Trade war forces Harley-Davidson to shift production from the US

Thanks to the brewing trade war between the US and its allies, numerous automobile companies having customers around the globe are left in the lurch. Premium motorcycle maker Harley-Davidson (HOG) announced today that it is shifting its bike production from the US to other global plants to avoid the tariffs imposed by the European Union (EU).

The decision was taken by the iconic bike maker after the EU stated last week that it would impose 25% tariff on goods coming from the US. At one stroke, the company’s tariff costs jumped to 31% compared to 6% earlier. Post the production shift announcement, the company’s shares are down 5% as of 12:08 PM ET.

Harley-Davidson, in its filing to the market regulator, added that it is moving production from the US as it feels passing on tariff burden to customers and dealers would impact its sales in the region. The company expects to incur $2,200 more in cost per motorcycle if exported from the US to the EU, which would increase its expenses in the range of $30 million to $45 million for 2018 and $90 million to $100 million for the next 12 months.

The decision makes sense as Europe is an important market for the company. Also, sales at its home market have been dwindling due to its premium pricing. Last year, exports to EU stood at 40,000 units, which make it the second biggest market after US. The company currently has plants in India, Thailand and Brazil and it’s not clear which plant would be producing the additional bikes for the EU region. It could take 9 to 18 months to ramp up production.

Related: Harley-Davidson rides in top gear despite profit decline; beats revenue and earnings estimates

Looming Trade Wars

It all started when the Trump administration imposed tariffs of 25% and 10% on imported steel and aluminum from Mexico, Canada and EU region, which came into effect on June 1, 2018. Retaliating to the US tariffs, EU charged levies on about $3.3 billion worth of US products covering nearly 200 categories, which includes 25% charges on motorcycles, starting June 22. Last Friday, Trump warned that the US may charge 20% tariff on all cars coming from EU region, if the latter doesn’t lift the tariffs.

On Sunday, Trump tweeted that all countries should revoke barriers imposed on goods coming from the US, or prepare to face additional charges from the US. He has categorically said, “Trade must be fair and no longer a one way street!” Economists are worried that the ongoing tariff battles will increase costs, where companies are forced either to pass it on to consumers or bear it themselves.

With just two weeks to go for the next earnings season to begin, analysts and investors would be keeping a close eye on the tariff related impacts to companies. Harley-Davidson plans to provide more details on tariff impacts in the upcoming earnings call scheduled on July 24th. Shares of the company are down nearly 18% this year and have lost nearly 25% in the past 12 months.