Harley-Davidson is a motorcycle icon that enjoys a mythical status among fans and a reputation among investors for solid returns. The good times, when dealers charged full price and customer demand outstripped supply, ended in 2014, and this week’s second-quarter financial report has not offered much to be optimistic about.
Second-quarter sales of its motorcycles and related products were down 6 per cent compared with a year earlier, and the company cut its forecasts for shipments this year.
Despite recent positive news such as the media launch of its long-awaited LiveWire electric motorcycle, the quarterly report exposes a company with crushing debt, rising customer loan defaults and continually declining sales. Milwaukee-based Harley-Davidson Inc. says it plans to grow through exports, and blames tariffs for the lack of traction in foreign markets, but that does not paint a complete picture.
The report points out that overall domestic demand is shrinking, but that the company is doing better there than others. While Harley-Davidson has dominated the highly profitable North American luxury motorcycle market for decades, the United States represents just 1 per cent of the 62 million motorcycles sold globally.
Meanwhile, rival luxury brands KTM, BMW and Triumph have all experienced record growth globally over the same period that Harley-Davidson suffered losses, specifically in Europe, India and China, the export markets Harley-Davidson has identified as crucial to its future.
Harley-Davidson motorcycles are deeply rooted in tradition at a time when competitors offer vehicles with a wide array of electronic rider aids and advanced safety technologies, such as multimode engine maps and traction control. The company’s V-twin engines, famous for their unique sound and feel, struggle to match the performance of rivals and will not meet new emission-control standards that come into force starting in 2020 in the world’s biggest markets.
Harley-Davidson developed the retro-styled and entry-level Street 500 and 750 motorcycles to win over newcomers, particularly in Asia. It was the right strategy, one Britain’s Triumph Motorcycles Ltd. and Italy’s Ducati Motor Holding S.p.A. used to propel their brands to record sales. But the Street family failed to find significant market traction, with production discontinued in Brazil and steep discounts available in India to clear two years of unsold stock.
The introduction of the LiveWire, the first high-performance electric motorcycle from a mainstream manufacturer, is positive news. The vehicle is also touted as the first of several all-new models that Harley has promised will turn things around. The aggressive plan depends heavily on research and development as well as business development in new areas where the company is weak or non-existent, which presents serious challenges.
Competitors, including Honda Motor Co. Ltd. and Yamaha Motor Company Ltd., are orders of magnitude larger in terms of scale and R&D assets, manufacturing tens of millions of motorcycles annually, as well as robots, jet planes and cars. Both already produce electric bicycles and motorcycles, possess self-balancing and autonomous riding technology, and earn more patents than the rest of the industry combined. They, along with other competitors BMW, Suzuki Motor Corp. and Kawasaki Heavy Industries Ltd., benefit from being divisions of conglomerates that they can exploit for tech and economies of scale.
The biggest red flag in the latest report is in the financials. As a maker of expensive luxury motorcycles, Harley-Davidson depends on a robust consumer credit environment for sustained prosperity. The company admits that both 30-day delinquencies and annualized loss rates are high and rising, just shy of the record levels set before the great recession of 2008.
According to credit agency Moody’s Corp., which rated Harley-Davidson’s recent US$553-million asset-backed securitization note, more than half of that debt pool features loans extending beyond six years. The second-hand market for Harley-Davidson motorcycles is already flooded, so if consumers with these long-term loans need to get out, they will face depressed demand and soft pricing, which will further bloat the used market, killing demand for new motorcycles.
As a motorcycle manufacturer, Harley-Davidson has operated only in its sheltered niche of classic American custom and touring models, where innovation and technology were less critical to success. As that corner of the market continues to shrink, attracting new customers will depend on stealing them from other segments and from the brands that dominate them.
To do that, Harley-Davidson must simultaneously invent, deploy and sell record-shattering volumes of new products against entrenched innovation giants, all of whom have decades of in-market experience, with deeper pockets, in markets Harley has never competed in.
Harley-Davidson has powerful tools it can use to effect positive change, such as a sharp leadership team and enough market capitalization to finance a transition into something new, but time is incredibly short.
The brand will survive regardless, because it is one of the most valuable in the world. The real question is, in what form? The next 12 months will decide.
Michael Uhlarik is a design and planning specialist at Motorcycle Global, consulting international brands in the powered two wheel industry. He has no investment positions in Harley-Davidson Inc.