Harley-Davidson Inc.

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Harley-Davidson Inc.

1700 West Juneau Ave.
P.O. Box 653
Milwaukee, Wisconsin 53201
U.S.A.
(414) 342-4680
Fax: (414) 935-4806

Public Company
Incorporated: 1903 as the Harley-Davidson Motor Company
Employees: 5,300
Sales: $939.80 million
Stock Exchanges: New York
SICs: 3751 Motorcycles, Bicycles & Parts; 3711 Motor Vehicles & Car Bodies; 3443 Fabricated Plate Work-Boiler Shops

The only motorcycle manufacturer in the United States, Harley-Davidson Inc. has been designing heavyweight machines for bike enthusiasts for almost a century. The company is legendary for the great loyalty its vehicles have inspired in generations of cyclists.

The first Harley-Davidson motorcycle was built in Milwaukee, Wisconsin—still the location of the company’s headquarters—in the early 1900s. The Davidson brothers—William, Walter, and Arthur—along with William S. Harley, designed and developed the bike and its three horsepower engine in their family shed. The machine went through many refinements until 1903 when the men established the Harley-Davidson Motor Company and produced three of their motorcycles for sale. Over the next several years both demand and production grew at a healthy rate, and by 1907 the company had begun to advertise.

Two years later the company produced a new model featuring a V-twin engine that produced a low, deep rumble now identified as the signature Harley-Davidson sound. The revolutionary engine—still a company standard—enabled riders to reach speeds of 60 miles-per-hour, which until that time had been believed impossible. Such capabilities served to set the company’s motorcycles apart from the competition; by 1911 there were 150 other companies manufacturing the vehicles.

The onset of the First World War was actually a boon for Harley-Davidson. The motorcycle, having done well in its utilization by police, was commissioned for use by the military. It proved especially useful on the U.S.-Mexican border, which was suffering incursions by the forces of Mexican revolutionary leader Pancho Villa. In all, 20,000 of the company’s machines were employed by the U.S. infantry during the war.

The battlegrounds of the war also served as proving grounds for the motorcycles. After resuming normal production, Harley-Davidson was able to begin incorporating improvements into its new machines. The 1920s saw the company taking the lead in innovative engineering with such features as the Teardrop gas tank and the front brake. In 1921, the winner of the first race in which motorists reached average speeds of more than 100 miles-per-hour was riding a Harley-Davidson machine.

The motorcycle industry was not immune to the financial difficulties of the Great Depression; only Harley-Davidson and Indian survived those years. However, a strong dealer network, continued use by the military and police, as well as the U.S. Postal Service, and strong exports to Canada and Europe allowed Harley-Davidson to weather the economic disaster.

Henry Ford’s introduction of the assembly line, on which he could quickly and inexpensively produce his Model T automobile, had a profound effect on the motorcycle industry. While motorcycles had traditionally been used by workers and busi-nesspeople, the more affordable car became their vehicle of choice. The motorcycle, in the meantime, was gradually becoming a recreational vehicle.

Military procurement during the Second World War, however, proved as helpful to Harley-Davidson as it was during World War I. In 1941 the company turned its entire manufacturing effort toward supplying U.S. and Allied troops going into battle, shipping nearly 100,000 machines overseas. Harley-Davidson’s efforts earned them the Army-Navy “E” award, an honor bestowed upon companies that excelled at production during wartime. The healthy post-war economy found consumers with money to spend. To meet burgeoning demand, the company purchased additional manufacturing capacity in 1947.

As the second generations of the founding families began moving into management positions at the company, Harley-Davidson found itself “king of the road”—with the shutdown of Indian in 1953, the company became the sole American motorcycle manufacturer. Continuing to prove itself, the company introduced its Sportster model in 1957, heralding the era of the all-powerful, throaty “superbikes.”

An entire subculture began to grow up around these motorcycles, and leather jackets and riding boots became as much a statement of one’s desire for a life of freedom on the open road as a necessity for motorcycling. However, the film The Wild One, starring Marlon Brando, depicted bikers riding Harley-Davidson motorcycles as packs of lawless renegades. The stereotype that grew out of this is one the company still actively strives to dispel.

In 1965 Harley-Davidson went public when the two families decided to give up control and put the company’s shares on the market. Four years later the company was bought by the American Machine and Foundry Co. (AMF), a leisure equipment manufacturer headed by Harley-Davidson fan Rodney C. Gott. The arrangement proved, at least initially, to be a good one for Harley-Davidson for it was also in the 1960s that the company experienced its first competition since Indian went out of business. The financial resources and stability that AMF were able to provide helped the company battle Japanese motorcycle manufacturers who had begun exporting their vehicles around the world, placing themselves in direct competition with Harley-Davidson.

Demand for motorcycles continued to grow through the early 1970s, and, in an effort to keep up, the company opened an assembly plant in York, Pennsylvania, in 1974. While engines would still be made in the Milwaukee facilities, the bikes themselves would be assembled in the new plant.

In 1975 AMF put Vaughn Reals at the head of Harley-Davidson, and Jeff Bleustein was named chief engineer. Bleustein was charged with making manufacturing improvements, which were becoming increasingly necessary as production grew.

These efforts added an extra $1,000 in costs to each bike, however, and the profit line suffered as a result. To compensate, AMF management began to apply pressure for greater sales volume, with the result that quality began to suffer. The production standards that customers had come to count on were being lowered, and there were chronic shortages of parts, with the result that as many as 30 percent of the vehicles coming off the assembly line were incomplete. This, in turn, meant extra manpower searching for spare parts to finish outfitting the machines, a task that even fell to dealers on those occasions when incomplete bikes were accidentally shipped.

Such problems took their toll on the company, especially in light of rising Japanese competition. In 1969 Harley-Davidson had enjoyed an 80 percent share of the U.S. motorcycle market for super heavyweight machines—bikes with engines over 850 cubic centimeters (cc). Ten years later, just when Honda Motor Co. was opening a plant in Marysville, Ohio, that share had dropped sharply to 20 percent. While there were still some riders who would settle for nothing but a Harley-Davidson motorcycle, newcomers to the motorcycle market were opting for Japanese affordability and dependability.

To make matters worse, the 1981 recession severely threatened Harley-Davidson’s share of the market for heavyweight bikes—motorcycles with engine capacities of 700 cc and higher—nearly finishing the company off as a manufacturer. Soon AMF began to lose interest in keeping the struggling business afloat. To save the company, and to effect a turnaround, 13 Harley-Davidson executives, led by Vaughn Beals, put together a plan for a leveraged management buy-out. With the financial support of Citicorp, the management team succeeded in taking control of Harley-Davidson from AMF on June 16, 1981, at a cost of $81.5 million.

Their turnaround strategy called for getting back on the quality track through new management and manufacturing techniques. Unable to beat them, Harley-Davidson instead decided to join their Japanese competition, adopting such management techniques as decentralized quality discussion groups and “just-in-time” inventory control. After the company’s top management toured Honda’s Marysville plant in 1981, Vaughn Beals noted in Fortune, “We were being wiped out by the Japanese because they were better managers. It wasn’t robotics, or culture, or morning calisthenics and company songs—it was professional managers who understood their business and paid attention to detail.” In an effort to do likewise, management at the York plant developed three principles for change: worker involvement, manufacturing materials available as needed, and statistical operator control.

One of the first steps Harley-Davidson took was to group the employees in a plant-wide network to ensure their input in improving the manufacturing process. The York plant management met with workers’ representatives for months in 1981 to achieve a consensus on what was sought and also to ease skepticism. The increases in productivity stemming from these measures were deemed to be the effects of effective communication, shop floor enthusiasm, and increased rewards and recognition.

The second point of the revitalization program involved managing the company’s inventory. A program of just-in-time inventory control called MAN—Material As Needed—was developed, based on Toyota Motor Corporation’s Toyota Production System. The plan called for the use of expanded communication in monitoring the flow of inventory.

Harley-Davidson also introduced a statistical operator control system to improve quality control. The aim was to reduce defects and scrap by reworking machines right on the assembly line. The process began with the operators, who established parameters for quality using statistical methods. Then workers along the assembly line would chart actual quality and introduce improvements where warranted.

During the early 1980s, the company began making cosmetic changes to their motorcycles, prompted by vice president William G. Davidson, grandson of the founder. Davidson, who felt it was important to remain close to the bike maker’s customers and their needs, would often mingle with Harley devotees at gatherings, sporting his own beard, black leather, and jeans. As he explained in Fortune, “They really know what they want on their bikes, the kind of instrumentation, the style of bars, the cosmetics of the engine, the look of the exhaust pipes, and so on. Every little piece on a Harley is exposed, and it has to look right. A tube curve or the shape of a timing case can generate enthusiasm or be a turn-off. It’s almost like being in the fashion business.” In addition to changing the look of established models, the company began to design new motorcycles to appeal to a broad range of consumers.

Meanwhile, the competition was moving ahead. Though the recession of the early 1980s had depressed demand for heavyweight bikes, Japanese manufacturers swamped the U.S. market with their surplus inventory, driving average market prices down still further. In 1982, however, the company won an antidumping judgement from the International Trade Commission (ITC). This led then-U.S. president, Ronald Reagan, to impose additional tariffs on imported heavyweight Japanese models, as allowed by the ITC.

The additional tariffs—45 percent on top of an existing 4.4 percent measure—were meant to decrease gradually over five years, until April 1988. These measures would give Harley-Davidson the opportunity to effect their revitalization plans. Predictably, as the company’s market share began to increase, so, too, did their profits. Harley-Davidson had lost $25 million in 1982, but rebounded into the black again in 1983 before posting $2.9 million in profits on sales of $294 million in 1984. Though Japanese bike makers were able to elude some of the tariffs by building more machines in the United States, by 1986 Harley-Davidson’s share of the U.S. super heavyweight market had crept back up to 33.3 percent, ahead of Honda for the first time since 1980.

During this time, Harley-Davidson began placing more emphasis on their marketing efforts. In a 1983 public relations move, the company established the Harley Owners Group, a club with its own newsletter for fans of the motorcycle. By the end of the 1980s, membership in HOG had grown to 100,000 members.

In 1984 the company developed the SuperRide promotion, which was designed to attract large numbers of new buyers. Television commercials were aired, inviting people to visit one of Harley-Davidson’s 600 dealers across the United States to test ride a new bike. Over 40,000 people took Harley-Davidson up on its offer. Though immediate sales did not cover the promotion’s $3 million price tag, the effort did result in increased sales over the course of the next several years, and many of the new buyers were owners of rival Japanese models.

Although Harley-Davidson was making great strides, the company suffered yet another blow in 1984. Citicorp—nervous that the economy was headed back into a recession, especially in light of the 1988 deadline on import tariffs—informed Harley-Davidson that in future years they would no longer provide overadvances—money over and above the conservative lending limits set as part of the company’s business plan.

Taking this as an indication that Citicorp wanted out of its arrangement with the company, Reals and Richard Teerlink, who was then the finance officer, began searching for another lender. Once word concerning Citicorp’s plans got out, however, other banks showed little interest in making the commitment. By October of 1985 Beals and his management team had approached the investment firm Dean Witter Reynolds in order to begin Chapter 11 bankruptcy proceedings.

Fortunately, before those plans were finalized, Beals and Teerlink were linked with an interested lender. After weeks of hard bargaining, Heller Financial Corporation—whose second in command, Bob Koe, was a Harley buff—agreed to supply Harley-Davidson with $49 million to buy out Citicorp’s stake in the business. Thus Citicorp was forced to take an $18 million write-down on their original investment.

Heller Financial Corporation’s faith in Harley-Davidson paid off handsomely. The company’s market share began to climb steadily, and profits for 1986 topped $4.3 million on sales of $295 million. That year a revived Harley-Davidson went public, offering 2 million shares of stock worth $20 million and $70 million worth of unsecured subordinate notes that would mature in 1997.

With the capital raised from these offerings Harley-Davidson purchased the motor home maker, Holiday Rambler Corporation. By December of 1986 the company had acquired all outstanding Holiday Rambler stock for approximately $156 million, enabling Harley-Davidson to diversify its manufacturing efforts. The company further broadened its business in 1986 when the U.S. government awarded Harley-Davidson a contract to produce military hardware, including casings for 500-pound bombs and liquid-fueled rocket engines for target drone aircraft.

The previous year had proven to be such a successful one for Harley-Davidson that in March of 1987 the company asked the ITC to remove the tariffs imposed on Japanese superbike imports a year earlier than scheduled. Even so, Harley-Davidson’s share of the super heavyweight market by the end of 1987 had climbed to 47 percent. In recognition of the company’s turnaround, then-president Reagan toured Harley-Davidson’s York plant, praising the employees for their hard work.

The changes in management philosophy at Harley-Davidson were quite significant. As associate purchasing agent Dave Gurka maintained in a 1988 Labor-Management Cooperation Brief published by the U.S. Department of Labor: “When AMF ran the company, in spite of its help in the continued existence [of Harley-Davidson] in bad times, it was .. . like a dictatorship, compared with today. The emphasis was on high volume—AMF wanted the parts and bikes out the door, now. Now the emphasis is on everyone working together and working on quality. It’s quality or nothing.”

In 1989 Harley-Davidson established a wholly-owned subsidiary in Britain and a joint venture in Japan to take advantage of emerging global markets for its product. In October of the same year, the company sold the assets of Parkway Distributors, a recreational vehicle parts and accessories distributor, for $3.5 million.

Despite the recession taking hold in 1990, Harley-Davidson saw its sales for that year increase to $864.6 million, up from $790.6 million a year earlier. The company also had a 62.3 percent share of the U.S. heavyweight motorcycle market, far and above Honda, their closest competitor with 16.2 percent. Holiday Rambler’s sales were somewhat affected, however, by lower consumer spending.

Richard Teerlink, who had become president and CEO of Harley-Davidson, warned in the company’s 1990 annual report that “maintaining Harley-Davidson’s growth through a recessionary period will be a difficult, but not impossible task. We could easily exploit our worldwide motorcycle popularity for quick profits, a near-fatal mistake we made in the 1970s, but we are committed to a corporate vision that discourages short-term thinking.”

The early 1990s brought the company some minor setbacks. Though sales in 1991 rose to $939.8 million, profits fell slightly, marking the first decrease since the 1986 refloatation. In addition, the company’s motorcycle division experienced a work stoppage at the York plant, and sales and profits at the Holiday Rambler Corporation continued downwards. However, Harley-Davidson has learned from past mistakes and proven itself to be a survivor. Their products are again associated with quality, and the company continues to attract the loyalty of customers around the world.