What Should Harley-Davidson’s Management Do?

 
 
SUMMING UP Stuck between a rock and a critical POTUS, Harley-Davidson should ignore the politics and operate where best business practices lead it, most of James Heskett's readers advise.
 
 
by James Heskett
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What Can the Harley-Davidson Case Teach Us About Managing in a Politicized Environment?

The advice to Harley-Davidson’s management from respondents of this month’s column is to (1) ensure that politics doesn’t deter the Company from its current strategy, (2) move production for the European market overseas, and (3) concentrate on designing and producing new products for new and existing markets.

There were several minority opinions, however. ASGMark commented, “The very idea of moving manufacturing of an American icon overseas, especially after being lauded by POTUS … as well as a gift-horse tax break, is offensive and extremely poorly timed. Get your (American) manufacturing streamlined and more efficient, offer models that compete with your competition …” A compromise was offered by dpgoodness: “My suggestion is to make all their engines, the soul of their bikes, in the US. This would allow them to open plants overseas to help in lowering manufacturing costs, yet still keep their iconic image.” Fahd suggested that the Company “look into building every continent’s bikes within the same region … while keeping the American bikes in the states.”

Steve argued that “HOG management should have” … first sought to have the tariffs on motorcycles to the EU removed, but failing that: “restated HOG commitment to American manufacturing of its products … adding that if (the) tariff stands HOG will have no choice but to move EU production elsewhere … then commenced contingency planning for move of EU manufacturing offshore …”

Most respondents suggested that the Company’s survival was more closely associated with product/market issues than the logistics and politics of manufacturing.

Roaddoggie said, “The new factory and tariffs are a sideshow compared to the problem of the Harley demographic aging out of the sport… the new concepts are a step in the right direction … most of all, the product must be right.” Kevin O’Meara agreed, saying that, “the tariffs and the ‘Twitter war’ are masking the true issues… (1) Aging consumer base (and) (2) younger people want fast “zippy” motorcycles that are substantially less cost.” Peter Barnet, similarly concerned about too much time spent on tariff reduction, suggested that the Company “create a flanking brand that is not the full Harley Davidson Hog and is ‘designed in America’ (and) assembled in America (or other markets) from overseas components.”

There were concerns that the Company could become involved in politics and lose its needed focus on new markets. Supporting the plant in Thailand, Erich Almasy suggested that, “Politics … are mercurial and should not dictate strategy.” ICONOCLAST reminded us that, “‘The business of business is business,’ is an important statement of Milton Friedman in this context. The criticism on Harley would be worse if they did not run their business in the most cost-effective way, including offshore manufacturing.” JimHBS89 added, “The Company should not run its business based on the short term whims of the POTUS who will be out of office at some point.”

Richard Eckel commented, “Screw the politics; run your business and innovate a strong brand into new markets… Start with engaging the markets in Europe to build what sells there.” Jpkelly teed up the question in the title nicely: “This is a good example of political risk exposure that you could not have foreseen 12 months ago.”

What can the Harley-Davidson case teach us about managing in a politicized environment? What do you think?

Original Column

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.

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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