Harley-Davidson Inc. received regulatory approval during the second quarter to ship the majority of its motorcycles for Europe from a new facility in Thailand, allowing it to avoid a higher tariff levied in retaliation for President Donald Trump’s tariffs on steel and aluminum.
Those tariffs are currently costing the company around $9 million per month. The initial approval covers Softail and Street models, but company executives expect approval for nearly all touring models in the near future.
The approval, however, came later than the Milwaukee-based company expected, prompting it to push back plans to cut inventory in Europe and leading to lower than expected shipments for the remainder of the year.
Harley now expects to ship 212,000 to 217,000 motorcycles in 2019, down 5,000 from its previous guidance. The company also cut its operating margin guidance from 8% to 9% to 6% to 7%, citing a delay in being able to sell lower tariff motorcycles, idle manufacturing operations in Thailand and costs from pursuing contingencies for a potential denial of the company’s plan.
Shipments are already down 6.5% for the first six months of the year compared to 2018 and decreased 5.3% in the second quarter.
Harley reported motorcycle-related revenue of $1.43 billion during the quarter, down 6% from last year. Financial services revenue did increase 5.6% to $198.6 million. Net income for the quarter fell from $242.3 million last year to $195.6 million this year and earnings dropped from $1.45 to 1.23 per diluted share.
Retail sales of Harley-Davidson motorcycles decreased 8.4% globally, including 8% in the U.S. and 14.4% in Europe.
“We’re seeing some light, but key developed markets remain troubled,” said Matt Levatich, chief executive officer of Harley-Davidson.
John Olin, chief financial officer at Harley, said European sales were down as the company lapped strong performance of Softail motorcycles last year and dealt with the impact of a recall of Street motorcycle models.
In addition to the weakness in Europe, Harley had planned to begin producing motorcycles from Thailand to Europe at the start of the second quarter, which would have cut the tariff on the bikes from 31% down to 6%.
The EU did not approve the Thai produced bikes at a lower tariff until a few weeks ago, delaying the start of production. Olin said the company now expects to begin production in October. It will take motorcycles about two months to reach Harley’s European distribution center and another few months to work through the company’s inventory, meaning Harley won’t see the benefit of a lower tariff until the second quarter of 2020.
“The whole tariffs situation has been complicated from day one and this certainly further complicates it,” Olin said.
Harley estimated last year that the tariffs would cost around $2,200 per motorcycle but opted against increasing prices in order to protect dealers from a potential drop in sales.
“We’re weathering softness this year, but we expect Europe to be an engine of growth for the company,” Levatich said.
He added the company is not concerned European customers will turn away from the brand because the motorcycles are assembled outside the U.S., noting the company has already been building Street models in India.