President Trump last year praised iconic US motorcycle maker Harley Davidson for its U.S. manufacturing presence and blamed global tariffs for making it “very hard” for the company to do business overseas. Well, in an ironic twist he was right, because on Monday Harley-Davidson announced that it will move the production of motorcycles bound for European countries out of the United States, citing rising costs from European Union tariffs on their products.
The decision comes at a time when Harley's European sales are at their highest relative percentage of total sales since 2011, while domestic sales have been slumping, dragging the stock price of HOG lower.
In an 8K filing on Monday, HOG said that the EU tariffs on motorcycles exported from the U.S. rose from 6% to 31%, which "will result in an incremental cost of approximately $2,200 per average motorcycle exported from the U.S. to the EU." That’s expected to add up to a burden of $90 million to $100 million annually, which Harley-Davidson will absorb rather than pass extra costs on to customers due to "an immediate and lasting detrimental impact to its business in the region."
As a result, motorcycles bound for European countries will now be produced in overseas factories. Harley also said that it’s planning to increase production in international plants over the next 18 months.
In the filing, Harley apologetically explains that "increasing international production to alleviate the EU tariff burden is not the company’s preference, but represents the only sustainable option to make its motorcycles accessible to customers in the EU and maintain a viable business in Europe."
And while HOG says it remains committed to making motorcycles in the U.S., it has no other choice in a market where it sold almost 40,000 bikes last year. Besides its U.S. plants, Harley-Davidson maintains manufacturing facilities in Australia, Brazil, India and Thailand, according to Bloomberg.
Earlier in the month, the EU announced earlier that it would impose retaliatory tariffs on a range of U.S. goods in July, including motorcycles. The measures came in response to Trump’s steep tariffs on imported aluminum and steel from the EU and other key U.S. allies, including Canada and Mexico.
The European Union has enacted tariffs on various U.S.-manufactured products, including Harley-Davidson motorcycles. These tariffs, which became effective June 22, 2018, were imposed in response to the tariffs the U.S. imposed on steel and aluminum exported from the EU to the U.S.
Consequently, EU tariffs on Harley-Davidson motorcycles exported from the U.S. have increased from 6% to 31%. Harley-Davidson expects these tariffs will result in an incremental cost of approximately $2,200 per average motorcycle exported from the U.S. to the EU.
Harley-Davidson believes the tremendous cost increase, if passed onto its dealers and retail customers, would have an immediate and lasting detrimental impact to its business in the region, reducing customer access to Harley-Davidson products and negatively impacting the sustainability of its dealers’ businesses. Therefore, Harley-Davidson will not raise its manufacturer’s suggested retail prices or wholesale prices to its dealers to cover the costs of the retaliatory tariffs. In the near-term, the company will bear the significant impact resulting from these tariffs, and the company estimates the incremental cost for the remainder of 2018 to be approximately $30 to $45 million. On a full-year basis, the company estimates the aggregate annual impact due to the EU tariffs to be approximately $90 to $100 million.
To address the substantial cost of this tariff burden long-term, Harley-Davidson will be implementing a plan to shift production of motorcycles for EU destinations from the U.S. to its international facilities to avoid the tariff burden. Harley-Davidson expects ramping-up production in international plants will require incremental investment and could take at least 9 to 18 months to be fully complete.
Harley-Davidson maintains a strong commitment to U.S.-based manufacturing which is valued by riders globally. Increasing international production to alleviate the EU tariff burden is not the company’s preference, but represents the only sustainable option to make its motorcycles accessible to customers in the EU and maintain a viable business in Europe. Europe is a critical market for Harley-Davidson. In 2017, nearly 40,000 riders bought new Harley-Davidson motorcycles in Europe, and the revenue generated from the EU countries is second only to the U.S.
Harley-Davidson’s purpose is to fulfill dreams of personal freedom for customers who live in the European Union and across the world, and the company remains fully engaged with government officials in both the U.S. and the EU helping to find sustainable solutions to trade issues and rescind all tariffs that restrict free and fair trade.