Harley-Davidson has a China conundrum

Having just watched “Harley-Davidson and the Marlborough Man,” listened to “Born to be Wild” and read about the Milwaukee company’s situation in the cover story in the previous edition of BizTimes Milwaukee, it seemed time to throw my two cents into the pot.

According to a report by the Spectrem Group, a Chicago-based consulting firm, the number of U.S. households with a net worth of $1 million or more in 2009, excluding wealth derived from a primary residence, grew 16 percent last year to 7.8 million. The number of ultra-wealthy, those with a net worth of $5 million or more, grew by 17 percent to 980,000. The number is down from the all-time high of 9.2 million in 2007, following a 27-percent decline in 2008, but clearly things are heading in a positive direction, in terms of the ability to accumulate wealth,

In China, the number of millionaires last year was 875,000, according to the Hurun Report, a monthly magazine known for its “China Rich List,” a ranking of the wealthiest individuals in China. The average profile of China’s new wealth is a 39-year-old man who prizes his European watches, classical Chinese art, has three cars and would like to buy a jet. He is 15 years younger than his counterparts in other countries, plays sports and likes to travel. He wants his children to have a British secondary education and go to college in the United States. He likes French wines and buys Italian suits.

The next piece of information is from Bain & Co., which forecasts that global luxury sales, a 153 billion-euro ($228 billion) industry will rise by 4 percent in 2010, following an 8-percent worldwide decline in 2009. According to the report, a 10-percent increase in the sales of luxury goods in Asia this year will offset declines in the United States, Japan and Europe.

Bain estimates that out of the estimated 300 outlets that will be opened this year, 15 percent will be in mainland China and 25 percent elsewhere in Asia.

Given that the United States has 9 millionaires for each one in China, the math seems a little sketchy but, based on positive reports thus far from LVMH, Richemont, Gucci, Hermes, Prada, Chanel, Mercedes, Rolls Royce, Bentley, BMW, Audi and Bugatti; anecdotal evidence from travels to various cities in China and a luncheon with the franchise holder for Bell Helicopters, Lear and Bombardier jets in China, it seems clear that the Chinese have an incredible appetite for luxury brands and products.

So the question is; how is it possible that one of the most iconic brands in the world, Harley-Davidson, is continuing to spiral downward as other brands seem to be recovering; especially in China, a market whose wealthy seem custom-made for its product’s appeal?

The issue cannot be about brand awareness, as I have rarely bumped into a wealthy Chinese guy who didn’t know the brand. It’s not about price, as the Chinese pay double the going U.S. price for luxury cars, due to a 100-percent government import tax. At the Beijing Auto Show this year, a Bugatti Vercheron you can buy in the United States for $1.8 million was sold for $5.86 million.

One answer is that Harley has failed to successfully crack the Asian market, particularly China. Dealerships are few and sales do not match the potential. Having chatted with various people at Harley over the years, it is clear they faced some difficult obstacles in China, particularly the prohibition against big iron in large cities, but business is about overcoming obstacles, and thus far, they have failed to find the right solution. Perhaps this is a case study which demonstrates the danger of not coming to terms with China’s market.

Two pieces of advice: First, if there is an interest in the China market, from the Chinese perspective, if the bike is not made in the United States (preferably Milwaukee) it will lose its luxury appeal in China. The Chinese place a high premium on authentic goods and will gladly pay a premium for the best. Second, while cutting costs is a business reality, growing profitable sales is the only long-term strategy.

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