Harley-Davidson Is Hurt by Trade Laws It Once Championed

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There are a lot of good reasons for Harley-Davidson (NYSE: HOG) to open up an assembly plant in Thailand, and few, mostly jingoistic, ones against it, but the irony is that the quintessential American motorcycle maker is going abroad because it is being punished by the same sort of trade rules it once championed.

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Where once it lobbied for -- and obtained -- draconian tariffs on foreign rivals to limit their ability to compete in the marketplace, Harley-Davidson is being hurt by similarly restrictive trade laws in Asia. By opening up a new plant there, the big bike maker will be able to skirt the rules and compete more effectively.

Trade for me but not for thee

In 1983, President Ronald Reagan imposed for the first time ever strict trade rules that benefited a single company. Harley-Davidson had become the last man standing in the U.S. motorcycle market, but even as the sole American manufacturer left, it was struggling financially.

Like today, the motorcycle market was in the midst of a downturn that affected all players, Harley as well as its vaunted Japanese competition. But Harley chose protectionism to beat its rivals and won from Reagan tariffs that soared as high as 49.4% in the first year with scheduled declines each year thereafter until their removal after five years. (Harley completed its turnaround early and had the tariffs scrapped ahead of schedule.)

In Thailand, Harley-Davidson faces tariffs of 60% on its imported motorcycles (cars face rates of 80%) that put its bikes at a competitive disadvantage on retail pricing. By opening a facility there that assembles bikes from U.S.-made parts, it will be able to get around those restrictive tariffs just like it does in India, which imposes a 100% tariff on motorcycle imports. (Harley also has an assembly plant in Brazil it opened in 1999 to take advantage of the country's free trade zone.)

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That's why making this move into Thailand makes a lot of sense, both practically and financially. By being located there, Harley-Davidson will have access not only to the Thai market but also the markets of the 10 countries that comprise the Association of Southeast Asian Nations (ASEAN). Moreover, it puts Harley in the position of having its bikes closer to China, a huge, albeit weakening, market.

According to industry analysts at MarkLines, the Asian motorcycle market remains largely robust, though there have been pockets of weakness, with China being one of those contracting. Sales fell 12% in 2016 to under 8 million units, continuing their decline from the year before. Conversely, India is strong, with sales growing nearly 10% last year and expected to gain almost 8% this year. Indonesia is expected to rebound in 2017 and Thailand is predicted to grow almost 3%. A Harley assembly plant in the region will be better able to target these markets.

Trading freedom for security

However, the United Steelworkers union has complained that the bike maker is shipping American jobs overseas, but as Harley notes, because the facility will be using American-made parts, it will actually keep U.S. jobs intact. Similarly, others pointed to the paradox of Harley opening a plant in a foreign market when it was lauded by President Donald Trump for keeping jobs in America.

Along those same lines, the president's decision to pull out of the Trans-Pacific Partnership trade agreement was also criticized, because it would purportedly help companies avoid high tariffs like those imposed by Thailand. But such arguments ignore the fact that Thailand itself isn't a signatory to the pact, so there might have been no benefit regardless, though it would have avoided tariffs in other countries.

Bilateral agreements are probably better as a matter of policy, which is what groups in Thailand are advocating, and by locating its plant in Thailand, Harley-Davidson will bypass the tariffs in other countries anyway.

The Asia-Pacific market is Harley's third largest, and it sold almost 32,900 bikes there last year, or 12% of the total. Harley noted that it had its best-ever retail sales there in 2016, but in the first quarter it was the worst-performing region, with sales tumbling more than 9%. And when you exclude Japan, the results were even worse.

If it wants to be able to compete and grow once more, Harley is almost required to build its bikes overseas. The greater irony, though, is that Harley-Davidson is being forced to construct this plant, and possibly earn the enmity of its unions, because of the same types of laws it once had imposed on its own competition.

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