Spuck Bennett’s dealership just outside Ocean City, Maryland, is cluttered with 65 shiny Harley-Davidson motorcycles, including the chrome Sportster and the sleek V-Rod. Last year, Bennett, 79, sold 200 bikes, down from 280 the year before. This year, sales have slowed to a crawl.
“I haven’t seen anything like this in the 33 years I’ve owned a dealership,” he says. “We’re just trying to survive.” He has cut expenses by trimming hours and overtime, and laid off seven of his 49 employees.
After riding high for two decades, the company that makes the hulky bikes that devoted riders affectionately call Hogs is sputtering. Harley’s core customers are graying baby boomers, whose savings, in many cases, have gone up in smoke in the market downturn. Few are in the mood to shell out up to US$20,000 or more for something that is basically a big toy, and the company, in turn, has not captured much of the younger market.
And though Harley’s woes pale in comparison to what the automakers face — Harley’s revenue dipped 2 percent last year while Detroit was crashing — overproduction and loose lending practices have burdened the company’s finances.
In a pattern similar to that of the housing bust, Harley goosed sales by luring many buyers with no-money-down loans. A subsidiary created about 15 years ago, Harley-Davidson Financial Services, made those loans and packaged them into securities to sell to investors. As the credit market skidded, so did this subsidiary.
As much as one-fourth of the US$2.8 billion in loans issued by Harley-Davidson Financial Services last year were subprime, with interest rates as high as 18 percent. As the downturn took hold, some borrowers started defaulting on loans and investors stopped buying the securities, forcing Harley to write down US$80 million of debt last year, analysts said. Although it recently tightened lending standards, the company is still chasing buyers by offering credit.
“It’s an unsustainable strategy to continue financing this way,” says Robin Farley, an analyst with UBS. “In the last few months, they’ve been running into a liquidity wall.”
Tom Bergmann, Harley-Davidson’s chief financial officer, defends the company’s lending practices. “It’s not easy in this environment,” he said. “We have to give loans to customers, but only to those worthy, and we’ve been disciplined and prudent in granting credit to our customers.”
In large part because of loan problems, though, profits at Harley fell 30 percent last year, to US$654.7 million on revenue of US$5.6 billion. Operating income of the financial subsidiary fell 61 percent, to US$83 million.
UNEASY RIDERS
Concerns about Harley’s future grew after the departures of its two top executives were announced. In December, Jim Ziemer, 59, said he planned to retire as chief executive this year. In early January, the company announced that Saiyid Naqvi, the head of the finance unit, was resigning after less than two years at Harley. Since September, Harley’s stock has plunged 70 percent, to less than US$13, compared with a 36 percent decline for the Standard & Poor’s 500.
Like many cash-tight companies, Harley, based in Milwaukee, is finding that borrowing is difficult — and expensive. Early last month, Harley announced that Berkshire Hathaway, Warren Buffett’s company, would buy US$300 million of its unsecured debt. (Harley reported total debt of US$3.9 billion last year, more than double what it held in 2007.) In exchange for his good name and millions, Buffett demanded 15 percent interest from Harley on his investment (similar to deals he received from Goldman Sachs and General Electric when he invested in those companies last fall).
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