Why Harley Can't Rev Up in China

Local road rules hold down the motorcycle maker's sales

China’s population is almost 2,300 times greater than that of Milwaukee, where Harley-Davidson is based. Yet after six years operating in China, the motorcycle maker still sells more bikes in its hometown. The reason: About 100 cities in the world’s most populous nation, including Beijing and Shanghai, have restrictions on motorcycles, including banning them from elevated highways and major thoroughfares to curb noise and thefts, according to the state-affiliated Society of Automotive Engineers of China. “Regulations are a pain,” grouses Shanghai businessman Calvin Chen, who owns a $50,000 Harley V-Rod Muscle. “There are many roads you can’t ride on, and the rules differ from place to place.”

Harley is lobbying the Chinese to ease those laws in an effort to hike sales by as much as 40 percent annually through 2016, says Sean Jiang, its managing director for China. The biggest U.S. motorcycle maker is quadrupling its number of dealerships and supporting riding clubs to capitalize on a luxury car market that J.D. Power says will grow by about 35 percent this year. Whether new customers will actually bite is uncertain. “Any investment in China without addressing the regulatory requirements will be a castle built on sand,” says Jiang.

Local laws treat motorcycles the same as scooters and motorized bicycles, even though some Harleys have bigger engines than cars and may cost more because of import duties that can add 30 percent to the sticker price even before China’s consumption and value-added taxes. China’s vehicle regulations also require that cycles be scrapped after 11 years, Jiang says.

Once, cycles were a cheap mode of travel in China. No longer. Harley’s Touring Ultra Classic Electra Glide, for example, starts at 340,000 yuan ($53,000). By comparison, BMW’s 320i Sedan starts at 273,600 yuan in Beijing and the Audi A4 sedan at 247,800 yuan, according to data compiled by SINA.com.

Shanghai bans motorcycles not only from elevated highways but also the historic Bund and the financial district. Beijing hasn’t allowed new bike registrations since 1985. And Guangzhou banned motorcycles in 2007 after a surge in drive-by purse snatchings. “Because of the import structure and high pricing, our customers here have a much higher disposable income,” Jiang says. “I don’t think they will use vehicles as a crime tool.” The Ministry of Commerce didn’t respond to a faxed request for comment.

Harley sold 268 motorcycles in China last year—its best-sellers are the Touring and less-expensive Sportster lines—and aims to double that this year. The House of Harley-Davidson dealership in Milwaukee sold “more than 500” bikes in 2010, sales manager Goran Zadrima says. Honda Motor, which sells scooters and smaller 125cc bikes used mainly outside big cities in China, delivered 1.29 million vehicles in the country last year.

International sales represented 35 percent of Harley’s revenue last year, up from 25 percent in 2006. The company wants to increase that to at least 40 percent by 2014, mainly by building sales in emerging markets. Harley plans to increase its number of Chinese dealerships to 28 by 2016, from seven at the end of last year. “With the U.S. motorcycle market fairly mature, Harley’s opportunity to gain market share abroad is a key positive,” says William Blair analyst Sharon Zackfia. “The noise ordinances in China may present a challenge.”

Another challenge is overcoming the perception that two-wheeled vehicles are strictly utilitarian, Chief Executive Officer Keith Wandell says. “The Chinese consumer is unfamiliar with leisure riding,” he says. “They’ve always looked at two-wheelers as a form of transportation and getting to work.”

To change that, Harley is working with the Automotive Engineers on a series of spots to be aired in China exploring motorcycle culture around the world. The company also has begun supporting riding clubs to promote the brand, says Wandell, who rode in a rally from Beijing to the Great Wall in April. There are chapters—called Harley Owners Groups, or H.O.G.—in Beijing, Shanghai, Qingdao, and Hong Kong. Every weekend, the Shanghai H.O.G. gathers at a Sinopec gas station on the city fringes before heading into the countryside. Bikers have to go around the nearby city of Hangzhou, however, because it bans motorcycles.

— With assistance by Mark Clothier, and Ying Tian


    The bottom line: Harley-Davidson sold just 268 motorcycles in China last year. It’s lobbying to ease local noise and traffic curbs that have stymied sales.

    Before it's here, it's on the Bloomberg Terminal.