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Not-So Easy Riders

Andy Brennan
Industry Analyst

Motorcycle manufacturers in the US operate in a starkly different landscape compared to just five years ago. The erosion of household wealth that occurred during the Great Recession severely diminished the industry. Consumers tightened their belts due to low disposable income and high unemployment caused by the economic downturn, and as a result, sales of discretionary luxury items like motorcycles tanked. Since bottoming out in 2010, motorcycle sales have undergone a slight uptick, but they are still nowhere near their prerecession highs. The Motorcycle Manufacturing industry currently produces about 450,000 scooters, on-road, off-road and dual-purpose motorcycles per year, less than half of the number produced during its peak in 2005.
With a base price under $8300, the SuperLow is the entry point for Harley-Davidson motorcycles.IBISWorld expects motorcycle sales will remain subdued over the next five years, captive to delicate consumer sentiment and the broader economic environment. While motorcycle sales are not expected to return to prerecession highs anytime soon, increased disposable income, predicted to grow at an annualized rate of 2.4% over the next five years, will likely to push up industry revenue. With scaled-down operations and more flexible production lines, domestic manufacturers are in a better position to take advantage of any reduction in demand over the next five years.

The early 2000s were a golden period for the industry, as sales in the US increased year after year. Retailers sold over one million new motorcycles each year from 2003 to 2006, according to the Motorcycle Industry Council (MIC), a national trade association that tracks monthly retail sales of motorcycles. The surge was caused by a combination of factors, including per-capita income growth, unprecedented access to credit and demographic changes. Ridership also soared during this period, as the number of vehicle miles traveled nearly doubled from 2001 to 2010.

As the economy ground to a halt in 2009, demand for new motorcycles fell dramatically. In late 2009, unemployment rose as high as 10%, the worst rate in at least two decades. Even consumers who had jobs couldn’t make large purchases; per-capita disposable income declined by 3.6% during the year. For these reasons, spending on opulent items, including motorcycles, dried up. The MIC reported that sales of motorcycles dropped by more than 40% in 2009 as a result of these trends.

Although motorcycle sales declined during the recession, it remained high by historical standards, indicating that consumers who already owned bikes were riding as much as ever. Many of those looking to purchase bikes opted for used vehicles through second-hand markets. Furthermore, many motorcycle owners under recession-induced financial pressure sold their bikes to raise cash. According to the MIC, major aftermarket distributors recorded both strong demand and increased sales of used motorcycles over the past five years while sales of new motorcycles were declining. The strong growth in motorcycle tire sales in the years since the recession is another indication of this trend.

The increased trade on the motorcycle aftermarket has had a pronounced impact on new motorcycle sales over the past five years. Motorcycle sales were down 5.2% over the first six months of 2013 compared to the same period in 2012, suggesting this trend is still a factor. One explanation for decline in sales could be relatively flat disposable income growth, which is expected to rise just 0.8% in 2013. As disposable income picks up over the next five years, a shift towards new motorcycle sales, rather than used purchases, is expected to occur, reversing a trend that has held for at least five years.

Harley-Davidson: All-American Market Leader
The domestic Motorcycle Manufacturing industry is highly concentrated, with the top four players estimated to account for about 80.0% of industry revenue in 2013. Harley-Davidson (Milwaukee), which specializes in heavyweight on-highway cruisers, dominates the industry and accounts for about one in every two sales of on-highway motorcycles in the US. Honda (Torrance, CA) had been the second largest domestic producer, but the company ended US manufacturing in 2009 because of dwindling sales and rising costs. The company previously made up to 70,000 motorcycles annually in its Ohio plant but opted to import bikes from Japan instead. Currently, Harley-Davidson’s main competitor is Polaris Industries (Medina, MN), which manufactures motorcycles under its Victory and Indian (which it acquired in 2011) brands.

As the largest domestic manufacturer, Harley-Davidson has been symbolic of the industry’s performance over the past five years. Harley motorcycles range in value from $8000 for a basic Sportster model to $40,000 for a custom touring bike. Harley’s worldwide sales peaked in 2006 at about 350,000 units before slowly declining over the subsequent years, including a massive 26.5% fall in 2009. As a result, the company has been forced to sell a number of loss-making assets and reorganize its business. In an effort to become more responsive to volatile year-to-year bike demand, Harley has revamped its manufacturing operations in Wisconsin, Missouri and Pennsylvania in recent years to cut labor costs. The strategy appears to be working: Harley’s profit margin has expanded in each of the past three years and is set for a sizeable increase in 2013 based on interim figures. With US sales flat, Harley is increasingly relying on exports as a substitute for domestic sales. International shipments accounted for about 35.0% of Harley’s motorcycle shipments in 2012, up from 16.0% in 2005.

Harley-Davidson also faces competition from a range of small, niche manufacturers of specialized or custom motorcycles. Specialized bikes appeal to a broad range of riders who want edgy, customized vehicles that cannot be found on the mass-market. During the motorcycling boom of the 1990s and early 2000s, a number of niche manufacturers entered the industry to cater to growing demand that wasn’t being met by Harley-Davidson. Cleveland CycleWerks, a small Ohio-based company, set up shop in 2008 to make bikes in small production runs with parts imported from Asia. Additionally, Indian, one of the oldest motorcycle brands in the United States but dormant since 1953, was re-launched in 2006 to cater to the ‘luxury’ market just before the recession struck. Other small manufacturers (e.g., Boss Hoss) that specialize in high-end customized bikes saw sales spike during the period before the recession.

However, the reduced demand caused by the recession meant a number of niche manufacturers exited the industry. Those that remain in 2013 are in a precarious position, operating with low margins and reduced revenue. Unless the industry experiences an unexpected surge in demand, these manufacturers will remain marginal players serving unconventional markets and won’t come close to challenging Harley-Davidson in terms of revenue or market share. Polaris is expected to maintain its position as the industry’s second biggest player due to the strong domestic presence of its Victory and Indian brands. Polaris is currently struggling, however, as sales of its on-road motorcycle division are down 6.0% over the first six months of 2013 compared with 2012.

Demographic Trends
For well over a decade, the biggest market for motorcycles in the US has been white, male, middle-aged consumers. This trend is especially evident in sales of Harley-Davidson products. The percentage of motorcycle owners over 40 years of age is currently well over 50%, compared to about 20% in the 1980s. The trend of baby boomers taking up riding appears to have slowed over the past five years: In 2012, Harley-Davidson claimed that for the first time in its history, its average rider was born after 1964. The sharply reduced spending power of the baby-boomer demographic caused by the recession is one of the main reasons for reduced sales of motorcycles over the past five years. As these consumers continue to age and their physical abilities diminish, motorcycles are less likely to be a convenient transport option. For this reason, motorcycle manufacturers are increasingly focusing on previously untapped demographic segments, including young people, women and minorities. This effort to diversify the customer base is expected to help industry revenue over the next five years as manufacturers rely less on their traditional core markets for growth.

International Trade
Total industry exports increased over the past five years, mainly driven by Harley-Davidson. Strong economic growth in countries such as China and India created a wealthier middle class. These consumers are increasingly looking to purchase items that reflect their success and newfound wealth, and Harley-Davidson motorcycles have been a popular choice. On the other hand, domestic producers are subject to a high degree of import competition from a number of foreign manufacturers. Imports represent close to 50.0% of domestic demand for motorcycles, equipment and parts in 2013. Brands such as Suzuki (Japan), Yamaha (Japan) and Ducati (Italy) are all popular in the US. Furthermore, imports have increased since Honda ceased its local manufacturing in 2009. Also adding to the industry’s imports have been historically high levels of scooter sales. While sales of the less-powerful, more-mobile two wheelers took a dive during the recession, high gas prices and increasing urbanization have kept demand for scooters strong. Because there is no large-scale scooter manufacturer in the US, consumers rely on imports from Europe and Asia to meet demand.

While both imports and exports are expected to grow over the next five years, imports will continue to heavily outweigh exports. About half of on-road bikes will be produced domestically, but scooters, dual-purpose and off-road bikes will continue to be sourced mainly from overseas, leading to a high level of industry imports. Although imports have been declining since before the recession, this trend is anticipated to reverse as consumers look for deals on discretionary purchases and international manufacturers improve their product quality and market presence. Exports will continue to be driven by Harley-Davidson, which will look to emerging economies for growth opportunities.

A Subdued Recovery
The industry will remain highly concentrated, and Harley-Davidson’s market-leading position will not be challenged in the immediate future. Additionally, manufacturers will focus on new customer segments over the next five years, increasingly marketing to a more diverse younger generation in an effort to increase sales. Emerging markets in Asia, the Middle East and South America are expected to boost exports, but industry trade will still be heavily weighted towards imports. Consumers will continue to look to foreign manufacturers as these motorcycles can be produced more cheaply than their American counterparts, making them more affordable for consumers. Even though household income growth is anticipated over the next five years, consumers will remain wary of economic conditions and will still look to save money on discretionary purchases, keeping motorcycle sales below historical levels of growth.

This article was first published in the 2013 edition of the Motorized Vehicle Manufacturing Yearbook.

Published Date : 11/13/2013

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