What Should Harley-Davidson’s Management Do?

 
 
Harley-Davidson was President Trump's poster child for American manufacturing—until the company announced plans to build a plant in Asia. What are the CEO's options, asks James Heskett, now that POTUS has unleashed a tweet war against his company?
 
 
by James Heskett
CasPhotography

In August 2018 CEO Matthew Levatich and his management team at Harley-Davidson was faced with a situation in which a decision to move jobs overseas to reduce costs and preserve profit performance appeared to be alienating workers, customers, and even the president of the United States.

Harley-Davidson had long been held up as a quintessentially American company, a producer of large motorcycles that had weathered many threats, including that of smaller, less expensive Japanese products aimed at a younger market in the 1990s. That image was enhanced by an invitation in February, 2017 from the newly elected administration in Washington to exhibit Harley’s latest bikes at the White House as part of an effort to highlight the importance of the health of American manufacturing. At that time, the president lauded the Company as “a true American icon” and “one of the greats.” When the speaker of the house of representatives sought to promote the importance of a significant tax cut in 2017 he did it by visiting Harley-Davidson’s facilities in his home state of Wisconsin.

"All of this had brought the Company’s relationship with the US president to the boiling point"

The Company had not performed well in recent years. By 2017, its profits were $521 million on revenues of about $5.6 billion; both figures were below 2013 results. Over the past five years, its stock declined by about a third at a time when the general market had seen large increases. Factors contributing to these declines were lower-priced competition and a younger customer segment that could afford only used Harleys or that preferred lighter, hotter, foreign-made machines.

Harley-Davidson’s strong culture and dedicated customer base helped it avoid larger declines. Its customers organized rallies attended by as many as 50,000 Harley owners, whose average age had risen into the 50s and whose backgrounds contradicted the long-held image of motorcycle owners. The rallies were often attended by company executives, who “biked” there on their own machines. Executives and employees alike shared a devotion to motorcycle culture. Its outlook was improved by the 2017 tax cut that would have reduced its tax bill by $80 to $90 million. This may have contributed to a Company announcement of a $700 million stock buyback.

Then, in January 2018, Harley-Davidson’s management announced plans to close its Kansas City plant, putting 800 workers out of work and moving 450 of those jobs elsewhere in the United States. The stock buyback was disclosed shortly after this announcement. Five months later, a decision was made to invest about $200 million in a strategy to build motorcycles in Thailand for export to Europe. Annual savings of $65 to $75 million were expected from the move. In part, this decision was prompted by the imposition of tariffs by the European Union on motorcycles made in the US as part of what some thought might become a global trade war. A trade conflict was a concern to the management of a company whose percentage of motorcycle sales (in units) outside the US had reached 40 percent.

All of this had brought the Company’s relationship with the US president to the boiling point. The president posted a tweet in which he said, “If they move, it will be the beginning of the end … the aura will be gone and they will be taxed like never before.” Harley’s CEO Levatich commented in a July 2018 interview that, “We’ve worked very hard to be apolitical in how we approach our business and our consumers everywhere in the world… We have to do what we have to do based on the facts and circumstances before us, and we’re doing that.” Then the US president tweeted on August 12: “Many @harleydavidson owners plan to boycott the company if manufacturing moves overseas. Great! Most other companies are coming in our direction, including Harley competitors.”

On a visit to a huge motorcycle rally in Sturgis, South Dakota, a reporter found that many Harley owners sided with the president and were highly critical of management. Some vowed never to purchase another Harley-Davidson product. Others were less negative, arguing that the Company probably had to do what it was doing to “stay in the game.”

The Company’s management faced a major decision. On the one hand, it could unwind the effort to begin production in Thailand and pull that work back to the United States, take a large one-time charge to do so, and increase the cost of motorcycles sold in Europe—an increasingly important market for the Company—by about $2,200 per bike. On the other hand, it could continue to pursue efforts to maintain its profit performance while running the risk of alienating not only its workers but, perhaps more importantly, its loyal customer base.

What should Harley-Davidson’s management do? What do you think?

References:

Annual Reports, Harley-Davidson Inc., for years 2013-2017, AnnualReports.com.

Alan Rappeport, Trade Clash Pits Harley Vs. Trump and Bikers, The New York Times, August 13, 2018, pp. B1 and B4.

Emily Stewart, Trump held Harley up as an American icon. Now it’s an American icon that is moving jobs overseas, Vox, June 26, 2018, @vox.com.

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