You probably saw the headline yesterday, the one where the stock market took a nosedive and there was talk of doom and gloom for our economic future.
For those that don’t know, the news behind the news is the fact that the bond market saw an inverted yield curve between the 2-year and 10-year treasury bonds. This is a fancy way of saying that investors expect to make more money in the short-term than the long-term, and this opinion reflects where our economy is headed.
For the last 50 years, an inverted yield curve has signaled the start of an economic recession, and while that is a scary thing to think about (we would all rather have a booming economy), the boom/bust cycle is common in economics and can often be mild.
Of course, what is different here is that the last recession that the United States experienced was the worst recession of all time, and in many ways we are still feeling its effects, whether those are physical or merely psychological.
While I will let the financial publications debate what kind of recession we are headed into, if they even agree that a recession is looming in front of us, this news does spark some interesting conversation for the motorcycle industry. Let me explain.
Consumer Discretionary Income
The most obvious point to make about an economic recession is that it affects how much money people spend. This is the essential crux of a recession, and it moves all the way down from consumers to businesses and governments as well.
For consumers though, one of the key factors a recession hits is the pace of consumer discretionary spending. That’s a funny way of saying the purchases on items that people don’t particularly need for their day-to-day lives.
Consumer discretionary spending includes things like tickets to go see a movie, money spent on vacations, and of course items like motorcycles, which are purely for recreation.
Now in other markets, a motorcycle purchase might not necessarily be considered discretionary, as it might be the only viable means of transportation in a developing country, or the only mode of personal transport available to someone in Europe. But in the United States, motorcycles are squarely machines used for fun, and that has always been a pain in the industry’s side.
It shouldn’t be a large logical step to realize that when the economy slows, people spend less money on the things that they don’t outright need. So then connecting the dots, we should expect to see motorcycle sales slow down during a recession.
The Recession That Never Stopped
If we stopped our analysis right here, it would paint a tough picture for what is ahead for the motorcycle industry, but no worse than what can be expected for a number of markets that depend on consumers with money stuffed in their pockets.
Consider one more fact though: the US motorcycle industry never recovered from the Great Recession from 10 years ago. Sales have not rebounded since their 2006 peak, in fact they remain at less than half that peak figure of 1.1 million unit sales.
What makes this trend interesting is the fact that for the past 10 years, we have seen the longest economic expansion ever in US history. Housing prices boomed, the stock markets hit record levels, and we are seeing unheard of levels of unemployment.
And yet, motorcycles flat-lined…at best.
From 2016 onward, we have actually seen the motorcycle industry in the United States beginning to contract again, fueled in part by the crashing sales from Harley-Davidson, which accounts for 1 in 4 bikes sold in the USA, and roughly half of the 600cc+ machines.
Again, I remind you that this sales slump is supposed to be happening during a booming economy.
For comparison, the European motorcycle market is thriving right now. Though slow to start, the latest reports from Europe show growth over the last few years for two-wheelers at +9.1% in 2016, +0.2% in 2017, and +9.9% in 2018.
This tells us that there is something unique about the motorcycle market in the United States, which can certainly be lumped into different causes in economy, transportation, consumer debt, and even politics.
Despite the MIC’s proclamation that the US motorcycle industry is strong and healthy, my contact with a number of brands throughout the industry show concerned dispositions and contracting expenditures.
The US motorcycle industry is already bracing for this coming recession…probably because they never felt like they left it.
Bracing for What’s Next
For the brands on the precipice, this surely means disaster. Funding and cash flow for startup ventures will be harder to come by, and I suspect this will greatly affect the electric space.
Zero Motorcycles burns through cash too quickly to hope for profitability in its current state, and a recession could mean the end of its limitless purse from Invus Capital. I am forever waiting to hear that they have run out of capital and are shutting their doors.
That would be a shame, because it would likely mean the end of an outside player pushing the US motorcycle industry towards electrics. The closing of Alta already took out one leg of that driving force, and Zero is certainly the only one left standing.
Market forces might keep the electric dream alive though, especially with Harley-Davidson throwing every strategy it can find into the hopes of finding new riders.
The Bar & Shield brand is perhaps still five years away from a real crisis, but make no mistake that the American company is hemorrhaging sales and marketshare.
Even with market conditions remaining constant, I might give Harley-Davidson even odds on redefining itself and finding a foothold with younger riders, but if the coming recession cuts the economy deeply, that might be a mortal wound for the iconic brand.
A collapse of Harley-Davidson is likely the collapse of the American motorcycle market. You could probably make a reasonable case for “too big to fail” for Harley-Davidson, especially if the collapse occurs quickly.
Just look at the media end of where Harley-Davidson’s dollars are spent, as the withdrawal of Harley-Davidson and Vance & Hines as advertisers essentially killed off Hot Bike magazine, which had become dependent on those two brands for its life support of cash.
Of note as well, Bonnier just laid off another round of people from its motorcycle group, including Motorcyclist editor-in-chief Chris Cantle. The publication was already a ghost town, but this news solidified the status for the once great magazine.
Meanwhile, the rest of BMG is polishing their resumés, and odds are being taken as to whether Cycle World will make it to issue #4 of its quarterly design – no one seems to be talking in terms of an issue #5.
All in, I think we will see a handful of publications closing in the next few years, especially those who haven’t adapted to online media consumption and are overly dependent on inflated advertising prices from OEMs.
Back to the OEMs, I have my doubts about the future of Suzuki. The Japanese brand nearly got out of the motorcycle business during the last recession, and basically shut down its factories for a year because of it.
Now, we see the same motorcycles in the lineup that we have seen for the better part of forever, and the “new” bikes that are coming out are really just reworked older models.
I will hedge that bet with the notion that we have heard a lot of talk about new machines coming down the pipe from the Japanese brand, and they could release just in time to boost sales for Suzuki when no one else is putting out fresh product.
This is an interesting point because the standard move in economic hardship is to cut R&D and other expenses, and essentially retract one’s business. But for an intrepid few, booming when others are busting can pay off dividends.
It is a risky move, but one could argue that at only 4% of the US motorcycle market share, what does Suzuki have to lose here?
I expect to see luxury brands like BMW, Ducati, Husqvarna, KTM, and Triumph to fare better than the others, but already we have seen falling sales from many of these marques.
KTM seems to do better with the headline figures, but talking to dealers about sale-prices and incentives paints a different story. If it wasn’t for its dirt bike business – the off-road sector is still fairly healthy in the USA – KTM might be another brand that lose us sleep at night.
I’m not sure anyone is really making a buck in the United States out of this group, and that is worrying, since the high-end brands should be more immune to consumer discretionary income swings. The fact is simple, the rich got richer this past 10 years; Middle America, not so much.
The tightening of purse strings comes at the motorcycle industry in a different way as well, as it means the limiting of choices.
A mild recession might mean that a number of households will still have considerable income to spend on purchases like motorcycles, ATVs, watercraft, etc…but it might mean that they only have money for one of those purchases.
That is to say, owning a motorcycle or buying a new motorcycle might still be a possibility for many consumers, but now that purchasing choice is much more competitive.
Skiing, mountain biking, a nice vacation – all of these things could now be competing for the same pile of cash, and as has been noted on A&R before, there is a very high barrier to entry into motorcycling, which is also a very singular activity for most of its participants.
Lowering the barriers to entry, such as lowering the costs that come up-front with buying a motorcycle, as well as the costs that come in the ownership process of having a motorcycle (buying gear and consumables, maintenance costs, etc), is vital to keeping current motorcyclists on the road, and creating new motorcyclists along the way.
The Silver Lining
If you are reading this, then likely you are a long-time reader of Asphalt & Rubber, and you thus know that I don’t sugarcoat things. We certainly have tough times ahead, but I do see a silver lining for the motorcycle industry in the coming years.
Tough lessons were learned during the last recession, and those lessons cost us several brands…and nearly several more. But, the motorcycle industry learned that it had to begin focusing on a younger generation of rider.
It is crazy to me to see that just now the MIC is announcing some sort of call-to-action for attracting new riders into the sport – you would think that this would be a conversation they would be espousing a decade ago. But, it is here now, and better late than never.
Many of the big manufacturers are refocusing their work on the smaller bike categories, which had long ago gone stagnant. 10 years ago the Kawasaki Ninja 250 look unchanged for a duration that could see a newborn become a college graduate, and now the segment is an arms race of increasing displacement and features.
There is a push to offer cheaper motorcycles, that are less complex. This has opened a door for brands like Royal Enfield, Benelli, and a slew of other entries from Asia.
Electric motorcycles are in a budding moment, with several offers on tap from the established brands, and several more startup brands trying to establishe themselves.
How we finance purchases has been rethought (the grand lesson of the Great Recession), and now the very concept of motorcycle ownership is being challenged, replaced perhaps with subscription services from OEMs or some third party.
The last 10 years have seen the US motorcycle industry separate the wheat from the chaff, and now the question is whether that means we can find new growth.
As I told one colleague not too long ago, everything is up for grabs when it comes to transportation. This means new opportunities await us, and it creates space for those who are thinking outside of the box.
The time ahead is uncertain, but it could also prove to be formative. May you live in interesting times.
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