American Machinist

How Harley-Davidson turned it around. (excerpt from book 'Well Made in America: Lessons from Harley-Davidson on Being the Best')

"If we can do it, any company can!" To understand why Harley-Davidson executives make this claim with total conviction, consider this scenario.- You're a senior manager in a US company that makes big-ticket leisure products and belongs to a conglomerate seeking to shift its focus away from leisure products to industrial goods. The parent puts your company on the block, and you look at the following:

* You are losing sizable chunks of market share to your much bigger Japanese competitors.

* The economy is beginning to slide, and many blue-collar workels-your core customers-are facing layoffs.

* Sky-high interest rates are also making it hard for your customers.

* Your manufacturing systems and product quality are inadequate to meet world-class competition.

* Your product is seriously out of date.

* Your company has been stereotyped with a rough, tough image.

* Your Japanese competitors are unloading thousands of products on American .-shores that compete directly with yours.

* The Japanese products not only have higher quality , but they also cost less.

Sound like a good deal? Few observers thought so in 1981 when the HarleyDavidson Motorcycle Co was put up for sale by American Machine & Foundry (AMF), the conglomerate that had owned infor 11 years. No one wanted it.

Next, consider what happened after 13 Harley-Davidson managers-despite all the negatives-still went ahead and bought the company in an 81.5-million leveraged buyout:

The market for heavy bikes declined by 20% in a year.

* Harley lost more market share as the Japanese flooded the US with Harley lookalikes at discounted prices.

* For the first time in 50 years, Harley lost money,

* Harley had to lay off more than 40% of its work-force.

* Saddled with a staggering LBO debt,

Harley had to borrow even more money just to service its debt and keep going.

Jump ahead to the good news: In the five years following the LBO, HarleyDavidson again became a thriving company. Shortly thereafter, it recaptured its market-share lead from Honda. Honda has since sharply cut back its participation in the US heavyweightmarket.

Harley quality is at an all-time high. The company sells every motorcycle it can market the premium end of the market.

Now, Harley is at full throttle.

The following story is taken from the book, Well Made in America: Lessons from Harley-Davidson on Being the Best, by Peter C. Reid, copyright 1990 by Harley-Davidson Inc. It is reprinted here with permission.

Peter C. Reid is a writer, editor, and journalist who specializes in business topics-and loves motorcycles.

WHEN 13 HARLEY-DAVIDSON executives met at Harley-Davidson's International Div offices in Stamford, Conn in earl 1981, only one of them knew that the subject of the meeting would be buying their company from AMF.

Chairman Vaughn Beals had organized the meeting, but he had not told his associates what he was going to propose. when he recommended that they buy their company with an equity investment of $1-million, their jaws dropped.

The idea seemed outlandish. Some of them thought he had flipped his lid to think they could buy a $300-million company for that little cash. But they listened intently as he reviewed the past six months and told them why he was convinced that a buyback was the only way to keep Harley-Davidson alive.

He first reminded them that AMF top management had agreed to his recommendation that it sell Harley-Davidson and had retained Goldman Sachs to handle the sale on a crash basis. There were no other takers.

That wasn't too surprising, he said. Nobody could be expected to jump at the opportunity to buy a capital-intensive company involved in a life-and-death struggle against aggressive Japanese competition. But with these avenues seemingly closed, the AMF man in charge of the

Harley-Davidson sale, Gary Ward, had turned to the possibility of a leveraged buyout. He and Beals had had an exploratory meeting with Harvey Appelle, a senior loan officer for Citicorp Industrial Credit, to discuss how such an LBO could be financed.

That meeting, Beals now told his associates in Stamford, had convinced him that all signs were positive for a buyback. He restated his belief with feeling: the 78-year-old Harley-Davidson Company-the last motorcycle maker in the UScould survive only if it were owned and run by people who understood the motorcycle business and were dedicated to preserving a legendary institution.

In retrospect, Beals says now, the events that followed confirmed his conviction that Harley-Davidson had to become independent. "We suffered serious losses in 1981 and 1982," he says. "If we had still been under AMF's wing, it would have done what any corporate parent would do-replaced HarleyDavidson's senior management-perhaps not an unreasonable decision, but one that probably would have been fatal to Harley's long-range interests."

Beals strongly believes that short-term management lies at the root of problems in many US companies, that business managements have become transient, either because of upward mobility through promotion or a conglomerate's policy of replacing management when things don't go well."

Some Harley executives at the Stamford meeting were still unconvinced. But Beals's fervor made them feel it was worth trying. Given a green light, Beals opened serious negotiations with Citicorp. He assumed it would be tough going, he says now, because he was no sophisticate in the world of finance.

But no arm-twisting was necessary. Beals found to his surprise that, far from having to be talked into financing an LBO, Citicorp was actually excited about doing the deal.

In view of Harley's problems with quality, productivity, and Japanese competition, some observers did not believe this excitement was justified. However, Citicorp saw some strong positives. Most LBOs in the early 1980s were based on expectations that the leveraged company would pay off its debt through profitable operations rather than through the sale of assets, as is often the case today. Lenders looked for companies led by a strong management team with a good track record who would stay on.

Harley-Davidson met these expectations. Citicorp also felt that HarleyDavidson's hard assets provided a solid collateral package, so it could still get its money out even if the company did fail.

Beyond this, there were the intangibles: the name Harley-Davidson and the loyalty of its customers. A Citicorp executive says, "What hit me was that this was the only product I'd ever seen that people had tattooed on their bodies."

Despite these positives, the LBO deal did not receive a favorable reaction from Todd Slotkin, the Citicorp loan officer first asked by Harvey Appelle to handle it. …

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