A Trade War Could Pick Off Weaker Firms. Look at Harley-Davidson
Posted June 26, 2018 9:00 p.m. EDT
The strength of the U.S. economy, the theory goes, gives it an edge in a trade war.
Harley-Davidson shows how this assumption might break down in practice.
The motorcycle maker said this week it would bear the cost of tariffs the European Union imposed in response to the ones Trump administration placed on steel and aluminum. And when Harley-Davidson said it would shift some production out of the United States to avoid Europe’s tariffs, President Donald Trump was quick to criticize the company.
It’s the sort of situation any company would want to avoid, but these challenges were the last thing Harley-Davidson, which has grappled with years of falling sales, needed. And it demonstrates how trade frictions could end up having an outsize effect on any other U.S. company that was struggling before hostilities broke out.
Harley-Davidson is vulnerable on several fronts. The Trump administration’s metals tariffs are pushing up its costs. The EU’s tariffs on American motorcycles, raised in retaliation last week to 31 percent from 6 percent, added on average $2,200 to the cost of a Harley sold in the bloc, the company said. For now, Harley-Davidson said it was going to bear the additional expense itself, which could cost the company as much as $100 million a year.
As if that were not enough, the company may now lose sales among supporters of Trump. The president did not hold back in his criticism of the company and even suggested that prospective buyers might now back away. “Customers are already very angry at them,” Trump wrote on Twitter.
If Trump’s comments do drive down demand, it would only make Harley-Davidson’s long-standing problems worse.
As tastes change, fewer people are buying Harley’s motorcycles — a trend that shows few signs of changing. Last year, Harley-Davidson sold 148,000 motorcycles in the United States, by far its biggest market, down more than 8 percent from 162,000 in 2016. To make up for falling domestic sales, the company has been trying to bolster its international business, with some success in recent years. But last year, overseas sales came in below the company’s expectations, falling 4 percent from 2016. And those sales struggles have weighed on Harley’s workforce. The company expected to shed 800 jobs with the closure of a plant in Kansas City, Missouri, while adding 450 at its main plant in York, Pennsylvania.
Harley’s weakness is reflected in its stock price. With a quintessentially American brand and an important niche in the U.S. manufacturing sector, Harley might have been expected to participate in the stock market rally that took place after Trump was elected. But the company’s stock is down 28 percent since then, compared with a 27 percent gain for the S&P 500.
Harley-Davidson may, of course, be citing the tariffs as a reason for moving more operations overseas when it was already planning to do so. Its foreign operations are still small compared with those in the United States, but they are a crucial part of its efforts to grow. Well before the EU tariffs came into effect, Harley-Davidson was investing significantly overseas, most recently a plant in Thailand expected to begin production this year.
The buoyant stock market, rosy economic statistics and the earnings kick from the recent tax cuts all might give the impression that U.S. companies can power through a trade war. But Harley shows why that might not always be the case.