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Harley-Davidson Is Fighting the Trade Wars on Two Fronts
Increasingly dependent on overseas markets, the motorcycle-maker is taking a hit from tariffs both at home and abroad.
June 25, 2018
MENOMONEE FALLS, Wis.— On the new battleground of the global trade wars, Harley-Davidson Inc. HOG -1.72% is threatened on two fronts.
New U.S. tariffs on steel and aluminum could increase the company’s bill for raw materials by as much as $20 million this year. And as other countries launch retaliatory tariffs, the cost of shipping bikes to Harley’s key overseas markets is expected to increase dramatically.
The company said in a security filing on Monday that tariffs of 31% that the EU enacted last week on its motorcycles would raise the cost of each bike it ships there from the U.S. by about $2,200. Harley said its immediate response will be to start moving production of cycles sold in Europe.
The strategy is expensive—costing as much as $100 million annually—but apparently necessary. America’s collection of motorcycle buyers is thinning out, making buyers abroad more important than ever to the 115-year-old manufacturing icon.
In the U.S., well-heeled Boomers, keen to embrace Harley-Davidson as a status symbol and a ticket to freedom, are aging. The younger set has shown stubbornly low interest in the two-wheeled machines sometimes known as Geezer Gliders.
At this rate, the number of foreign buyers of Harleys will eventually eclipse those in the U.S. Last year, more than 39% of Harley’s sales were outside the U.S. It’s a big reversal for accompany that as recently as 2004 sent four of five motorcycles it sold to American garages.
International markets offer big opportunity, says Harley’s chief operating officer, Michelle Kumbier. But they also offer lower profits, in part because buyers in Europe and Asia tend to opt for smaller bikes and fewer options. This is not a welcome development at a time when operating margins are projected to potentially slip below 10%.
Harley has taken the step before of building factories overseas to steer around tariffs in high-growth markets. Tariffs are already as high as 100% in countries like India and Thailand. So Harley bikes, an iconic American product, are now churned out of plants in India and Brazil. A new facility in Thailand is about to spring to life.
In the U.S., Harley is building for the overseas market as well. A recent tour of the company’s Menomonee Falls, Wisc., powertrain plant showcased a buzzing factory where Milwaukee-Eight Big Twin engines were assembled to be shipped to bike factories in the U.S., or crated for shipment to foreign factories. This operation’s future is dependent on the company’s ability to woo buyers on the other side of the world.
Other factories are falling victim to the declining demand for motorcycles in the U.S. Dave Rogers, a 50-year-old with two children in college, will be losing his job at Harley-Davidson’s Kansas City, Mo., factory, which will soon close its doors.
He joined the company in April 2017 “thinking this is the last job I’m going to have to get.” He expects to find work once Harley cuts him loose, but it is hard to replace the high-paying manufacturing jobs that old unionized producers offer.
Ms. Kumbier said trade wars are squeezing Harley, particularly because the price of steel and aluminum (of which motorcycles are primarily comprised) has spiked due to speculation on the impact of potential tariffs.
The anticipated increase in raw material prices could add as much as $86 to the cost of every Hog shipped in 2018, although executives are looking for ways to mitigate the impact.
Maryam Ahmed Al-Moalem, a Saudi female bike rider, takes her lessons in advanced motorbike training at Harley Davidson training centre in Manama, Bahrain, in March. PHOTO: HAMAD I MOHAMMED/REUTERS
Meanwhile, to boost ridership in the U.S., executives are putting a big focus on training more cyclists, hoping to raise a new crop of riders with motorcycle-ed programs offered at Harley dealerships. And the company plans to launch a battery-powered bike that is easier to ride.
That’s right, an electric Hog. No one said recovery wouldn’t be humbling.
Harley-Davidson has needed to adapt to tough market conditions before. A decade ago, to boost efficiency and margins, the company slimmed down departments, eliminated redundant facilities, added more automation to its plants and set up new systems to add flexible workers. In the 1980s, faced with competition from Japan, the company adopted lean-production techniques and management styles popularized by Toyota.
But the company has also needed a helping hand. In 1983, President Ronald Reagan slapped a tenfold increase in tariffs on imported motorcycles to combat Honda, Kawasaki and other foreign rivals, and compel those companies to build more bikes stateside. The duties lasted about five years, propping up America’s motorcycle sector.
President Donald Trump referenced those protections during his meeting with company executives in early 2017, saying Mr. Reagan “put on large tariffs, and you wouldn’t be talking about Harley-Davidson probably right now if he didn’t do that.” Still, the steel-and-aluminum tariffs that Mr. Trump enacted to further aid American manufacturers could end up crippling one of the main players he intended to help.
Those that live by trade barriers could eventually die by them. Ms. Kumbier says its important to remember the current tit-for-tat is still playing out. “We’re hoping more reasonable minds prevail.”
Harley-Davidson to Shift Production Overseas to Offset EU Tariffs
Motorcycle maker said 31% tariff the EU enacted last week would raise the cost of each bike it ships there from the U.S. by about $2,200
By
Bob Tita
Updated June 25, 2018 6:11 p.m. ET
Harley-Davidson Inc. plans to shift more production overseas to avoid European Union tariffs on its iconic motorcycles, the latest manufacturer to reconfigure operations amid a widening global trade fight.
Harley prizes its made-in-the-USA reputation as central to its appeal to customers all over the world. But the Milwaukee company has opened factories in Brazil, India and Australia to tap international markets and hold down prices as sales falter in the U.S.
That manufacturing footprint outside the U.S. is set to expand. Harley said in a securities filing Monday the 31% tariff the EU enacted last week on its motorcycles would raise the cost of each Hog it ships there from the U.S. by about $2,200. Rather than raise prices, Harley said it would shift production of the motorcycles it sells in the EU outside the U.S. over the next 18 months.
“Expanding international production to alleviate the EU tariff burden is not our preference, but it’s the only sustainable option we have to make motorcycles available and affordable to EU customers,” Harley spokesman Michael Pflughoeft said.
Harley’s shares fell 6% on Monday to $41.57.
President Donald Trump criticized the company’s move. “Surprised that Harley-Davidson, of all companies, would be the first to wave the White Flag,” he wrote in a tweet. “I fought hard for them and ultimately they will not pay tariffs selling into the E.U., which has hurt us badly on trade.” He added: “Taxes just a Harley excuse - be patient!”
The tariffs by the EU, Harley’s second-biggest market after the U.S., are a response to tariffs the Trump administration imposed this spring on steel and aluminum from producers in Europe and elsewhere.
EU officials retaliated by placing tariffs on many U.S. products including those with strong American branding, such as Harleys, Levi’s jeans and Kentucky bourbon. A spokesman for the European Commission, the EU’s executive arm, declined to comment Monday on Harley’s plans.
The White House on Monday defended its trade policy in the wake of Harley’s announcement. “The European Union is attempting to punish U.S. workers with unfair and discriminatory trade policies,” White House press secretary Sarah Sanders said. “President Trump will continue to push for free, fair and reciprocal trade in the hopes that the EU will join us in that.”
The tariffs are a tough blow for Harley, which has struggled to lift sales. Chief Executive Matthew Levatich has made a priority of boosting overseas sales as ridership in the U.S. stalls and the company’s die-hard fans age.
Harley on Monday urged U.S. and EU officials to reach an agreement to rescind their tariffs.
Harley’s international sales rose for the first time in over a year in the company’s first quarter, by 0.2% annually. Harley wants to boost its international business to half of its annual sales volume over the next decade, from about 40% currently.
U.S. sales fell by 12% in the quarter, continuing a downward trend in recent years. Harley has aimed to boost its U.S. customer base by promoting motorcycle-riding classes and trying to recruit more women and minority riders.
Mr. Levatich has said that it can’t price its motorcycles competitively without opening plants abroad to avoid tariffs and take advantage of lower manufacturing costs in some markets.
Harley was already planning to shrink its U.S. manufacturing base. Earlier this year the company said it would close a factory in Kansas City and consolidate production at plants in Milwaukee and York, Pa. The first layoffs at the Kansas City plant are scheduled for August.
Joe Capra, a district representative for the International Association of Machinists union in Kansas City, said Harley’s response to the EU tariffs and the company’s plan for a plant in Thailand confirmed it aims to siphon production from the U.S.
Mr. Pflughoeft, the Harley spokesman, said the company remained committed to making motorcycles in the U.S.—and to expanding its reach abroad. “To do that, we must provide riders greater access to our brand and our products,” he said. “And we have to do that at a competitive retail price.”
Other companies are also navigating hurdles that the tariffs have thrown up for their international supply chains and sales. Luxury German car manufacturer Daimler AGDMLRY -0.18% warned that tariffs China placed on vehicles it makes in the U.S. would hurt revenue and profit from its Alabama factory that makes SUVs.
Cummins Inc., which imports components from its factories in China for further assembly at its U.S. plants, is weighing whether to raise prices to reflect the 25% tariff the U.S. is implementing on those products July 6.
Harley-Davidson said it expects costs related to the tariffs to reach up to $45 million for the rest of 2018 and about $90 million to $100 million annually thereafter.
“This will make their manufacturing less efficient,” said Sharon Zackfia, an analyst for William Blair & Co. “It’s just another headache for Harley.”
George Gatto, a longtime Harley dealer in the Pittsburgh area, had mixed feelings about the plans to shift production abroad. “I am a big proponent of made in U.S.A. and good-paying union jobs,” he said. “People with these jobs are many times the same people who buy and ride Harley-Davidson motorcycles.”
But, he said, faced with steep tariffs in Europe, Harley needs to do whatever it takes to stay competitive.
QUESTIONS:
1. What factors contributed to Harley-Davidson's decision to shift production overseas?
2. How could the increasing global trade tensions impact the supply chains of companies?
3. Do you support the decision of Harley-Davidson to shift production overseas? Explain your point of view.
4. President Donald Trump tweeted that Harley-Davidson was "using EU tariffs as 'an excuse' to shift production overseas" and that its decision to shift production overseas would be the "beginning of the end." Do you support his point of view? Defend your position.
Explanation / Answer
Answer 1. The factors that contributed to Harley-Davidson's decision to shift production overseas are as follows :-
In the current trade wars, the company's cost of shipping bikes to overseas markets is likely to increase significantly. Just as an example, the tariff of 31% enacted by the EU is likely to increase cost of one bike by $2,200.
In addition to this, Harley-Davidson has witnessed gradualy decline in demand for its bikes in the United States as compared to sales outside the US. Therefore, the factor of tariffs increasing cost coupled with relatively depressing sales in the US has translated into this decision. Just to put things into perspective, the company had 39% sales in 2017 outside the US as compared to 2004 when four of five motorcycles the company sold was to American garages.
Speaking of tarrifs, countries like India and Thailand already have 100% tariff and Harley-Davidson has shifted production in these countries to reduce per unit cost for the customer. It is also worth mentioning that US tariff on steel and aluminum is likely to increase raw material cost by $20 million and that's another reason that supports the company's view to shift production.
Answer 2. The increasing global trade tensions impact the supply chains of companies in the following ways -:
The most important point to remember here is that we are living in a globally synchronized enviornment where a product might be assembled in one country, but the raw material and components are sourced globally.
Just as an example, Cummins imports components from its factories in China to assemble at US plants. The company is now considering increase in prices for the 25% tariff the U.S. is implementing on these products.
An increase in end product price would possible translate into decline in sales. Therefore, the global supply chain, which served as an advantage, becomes a disadvantage.
With several compaanies having production facilities globally, the impact is far reaching as plants constructed overseas have been at significant cost and even with rising components cost, the companies are unlikely to close down plants.
Similar to Cummins, Luxury German car manufacturer Daimler has also warned that tarrifs placed by China on vehicles made in US would negatively impact revenues.
Answer 3. I support the decision by Harley-Davidson to shift production overseas. The most important factor that I would consider is the fact that the company's sales have been increasing globally and US sales have been on a downtrend.
While US still contributes to a bigger chunk of the sales, the company's plans have to be forward looking. As emerging markets grow and per capita income increases, there is likely to be significant demand coming from India and China, which is home to more than 2.5 billion people.
Additionally, considering the EU (the company's second biggest market after the US), the company is likely to be hit by tariffs and that would make the end product less competitive in terms of pricing. It therefore makes sense to shift production and remain competitive.
Answer 4. I would not support the point of view of Donald Trump. The key point is that Harley-Davidson is making a business decision that's based on facts related to its sales in the US and potential increase in cost due to raw material and tariff impact. Any business would not like to see it's competitiveness decline on a global scale.
It is also important to note that US remains a critical market for Harley-Davidson. The company has been focusing on training more cyclist and renew the demand for bikes within the US. Therefore, shifting production abroad to save cost and competitiveness cetainly does not imply that Harley-Davidson is completely shutting out from the US.
However, trade wars are negative for businesses and the corporate sector will try to figure out a way to escape the negatives of trade war. Harley-Davidson is doing just that.
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