Reference no: EM132230014

Internationalization at Harley-Davidson

Founded in 1903, Harley-Davidson (Harley) is a U.S. motorcycle manufacturer that offers 35 models through a network of more than 1,500 dealers. Its global motorcycle revenue was over $6 billion in 2014, an increase of about 45 percent from 2009. Harley earns about 65 percent of its total sales in the United States, where it also manufactures almost all its bikes to support its brand image and quality control. The firm makes four distinctive groups of models:

Standard: Practical bikes used for low-cost commuting

Performance: Sleek, sport-style racing bikes built for speed and easy handling

Custom: Stylized bikes customized to customer tastes

Touring: Long-distance, large-capacity, comfort bikes that typically include cruise control, stereos, and luggage racks

In the United States, Harley competes primarily in the custom and touring segments, which account for around 85 percent of heavyweight sales. Its numerous competitors are all headquartered outside the United States and include Honda, Suzuki, Yamaha, and Kawasaki in Japan and BMW, Ducati, and Triumph in Europe. New competitors are emerging from China.

Harley heavyweight bikes sell for $17,000 or more, which puts them beyond the reach of many buyers. The average age of a Harley buyer in the United States is nearly 50. One key to Harley’s success is the Harley Owners Group (HOG), a club of loyal Harley owners with more than one million members, including 100,000 in Europe. HOG is an important marketing tool for promoting sales. In the United States, brand loyalty is fierce, and switching costs for Harley owners are high. Over time, the firm has created a mystique around its heavyweight bikes that helps drive sales. Indeed, many owners get Harley tattoos.

Threat of Foreign Competitors

Some years ago, Harley faced financial ruin. By the 1980s, Honda, Kawasaki, Suzuki, and Yamaha were selling millions of motorcycles in the United States by specializing in inexpensive, lightweight models. Initially, Harley paid little attention to the competition and continued to focus on heavyweight bikes, but the market for lightweights continued to grow. Meanwhile, Harley began to experience major problems with the quality of its bikes and poor productivity in its factories. Over time, the firm’s image suffered and sales declined sharply; Harley nearly went bankrupt.

Revival

The arrival of a new CEO marked the beginning of efforts to revive Harley. Ironically, it adopted Japanese-style management techniques—updating manufacturing methods, improving quality, and expanding model offerings. In its factories, Harley instituted just-in-time inventory systems and total quality management and empowered its production workers. Management increased marketing efforts, improved the dealer network, and undertook various cross-branding ventures. By the mid-1990s, management had repositioned Harley more strongly in the performance motorcycle market. The enhancements have paid off in sharp improvements in company image and sales.

International Expansion

Harley management resolved that future success would come from expansion into foreign markets. The firm had established a distribution network and local subsidiary in Japan, and by 2005, it was selling more than 12,000 motorcycles annually. It continued to sell heavyweight motorcycles in Japan at a price of more than $18,000, substantially more than Honda’s standard lightweight model. Harley’s foreign sales continue to grow. Most recently, it increased about 9.2 percent from 2013 to 2014. Europe, Middle East, and Africa make up the key regions for Harley’s retail sales.

Harley also made significant inroads in Europe, a vast marketplace that is home to dozens of countries with diverse needs and tastes. In Europe, performance bikes are the top seller by far, accounting for more than one-third of Harley sales, followed by touring, standard, and custom bikes. In the United States, customers strongly prefer custom and touring bikes, which account for about half and one-third of U.S. sales, respectively. Performance and standard models produce much smaller revenues in the United States. European tastes are distinctive, often differing by region. Some buyers prefer Italian styling, which is dominated by Ducati. Others prefer the German styling of BMW.

Compared to U.S. customers’ tastes, European preferences are varied. Freeways in much of Europe have high speed limits that necessitate high-performance bikes. Most Europeans do not relate to Harley’s U.S. image of rugged individualism, freedom, and rebellion. Harley’s big bikes are difficult to maneuver in narrow streets and impractical for daily commuting. Fortunately, Harley sells a broad range of bikes that suit European tastes. To enhance its European presence, Harley launched an overseas branch of the HOG club. To further its presence in Europe, Harley also bought the Italian motorcycle firm MV Agusta Group for $109 million in 2008, but economic conditions forced it to divest its interest in Agusta in 2010.

In addition to Europe and Japan, Harley management wants to target emerging markets. Harley sought to enter Brazil, but the market is fraught with challenges. Initially, Brazil’s government imposed high import tariffs that doubled the cost of bikes to Brazilian buyers. To address this dilemma, Harley established an assembly plant in Brazil, a step that avoids import barriers and reduces costs thanks to the availability of low-cost workers.

Management also set its sights on China, home to 1.3 billion people, many of whom ride small motorcycles. However, selling in China has its own challenges. Average wages are low but are growing rapidly. In addition, Harley is concerned about piracy. Some Chinese entrepreneurs are known to counterfeit well-known foreign-branded products, especially those with big price tags. Moreover, many Chinese cities restrict motorcycle usage on local highways to reduce noise and drive-by thefts. Harley also must overcome the perception in China that motorcycles are only for commuting; management wants to develop the market for leisure riding too.

Harley is also considering India, where millions of households have annual incomes over $80,000. Honda, Yamaha, and Kawasaki all have a strong presence there. Harley established a subsidiary near Delhi, but market entry has been delayed due to high trade barriers and local emissions regulations.

Harley’s fastest-growing market outside the United States is Canada, but Canada still accounts for just 4 percent of total Harley sales. Harley holds a similar market share in Japan, but the country’s economy is stagnant, and disposable income has declined. Australia is promising, but with a population of 20 million people, the market is limited. In Latin America, Brazil provides less than 2 percent of total sales. Low buying power in Latin America remains a challenge.

Environmental Sustainability Challenges

Like automobiles, motorcycles pollute the natural environment, and Harley is vulnerable to regulatory sanctions because it manufactures very large bikes. Most of Harley’s greenhouse gas (GHG) emissions emanate from its manufacturing plants, and management is moving to reduce pollution, as well as energy and water usage, as part of an integrated sustainability strategy. The firm is also addressing climate change by preparing for the transition to a lower-carbon economy. These actions and its recycling program help align Harley’s actions with stakeholder expectations and strengthen the brand. California and Taiwan have recently imposed rigorous new GHG standards on motorcycles, and Japan and various European countries are developing similar new standards aimed at GHG reduction. In Japan, the firm launched a motorcycle recycling program and is attempting to stay ahead of evolving regulations in its other markets, too.

The Future

The recent global recession hurt Harley as discretionary income fell around the world. Harley’s share of the U.S. market for heavyweight motorcycles declined to 51 percent in 2015 from 58 percent in 2013. For management, a big question is how best to position the firm given declining demand in its home markets and abroad. Management believes the keys to sustainable growth will be (i) a heightened focus on foreign markets; (ii) an appeal to lighter-weight, performance-based markets; (iii) improved and larger dealer networks; and (iv) strategic control of distribution.

Harley also needs to balance production and sales for domestic and international markets. As the U.S. market slows, Harley’s revenues are suffering. To diversify its revenue streams and reduce its dependence on U.S. sales, Harley wants to increase its international business. Its CEO believes the ideal sales mix is 60 percent in the United States and 40 percent internationally, but management needs to figure out a strategy to achieve this goal.

Chapter 1 Case Questions

What is the nature of the international business environments Harley faces? What types of risks does the firm face?

How can Harley benefit from expanding abroad? What types of advantages can the firm obtain? What advantages acquired abroad can help Harley improve its performance in its home market?

How can Harley effectively compete with rivals from Japan and Europe? What strategies should management apply to grow the firm’s sales in those regions?

Competitors such as Lifan and Zongshen are beginning to emerge from China, where they enjoy competitive advantages such as low-cost labor and extensive experience with emerging markets. How can Harley compete against such firms? Should Harley more aggressively pursue emerging markets such as Brazil, China, and India? If so, what strategies will help them succeed in those markets?

Evaluate Harley’s environmental sustainability initiatives in the evolving regulatory environment on global greenhouse gas. What advantages does Harley gain by attempting to produce environmentally safe and sustainable products?