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Harley-Davidson Needs To Go Through A Major Paradigm Shift

A talk with ATK Motorcycles President and CEO Frank White.

by Atta Khan with Seeking Alpha

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Recently I had the pleasure to sit down with Frank White and talk to him about Harley-Davidson (NYSE:HOG) and the American motorcycle industry in general. Frank White is the President and CEO of ATK Motorcycles and has a reputation in the motorcycle industry as a true biker's biker.
Not only does he run one of America's oldest motorcycle manufacturing companies but he has also won himself a couple of racing titles, including the National AMA ISDE 6-Day Open Expert Class aboard a 500 ATK Enduro. In 2002 the Bush Administration had Frank White represent the motorcycle industry with the EPA and since that time he has worked with a variety of government entities with respect to the motorcycle industry.
Along with Harley-Davidson and Polaris, ATK motorcycles are the three members of the US Motorcycle Manufacturers Association

Dr. Feng from Bikernet rode the 650cc ATK daily for over three years. Last week he got a tank of bad gas, which caused him some problems.
Dr. Feng from Bikernet rode the 650cc ATK daily for over three years. Last week he got a tank of bad gas, which caused him some problems.

AK: Can you briefly describe your relationship with Harley-Davidson?

FW: My first encounter with Harley-Davidson was in 1972 when I was a 15-year old kid. I was on their TV commercials riding the little dirt bikes they had. My second involvement with Harley was in 1991 when my father and I took over ATK and ATK and Harley at that time were the two sole members of US Motorcycle Manufactures Association. Over the past 25 years I've developed great relationships with people like Bill Davidson, he's a fifth generation Davidson, and his father Willie G. Bill actually had one of our dirt bikes in his garage and we used to go dirt bike riding. Over the years I've known several of their CEOs, COOs, presidents, some of their many vice presidents, directors, and engineers. Racing team people at HD, I really get along well with those guys, actually I have a whole rolodex of all the Harley business cards. Most of the involvement I've had with them over the years has been with government related stuff.

I know a couple of the 13 people who saved Harley-Davidson from bankruptcy in '91, and you know we remain friends to this day. It's sort of like the biker bond. In addition to the Harley-Davidson Motor Company employees I've become friends with many of the 700 Harley-Davidson dealers themselves.

How long have you and the other members of the industry been bringing up Harley's aging demographic with its management?

It's not just Harley that has a problem with aging demographics, it's everybody. I'm friends with several of the guys who run the Asian brands in the USA and we've been talking about this for years. We've all seen it coming. What's so surprising is how fast the Asian brands and Polaris have reacted to what the younger generation of riders want and expect. For years dealing with the Asian brands, you know they kind of have a thought process "Analysis Paralysis," they over analyze everything and it's just like nothing happens. So what's shocking is that they bring things to the market really fast and I think that's kind of hurt Harley, because you know when Harley develops something they engineer it for years and then it's past tense. I'm a member of the US Motorcycle Manufactures Association which is a member of the International Motorcycle Manufactures Association (IMMA). I see all the sales statistics worldwide and I recognize that most segments are on the decline worldwide for a variety of reasons, and I think that if you really look at the one that's going to be taking the biggest hit is the one that Harley-Davidson sells - the big V-Twin heavyweight motorcycle. That market is just declining the fastest. I see the numbers, I know what's happening, I've had the discussions with the guys in the other motorcycle brands around the world and we're all kind of like "What do we do next?" I think we need to identify who the new customer is and make the product for him.

AK: Do you see any other reasons besides Harley's aging demographic which could be leading to a loss in demand for Harley-Davidsons? For instance maybe their pricing issues, or maybe the millennials' taste in bikes?

FW: I think the styling of the Asian bikes and the Polaris stuff is more appealing to the younger demographics in addition to being a lot less money. You know, Harley came out with a new Harley-Davidson street version, the 750…and the dealers are not selling these. The Harley-Davidson dealers tell me they look too much like a downsized Harley and that's not what the millennial wants. The millennials are a weird bunch, and you just can't downsize something and think that that's something they're going to want. I think one of the keys to success is knowing what the future wants. Do you know who used to tell me this all the time? It was Bill Davidson when we'd power around on a bike ride and go on trips. He told me this in the mid '90s. His father, Willie G., and a few others would go to all the big motorcycle rallies and they'd absorb everything…and it appears to me that that's not what they're (Harley-Davidson) doing. I lift weights every other day and I hang out with a bunch of young kids, and you know they think differently. I've also got kids who are millennials. You can't really guess what they want, you have to be involved with them. To the new millennial buyer price is a huge thing…a huge thing. And this is a problem for Harley-Davidson because you know it's American-made and a higher price so it really doesn't cut it for these kids. Price is key, much more so than it used to be.
Classic 250 cc ATK. Bikernet road tested one for several years. Great bike for the price.
Classic 250 cc ATK. Bikernet road tested one for several years. Great bike for the price.

AK: Is there a certain way you think Harley should be combating this issue, like maybe using ATK as a feeder brand or maybe acquiring other companies?

Absolutely. In my opinion and in the opinion of several of my retired senior friends Harley needs a second brand as a feeder brand. One of the guys who started HOG, he told me that Harley is all about building great big beautiful V-twin bikes with lots of chrome that roar down the highway, and you know he's right…that's Harley-Davidson. That's what people think of it. And anything else other than that would hurt to bring in. Having a feeder brand should be an incubator for future motorcycle riders.

Many Harley-Davidson customers began their riding career by riding small Harley-Davidson motorcycles or small Japanese dirt bikes made in the '70s. When I talk to riders I ask them "What bike did you get hooked on?" a lot of them turn out to be these small bikes. And I was one of those kids, and I got hooked on a Yamaha 80. You can plot a cradle to the grave story: start out with a small dirt bike and then you glide out into the sunset riding a big beautiful Harley-Davidson V-twin. But you first got to get them hooked, and that's the key. In essence Harley-Davidson needs a Scion brand as what Scion is to Toyota. You look at these car companies and they have feeder brands. I think a key element to success is that most companies need to grow their products to new consumer bases. You know one of the Harley-Davidson directors told me that they had a discussion in 2008 about small dirt bikes being in the lineup, however the board of directors axed it because of potential liability issues. There's another reason to have a feeder brand, because it would reduce the potential liability of the main brand.

(Harley-Davidson Project LiveWire - Source: Harley-Davidson website)

And then I look at the E-bikes, Harley-Davidson started this LiveWire program and it had great success. I got lots of calls from lots of Harley dealers asking me about it because they had a lot of millennials coming into their shops wanting to try out this new bike, and really there's no way to capitalize on the buzz they created because Harley-Davidson is not about E-bikes. A new feeder brand could be the way to keep the momentum they gained. The technology is out there right now for small electric motorcycles. Some of our manufacturing partners actually have this, so we (ATK Motorcycles) could actually bring to the market a good small electric bike. I think later on these potential customers would be in a position to buy a Harley, the big cruiser, once the battery technology advances to support it. I think Harley-Davidson needs to capitalize on what it started and don't let others like Polaris taking advantage of who's coming out with a good E-bike.

Also, having a feeder brand will signal to the Wall Street analysts the ability to adapt to a changing market by enticing a new demographic of consumers. I think having a feeder brand could also be the foreign link to Harley-Davidson dealerships. Harley-Davidson is all about 'Made in the USA' and anything foreign is kind of taboo, but the dealers need to recognize that they need foreign products in there to attract the millennials. So there's a little bit of a conflict, but I think having a feeder brand could alleviate that conflict so it doesn't hurt the Harley-Davidson brand integrity.

In summary, Harley-Davidson needs to go through a major paradigm shift and this requires a diverse range of products to cultivate those new customers who with time would buy a traditional Harley-Davidson motorcycle. It's kind of like cocaine marketing: get 'em hooked and they'll keep coming back! That's the key! And could ATK be that feeder brand to undergo that paradigm shift? Absolutely.

Do you think Harley Davidson's recent marketing strategy backfired? Because I remember Polaris' CEO saying it's "nice when somebody else pays for your advertising." How much of an impact might faulty marketing strategies have on Harley-Davidson?

FW: You know on that specific thing I don't have any specific knowledge on that. You mention Polaris, 12 years ago they were joke…a total joke, their products were crap and everything was awful. You talk about a turn around and Polaris is there. They are just rocking! They are not a company which you just ignore, you know one of the executives of Harley-Davidson, 2-3 years ago I asked him "do you guys have discussions about Polaris?" and he said "No, we don't really consider them our competition." and I wonder if they still think that way today. I hope they don't. For years they thought they were kind of immune to the upcoming competition.
Classic American Made ATK dirt bike. The only American made dirt bikes for years.
Classic American Made ATK dirt bike. The only American made dirt bikes for years.


How would you compare the current management at HD vs their predecessors?

FW: Well in the new profile I know Matt Levatich, and I like Matt. We had lots of dialogues when he was running Harley Davidson in Europe, but his predecessor, Keith Wandell, he was really kind of a wild man and you know he basically alienated all the old guys who turned the company around…he alienated them so much that they all decided "to hell with this! I wanna retire." He was just a bully. And you know a lot of guys who made the company what it is left. Matt didn't leave, he stayed and you know the old group they had a unique taste on everything. They had guys who were really good in embracing things, and they just worked as a team. And I think that's one of corporate America's turnaround stories. They saved the company from total collapse in the 80s and made it what it is today, and my hats off to them.

AK: So the way you talk about things it seems like you believe Harley-Davidson needs to reevaluate how it operates?

When you are publicly traded company you gotta do what's best one day for the shareholders and one day what's best for the company and the dealers, so there is a dilemma. If you don't know what's right for the company and the dealers it becomes anemic. It's not about just share price, it is about really making company solid. And I see hope in the Matt's leadership. I see things good for the dealers and thus subsequently for the shareholders. I think that the Motor Company is waking up to the fact that the demand for the motor bikes will never be what it was. And it appears that Matt is changing something in the company for the sustainability of its future and to me this shows his integrity and not his greed.

Do you think that Harley should move away from Wall Street or should they delist themselves?

I have heard rumors of that, and some of my retired friends think that would be the great thing. But I think they need to do what's best for the company and their riders, and not worry so much about the share price. I think the people shouldn't look too much into sales instead they should look into the profitability and whether they are building us a structurally sound business. And I think that's the key in my opinion. To me it's the foundation of the business that sustains it. I don't look at the sales because sales are never going to be what they were worldwide… it's just a fact.

AK: Looking ahead, do you think HD can sustain sales and profitability using their current vision?

FW: No, in my opinion no. They need a paradigm shift. I think the big V-twin market is on the decline. I tell this to the dealers each week that it's never gonna be what it was so you need to make changes to sustain their business because they have invested millions in dealership. Out of 20 or so motorcycle market segments there are only three that are growing and the other 17 are on decline. It appears Harley-Davidson is coming to grips with this. They're spending millions of dollars in marketing and I had many journalists and motorcycle dealers asking me what this marketing campaign will do. "How will it benefit us?" And who in the world doesn't know about Harley Davidson? It's not about marketing, it's about the product and the right product for the right person.
AK: What would your advice be to investors who have a stake in the stock?

FW: I would advise to investors to see where the market is and going, see whether the company is going in right direction. Don't worry about these stupid sales numbers. Do what is structurally right. Long-term thinking, that's how I see it. Harley-Davidson is the greatest motorcycle brand ever, and I hope and wish that the current management and stakeholders will continue to do what's best and right for the company. I just look at the strength of the company. I think Levatich will do the right thing. He's got integrity.

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Reader Comments

I think what ATK needs in it's street bike line is a design shift. The bikes remind me of American Motors styling. Fugly

Friday, November 4, 2016

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