Motorcycle and financial services Essay

raise The susceptibility of Harley-Davidsons make and dominant market position give the degenerate a great moat, in our opinion. However, weaker consumer spending and tight credit markets be presenting the firm with nigh signifi female genitalst near-term challenges. In addition, we look at the firm mustiness carefully broaden the aggregation of its brand to secure its semipermanent success. Harley-Davidson is a fad brand that resonates around the world. There are more than 1 million members of the Harley Owners Group, and every year several(prenominal) century thousand Harley fans attend biking events at Daytona, Fla. , and Sturgis, S. D.Its no wonder that every rove 50% of Harleys revenues are generated from repeat gross sales and these sales are at premium prices to other motorcycle brands. In addition, with or so a 50% share of the U. S. market, Harley also achieves economies of scale greater than most of its competitors. A Harley is non just a bike it is an inve stment. brand loyalty, its economies of scale, and its network of mostly exclusive dealers have created significant barriers to entry, and as a result, Harley has achieved historical operational margins of oer 20% and returns on invested capital of everywhere 40%, excluding the financial function segment.JIT Principles JIT is an operational strategy which helps in making inventory take aims lean. An organisation which goes for synchronous manufacturing incorporates JIT to have put down inventory levels. Synchronous manufacturing encompasses techniques of JIT to achieve the target. Organisations which have implemented JIT and are using synchronous manufacturing have a very lean system. It has minimum wastage and the highest possible quality. These organisations are cost effective and generally have high margins than their competitors.This results in higher level of efficiency in the organisation and a better work environment. bits per inch helps in management of inventory and related operations. It is very important that organisation on a lower floorstand the importance of rising methods and reengineer their lickes in line with the requirements. The minimum level of inventory which is required as WIP is determined by the ecesis and indeed control efforts are put in so that there is always the minimum level available and it would never cross the maximum level.This is done because one cannot hold high levels of inventory because it comes at a very high cost and is an occupational and can be a operation hazard. The strength of Harley-Davidsons brand and dominant market position give the firm a wide moat, in our opinion. However, weaker consumer spending and tight credit markets are presenting the firm with many significant challenges and we believe the firm must carefully expand the appeal of its brand to secure its long term success.Harley-Davidson is a cult brand that resonates around the world. There are more than 1 million members of the Harley Ow ners Group, and every year several hundred thousand Harley fans attend biking events at Daytona, Fla. , and Sturgis, S. D. Its no wonder that over 50% of Harleys revenues are generated from repeat sales and these sales are at premium prices to other motorcycle brands. In addition, with almost a 50% share of the U. S. market, Harley also achieves economies of scale greater than most of its competitors.The intensity of the firms brand loyalty, its economies of scale, and its network of mostly exclusive dealers have created significant barriers to entry, and as a result, Harley has achieved historical operating margins of over 20% and returns on invested capital of over 40%, excluding the financial services segment. Despite its safe brand, sagging consumer spending on high-ticket items is in all probability to continue to depress volumes in the near term, and we convey the economic downturn to prolong the period of failing sales through 2010/11. The firm has already discount produc tion in an attempt to trim costs in line with faling take up.in addition, just over half of Harleys motorcycle revenues are derived from retail sales made on credit. We commemorate that the wishing of available funds on the wholesale markets and the shrinking of the number of qualifying customers will make it uncorrectable for the unions financial services division to continue to support retail sales by providing credit to customers. Harley must address some long-term challenges. The firm has been foc employ on a get demographic group (around 89% of customers are male) and the median age of Harleys customers has been on a long-term upward trend.We believe that the firm must find ways to broaden the appeal of its brand without modify its core customer base. Harley has grown in recent years in the global market , and revenues generated foreign have risen to 25% of total revenues in 2007 from 19% in 2004. Although the firm has recently introduced a performance motorcycle for the European market, I think that it may find it concentrated to deliver customized products for overseas markets while supporting its brand franchise. RiskHarleys revenues could be severely hurt by a further weakening of the global economy and increased reductions in consumer spending on high-ticket discretional items, and the firm may not be able to securitize its receivables if the asset-backed security market is slow to recover. Harleys sales are focused on a thin demographic segment 35- to 54-year-old males. In our opinion, the firm must broaden its appeal in order to secure its long-term profitability, but any missteps in merchandise its products to other demographic segments could damage the brand.Harley-Davidsons brand resonates around the world, and it has particular strength in its let out target market of 35- to 54-year-olds. Historically, Harley has generated free cash flow at around 15% of revenues, allowing the firm to unwrap a strong track record of returning cash to shareholders through dividends and stock repurchases. Through the downturn, Harleys management has been careful to maintain spending on research and development and marketing, important steps in maintaining the strength of the brand, in our opinion.The firm has worked successfully with its network of dealers to significantly reduce dealer inventory over the experience 12 months. Harleys core demographic, the baby boomer generation, is aging, and thats promising to reduce demand for Harleys products in the future. In order to mitigate the negative impact on revenues, the firm must improve its penetration in other segments. * Harley is likely to continue to face some severe short head winds, with anemic consumer spending likely to hurt revenues through 2010.The large inventory of used Harley motorcycles is likely to contribute to Harleys near-term challenges, as a greater number of under-pressure consumers may opt for a cheaper used model in the secondary market. The turmoil in the credit markets is likely to raise the cost of the short-term capital required to fund HDFS. Despite raising the retail rate on its loans, I counter the operating margins of HDFS to come under severe pressure through 2009. HDFS may also find it difficult to raise financing for retail credit in the wholesale markets.This could restrict the number of loans the firm can make to customers and thwart the firms attempts to support retail sales volumes. Inventory forethought in Harley Davidson Growth Historically, the strong spending power of the baby boomers, Harleys core demographic, has been favourable for the motorbike manufacturer. As the baby boomers age, however, I expect slowing domestic revenue growth to be only partly mitigated by international expansion. Profile Harley-Davidson is the worlds leading manufacturer of heavyweight motorcycles, parts, and accessories.It sells the Softail, Sportster, Dyna, Touring, and VRSC models under the Harley-Davidson name, and it also man ufactures the Buell brand. Harley-Davidson Financial Services provides wholesale financing to dealers and retail financing and insurance brokerage services to customers. Strategy Harley leverages its strong brand to sell a broad range of motorcycling-related products. The firm is attempting to broaden its appeal to more demographic groups by expanding its product line-up.It is also focused on international expansion, and it has introduced a bleak performance-based bike in an attempt to increase its share in overseas markets. Management I think the quality of corporate governance at Harley-Davidson is above average. I applaud the firm for splitting the chairperson and CEO roles between two individuals, although I am concerned that the relationship between the two individuals armed service in these roles may weaken the chairmans ability to provide independent oversight. CEO crowd together Ziemers career at Harley blossomed under the leadership of former CEO and current Chairman Je ffrey L.Bluestein. In addition, although nine of the firms 12 directors meet the NYSE definition of independent, a total of sixsome of them have served on the board for over a decade, and I believe that their long-term relationships with management, together with some related-party transactions, may further compromise their independence. Having said that, the Harley-Davidson board does contain a solid range of legal, accounting, and executive experience. Management compensation is skewed to long-term incentive components, and I think that this aligns the interests of the management team with those of shareholders.The firm has a strong track record of returning cash to shareholders, both through dividend disbursements and share buyback programs. Harley Reports Lower 3Q Earnings I am leaving our fair tax estimate for Harley-Davidson in place following the release of third-quarter earnings, which were in line with our expectations. Revenue fell 8% year over year, to $1. 42 billion, as the economic downturn hurt retail sales volume, which declined 14%. The bright spot was international sales, but only a small part of the 11.3% rise in international revenues was imputable to volume increases most of the increase was caused by favourable currency movements. At Harley-Davidson Financial Services, the customer finance division, third-quarter earnings fell 28% from the same period last year, to $35. 6 million, because of lower securitization income and the write-down of some finance receivables held for sale. I was pleased to note that the firm is being proactive in securing alternative sources of reenforcement for the finance division, in the event that it cannot raise funds in the unsecured debt market.However, we expect that Harleys living requirements would be met comfortably by its bank credit facility, if required. Supply side & Economic Scenario Given the act macroeconomic deterioration and tightness in credit markets, I am raising our fair value uncertai nty rating for Harley-Davidson. The companys growth has decelerated during the last three years, and year-over-year shipments were down 15% last quarter. In addition, we see significant downside risks to the contribution from Harley-Davidson Financial Services.Last quarter, financial services income was down 43% because of a $20 million reduction in securitization gains. Financial income was also affected by a $6 million write-down in retained securitization interests. Since that time credit markets have seized up, and its likely the firm will report increasing charge-offs on consumer loans in the coming quarters. Summary Business process reengineering is very critical for companies and industries which survive on innovation. Sometimes there are cases when old processes in the company are dying and their is a pressing need to rejuvenate then.This process of is known as line of merchandise process reengineering. A company that does not innovate dies out in the market. Old operations over time die down and new process needs to be rebuilt into the system. This is where the concept of business processes engineering is very critical. 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