Why Harley-Davidson Can’t Break Through The Wall Of China

Harley-Davidson (NYSE:HOG) has historically relied on its U.S. and Europe businesses for over 80% of its retail sales. But with a maturing U.S. heavyweight motorcycle market and sluggish economic conditions in Europe, growth for the iconic motorcycle maker may have to come from the faster growing economies of Asia-Pacific.  At a time when most automakers are looking to take advantage of the growth opportunities in China and India, Harley-Davidson is also looking to step up its operations in these countries. The company’s Asia-Pacific sales rose by about 10% in 2013. However, while foreign carmakers such as Audi, BMW and Jaguar Land Rover have had tremendous success in China’s fast growing premium car market, the country’s premium motorcycle market hasn’t received the same impetus.

Despite the promise of a highly populated fast growing economy, sales of heavyweight motorcycles, and motorcycles in general in China have reeled under strict governmental regulations and a lack of a biking culture. Heavyweight bike sales in the country barely cross those in Milwaukee, where Harley-Davidson is headquartered, even though the population of China is over 2,200 times that of Milwaukee. In this article, we take a look at the obstacles that hinder growth of Harley-Davidson and its peers in China.

We have a $59 price estimate for Harley-Davidson, which is around 13% lower than the current market price.

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Discouraging Motorcycle Laws Impede Demand

While the car market in China jumped 5% in 2012 and 14% in 2013 to cross record-breaking unit sales of 22 million in 2013, the motorcycle industry witnessed a decline in domestic sales. Back in 2008, it was expected that motorcycle sales will cross the 24 million mark in the country, but instead, the figure fell below 23 million in 2009 and to 19.5 million units in 2012. ^[1] This is primarily due to the strict laws in place for two-wheelers in parts of the country. Many local governments in China have imposed laws against bike-riding in order to curb traffic and drive-by thefts associated with motorcycle riders. Low safety performance has also been cited for restriction of bikes in some cities. Growth of heavyweight motorcycles in China could be hampered on account of the following regulations:

• Motorcycles have been banned in close to 200 cities, including the highly populated Beijing and Guangzhou. Beijing bans motorcycles from certain main roads and limits their entry on some other roads during the day. In Guangzhou as well, bikes are restricted from entry into Guangzhou city. In fact, motorcycles from other cities are not allowed to pass within Guangzhou.
• China also limits distribution of number plates to control traffic on roads. For example, Beijing uses the system of number plates marked “A” and “B” to allow entry to only specific motorcycles on certain roads. While there is an upper limit on number of “B” number plates released, distribution of “A” number plates was altogether stopped a few years ago.
• As per law in China, motorcycles have to be scrapped after eleven years of registration. This law encompasses not only the cheaper mopeds and scooters, but also high-end premium motorcycles. Although aimed at controlling pollution levels, this enactment fails to acknowledge the general tendency of heavyweight motorcycle owners to use these expensive bikes sparsely and mostly for leisure purposes.

Strict laws laid down by the Chinese government clearly point to the absence of a leisure biking culture in the country. Automakers around the world have tried to persuade the country to relax some of its restrictions, urging that heavyweight motorcycles should be exceptions to most motorcycle laws. For example, companies argue that expensive bike owners are less likely to orchestrate drive-by thefts. If no amendments are made to these regulations in future, growth of the heavyweight motorcycle in China could continue to face headwinds.

Higher Pricing Is Another Deterrent To Harley’s Growth

Harley-Davidson operates as a wholly foreign-owned enterprise in China. The automaker had around 11 dealerships in the country in 2012 and plans to increase this figure to 28 by 2016. ^[2] While Harley has established completely-knocked-down manufacturing facilities in India, it has no plans to set-up manufacturing in China as of now. As a result, large import taxes are levied on the company’s bikes, which are consequently passed on to consumers. Higher prices could also potentially hurt sales of Harley-Davidson in China.

Potential Upsides For Harley-Davidson

Harley-Davidson sold around 268 motorcycles in China in 2010 and has reported ~40% growth each year since then. The company has looked to facilitate a biking culture in the country by organizing rallies and bike-shows. In addition, Harley-Davidson will also look to launch its new lightweight motorcycles, the Street 500 and Street 750, in China this year. The company plans to export these bikes from India, where the Street pair is assembled. In the U.S., heavyweight motorcycles have a share of 62% in the overall motorcycle market. In contrast, more than 80% of the market in China is dominated by motorcycles with engine displacements less than 250 cc. ^[3] With these entry-level bikes, the company aims to attract the growing middle-class in China, who generally prefer lightweight and affordable motorcycles.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. “China motorcycle industry“, December 2013, ultimatemotorcycling.com [↩]
2. “Harley-Davidson in China Encounters Barriers of Entry for Two Wheels: Cars“, bloomberg.com [↩]
3. “About the motorcycles“, china-driver-license.com [↩]