Why Harley-Davidson Isn't Alone in Overseas Shift

It's Called Nearsourcing, and Tariffs Are Just the Latest Reason To Do It

Jun 27, 2018
Finance

SMITH BRAIN TRUST – When Harley-Davidson announced this week it would move some production overseas to weather the increased costs posed by the European Union’s retaliatory tariffs, the announcement was pretty stunning. 

How could the iconic American motorcycle maker, a symbol etched into the American consciousness from films like “Easy Rider,” “Pulp Fiction,” “Terminator 2” and “Every Which Way But Loose,” manufacture anywhere else but the U.S. of A? To some people, the decision seemed almost unpatriotic.

But, the fact is, manufacturing overseas isn’t even new for Harley-Davidson. The Milwaukee-based company, with its most-brilliant ticker symbol HOG, has had manufacturing plants overseas for years. Its factories in Brazil, India and Thailand are part of a global logistics and distribution strategy embraced by multinational companies all around the world.

Its manufacturing plant in India, opened about seven years ago, helps the company serve around that country’s 100 percent tariff on imported motorbikes. A newer factory in Thailand aims to broaden the company reach into Asia to better serve its Southeast Asian fan base, and helps the company avoid a 60 percent import tariff in that country. The company also has an assembly plant in Brazil.

The strategy, commonly referred to as nearsourcing, makes solid business sense from a tariff standpoint. It also reduces logistics costs, shrinks inventory requirements and minimizes lead time for delivering those shiny, two-wheeled hogs.

But Harley’s announcement drew the ire of President Donald Trump, who threatened that the motorcycle maker would be “taxed like never before” if it moves production abroad. 

"A Harley-Davidson should never be built in another country – never! Their employees and customers are already very angry at them. If they move, watch, it will be the beginning of the end – they surrendered, they quit! The Aura will be gone and they will be taxed like never before!" Trump said in a tweet.

Trump also charged that HOG was using the tariff issue as an excuse to justify a manufacturing shift it already had planned. 

Harley has seen some sputtering in motorcycle sales, dropping by 8.5 percent in the U.S. last year, and by 3.9 percent abroad.

The EU raised tariffs on the company’s motorcycles to 31 percent, from the previous 7 percent, hiking the cost of the average bike made in the U.S. and sold in the EU by about $2,200. 

HOG says it won’t move production to Europe as a result of the EU’s tariffs, themselves levied in retaliation against the Trump administration's duties on steel and aluminum. The company would instead assemble bikes aimed at Europe at a plant overseas, likely the one in Thailand, to steer around the tariffs.

Plans to build the Thai factory were announced last year, after Trump withdrew the U.S. from the Trans-Pacific Partnership, a free-trade agreement with 11 other countries, most of them Asian.

“This is just Harley-Davidson deciding, well, ‘It would be cheaper for us rather than try to export from the U.S. with this big tax added on, which might threaten sales, just to manufacture the motorcycles abroad,” says William Longbrake, executive in residence in the finance department at the University of Maryland’s Robert H. Smith School of Business. “It wasn’t inevitable. The decision was triggered by this tariff, which changed the economics for Harley-Davidson.”

With the shift, Longbrake adds, Harley will be able to take advantage of lower labor costs in Thailand, as well. “From HOG's point of view, the business decision is soundly based,” he says. “And, I am sure the company anticipated Trump’s criticism and determined that the financial benefits to moving production offshore would outweigh the reputational consequences in the U.S.” 

Other companies may find similar equations in weighing whether to shuffle some production abroad, he says.

Trade tensions have heightened in recent months between the U.S. and much of the world. And now those tensions are filtering across the corporate map, with Harley-Davidson becoming one of the first to reveal specific repercussions from the tit-for-tat tariffs.

“For now, in terms of trade, this will be the new normal, because there is the larger agenda, in particular its primary agenda which is aimed at China," Longbrake says. "It’s about the theft of intellectual property and ultimately it’s about the economic security of the U.S. vis-a-vis China.”

It’s a high-stakes game, he says, in terms of world influence. “The situation is set up for this to escalate even though it’s in neither country’s best interests for that to happen,” he says.

GET SMITH BRAIN TRUST DELIVERED
TO YOUR INBOX EVERY WEEK

SUBSCRIBE NOW

About the Expert(s)

More In

Accounting

Survive Thanksgiving Travel, With Tips From the Experts

Maryland Smith faculty share their best travel hacks, from traveling early to the best ways to tolerate traffic, to make your holidays easier.

Nov 15, 2018
What To Watch As Pharma Prices Take Center Stage

Pharmaceutical prices are poised to become a central issue for the next Congress, potentially forcing lawmakers to consider at least two factors that coincide with America’s higher-than-average drug prices.

Nov 14, 2018
What the Midterm Election Means for Stocks

The stock market was taking the election in stride, beginning a rally that could extend through next year. Maryland Smith's David Kass explains three reasons why.

Nov 07, 2018