Harley-Davidson is an ongoing story in the news, not because it’s a huge company, rather it’s an American icon. An icon that President Donald Trump used to spread his message about keeping American manufacturing here.
Then came an announcement that normally wouldn’t receive much attention outside of the motorcyclist industry and its loyal biker cadre. Harley-Davidson, the big HD, was going to move some of its production to somewhere in the EU, due to increasing costs for motorcycle imports into those markets. The reason announced, increasing costs, due to increasing tariffs.
Paul Krugman is an American economist who is currently Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for The New York Times. A regular contributor to the NYT of economic opinions, most especially, anti-Trump. He’s almost gloating with glee to add this latest on how he thinks the disastrous Trump economic policies are beginning to be exposed in the latest announcement by Harley-Davidson and the subsequent comments of displeasure by Donald Trump.
Paul Krugman – public domain image
His column, Trump Versus the Hog-maker, excoriates the increasing pressure the Trump administration has placed on international trade, which for years hasn’t been the “open market”, many had supposed.
I prefer you click on the above link and read his post before you continue with mine. I’m going to refer to it and other announcements which I will provide in links.
If you’re not familiar with Donald Trump’s reaction to the Harley-Davidson offshore production announcement, click in this link to read as background.
Let me start with a few givens…
- I’m not an economist.
- I don’t know how the long-term effects of the Trump influenced economic decisions will play out over time.
- I don’t think Paul Krugman, or any other economist knows how they will work out, either.
- His June 28th opinion column is less about economics and more about politics.
- By the end of this post, I’m more interested in you thinking about what’s being told to you, rather than just accepting it, because someone with huge public recognition says it to be so.
Let’s also start with a few pragmatic assumptions.
- Paul Krugman doesn’t want to see the economy fail to prove his point, right?
- Donald Trump doesn’t demand fair trade policies just because he thinks it will only benefit himself, right?
- Harley-Davidson made these offshore production decisions before Donald Trump made any tariff proclamations?
Wait a minute? What was that last assumption?
Let’s examine what has taken place by rewinding to the past HD proclamations, and what are the industry trends.
— Quoted from CNN article June 26, 2018 – Trump vs. Harley-Davidson: What’s Really Going On? —
Harley says moving more production overseas is its “only sustainable option” in the wake of the growing trade war.
So what’s really going on?
Americans are buying fewer motorcycles. People outside the United States are buying more, and Harley wants to build bikes closer to its international customers.
Last quarter, Harley’s sales in the United States fell 12%, but they grew 6.8% in Europe, the Middle East, and Africa. In Latin America, sales grew 7%.
In 2017, Harley-Davidson said they would close their plant operations in Kansas City, and expand manufacturing in Thailand. That was long before Tariffs were announced. (CNN June 26, 2018)
Harley-Davidson is a publicly traded company and like any such company answers to stock holders. During this downward cycle, they’ve attempted to put the best spin on a market reality, their primary buyer base is getting older. Younger motorcycle buyers in the USA aren’t as large a percentage of the population as they were when looking back over 40 years. Any quick look at who is buying what kind of transportation in the USA will find, younger buyers have made a clear choice for trucks and cars, but not a large number of motorcycles. That’s different in Asia, where you can find motorcycles are far cheaper to buy and operate, than cars.
During the low-cost & easy to get a loan for luxury items prior to 2008, many an aspiring motorcyclist were caught up with the cache of the name, HD. Harley is also competing with their 10-year-old, like new bikes for market share. It’s now common to find 10-15 year old Harley’s with less than 10,000 miles, many less than 5,000 on the odometer.
The problem for Harley-Davidson, like other companies when it comes time to explain things, they opt for any opportunity to get out from under adverse stockholder scrutiny. Harley-Davidson made the decision several years ago to move some of their production offshore. RideApart November 14, 2013 .
Harley-Davidson worldwide retail motorcycle sales were down 6.7 percent in 2017 compared to 2016. U.S. retail sales decreased 8.5 percent and international retail sales were down 3.9 percent.
During 2016, the company reported its best-ever retail sales results in Asia Pacific and EMEA. The company added 40 new dealer points internationally. (Europe-MiddleEast-Africa). PRN
“Our actions to address the current environment through disciplined supply and cost management position us well as we drive to achieve our long-term objectives to build the next generation of Harley-Davidson riders globally,” said Matt Levatich, president and chief executive officer, Harley-Davidson, Inc. “We finished 2017 with over 32,000 more Harley-Davidson riders in the U.S. than one year ago, and we delivered another year of strong cash generation and cash returns to our shareholders.”
Corporate Tax Rate
For 2017, Harley-Davidson’s effective tax rate was 39.6 percent compared to 32.4 percent in the prior year. The increased tax rate was largely due to the impact of the write-down of deferred tax assets related to the 2017 Tax Cuts and Jobs Act.
The Company expects its 2018 full-year effective tax rate to be approximately 23.5 to 25.0 percent, down considerably behind the expected benefit of the new tax legislation. HD 2017 Investor Relations
If you examine the individual components of a HD motorcycle, you will find some of the American brand name is first made overseas, then assembled in the US to claim it as an American made product. Wheel, brake, and electrical components are made outside of the US. It’s nearly impossible to determine the exact percentage of parts made in America. There are several thousand “manufacturing customers” of HD.
Here’s what can be easily found.
Menominee Falls, Wisconsin – Powertrain
Tomahawk, Wisconsin – Windshields, composite plastic parts
Kansas City, Missouri – Assembly, Powertrain <— Closed
York, Pennsylvania – Fabrication, Paint, Final Assembly
Manaus, Brazil – Assembles models sold in Brazil
Bawal, India – Manufacture of Street models for India, Italy, Spain, and Portugal
History is littered with defunct motorcycle companies, as well as resurrected ones. Many of the resurrected ones died again during the last recession.
According to a Harley Davidson 2013 annual report:
Six in 10 customers are from outside the United States.
Two out of every three new dealerships are in “emerging markets”.
3.5 billion people live in cities globally
50% of the population is under 30
The strategy is to grow outside the US faster than growing inside the US
The strategy inside the US is to grow the ‘outreach segment,’ which includes women, young adults 18-34, African Americans, and Hispanics
In 2013, this outreach segment grew twice as fast as ‘core’ customers.
Their newest bikes, the Street 500 and Street 750, were engineered with the young urban rider in mind – smaller, more efficient bikes.
Harley-Davidson has committed to manufacture and assemble the motorcycles used in the United States. But companies aren’t blind to their ability to export motorcycles to the world at large, or to recognize other segments of their market, nor should they be. To expand in these new areas and markets, in many cases, they’ve opened facilities overseas or outside US borders. The flexibility to export using foreign facilities certainly doesn’t seem like a bad thing for an American company as it grows.
Analysts are divided about what impact the protectionist measures will have on the broader economy. That’s understandable. We’ve seen the greatest of prognosticators under the “Boffins hat” of an Economist predict the opposite of what does happen.