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The Trouble with Tariffs, Part 3

The Trouble with Tariffs, Part 3

August 15, 2018

In the first two columns in this series, Ian Heller, MDM’s President & COO, wrote that tariffs are taxes that have pushed Harley-Davidson into making products overseas that are destined for the European market. In the final column on this topic, Heller explains the costs distributors pay for tariffs and what Harley-Davidson can do about its difficult dilemma.

Costs to Distributors

The issue of tariffs affects many industries; motorcycles are just an example. Tariffs have real costs for distributors:

  • Higher costs for imported goods for resale: Imports make up a significant portion of many distributors’ purchases. When the U.S. imposes import tariffs, distributors’ costs go up proportionally, forcing them to either cut profit margins or lose sales through price increases.
  • Slower sales growth to U.S.-based manufacturing plants: Since tariffs cause companies to pay more for imported raw materials and components, costs go up and they will likely raise prices. This hurts their sales and they will buy less from distributors.
  • Lost sales due to production that is moved overseas: Many companies that own plants in the U.S. will do what Harley and Indian are doing – move some production overseas. This will reduce purchases from distributors.
  • Slower sales growth in non-manufacturing sectors, like construction: Steel costs are at their highest levels in years, which raises construction costs. Distributors that sell into the construction industry will see slower sales growth if construction slows.
  • Missed opportunities with foreign companies that decide not to manufacture in the U.S: Fewer foreign manufacturers will set up production in the U.S. as tariffs make raw materials and components more expensive. This will mean slower growth in the long run for many U.S. distributors. 

There are benefits to tariffs as well. As foreign goods become more expensive, demand for some U.S.-made goods increases. This drives more sales for the distributors that support these plants. However, these manufacturers often react to the tariff-reduced competition by raising prices, contributing to inflation.

Perspective on Tariffs

On Aug. 13, Fox Business Network’s Neil Cavuto interviewed Dan Mitchell, chairman of the Center for Freedom and Prosperity.

Mitchell said, “The problem is Trump’s tariffs are making it expensive for Harley-Davidson to build motorcycles in the U.S. Trump should be looking in the mirror instead of blaming the company.”

He added, “For Trump to now go after the company, potentially damage them in the long run to the benefit of foreign companies doesn’t make sense at all.”

Mitchell gave credit to the president for reducing regulations and lowering corporate taxes. “But,” he added, “[Trump is] taking away with his left hand what he did good with the right hand by doing this protectionism.”

Mitchell also added that continued heavy-handed actions in trade relations could threaten the role of the dollar as the world’s reserve currency. He says this would add enormous costs to U.S. companies and greatly increase the Federal Government’s debt service costs.

What Should Harley-Davidson Do?

Harley-Davidson is not doing a good job making its case. Most people, including motorcyclists, do not participate in earnings calls. They aren’t reading investor relations press releases. They are, however, listening to the president’s tweets and speeches. He is winning them over while the company does a poor job explaining its predicament and the rationale behind its decisions.

Harley-Davidson needs to use social media and other channels to communicate a simple message:

  • New tariffs from the U.S. and EU cost it $100 million per year
  • That’s about 20% of its entire annual profits
  • Lower tariffs mean more manufacturing in the U.S. – higher tariffs mean the opposite

This should be communicated not by the CEO but rather by either Harley-Davidson factory workers or by spokespeople who ride the company’s motorcycles. This won’t win over all of its detractors but will have a positive effect and give talking points to those who currently have no line of thinking other than that coming from the Trump administration.

The company can make this argument about tariffs and not criticize the president. But staying silent means they have no influence over the narrative and that is a big mistake.

The 2018 Sturgis Motorcycle Rally in South Dakota just ended. It’s the largest motorcycle rally in the world, drawing up to 700,000 riders, most of them riding Harleys. There are a couple of interesting reports from this year’s rally:

  1. Some riders are supporting President Trump by wearing long sleeves to cover up their Harley tattoos.
  2. There were t-shirts for sale at the rally from an organization called Bikers for Trump. They’re made in Haiti. The U.S.-made t-shirts are “too expensive,” according to Chris Cox, president of the group. Cox is choosing to maximize profits, which is rational, capitalistic behavior. It makes no sense for his organization to support a boycott of Harley-Davidson for choosing to do the same thing.

In my opinion, Harley-Davidson’s leadership is making rational decisions in a tough climate.  I’m happy to hear other points of view. I invite your comments below or by email. But please keep it professional. You can reach me at ian@mdm.com.

© 2019 Gale Media, Inc.

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