Tune Up Time For Harley

It must soothe impatient customers and fight imitators

It's Bike Week, Harley-Davidson's annual early-March party, and the streets of Daytona Beach, Fla., are filled with some 400,000 Harleys. But the carnival mood has turned a bit sour for 73-year-old Robert Wanta, who has cornered Harley CEO Richard F. Teerlink to let off steam.

Wanta is ready to trade his BMW and Honda cycles for his dream Harley, a chrome-and-gold Dyna Super Glide. But his local Tampa dealer wants a 47% markup above the $10,195 list price. "I'd love to buy that bike, but I'm not going to pay $15,000," Wanta complains. Listening intently, Teerlink says: "I hear what you're saying. But we're going to get you as a Harley rider."

For years now, Teerlink has been able to say that and mean it. Harley-Davidson Inc. has roared back to life since 1985, when shoddy quality and a glut of cheap Japanese bikes left it near bankruptcy. Today, Harley's low-slung "Hogs" grab more than one-fifth of all U.S. bike sales--and more than half of the fast-growing $1.3 billion market for heavyweight cycles. And a huge trade in used bikes--fostered by Harley's deliberate curbs on output--makes them worth more secondhand than new.

But to hang on to its increasingly impatient customers and fight off a bevy of new Japanese competitors, Teerlink must shift the Milwaukee-based company into higher gear. Harley must boost production while maintaining its cultlike appeal. "We've been blessed with a heritage," says Teerlink. "But we can't simply rely on the mystique."

The balancing act will be delicate. But Teerlink, who joined Harley in 1981 as chief financial officer, has faced tougher problems: He negotiated the financing that kept Harley out of bankruptcy in 1985. Four years later, he became CEO, succeeding Chairman Vaughn L. Beals Jr., who began the turnaround. Thanks to protective tariffs (since removed), a total manufacturing overhaul, and the marketing of Harley as the essence of Americana, the company has had the wind at its back for years. Since 1991, earnings have jumped 130%, to $111.1 million, on sales up 85%, to $1.3 billion. Cycle output has risen 50% since 1992.

Still, success has brought new problems. Conservative to a fault, Harley builds fewer bikes than it can sell; annual production runs 25% to 40% below estimated demand. In part, that's because Harley can't forget the 1980s, when it ended up with huge unsalable inventories. Harley also realized that scarcity made its bikes more desirable.

Now, however, customers are grumbling that Harleys are too hard to get, with waiting lists of up to three years for its popular Road Kings. That has led to outrageous dealer markups--and dealers aren't the only ones living high on the Hog. Buyers also order bikes and quickly flip them. Says Irvin K. Fosaaen, president of the dealer advisory council and owner of a Waukon (Iowa) dealership: "We've seen people buy a new Harley and then sell it in the parking lot for $4,000 to $5,000 more."

"RUBBIE" RIDERS. So Teerlink is adding a third manufacturing plant, which will take capacity from 115,000 to at least 200,000 by 2003. "Our goal is to eventually run production at a level that's always one motorcycle short of demand," he says. In March, he sold Harley's $250 million Holiday Rambler recreational-vehicle unit for $50 million to Monaco Coach Corp., based in Junction City, Ore. Wall Street gave both moves a green light, bidding the stock up 34% this year, to a 52-week high of about 39. Analyst Ronald A. Glantz of Dean Witter Reynolds Inc. thinks Harley's earnings will double in five years.

Demographics help. Harley's big, comfortable cruisers appeal to baby boomers looking for an easy ride. These days, the Harley rider is as likely to be a "rubbie" (rich urban biker) as a rebel. "The industry owes its health to the boomers," says motorcycle industry consultant Don J. Brown of Irvine, Calif.

Big cruisers now make up 44% of all U.S. motorcycle sales and grew 11.3% last year--well above the 8% growth in cycle sales overall. It's no wonder Honda, Kawasaki, and Yamaha have recently introduced high-tech Harley lookalikes. Even Earl K. Werner, Harley's chief engineer, is impressed with the technology. "In some cases, they are as good as, if not better" than Harleys, he says. Still, Harley has something even rivals admit they lack: intense brand loyalty. "The Harley audience is granitelike, and most buy on emotional and lifestyle issues," says Robert Moffit, vice-president for sales at Kawasaki Motors Corp. USA.

To help keep rivals at bay, Harley has boosted its capital spending from 1995's $110 million to between $150 million and $175 million annually. Besides the new plant, the money will go to such projects as a new $25 million design and engineering center in Milwaukee and customizing colors and handlebars.

SMALLER SPORTSTERS. Harley, which now exports 30% of its cycles, also plans to target European, Asian, and Latin American markets with bikes designed for local tastes. Sidecars for Japanese buyers are under study. And to add share without diluting its brand, Harley is using its joint venture with Buell Motorcycle, based in East Troy, Wis., to sell cheaper, smaller sportsters.

But will the ramp-up satisfy Harley's frustrated customers without causing the organizational problems that have hurt in the past? Although manufacturing quality, once a serious issue, is much improved, earlier efforts to boost production have hit snags. The last time Harley upped output, in 1993, it so underestimated demand that its plans were outmoded before work began.

And elsewhere, snafus continue. Last fall, inadequate computer ordering systems left many dealers with too much clothing and too few parts. The problems led Harley to report disappointing third-quarter earnings of $23.7 million, virtually flat with the previous year's quarter. Harley is revamping its system, but the problems left some dealers with hard feelings. "Camaraderie needs rebuilding," says Fosaaen.

But Harley worries that some dealers may be out of touch with the new breed of riders. To meet the needs of first-time buyers and move more merchandise, dealers have been told to expand their stores and add staff. At rallies, Harley now surveys customers on dealers: Top scorers often get first dibs on new bikes. Along with better customer-service training, Harley hopes such moves will end overcharging.

To keep riders on board, dealers are also being urged to bolster the activities of local Harley Owners Groups (HOGs), the clubs that gather for rides and events. Big HOG rallies are scheduled for this summer in Europe, Asia, and the U.S. The targets are people like Lore Lee Howell, 60, of Conroe, Tex.--dressed, like her husband, in black jeans, purple shirt, and black leather vest. She came into town aboard her new Harley sportster and says it has changed her life. "I got me a Harley. Now I'm classy," she says. Nearby, William Shull, a rider from Canton, Ohio, agrees. He insists that "anybody who owns a bike eventually ends up with a Harley." As long as they can wait a few years.

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