Iconic motorcycle manufacturer Harley-Davidson Inc. has had a rough couple years, from competing for marketshare with other manufacturers — who undertook aggressive discounting in 2015 and 2016 — to a slowing demand for its new motorcycles in the U.S.
Not to mention that losses for Harley-Davidson Financial Services — which were up 40 basis points to 1.8% in the fourth quarter of 2016 — continue to reach record highs unseen since 4Q10, when losses hit 2.11%, according to the company’s latest earnings report.
“The increase was due to higher defaults across the portfolio, including those in oil-dependent areas, and lower used-bike values at auction,” said John Olin, Harley-Davidson’s senior vice president and chief financial officer, during the 4Q earnings call in late January.
The recovery value is a function of the used-bike price, James Hardiman, managing director of equity research at Wedbush Securities Inc., told Powersports Finance. “As used-bike prices have come down, credit losses have gone up at HDFS, and that’s probably the most direct and immediate result of the used-bike pricing issue.”
Holding the Line
The continued rise in credit losses caused Harley-Davidson Financial Services to adjust its underwriting, particularly in oil-dependent areas, during the third quarter of 2016 — which the captive “feels good” about, Olin said on the 4Q call.
“We’ve got a robust process to make sure we are taking everything into account,” Olin said of the captive’s strategy.
In recent months, approval amounts seem to be tightening in the subprime tier, confirmed a southern-state Harley-Davidson dealer, who wished to remain unnamed. “For prime customers, we have not seen a change,” he told Powersports Finance.
HDFS appears to be “holding the line” on subprime, he added. “The biggest impacts have been on documenting stipulations, and HDFS’s willingness to make exceptions,” on subprime deals that were not immediately approved.
However, the captive’s originations mix — so far — remains unchanged. HDFS’ 2016 originations were comprised of 80% prime loans and 20% subprime loans, the same as the previous year’s origination mix.
“Harley-Davidson very much believes that a material portion of their customer base are subprime borrowers, and so as we talk about them needing to spur demand, they don’t believe turning their backs on subprime borrowers is the way to do that, by any stretch,” Hardiman said. If HDFS didn’t tighten subprime lending, it would increase exposure to losses in the event of a downturn, he added, but “I don’t believe the issue here is an economic downturn.” Harley-Davidson needs to sell more motorcycles and bolster used-bike pricing, he added.
Indian Motorcycle is a big competitor for Harley-Davidson — particularly since parent Polaris Industries Inc. announced in early January that it planned to wind down its Victory Motorcycles brand, veering more of the OEM’s focus and investments on the Indian brand. However, in most cases, the biggest competition for a new Harley motorcycle is a used Harley motorcycle, Hardiman said.
“The Harley-Davidson brand is extremely powerful, so a lot of people are not just in the market for a motorcycle, they are in the market for a Harley-Davidson,” he said. “To the extent that they can get a three-year-old bike of their choice for $3,000 to 4,000 less than buying it new — that’s really significant. That’s a value proposition that is hard to pass up. As the availability of used Harley- Davidson bikes has gone up, the pricing has come down. I think that’s created a drag on demand for the new bikes.”
To that end, 2016 retail sales of Harley- Davidson’s motorcycles dropped 3.9% year-over- year in the U.S. to 161,658 units. Declining sales throughout 2016 even prompted the Milwaukee-based manufacturer to lower its shipment guidance in July to a range of 264,000 to 269,000 motorcycles. Harley had previously estimated it would ship 269,000 to 274,000 motorcycles, according to the company’s second-quarter 2016 earnings.
However, Harley-Davidson hopes to turn the tide with the launch of its new Milwaukee-Eight engine bikes, according to analysts. Harley-Davidson unveiled the engine in late August 2016, which is featured in the OEM’s model-year 2017 touring motorcycle lineup.
“I think the knock against the industry is there hasn’t been a ton of innovation, which is why there was a lot of excitement surrounding these Milwaukee-Eight bikes,” Hardiman said. Although, the new engines might essentially devalue all the Harley-Davidson motorcycles prior to that model, according to an analyst, who wished to remain unnamed. “Consumers don’t want model-year 2016 inventory because it’s got the old engine, and there is a lot of model-year 2016 inventory out there,” he said. “It becomes problematic because it puts pressure on prices.”
Additionally, back in July 2016, Harley- Davidson announced plans to cut 200 jobs across the country — scheduled throughout the fourth quarter. About 115 of the 200 eliminated positions were union jobs at Harley-Davidson’s York Vehicle Operations plant in Pennsylvania, which assembles cruiser models, according to a published report.
In mid-January, the York County plant was shut down temporarily for a weekend. The OEM claimed it suspends manufacturing operations from time to time, but declined to specify the reasoning behind the shutdown or how many workers were affected.
However, the plant closing is an anomaly more than anything, Hardiman said. “Every once in a while they have some product issues, and they have to make sure from a quality perspective that they are putting out safe and reliable products,” he said. “So I don’t think that has to do with longer term demand issues that we’ve seen.”
Harley-Davidson does not discount its bikes. It is perhaps one of the motorcycle manufacturer’s most distinctive traits, as it is the only OEM that doesn’t discount. Rather, it relies heavily on HDFS for financing incentives to boost unit sales.
As a result, many of Harley-Davidson’s problems manifested around late 2014 and early 2015 when the Japanese manufacturers — such as Yamaha Motor Corp., Honda Motor Co., and Suzuki Cycles — began aggressively discounting their bikes, said a person familiar with Harley-Davidson, who wished to remain unnamed.
The heavy discounting from competitors, coupled with Harley-Davidson’s unwillingness to discount its products, quickly placed the OEM in a position where it was being outsold by competitors, the unnamed person told Powersports Finance.
“Then 2016 came along, and what we’ve seen is a continuation of a highly promotional environment, less so from Japan but more from European players this time and also Polaris, which has been discounting its Indian motorcycles like crazy,” he added.
With a weaker market, there is less marketshare to grab, and when that happens manufacturers tend to get more “aggressive” with their promotional offerings to get a bigger slice of a declining pie, he said.
“It’s kind of like a prisoner’s dilemma: If you are not discounting, your peer is, so then you have to discount to be competitive,” he said. “It’s like a vicious cycle downward.”
Harley-Davidson’s reliance on HDFS also played a role in the captive’s rising credit losses, said David MacGregor, chief executive, director of research, and senior analyst at Longbow Research.
The credit metrics — delinquencies and loan losses — have definitely inflected negatively for Harley-Davidson, MacGregor said. “It’s a competitive space, and in the case of Harley-Davidson, they have committed to not discounting — which I think is smart, because that would have diluted the brand,” he said. “But if you aren’t going to discount, how are you going to compete in a highly promotional market?”
Given the environmental conditions, HDFS becomes a pretty important part of Harley- Davidson, MacGregor said. “I would expect that they have to continue relying heavily on HDFS, and I would expect the current credit experience to continue.”
Harley-Davidson is relying on finance promotions and also on the brand, MacGregor said. Some people may fear that the brand has lost its luster, but that’s not Longbow Research’s view, he added. All in all, there is still a high level of loyalty among riders toward the Harley-Davidson brand, he said, but the OEM has found itself in a rockier environment — where it is competing aggressively with foreign manufacturers.
This story originally appeared in the first-quarter issue of Powersports Finance. To view the full magazine, click here.