The Harley-Davidson Paradox

The motor company gets beat down by critics for lack of technology advancements and then they’re pummeled on social media by customers every time they sway off from tradition.

In this category, the rock and hard place are A) the need for change and B) the danger of following the buzz.  And, in an increasingly social media driven world it is easy, and tempting, to mistake the buzz and savvy social pundits for a real business opportunity.

Simultaneously, the Wall Street view of Harley-Davidson’s move into electric motorcycles being an enduring trend will likely come up dry.  Then the industry analysts believe the U.S. motorcycle market is in terminal decline and are not influenced by a “fun appliance” and the More Roads to Harley-Davidson plan.

But, for many riding enthusiasts, the motor company has introduced so many changes over the last few years its difficult to know where to start.  I’m not talking paint colors, rather engineering developments, i.e. water-cooled engines, Reflex Linked Brakes with ABS,  Reflex Defensive Rider System (RDRS), subscription-based cellular connectivity, advanced electronics with Bluetooth connectivity, voice recognition (microphone/headphone fitted to the rider’s helmet), text to speech technology, sophisticated GPS navigation system, wind tunnel designs to reduce head buffeting, LED lights, revised manufacturing processes, 131 cubic inch Screamin’ Eagle® Crate Motor and the first great-looking electric motorcycle (LiveWire) along with a large number of smaller updates.

The list goes on and on….

Other than the fact that the motorcycles are not inexpensive and in several instances most everyone would consider as very expensive, there’s not much else really to grumble about.

Yet, Harley-Davidson stated yesterday in the Q4 2019 and year-end financial report that its motorcycle sales slipped again!  Despite multiple new models, electrification, expanded overseas operations and Brand strategies to resuscitate demand.

The 4th quarter 2019 net income was $13.5 million on consolidated revenue of $1.07 billion versus net income of $0.5 million on consolidated revenue of $1.15 billion in the fourth quarter of 2018.  That brought full-year 2019 revenue to $5.36 billion, compared with $5.72 billion in 2018.  For 2019, earnings were $2.68 a share, compared with $3.19 in 2018. Adjusted earnings for 2019 were $3.36 a share, down from $3.78.  Harley-Davidson sold 7% fewer units in Q4’19 than a year earlier. The U.S. dealers which account for half of worldwide Harley sales, saw their retail sales fall 3%.

CEO Matt Levatich tried to curb the narrative numbers skid (12th consecutive quarter of U.S. retail sales decline!) in the company’s announcement, saying, “Our performance in Q4 and the full year was in line with our expectations and indicative of increased business stability.”

I am reminded that in matters of business, it’s often the case that the most vehement of corporate assertions are at 180 degrees to inconvenient facts.

The freedom of the open road is all very well, but remaining in the marketplace and growing is key. The motor company should avoid “stooping to compete” with the rest of motorcycling (i.e. chasing buzz).  Harley is iconic because, instead of treating motorcycles as a commodity, it recognizes them as a basis for a lifestyle and a shared set of attitudes

Photos courtesy of Harley-Davidson

UPDATE: January 30, 2020 — added: 12th consecutive quarter of U.S. sales decline.

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The Harley-Davidson ‘False Friend’

“Harley-jiang” 338cc

A ‘false friend’ (‘faux amis’ in French) is a word in two languages that on the face of it sounds or looks alike, but which does not share the same meaning or which may even mean the opposite.

When you communicate with people from other countries in another language than your own, you need to consider both cultural and language differences if you want to engage in a good, honest and accurate dialogue.

Speaking of another language…

Press reports have circulated since June that Harley-Davidson is working with the Quianjiang (QJ) motor group to introduce its ultra-affordable (parallel-twin) motorcycle for the Chinese market. According to this article, both motorcycle manufactures have approved the final design of the motorcycle by ‘signing off’ publicly.  The new motorcycle is a parallel-twin streetbike, which is currently expected to launched in the Chinese market by the end of 2020.

For motorcyclists of a certain age, parallel-twin sport bikes are synonymous with British iron of the ’70s. Ride one down the street and watch as babies point and smile, dogs chase joyfully, angsty teens fight the curling in the corners of their mouths, old biker types in leather nod with appreciation.

But, I’ve digressed…

The manufacturing and production of the motorcycle will be done by Qianjiang, a motorcycle-building giant in China. Since 2016 it’s been owned by automotive behemoth Geely, which sells cars under its own name but also owns more familiar western brands Volvo and Lotus as well as the upcoming car firm Lynk&Co. Qianjiang itself sells motorcycles under brands including Keeway, Generic, KSR-Moto and, Benelli.

The Italian-branded part of this equation is most relevant.  While true motorcycle enthusiasts will recognize the Italian roots associated with the Benelli brand, the company is no longer authentically Italian.  Since 2005 Benelli has been a part of the Qjianjiang (QJ) motor group, the largest capacity manufacturer of motorcycles in China. Qjianjiang produces over 1.2M vehicles per year at its super modern factory in Wenling, about 250 miles from Shanghai. With over 14,000 employees, the factory is as big as many cities.  Benelli is one of the oldest Italian motorcycle brands, now Chinese-made machines. The motorcycle company once manufactured acclaimed shotguns, although that part of the business is now a separate company.

According to this post: A modern Benelli will offer you poor build quality, vibrations, a finish that’s below what anyone would expect of a modern motorcycle, and depending on the model, you can also get a motorcycle with bad power to weight ratio and less than inspiring handling. “What a great way to spend our hard-earned money…”

The design of the joint “Harley-jiang” 338cc parallel-twin engine motorcycle is heavily inspired (inspired = essentially a parts-bin special slapped together to meet demand) by the Benelli 302S. The current thinking is to borrow parts so the motorcycle development can be accelerated.  The motorcycle shares the trellis frame, motor, swing-arm, suspension and braking components with the Benelli 302S.  A trellis frame connects the steering head to the swing-arm pivot as directly as possible using metal tube arranged in triangulated reinforcement. Using lattice girder principles, a trellis frame is typically constructed of round or oval section metal tubular segments that are welded or brazed together.  I think Ducati when I hear trellis frame!  Also, in using the crankshaft from the Benelli 302S, with a stroke of 45.2mm, and the pistons and cylinders of the TRK and Leoncino 500cc engine – which uses a 69mm bore – you get the 338cc.

Harley-Davidson’s “More Roads” plan is all about bringing it’s brand of freedom to more people around the world.  That marketing strategy/message seems naive and incredibly ironic given the human rights abuses in China and the “police state” in Hong Kong!  I’m unclear how the Chinese Harley-Davidson inspired motorcycle maverick ― Stickin’ It to the Man ― will square given everything is completely controlled by the Chinese Communist Party.

In connecting the title of this post back to China; “There are few things worse than mistaking an enemy for a friend.” ― Wayne Gerard Trotman

If you want to observe first-hand a commercial website in disarray visit Benelli.

Photo rendering courtesy of Harley-Davidson

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Harley-Davidson Q3 2019 Financial Results

Harley-Davidson, Inc. (NYSE:HOG) reported the third quarter 2019 financial results in a press release HERE.

Key indicators the motor company reported was revenue from motorcycle and related products fell 4.9% Y/Y to $1.07B in Q3.  Motorcycle shipments were down 5.8% to 45,387 and gross margin fell one point to 29.9% of sales.  The company stated it expects shipments of 38,500 to 43,500 motorcycles in Q4 and 212K to 217K for the full year.

In other interesting financial sound bites; Harley’s Q3 marketing spend was up over 30% with efforts on the LiveWire and LowRider S television spots running in major markets across the U.S.  International retail sales were up 2.7% driven by growth in both developed and emerging markets.  In addition, Harley-Davidson gained 2.2 percentage points of market share during the quarter within the Touring and Cruiser segments, which represents approximately 70% of the total 601cc plus industry.

In the attracting more people to riding and keeping riders riding space (i.e. the 2027 strategic imperative) — in Q3 the company gained deeper analysis and insights on why people engage, participate and disengage from riding.

Lets call it a “participation lifecycle!”

H-D Marketing and Brand Amplification

Harley-Davidson now has an acute focus on how to influence each customer at their buying decision points to build the total number of committed Harley-Davidson riders.  By 2027,  the company will expand to 4M total Harley-Davidson riders in the U.S., grow international business to 50% of annual HDMC revenue, launch 100 new high impact motorcycles and do so profitably and sustainably.  Lastly, Harley added Amplified Brand as a growth catalyst in the More Roads to Harley-Davidson’s growth plans.

For example Harley-Davidson refreshed their brand look at major events during Q3 including Sturgis, World Surf League and Spartan races and recently announced we will be the presenting sponsor at next summer’s hotly anticipated Hella Mega music experience tour featuring Green Day, Weezer and Fall Out Boy.  The Hella Mega Tour being promoted by Harley-Davidson is the co-headlining tour of rock bands Green Day, Fall Out Boy, and Weezer. The tour was announced on September 10, 2019 and includes dates from March to August 2020.

Navigating Section 301 Tariff Process

You can’t have a finance report these days and not talk about TARIFFS!  The dizzying series of trade and tariff events over the last few months has pushed the trade war front and center into Harley-Davidson.  How to navigate the Section 301 Tariff process, prepare for any impact etc., is a challenge in of itself.  For the full year 2019, Harley-Davidson now expect impacts of recent EU and China tariffs to be approximately $105 million. This is a $5 million increase from prior expectations and is driven by an increase in Section 301 tariffs, which continue to shift with the breeze as part of global trade negotiations.

It appears that some developed nations will slip towards recession, and governments and companies keep hoping the signs of economic weakness in China would push all the parties to a “deal” table faster.  Harley-Davidson looks to continue mitigating the impact of tariff increases through tariff classification, tariff engineering, first sale, and other methods.  Some of which may have an impact on U.S. manufacturing jobs.

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Q3’19 Press Release:  HERE
Investor Slides:  HERE
Transcript of Q3’19 Financial Call:  HERE
More Roads Plan:  HERE
Hella Mega Tour:  HERE
Section 301 Tariffs:  HERE

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Photos courtesy of Harley-Davidson

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