Thu, Oct 11, 2001 page24

• Harley-Davidson bets on V-Rod to rev up sales

  AN AMERICAN ICON The fuel injected, 115 horsepower V-Rod is not your father's hog. The bikemaker's latest offering is aimed at attracting a new generation of fans

  • BLOOMBERG
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  Harley-Davidson Inc, whose big motorcycles rumbled their way into American pop culture, is trying to ensure the future of the hog.

  Harley begins production this month of the V-Rod, a motorcycle whose styling and performance are intended to attract fans of German and Italian motorcycles. The company's traditional bikes, or so-called hogs, draw buyers with an average age of 45.

  The V-Rod is aimed at getting younger buyers hooked on Harleys.

  

  John Klein of Bayview, Wisconsin, test drives the new Harley-Davidson V-Rod. Harley-Davidson introduced its new street custom V-Rod bike at the start of the Milwaukee Home-Run Rally 2001. The V-Rod is designed to be a high-performance bike with a four-valve, fuel injected 115 horsepower V-Twin engine. The retail price is under US$17,000.

  PHOTO: BLOOMBERG.

  "We have to get a lot of young riders in to keep the brand growing," said Jim McCaslin, president of Harley, which Tuesday said third-quarter profit rose 35 percent. "At the same time, we don't want those existing riders to leave -- we want them to ride until the end."

  Loyal customers

  Harley eluded bankruptcy in 1986 and in the 1990s won half the US market for heavy bikes, in large part because of those loyal customers. In the last five years, Harley doubled sales and profit by improving quality and efficiency and marketing machines as a lifestyle choice. The stock quadrupled in the same period, giving Harley a market value of US$13 billion.

  

  The 2001 Harley VRSCA V-Rod motorcycle.

  PHOTO: BLOOMBERG.

  Now Milwaukee-based Harley is sticking to plans to expand just as other vehicle makers are pulling back on concern that the slowing US economy and consumer confidence shaken by Sept. 11 terrorist attacks will hurt sales.

  "Harley is an American icon and there's a cachet to it that is not normal," said David Zerfoss, who helps manage a US$3.5 billion equity portfolio for Pacific Century Trust Co. that includes 700,000 Harley-Davidson shares. "Given no further terrorist activity or something targeted specifically at them, I don't see anything changing in their outlook."

  Record-setting earnings growth

  

  PHOTO: BLOOMBERG.

  Harley's third-quarter net income rose to US$111.7 million, or US$0.36 a share, from US$83 million, or US$0.27, in the year-earlier period, while sales rose 19 percent to US$850.8 million. It was company's 24th quarter of profit growth and beat the average forecast of 33 cents a share in a Thomson Financial/First Call analyst poll.

  The biggest maker of motorcycles with engines 650cc or larger plans to build a record 232,500 Harleys this year, 14 percent more than in 2000, and 10,000 sport bikes sold under its subsidiary Buell nameplate. Harley-Davidson is enlarging its Kansas City, Missouri, plant to make V-Rods and Dyna-series bikes and spending US$145 million to add a second York, Pennsylvania, plant.

  "These moves prepare us for the low double-digit annual production growth we've talked about," McCaslin said.

  In contrast to automakers, whose sales dropped 6.8 percent in the first eight months of 2001 from a year earlier, US demand for big motorcycles grew 17 percent to 323,000, according to the Irvine, California-based Motorcycle Industry Council.

  While Japan's Honda Motor Co, the largest motorcycle maker, leads in total US sales, Harley dominates in more profitable heavy bikes with a 50 percent share. Harley also has 21 percent of the Asia-Pacific market and its share rose 0.9 points to 7.4 percent last year in Europe, where it's trying to win sales from Bayerische Motoren Werke AG and Italy's Ducati SpA.

  Sales last year rose to US$2.9 billion from US$1.5 billion in 1996, while profit rose to US$347.7 million from US$166 million.

  Demand outstrips supply

  Harley may not be hurt like other companies by declining consumer confidence, analysts said.

  "Demand already outstrips supply," said Britt Beemer, chairman of America's Research Group, which tracks shopping patterns. "Demand could fall 10 percent to 12 percent and they'd never notice."

  The entry-level 883cc XLH Sportster starts at US$6,000; an Ultra Classic Electra Glide 1450cc motorcycle costs US$20,000. Limited supplies mean dealers can charge premiums of US$1,000 or more for popular models, analysts say.

  "A Harley is one of the few things that people save up for to treat themselves, sometimes for years," said Tim Conder, an analyst for A.G. Edwards & Sons who rates Harley shares "buy" and does not own them. "Unless a family's finances dramatically fall off, they're still going to make that purchase."

  The V-Rod, which arrives at dealers next month, has a silver chassis and fluid acceleration that distinguishes it from the look and feel of Harley's Road King and Fat Boy cruisers. The US$17,000 bike has a 115-horsepower 1130cc liquid-cooled engine developed with Porsche AG.

  "It's going to do what it's intended to do -- expand our market," said Willie G. Davidson, Harley's vice president of design and grandson of a founding Davidson brother. Davidson and his son Bill Davidson, Harley's director of product development, were key designers of the V-Rod. The V-Rod appeals to riders who have shown less interest in traditional Harleys, said Art Spinella, an analyst at CNW Marketing Research in Bandon, Oregon.

  Limited output

  "The V-Rod played best with the 29-year-old to 45-year-old age group -- exactly the market they need," he said.

  V-Rod production starts this month. To help ensure quality, McCaslin said Harley will make just 11,000 bikes for the 2002 model year. Some dealers aren't happy about that.

  "Our allotment for the first year is just 13," said Jim Halbman, sales manager for Milwaukee's House of Harley-Davidson, which sells about 700 new and used bikes annually and is among the Harley's 10 biggest dealers. "If I had 100 right now, I could sell them all." Even devotees of traditional hogs, such as "Dirty" Goffe, a Racine, Wisconsin, Harley enthusiast in his 50s who tested a V-Rod at the company's Labor Day rally in Milwaukee, said they are impressed with the V-Rod.

  "If I had the extra cash," Goffe said, "I'd buy one."
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