#ducati

Abu Dhabi Police get new wheels

Good to see that Abu Dhabi Police have spared no expense on buying the most technologically advanced superbikes at A$40k a pop. 300km/h+ performance should allow them to keep ahead of those young sheikhs in their supercars.

Harley delinquencies at 8 year high

Just noted from the conference call that Harley-Davidson (HOG) motorcycle loan delinquencies (30+ days in arrears) are at an 8 year high of 3.73%. While actually loss experiences have tracked sideways for the past few years, they are still higher than 8 years ago.

Interestingly, HOG loans outstanding were $7.53bn in 1Q 2015. In 1Q 2019 that figure was $7.63bn. So next to no loan growth against c.20% lower unit sales. In 1Q 2015 HDFS made $683.6m in new loans, 80% prime out of $1.5bn in 1Q motorcycle (incl parts/accessories) sales (43.6% financed). In 1Q 2019, $685.3m in new loans were made with a claimed 80-85% “prime” against $1.124bn (61.0%) of m/c and P&A sales. Essentially total sales would be worse without the finance arm. Why does CM smell Ford Credit all over?

So delinquencies up against a strategy to pump more bikes through financing. Is it the non-prime portion is faltering at greater rates? Or the prime?

Luxury motorcycles are generally considered discretionary spend items. Are aspirational consumers just tapped out?

HOG’s 2mn new riders in the US by 2027 seems an irrelevant target. 200,000 “new” riders per year by definition should not include existing customers. Management combine new and used sales using IHS Markit Motorcycles in Operation (MIO) data, not their own! That is fine if all are new Harley customers yet the brand has some of the highest loyalty rates of any maker period. Are we to believe that long term Harley owners didn’t upgrade?

Of the 138,000 new domestic US sales in 2018, the brand assumed 278,000 new riders to the family. It also cites that 50% of that were 18-34yo (implies poorer product mix), women (smaller capacity hence poorer product mix) or ethically diverse (irrelevant) riders. So by definition at least 140,000 sales were used bikes. Harley used bike sales in America are around 2.5x new, or 350,000 units. So assuming half were new customer sales for new bikes, 60% of used sales must have been to ‘never owned a Harley’ customers. Seems high.

It doesn’t much matter if HOG hit targets for new riders, the actual financial results point to further deterioration across the board at the top of the cycle. Most competitor luxury brands are ticking along just fine.

100 new high impact motorcycles has all the hallmarks of chucking spaghetti at the wall and hoping some of it sticks.

This stock should continue to flounder. CM thinks it will get back to the GFC $8 handle.

CM is not invested in HOG nor short the stock. This doesn’t constitute financial advice.

Yamaha’s MotoGP woes in stats

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Many in the MotoGP world are questioning the horrible performance of Yamaha in 2018. As it stands Yamaha holds no victories this year with a handful of races left in the season. This would equal its worst performance in 15 years.

Yamaha’s successes really started to trend much higher after hiring Honda legend Valentino Rossi (who took the 2001, 2002 & 2003 crowns for Honda). He subsequently took 2004 & 2005 crowns for Yamaha. After narrowly missing the 2006 title to Honda’s Nicky Hayden and losing to Aussie Casey Stoner in 2007 on a Ducati (the first title for the Italian maker) Rossi won for Yamaha in 2008 & 2009.

Yamaha won the championship again in 2010, 2012 & 2015 under Jorge Lorenzo. Honda won the 2011 with Stoner and the 2013, 2014, 2016 & 2017 titles under Marc Marquez who looks odds on to win 2018. At tonight’s Aragon GP in Spain, Yamaha’s four riders start 12th, 14th, 17th & 18th on the grid.

In August this year after the poor performance at the Austrian GP, Yamaha made the unprecedented motion of apologizing to its riders for having such a rubbish bike. The problem has continued for 18 months now. No doubt the developers in the team back in Iwata, Japan are still busy working out how to take responsibility instead of working to fix it.

The reality is that the other motorcycle teams have got much better. The Italians didn’t qualify for the recent Football World Cup and Germany was bailed out in the pool games. So Yamaha needs to stop resting on the laurels of having two world class riders with 10 championships between them to come up with a competitive product.

N.B. Suzuki withdrew from MotoGP in 2012 & 2013. Ducati entered MotoGP in 2003.

Harley-Davidson to go into the Adventure category

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Actually credit where credit is due. Harley maybe very late to the party but realizes it must be bold to survive in the long run. Adventure (ADV) bikes (think of them as 2-wheeled SUVs)  are one of the most popular motorcycle segments now due to versatility but the competition is fierce and only getting moreso. Harley plans to launch a 1250cc ADV bike in 2020.

It is unlikely to cause segment leader BMW to quake in its boots with respect to its best seller GS series although the question is can the Harley brand can carry any sales at all? At the luxury end BMW, KTM, Ducati, Triumph, Moto Guzzi and Aprilia all have ADV bikes. BMW & KTM are the sales chart leaders. BMW for inventing the segment and KTM for strapping a 160hp nuke to its expertise in off road and 17 straight wins in the Paris-Dakar.

It is fast becoming a horsepower war. BMW is looking to launch a 145-150hp 1250cc next year for the GS from the 125hp 1170cc twin it currently has to keep up with the competition.

Without a spec sheet it is hard to tell much about the Harley ADV. It looks heavy. Weight matters. The BMW is around 240kg. The KTM 210kg. Will the Harley keep it under 260kg?

Horsepower is not a Harley strong suit. You won’t find power in a Harley spec sheet at the dealer. Will it use a clump of lazy torqued Milwaukee pig iron for an engine? In a low slung cruiser one can get away with it but in a tall ADV bike, when negotiating goat tracks (that’s a wide belly pan!), traction, power delivery and how a bike carries its weight is crucial. Can Harley produce over 120hp from this 1250cc engine with flexibility across the rev range? Will it be chain driven? Shaft? Belt? These things matter to the ADV snobs.

The design of the ADV Harley is certainly bold. CM likes it although if you drop it that headlight unit sure looks expensive to replace. Like many SUVs never see more off-road than a gravel driveway, the most dirt tracking Harley ADVs will see might be some road repairs on Route 66. The Pan America name certainly rings of highway biased use.

The next thing will be price. Even before (and after) we have full specs can Harley launch the bike at a competitive price? Harley can’t just rock up into a segment it’s never been active in and demand the type of premium it’s cruisers carry. It’s top of the line CVO series can be $50,000. BMW is considered the premium offering in ADV. Luxury Italian brand Ducati tried to price it slightly north and was caned in the sales race. KTMs are priced slightly cheaper but BMW remains king and having owned one know exactly why. The BMW is good at absolutely EVERYTHING.

Harley has history in new ventures. It broke the mold decades ago and took a stab at sports bikes with the Buell brand, but it was an abject failure. Porsche was called into help develop the V-Rod engine some 18 years ago but that is no longer sold.

Harley also aims to launch electric bikes, smaller 250-500cc categories for Asian markets and a mid range 500-1250cc for new sport type street fighters. All looks margin crushing from a distance.

From an investor perspective the accountants will require a lot of volume to justify the R&D expense. The shares closed toward the lows on the announcement.

Without getting too Harvard MBA, Harley feels extension of product is vital. To a degree it is right. Unfortunately graveyards for such strategies are too commonplace. Few get it right. Buell was case in point. BMWs K1600 Bagger will flop because it was an excuse trying to find a home for its 1600cc 6-cylinder regardless of capabilities. Customers see through this.

Harley’s ADV will have distribution channels as it’s biggest weapon. It will have a hard time converting ADV faithful unless it offers something truly better at a competitive price. Otherwise it will gather dust on showroom floors.

Personally this ADV will probably do better than most think. It won’t get close to toppling the Beemer but there are enough quirky people out there who want to be different. Nice job Harley but can it turn groups profitably around? The last 5 years have been a disaster. The question is all this product arrives at a time when the economy is likely to turn south.

Harley-Davidson Shinjuku declares bankruptcy after revenues fall 85%. Changes ownership.

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Yahoo Japan reports Harley-Davidson Shinjuku, a central Tokyo dealer for the motorcycle brand has gone out of business after almost 70 years in the trade.  Established in August 1953 before Harley Davidson Japan became the domestic agency, it ran a parallel imports business of the iconic brand. In the fiscal year ended July 1992, the annual turnover was estimated to be about 2,426 million yen. However, as the motorcycle market contracted, annual sales in the fiscal year ended July 2017 fell 85% to about 376 million yen. Even after closing the Yokohama, Hachioji stores, losses continued every year.

Debt is approximately 146 million yen as of the end of July 2017. “Harley Davidson Shinjuku” was closed on July 11.

It has since reopened under new ownership. Customers of the dealership have been informed of the ownership change according to HD Japan. Harley had peak sales of 16,000 units in Japan and is likely to do around 9,500 units in 2018.

Harley – the Milwaukee Anvil

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Harley can blame tariffs for ruining margin but the rot set in well before. 2Q motorcycle shipments came in at 72,593 (-11.3%). The other luxury brands continue to climb. Its long time American arch rival Indian continues to grow. Indian’s parent Polaris Reports Q2 tonight. Indian sales were up double digit in Q1. The limited edition Indian Jack Daniels Scout Bobber sold out in 10 minutes. Product anyone?

Harley is losing share in America, it’s largest market, and Australia and Japan remain soft. Harley used to sell 16,000 units in Japan. In 2018 it will be lucky to ship 9,500. Ironically Europe is its most encouraging growth area yet tariffs will impact it.

Luxury motorbike brands BMW Motorrad, KTM, Ducati, Triumph etc are ALL growing.  Just Harley is flailing – the best motorcycle brand in the business (one where customers are prepared to tattoo the brand to their bodies) is chasing dreams from some consultant inspired long term plan which misses one core ingredient – listening to customers.

Expect the Harley management to keep the excuses rolling. It suffers from the divine franchise and its leadership seem more willing to point to external factors for its issues when internal complacency and resting on the laurels of the glory days seem the biggest factor. It is so obvious.

So Harley met its Luke warm 2Q EPS guidance. Maybe shareholders should reflect on the $103mn (1.3% of outstanding) of the $700mn in planned share buybacks which flatters EPS. E is not rising, S is falling. 10% of the stock is being shorted.

Harley-Davidson needs a major overhaul

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Harley-Davidson (HOG) is the classic case of a divine franchise. While still the world’s largest maker of cruiser motorcycles, it is being swamped by new competition. HOG’s EBIT performance has slid for the last 4 years and is even below the level of 2012. BMW Motorrad, KTM AG, Ducati and Triumph are all growing unit sales and profits. HOG has a very defined product line whereas its competitors are flush with sports, adventure, cruiser, heritage, cafe racers, scooters, off road and much broader engine sizes.

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The further complication is that the Japanese are getting their act together. Honda is targeting over 20mn units in 2018 (mainly driven by emerging Asia). Honda has received rave reviews of its new CB1000R which should keep the fires burning. Several years ago, Yamaha introduced a budget cruiser called the Bolt but HOG responded with a competitively priced bike made in India which showed the desperation of a strategy where it doubted its brand power. Kawasaki has a 12 month waiting list on its Z900RS cafe racer which is a replica of the 1970s classic. Kawasaki has no interest playing in scooter markets and remains focused on its core larger bore segmentation.

Yamaha and Kawasaki have gone down the path of profitability than pure unit growth while Suzuki is the real laggard, lost in me too group think product. Honda has had a real resurgence in product which harks on its history. Honda now has 75% market share in Indonesia, 72% in Vietnam, 80% in Thailand and 82% in Brazil. Only 28% in India. Still, the market share, resale and brand power in Asia no maker will usurp them for decades. Put another way, the risks associated with dethroning Honda in Asia by a dealer channel push would be astronomically high. Yamaha has the other 10%.

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Profitability is starting to look much rosier for the Japanese too. Even Suzuki has managed to pull itself out of loss.

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Sadly for HOG, 1Q 2018 has shown even worse numbers. Global unit sales were 7.2% down on the previous year and 12% down at home.  Japan and Australia were soft. Looking at the strategy it looks like throwing spaghetti at a wall and hoping it sticks. It looks like some consultant has rattled together some funky catchphrases.

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HOG’s problems are simple. It is not listening to customers. When grandson of the founder, Willie Davidson, took over the reins after the near bankruptcy under AMF stewardship in the 1980s, the company really consulted customers and worked out they wanted more reliability and capability. It delivered. Sadly HOG is hanging on by its fingernails on brand alone today. The Polaris-owned Indian brand is coming up with excellent product lines which have all of the cachet of HOG given it was its fiercest competitor in the 1930s.

HOG’s product line up is relatively stale in terms of real innovation. While the Milwaukee 8 engine is a very good start and the Fat Bob is a proper philosophy change, the rest of the line up needs major revamp. At the moment it seems the brand is stuck in an echo chamber.

In closing Harley’s are a cult. There aren’t many brands where customers are prepared tattoo it to their bodies. In all the bikes CM has owned, the Harley had 10x the number of people wanting to ride on the back vs the rest combined. Yet it goes to show that brand only goes so far. Product still matters.