 . 010 .1

c

Yamaha 8 .5 8 .9 7 .9 8 .4 7 .0 4 . 2

Other 6 .3 6 .6 7 .1 8 .0 6 .7 5 .9Pc

Total 100 .0% 100 .0% 100 .0% 100 .0% 100 .0% 100 .0 %

New European registration s(thousands of units )

Total market new registrations 323 .1 303 .5 292 .1 293 .4 306 .7 270 .2

C

Total Harley-Davidson new registrations 26 .3 20 .1 19 .6 19 .9 17 .8 15 .7 1

Percentage market share

Total Harley-Davidson 8 .1% 6.6% 6.7% 6.8% 5.8% 5.8 %

Honda 16 .7 21 .0 17 .4 21 .8 22 .2 24 . 1

Yamaha 16 .0 17 .7 16 .4 17 .3 18 .0 16 . 3

BMW 15 .3 15 .1 15 .1 13 .0 13 .0 13 . 4

Suzuki 15 .5 14 .8 16 .5 14 .3 15 .4 17 . 2

Other 28 .4 24 .8 27.9 26 .8 25 .6 23 . 2

Total 100 .0% 100 .0% 100.0% 100 .0% 100 .0% 100 .0 %

New Asia-Pacific registration s(thousands of units )

Total market new registrations 58 .9 63 .9 62 .1 62 .7 63 .1 69 . 2

Total Harley-Davidson new registrations 15 .2 13 .0 12 .7 12 .2 11 .6 10 . 3

Percentage market share

Total Harley-Davidson 25 .8% 21 .3% 20 .4% 19 .5% 18 .5% 14 .8%

Honda 17 .8 19 .1 17 .3 20 .4 22 .4 28 . 0

Kawasaki 13 .8 15 .8 15 .6 18 .9 19 .0 22 . 1

Yamaha 11 .4 13 .6 15 .8 17 .0 19 .0 16 . 0

Suzuki 10 .7 10 .1 12 .8 10 .4 9 .3 7 . 9

Other 20 .5 20 .1 18 .1 13 .8 11 .8 11 . 2

Total 100 .0% 100 .0% 100 .0% 100.0% 100 .0% 100 .0%

Source: Harley-Davidson Inc . 10-K reports and annual reports .


C-36 5

Exhibit 5 Registrations of New Motorcycles in Major Europea nMarkets, 1998-2003 (engine displacement of 125+cc )

Country 1998 1999 2000 2001 2002 2003

Germany 175,937 187,192 170,636 158,270 145,369 138,712

Italy 79,400 103,800 122,085 126,400 129,261 130,224

France 88,500 109,105 103,900 106,802 113,852 N/ A

Great Britain 84,500 98,186 93,634 91,543 93,557 N/ A

Spain 35,600 39,200 38,052 31,829 35,252 N/A

N/A = Not available .

Sources : Association des Constructeurs Europeens de Motocycles, Brussels ; Industrieverband Motorra dDeutschland e .V.

comfort. Comfortable saddles, upright riding po-sitions, and other features found on touring bike swere especially welcomed by those who took cross -country or other long-distance journeys on their mo-torcycles . Custom and touring motorcycles were les spopular outside of the United States since cyclists inother countries were more likely to travel only shor tdistances and did not necessarily identify with theindividualist or outlaw image associated with heavy-weights in the United States . The largest segmen tof the heavyweight motorcycle category outside th eUnited States was the performance bike categor ysince most riders in other countries preferred sleekstyling and were more interested in speed and han-dling rather than in comfort and tradition . In addi-tion, motorcyclists in Europe and Asia tended t ochoose performance bikes over motorcycles in thecustom and touring categories because of the hig hrelative prices of such motorcycles . Exhibit 6 present sa regional comparison of motorcycle registrations b yheavyweight category for 1998 through 2002 .

Competition in the GlobalMotorcycle IndustryRivalry in the motorcycle industry centered on per-formance, styling, breadth of product line, image andreputation, quality of after-the-sale service, and price .Most motorcycle manufacturers had good reputation sfor performance and styling with the greatest vari-ance between brands occurring in pricing, variety o fmodels, and quality of dealer service . Most cyclists

preferred not to purchase specific brands, even if theywere attracted to specific models, if the company'sdealers did not have trained mechanics or had a repu -tation for shoddy workmanship or poor parts availabil -ity. There was also a great degree of price variabilityin the industry with comparable models of Japanesemotorcycles typically carrying retail prices far belo wthat of U.S .- or European-made motorcycles .

Exhibits 7 and 8 illustrate the difficulty U .S . andEuropean manufacturers had experienced in attract-ing price-sensitive buyers in Europe . The Japaneseproducers were able to offer high-performancemotorcycles at prices below those of Harley -Davidson, Ducati, Triumph, or Moto Guzzi . BMWhad achieved considerable success in Europe ,especially in Germany, because of exceptiona lperformance and reputation, a strong dealer network ,and regional loyalty to the brand .

Motorcycle manufacturers, like automobile man-ufacturers, maintained relationships with suppliers t oproduce or assemble components such as upholstery,tires, engine parts, brake parts, wiring harnesses ,shocks, and rims . Almost without exception, th emanufacturer designed and manufactured its engine sand frames . Design and assembly of motorcycle stook place in the manufacturers' home country, andcompleted motorcycles were exported to countrymarkets where dealer networks had been established .

Consumers typically evaluated brands by talk-ing to other cyclists, reading product reviews, perus-ing company Web sites, noting ads in print and othe rmedia, and noting a manufacturer's performance incompetitive events . Typically, consumers had some

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Exhibit 6 Regional Comparison of the 651+cc Motorcycl eMarket by Segment,* 1998-2002 (percent of unit sregistered )

United States

Custom 58 .4% 57.7% 56 .6% 58 .9% 60 .3 %

Touring 20 .4 21 .7 21 .1 20 .3 20 . 2

Performance 19 .4 18 .9 20 .4 19 .1 17 . 3

Standard 1 .8 1 .8 2 .0 1 .7 2 . 2

100.0% 100.0% 100 .0% 100 .0% 100 .0%

Europ e

Custom 22 .8% 20.2% 17 .6% 17 .8% 13 .8 %

Touring 5.3 5 .5 5 .2 5 .2 4 . 8

Performance 59 .8 58 61 .7 59 .8 61 . 2

Standard 12.1 16 .3 15 .5 17 .2 20 .2

100 .0% 100 .0% 100 .0% 100 .0% 100 .0%

Asia-Pacifi c

Custom 18 .3% 28 .6% 26.7% 23.9% n/aTouring 3 .9 4 .7 3 .7 7 .2 n/aPerformance 76 .1 64 .5 66 .2 65 .5 n/aStandard 1 .7 2 .2 3.5 3 .4 n/a

100 .0% 100 .0% 100 .0% 100 .0% n/a

*Category definitions :

Custom Characterized by "American styling ." Often personalized by accessorizing .

Touring: Designed primarily for long trips, with an emphasis on comfort, cargo capacity, an dreliability. Often have features such as two-way radios (for communication with passenger), stereo ,

and cruise control .

Performance: Characterized by quick acceleration, top speed, and handling . Commonly referred toas "sport bikes ."

Standard: A basic, no-frills motorcycle with an emphasis on low price .

Source : Harley-Davidson Inc . 2003 and 2002 10-K reports .

ability to negotiate prices with dealers, but mos tpreferred to buy from dealers with good servicedepartments, large parts inventories, and attractivefinancing programs . Similarly, strong motorcycledealers preferred to represent manufacturers wit hgood reputations and strong consumer demand, re-sponsive customer service and parts delivery, for-mal training programs for service technicians, andfinancing divisions that offered competitive ratesand programs .

Consumers purchased motorcycles for variousreasons . Some individuals, especially in developingcountries, were looking for low-cost transportation .Lightweight motorcycles, mopeds, and scooters werepriced inexpensively compared to cars and used far

less gasoline . However, motorcycles provided noprotection from the elements and were used only fo rfair-weather transportation by most riders who als o

owned a car . In the United States and Europe, mos tconsumers who purchased a motorcycle also owne da car and preferred to travel by motorcycle on week-ends or other times they were not working . Some i nEurope did choose to commute to and from wor kon motorcycles when weather permitted because o flimited parking available in large European citie sand the high cost of fuel . Many motorcycle owners ,particularly so in the United States, looked at ridingas a form of recreation and had given up other sport s

or hobbies to spend time touring on motorcycles .

Many middle-aged bikers in the United States ha d


C-36 7

Exhibit 7 Market Shares of the Leading Sellers o fMotorcycles in Germany, 2001-200 3(engine displacement of 125+cc )

Sources : Kraftfahrtbundesamt Industrieverband Motorrad Deutschland e .V.

BMW 16.0% 18 .1% 19 .5 %

Suzuki 21 .7 20 .3 19 . 2

Yamaha 16 .3 16 .0 15 . 9

Honda 16 .8 17 .3 15 . 5

Kawasaki 11 .1 10 .7 10 . 6

KTM 3 .1 3 .8 4 . 4

Harley-Davidson 3 .6 3 .7 4 . 2

Ducati 2 .8 2 .8 2 . 9

Triumph 2 .5 1 .8 2 . 0

Aprilia 1 .7 1 .5 1 .4

Moto Guzzi 0 .6 0 .7 0 . 9

Buell 0 .4 0 .3 0 . 6

MV/Cagiva 1 .2 0 .8 0 . 6

MZ 0 .5 0 .4 0 . 3

Sachs 0 .3 0 .2 0 . 2

Other 1 .4 1 .6 1 . 9

Total 100 .0% 100 .0% 100 .0%

ided no

only fo r

vho als ole, mos t

a owne din week-Some i n

.m work

cause of

in citie s

owners ,

at riding

er sports

>rcycles .

aces had

Exhibit 8 Best-Selling Motorcycle Models in Germany, November 2003

Sources : Kraftfahrtbundesamt ; Industrieverband Motorrad Deutschland e.V .

Manufacturers'

Year-to-DateRecommended

2003

HeavyweightRank

Brand

Model -

Price ($ US)

Registrations

Classification

BM W

Suzuk i

BM W

Suzuk i

Yamah a

Suzuk i

Suzuk i

Kawasaki

BMW

BMW

R 1150 G S

GSF 1200 (KL)

F 650 G S

SV 65 0

FZS 600

GSF 600

GSX-R 1000

Z1000

R 1150 R T

R 1150 R

$14,500

7,399

8,190

6,299

6,499

6,29 9

10,59 9

8,49 9

16,29 0

9,990

6,24 2

4,02 3

3,52 4

3,44 4

3,29 4

3,182

2,8362,825

2,607

2,539

Enduro/Tourin g

Performance

Enduro/Tourin g

Standar d

Standar d

Standar d

Performanc e

Performanc e

Touring

Performanc e

C-368


purchased motorcycles after giving up sports andactivities requiring more athleticism or endurance .

REGULATION AND LEGA LCHALLENGE SThe motorcycle industry was subject to laws an dregulations in all countries where motorcycles wer eoperated . The European Parliament and the Europea nCouncil included motorcycles in their agreemen tto reduce exhaust gas values during their Marc h2002 meeting . The agreement required producer sof motorcycles and scooters to reduce pollutants b y60 percent for all new cycles produced after Apri l2003 . A further 60 percent reduction would be re-quired for motorcycles produced after January 2006 .Demand for motorcycles in Europe was impacted t oa great degree by the implementation of the euro i n2002 : prices of motorcycles increased substantiall yin some countries when the currency exchange too keffect . For instance, because Germany's currenc ywas much stronger than that of many other Europea nUnion countries, prices of most products and serv-ices increased in Germany after the change to theeuro since the euro attempted to equalize the differ-ences between currencies . The difficulty in obtainin ga driver's license for motorcycles in some Europea ncountries also affected demand for motorcycles .German laws required separate automobile and mo-torcycle licenses for riders of motorcycles larger tha n125cc, and France required those applying for motor -cycle licenses to have first held an automobile licensefor two years . Austria's licensing laws were the mostrestrictive, requiring applicants to first hold an auto -mobile license for five years and to complete six train -ing sessions prior to obtaining a motorcycle license .Motorcycles that produced excessive noise were als ounder attack in most European countries .

In the United States, motorcycle producers wer esubject to certification by the Environmental Protec-tion Agency (EPA) for compliance with emission andnoise standards, as well as agencies in some state simposing more stringent noise and emission stan-dards . The California Air Resources Board (CARB )had outlined new tailpipe emission standards tha twould go into effect in 2004 and 2008 . The EPA de-veloped new emission standards that would go int oeffect in 2006 and 2010 to match national standards

with those in California . Motorcycle producers in th eUnited States were also required to meet the produc tsafety standards imposed by the National HighwayTraffic Safety Administration (NHTSA) .

Also in the United States, many motorcyclist sfound that their health insurance providers exclude dcoverage for any injuries sustained while on a mo-torcycle . The American Motorcyclists Associatio n(AMA) had successfully petitioned the U .S . Senate topass a bill in October 2003 that would prohibit insur-ance companies from denying coverage to someon ehurt while riding a motorcycle, a snowmobile, or anall-terrain vehicle . Insurance companies had basedtheir policies on NHTSA statistics that found motor-cycling to be much more dangerous than travelin gby car. While traffic fatalities per 100 million vehicl emiles traveled hit a historic low in 2002, motorcycl efatalities had increased for a fifth consecutive year ,to reach 3,244 deaths. There were 42,815 traffi cfatalities in 2002 involving occupants of automo-biles . Fatalities involving motorcyclists ages 50 an dolder increased by 26 percent during 2002 a higherrate of increase than any other age demographic .State legislatures in some states where helmets wereoptional had attempted to force motorcyclists wh ochose not to wear helmets to become mandatoryorgan donors . However, the AMA and its member-ship had successfully stopped all such attempts t opass mandatory organ donor laws .

HARLEY-DAVIDSON' SSTRATEGY FO RCOMPETING IN TH EMOTORCYCLE INDUSTRYHarley-Davidson was reincorporated in 1981 afterit was purchased from AMF by 13 of its manager sthrough a leveraged buyout (LBO). The managemen tteam's main focus at the time was to preserve jobs ,but its members soon realized the company woul d

need to be rebuilt from the ground up to survive . The

company's market share in the United States ha d

fallen to 3 percent, primarily because its product s

were unreliable and had poorer performance relativ e

to less-expensive Japanese motorcycles . In addition,

its nthatUpome nHar ionl ybeg ;tim ewe rquashittopr eHacu smofor20 1fo rdi ewtim

1


C-369

-s in th earoduc tighway

cyclist scclude damo-

)ciatio nmate tot insur-nneon e

or a nl base dmotor-avelin gvehicl earcycl ee year,traffi c

utomo -50 andhigherraphic .ts werets whoidator yember-npts t o

1 afte rnager semente jobs ,wouldie . Thees hadoduct selativedition,

its network of dealers ran greasy, run-down shop sthat many people didn't feel comfortable visiting .Upon assessing the company's situation, the manage-ment team concluded that a strong allegiance to th eHarley brand by many bikers was the company' sonly resource strength . However, when manager sbegan to meet with customers, they found that long -time Harley riders felt cheated by the company an dwere angry about the lack of attention to produc tquality and customer service under AMF owner-ship. Some of the most loyal Harley riders refusedto call models produced in the 1970s Harleys ,preferring to label them as AMFs. After the LBO ,Harley management tried to win over previouscustomers by attending any function at whichmotorcyclists congregated . The company's direc-tor of communications at the time commented in a2003 interview with a trade publication . "At first wefound that our customers didn't like us, and the ydidn't trust us "' However, the distrust subside dwhen Harley owners saw their suggestions bein gimplemented by the company.

Harley-Davidson's turnaround strategy includ-ing improving product quality by adopting Japa-nese management practices, abandoning a relianc eon advertising in favor of promotions at motorcycl erallies, and improving its dealer network to broadenits appeal to new customers . After hearing com-plaints about dealers from Harley riders at rallie sand other bike events, Harley-Davidson conducte da pilot program with two dealers in Milwaukee thatcalled for the dealers to build clean, attractive storesto showcase the company's improved motorcycle sand display apparel and other merchandise that cy-clists might wish to purchase . The two dealershipsrecaptured their investments within 18 months ,while other dealers struggled. The pilot progra mled to new or remodeled dealerships across th eHarley-Davidson network and helped the compan yenter into a new product category . Harley showroom soffered a large assortment of clothing items andaccessories--for example, leather jackets, T-shirts ,helmets, and boots in addition to new motorcycles .In 2003 Harley-Davidson introduced 1,200 ne wclothing items and licensed its name to more tha n100 manufacturers making everything from Harley -Davidson Edition Ford F-150 pickups to Harley Bar-bie dolls . Apparel and accessories were so important

to the company and its dealers that in 2003 ever ydealer had a fitting room .

Cultivating Loyalty ThroughHOG MembershipAfter Harley-Davidson's product quality issues ha dbeen resolved, the company focused on cultivatin gthe mystique of Harley ownership . The companyformed Harley Owners Groups (HOGs) in 1983 t oprovide Harley owners with local chapters throug hwhich they could socialize and ride with other own-ers . Harley-Davidson established HOGs in citie swhere dealers were located, but did not interfere wit hHOG operations or try to use the organization in aself-serving way. The company's primary interest i nsetting up the chapters was to give motorcycle buy-ers a sense of community . Management understoo dthat once new owners came to feel they belonged tothe Harley community, they would bring new buy-ers to the company without any encouragement fro mHarley-Davidson .

The company provided each new Harley buye rwith a free membership to a HOG where they coul dnot only meet other area bikers but also learn the insand outs of the biker world . HOGs also organizedrides, raised money for charities, and participated i nnationwide HOG events . Owners were required to re -new their free memberships each year to ensure tha tonly active participants would be on chapter roles .The HOG organization started with 33,000 member sin 1983 and had grown to 793,000 members in 1,200chapters in 2003 . The company sponsored about 100HOG rallies in 2003, with thousands of additionalevents organized by local chapters .

Harley's Image and Appeal withBaby BoomersEven though Harley sold many motorcycles to con-struction workers, mechanics, and other blue-colla rworkers, Harley riders included a great many account-ants, lawyers, bankers, and corporate executives . In2003, Harley-Davidson's typical customer was a 46-year-old male earning $78,000 per year . The companyhad successfully added upscale consumers to its list o fcustomers without alienating traditional bikers. Someof the more traditional bikers did complain about the


pointout t :icitiz~trios(not 1tore )thei rley sCal ion eco monAI-conthe }nuaersremand

C-37 0

new breed of "bean counter Harley owners," some -times calling them "rubbers"—rich urban bikers . Suchconcern had been calmed to some degree by Willia mG. Davidson's continuing involvement with the com-pany. "Willie G" was the grandson of the company'scofounder and, as chief designer, had designed ever ymotorcycle for the company since the 1960s . Willi e

G. was an "old-school " biker himself and rational-ized the company's alliance with upscale baby boom-ers with comments such as "There's a lot of beaners ,but they're out on the motorcycles, which is a beauti-ful thing" '

Part of the appeal of HOG membership was tha tnew motorcyclists could experience freedom of theopen road, much like a Hells Angel might, if onl yduring occasional weekends when the weather wasnice . Some middle-aged professionals purchase dHarleys because riding was an opportunity to recre-ate and relax without being reminded of their dailyresponsibilities . Belonging to a HOG or other rid-ing group was different from joining a country clu bor other club dominated by upper-income families ;as the CEO of a Fortune 500 company explained ,"Nobody cares what anybody else does . We shar ea common bond of freedom on a bike" This sam eHarley owner claimed that after a few hours ofriding, he forgets he's a CEO.' Another affluentHarley owner suggested that Harley owners fro mall walks of life shared the brotherhood of the ope nroad: "It doesn't matter if you make $10,000 a yea ror $300,000" 9 Others suggested that Harley own-ership gave you an identity and provided you wit ha close group of friends in an increasingly anony-mous culture .

However, other Harley owners were lured b ythe appeal of Harley-Davidson's outlaw image .The editor of AARP Magazine believed that babyboomers purchased Harleys because of a desire tofeel "forever young" L0 The AARP Magazine edito rsaid that riding a Harley helped take boomers bac kto a time when they had less responsibility . "You saw`Easy Rider .' As a kid, you had a bit of a wild periodin the '70s and you associate the motorcycle wit hthat . But you got married . You had kids and a career.Now you can afford this . It's a safe way to live outa midlife crisis . It's a lot safer than running off witha stewardess°' In fact, many of Harley-Davidson 'scompetitors have claimed that Harley sells lifestyles ,not motorcycles . Harley-Davidson CEO Jeffre yBleustein commented on the appeal of the com-pany's motorcycles by stating, "Harley-Davidso nstands for freedom, adventure, individual expression

and being a little on the edge, a little bit naughty.People are drawn to the brand for those reasons" , '

The desire to pose as a Hells Angel, Peter Fonda' sWyatt character, or Brando's Johnny helped Harley -Davidson sell more than 290,000 motorcycles andover $200 million in general merchandise in 2003 .Many of Harley-Davidson 's 1,400 dealers dedicatedas much as 75 percent of their floor space to appareland accessories, with most suggesting that betwee n25 and 40 percent of their annual earnings came fro mthe sale of leather jackets, chaps, boots, caps . helmets ,and other accessories . One dealer offered her opinionof what drove merchandise sales by commenting ,"Today's consumer tends to be a little more affluent ,and they want the total look." L3 The dealer also saidthat approximately 5 percent of the dealership's ap-parel sales were to non—bike owners who wanted th ebiker image . Even though some high-income bab yboomers wanted to be mistaken from a distance forHells Angels' "1 percenters" the most rebellious Ipercent of the population for most it was all show.When looking out at the thousands of leather-cladbikers attending Harley-Davidson's 2003 MemorialDay centennial celebration in Milwaukee, a Harleyowner said, "The truth is, this is mostly professiona lpeople . . . People want to create an image . Everybodyhas an alter side, an alter ego . And this is a chance tohave that" 7

Another Harley owner who had ridden his Heri-tage Softail from his home in Sioux Falls, Sout hDakota, to attend the centennial event commente don his expectations for revelry during the four-daycelebration by pointing out, "Bikers like to part ypretty big . It's still a long way to go before you for -get the image of the Hells Angels ."' However, week-end bikers were quite different from the image theyemulated. The Hells Angels continued to be linke dto organized crime into 2003, with nine Hells Angel smembers being convicted in September 2003 of dru gtrafficking and murdering at least 160 people, most

of whom were from rival gangs .'" Similarly, Hell s

Angels organizations in Europe had been linke d

to drug trafficking and dozens of murders ." Fifty-seven Angels in the United States were arrested inDecember 2003 for crimes such as theft of motor -cycles, narcotics trafficking, and firearms and explo-sives trafficking following a two-year investigatio nof the motorcycle club by the Bureau of Alcohol ,Tobacco, Firearms and Explosives . "

Harley-Davidson balanced its need to promot e

freedom and rebellion against its need to distanc e

the company from criminal behavior. Its Web site


C-37 1

n aughty.ons ."1 2

Fonda'sHarley-

:lies andn 2003 .edicatedapparel

betweenne fromlelmets,opinio nnenting ,affluent ,lso saidlip's ap-nted thene baby1.nce forillious 111 show.her-clademoria lHarley

essionalNrybodylance to

is Heri-, Sout htmentedbur-dayo party3ou for-r, week-ge they

linke dAngel sofdruge, most

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' Fifty-sited i nmotor-

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Iromot elistanceIeb site

pointed out that "the vast majority of riders through -out the history of Harley-Davidson were law-abidin gcitizens," and the company archivist proposed, "Eve nthose who felt a certain alienation from society werenot lawless anarchists, but people who saw the mo-torcycle as a way to express both their freedom an dtheir identity ."'`' When looking at the rows of Har-leys glistening in the sun in front of his SouthernCalifornia roadside cafe, the longtime proprietor o fone of the biggest biker shrines in the United State scommented, `There used to be some mean bastard son those bikes. I guess the world has changed ."' "A Harley-Davidson dealer commented that dealersconsidered hardcore bikers "1 percenters" becausethey made up less than 1 percent of a dealer's an-nual sales . The dealer found that very affluent buy-ers made up about 10 percent of sales, with th eremainder of customers making between $40,000and $100 .000 per year. '- '

Harley-Davidson's ProductLin eUnlike Honda and Yamaha, Harley-Davidson did no tproduce scooters and mopeds, nor did it manufac-ture motorcycles with engine displacements less than651cc . In addition, Harley-Davidson did not producedirt bikes or performance bikes like those offere dby Kawasaki and Suzuki . Of the world's major mo-torcycle producers, BMW produced bikes that mostclosely resembled Harley-Davidson's traditional line ,although BMW also offered a large number of per-formance bikes . In 2004, Harley-Davidson's tourin gand custom motorcycles were grouped into five fami-lies : Sportster, Dyna Glide, Softail, Touring, and theVRSC V-Rod. The Sportster, Dyna Glide, and VRSCmodels were manufactured in the company's KansasCity. Missouri, plant, while Softail and Touring mod-els were manufactured in York, Pennsylvania . Harley -Davidson considered the Sportster, Dyna Glide, an dVRSC models custom bikes, while Softails and Tour-ing models fell into the Touring industry classifica-tion. Sportsters and Dyna Glides each came in fou rmodel variations, while Softails came in six variation sand Touring bikes came in seven basic configurations .The VRSC V-Rod came in two basic styles . Harley-Davidson produced three models of its Buell perfor-mance bikes in its East Troy, Wisconsin, plant. In 2004 ,Harley Sportsters carried retail prices ranging fro m$6,495 to $8,675 ; Dyna Glide models sold at pric epoints between $11,995 and $16,580; VRSC V-Rods

sold between $16,895 and $17,995 ; Softails were of-fered between $13 .675 and $17,580; and the Roa dKing and Electra Glide touring models sold at price sbetween $16,995 and $20,405 . Consumers could als oorder custom Harleys through the company's Cus-tom Vehicle Operations (CVO) unit, started in 1999 .Customization and accessories on CVO models coul dadd as much as $10,000 to the retail price of Harley -Davidson motorcycles . Images of Harley-Davidson'sfive product families and CVO models can be viewe dat

Honda, Kawasaki, Suzuki, and Yamaha hadall introduced touring models that were very clos ereplicas of Harley Sportsters, Dyna Glides, Roa dKings, and Electra Glides . The Japanese producershad even copied Harley's signature V-twin engin eand had tuned their dual-crankpin designs in a nattempt to copy the distinctive sound of a Harley -Davidson engine . However, even with prices up to50 percent less on comparable models, none of' th eJapanese producers had been able to capture sub-stantial market share from Harley-Davidson in th eUnited States or in their home markets . (Refer bac kto Exhibit 4 for a breakdown of market shares i nthe heavyweight segment in the U .S ., European, andAsia-Pacific regions .) Indian Motorcycle Corpora-tion had experienced similar difficulties gainingadequate market share in the U .S . heavyweight seg-ment and ceased its operations for a second time i nSeptember 2003 .

Harley-Davidson's difficulties in luring buyers i nthe performance segment of the industry were simila rto challenges that Japanese motorcycle producers hadencountered in their attempts to gain market share i nthe custom and touring categories of the U .S . heavy -weight motorcycle segment . Harley-Davidson ha dco-developed and later purchased Buell to have aproduct that might appeal to motorcyclists in theUnited States who were in their 20s and did not iden-tify with the Easy Rider or Hells Angels images o rwho did not find Harley-Davidson's traditional styl-ing appealing . Harley management also believed thatBuell's performance street-racer-style bikes coul dhelp it gain market share in Europe, where perfor-mance bikes were highly popular . The Buell brandcompeted exclusively in the performance categoryagainst models offered by Honda, Yamaha, Kawasaki ,Suzuki, and lesser-known European brands such a sMoto Guzzi, Ducati, and Triumph . Buell prices be-gan at $4,595 for its Blast model to better competewith Japanese motorcycles on price as well as on per-formance and styling . Buell's Lighting and Firebolt

C-372


models were larger, faster motorcycles and retaile dfor between $9,000 and $11,000 . The VSRC V -Rod„with its liquid-cooled, Porsche-designed engine, wa salso designed to appeal to buyers in the performanc esegment of the industry, both in the United State sand Europe.

As of 2004, Harley-Davidson had not gaine da significant share of the performance motorcycl esegment in the United States or Europe . Some in-dustry analysts criticized Harley-Davidson's dealer sfor the lackluster sales of V -Rod and Buell models

since most dealers did little to develop employees 'sales techniques. Demand for Harleys had e xceed-ed supply since the early 1990s, and most dealers 'sales activities were limited to taking orders an dmaintaining a waiting list . In addition, most Harley-Davidson dealers had been able to charge $2,000 t o$4,000 over the suggested retail price for new Har-ley-Davidson motorcycles, although most dealershad begun to sell Harleys at sticker price in 2003 ,Harley-Davidson's revenues by product group ar eshown below :

Harley-Davidson Revenues by Product Group (in millions)

Harley-Davidson motorcycles $3,621 .5 $3,161 .0 $2,671 .3

Buell motorcycles 76 .1 66 .9 61 . 7

Total motorcycles $3,697 .6 $3,227 .9 $2,733 .0

Motorcycle Parts and Accessories 712 .8 629 .2 509 . 6

General Merchandise 211 .4 231 .5 163 . 9

Other 2 .5 2 .4 0 . 3

Net revenue $4,624 .3 $4,091 .0 $3,406 .8

Source: Harley-Davidson Inc . 2002 and 2003 annual reports .

The number of Harley-Davidson and Buell mo-torcycles shipped annually between 1998 and 200 3is presented in Exhibit 9 .

Distribution and Sales in NorthAmerica, Europe,and Asia-Pacifi cHarley-Davidson's dealers were responsible for op-erating showrooms where motorcycles could b eexamined and test-ridden, stocking parts and acces-sories that existing owners might need, operatin gservice departments, and selling biking merchandisesuch as apparel, boots, helmets, and various Harley -Davidson-branded gift items . Some Harley ownersfelt such strong connections to the brand that the yeither gave or asked for Harley gifts for birthdays ,weddings, and anniversaries . Some Harley ownershad even been married at Harley-Davidson dealer -ships or at HOG rallies . Harley-Davidson dealerswere also responsible for distributing newsletter sand promoting rallies for local HOG chapters . The

10,000-member Buell Riders Adventure Group(BRAG) was also supported by Harley-Davidso ndealers .

Harley mechanics and other dealership person-nel were trained at the Harley-Davidson Universit y(HDU) in Milwaukee, where they took courses insuch subjects as retail management, inventory con-trol, merchandising, customer service, diagnostics ,maintenance, and engine service techniques . Morethan 17,000 dealership employees took courses a tthe company's university in 2002 . Harley-Davidso nalso provided in-dealership courses through its Web -based distance learning program . In 2002, HD Uheld 665 instructor-led classes, 115 online classes,and had participation in their courses by 96 percentof the company's dealers .

The company also held demo rides in variou slocations throughout the United States, and man yHarley dealers offered daily rentals designed tohelp novices decide whether they really wanted a

motorcycle . Some dealers also rented motorcycles for

longer periods to individuals who wished to take long -distance trips . Harley-Davidson motorcycles coul d

i p l oyees 'exceed-dealers '

ders andt Harley-;2,000 t ofew Har-t dealersin 2003 .roup are


C-373

Exhibit 9 Annual Shipments of Harley-Davidson and Buell Motorcycles ,1998-2003

Harley-Davidso n

Sportster 57,165 51,171 50,814 46,213 41,870 33,89 2

Custom* 151,405 141,769 118,303 100,875 87,806 77,43 4

Touring 82,577 70,713 65,344 57,504 47,511 39,492

291,147 263,653 234,461 204,592 177,187 150,81 8

Domestic 237,656 212,833 186,915 158,817 135,614 110,902

International 53,491 50,820 47,546 45,775 41,573 39,91 6

291,147 263,653 234,461 204,592 177,187 150,81 8

Buel l

Buell (exc . Blast) 8,784 6,887 6,436 5,043 7,767 6,33 4

Buell Blast 1,190 4,056 3,489 5,41 6

9,974 10,943 9,925 10,189 7,767 6,334

* Custom includes Softail, Dyna Glide, and VRSC .

Source: Harley-Davidson Inc . 2002 and 2003 annual reports .

Group)avidson

variousid manygned tovanted aycles fo rike loneres could

person-niversitycurses i nDry con-gnostics ,;s . Morep urses a t)avidso nits Web -

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0 percent

also be rented from third parties like EagleRider th eworld's largest renter of Harleys, with 29 location sin the United States and Europe . Harley-Davidson'sRiders Edge motorcycle training courses were als ooffered by quite a few dealers in North America ,Europe, and Asia-Pacific. The company had foundthat inexperienced riders and women were muchmore likely to purchase motorcycles after taking atraining course . Harley-Davidson management be-lieved the 25-hour Riders Edge program had con-tributed to the company's increased sales to women ,which had increased from 2 percent of total sales priorto the adoption of the program to 9 percent in 2003 .

In 2003, Harley-Davidson motorcycles weresold by 644 independently owned and operate ddealerships across the United States . Buell motor-cycles were also sold by 436 of these dealers . Therewere no Buell-only dealerships, and 81 percent o fHarley dealers in the United States sold Harley -Davidson motorcycles exclusively. The companyalso sold apparel and merchandise in abou t50 nontraditional retail locations such as malls ,airports, and tourist locations . The company'sapparel was also available seasonally in about 2 0temporary locations in the United States where therewas significant tourist traffic . The company also ha dthree nontraditional merchandise outlets in Canada ,where it had 76 independent dealers and one Buell

dealership . Thirty-two of its Canadian Harley dealer salso sold Buell motorcycles .

Harley-Davidson had 161 independent deal-ers in Japan, 50 dealers and three distributors in th eAustralia/New Zealand market and seven other deal-ers scattered in smaller East and Southeast Asia nmarkets . Only 73 of Harley-Davidson's Asia-Pacificalso sold Buell motorcycles . The company also hadtwo dealers that sold Buell but not Harley-Davidso nmotorcycles. Harley-Davidson motorcycles weresold in 17 Latin American countries by 32 dealer-ships . The company did not have a dealer for it sBuell motorcycles in Latin America, but had 1 3retail stores carrying only apparel and merchandis ein the region .

The company's European distribution divisio nbased in the United Kingdom served 32 countries i nEurope, the Middle East, and Africa . The Europeanregion had 436 independent dealers, with 313 choos-ing to also carry Buell motorcycles . Buell motorcycleswere also sold in Europe by 10 dealers that were no tHarley dealers . Harley-Davidson also had 26 nontra-ditional merchandise retail locations in Europe .

Exhibit 10 presents the company's revenues bygeographic region, along with the division of asset sin the United States and abroad and a breakdown o ffinancial services revenues by region . The company'sfinancial services unit provided retail financin g

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Exhibit 10 Harley-Davidson's Net Revenues and Long-Lived Asset sby Business Group and Geographic Region, 2000-2003

2003 2002 2001 2000

Motorcycles net revenue

United States $3,807,707 $3,416,432 $2,809,763 $2,357,972

Europe 419,052 337,463 301,729 285,372Japan 173,547 143,298 141,181 148,684

Canada 134,319 121,257 96,928 93,352

Other foreign countries 89,649 72,520 57,185 57,966

$4,624,274 $4,090,970 $3,406,786 $2,943,346

Financial services incom e

United States $

260,551 $

199,380 $

172,593 $

132,684

Europe 8,834 4,524 1,214 655

Canada 10,074 7,596 7,738 6,796

$

279,459 $

211,500 $

181,545 $

140,135

Long-lived assets

United States $1,400,772 $1,151,702 $1,021,946 $ 856,746

Other foreign countries 41,804 36,138 33,234 27,844

$1,442,576 $1,187,840 $1,055,180 $ 884,590

Source: Harley-Davidson Inc . 2002 and 2003 10-K reports .

to consumers and wholesale financial services todealers, including inventory floor plans, real estat eloans, computer loans, and showroom remodelingloans .

CHALLENGESCONFRONTIN GHARLEY-DAVIDSO NAS IT ENTERED ITSSECOND CENTURYAs Harley-Davidson entered its second century i n2004, the company not only celebrated a success-ful centennial celebration that brought more tha n700,000 of Harley's most loyal customers to Mil-waukee but also a successful year with record ship-ments, revenues, and earnings . New capacity hadallowed the company's shipments to increase to mor ethan 290,000 units, which drove annual revenues t o$4 .6 billion and net earnings to nearly $761 million .The company's planned 350,000-square-foot expan-sion of its York, Pennsylvania, plant would allow the

company to increase production to 400,000 unit sby 2007 . However, there was some concern that thecompany might not need the additional capacity .

Some market analysts had begun to believeHarley-Davidson's stock was approaching its ape xbecause of the aging of its primary baby boome rcustomer group . Between 1993 and 2003, the aver-age age of the company's customers had increasedfrom 38 to 46 . The average age of purchasers o fother brands of motorcycles in 2003 was 38 . Som eanalysts suspected, that within the next 5 to 10 years ,fewer baby boomers would be interested in ridingmotorcycles and Harley's sales might begin to de -cline . Generation X buyers were not a large enoughgroup to keep Harley's sales at the 2003 level, whichwould cause the company to rely on Generation Y(or echo boomer) consumers . However, most Gener-ationY motorcyclists had little interest in the compa-ny's motorcycles and did not identify with the Easy

Rider or outlaw biker images that were said to appea lto baby boomers. The company's V-Rod motorcycl ehad won numerous awards for its styling and per-formance, but its $17,000-plus price tag kept mos t20-year-olds away from Harley showrooms . Simi-larly, Buell motorcycles were critically acclaimedin terms of performance and styling but had bee n


C-375

unable to draw performance-minded consumers i nthe United States or Europe away from Japanes estreet-racing-style bikes to any significant degree .

Europe was the largest market for motorcyclesoverall, and the second largest market for heavy -weight motorcycles, but Harley-Davidson had strug-gled in building share in the region . In some way sthe company's 6+ percent market share in Europ ewas impressive since only 4 .8 percent of motorcycle spurchased in 2002 were touring cycles and custo mcycles accounted for only 13 .8 percent of motorcy-cles sold in Europe during 2002 . The V-Rod's great-est success was in Europe, but neither the V-Rod norany other HD model had become one of the top-1 0best-selling models in any major European market .

There was also some concern that Harley-Davidson's 14-month production run had caused a nunfavorable short-term production problem since th ecompany's waiting list, which required a two-year

wait in the late 1990s, had fallen to about 90 day sbeginning in mid-2003 . The overavailability of 2003models had caused Harley-Davidson's managemen tto adopt a 0 percent down payment financing pro -gram that began at midyear 2003 and would ru nthrough February 2004 . When asked about the pro -gram during a television interview, Harley-DavidsonCEO Jeffery Bleustein justified it by noting, "It's notzero percent financing, as many people understoodit to be, its zero dollars down, and normal financing .The idea there was to get the attention of some o fthe people who aren't riding Harleys and are used t oa world of other motorcycles where there's alwaysa financing program of some sort going on . We justwanted to get their attention"' By year-end 2003 ,dealer inventories had declined to about 2,000 unit sand many dealers again began charging premium sover list price, but not the $2,000—$4,000 premium scharged in prior years .

Endnote s

As quoted in "Analyst Says Harley's Success Had Been to Drive int oBuyers' Hearts," Canadian Press Newswire, July 14, 2003 .'As quoted in January 21, 2004, press release .'As quoted in "Wings of Desire," The Independent, August 27, 2003.As quoted in "Born to Raise Hell," BBC News Online, August 14, 2000 .

5"Wheel Life Experiences," Whole Pop Magazine Online.As quoted in "Will Your Customers Tattoo Your Logo?" Trailer/Body

Builders, March 1, 2003, p. 5.'As quoted in "Will Harley-Davidson Hit the Wall? " Fortune, July 22 ,2002 .'As quoted in "Even Corporate CEOs Buy Into the Harley-Davidso nMystique, Milwaukee Journal-Sentinel, August 24, 2003 .'As quoted in "Harley-Davidson Goes Highbrow at Annual Columbia ,S .C ., H.O .G . Rally:' The State, September 26 . 2003 .

0 As quoted in "Even Corporate CEOs .""Ibid .

As quoted in "Milwaukee-Based Harley-Davidson Rides into Futur ewith Baby Boomers Aboard, " The News-Sentinel, August 5, 2003 .

"As quoted in "Harley-Davidson Fans Sport Motorcycle Style," DetroitFree Press, August 28, 2003 ."As quoted in "Bikers Go Mainstream 100 Years On," Global NewsWire, September 11, 2003 ."Ibid .""Nine Montreal Hells Angels Sentenced to 10 to 15 Years in Prison,"CNEWS, September 23, 2003 ."'`Hells Angels: Easy Riders or Criminal Gang?," BBC News, January2, 2004 .''"Feds Raid Hells Angels' Clubhouses," CBSNews.com, December 4,2003 .13As quoted in "Wings of Desire," Global News Wire, August 27, 2003 ."Ibid .'Interview with Mobile, Alabama, Harley-Davidson dealershi ppersonnel ."As quoted in a CNNfn interview conducted on The Money Gang ,June 11, 2003 .

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Documents

Harley-Davidson in 2004 - Indiana Universityhome.kelley.iupui.edu/kwendeln/J402F08/Harley15eCASE20.pdf · Case 20 Harley-Davidson in 2004 Exhibit 1 Photos from Harley-Davidson's Open