Could This Inevitable Shift Damage Harley-Davidson's Reputation?

An unstoppable wave of innovation could threaten to alienate Harley-Davidson's core customers. Find out how this controversial new product is a necessary evil for the company.

Jun 29, 2014 at 11:32AM

I have good news for you if you're a Harley-Davidson (NYSE:HOG) fan: the hog is experiencing quite the resurgence!

Like most big-ticket retailers, Harley-Davidson wiped out during the recession, seeing its annual production fall from 349,196 units in 2006 to as low as 210,494 in 2010. Some had questioned the company's ability to rediscover its previous glory following a four-year downtrend in sales, but after a three-year period where sales have surged, including a 4.4% unit sale increase to more than 260,000 units in 2013, we can say with some level of certainty that Harley-Davidson still has what it takes to attract riders.

Images

Source: Pedro Ribeiro Simoes, Flickr.

To some extent it's not difficult for Harley-Davidson to draw in repeat customers. Unlike the auto market, competition among motorcycle builders isn't nearly as crowded. Buyers also tend to be considerably more loyal to a single brand. The Harley-Davidson brand name is practically synonymous with motorcycle riding culture, and it's a primary reason why it currently holds nearly half of all young adult (ages 18-34) market share in the U.S., and a whopping 63% of all market share for Caucasian men aged 35 years and up. By comparison, the next closest competitor holds just 6.5% market share. 

Harley-Davidson makes history again
Harley-Davidson is known as a pioneer and trend-setter in the motorcycle industry, but a natural evolution currently underway within the auto sector could adversely affect the brand image it's been working more than 110 years to build.

This unstoppable evolution is the introduction of all-electric vehicles. While Tesla Motors (NASDAQ:TSLA) wasn't the first to introduce an electric vehicle, or EV, to market, it is the first to successfully introduce a new car brand in 50 years as well as mass-produce an EV, the Tesla Model S. With an electric range that dwarfs its closest competitors and the prospect of having a vast Supercharger network up and running within a few years, the allure of Tesla's vehicles has spread to both young and old consumers.

Harley Livewire

Harley-Davidson LiveWire, Source: Harley-Davidson.

This past week, the all-electric trend made its debut in a Harley with the company introducing its first all-electric motorcycle, known as the LiveWire. LiveWire can take a rider from 0-60 mph in just four seconds and has an electric range of 53 miles.

While not available for sale yet, Harley-Davidson plans to visit more than 30 dealerships all over the U.S. in an effort to drum up interest for the LiveWire, as well as suss out what sort of demand the company should expect from consumers. Consumers will either get a chance to ride LiveWire and provide feedback or participate in a LiveWire simulation. Next year, Harley-Davidson will expand its "Project LiveWire" tour beyond just the U.S. borders and push into Canada and Europe as well. 

The evolution of an electric bike is necessary for Harley-Davidson
The reasoning behind the move to make an all-electric motorcycle now does make sense for Harley-Davidson for a number of reasons.

First, consider the toughening standards from the Environmental Protection Agency. The EPA imposed lofty mpg goals on the auto sector in 2012, which has pushed automakers toward researching more fuel-efficient and low-emission vehicles. This is one of the primary reasons a company like Tesla has been able to zoom to the forefront. By the same token, the EPA will continue to clamp down on emission and mpg standards for gas-powered motorcycles, pushing companies like Harley-Davidson to continue to innovate, including the development of electric-powered bikes.

Second, not to say that older generations of adults don't care about the environment, but the best way to attract Millennials and other young adults is to show a genuine interest in caring for the environment. Going green isn't just an exception to the rule any longer, but is instead becoming the expectation of a burgeoning class of new consumers. By introducing an electric bike, Harley-Davidson is demonstrating to a new generation of potential buyers that it cares about the environment. In addition, it also introduces the brand to a class of riders that perhaps was too intimidated to purchase a Harley previously.

Finally, LiveWire gives Harley a way of diversifying its revenue stream. Although electric bikes make up a minuscule 1.5% of total motorcycle market share at the moment, their growth in future years is undeniable. Given the fickle buying habits of consumers, being able to offer an eco-friendly and quieter Harley could juice up its sales over the long term.

Www
Source: HiEtec, Flickr.

Could this move destroy Harley's reputation?
The fear does exist that the introduction of an electric motorcycle could undermine everything that Harley stands for. As NBC News reported last week, while the company has been very encouraged by the response to LiveWire thus far, an outpouring of criticism concerning the bike has also been aired. As one California Harley owner told NBC News, "When I ride a motorcycle, it's that engine vibration, the sound, the kind of visceral experience you get that you can't get with an electric motorcycle. If I'm going to buy an electric motorcycle, I might as well buy a scooter or something like that."

Harley's image is built on being tough and edgy, all the way down to the throaty roar of its engine. The introduction of an eco-friendly bike with a considerably muted electric sound could threaten to alienate its core customer and undermine everything Harley-Davidson is perceived to stand for. Harley-Davidson is still trying to reclaim its pre-recession glory, so alienating its core customer now would be a very bad idea.

Images

Source: Michael Hooper, Flickr.

Aesthetically LiveWire is a good-looking bike, but its electric range of just 53 miles and its full charge time of three-and-a-half hours could leave a lot to be desired. Can you imagine how long it would take to get from any U.S. coastal city to the annual motorcycle rally in Sturgis, S.D., in August with a motorcycle that only had a 53-mile range and needed to be plugged in for more than three hours at a time to fully charge? Battery size constraints and infrastructure challenges could present an insurmountable challenge for LiveWire. Harley owners love the freedom of simply getting on their bikes and traversing the country. With its limited battery capacity, that may not be possible for quite some time with an electric bike.

Plenty of questions remain
The truth is that we just don't know yet how well LiveWire will be received because there are simply more questions than answers after last week's New York unveiling.

We know nothing about how Harley-Davidson plans to price LiveWire, whether a more range-efficient battery can be introduced, when (or even if) it plans to take LiveWire from prototype model to production bike, or how a diverse range of consumers will ultimately react to its introduction.

Images

Source: Joe Bielawa, Flickr.

My personal hunch is that, similar to the EV auto market, it's going to take a few generations of product, as well as some trial and error, to really make an impact on consumers. None of the existing electric bike producers, such as Zero and Brammo, have the capital or true motorcycle know-how to take their production to the next level. Harley-Davidson is therefore the company that will, by default, have to advance a mass-produced electric bike.

But, Harley-Davidson has to be very careful how it eases into eventual electric moto production. Throughout the remainder of the decade Harley's core buyer is likely to remain the 35 and up crowd. Beyond that, however, we're probably going to see a shift to a younger generation of buyers which could necessitate Harley altering its product platform to include electrics. Therefore, it's imperative that Harley prepares for the future now, but that it doesn't overshoot this transition and alienate diehard Harley fans. It's a balancing act that only a company on two wheels is capable of successfully performing.

Should the Harley faithful be worried? Take a look at this exclusive free report!
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to invest in this megatrend. Click here to access our exclusive report on this stock.

Sean Williams is short shares of Tesla Motors, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of, and recommends Tesla Motors and Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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