HARLEY-DAVIDSON IN TROUBLE - PART TWO by CLAIRE SUDDATH for BLOOMBERG

Another Downshift

Maybe, but not that many people in the U.S. are buying Harleys—or any motorcycle. (This is a chicken-or-egg situation. Harley accounts for about half of U.S. motorcycle sales, so it’s hard to tell which one is dragging the other down.) In the U.S., motorcycles are generally used as leisure vehicles, costing from $5,000 to $45,000. Harleys average about $15,800. The baby boomers who want them already have them, and since the 2008 recession, that price is something younger people—­especially millennials, who’re now in their early 30s and should be getting into the hobby—are unwilling to pay. According to the Federal Reserve’s Survey of Consumer Finances, the average millennial household owes almost $15,000 in student loans. Throw in a mortgage, children, and frozen purchasing power—it’s barely budged for 40 years in the U.S.—and what was once a middle-class luxury is out of reach. “For young adults, especially, we’re finding there’s a financial pressure that might not have been there in the past,” says Harley’s Malenshek. 

Add that to the unappealing stereotype, and the problem becomes even more intractable. “That whole biker-with-his-T-shirt-sleeves-cut-off image has finally caught up with them,” says Randy McBee, author of the motorcycle history book Born to Be Wild. According to the Motorcycle Industry Council, only a quarter of all riders are age 25 to 40; just 14 percent are women. “I’m concerned about the core business, the hobby itself,” says Kevin Tynan, a Bloomberg Intelligence senior analyst. “I just don’t think young people are connecting with motorcycles the way previous generations did.”

While ridership has declined in the U.S., it’s growing in Europe and Asia. People in crowded Asian cities are turning to small, lightweight motor­cycles for daily transportation. According to the Pew Research Center, 80 percent of households in Indonesia, Thailand, and Vietnam own a motorcycle or scooter. Europe is similarly promising. The number of motorcyclists there is larger than in the U.S. That’s good news for Harley, because Europeans use bikes to commute and for long-distance touring. Today, Europe accounts for 16 percent of the company’s business, and that number is growing. Last year, Harley’s sales in Europe rose 8 percent.

In the U.S., the cultural shifts came to a head for Harley during the recession. From 2008 to 2010, sales dropped more than 40 percent. Ten years later, its executives talk about that time the way other people reflect on a divorce or an unexpected death. “The recession rocked us,” Malenshek says. “It rocked every company, but it really hit us.”

Malenshek has been with the business for only four years. But after you learn that she’s been riding Harleys since she moved to the U.S. from Scotland 20 years ago, you see why she says “us.” She got to know her adopted country on a monthlong Harley ride. “I had a 1200 Custom Sportster. Purple,” she says. “My friends were like, ‘This is insane, people in America have guns!’ I was like, ‘It’ll be fine.’ And it was.” 

Malenshek sometimes wears Harley T-shirts to work, paired with a leather blazer for a vaguely executive-biker look. Harley’s headquarters is in the same brick building its founders moved into in 1906 after they outgrew Davidson’s shed. The building may be old, but it’s been given an industrial-chic renovation, with real tire tracks winding along the floors, Harley engines turned into lobby end tables, and the word “Freedom” in big, bold letters greeting everyone who walks through the front door.

The recession changed Harley’s perception of itself. Until then, it had never done much consumer research. “We’d mostly gone on gut feel. We thought we knew our existing customer base and what they wanted,” says Michelle Kumbier, Harley’s chief operating officer. She’s been with the company for almost 21 years and riding for more than a decade. 

That gut feel led to some embarrassing oversights. In 2011, Harley’s top engineers and executives were at its test track in Arizona trying out new versions of its luxury touring bikes—ones designed for long-distance travel—when somebody remarked that couples rode 70 percent of touring motorcycles. When Levatich, who was COO at the time, heard that, he blanched. Neither he nor the engineers had considered the passenger, who is still generally a male rider’s wife or girlfriend. Kumbier was the only woman there. “She was the only one who’d ever been a passenger,” Levatich says. “We realized we were designing a product, but only listening to half the customer.” 

Harley needed to do some emergency passenger-testing. The company is deeply proud of, and notoriously secretive about, its designs and technology. It won’t even let curators display old prototypes in the company museum. Harley wasn’t about to just show people its bikes—that would be ludicrous. Instead, it asked employees to try its motor­cycles with a passenger. They returned with a lot of opinions: The armrest wasn’t right. The seat was too small to comfortably fit a rider and passenger, especially those made of “hardy Midwestern stock,” as Levatich says. A decorative bar around the saddlebags rubbed against the passenger’s leg. Later, Levatich’s wife, Brenda, attended the redesigned bikes’ unveiling. “When they announced the bar change, I get this jab in my ribs,” Levatich says. It was Brenda, who was thrilled they had redesigned it. “She’d never mentioned, ‘Hey, you need to fix this bar, it’s rubbing my leg all day long,’ ” he says. “We learned so much.”

Harley was supposed to be the master of touring bikes. If it could improve them that drastically, what else was it doing wrong? “We needed to talk to people in a more constructive way. In the past, we’d just go talk to customers at rallies,” Kumbier says. But those people already owned Harleys. If the company wanted new riders, it was going to have to court them, even if they didn’t like Harleys, or didn’t ride motorcycles at all. 

During this time, Harley streamlined its manufacturing process. In 1997—when boomers were relatively young, U.S. rider­ship was peaking, and Harley was in its 12th consecutive year of record profits—it opened the factory in Kansas City, Mo. “We had two-year waiting lists,” Kumbier says. “Life was great.”

The company had divided its manufacturing so that engines were made in Wisconsin, most smaller bikes in Kansas City, and heavyweights in York, Pa. But with no sign that American demand would return to prerecession levels, three U.S. factories became too much. In January, Harley announced it would close its Kansas City plant and consolidate U.S. assembly in Pennsylvania. Roughly 800 employees will lose their jobs in Missouri; 200 have been hired in Pennsylvania already, and Kumbier says the company expects to hire another 200 in the next eight months, some from Kansas City. (All of Harley’s U.S. factories are unionized; the International Association of Machinists and Aerospace Workers declined to comment for this story.) Harley made the announcement after Congress passed a corporate tax cut that reduced the company’s effective rate to about 24 percent from about 35 percent. Instead of keeping Kansas City open, Harley increased shareholders’ dividends and repurchased about $700 million in stock. 

Meanwhile, promising overseas demand has been tempered by high import tariffs in such countries as Thailand (with a 60 percent duty), India (50 percent), and China (30 percent). In 2011, Harley opened an assembly plant in India. It’s doing the same in Thailand. “We have a tremendous opportunity in Asia, but we need to be affordable,” Kumbier says. The Thailand facility will service China and the 10 countries in the Association of Southeast Asian Nations, she says, “to get around the—I shouldn’t say ‘get around’—to appropriately produce in region so we [don’t] have the duties and the tariffs.” Last year, Trump seemed to understand this economic logic. In a February 2017 address to Congress, he referred to the meeting he had with Levatich and other Harley executives. “They told me, without even complaining,” he said, “that it’s very hard to do business with other countries because they tax our goods at such a high rate.”

Asian and European riders prefer smaller, leaner bikes, not the refrigerator-size monsters U.S. boomers ride. So Harley started making some. In 2014 it released a line of low-priced street bikes, its first completely new series in 13 years. It continued surveying younger Americans, too. That’s when it found out that a good portion of them didn’t care about Harley.

“That tone of ‘us against the man’ was making us inaccessible to young adults,” Malenshek says. “They’d say, ‘That’s exclusive, and I don’t want to be part of that.’ ” It kept Harley from tapping into millennial appreciation for heritage brands, something Levi’s and even KFC had managed to do years earlier. The snowmobile company Polaris Industries Inc.saw Harley fumbling, and in 2011 it bought the defunct Indian motorcycle brand and began marketing it as an American classic. Sales of big Indian cruising bikes boomed in the U.S. as Harley’s sales declined. From the Harley headquarters, employees could see an old Miller sign from the Milwaukee beer’s oldest brewery. In 2014, Miller Lite reverted to its 1975 white label design, and sales of the beer shot up 14 percent. The branding opportunity was staring Harley right in the face.

The company had also missed out on several chances to draw in those young riders who did exist. Adventure bikes—powerful motorcycles that look like dirt bikes on steroids, cost as much as $20,000, and can be used on- and off-road—had recently become popular, especially with young and European riders. BMW and Yamaha had been selling adventure bikes for years. Harley didn’t make even one.

If Harley wanted people to stop associating it with that biker stereotype, it needed to give them something they wanted to ride. So a few years ago, it quietly got to work on some adventure prototypes. “We’d show consumers concept photos and say, ‘What if Harley made this?’ ” Malenshek says. “Everyone we spoke to was like, ‘Oh, they’d never do that.’ We’d say, ‘OK, tell us why.’ ” Malenshek looks almost dejected when she explains the answer: “They just didn’t think we would.” 

Listening to criticism wasn’t easy. Even now, Harley executives waver between claiming the company has changed and bristling at the notion that it even needed to. “We’re sometimes told we’re not innovative. Actually, we are very innovative,” says Kumbier. Malenshek says: “It gets frustrating. It’s like, ‘No, no, it’s not true!’ ”

As Harley designed its new bikes, Levatich realized the company shouldn’t keep them secret. “If we just show up with those products and don’t prepare to meet the new customer on their terms, we won’t be successful,” he says. 

In 2014, Harley turned 111 years old and finally decided to do some publicity. It allowed select trade publications to test-ride an electric motorcycle prototype, which the company named LiveWire. A LiveWire appeared in the 2015 movie Avengers: Age of Ultron. Then, for the next three years, it disappeared. There’s a finished LiveWire in Harley’s top-secret product development center. It looks like something out of Blade Runner, but if you want to see it up close, you have to let a security guard block out your phone’s camera with a sticker. Electric vehicles are often quiet, but part of Harley’s appeal has always been the unmistakable sputter-rumble its motorcycles make when revved. Harley says the LiveWire will sound like a jet engine.

In July the company was finally ready to show the worldwhat it had been up to. It announced that the LiveWire will go on sale next year, followed by several electric models of varying weights and sizes. Two adventure touring bikes will debut in 2020. There are new street bikes and lightweight bikes; even its older models are getting upgrades. Harley still won’t reveal its entire lineup and is mum about technological upgrades to existing motorcycles. But it’s trying to be more forthcoming. “Look,” Malenshek says. “We’re bringing it!”

Harley is also testing ways to leverage its 115-year history without reminding people of its reputation for making grandpa bikes. At its anniversary festival, planned around Labor Day weekend in Milwaukee, the company will host old-fashioned competitions, from “run what you brung” drag races to a 1910s-era hill climb race up a ski slope. Its social media campaigns highlight washed-out, filtered videos of vintage bikes and interviews with people who talk about what Harley means to them. Harley is starting to feel young again. The one big problem is President Trump.

In March the company was preparing to introduce its bikes when Trump announced a 25 percent tariff on foreign steel and a 10 percent levy on aluminum. He tweeted: “Our steel industry is in bad shape. IF YOU DON’T HAVE STEEL, YOU DON’T HAVE A COUNTRY!” This wasn’t good news for Harley—or Ford, General Motors, or any other U.S. company that used steel and aluminum. Harley estimates that Trump’s tariffs will cost it from $15 million to $20 million this year.

The EU, which sells billions of dollars of steel to the U.S. every year, responded to Trump with its own set of tariffs, targeting famous American companies whose workers and customers largely support the president. It zeroed in on Kentucky bourbon, Levi’s jeans, and Harley-Davidson. “We thought it can’t possibly happen,” Kumbier says. But it did. The 31 percent EU tariffs—a 25 percent bump on top of a 6 percent duty that already existed—went into effect in June, costing the company an additional $30 million to $35 million. If the situation isn’t resolved soon, it’s looking at annual costs of $100 million, or much of its European profit. Harley needs those European customers so badly that it says it will eat the costs, which come to about $2,200 per motorcycle, instead of raising prices.

The company will also take its standard approach to getting around the new taxes. Next year, Kumbier says, Harley will start manufacturing European bikes overseas, likely in its preexisting Asian plants. Industry analysts suspect it’s been considering the move for a while. Trump is fickle in his policies and promises, and a new administration would likely end any trade war. “This was a convenient cover for them to move production,” says Bloomberg analyst Tynan. Kumbier says that’s not true: “This wasn’t in our plan, I assure you.” Harley was so surprised by its role in the trade war that Kumbier says it will take 9 to 18 months before it has a solid European manufacturing plan in place. 

Trump either misunderstands or doesn’t care about the economic straitjacket Harley is in. “A Harley-Davidson should never be built in another country—never!” he tweeted in July, apparently unaware of the company’s international presence. He’s insinuated that the U.S. motorcycle market is booming (“The U.S. is where the Action is!”) and is urging Harley riders to boycott the company, goading them to turn against something they love and drive it into the ground simply for the appearance of winning. 

No one at Harley will talk openly about any of this. Levatich calls the situation “unfortunate.” Kumbier says, “We’re managing the best we can.” A recent internal memo to employees explaining its approach to the tariffs didn’t even mention Trump by name. Harley’s characteristic reticence has served it well. The people Trump is egging on still account for the majority of its business. It neither can nor wants to offend them. “They are a good portion of our customer base, and we absolutely love them,” Malenshek says. 

Harley is caught between dueling ideologies about what it represents. It’s searching for a middle ground, one that will let it reach into the future without letting go of the past. If there is such a path, it must be pretty narrow, because the rest of the country hasn’t found it either. “We’re not a political organization,” Malenshek says. “We focus on motorcycling.” But to many people, those motorcycles represent America, and right now, America is at odds with itself.At a waterfront restaurant in western Connecticut, the Long Island H.O.G.s drink beer and watch the late-afternoon sun dance on the surface of a small lake. Their 100-mile ride was a leisurely one along winding two-lane roads, with plenty of time for reflection.

The H.O.G.s order burgers and fries, or sometimes burgers and side salads, because they’re getting older and have to watch their weight. They swap stories about crossing the Badlands and outrunning tornadoes in Kansas, but they quiet down in deference to Richie Blake, an 89-year-old Korean War veteran who’s been riding Harleys since 1945. He arrived today on his 800-pound 2000 Street Glide, retrofitted to carry the motorized scooter he sometimes uses to get around because, thanks to the frostbite he got in Korea, he has trouble walking. Blake, who grew up in Harlem, tells a story about the time he and his friends raced a group of police officers down Manhattan’s West Side Highway, blazing right by them.

So he won? 

Blake nods. “We had Harleys,” he says. “The cops had Indians.”