You don't have to be an economist or a chief financial officer to know that if the stuff your company buys is getting more expensive and the products you're trying to sell are getting harder to buy for some of your consumers, you're in a tough place. Welcome to Harley-Davidson's current reality.
Back in March, I wrote about the brewing trade war threatening to hit Harley-Davidson harder than most companies. Those European Union tariffs on motorcycles larger than 500 cc imported from the United States are now reality, enacted in response to U.S. tariffs on steel and aluminum.
Harley is getting squeezed from both sides. First, it buys steel and, as the company warned earlier this year, tariffs tend to raise prices overall. It's not very easy to pin down movements in the price of steel because unlike gold, for example, there is not a single widely traded futures contract. Instead, there are various futures based on product and region. But the chart below, showing the June futures contract for Midwest domestic hot-rolled coil steel gives a clear idea of the general trend this year.
How much will steel prices hurt Harley-Davidson? One widely cited analysis by Wedbush Securities estimated the impact at $30 million this year. That's not a huge number for a company with $5 billion in annual revenues, but Harley-Davidson has been struggling to remain profitable in recent quarters, so any new cost threatens to shift the bottom line to red.
On the other side, the 25 percent tariff placed on U.S. motorcycles coming into Europe will affect both Indian and Harley-Davidson. For Indian, however, Europe represents a tiny slice of its sales. For Harley-Davidson, the tariff is a direct blow to a key part of the company's strategy. H-D has publicly set a goal of increasing international sales to 50 percent of total motorcycle sales by 2027. As the chart below shows, Harley has made slow but steady progress toward that goal, increasing international shipments by 22.5 percent in the 2010-2017 time period covered by this chart.
Europe accounts for almost 20 percent of Harley-Davidson's motorcycle shipments. In the first quarter of 2018, the EMEA region (Europe, Middle East and Africa) was one of the few growth areas for Harley-Davidson, up 6.8 percent year over year. The company increased its market share in Europe in the 601 cc and up class from 9.1 percent to 10.4 percent year over year.
Harley-Davidson is looking for momentum wherever it can find it, and the positive signs out of Europe could be stamped out quickly if the tariffs remain in effect for long (and I can't even speculate on whether this dispute is going to escalate or be resolved by dropping tariffs on both sides). For a company facing a range of challenges, from unfavorable customer demographics to changing consumer tastes, getting caught in a trade war can't possibly be making life easier for MoCo executives in Milwaukee.