Case Study 3

204 Part 2 Strategy Content and Formulation for Multinational Companies

C H .A P T E R C A S E

Harley-Davidson, Inc.: Troubled Times Increase H-D's Reliance on International Sales

JAMES W. BRONSON, UNIVERSITY OF WISCONSIN-WHITEWATER MARGARET L. KUCHAN, UNIVERSITY OF WISCONSIN-WHITEWATER

( • ) 2009 Mission Statement, as stated on the company Web site: We inspire and fulfill dreams around the world through Harley-Davidson motorcycling experiences.

( H ) 2007 Mission Statement: We fulfill dreams through the experience of motorcycling, by pro­ viding to motorcyclists, and to the general public, an expanding line . of motorcycles, branded products, and services in · selected market segments.

arley-Davidson, the over-100-year-old man­ ufacturer of motorcycles, turned a corner in 2008-2009, but it was largely the wrong corner. Total sales for 2008 were down

4 percent from the company's 2006 high. Sales in North America, the company's dominant market, were off 17 percent, and the company estimated its total sales would be down an additional 1013 percent in 2009. Part of the problem could be attributed to sell­ ing a luxury good during a recession, but Harley­ Davidson (H-D) had also made some notable tactical errors.

Harley-Davidson's Financial Services (HDFS) had financed the sale of motorcycles to buyers of ques­ tionable financial means. These motorcycle loans were resulting in a high default rate. H-D's question­ able loans and high default rate closely paralleled the 2008-2009 bank crisis brought on by subprime mort­ gages. H-D wrote off $80 million in loans in 2008, and 2009 is expected to be worse. Where H-D had been a Wall Street darling since the early 1990s, as of mid- 2009 it is on many sell lists.

The most damaging aspect of loan default was not the loss on the loans, but the thousands of used H-D motorcycles that entered the marketplace at bargain

prices. Traditionally, used H-D motorcycles had retained their value, and value retention was a major selling point. However, the glut of used H-D motor­ cycles not only eroded the sales of new H-D motor­ cycles but significantly reduced the value of H-D owners' investments.

H-D had been touted as a model for favorable labor relations management for many years. This era may have come to an end in 2008 when H-D announced the layoff of up to 1,500 employees, or about 15 percent of the company's workforce. While the labor force was being reduced as the result of declining domestic sales and diminished profits, outgoing CEO James Ziemer's pay jumped from $4,447,713 in 2007 to $5,625,595 in 2008, a 26.5 percent increase.

The bright spot for H-D was international sales. Between 2006 and 2008 H-D's international revenue increased by 49 percent. During the same period the number of motorcycles sold in international markets grew 28 percent, while the domestic market decreased 25 percent.

H-D produces and sells only heavyweight motor­ cycles under the H-D brand. These motorcycles, showcasing chrome and flawless paint, are intended to make a statement for their owners. It can be an expen­ sive statement; 2009 base prices ranged from $6,999 for the smallest model, the venerable Sportster, to over

$29,999 for the massive Tri Glide Ultra Classic. Acces­ sories, shipping, import tariffs, and other duties and licenses can more than double the factory price in off­ shore markets. The company also manufactures about 13,000 motorcycles a year under the Buell brand.

The company has defined the heavyweight segment as motorcycles with engines displacing a minimum of 651 cc. Following a decade of short supply, the pro­ duction of H-D heavyweight motorcycles rose markedly

Chapter 5 Strategic Management in the Multinational Company 205

nthe first six years of the twenty-first century. A portion of the rise in production was attributable to a nontradi­ tional design, the V-Rod or VRSC. Introduced for the 2002 model year, H-D's VRSC model merged engi­ neering from German auto manufacturer Porsche with H-D's classic design. Increased production capacity and a slowing domestic market were driving H-D's increased focus on international markets.

International Market for Luxury Goods

Economists define luxury goods and services as goods for which demand increases more than propor­ tionally as income rises. From a sociocultural perspec­ tive, a luxury good is seen as a product at the highest end of the market in terms of design, quality, durability, performance, and price. The definition of luxury is not solely objective; it is also subjective as a function of the buyers' personal circumstances and the status the good conveys. The concept of luxury evolves con­ stantly with the ever shifting economic, demographic, sociocultural, and geopolitical climate. Classic luxury goods include haute couture items such as clothing, perfume, and luggage. Most products and services have a luxury segment, such as cars, hotels, and even chocolate. Bain and Company, consultants, put the value of the global market for luxury goods at

$201 billion. Estimates of this market can vary widely depending on the goods and services included and range up to $1 trillion. What does not vary widely are estimates of the global decline in the luxury good mar­ ket, about 10 percent for 2009. The decline will be even higher in the United States, where sales are expected to be off 15 percent. Not all markets for lux­ ury goods are expected to contract; China should be up 7 percent. Whether sold in the domestic or inter­ national market, H-0 motorcycles fall into the highest end of the market in terms of price, quality, and finish­ the luxury segment of the motorcycle market.

North and South America The United States con­ sumes roughly 25 percent of the world's luxury goods,

with the remainder of North and South America con­ suming an additional 8 percent. In the United States, four million households have an income of more than

$1 million. This population defines the luxury sector through its patronage. There are an additional 18 million households in the U.S. with incomes over $100,000. Although the purchase of luxury goods is less frequent in these 18 million households, their collective purchase of luxury goods is a significant share of the market. The purchasers of luxury goods are not price resistant, but they do want to know what they get for their money. Thus, companies must demonstrate that not only are their products luxurious but that they will also add value to the consumer's lifestyle.

Europe The estimates for the size of the European luxury good market is currently 38 percent of the global market. Europe is the spiritual home of luxury goods and the originator of many traditional brands, such as ·Chanel, Louis Vuitton, and Ferrari. European demographics bear many similarities to those in the United States. However, in Europe income growth has been more evenly distributed across the popula­ tion. Europe also has doubled the population of seniors. Those seniors control more wealth and are more likely to spend that wealth on luxury goods.

Japan Japan is the home of the largest Louis Vuitton store, a fact that seems appropriate given that 94 percent of Tokyo wom n in their 20s own something from Louis Vuitton. Japanese luxury goods retailers account fpr 12 percent of the global market, and they often charge 40 percent more than in the European market. Prestige is valued in Japanese cul­ ture, and external signs of status are evident.

China China, together with India and Russia, is part of what is seen as the so-called golden triangle of the newly wealthy who are thirsty for luxury goods. These growth markets are attractive to Western luxury goods businesses, whose sales efforts have tradition­ ally been concentrated on the United States, Europe, and Japan. China currently accounts for 3 percent of the global market for luxury goods. China is expected to pass Japan to become the world's second-largest

Harley-Davidson: Motorcycle Sales in Units: Domestic and International Markets

H D Units	Percentage		Percentage		Percentage		Percentage
Sold 2008	Change (%)	2007	Change (%)	2006	Change (%)	2005	Change (%)	2004
Domestic 206,309	-15	241,539	-12	273,312	3	266,507	2	260,607
International 97,170	9	89,080	17	75,984	22	62,510	10	56,682
Total 303,479	-8	330,619	5	349,196	6	329,017	4	317,289

206 Part 2 Strategy Content and Formulation for Multinational Companies

purchaser of luxury goods by 2015. Consumers are status conscious, increasingly wealthy, hungry for brand image, and fanatical about shopping. A recent survey of young urbanites on the Chinese mainland found that over 60 percent of them are prone to buy­ ing high-end consumer goods. On the average, luxury goods consumption accounts for 4 percent of con­ sumer spending, but in China the proportion is esti­ mated to be as high as 40 percent.

India Of all Indian households, 1.6 million spend an average of $9,000 a year on luxury items. India has the· highest wage growth in Asia. Multi-income families and increasing international exposure are driving a sociocultural transition from saving to spending. Sales of luxury products have risen by 20 percent per year, and consumers want the latest models and exclusive editions. India's luxury car market has tripled in the past five years despite import duties of about 100 percent. · !

Russia Russia accounts for 5 percent of the global luxury goods market. The country is producing today's most determinedly conspicuous consumers and may rival China as the fastest growing market for luxury goods. A lot of this spending is abroad, as more than

23 million Russians travel outside the country each year. While the luxury market continues to develop in Russia, it is not yet saturated and the demand for exclusive and prestigious brands continues.

Consumption of luxury goods reflects a movement to a single luxury esthetic that incorporates influences from every corner of the globe. This means that a brand's ethnicity is no longer an indicator of where its owners are from, where the goods are produced, or who buys them, but rather a matter of buyer preference-for anyone who can pay the price.

The International Heavyweight Motorcycle Market

In the United States, H-D clearly trades on its image and nostalgia to sell its traditional bikes. While Harley's quality and engineering are excellent, the technology of the company's traditional bikes lags behind that of competitors. The technology gap is largely intentional; customers are paying for an American icon. H-D relies on something other than nostalgia for an American icon to sell motorcycles in the international market, however. That something consists of the image and status conveyed by a luxury good. Like the traditional styling and dated mechanical movement of a Rolex watch, the value of an H-D motorcycle is in its status and image and not in its technology.

Heavyweight bikes constituted 55 percent of the

U.S. motorcycle market in 2008. H-D has led the motorcycle industry in domestic unit sales of heavy­ weight bikes for 20 straight years. In 2008 H-D man­ ufactured 46 percent of the heavyweight motorcycles sold in the United States. In the face of recession, the company's domestic unit sales decreased 10 percent from 2004 to 2008. The company faces a challenge in balancing motorcycle availability to ensure high mark­ ups for itself and its dealers, while maintaining market share in the face of stiff competition.

Traditionally, a maximum of 20 percent of the pro­ duction of H-D's traditional motorcycles has been shipped offshore. This policy ensured that the supply of new motorcycles favored domestic dealers. The company broke this unwritten policy in 2006 when it exported 22 percent of production, and by 2008 the export percentage had reached 32 percent. In 2008 the company's combined market share in the heavy­ weight motorcycle segment for the United States and Europe was 31 percent.

The European market is a particularly difficult one for H-D, and the company's market share hovers around 10 percent. The market is an attractive one, however, because European heavyweight motorcycle sales are 83 percent of those in the U.S. market. Unlike the U.S. market, in Europe the H-D image and nostalgia don't sell many bikes. Seventy percent of the European market is comprised of performance bikes, a market segment in which the traditional H-D offerings are not competitive. Harley-Davidson's newest design, the V-Rod or VRSC, with its Porsche-designed engine, competes in this mar­ ket segment. Europeans differ in their tastes on a regional and national basis. Those that favor Italian flair have the option of the racy Ducati and similar bikes, while those who like Teutonic thoroughness can opt for the highly refined BMW. H-D would like to double its European mar­ ket share over the next few years. In 2008, H-D acquired an Italian manufacturer of motorcycles, MV Agusta. The MV Agusta acquisition appears to have been made to advance H-D's pursuit of the European market.

In 2008 H-D sold over 14,600 motorcycles in Japan through a network of 81 dealers. The VRSC model is popular with Japan's 20-something thrill junkies. Overall motorcycle ownership in Japan peaked in the mid- 1980s and has been in a slow decline since then. However, the decline in ownership has been largely limited to motorcycles less than 250 cc. Japanese law currently does not allow a motorcycle driver to carry a passenger.

China and India offer large and fast growing motorcy­ cle markets. In both countries motorcycles meet the

Chapter 5 Strategic Management in the Multinationa l Company 207

( 2 00 8 Percentage Change ( % ) 2 0 0 7 Percentage Change ( % ) 2 0 0 6 Percentage Change ( % ) 2 0 0 5 Percentage Change ( % ) 2 0 0 4 United States 218.9 - 13.0 251.8 -6.2 268.4 5.9 253.4 4.2 243.2 Canada 16 . 5 11. 7 14.8 9.4 13.5 15.9 11 . 7 4.1 11.2 Europe 40.7 4.8 38.9 15 . 0 33.8 14 . 6 29 . 5 19.9 24.6 Japan 14 . 6 6.5 13.8 3.6 13.3 16.3 11.4 11.1 10.3 Other markets 23.1 25 . 0 18 . 5 23.7 15.0 34.3 11.2 19.4 9.3 Total 313.8 -7 . 1 337 . 8 - 1.8 344.0 8.5 317.2 6.2 298.6 )H-D: Motorcycle Retail Unit Sales by International Market (1,000 motorcycles)

basic transportation needs of millions of families and businesses. Each country currently consumes about six million new motorcycles each year with almost all bikes displacing 250 cc or less. Price is the competitive issue, and joint ventures between domestic companies and international motorcycle manufacturers like Honda and Kawasaki produce affordable motorcycles of good qual­ ity. H-D has an agreement with China's Zhongshen Motorcycle Group to develop the Chinese market, and a H-D dealership was opened on the outskirts of Beijing in 2006. Trade barriers at all levels remain a problem in the Chinese market, and motorcycles are banned from a large portion of Beijing. Import tariffs are also onerous in India, running over 90 percent for a heavyweight motorcycle. India's emission standards for bikes over 500 cc are exceedingly rigorous and exclude H-D's cur­ rent products. H-D has engaged in talks with the govern­ ment of India, but there is little reason to think India will change its regulations to permit the import of H-D motor cycles. Despite the vagaries of Indian regulations,Suzuki and Kawasaki have enjoyed modest success selling per­ formance motorcycles in India.

Australia and New Zealand continue to be strong market's for H-D motorcycles. Australia in particular has roads and landscapes similar to those found in United States. H-D is seen as a symbol of the freedom of the open road and has a loyal and passionate fol­ lowing. The growth segment in the Australian motorcy­ cle market is off-road or dirt bikes with 40 percent of the market. H-0 operates a wheel manufacturing plant in Adelaide, Australia. Other significant markets for H-D include Canada, Brazil, and Mexico. H-0 opened its first dealership in Moscow, Russia, in 2005.

Competitors

According to H-D:

Competition in the heavyweight motorcycle market is based upon a number of factors, including price,

quality, reliability, styling, product features, cus­ tomer preference, and warranties . . .. The Company emphasizes quality, reliability and styling in its prod­ ucts and offers a two-year warranty.... (2008 Form 10-K).

All of H-D's major compet itors have their headquar­ ters outside the United States. Most of the major com­ petitors are operating units of large divesified companies like Honda, Yamaha, Kawasaki, Suzuki, and BMW. At least one of H-O's major competitors, Honda, manufactures its largest motorcycles in the United States. A major exception to the large diversified company rule 1s Ducati an Italian company that is a leader in the European perforance market. In addition to offshore competiti?n, H-D faces domestic competitors. These companies include relatively new brands like Big Dog and Polaris, and a number of small custom shops that cater to the ultrahigh-end motorcycle market. .

Ducati Motor Holdings Ducati is representative of H-D's European competition and is listed on bot.h the Milan and New York stock exchanges. Ducat1 has adopted a cyberspace model selling motorcycles, accessories, and clothing online. The company promotes its cyberspace modelthrough participation in motorcy?le racing where Ducati has dominated the world Superb1k Championships for over ten years. Unlike H-0, Ducat1 does not build bikes on the basis of nostalgia and com­ fort· rather Ducati sells style and performance based on technologically advanced designs. Ducatis are race­ proven bikes, sold for use on the street-the ult1mte cafe racer. Like H-0, Oucati employs a premium pricing strategy, even though its customers tend to .be youngr and somewhat less affluent. Unlike most of its competi­ tors Oucati's sales were up 22 percent in 2008. H-O's V-Rd appears to be aimed squarely at the high end of Oucati's customer base.

BMW BMW's focus is on putting their best efforts

into a small range of products, a policy that makes