The Hog and the Dragon: Harley Looks to Chinese Motorcycle Market

The Harley-Davidson Motor Company is exploring a relationship with China's Zongshen Motorcycle Group to pave the way for its entry into the Chinese market.

Zongshen Motorcycle
Zongshen's flagship 250 shows some Harley influence already. Harley hopes the company can pave the way for its entry into the Chinese market, which may soon be able to buy Harley's in attractive numbers.Harley-Davidson

Harley-Davidson Motor Company announced today that it is exploring a relationship with China's Zongshen Motorcycle Group with an eye on entering the Chinese market. Citing formidable barriers to foreign motorcycle makers, Harley has signed a memorandum of understanding with Zongshen, which one of the largest, if not the largest, of China's hundreds of motorcycle manufacturers.

The two companies are seeking a mutual beneficial relationship. Harley is looking for a profitable entry into the massive Chinese market, which seems poised to grow in Harley's direction. It is looking to an alliance with Zongshen to guide it past the considerable obstacles it foresees confronting it in China. Zongchen apparently sees value in an association with the American icon, and would also be offered information on some of Harley's technology and strategies. That is, if the relationship in consumated. At the moment the two companies are just in the dating stage.

Although few Americans have heard of it, Zongshen is a major player in the transportation-oriented Chinese motorcycle market. It makes a million 50cc to 250cc motorcycles a year and twice that many motorcycle engines. It is reportedly working on a 1000cc four, and has been sponsoring entries (on Hondas and Suzukis) in world endurance and superbike racing for publicity and research. Zongshen also supplies marine outboard, minicar, and over a million other small engines (in 50 varieties and 700 types) annually. It employs about 20,000 people, has over 50 subsidiaries, and distributes its products throughout Asia as well as to Europe and the U.S. It recently spent $30 million on an engineering center and has a 300-person R&D; facility as well. In 2002 and 2003, Forbes listed Zongshen Chairman, Zuo Zongshen, 51, among China's 100 richest people.

Zongshen Motorcycle
One of Zongshen's 200sHarley-Davidson

The release from Harley-Davidson follows.

**Harley-Davidson Moves to Bolster China Presence; Motorcycle Maker Announces Relationship with Chinese Company **

MILWAUKEE (June 8, 2004) - Harley-Davidson, Inc. today announced the signing of a memo of understanding with the Zongshen Motorcycle Group which could facilitate Harley-Davidson's entry into the Chinese motorcycle market and enhance Zongshen's capabilities in its home market. The announcement came during a visit by Harley-Davidson Chairman and Chief Executive Officer Jeffrey Bleustein and other company officials to Zongshen's headquarters in Chongqing, China.

Both companies emphasized that the memo of understanding provides a framework for a potential relationship, but that many details are yet to be discussed before the two companies commit to a formal agreement.

"Harley-Davidson's primary objective is to export our American-made motorcycles to China and to develop political and motorcycle industry alliances in anticipation of the market becoming more accessible," said Bleustein. "We do not believe it will be necessary for Harley-Davidson to manufacture its motorcycles in China in order to be able to sell them there," he said.

Under the contemplated relationship, Harley-Davidson would work with Zongshen to gain a better understanding of the business practices, markets and distribution channels it will encounter in China. Zongshen is a recognized leader in the Chinese motorcycle industry. "We believe there is a lot we can learn from working with a company that has intimate market and industry knowledge in China," said Bleustein.

Harley-Davidson would share certain technology of a non-competing nature, as well as marketing philosophies and practices with Zongshen, under the contemplated agreement.

"In China, there are hundreds of motorcycle companies. However, Harley-Davidson is known around the world and throughout China for its outstanding reputation," said Zongshen Motorcycle Group Chairman Zuo Zongshen. "Harley-Davidson's status as an American-made motorcycle has a strong appeal here, and we believe an association with Harley-Davidson holds solid value for us in China," he said.

While in China, Bleustein is also pressing Harley-Davidson's case for market entry with government officials. The day before his visit to Zongshen, Bleustein met in Beijing with China's Vice Minister of Commerce, Wei Jianguo, to urge the easing of official and unofficial trade barriers that limit Harley-Davidson's ability to sell its premium American-made motorcycles in China.

Those barriers include a 50 percent import duty on motorcycles. The duty is scheduled to drop to 30 percent by January 2005, a level which is still onerous according to Harley-Davidson. In addition, local governments in China often limit the number of motorcycle licenses they will grant, and motorcycles are singled out for outright bans from operating in many of China's largest cities._