CHAPTER 1 INTRODUCTION: WHAT IS INTERNATIONAL BUSINESS?

CLOSING CASE

SS

Internationalization at Harley-Davidson

Founded in 1903, Harley-Davidson (Harley) is a U.S motorcycle manu

facturer that offers thirty-five models through a network of more than
1,500 dealers. Its annual revenues are about $6 billion, mainly from sales
of the big bikes that made the firm famous. Harley earns three-quarters
of its total sales in the Un ited States, where it also manufactures almost
all its bikes to ensure quality control. The firm makes four distinctive
groups of models:

Standard. Practical bikes used for low-cost commuting.

Performance. Sleek, sport-style racing bikes built for speed and
easy handling.
Custom. Stylized bikes customized to customer tastes.
Touring. Long-distance, large-capacity, comfort bikes that typically
include cruise control, stereos, and luggage racks.
In the United States Harley competes primarily in the custom and
touring segments, which account for around 85 percent of "heavy
weight" sales. Its numerous competitors are all headquartered outside
the United States and include Honda, Suzuki, Yamaha, and Kawasaki
in Japan, and BMW, Ducati, and Triumph in Europe. New competitors
are emerging from China.
Harley heavyweight bikes sell for $17 ,000 or more, wh ich puts
them beyond the reach of many buyers. The average age of a Harley
buyer in the United States is nearly 50. One key to Harley's success is
the Harley Owners Group (HOG), a club of loya l Harley owners with
over one million members, includ ing 100,000 in Europe . HOG is an im
portant marketing tool for promoting sales. In the United States brand
loya lty is f ierce, and switching costs for Harley owners are high. Over
time, the firm has created a mystique around its heavyweight bikes
that helps drive sales. Indeed, many owners get Harley tattoos.

Threat of Foreign Competitors

Some year ago, Harley faced financial ruin. By the 1980s, Honda,
Kawasaki, Suzuki, and Yamaha were selling millions of motorcycles in
the United States and specializing in inexpensive, lightweight models.
Initially Harley paid little attention to the competit ion and continued to
focus on heavyweight bikes, but the market for lightweights continued
to grow. Meanwhile, Harley had beg un to experience major problems
with the quality of its bikes and poor productivity in its factories. Over
time, the firm's image suffered and sales declined sharply; Harley nearly
we nt bankrupt.

Revival
The arrival of a new CEO marked the beginning of efforts to revive
Harley. Ironically, it adopted Japanese-style management techniques,
updating manufacturing methods, improving quality, and expanding
model offerings In its factories, Harley instituted Just-in-time inventory
systems and total quality management and empowered its produc
tion workers. Management increased marketing efforts, improved the
dealer network, and undertook various cross-branding ventures. By
th e mid-1990s, management had repositioned Harley more strongly
in the performance motorcyc le market. The improvements paid off in
sharp improve ments in company image and in sales .

International Expansion
About the same time, Harley management resolved that future
success would come from expansion into foreign markets. The
fi rm had established a distribution network and local subsidiary in

Japan, and by 2005, it was selling more than 12,000 motorcycles

there annually. It continued to sell heavyweight motorcycles in
Japan at a price of more than $18,000, substantially more than
Honda's standard lightweight model. In 2012, Harley generated
about one-third of its total sales from internationa l markets, up
from 25 percent in 2006.
Harley also made significant inroads in Europe, a vast marketplace
that is home to dozens of countries wi th diverse needs and tastes.
In Europe, Performance bikes are the top seller by far, accounting
for more than one-third of Harley sales. Th is is followed by Touring,
Standard, and Custom bikes. In the United States, custome rs strongly
prefer Custom and Touring bikes, which account for about half and
one-third of U. S. sales, respectively. Performance and Standard mod
els produce much smaller revenues in the United States . European
tastes are distinctive, often differing by region. Some buyers prefer
Italian styling, which is dominated by Ducati. Others prefer the
German styling of BMW
Compared to U.S. customers' tastes, European preferences are
diverse. Freeways in much of Europe have high speed limits that
necessitate high-performance bikes . Most Europeans do not relate to
Harley's U.S. image of rugged individualism, freedom, and rebellion,
and its big bikes are difficult to maneuver in narrow streets and im
practical for daily commuting. Fortunately, Harley sells a broad range of
bikes that suit diverse European tastes. To enhance its European pres
ence, Harley launched an overseas branch of the HOG club . The com
pany bought t he Italian motorcycle firm MV Agusta Group for $109
million in 2008. However, economic conditions forced Harley to divest
its interest in Agusta in 2010.
In addition to Europe and Japan, Harley management wants to
target emerging markets. Brazil, Harley's biggest potential market in
Latin America, is fraught with challenges. Initially Brazil's government
imposed high import tariffs that doubled the cost of bikes to 'Brazilian
buyers. To address this dilemma, Har ley established an assembly plant
in Brazil. Loca l assembly avoids import barriers and reduces costs
thanks to the availability of low-cost workers.
Management also set its sights on China, home to 1.3 billion
peop le, many of whom ride small motorcycles. While average wages
are low, income levels are growing rapidl y. Harley is concerned
about piracy. Some Chinese entrepreneurs are known to counterfeit
we ll-know n foreign-branded products, espeCia ll y those with big
price tags. Moreover, many Chinese cities restrict motorcycle usage
on local highways, to reduce noise and drive-by thefts. Harley also
must overcome the perception in China that motorcycles are only
for commuting; management wants to develop the market for lei
sure riding too.
Harley is also considering India, where millions of households have
annual incomes over $80,000. Honda, Yamaha, and Kawasak i all have
a strong presence there . Harley establ ished a subsidia ry near Delhi, but
market entry has been delayed due to high trade barriers and local
emissions regulat ions.
Harley's fastest-growing market outside t he United States is
Canada . But Canada still accounts for just 4 percent of total Harley
sales. Harley holds a similar market share in Japan , but th e country 's
economy is stagnant, and disposable income has declined. Australia
is promislllg, but with a population of 20 million people, the market
is limited. In Latin America, Brazil provides less than 2 percent of total
sales. Low buying power in Latin America remains a challenge.

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PART 1 FOUNDATION CONCEPTS

Environmental Sustainability Challenges

The Future

Like automobiles, motorcycles pollute the natural environment. and

Harley is vu lnerable to regulatory sanctions because it manufactures very
large bi kes. Most of Harley's greenhouse gas (G HG) emissions emanate
from its manufacturing plants, and management is moving to reduce
pollution, as well as energy and water usage, as part of an integrated
sustai nability strategy. The firm is also addressing climate change by
preparing for the transition to a lower-carbon economy. These actions
and its recycling program help align Harley's actions with stakeholder ex
pectations and strengthen the brand . Ca lifornia and Taiwan have recent ly
imposed rigorous new GHG standa rds on motorcycles. Japan and various
European countries are developing sim ilar new sta ndards aimed at GHG
reduction . Harley is attempting to stay ahead of evolving regulations . In
Japan, the firm launched a motorcycle recycl ing prog ram .

Th e recent global recessio n hurt Harle y as discreti ona ry income fell

around the wo rld . Fo r manageme nt, a big questio n is how best to
position the fi rm given decl ining demand wo rldw ide. Management
believes the keys to sustainable growth wi ll be : (i) a heighte ned
focus on fore ign markets; (ii) an appea l to lighter-weight, perf or
mance-based ma rke ts; (ii i) improved and larger deale r networks;
and (iv) strategic control of distribution.
Harley also needs to balance production and sales for domestic an d
international markets. As the US market slows, Harley's revenues are
suffering. To diversify its revenue streams and reduce its dependence on
US sales, Harley wants to increase its international business . Its CEO
believes the ideal sales mix is 60 percent in the Un ited States and 40 per
cen t inte rnationally, but the com pany is strugg ling to achi eve this goal.