accessories, apparel and general merchandise.

The company also provides financial services such

as wholesale and retail financing and insurance programs. Strong market position and brand
image enables the company to gain more business and increase the investor's confidence.
However, various regulatory compliances would impose additional costs and obligations on the
company's operations, which could adversely affect its margins.

Table 3: SWOT Analysis Overview

Strengths
Weaknesses
 Strong market position and brand
image
 Weakening financial performance
 Wide marketing and distribution
 Unfunded employee post retirement benefits
networks
 High inventory turnover ratio

Threats
Opportunities
 Regulatory compliance
 Labor issues
 Launch of new models
 Forecasted recession in North America and
 Growing global motorcycle market
Europe


Strengths

Strong market position and brand image

Harley is one of the leading American heavy weight motorcycle manufacturers. It has been
enjoying the largest share of the US heavyweight (651+cc) motorcycle market since 1986. In
2007 and 2008, the company's market shares in the US, based on retail registrations of new
Harley Davidson motorcycles, were 48.7% and 45.5% respectively. In Canada, the company's
market share based on registrations was 41.9%, 39% and 38.2% during 2008, 2007 and 2006,
respectively.

In addition, the company has a strong and unique brand image. The company markets its
products under the following brands: Harley, H-D, Bar & Shield logo, Blast, Buell, MV Agusta,
Cagiva, Dyna, Softail, Sportster, VRSC, Riders Edge, MotorClothes, H.O.G and V-Rod. Strong
market position and brand image enables the company to gain more business and increase the
investor's confidence.

Wide marketing and distribution networks

The company markets its vehicles through a network of independent retail dealers and
distributors. During 2008, 2007 and 2006, the company incurred advertising costs of $89.2
million, $76.9 million and $69.7 million respectively. In the US, the company sells its
motorcycles and related products at wholesale to a network of approximately 686 independently-
owned full-service Harley-Davidson dealerships. The US independent dealer network includes
306 combined Harley-Davidson and Buell dealerships. In Canada, there are approximately 71
Harley-Davidson dealerships and one independent distributor.

In the European region, there are five independent distributors and 383 independent Harley-
Davidson dealerships. This includes 56 dealerships that sell only Harley Davidson motorcycles
and 323 combined Harley-Davidson and Buell dealerships. Buell is further represented by four
independent dealerships that do not sell Harley-Davidson motorcycles. In Japan, the company's
sales, marketing, and distribution of product is managed from its subsidiary in Tokyo, which
sells motorcycles and related products. The Asia/Pacific independent dealer network includes
201 combined Harley-Davidson and Buell dealerships. Further, the Latin America independent
dealer network includes 32 combined Harley-Davidson and Buell dealerships. The company's
distribution network also extends to Australia and New Zealand. Strong network allows Harley
to meet demand for its products in multiple regions in a cost-efficient way.

High inventory turnover ratio

Harley has registered a higher inventory in comparison to its competitors. The company's
inventory turnover ratio in FY2008 was 9.7, considerably higher than its competitors Bayerische
Motoren Werke (6); Suzuki Motor (6.2); and Honda Motor (7.2). The higher inventory turnover
ratio signifies the efficient management of inventory by the company. The higher inventory
turnover ratios reduce the exposure of the company to inventory obsolescence due to the rapid
technological changes occurring in the automotive industry.

Weakening financial performance

Harley recorded declining efficiency in FY2008. The revenues of the company declined at a
compound annual rate of change (CARC) of 2% from $6,185.6 million in FY2006 to $5,971.3
million in FY2008. The company registered decline in revenue in all its key business segments:
motorcycles and related products (recorded a decline of 2.3% in revenues); and financial services
(revenue declined by 9.4%).

The profitability position of the company also declined significantly. The company's operating
profit declined at a CARC of 20%, from $1,597.2 million in FY2006 to $1,029 million in
FY2008. The net profit of the company also declined at a CARC of 21% to reach $654.7 million
in FY2008 from $1,043.2 million in FY2006. Further, the operating profit margin of the
company declined from 25.8% in FY2006 to 17.2% in FY2008; and net profit margins declined
from 16.9% in FY2006 to 11% in FY2008. The weakening financial performance of the
company would erode the investor confidence.

Unfunded employee post retirement benefits

The company has significant unfunded pension obligations. The company provides retirement
benefits for most of their employees, either directly or by contributing to independently
administered funds. In FY2008, the company's pension obligations stood at $1,178.3 million as
compared to the planned assets of $690.6 million, resulting into an unfunded status of $487.7
million.

Volatility in financial markets (equity and debt) led to decline in pension fund asset values.
Unfunded pension obligations will force the company to make regular cash contributions to
bridge the gap between pension assets and liabilities, pressurizing the liquidity position of the
company.

Opportunities

Launch of new models

Harley introduced various new and improved models in order to expand its product offerings.
For instance in FY2008, Harley launched a new Softail model motorcycle. The company also
introduced the 2009 Tri Glide Ultra Classic motorcycle. Further, in July 2009, Buell Motorcycle
introduced 1125RR racing motorcycle. Other new motorcycle models for 2009 are Nightster,
Street Bob, Fat BoB, V-Rod Muscle and Street Glide.

In addition, Harley plans to launch nine new motorcycle models in 2010. It includes the Electra
Glide Ultra Limited model, Road Glide Custom model, Wide Glide, Street Glide Trike, CVO Fat
Bob, CVO Softail Convertible, CVO Street Glide and CVO Ultra Classic Electra Glide. By
introducing new models of motorcycles as per the changing market needs, the company could
increase its product portfolio and revenues.

Growing global motorcycle market

The global motorcycle market has witnessed a strong growth since recent past. The global
motorcycles market generated total revenues of $64.1 billion in 2007, representing a compound
annual growth rate (CAGR) of 12.2% for the period spanning 2003-07. The performance of the
market is forecast to accelerate, with an anticipated CAGR of 13.8% for the five-year period
2007-12, which is expected to drive the market to a value of $122.4 billion by the end of 2012.
Further, in 2012, the global motorcycles market is forecast to reach a volume of 52.7 million
units, an increase of 60.7% since 2007. An expanding end market is likely to drive demand for
the company's products. The growing demand for motorcycles represents an opportunity for
Harley to capitalize on this market and expand its revenues and profits.

Threats

Regulatory compliance

The company's motorcycles are subject to certification by the US Environmental Protection

Agency (EPA) for compliance with applicable emissions and noise standards. Compliance is also
required by the State of California Air Resources Board (CARB) with respect to CARB's
stringent emissions standards. Motorcycles sold in California are also subject to evaporative
emissions standards that are unique to California. CARB's motorcycle emissions standards will
become more stringent from 2008 onwards. The EPA has finalized new tail pipe emission
standards for 2006 and 2010, respectively, which are harmonized with the California emissions
standards. Harley motorcycles have been certified to the new EPA standards for 2006 but not for
2010. Additionally, the European Union, Japan and certain emerging markets are considering
making motorcycle emissions and noise standards more stringent. The company is pressurized to
adapt its product portfolio to comply with these motorcycle emissions and noise standards. These
standards would impose additional costs and obligations on the company's operations, which
could adversely affect its margins.

Labor issues

A majority of the Harley workforce is represented by one of several collective bargaining

agreements. Work stoppages or threat of work stoppages can negatively affect the competitive
position of Harley. In addition, the company also faces the increase in labor costs across the
world.

Labor costs are rising in the US. In recent times, tight labor markets, increased overtime,
government mandated increases in minimum wages and a higher proportion of full-time
employees are resulting in an increase in labor costs, which could materially impact the
company's results of operation. Under the Fair Labor Standards Act, the federal minimum wage
rate in the US, which had remained at $5.15 per hour since 1997, increased to $5.85 per hour in
2007 and then to $6.55 per hour in 2008. The minimum wage rate increased to $7.25 per hour,
effective July 2009. The company has a total work force of 10,100 people around the world. An
increase in labor costs in the US would adversely impact the company's bottom-line.

In addition, many of the company's union contracts are going to expire over the next few years.
There is no certainty that the company will be successful in negotiating new agreements with
these unions that extend beyond the current expiration dates or that these new agreements will be
on terms as favorable to the company. Failure to renew these agreements or to establish new
collective bargaining agreements, could result in work stoppages or other labor disruptions. Such
labor issues may have a material adverse effect on customer relationships and the company's
business and results of operations.

Forecasted recession in North America and Europe

The company has presence primarily in North America, Europe and rest of the world. North
America is the largest geographical market of the company. The profitability of the automotive
business is tied to the performance of the economy in which the company operates. Healthy
economic growth is therefore a precondition for the positive growth rate of the business.
According to the IMF world economy outlook July 2009, the real GDP growth of the US and
Europe is expected to slowdown. While the GDP growth of the US economy is forecasted to
decline from 2% in 2007 to -2.6% in 2009, the GDP growth of Eurozone is forecasted to decline
from 2.7% in 2007 to -4.8% in 2009.

In addition, the consumer confidence in the US has registered a decline during recent times. In
February 2009, the Conference Board's Consumer Confidence Index fell to 25, the lowest level
since 1992. Confidence is down with the US economy being hit by both a property slump and
rising rate of job cuts. Falling consumer confidence leads to the decline in consumer spending.
Declining consumer spending signals a deepening economic situation in the US, as consumer
spending accounts for two-thirds of its GDP.

An economic downturn poses challenges for Harley. The financial turmoil and credit tightening
has led to an extreme cautiousness among the company's customers when it comes to deciding
on investments, which in turn may cause a decrease in demand for Harley's products. The present
market conditions also limit the accessibility to credits and loan financing, which may negatively
affect customers, suppliers, dealers as well as the company. Suppliers' financial instability could
result in delivery disturbances. Therefore, further recession in North America and Europe would
harm the company's business by adversely affecting its revenues, results of operations, cash
flows and financial condition

Competitor Profiles

-Bayerische Motoren Werke AG

-Ducati Motor Holding S.p.A

-Honda Motor Co., Ltd.

-Polaris Industries Inc.

-Suzuki Motor Corporation

-Yamaha Motor Co., Ltd.

future.
8
Five Forces Analysis
Internal Rivalry
The market for heavyweight motorcycles is fairly concentrated: there are only four
major firms producing these motorcycles. In addition to Harley Davidson the other
three are Honda, Suzuki, and Yamaha, all Japanese companies. Over the last ten to
fifteen years the market for heavyweight motorcycles has seen double digit annual
growth, but many experts predict that the market is maturing and growth will slow
down in coming years, perhaps falling to low single digits.
Harley Davidson has traditionally been the dominant player in this market with a
market share well in excess of 50% in the past. Today this market share has fallen to
about 50% due to the other companies expanding their heavyweight motorcycle
production and stepping up marketing, especially to American consumers. One of the
reasons that Harley Davidson’s market share has been falling is that the different
products from the different companies are becoming less differentiated. In the past it
was easy to recognize the distinctive style of a Harley Davidson motorcycle, but the
Japanese manufacturers have begun to incorporate popular design features into their
products. Any differences in the quality of the products are also less of a concern today
than it might have been in the past. The result is that motorcycles from each of the
manufacturers are becoming less differentiated over time. As this happens Harley
Davidson is relying more and more on their brand name to maintain and build its
customer base. This is still a major factor when purchasing a heavyweight motorcycle
for many people. Many people would rather own a Harley than a Honda, but the
number of these people has been falling, due in no small part to the improvements that
Honda has made in its products.
Entry
The heavyweight motorcycle industry is very capital intensive. Like most other
manufacturing industries there are significant economies of scale involved in building
motorcycles. Even ignoring the falling marginal costs as production increases, the
capital requirements for manufacturing a similar product are extremely high, even on a
small scale. Such significant economies of scale is the major reason that there are only
four major players in the market.
There are some small scale motorcycle builders whose business is based heavily on
reputation and appeal to serious motorcycle enthusiasts, mainly focused on completely
custom bikes. These small custom builders do not produce enough motorcycles to
threaten Harley Davidson’s market position, but they do help the industry as a whole
by helping to increase interest in motorcycles in the general public.
Substitutes and Complements
Heavyweight motorcycles are a luxury item for the vast majority of consumers so there
are few close substitutes for heavyweight motorcycles that could serious affect the
market. Honda, Yamaha, and Suzuki all also manufacture smaller, quicker
motorcycles, which are the closest substitute followed by passenger cars and scooter
bikes. However, for most people considering purchasing a heavyweight motorcycle are
not also seriously considering one of these options. Heavyweight motorcycles project a
certain image which is part of the consumer’s decision to purchase a motorcycle. Also
smaller motorcycles require a different riding style, more hunched over the bike as
opposed to sitting upright on a heavyweight motorcycle.
Passenger cars are weak substitutes for heavyweight motorcycles because consumers
rarely purchase them to satisfy transportation requirements. These bikes are more of a
luxury item than a necessity for traveling from point A to point B. Even though
motorcycles may be better through traffic and use less gasoline than a car a consumer
purchasing a motorcycle for these reasons would be more inclined to purchase a lighter
motorcycle, which would be more maneuverable and fuel-efficient than a heavyweight
bike.
The most obvious complement for heavyweight motorcycles is gasoline. If the price of
fuel is high then consumers will be less likely to purchase a heavyweight bike due to the
fact that most trips taken on such a motorcycle is largely discretionary and taken for
pleasure rather than through a need for transportation. However, if consumers are
willing to pay between $8 thousand and $25 thousand for a luxury item like a
heavyweight motorcycle then they are probably not troubled by paying a slightly
higher price for gasoline.
Buyer and Supplier Power
Harley Davidson operates nearly every stage of the production of a motorcycle, taking
raw materials such as steel and basic electrical components and shipping completed
motorcycles to its extensive independent dealership network. Because there are many
suppliers of all inputs that Harley Davidson requires for its manufacturing operations
there is very little that any single supplier can do the exact rents from Harley. If one
supplier attempted to increase its profits by charging Harley a higher price it would not
be difficult for Harley to switch suppliers without a significant disruption in
production.
Similarly, Harley Davidson’s customers are largely individual consumers, making it
difficult for them to seriously affect Harley Davidson’s financial situation by refusing to
cooperate. Since Harley Davidson dealerships are independently owned an operated
the companies customers are technically its licensed dealers, but the sheer number of
dealers that Harley Davidson has throughout the world makes the situation for dealers
not much better than individual riders.