Case Analysis: Harley Davidson Company

Executive Summary

Harley Davidson Motor Company is a motorcycle manufacturing company founded in Milwaukee, Wisconsin in 1903 by William S. Harley, and the Davidson brothers – Arthur, William, and Walter (Holmstrom 1). In 1969, the company was bought by the American Machine and Foundry (AMF). Between 1970 and 1980, the company experienced financial difficulties and stiff competition from Japanese manufacturers. In June 1981, AMF sold the company to 13 Harley Davidson executives in a leveraged management buy-out for $81.5 million. The management, led by Vaughn Beals (President) and William G. Davidson (Vice President), turned around the company through production efficiency, worker involvement, and quality improvement. Harley-Davidson Inc. went public in 1986. The company grew and started operations outside the United States, opening the first overseas factory in Brazil in 1998, and established a subsidiary in India (Harley Davidson India) in 2009 (Holmstrom 24). It has also established operations globally through a network of independent dealers and subsidiaries with sales in Canada, Asia Pacific, Europe/Middle East/Africa (IMEA) and Latin America. As of May 2017, the company had 6,000 employees and 1,498 dealerships in 97 countries. With a market capitalization of $10.7 billion, it is the fifth largest motorcycle manufacturer in the world (United States Securities and Exchange Commission).

Harley-Davidson Inc. mission is “preserve and perpetuate the Harley Davidson institution through continuous improvement in product quality and services” (Holmstrom 4). To fulfill its mission, the company has two reportable segments, that is, the Motorcycles and Related Products Segment (HDMC) and the Financial Services Segment (HDFS). The Motorcycles segment designs, manufactures and sells Harley-Davidson motorcycles on a wholesale basis as well as motorcycle parts and accessories. It also produces and sells general merchandise comprising MotorClothes apparel and riding gear as well as offering a range of services including motorcycle servicing, customized dealer software packages, and management training programs. The Harley-Davidson Motorcycles include touring, and cruiser models with engine displacements of between 600 cc to 1900 cc. Others include the Standard, Dual, and Sportbike models. The financial services segment provides retail and wholesale financing and insurance services to the company’s dealers and retail customers (Holmstrom 2).

The company reported total revenue of $5.65 billion for the financial year ended 31st December 2017, a 6% decline from the previous year (2016: $5.996 billion). Net income also reduced by 25% from $692.2 million in FY 2016 to $521.8 million. The decrease in revenue was attributed by difficulties in the international markets, particularly softness in the emerging markets of the Middle East, Russia, and South Africa. Although sales of used motorcycles in the U.S. increased by 0.9%, retail sales of new motorcycles in the U.S. declined due to limited availability of model-year 2018 product and industry weakness. The decline of 25% in net income was as a result of lower production volumes coupled with increased manufacturing costs due to the increase in the prices of aluminum and steel and higher depreciation. Also, the enactment of the Tax Act in December 2017 required the company to re-measure its net deferred assets, resulting to a non-cash income tax charge of $53.1 million which contributed further to the decline in net income. The company had a debt-to-equity ratio of 349.7% in FY 2017 (2016: 423.38%) and after-tax Return on Equity (ROE) of 28% (2016: 36%). With total assets of $ 9.97 billion and interest coverage of 32.8 times, the company is able to service its debts. The diluted earnings per share were $3.02 in FY 2017 down 2.1% compared to FY 2016. This was due to the 25% increase in net income. Harley-Davidson’s financial services segment (HDFS) financed 61.2% of new motorcycles in FY 2017 (2016: 61.7%).

Opportunities and Challenges

Harley Davidson Inc. faces several challenges. Ridership demographics have changed considerably over the last few decades. Since 1987, the median age of motorcycle owners has changed from 32 to 48 (Roese and Compella 16). Today, millennials in the U.S. are not widely embracing a lifestyle of motorcycling posing a challenge to new motorcycle sales, while the older generation of riders is gradually aging our of riding. Millennial customers are also more price-conscious. Unfavorable economic conditions and the tightening of retail and credit markets discourages many potential riders from purchasing the premium Harley-Davidson motorcycles. Additionally, the company faces stiff competition from Japanese, Indian and European companies which is contributing to a shrinking market share – Harley-Davidson’s market share decreased by 0.5% in FY 2017. Foreign motorcycle manufacturers such as Polaris have taken discounting measures in the last few years, and their cheaper models have seen them grab Harley-Davidson’s market share. Harley-Davidson’s CEO Matt Levatich also faces the challenge of continuous improvement in product quality while reducing production costs and increasing the company’s response to market changes. Another problem facing the company is exposure to market risk from a stronger U.S dollar, and changes in interest rates and commodity prices. The company relies heavily on the international market, and the weakening of foreign currencies relative to the U.S. dollar affects the company’s sales and margin levels.

Despite these challenges, the company has expressed a positive outlook on the future by taking advantage of the opportunities in the market. Harley-Davidson’s most significant opportunities are product diversification, global expansion, and growing ridership in the U.S. On the global diversification front, the company will focus on the Asian market, especially India and China, where the motorcycle market is expected to grow considerably in the next decade. The company is also set to open a subsidiary in Thailand. Moreover, the company plans to introduce new high-impact motorcycle models and increase its investment in electric motorcycle technology. Harley-Davidson’s 10-year strategy is to build a ridership of 2 million people in the U.S, introduce 100 high-impact models and grow international sales by 50%. The company also has a manufacturing optimization plan which will result in annual cash savings of $25- $30 million and $45-$50 million in financial years 2019 and 2020 respectively.

International Business Policies and Ethics

Foreign policy has a significant impact on Harley Davidson’s operations, given that more than one-third of its sales are to markets outside the U.S. The recent trade friction between the U.S. and Europe has adversely affected the company’s performance. Europe is Harley-Davidson’s largest overseas market – 16% of sales in the FY 2017 were to Europe. In 2018, U.S. President, Donald Trump significantly increased trade tariffs by 25% on Steel and 10% on aluminum imports from Europe, Canada, and Mexico. Europe, through the European Commission, has responded through retaliatory tariffs on motorcycles and other goods which have negatively affected the company’s sales to Europe. European tariffs increased from 6% to 31%, considerably increasing the cost of producing each unit by $2,000 and increasing total production and sales costs by $90 million to $100 million annually. The trade war between the U.S. and Europe has made Harley-Davidson motorcycles less accessible to European customers.

Such trade wars that are politically instigated are unethical and adversely affect business operations of large multinational companies. Harley-Davidson being one of the most recognizable American brands has been targeted by foreign leaders looking to make a political point in a trade war. The trade war between the U.S. and Europe has led to the company’s management to shift production overseas. However, President Donald Trump has put pressure on the company not to move production out of the U.S. In June 2018, President Trump stated Harley Davidson “would not be able to sell back into the U.S. without paying a big tax” (Kamm). The political pressure on Harley-Davidson has resulted in a decline in revenue and net income.

Recommendations

The recommendations to the CEO are to diversify the product mix, focus on international markets, and innovate products that are more affordable and environmentally friendly. The global market for motorcycles presents growth opportunities. Harley-Davidson has a limited market reach, in terms of age and income, and a narrow product mix. The management should increase the product range for the U.S. market and emerging markets to increase ridership and demand for its products. To drive international sales, the company should increase its dealer network outside the U.S. The management should also redefine its product, and expand into new rapidly evolving spaces to counter competition and remain relevant. This primarily comprises the production of electric motorcycles that are more environmentally friendly and appealing to users. Maintaining and strengthening the Harley-Davidson brand is critical to the expansion of the company’s customer base.

Harley Davidson should also optimize production to save on manufacturing costs, through the implementation of new technology and information systems. Adopting new production technology will enhance efficiency and reduce the risk of failure in its portfolio. Driving international sales and simultaneously cutting on production costs will have a positive direct effect on net income and will boost the company’s stock. Additionally, the management’s efforts to shift some of the company’s operations overseas is positive as it will reduce the tariff and tax burden charged on fully assembled imports in those countries, as well as result in competitive pricing in emerging markets such as India and Brazil. Furthermore, to maintain the confidence of stakeholders, it must continue its good corporate governance practices and business ethics.

Works Cited

Cottrell, David, et al. Essentials of Advanced Financial Accounting. McGraw-Hill Education, 2011.

Holmstrom, Darwin. Harley-Davidson: The Complete History. Motorbooks International, 2016.

Kamm, Nicholas. “7 Ways Donald Trump Made Harley-Davidson a Target.” Time, 26 June 2018, time.com/5322873/donald-trump-harley-davidson-tariffs/. Accessed 14 Feb. 2019.

Roese, Neal, and Mohan Compella. “Harley-Davidson: Chasing a New Generation of Customers.” 2013.

United States Securities and Exchange Commission. “Harley-Davidson, Inc. Form 10-K.” Investor Relations | Harley-Davidson USA, Feb. 2018, investor.harley-davidson.com/static-files/98813045-7888-4ad9-8574-8f13991acf26. Accessed 14 Feb. 2019.

Warren, Carl, et al. Financial & Managerial Accounting. Cengage Learning, 2011.

 

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