What Harley-Davidson Learned From GM

Established in 1903, the Harley-Davidson Motor Company grew rapidly during the two world wars. Foreign competition hit the industry early, and by 1953 Harley-Davidson was the last remaining major motorcycle manufacturer in the United States.

Harley was bought by AMF in 1969 and by the late 1970s they were on the block again, thanks to a sharp reduction in sales because of poor quality levels. In 1981, 13 Harley executives purchased the company from AMF, and an overall reduction in the motorcycle market drove additional production cuts.

The company almost went bankrupt in 1985, but CEO Richard Teerlink persuaded lenders to accept a restructuring plan that included the application of “Japanese management principles,” in effect the Toyota Production System or lean manufacturing. A temporary and reducing tariff on large imported motorcycles created a brief time window for the turnaround.

The plan worked. In 1987, one year before the five-year temporary import tariff was scheduled to expire, Harley announced it no longer needed the tariff protection to compete. Between 1985 and 1987, the company had increased inventory turns from five to 20, reduced inventory by 75 percent, reduced scrap by 68 percent, increased productivity by 50 percent and reduced manufacturing space requirements by 25 percent. Similar improvements were made to the marketing and product development sides of the company.

Employee involvement was critical to the process, which required a unique, trusting relationship with the union (The International Assocation of Machinists and Aerospace Workers Local 175). The union viewed management as a partner, and management tried to in-source as much work as possible to help improve worker and employment potential. The workers responded by embracing and owning quality and continuous improvement.

Today Harley-Davidson is at a crossroads. A recent Wall Street Journal article describes how sales, income and market share are increasing as workers are striking at its largest manufacturing complex in York, Pennsylvania. Neither side is budging. The dispute is over a variety of wage and benefit issues, with management’s current contract proposal calling for a two-tier wage system to reduce the payscale of new hires, a 4-percent wage increase for each of the contract years, a requirement for workers or the union to contribute toward health insurance, and the company increasing the company 401(k) contribution match from 25 percent to 50 percent.

The Harley-Davidson production line

A 4-percent guaranteed wage increase, regardless of merit or performance, is unusually generous, as is a 50-percent 401(k) match. The problems with the contract from the workers’ standpoint are the additional health care cost and the tiered wage system. The vast majority of us expect to contribute something to our health insurance plan. From a cost containment standpoint, not contributing anything, as Harley employees currently do, creates the potential for system abuse, leading to rapidly increasing costs.

Similarly, a tiered wage system creates divisions between older and newer employees; in effect the company is trying to reduce wage creep and bring overall wages back in line through a step function. It’s not pretty, but accomplishing an overall wage adjustment is never easy. On one side, you could argue that this is far less painful than a layoff to bring costs in line, but lean manufacturers know that this option eliminates thousands of years of off-balance-sheet knowledge assets while demolishing a critical worker-management partnership. A true lean approach would be to grow markets and production, while increasing productivity so that the whole labor system remains in balance. Unfortunately, growing markets is often dependent on uncontrollable economic factors.

Harley-Davidson has learned something, albeit imperfectly, from what happened to General Motors and Ford Co. The pre-Japanese era during the 1960s and 1970s was a booming period for Detroit. Foreign competition was minimal and perceived as very manageable. Detroit executives allowed lavish union contracts to be negotiated that included no worker copayment for health care costs, incredibly high hourly rates, guaranteed wages even when not working, strict stratification of duties that made flexibility impossible, and golden retirement benefits.

The chicken has come home to roost, and it’s no longer laying golden eggs. The costs associated with those benefits is one reason that U.S. automakers cannot compete with the likes of Toyota; the other reasons are failed product design, poor quality and a management so shallow that it believes that being No. 1 in sales actually means something.

Many, especially in the media, blame the GM workers for their exorbitant benefits that created the costs that have made Detroit uncompetitive. I don’t. I blame their management. Management was also at the negotiating table. They didn’t look very far into the future to envision an environment with serious competitors. They didn’t care that their worker compensation structures and packages were skewing far above the norm. Therefore, they couldn’t—and didn’t try to—explain the upcoming competitive reality to their workers. That management failure led to their current problems.

Harley-Davidson management is looking ahead. The Wall Street Journal article quotes Fred Gates, general manager of the York operations, “... [T]he concessions were necessary now . . . because we don’t want to find ourselves in 10 years in the same position that the Detroit auto industry is in now.”

They can see a future with strong competitors and they’re trying to prepare the company now. That’s leadership. Sharing the cost of health care is common and should be a part of the contract. However, there must be a more creative way to address base wage costs than to create a two-tier structure. Harley-Davidson needs to sit down with their workers and union, and describe their vision of a more competitive future, reinvigorating the spirit of partnership that helped the company revive in the late 1980s to attack the problems of the future. Together.

This article appeared originally in the Evolving Excellence blog. 

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