Indian Motorcycle Company: strategy for market reentry.

Droege, Scott

CASE DESCRIPTION

The primary subject matter of this case concerns strategic management. Secondary issues examined include entrepreneurship. The case has a difficulty level of four, appropriate for senior level courses. The case is designed to be taught in two class hours and is expected to require two hours of outside preparation by students.

CASE SYNOPSIS

This case presents a an iconic U.S. firm, Indian Motorcycle Company, with a rich history that has ceased production three times in the past century and compromised the authenticity upon which the brand is based through a variety of ownership changes and market challenges. Indian Motorcycle Company most recently disillusioned consumers and distributors in 2004 by suddenly ceasing production, leaving distributors without products to sell, and leaving customers with unenforceable warranties. But currently, the British private equity firm, Stellican Limited, is attempting to restore the brand. Two of Stellican's partners, Steve Heese and Stephen Julius, have taken active management roles in the new Indian Motorcycle Company. Both have experience in reviving struggling brands. Indian will soon begin production of a motorcycle model, the Indian Chief, which hearkens back to the 1930s. Yet with three failures in its past, it is uncertain whether Stellican can bring the Indian brand back to life. Students must decide whether the reentry of this nostalgic brand will be successful in the highly competitive heavyweight cruiser segment of the U.S. motorcycle industry.

INTRODUCTION

Steve Heese and Stephen Julius, partners in the venture capital firm Stellican Limited, have faced similar challenges before but their current challenge is among the most difficult. They intend to resurrect Indian Motorcycle, a failed brand with a rich history. Despite a recent botched endeavor to regain its place among the motorcycle "cruiser" market, Indian Motorcycle once again will attempt to capture the market's attention.

Stellican Limited has purchased the rights to the Indian Motorcycle name. Stellican is not new to brand revival; the firm previously brought back to life other firms with bleak outlooks. Riva is an Italian yacht manufacturer with a 160-year history that nearly failed until Stellican acquired it. Chris Craft is an American boat manufacturer that Stellican revitalized. Even a dying Italian soccer franchise, Vicenza Calcia, found its footing after Stellican injected it with capital and took an active management role in rejuvenating the franchise. Still, will this collective experience be enough to challenge entrenched and emerging competitors in the American motorcycle industry? Julian believes he and Heese can accomplish this:

"Great brands, if you do the right things with them, if you manage to fulfill a promise to the brand by creating a beautiful product, then the brand equity will come flooding to the surface very, very quickly. What Indian needs is to be treated right. Its past needs to be respected but its future needs to be recognized. If you can produce a blend of contemporary products which hark back and takes cues from the past, then you'll have a winning product."

LEGENDS AND STORIES

Factors setting Indian Motorcycle apart are the legends and stories embedded in its past. For example, its first corporate sale was to the New York City Department of Police. Police in New York had a recurring need to capture horses that had gotten away from their owners; Indian motorcycles provided the solution with motorcycles that were quick enough to round up the horses.

As the U.S. entered World War I, the military had a dire need for reliable and agile transportation. Indian Motorcycle agreed to suspend its production of consumer motorcycles to supply the defense department with over 41,000 motorcycles to meet the need. This sparked the firm's reputation as a company committed to patriotism and sacrifice (even though they profited greatly from the military contract). Indian Motorcycle again received a Department of Defense contract in World War II, further reinforcing this image.

A competency Indian Motorcycle gained during World War I was the ability to make extremely nimble and responsive cycles despite the reputation it later gained as a heavy, lethargic cruising motorcycle. Among its early models, however, the Indian Scout was noted for excellent handling. Stunt riders frequently chose the Scout as the preferred model for wall-of-death stunts where riders would ride horizontally in a large enclosed wooden cylinder. This wall-of-death stunt is still performed today at the Sturgis Motorcycle Rally in South Dakota, the largest annual motorcycle rally in the U.S.

Much later, Indian Motorcycle gained attention when its bikes were used in Hollywood productions such as Terminaor 3, Cat in the Hat, and Scooby Doo 2. Recently, The World's Fastest Indian recounted the life of Burt Munro of New Zealand who set the motorcycle world speed record in 1967 on a 1920 Indian Motorcycle he had rebuilt over a number of years.

A CHECKERED PAST OF THREE FAILURES

The First Ending, 1901-1953

Indian Motorcycle was the first company to mass produce motorcycles in the United States beginning in 1901, two years before current market leader Harley-Davidson Motor Company. Two bicycle racers, George Hendee and Oscar Hedstrom, founded the firm and in just three years Indian Motorcycle received the Gold Medal for Mechanical Excellence just as Harley-Davidson was getting off the ground. This was the same year Indian Motorcycle came out as the leader of Great Britain's Reliability Trial, a 1,000-mile endurance race.

By 1914, the firm had 3,000 employees producing over 32,000 motorcycles annually at its Massachusetts seven-mile long assembly plant commonly referred to as "the wigwam." Although the original name of the firm was the Hendee Manufacturing Company, as model lines were expanded and eventually included motorcycles such as the Indian Chief, the Scout, the Warrior, and the Arrow, the firm took on the Indian Motorcycle name. While the firm had no direct connection to American Indian tribes, each new model name was an effort to be emblematic of U.S. heritage.

In 1938, Hap Alzina, owner of an Indian Motorcycle distributor, narrowly missed beating Harley-Davidson's land speed record at the Bonneville Salt Flats in Utah by only 1 mph (although Burt Munro set the record on an Indian in 1967). This slight miss in 1938 became prescient of Indian Motorcycle's future. The firm's profitability and liquidity began to unravel as competition from Harley-Davidson and other motorcycle manufacturers, together with the substitution threat from Henry Ford's Model T automobile, resulted in pricing pressure within the industry. In addition, the Great Depression followed later by World War II hurt American consumers' discretionary income reducing sales of nonessential consumer purchases. This combination of competition, substitute products, and reduction in consumer discretionary income magnified Indian Motorcycle's liquidity and profitability problems.

At the end of the Great Depression, E. Paul DuPont acquired Indian Motorcycle and saved it from bankruptcy. This coincided with the latter part of the art deco period in American history and influenced DuPont's motorcycle styling concerns. Indian Motorcycle under DuPont's direction incorporated art deco styling with its now-classic deep fender skirts, seat fringe, and the look that became associated with historical biker traditions.

In 1945, Torque Engineering Company acquired Indian Motorcycle from DuPont. Increases in consumer spending after World War II were not enough to buoy sagging motorcycle sales forcing Torque to divide the firm into the Atlas Corporation as the manufacturer and Indian Sales Corporation as distributor. However, this restructuring initiative was unable to restore the company to its former profitability. Production in the Massachusetts plant was discontinued in 1953.

The Second Ending, 1954-1985

The private British firm, Brockhouse Limited, bought the rights to the Indian Motorcycle name and its remaining assets in 1954 after U.S. production ceased. Brockhouse ran an ad in the U.S. stating: "After many moons ... a brand new Indian." This ad was intentionally designed to capture the Indian Motorcycle tradition and continue the trust American motorcycle enthusiasts had placed in the firm.

Brockhouse maintained Indian Motorcycle's U.S. distribution network but moved production to England through a joint venture with Royal Enfield, a British motorcycle manufacturer (now located in India). Rather than producing "a brand new Indian" as promised, Brockhouse simply rebranded Royal Enfield motorcycles. Royal Enfields that were shipped to U.S. distributors bore the classic Indian Motorcycle badge with Indian script on the gas tank. This was an attempt to capitalize on the Indian Motorcycle heritage while also leveraging the market popularity of British motorcycle manufacturers such as Triumph, BSA, and Norton. These firms were gaining market share in the U.S.; Brockhouse believed that branding its motorcycles to link the past with the present was key to increasing sales among American bikers. Brockhouse's Royal Enfields continued the tradition of purloining Native American history by introducing new models with names such as the Tomahawk, Apache, and Fire Arrow.

However, U.S. bikers quickly recognized that the new Indians were not traditional American motorcycles but rather British bikes with different names. Although other British bikes had a loyal following in the U.S., the Royal Enfield Indians soon became known as a "knock-off" brand. Among U.S. bikers, authenticity was among the most important features. A British motorcycle feigning an American tradition had difficulty penetrating this core biker market.

Toward the end of the 1960s, Brockhouse realized its strategy was failing. The Indian brand had mostly disappeared as the distribution network dried up from lack of sales. At this time, Floyd Clymer, a wealthy American who had been an Indian Motorcycle distributor, a motorcycle racer sponsored by Harley-Davidson, and owner of the renowned Cycle trade magazine, attempted to save the brand. Clymer valued the traditions set by Indian Motorcycle in its pre-1954 era and attempted to restore the authenticity by reviving the Indian Scout model. Clymer wanted to improve the quality as well as restore the brand to its roots and this, paradoxically, led to its downfall. Clymer utilized a German-built frame that was state-of-the-art at the time but combined this with an older model engine. This attempt to link the old with the new, although advertised heavily, never gained the momentum to even make it to production.

Clymer then took a different approach and targeted the sport bike market composed of motorcyclists who were less steeped in loyalty to American motorcycle brands and instead were more impressed with performance regardless of country of manufacture or origin. Clymer put together an Italian high-performance frame sourced from Italjet with a top-of-the-line engine sourced from Royal Enfield. Additional parts were sourced from other German, Italian and, and British firms. After producing less than 100 of these motorcycles, Clymer died, leaving the vision of an Indian-branded high-performance sport bike unfulfilled.

Clymer's attorney, Alan Newman, took over where Clymer left off. But rather than aiming for the large-bore cruiser market, Newman saw more potential in the minibike and small transportation market. He opened a factory in Taiwan and sold 20,000 bikes in the 1972-1973 model year. While not near Indian's peak during its glory days--its single year record sales were set in 1913 at 32,000 units--this was still a profitable venture. Newman cashed out in 1977 by selling the rights and assets to American Moped Associates, a firm that continued production in Taiwan until selling in 1982.

By this time, the original concept that had gained such popularity in the first half of the century was far removed from the then-current production model. Indian Motorcycle had lost its authenticity and now was just another small bike producer competing with Honda, Kawasaki, Yamaha, Suzuki and other mass producers. What was left of the Indian Motorcycle brand folded in 1985 as competition compressed profit margins and contracted market share.

The Third Ending, 1998-2004

Murray Smith, backed by $22 million in venture capital funding, bought the Indian Motorcycle trademark in 1998. Production began promptly in 1999 with the Indian Chief, a large cruiser model designed to replicate the famed model of the art deco era. The board of directors, however, fired Smith after only one year when the board and Smith clashed over the strategic direction of the new venture. Smith wanted to leverage the Indian Motorcycle brand into a restaurant franchise and develop a line of Indian-branded cologne and other merchandise. The board believed the most promising approach was to focus initially on the motorcycle itself rather than diversification into other product and service lines.

In 2000, the company achieved sales of $90 million. In 2001, Frank O'Connell, formerly a top management member at both Reebok and then Gibson Greetings, bought private equity firm Audux Group and subsequently injected $45 million into Indian Motorcycle Company thereby acquiring a controlling interest in the firm. Smith told Fortune magazine, "To bring back a legend is the sexiest thing in the world."

Also in 2001, Indian Motorcycle Company reintroduced the Indian Scout and the Indian Spirit, both smaller than the Chief but still targeting the cruiser market. The company believed the best strategy was to get production up quickly by assembling outsourced components with intentions to subsequently produce major components such as a proprietary engine as the firm developed. Engines were originally sourced from S&S Cycle, an American manufacturer, while Indian's R&D engineers were designing a motor. The new proprietary engine was introduced in the 2002 model year.

"To bring back a legend is the sexiest thing in the world" but it may also be the impossible dream, at least at this point in Indian's evolution. During the 2004 model year, Indian produced only 40 motorcycles then suddenly announced it was discontinuing business. This left bikers who had purchased Indian motorcycles since 1999 with no authorized service dealers and warranties that no longer had any backing. Distributors were left with no bikes to sell. Once again the reputation of Indian Motorcycle was tarnished.

THE CRUISER SEGMENT OF THE U.S. MOTORCYCLE INDUSTRY

The new Indian Motorcycle Company is now thinking carefully about segmentation within the cruiser niche of the U.S. motorcycle market. Harley-Davidson is the incumbent with historical similarities to Indian but with a huge market lead and a very established distribution network. Harley-Davidson--among the most recognizable brands in the world--currently has 49% of the heavyweight, or cruiser, segment of U.S. motorcycle sales. Victory Motorcycles is a division of Polaris started in 1998 that can, along with Indian and Harley-Davidson, claim that it is an American motorcycle company with headquarters in Minnesota (this tends to have consumer appeal in the cruiser market segment). Non-U.S. firms that target the motorcycle cruiser market such as Honda, Yamaha, Kawasaki, and Suzuki have established a strong following among cruiser buyers. These firms have taken styling cues from Harley-Davidson and combined them with distribution and manufacturing scale to drive cost reductions. Still, these manufacturers' motorcycles tend not to have the esteem of the market leader, Harley-Davidson, within the cruiser segment of the market. Boutique firms such as Orange County Choppers and Mad Dog make custom, one-of-a-kind motorcycles. For example, Orange County Choppers recently built a chopper with a built in guitar amplifier for Hartley Peavey, founder and CEO of the acoustic industry specialty firm Peavey Electronics. These custom motorcycles tend to have considerable esteem and status among bikers; however, the one-off custom manufacturing process eliminates the scale efficiencies of the mass producers. Prices can be more than ten times as much as a top-of-the-line Harley-Davidson or Victory motorcycle. Thus, the boutique firms aim for the upscale market within the cruiser segment of the motorcycle industry.

The cruiser segment of the U.S. motorcycle industry is growing by about 5%. Higher growth areas are overseas. The European cruiser segment, for example, is expanding at a 14% rate although analysts predict this will slow over the next few years. All manufacturers except the boutique firms are taking advantage of this disparity by enlarging overseas distribution networks. Still, U.S. personal discretionary income is high relative to many other parts of the world; U.S. sales currently generate 30% of total motorcycle manufacturer revenues even though the U.S. accounts for only 7% of global motorcycle unit volume. The new Indian Motorcycle Company has future plans to expand into international markets, but the near-term strategy is to focus reintroduction in the U.S. This is as much a practical concern as a market concern; a driving priority for Indian is development of a network of dealers in the U.S.

Several factors are likely to affect the U.S. cruiser market. Consumer confidence is a key economic driver of sales. If personal income rates stagnate and unemployment rates increase, discretionary purchases such as motorcycles will be hit hard. Some analysts believe an aging baby boomer population will dampen demand for future U.S. motorcycle sales as health problems prohibit the ability of some among this demographic group to ride motorcycles (the average age of motorcyclists is currently 42-years-old). On the other hand, as baby boomers retire they also gain increased free time to ride motorcycles. In either case, only 1.1% of U.S. bikers ride their motorcycles to work providing support that, for many individuals, motorcycle purchases are discretionary rather than necessary. Economic and demographic factors that can constrain discretionary income thus can have a heavy impact on motorcycle demand.

PREPARING FOR REINTRODUCTION

After Indian Motorcycle Company failed for the third time in 2004, Steve Heese, president, and Stephen Julius, chairman, purchased the rights to the Indian brand name through the venture capital firm Stellican Limited. However, they realize it will take much more than simply leveraging the brand of the past to build a successful company for the future. Both executives are well aware of Indian's past successes and failures. Still, they are firmly committed to bringing back the iconic legacy. Stellican has recently backed up this commitment with $30 million of additional funding beyond that paid for the initial brand name rights. Julius states:

"This capital increase is a clear demonstration of our significant commitment to the successful future of Indian Motorcycle. It ensures that the Company has the proper financial foundation. However, the success of Indian Motorcycle will not be based on capital alone. Recruiting a world-class management team and following the appropriate business strategy are paramount."

Currently, Indian has a 40,000 square foot manufacturing plant in Kings Mountain, North Carolina with room for expansion of up to 125,000 square feet.

Steve Heese, as Indian's current president, brings substantial experience in reviving deteriorated brands. He is a partner with Stellican Limited and also president of Chris Craft, a formerly struggling boat manufacturer Heese was able to reposition Chris Craft as a stable manufacturer in the boating industry. Stephen Julius is chairman of Chris Craft. The combined talent of the Heese-Julius management team makes Indian Motorcycles a formidable competitor if they can overcome the mistakes of the past. Both Hees eand Julius were involved when Stellican Limited turned around the Italian yacht manufacturer Riva and the Italian soccer franchise Vicenza Calcia. Together, Heese and Julius bring decades of cumulative experience to successful brand reentry.

Yet, it will take more than these two executives to successfully bring the Indian back to life. Heese and Julius were successful in recruiting Geoff Burgess as Vice President of Product Development and Engineering. Burgess, ironically, was previously Director of Product Development at S&S Cycle from whom Indian sourced its engines in 1999 and 2000. Getting Burgess to join Indian was a major win. In addition to his work at S&S Cycle, Burgess has held product development posts at Victory Motorcycles, Global Motorsports Group, and others. As of May 2007, Indian had employed only 14 engineers but plans to increase this to 200 in the near future. Recently, Indian hired Nick Glaja, a 27 year veteran in the motorcycle industry, as Vice-President of Engineering.

Indian will begin with only once model line, the Indian Chief. The Chief may have a few product variations, but near-term plans include only this single model. Future plans are not yet definitive but will likely include other model lines such as the Scout.

Indian has been marketing its introduction rather quietly. The top management team realizes that Indian's most recent failure in 2004 was in part due to over-promising and under-delivering. The current team is attempting to avoid making promises that seem too ambitious, worrying that potential consumers, and especially distributors who remember when the former Indian Motorcycle Company left them hanging, will see the new Indian Motorcycle Company as just a specter of the past. Instead of aggressive advertising, the new Indian has utilized a grass roots model. The company has been catering to current Indian owners groups such as the Iron Indian Riders Association. Indian has also taken the unusual step of promising availability of a new 2009 Indian Chief for a $1,000 deposit made through the company website. The uniqueness of this is that potential buyers will not know the final price, motorcycle specifications, or any other details until production begins even though they must pay their $1,000 deposit upfront.

FUTURE CHALLENGES

The company claims in a recent press release:

"There is a considerable consumer base for a premium line of motorcycles under the Indian Motorcycle brand, which has an almost cult-like status amongst many consumers. The company will focus on supplying genuine, American made, motorcycles which are beautifully designed, made of the highest quality materials, reliable and supported by a qualified dealer network."

This presents some assumptions, however. Those who remember first hand the "cult-like" status of the original Indian Motorcycles are well into their 60s or beyond given that the last of the "authentic" Indians were produced in 1953. No doubt there is a consumer base that desires premium motorcycles, but will Indian be able to penetrate markets with established incumbents such as Harley-Davidson? The recent rebranding by Yamaha of its Star motorcycle line competes in this same market space. A relative newcomer to the cruiser market, Victory (owned by Polaris) has also established a strong foothold in this same target market with excellent quality ratings by J.D. Power and Associates. Will another newcomer such as Indian be able to achieve quality levels at the outset necessary to win over consumers and distributors who were burned by Indian's sudden closure in 2004? And will a single model line in the near term, the Indian Chief, be enough to convince potential customers and distributors that Indian is here to stay?

Stephen Julius has promised that "this is a 10, 15, 20-year project, this is not a 12-month project ... There's no magic to this. We've just got to do it right, slowly, carefully, take our time and not think that it's going to happen overnight." Julius points out that the problem with the most recent Indian Motorcycle during the 1999-2004 period was that "they just felt that it could be done instantly and it can't." Given this history, why has Stellican Limited chosen Indian when there are numerous other investment alternatives?

Indian has failed on numerous occasions in the past, yet the top management team of Steve Heese and Stephen Julius has succeeded in similar situations just as often. Combined with the motorcycle product development expertise of Geoff Burgess and the engineering expertise of Nick Glaja, Indian has a highly competent group leading its strategic initiatives. With the financial backing of Stellican Limited, Indian may once again have a chance to pierce the American cruiser market segment. Still, is this enough? Heese and Julius now face the combined challenges of moving from design to development, creating a distribution network, and regaining the confidence of the American cruiser market despite past failures.

Stephen Julius recently reported to potential customers: "We are honored and inspired by your patience and continued commitment to the resurgence of Indian Motorcycle. We feel certain that we will surpass your expectations with our world-class staff, sound engineering platform and selection of dealers committed to premium service." Time will tell.

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Scott Droege, Western Kentucky University