Harley says EU plans still in the works

Company has not made a decision on where to shift production

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Harley-Davidson Inc. officials are still developing plans to address tariffs placed on their motorcycles by the European Union and have not finalized a plan on where to shift production, executives said Tuesday during an earnings call with analysts.

John Olin, Harley-Davidson chief financial officer, said the company is working to mitigate the increased costs of shifting production of the nearly 40,000 motorcycles Harley sells in Europe to international production facilities. He said the effort is more challenging because the company’s business plans did not consider the possibility of moving the work overseas.

“We never contemplated moving our European volume out of the United States,” Olin said.

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He added the company has a “constant dialogue” with those involved in the new tariffs to have them removed.

“We are working with the (Trump) administration. We are working with all governments we can,” Olin said, although he declined to elaborate on those discussions.

Harley announced in June it would shift the production of European motorcycles to overseas facilities to avoid an increase in tariffs on the bikes from 6 percent to 31 percent. The company estimated the tariffs would add $2,200 to the average price of a motorcycle and decided it could not afford to pass that cost along to dealers and customers.

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Matt Levatich

After including only brief mentions of the tariffs in announcing second quarter earnings, Harley executives spoke extensively about the potential business impact during the company’s quarter call with analysts.

“We made the best decision given the circumstances,” said Matt Levatich, Harley president and chief operating officer. “We will continue to make the best business decision for Harley-Davidson.”

The company originally estimated absorbing the higher tariffs could cost up to $45 million this year, but lowered that figure to closer to $35 million after shipping additional motorcycles to Europe ahead of the tariffs being put in place. Retail sales in Europe increased 4.3 percent, but said the demand came from Harley’s new Softail models, not customers trying to buy bikes ahead of the tariffs.

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Harley continued to estimate the tariffs could cost up to $100 million annually beginning in 2019, but Olin said the company hopes to reduce those costs over time.

“We are doing everything at the company to absorb the costs that we can,” Olin said. “It is our aim to mitigate those over time …. But this is going to take a lot of work.”

In addition to the European tariffs, Harley estimates new U.S. tariffs on steel and aluminum will increase raw material costs $15 million to $20 million this year. The added costs prompted the company to cut the midpoint guidance for its operating profit from 10 percent to 9.5 percent.

Harley has produced motorcycles internationally since the late 1990s with the opening of a facility in Brazil and later in India. The company is currently expecting to begin production at a facility in Thailand in the fourth quarter of this year. A wheel production facility in Australia is closing as part of an ongoing restructuring plan.

The international facilities – with the exception of Australia – have typically been final assembly facilities aimed at avoiding tariffs in specific markets. The shift in production for Europe has a similar goal.

Levatich said the company would continue to make motorcycles for the U.S. market domestically.

Asked if the company had decided to shift the European production to the new Thailand facility, Olin said the company is looking at all of its options and will share its plans when a decision is made.

Harley’s decision to produce European bikes internationally has drawn sharp criticism from President Donald Trump, who suggested on Twitter that the company was only using tariffs as an excuse and said his administration would work with Harley’s competitors to bring production to the U.S.

“I’ve done so much for you, and then this,” Trump wrote in one tweet. “We won’t forget, and neither will your customers or your now very HAPPY competitors!”

Levatich said the company has done “a lot of consumer research” on the reaction to the decision and has seen “no discernible shift” in sales patterns or favorability toward the Harley brand.

He added many European dealers were proud the company recognized their investment in Harley and said most U.S. dealers “understand the nature of the decision.”

“They see us doing the right thing for our customers, dealers and our business,” Levatich said.

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