chap 11 Strategies

8/11/2019 chap 11 Strategies

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C A S E 1 1 H A R L E Y D A V ID S O N 2 S 1 5

manufacturer. Harley ended family ownership in 1965with a public offering. Only fouryears later, the company merged with the American Machine and Foundry Company ,'(AMF), a longtime producer ofleisure products.

Bythe early 1970s , the United S tates was importing huge numbers of lower-priced Japanese motorcycles. Japanese firms were able to capture a large portion ofHarley's market share. Because it had expanded production so quickly , Harley wasalso having quality problems . In 1981, 13of Harley's senior executives purchased thebusiness from AMP.The company then convinced U .S. President Ronald Reagan, byrelying on a recommendation from the International Trade Commission (ITC), toimpose additional tariffs for five years on imported heavyweight Japanese motor-cycles that were 700 cc or larger, starting in 1983. In 1986, Harley- Davidson, Inc. ,became publicly held for the first time since 1969. That same year, Harley regained itsplace at the top of the u.s . super-heavyweight market, beating put Honda . The nextyear, the company asked the ITC to remove the tariffs one year early. This m


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1 6 F R E D R D V I D

the sales of Harley- Davidson motorcycles are to buyers with at least one year of educa-tion beyond high school, and 30 percent have college degrees, Only about 10percentof Harley's U.S. retail motorcycle sales are to women. Repeat business is strong, asabout 42 percent of motorcycle purchasers have owned a .Harley previously.

Harley's heavyweight class of motorcycles is divided into four segments: standard,performance, touring, and custom. The standard segment emphasizes simplicity andcost, and the performance segment emphasizes handling and acceleration. The touringsegment focuses on comfort for long-distance travel; Harley-Davidson pioneered thissegment of the heavyweight market . Harley's custom segment gives owners the oppor-tunity to customize their bikes.

Once a competitor to Harley, but now part of the Harley company, the Buellmotorcycle line serves the standard and performance segments of the market . Buell sellsfour heavyweight performance models, with retail prices ranging from $8,695 to$10,495. The company also offers the Buell Blast f~r the standard market, with a pricetag of about $4,595. The Blast is smaller and lightet ',than the other motorcycles offeredby Buell. The bike also has a single-cylinder engine, as compared to the trademarkV-engine configuration. The company's studies indicate that 57 percent of Buell Blastpurchasers have never owned a motorcycle before and over 50 percent are women.

Harley-Davidson Financial Services (HDFS) finances about 35 percent ofretail purchases of new or used Harleys. HDFS also offers wholesale financing,with services including floor plan and open account financing of motorcycles and

accessories. In addition, the company often makes real estate loans, computerloans, and showroom remodeling loans to many dealers. In the United States andCanada, where these services are offered, they were used by about 95 percent of alldealers.

MarketingHarley-Davidson has approximately 659 independently owned full-service dealer-ships in the United States. About 82 percent of these dealers are exclusive Harleydealerships. The marketing efforts are divided between dealer promotions, cus-tomer events, magazine and direct-mail advertising, and public relations. Harleyalso sponsors racing activities and special promotional events, and it participatesin all major motorcycle consumer shows and rallies. The Harley Owners Group(HOG), which was founded in 1983, currently has approximately 900,000 mem-bers worldwide and is the industry's largest company-sponsored motorcycle

enthusiast organization (www.hog.com). The Buell Riders' Adventure Group(BRAG) was also formed in recent years and has grown to approximately 10,000members. Both HOG and BRAG sponsor events for motorcycle enthusiasts,including national rallies and rides across the United States and around the world.Harley faces competitive forces from the likes of Honda, Suzuki, Kawasaki, andYamaha in maintaining its dominant 48 percent overall market share in theU.S. heavyweight motorcycle market.

Harley-Davidson is one of the most admired and recognized companiesin the world today. The company has licensed the production and sale of t-shirts,jewelry, small leather goods, toys, and other products. The company also licensesthe Harley-Davidson name to two cafes, one located in New York City and one inLas Vegas.

Harley has an online catalog featuring its genuine motor accessories and motorclothes. In addition to browsing and making a wish list, customers can actually purchasethese products at the Web site.The orders are then distributed to local dealers who canship the products directly or hold the items for pickup. .


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2 4 2 3 2 2Net Revenue 5,015 ,190 4,624,274 4,090 ,970

Cost of Goods Sold 3,115,655 2,958,708 2,673,129Gross Profit 1,899,535 1,665,566 1 ,417,841

Financial Serv ices Income 305,262 279 ,459 211,500Financial Services Expense 116,662 111,586 107,273Operating Income from Financial Services 188,600 167,873 104,227

Selling,Administrative and Engineering E xpense 726,644 684,175 639,366 ncome from Operations 1,361,491 1,149,264 882,702

- Investment Income, Net 23 ,101 23,088 16,541Other, Net (5,106) (6,317) (13,416)Income Before Provision for Income Taxes 1,379,486 \,166,035 885,827Provision for Income Taxes . 489,720 405,107 305,610Net Income 889,766 760,928 580,217

BasicEarnings Per Common Share 3.02 2.52 1.92Diluted Earnings Per Common Share 3.00 2.50 1.90

Cash Dividends Per Common Share .405 .195 .135

S l tm HarI~-David50n 's F. 10K 2004, p. 41.

C A S E 11 H A A L E Y D AV I D S ON 2 5 1 0 7

EXHI BLT 1 Harley-Davidson, inc . Consolidated Statements of Income Years Ended December 31,2004 ,2003 , and 2002 (in S .thousands, exceptper share amounts)

FinanceHarley 's recent income statements and balance sheets are prov ided in E xhibits 1and 2.Note that both revenues and net income have increased annually for a number of years.

G lo ba l Is su es

EuropeHarley's international revenue was $917 million in 2004, up from $816 million in

2003. In Europe, Harley is headquartered in Oxford, England, whi ch is the head -quarters for all sales and distribution activities in Europe , the Middle East , andAfrica, including 36 countries . Buell is represented in Europe by seven dealershipsthat do not sell Harley-Davidson motorcycles. Harley t akes into account the uniqueEuropean tastes of many individual countries that t ogether represent a market aboutthe size of the U.S. market . Also , the European Un ion's motorc ycle noise standardsare lower than those mandated by the U .S. Environmen tal Protection Agency (EPA ).This causes research and development costs relat ed to motorc ycle noise em issionsto be higher for motorcy cles produced for the European mark et. The standard andperformance segments account for 74 percent of Harle y has 7.7 percent marketsha~e in Europe. The company has had difficulty growing its market share inEuropean markets. The European region is home to about 389 Harley -Davidsondealerships.

AsiaHarley has about 22 percent of the motorcycle market share in Asia. It is now easierto obtain a heavyweight motorcycle driver's license in Japan. Currently, about


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10 8 F R E D R D V ID

E X H I BJ T 2 Harley-Davidson , Inc . Consolidated Balance Sheets D ecem ber 31 2004and 2003 (in $ thousands, except share amounts)

2 4 2 3

AssetsCurrent Assets

Cash and Ca sh EquivalentsMarketable SecuritiesAccounts Re ceivable, NetCurrent Porti on of Finance Receivable s, NetInventor iesDeferred In come T axesPrepaid Expenses and Other Current Asse tsTotal Current AssetsFinance Receiv ables, NetProperty, Plant and Equipment, NetGoodwillOther AssetsTotal Assets

Liabilit ies and Shareholders' Equi ty

Current Liabilities:Accounts PayableAccrued Expenses and Other Liabil itie sCurrent Portion of Finance DebtTotal Current Liabili tiesFinance DebtOther Long-term Liabili tiesPost-r etirement He althcare Benefit sDeferred Income Taxes

Commitments and Contingencies (Not e 6)

Shareholders Equity

Series A Iunior Parti cipating Preferred Stock , None IssuedCommon Stock, 329,908 ,165 and 326,489,291 Shares

Issued in 2004 and 2003 , RespectivelyAdditional Paid -in CapitalRetained EarningsAccumulated Other Comprehensive (Lo ss) Income

275,1591,336,909

121,3331,207,124

226,89360,51738,337

3,266 .272905,176

1,024,66559,456

227,7245,483,293

329,329993,331112,406

1,001,990207,726

51,15633,189

2,729.127735.859

1,046,31053,678

358,114t,923,088

223,902407,566324,305955,773670,000

86,337127,444125,842

244,202433,053495,441

1,172,696800,000

90,846149,848

51,432

3,266419,4553,074,037

47,1743,543 ,932

3,300533,0683,844 ,571

(12,096)4,368,843

Less:

Treasury Stock (35,597,360 and 24 ,978,798 Shares in 2004 and 2003,Respectively ), at CostTotal Shareholders' EquityTotal Liabil ities and Shareholders' Equi ty

(586,240)2,957,6924,923,088

(1,150,372) .3,218,4715.483.293

S O Mrrt Harley-Davidson 's o rm 1 0 K 2004. p, 42,

170 H arley- Davidson dealers currently serve 10 country markets in the Asia-Pacificregion , but Japan is the largest market with 133 dealers . Australia/New Zealand is theregion 's second -largest market with 51 dealers . Of the 170 total dealers, 134 sell bothHarleys and Buell bikes . Three dealers sell only Buell bikes. .


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CA SE 1 1 H AR LE YD AV IDSON-2005 109

Latin AmericaI n L atin A m erica, Har ley serves14 countries through31 dealers. The com pany has ana ~m bly fa cility in M an au s, Brazil.the first such operation outside the United States.Brazi l i s the seco nd -la rg es t m a rk et in th is regio n, b ehin d M exico with 10 deale rs . The'M a na us fa cility ~ po rts U .S .-m a de c om ponents for final a ssembly in Brazil .

~ CanadaIn Canada, Harley has 75 dealerships ,o f wh ich43 a re c om b in ed H arle y and Buelldealer s.

CompetitionT he U .S. and international heavyweight (651 + c c) motorcycle m a rk et is h ighly compet-itive. Some of Harl ey's major competi td t s have large r f inanc ia l and marketing resourcesand are m_


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11 0 F R E D R D V I D

E X H I B I T 4 Worldwide Heavyweight Motorcycle Registratio n Data (EngineDisplacement of 651 + cc) (units in thousands) ,

2 4 2 3 2 2

UNITS , SHARE UNITS SHARE UNITS HARE

North America

Harley-Davidson N ew Regist rations 255.8 48.2 % 238.3 48.1% 220.1 46.4%Buell New Registrations 3.8 0.7 3,7 0.8 3.0 .6Company Registrations 259.6 48.9% 242 .0 48.9% 223.1 47.0%Market New Registrations 530.8 495.5 475.0

Europe

Harley-Davidson New Registrations 25.9 7.7% 26.3 8.1 % 23.5 7.1%, Buell New Registrations 4.5 1.3 3.1 1.0 1.9 0.6

Company Registrations 30.4 9.0% 29.4 9.1% 25.5 7.7%Market New Registrations 336.2 323.1 331.8

Japan Australia

Harley-Davidson N ew Registrations 15.6 25 .3% 15.2 25.8% 13 .6 21.3%BuellNew Registrations 1.0 1.5 1.0 1.7 .7 1.2Company Registrations 16.6 26 .8% 16.2 27.5% 14.3 22.5%

Market New Registrations 61.9 58.9 63.9

Total

Harley -Davidson New Registrations 297.3 32.0% 279.8 31.9% 257.2 29.6%Buell New Registrations 9.3 1.0 7.8 0.9 5.6 0.7Company Registrations 306.6 33.0% 287.5 32.8% 262.8 30.3%Market New Registrations 928.9 877.5 870.7

Nott : Nort h Ameri ca includes the Unite d St ates a nd Canada . U.S. data provided by the Motorc yc le Indust ry Counci l and Canada c la ra p rovid ed by theM ~ and Mo,ollytie Industry of Canada. Europe dara provided by Giral S .A., includes re ta il s al es in Austria, B elgium, france , Germany, I taly , theNethe rl ands , Spa in , Swuze rl and Unit ed Kingd om, Denmark , Finland , Greece. ~orway , Portugal , and Sweden .Sou r a : www .harley -davidson com

of the European heavyweight (651 + cc) market . Exhibit 4 provides worldwide heavy-

weight motorcycle registration data for 2002 through 2004.

T he F utu reIn the United States, Harley has the kind of name recognition and brand loyalty thatis the envy of the industry. Could it ever develop a similar customer relationshipabroad? Recognizing that part of the Harley image is built on tradition, how canHarley stay true to the things (and people) that helped to make it what it is and stillgrow as i t has in the past few years?

Prepare a three-year strategic plan for Harley-Davidson , Address the specificIssues of international growth opportunities in European countries, as well as domes-tic competitive threats from Honda, Suzuki, and Kawasaki. Examine the strengths ofthe Harley-Davidson brand along with the continuing weakness of ongoing capacityconstraints . Imagine you are chairman and CEO Jeffery L . Bleustein and have the taskof leading this company as it prepares to meet the growing demand for its motorcycles

in the coming years. What specific actions would you take? Should your recommenda-tions be financed with debt or equity? Develop projected financial statements to assessthe impact of your changes.


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EX HIBIT 5 Motorcycle Unit Shipments and Net Revenue (in millions}

INCREASE2 4 2 3 (DECREASE) CHANGE

Motorcycle Unit Shipments

Touring Motorcycle Units 93,305 82,577 10 ,728 1 3.0%Custom Motorcycle Units 154,163 151,405 2,758 1.8Sportster Motorcycle Units 69,821 57 ,165 12,656 22 .1Harley-Davidson Motorcycle Units 317,289 291 ,147 26 ,142 9.0Buell Motorcycle Units 9,857 9,974 (l17) (1.2)Total Motorcycle Units 327,146 301,121 26,025 8.6%

~ Net Revenue ~

~ Harley- Davidson Motorcycles 3,928.2 3,621 .5 306.7 8.5%

Buell Motorcycles 79.0 76.1 2.9 3 .9Total Motorcycles 4,007.2 3,697.6 309.6 8.4

Parts and Accessories 781.6 712.8 68 .8 9.7General Merchandise 223.7 211 .4 12.3 5.8Other 2.7 2.5 0 .2 8.0Net Revenue 5,015.2 4,624.3 390.9 8.5%

SOIIf Cf www .harley -davidson .com

CA SE11 H A R LE Y-D A VID SO N-2005 III

EX HIBIT 6 Harley-Davidson s Geographic information(in $ thousands)

2 4 2 3 2 2

Motorcycles Net Revenue

United States 4,097 ,882 3,807 ,707 3,416,432Europe 477,962 419,052 337 ,463Japan 192,720 173,547 143 ,298Canada 136,721 134,319 121,257Other Foreign Countries 109,905 89,649 72,520

5,015,190 4,624,274 4,090 ,970

Financial Services Income

United States 283,837 260,551 199,380Europe 9;538 8,834 4,524Canada 11,887 10,074 7,596

305,262 279,459 211,500

lolli-lived Assets

United States 1,246,808 1,400;772 1,151 ,702Other Foreign Countries 44,300 41,804 36,138

1,291,108 1,442,576 1,187 ,840

S m www .harley -davidson .com

chap 11 Strategies

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