Polaris Is Trailblazing Again, This Time Overseas
It’s not Scott Wine’s assistant who greets you. It’s Scott Wine himself. Striding through the sunny lobby of his company’s Medina headquarters and dressed business-casual, the chairman and CEO of Polaris Industries shouts an attaboy to a company comrade just outside the Victory Roadhouse, a company dining area named for the motorcycle line that Polaris launched in 1998. He walks up and proffers a crisp handshake. Upstairs, his office provides a view of Polaris’ rural-suburban surroundings. On the half-hour, a ship’s bell on his credenza chimes, a memento of his seven years of service in the U.S. Navy after graduating from Annapolis in 1989.
It’s a good time to be the captain of his company, and you can’t blame Wine for being revved up. From the depths of the downturn in 2009, Polaris’ revenue, net income, and stock price have all been climbing with the same nimble maneuverability of one of his company’s all-terrain vehicles. For that, Wine credits the “speed and competitiveness that our employees possess” and “a corporate structure that is small and agile that allows us to move very, very quickly.”
Polaris is still on the move. With more and more off-road vehicles (ORVs)—roughly 70 percent of its $3.2 billion business—used for non-recreational purposes, Polaris is expanding its ORVs for transporting equipment for farming and landscaping, among other commercial applications. It’s exploring new technologies beyond the gasoline-powered engine, and has entered the small-electric vehicle markets. Its sexiest move is this year’s reintroduction of the Indian motorcycle (see “No Easy Ride” at the end of this story), which will be competing with Harley-Davidson, the heavyweight of the U.S.-made heavyweight cruiser market. Wine and Polaris also have lofty goals for expansion beyond the company’s longtime North American base. Wine would like see overseas revenue comprise a third of the business eventually.
The Polaris name may conjure backwoods adventure, but the company itself has a bigger vision, what Wine calls an “ABC strategy—‘anything but cars.’ ” Having used the recession for more than retrenchment, Polaris is becoming something more than a manufacturer of powersports vehicles (a category that includes ORVs, snowmobiles, and motorcycles). The company is driving its growth in several new directions.
Polaris: Beyond the Snowmobile
Off-road vehicle (ORV) A category of vehicle that includes ATVs and side-by-sides. Dirt bikes, dune buggies, and other recreational vehicles capable of driving off paved or gravel surfaces fall into this category.
All-terrain vehicle (ATV) Usually four-wheeled, straddle-seat ORVs used primarily for recreational riding, though also used by farmers and others for hauling.
Side-by-side ORVs with two or four seats and either rollover protection bars or full enclosure. As the alternate names imply, these vehicles can be used for recreation or utility purposes; many have small cargo beds. Also called UTVs (utility task vehicles) or ROVs (recreational off-highway vehicles).
Across Rough Terrain
Though Polaris was founded as a snowmobile manufacturer in 1954 in the northern Minnesota border town of Roseau, those vehicles currently make up only about 9 percent of its business, and Roseau is now one of four Polaris manufacturing locations—three in the Upper Midwest and one in Monterrey, Mexico. It also has plans to build a factory in Poland, whose precise location should be announced by this summer.
These days, Polaris’ main products are ORVS, particularly utility task vehicles, or side-by-sides—a fast-growing market that Polaris dominates. According to Powersports Business magazine’s research, the U.S. powersports market is a $12 billion industry. Based on that estimate, Polaris accounts for about 20 percent of the industry’s revenues.
That market share has grown since Wine became CEO in 2008. Wine, who had no powersports industry experience, was just 41 at the time. That said, Polaris has had a history of young CEOs. His predecessor, Tom Tiller, had arrived at Polaris from GE, at the age of 37. Before Tiller, Hall Wendel (another Naval Academy grad) was 37 when he became CEO in 1981.
For Wine, the new job was a baptism by fire. He took the wheel just as the recession began. Polaris didn’t get whacked as hard as some of its competitors: Sales declined from $1.9 billion in 2008 to $1.6 billion in 2009. Still, the economic signs were worrisome. Polaris had to make “tough choices about the business,” Wine says. In 2009, he adds, “we took $100 million of costs out of our business.”
Much of this trimming could be achieved due to Polaris’ “flexible engineering” approach. “We can go up and down with labor, we can go up and down with production, we can go into models and out of models very, very quickly,” says Wine, adding that he asked Polaris engineers to put off designing new products for a year and instead focus on ways to re-engineer existing vehicles. Since Polaris taps outside vendors, including many small Minnesota companies, for items including drivetrains and assemblies, it can power up and down without carrying a large inventory of components. (See “Made in Minnesota” sidebar.)
The recession also required layoffs, some due to a controversial 2010 move to close its Osceola, Wisconsin, facility, which employed about 500 people, and open the plant in Monterrey. (David Obey, then congressman for the district including Osceola, called the move “unpatriotic.”) Polaris ended up keeping about 140 workers in Osceola; with business improving, the plant now employs approximately 175. Monterrey, which opened in 2011, now handles about 25 percent of Polaris’ production, according to Wine.
“If we had not made that investment [in Mexico], we would not have had the capacity to deliver the growth we’ve delivered over the past three years,” Wine says. Moving some production south of the Rio Grande was about logistics, not labor, he insists. “We spend more shipping products around the world on inbound and outbound freight than we do on labor,” Wine says. “Part of [opening the Monterrey plant] was being closer to the customers in the southern half of the United States,” as well as those in Latin America.
One area where Wine didn’t cut was research and development. Traditionally, he says, the company has put 4 percent of revenue into R&D. Since revenue has doubled in the last three years, R&D spending has grown accordingly. This allowed the company to announce a major expansion of its engineering facility in Wyoming, Minnesota, last year. As a result, when the economy began to turn around in 2010, Wine says, “we were the only company in powersports that had new products to bring out.”
In 2010, Polaris sales were higher than in 2008, and it’s been all positive ever since. “Scott Wine has done a wonderful job taking a great company and making it better,” says Craig Kennison, director of research operations for Milwaukee-based investment firm Robert W. Baird & Company. “There are a lot of great ideas in that engineering department; I think Scott has given everyone the confidence to dream bigger and take on bigger challenges.”
Wine gives plenty of credit for Polaris’ high performance to his C-suite colleagues, his employees (who now number 4,600 worldwide), as well as his CEO predecessors. Even before Wine came on board, the company had a history of adventure in terms of new products, partnerships, and acquisitions. Not all have worked out, however, at least not immediately. In 2005, for instance, it entered a two-year partnership with Austrian motorcycle manufacturer KTM, where each company would share technology and boost the other’s market share. Polaris acquired 25 percent of the Austrian firm. The partnership ended early, and Polaris no longer owns any of KTM. In 1998, Polaris launched its Victory motorcycle line. Only in the past few years has it actually turned a profit.
Under Wine, Polaris has continued to journey beyond its powersports base. In April 2011, Polaris bought Global Electric Motorcars (GEM) from Chrysler; the following November, it acquired French company Goupil, another small-electric vehicle manufacturer. Polaris tested its own electric vehicle, called the Breeze, in 2009, but has since pulled the plug choosing to focus on GEM.
More recently, Polaris invested in Oregon-based Brammo, which produces electric motorbikes using its own lithium-ion battery technology. Lithium-ion battery-driven vehicles promise better power performance at a much lower weight than vehicles with a gasoline-fueled engine do. Polaris’ investment could help Brammo extend the use of this technology into other vehicles, such as ORVs and snowmobiles. “We think most of our powersports customers are going to prefer regular gas products,” Wine says. “But there will be a segment that will prefer the lack of noise and the lack of emissions of electric vehicles.”
Polaris doesn’t have a “ ‘not-invented-here’ problem,” Wine says. It has partnered with other companies that are further along in a technology or market that Polaris wants to add to its mix—for instance, lithium-ion batteries. “We could have developed it ourselves. Or we could make an investment in Brammo and have access to the technology that way.”
This raises a question: How can Polaris afford to pursue so many new ideas, particularly when they don’t always play out? The short answer: Polaris has the money, and Wine has emphasized profitability. “Growth without margin expansion is worthless,” he says. Mark Smith, senior research analyst at Feltl & Company in Minneapolis, notes that Polaris always has had plenty of cash on hand, and has put much of its money into R&D. When it does make an acquisition, it goes after “best of class” manufacturers such as KLIM, a Idaho-based powersports garment maker that Polaris purchased in December. One source of that cash, Smith says, is Polaris’ dominant side-by-side business.
In a sense, the economic downturn turned out to be a blessing for Polaris, which became a sales leader in the powersports industry during the downturn. “And if we want to maintain it, we’re going to have to be not only as good as we’ve been, but significantly better than we’ve been,“ Wine says. “We have to recognize that the competition will be shooting for us.”
Eyes on the Off-Road
Polaris has made itself a tempting target. “It’s no secret that [side-by-sides are] a fast-growing, attractive marketplace,” says Jimmy Baker, a Chicago-based senior analyst with Los Angeles investment firm B. Riley & Company. While Polaris has the clear lead in side-by sides, other competitors “are gunning for some of that market share,” Baker says. Such competition could cut into Polaris’ market share, particularly if competitors can put pressure on pricing.
Antonio Danova, sports industry analyst with California-based market research firm IBISWorld, believes that one advantage Polaris has over some of its Japanese rivals is its focus. “Companies like Polaris and Arctic Cat that focus primarily on powersports vehicles have actually outperformed those large companies,” he says. “Sometimes with those larger companies, when a division isn’t performing as well, they’ll have to cut back,” whereas powersports manufacturers “are looking to improve [their products] as much as possible.” Danova also says that powersports vehicles that are used commercially, particularly side-by-sides, have come back from the recession more quickly than strictly recreational versions, which, after all, are discretionary items.
While Japanese companies like Kawasaki and Honda have had long runs in the U.S. powersports market, Polaris’ most formidable competitors may be based much closer to home. Thief River Falls-based Arctic Cat is putting more marketing and design muscle behind its ORV lines, particularly side-by-sides. Then there’s Quebec-based Bombardier Recreational Products (BRP), which was spun off 10 years ago from the internationally known manufacturer of smaller commercial aircraft, passenger rail cars, and locomotives. BRP’s Ski-Doo is the number one snowmobile brand in the world; the company also makes ATVs and motorcycle engines.
According to analyst Baker, one of Polaris’ competitive strengths is its distribution network, which is as strong “as you’re going to find in the industry”; that network, Baker says, is an increasing barrier to entry, or at least a differentiator from its competitors. Polaris has 1,650 independent dealers in North America, as well as 15 subsidiaries and 80 distributors in more than 100 countries outside North America. Baird analyst Kennison describes its success among dealers as being “pretty simple—the dealers like to sell products that sell. Polaris has been the market leader in innovation in many categories, and they’re creating products that people truly crave.” Polaris, he adds, likes to keep dealer inventory lean, which means dealers can make a lower investment. The powersports industry “has gone through a deep cyclical downturn,” Kennison says. “Polaris has been able to buck that trend through creating innovative products. If you don’t have fresh innovative products, then you’re struggling.”
Shawn Kral, sales manager for Mies Outland, a dealership in Watkins, Minnesota, that is one of the country’s largest Polaris retailers, touts Polaris’ sales support as well as its products. Polaris, he says, has marketing teams that work with dealers on various aspects of marketing, whether print, Internet, or show floor—“different ways to reach and touch people. They’re trying to use cutting-edge [marketing] to keep their dealership network on top of everyone else’s.”
However strong Polaris may be in North America, the company has made it clear over the past decade that it also wants to ride deeper into territories outside the United States.
What a CEO Can’t Do
Analyst Baker notes that the international market is “a critical focus” of Wine, who came to Polaris after careers at United Technologies and Danaher—companies with strong global presences. “He sees [an international presence] as a trait of a really strong business,” Baker says.
Wine says he’d like to see Polaris’ sales from outside the United States reach 30 to 33 percent of its total; when he joined the company, it had 15 percent of our sales outside North America, he says. Since then, Polaris has added $150 million in sales in Latin America and overseas. It has offices in Brazil and China, and is working with a strategic partner in India; in 2010, it opened a European headquarters in Switzerland. In 2010, Polaris acquired Swissauto Powersports, an engine-design firm. (Swissauto’s automotive business wasn’t part of the acquisition.) Swissauto Powersports’ focus will be designing products for the European market.
The return on all of this overseas investment? “We’ve gone from 15 percent to 14 percent,” Wine says wryly. In the short term, he worries that the unsettled European economy will continue to dampen growth across the Atlantic.
Still, he does expect a bigger payoff in the future. If it comes, it could result in a far-flung company. Earlier this year, Wine traveled to all of Polaris’ facilities, including Monterrey, to discuss 2012 and offer a preview of 2013. It’s a way of maintaining an esprit de corps among Polaris’ many outposts. “I want to make sure that no matter how big we get, we stay a small company,” he says. That might be more difficult when managing multiple overseas manufacturing operations, particularly in Asia, where doing business can be notoriously complex.
One of Wine’s greatest targets of contempt is red tape. “I detest bureaucracy,” he says. Certainly, few business executives like it. But Wine suggests that it has a particularly dangerous effect on a company like Polaris, built on lean manufacturing and speed to market.
“Almost by definition, [bureaucracy] involves waste, cost, and slowness,” Wine says “And the last time I checked, waste, cost, and slowness are among the worst three things that can happen to a company. If we want to let the competition catch us, let us be wasteful in how we spend our money and our time. Let us be slow in how we bring new products to market.”
Polaris’ employees, he says, not only share in the credit of the company’s growth, but also in its profits once a year—and as a whole make up the largest ownership group in the company via an employee stock option program. “If I can keep it free for them to innovate and drive success faster, then I’m doing my job,” Wine says. But if he allows “the morass of bureaucracy” to gum up his people’s wheels, “then I’ve failed miserably.”
Polaris can still make moves that don’t quite pay off and be a winner. But to slow down an innovative leader? That would be trading Victory for defeat.
—By Gene Rebeck, Twin Cities Business’ northern Minnesota correspondent.
No Easy Ride
It took Polaris eight years to make its Victory motorcycle profitable. How long will it take for Indian?
By fall, Polaris will launch its new motorcycle line, which will bear a famous old name—Indian. It’s a famous name, however, that hasn’t been around since 1953, when Indian went bankrupt, leaving the road clear for Harley-Davidson to rule the U.S. heavyweight cruiser market. Harleys now make up about 80 percent of that market in the United States.
Does the new Indian stand a chance? It won’t be a smooth path. Others have tried to resurrect the brand since the 1970s. The most recent attempt, in North Carolina, financed by British private-equity firm Stellican, didn’t take in the market; Stellican sold the brand in 2011 to Polaris, which is manufacturing the new version at its Spirit Lake, Iowa, facility. Another Minnesota attempt to launch a competitor to Harley, Excelsior-Henderson, even had state backing and an IPO, but couldn’t resurrect the old brand.
Polaris, of course, is no startup. It already has its Victory line of bikes, which the company introduced in 1998. But even with its marketing skills and distribution panache, Victory didn’t become profitable until 2006, eight years after the division began.
Tim Buche, CEO of the California-based Motorcycle Industry Council, says that Polaris has done “a remarkable job” with Victory. But, he adds, “I think you can also look at the timeframe that it took to get Victory to where it is.” The challenge Victory had to meet: Creating not only a brand-new motorcycle, but building a brand—not easy in a market where brand loyalty is rock-solid. Even with Polaris’ market knowledge, distribution prowess, and financial strength, “it was still difficult to create a brand while creating the motorcycle and finding the market,” Buche says.
After struggling unprofitably with the brand for a number of years, CEO Scott Wine says Polaris did a “deep dive” into the market, and discovered that the price of a Victory bike was “a bit too high.” Also, slow-selling bikes were cluttering up inventory and forcing discounting. It “cost us a lot of money,” Wine notes. “We cleaned up the business, if you will. We changed our marketing strategy. We put a new leader in place—Steve Menneto [vice-president Motorcycles] is one of our brightest young leaders.” Polaris concluded that Victory’s market is what’s termed “performance enthusiasts,” which Wine describes as riders who couldn’t “care less about the brand, but they really want a high-performance bike.” Victory put more focus on that customer and beefed up its marketing. Polaris revised the logo and added a tough-guy spokesman—actor R. Lee Ermey, best known for his role as Gunny in the 1987 movie Full Metal Jacket. What’s more, taking on Harley was no longer the objective. “With Victory,” says Wine, “we’re carving out our own niche.”
In making the deep dive, Wine says, Polaris found that Victory wasn’t really competing in the heavyweight cruiser market. “We had two choices at that point. We could either make a huge investment in the Victory brand and reposition it, or we could buy Indian.”
The new Indian bikes will be completely different from Victory’s. But can they take on mighty Harley? “Harley is formidable—no question, the great American business success story,” Buche says. It will help that Polaris is bringing back a legendary American brand. But it’s one that hasn’t been around since cars on the road included Packards and Studebakers.
Buche thinks Polaris has a shot, particularly compared to other companies that tried to bring back Indian and failed. The heavyweight cruiser market, he notes, is “the largest, most profitable segment” in American motorcycles. “I think Indian will be a viable alternative,” Buche says, adding that the excitement Indian brings to the marketplace “intrigues brand-new riders, who are vital to the industry.”
Asked whether he sees U.S. sales of off-road vehicles and snowmobiles growing at a slower rate than motorcycles, Wine answers thoughtfully, “I think that’s true.”
Harley-Davidson has had no competition for 60 years, Wine says. “We’re going to bring competition back to the industry.” Polaris is going whole hog, with a retro-looking logo, heavy marketing, high-level design, and a distribution system that Excelsior-Henderson and previous incarnations of the Indian couldn’t match. Beyond that, Wine seems both fired up and philosophical. Once the bike hits the asphalt, “we’re going to see what happens.”