Harley-Davidson Reveals The Hardwire Plan

[Peon Maface]

Harley-Davidson laid out the details for The Hardwire, the company’s new strategic plan for the next five years. Highlights of The Hardwire include investing in the touring and heavyweight cruiser segment, expanding into new segments and creating a new division dedicated to electric motorcycles.

The Hardwire’s goals from 2021 to 2025 include a mid single-digit annual growth in revenue and a steady improvement in operating margin from motorcycle sales as well as a double-digit growth in Harley-Davidson Financial Services (HDFS). Capital spending will range between $190-250 million annually, including expanding Harley-Davidson’s digital ecosystem and establishing the new electric vehicles division. Harley-Davidson also targets a low double-digit growth in earnings per share.

The Hardwire builds on the groundwork set by the previous Rewire strategy and consists of six key priorities:

• Investing in Harley-Davidson’s most profitable segments
• Selective expansion into new segments
• Leading in electrification
• Growth in non-motorcycle businesses
• Connecting with customers
• Inclusive stakeholder management

Most of these priorities come as no surprise, as they continue trajectories established by the Rewire.

The first two priorities go hand-in-hand, as Harley-Davidson strikes a balance between its existing segments – large cruisers, touring motorcycles and trikes – and new segments like adventure touring with the new Pan America.

Jochen Zeitz, chair, president and chief executive officer of Harley-Davidson, says the company will establish a 70-20-10 construct; a 70% focus on its core segments, 20% on new segments, and 10% on other opportunities including small displacement models.

Harley-Davidson’s Core Segments

Putting the bulk of its focus on its existing segments is a conservative choice, and one Harley-Davidson has made time and time again. While this approach tends to draw the scorn of critics, it’s the smart decision, as heavyweight cruisers, tourers and trikes have proven to be highly profitable for Harley-Davidson with strong margins.

Critics argue that Harley-Davidson needs to branch out into new segments, but doing so requires establishing a strong core business in order to fund development of new segments and balance against the inherent risks.

New Segments

The 20% focus on new segments also reflects a conservative approach. Zeitz says Harley-Davidson will selectively focus on segments where it sees a balance of volume, margin and potential, and where the company sees a clear path to leadership.

“By narrowing our focus on those opportunities that meet these criteria, we make our intention clear: we will be in them to win,” says Zeitz.

Harley-Davidson believes the Pan America meets these criteria, with potential for growth, and it sees the adventure-touring segment as an extension of Harley’s touring heritage. Across the industry, we’ve seen adventure bikes effectively supplant the sport-touring segment, so perhaps Harley-Davidson sees potential for customers deciding between traditional touring and adventure-touring products.

Not mentioned at all is the streetfighter segment which was to be occupied by the Harley-Davidson Bronx. The implication here is that Harley-Davidson doesn’t see potential for either profitability or market leadership in this competitive segment. Officially, the Bronx remains indefinitely delayed, but reading between the lines, it’s becoming clearer that the streetfighter no longer fits into the company’s plans.

The 20% focus does includes the middleweight cruiser segment, which Harley-Davidson intends to reinvent and increase profitability using the new Revolution Max engine (which also powers the Pan America).

“Our new Revolution Max engine provides a versatile platform that enables expansion across segments,” says Zeitz. “This will provide us with what we believe is a highly competitive and profitable path in a segment that expands our relevance to a great customer set beyond our stronghold offerings.”

Harley-Davidson has been teasing this new middleweight cruiser with images of its Custom 1250 prototype, and Zeitz says we will see more of this on Feb. 22 with the Pan America’s launch.

The remaining 10% of the company’s focus will be on other new avenues including premium low-displacement models with partnerships. Harley-Davidson is already partnering with China’s Qianjiang on a small displacement model, and in October, signed a licensing and development deal with India’s Hero Motocorp.

Electrification

As we previously reported, Harley-Davidson recently removed mentions of its electric concepts from its website. While this move created some doubt about the Harley’s EV plans, The Hardwire reaffirms the company’s commitment with the establishment of a new division for electric motorcycles.

“Our combustion motorcycles will drive our business for years to come, however our electric motorcycles are important to our long-term success,” says Zeitz. “We are fully committed to, and passionate about leading in electric motorcycles.”

The new division will have full autonomy of EV development and operate separately from the internal combustion development. This will allow for more agile decision making and execution, and allow for potential external partnerships for future developments.

Interestingly, Zeitz spoke about how the traditional model year structure doesn’t apply to electric vehicles the same way it does with internal combustion motorcycles. With electrics, the focus is on new technologies rather than annual iterations, which may explain why there was no mention of the LiveWire with the rest of the 2021 model year announcements in January.

Growth in Complementary Businesses

While motorcycle sales drive the company, it’s not the only area where Harley-Davidson makes money. Harley-Davidson Parts & Accessories and general merchandise sales will be an important part of The Hardwire, as well as HDFS. Under The Hardwire, Harley-Davidson will refresh its product offerings and drive sales both online and in dealerships.

HDFS will also be expanded globally, while also including a “Harley-Davidson Certified” Program for pre-owned motorcycles.

Customer Experience

Under the Hardwire, Harley-Davidson will seek to attract both new and existing customer bases. Zeitz spoke about the perception of Harley-Davidson’s aging demographics, arguing that its customer base is in line with the industry.

“Our data suggests there’s a more nuanced story to be told. Our customers are diverse, joining motorcycling and the brand at all life stages including younger age groups,” says Zeitz. “While we automatically skew towards middle-aged riders, given the segments we are in, our customer age profile is very similar to that of our closest competitors.”

What the company does well, according to Zeitz, is having customers enter and remain with Harley-Davidson as they age. As such, Harley’s digital marketing efforts will target a range of age demographics.

Inclusive Stakeholder Management

A significant part of the Rewire included cutting up to 700 jobs in 2020, but under The Hardwire, Harley-Davidson will now focus on attracting and retaining talent. Harley-Davidson will be offering stock options to approximately 4,500 employees, from factory workers to executives.

The Hardwire also sets a goal for the company to have a net zero environmental impact.

Will The Hardwire Succeed?

It’s too soon to tell whether The Hardwire will work, but Harley-Davidson has a lot of ground to make up. Despite a relatively positive third quarter, the final quarter saw a net loss of $96 million, resulting in a year-end net profit of just $1.3 million for the 2020 fiscal year, compared to a net income of $423.6 million in 2019.

Motorcycle shipments to dealers fell 32% to 145,200 units, though much of that was planned to correct an over-supplied market and reduce discount pricing.

Harley-Davidson faces a lot of challenges ahead, so we’ll see how things move forward from here. The next step will be the Feb. 22 launch of the Pan America, followed by further details of the Custom 1250 and the establishment of Harley-Davidson’s new electric vehicle division.

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