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Not your old man's Hog: Harley bets big on a small bike

By James B. Kelleher KANSAS CITY, Missouri (Reuters) - To catch a glimpse of Harley-Davidson Inc history, visit its Milwaukee headquarters, housed in the 111-year-old company's first real factory. Or tour its York, Pennsylvania, plant, which has cranked out motorcycles since the early 1970s and builds some of its biggest cruising bikes, including the Road King and Electra Glide. But for a look at the company's future, head for its vehicle and power-train plant in Kansas City. Opened in 1998, the 435,000-square-foot factory produces several of Harley's most popular bikes, including the Sportster and V-Rod. Earlier this year a motorcycle unlike any Harley has made in decades began coming off the line. Known as the Street, it is the company's first entirely new bike in more than a decade and the first U.S.-built small bike bearing the Harley name in nearly 50 years. With an expected retail price of $6,500 to $7,500, the Street is the most affordable bike Harley has brought to market under its name in decades and an unapologetic effort to bring young riders around the world into the company's two-wheeled fraternity. "This basically targets a whole new market of people who want to try a Harley-Davidson but don't have the money to try one of the bigger bikes with all the bells and whistles," said Jaime Katz, an analyst at Morningstar. The Street, which will arrive in dealerships this spring, is a stripped-down bike built for urban environments -- a major departure Harley, known for heavy touring bikes built for the open highway. It is also proof, according to Chief Executive Officer Keith Wandell, that a company whose products have been dismissed as "geezer glides" has no plans to shamble off into the sunset along with the baby boomers who built the brand. "Street is really symbolic," Wandell said. "It's the first new product we've brought to market under the Harley-Davidson badge that is intended to bring new riders -- and even younger riders -- into the Harley-Davidson family." It also illustrates Wandell's commitment to transform the company into a leaner, more nimble manufacturer. The last time Harley introduced a new bike, in 2002, it spent big bucks -- it refuses to say how much -- building a new line in Kansas City dedicated to the motorcycle. This time, Harley did it on the cheap, incorporating its new bike into an existing line. The Street's introduction is not without risks. It puts Harley in direct competition with Japanese bike makers, which have strong brands of their own. The yen's current weakness against the dollar will also help the Japanese defend their small-displacement, sport-bike turf. Meanwhile, Harley faces a unique problem: convincing its core customers that the new bike does not undermine the brawny, muscular quality of the Harley brand. Company executives insist they aren't worried. "It's a Harley that just happens to be a little smaller," says Mark-Hans Richer, Harley's top marketing executive. The Street's exhaust, he noted, was specifically tweaked to make generate the distinctive Harley "potato-potato-potato" rumble. "We worked really hard on that," he said. The debut will also make it harder for investors to understand where profit margins on motorcycles will settle after years of restructuring under Wandell. Harley has acknowledged that the Street may pull buyers away from higher-margin entry-level heavyweight motorcycles in its line, like the Sportster. "As that mix shifts, it could hurt gross margins -- at least temporarily," said Morningstar's Katz. Harley saves considerable cost by building the Street on the same line, and often at the same time, as its larger V-Rod. Changeover from V-Rod to Street production can take place on the fly, several times in a 24-hour period. The process could easily devolve into chaos, said Steve Wiggins, manager of the Kansas City plant, but factory workers quietly choreograph the changeover, swapping components and tools in and out and just in time. Workers on the line, who are briefed during a pre-shift huddle on the day's production schedule, "don't see anything happen (during the changeover) except they look up, see we've switched to Streets, and the parts and tools they need are there." Wiggins said. "So we do not lose any build time. … There's not a single skipped carrier or anything." SMALL FLOPS The last U.S.-made, Harley-badged small bike, the 1966 BTH Bobcat, was an underpowered flop, discontinued after a year. More recent efforts to break into the market with the Buell and MV Agusta brands also ended badly. The Street's stripped-down design and low price -- it costs just a bit more than some Vespa scooters -- reflect the need to find a new generation of buyers. The Street is the simplest motorcycle Harley has offered since it discontinued the Buell Blast, a bike ridiculed by Harley stalwarts as the "Be-Last." Neil Howe, a demographer who helps companies market to younger consumers, said Harley needs to show twenty- and thirtysomethings that the Street meets their transportation needs. That age group has a "brutal pragmatism," he said. "It's one of their most impressive characteristics, the urge to simplify," he said. Harley expects to ship just 7,000 to 10,000 Streets in 2014 and has confined the rollout to half a dozen countries, including the United States, Italy, Spain and Portugal. Still, executives see the debut as a pivotal event. "We don't come out with a new platform every day," Richer said. Doing nothing is not an option. Harley faces a growing number of challenges, including shrinking demand in the United States, its No. 1 market, for the big, expensive bikes it has made for years. And even as that market shrinks, new competitors, including the relaunched Indian brand from Polaris Industries Inc , are moving into the space. Harley has problems overseas as well. Europe hasn't provided the boost the company needs to offset the slowdown at home. And sales in China have been disappointing since they began in 2006. "They've found it hard to break into China with a $20,000 bike," said Morningstar's Katz. If the Street -- water-cooled like the V-Rod, with either a 500cc and 750cc engine -- takes off, it could reestablish Harley-Davidson as a growth stock by increasing sales to members of the "millennial" generation worldwide. The Street will be Harley's first global bike, with models built in Kansas City for North America and at a plant in Bawal, India, for the rest of the world. It's also not clear that Europeans, who have until now been supplied by U.S. factories, will accept an Indian-made Harley, though company executives downplay those concerns. "The ‘made in America' cachet is certainly more real in the United States maybe than anywhere else in the world," Wandell said. It may be some time before investors will know whether the Street is a hit. Most of the bikes produced in 2014 won't be sold to consumers straightaway but will instead be used as training bikes in dealer-run motorcycle riding classes. Even if the Street's launch is a success, Katz said she doesn't see Harley's global shipments returning to their 2006 highs until 2019, in part because so many boomers are aging out of their motorcycle riding years. "You're going to have that massive user base that takes off their helmets and stops riding," she said. "So they are hoping that this smaller, lighter, less expensive bike caters to a much wider audience and moves volume through the channel. And then they're just crossing their fingers that Street buyers trade up as they get older and convert to heavy bike riders." (Editing by David Greising and Douglas Royalty)