Why Harley-Davidson is building a factory in Thailand

There’s a lot going on in Harley-Davidson world, and some of it may have escaped your attention.

While it’s not always the best practice to focus on one company as the bellwether of how an industry is doing, Harley-Davidson is such an iconic American brand that it does serve as a beacon of sorts for not just American industry, but the overall motorcycle industry as well.

We’re constantly bombarded with “America First” and “Make America Great Again” from the Trump administration, but as recent moves from Harley-Davidson show, manufacturing and business are far more complex than slogans can account for. Capitalism is, of course, built up and torn down at the altar of the Market, and what the Market giveth the Market can taketh – often in one quarter.

harley-thailand-fullOn 23 May 2017, The New York Times broke the story that Harley-Davidson is establishing a factory in Thailand. HD officials say the purpose of the factory is to build motorcycles for Asian and other overseas markets, and that the motorcycles will not be brought into the United States.

This move has been roundly denounced by union officials, such as:

  • Robert Martinez Jr., president of the International Association of Machinist and Aerospace Workers: “It’s a slap in the face to the U.S. workers who built an American icon.”
  • Press Release from the United Steelworkers: “[Harley’s] decision to offshore production is a slap in the face to the American worker and hundreds of thousands of Harley riders across the country.”

Indeed, in a lot of places, Harley-Davidson IS America. Harley has spent decades building its image and carefully crafting the perception that riding a Harley motorcycle is part of a lifestyle worth achieving. To a certain extent, all the motorcycle manufacturers do this, but none perhaps so successfully as Harley-Davidson.

What the critics of this Thai factory are missing are two incredibly important aspects of the motorcycle industry.

Displacement

MY17 107 Engine. Milwaukee Eight.There is a common adage among motorcycle riders that there is “no replacement for displacement,” meaning that the bigger a motorcycle’s engine, the better the motorcycle is. This is not a sentiment shared by the majority of the population of the world, and certainly not in countries where gasoline is more expensive than Americans can possibly imagine.

For example, the average price of a gallon of gasoline in the USA on 19 April 2017 was $2.57 a gallon. In Thailand, it was $3.72; in India, $4.32. The highest average price in the Bloomberg article used as a reference was $7.23 in Hong Kong; the lowest was $0.91 in Saudi Arabia.

The average gas price isn’t enough to form a solid picture of the real cost, however. In the USA, the average worker enjoys a daily income of nearly $163, while in Thailand, the average worker’s daily income is just over $17. That difference is critical – no matter the price difference in gasoline between the USA and Thailand, gas is simply more affordable in one country than the other.

What this means is that where the rubber meets the road, the American motorcycle rider simply doesn’t have to care about fuel efficiency as much as the Thai rider does. That $3.72 the Thai rider spends on a gallon of gasoline has to last him (or her) much longer than the $2.57 the American rider spent.

As a result of this need for extreme fuel efficiency in nearly every country that isn’t the USA, large-displacement motorcycles are a luxury item. For example, in 2014 Americans bought 466,000 motorcycles of all brands. In the same year, TVS Motor in India sold 784,000 units. Neither of them even holds a candle to Honda, however, which sold over 15 million units in 2013, most of them (13 million) in Asia. Even with 15 million units sold, motorcycles are only Honda’s THIRD biggest source of revenue!

The majority of these motorcycles are vehicles that American riders wouldn’t even identify as such, calling them mopeds, scooters or even just toys. Motorcycles with 50cc engines dominate foreign markets – and in the USA, the average walk-behind lawn mower has a 150cc engine! In every other place on Earth besides the United States, most motorcycles come in under 300cc, and many of those are well under even that mark.

In the long run, the motorcycles Harley-Davidson makes are only hugely popular in the United States, and they’re losing market share on this continent, primarily to Indian Motorcycles (manufactured by Polaris Industries).

Putting factories in other countries gives Harley-Davidson access to people and companies who have been building smaller displacement motorcycles for decades, and it won’t be long before we see Harley’s Street 500 being built in overseas factories. Harley may well start making motorcycles smaller than that as well.

Taxes

Income taxThe simple matter of import taxes (tariffs) is the other aspect of why Harley-Davidson is looking to build bikes in Thailand.

Importing a 125cc motorcycle into Thailand carries an immediate 60 percent upcharge. Add to that another 5 percent for the excise tax, 7 percent for the value-added tax (VAT) and 10 percent for the interior tax, and the cost for a run-of-the-mill Harley-Davidson Road Glide jumps from $21,999 in the US to $43,499. The reality of it is, though, that the Road Glide is not a 125cc motorcycle and its import taxes would be exponentially higher, driving the cost closer to $60,000.

In India, the import tax on a 300cc motorcycle is 100%. The price of a small imported motorcycle doubles before it even hits the showroom floor – yet India continues to be the hottest, fastest-growing market for companies like Trimuph, whose sales rose 37 percent … to 350 motorcycles. Triumph’s smallest displacement motorcycle is about 675 cubic centimeters, so even with that ridiculously small number of sales, there is clearly a market in places like India for foreign brands with higher displacements than are traditionally built in India.

When it comes down to the economic bottom line, it makes excellent economic sense to simply build these motorcycles in the countries where the manufacturer wants to sell them. With the Trump Administration backing out of the Trans-Pacific Partnership early in 2017, it really shouldn’t be a surprise to see Harley-Davidson initiating the manufacturing of its motorcycles in Thailand, because Asian nations won’t have the same tax rates for products coming from other Asian nations as they will for products coming from the United States.

It’s smart business.

In the past several years, another well-known motorcycle manufacturer, BMW Motorrad, has started making motorcycles and their components in Brazil and India. Branching out from their core manufacturing homeland of Germany has enabled them to not only keep costs down from a manufacturing standpoint, but to also get around some of these massive import taxes used by some countries to protect their home-grown industries.

When it comes to protection, that’s exactly what Harley is trying to do. Polaris Industries bought the rights to the Indian Motorcycle name in 2011 from UK private equity firm Stellican Limited (majority owner, at any rate). At the time they already owned Victory Motorcycles, and Victories were well-regarded bikes despite their low sales numbers. Two years after the acquisition, they announced their 111 cubic inch engine – that’s 1,820 ccs for you metric folks – and started selling motorcycles based around that “Thunderstroke” engine in August 2013. Here it is only four years later, and Polaris has shut down Victory completely to focus on the ten current models Indian offers – a number that is likely to continue to grow.

Harley-Davidson did a similar thing in 2009 when it closed the doors on Buell. Buell motorcycles were touted as technologically advanced, but they didn’t sell in numbers high enough to warrant their continued existence under the HD banner. Many riders cried foul when Harley unceremoniously dumped Erik Buell’s bikes in the dustbin of motorcycling history, but shares of $HOG began to steadily rise through the end of that year. It’s that perceived value, as represented by the stock price, that appeals to shareholders, board members and investors, not how cool or high-tech the motorcycles are.

Even though Indian is still selling a fraction of the number of motorcycles Harley is selling every year, Indian is selling more and more bikes every year while Harley is selling fewer and fewer every year. With Victory out of the picture, Polaris can concentrate all its motorcycle efforts on one brand, and believe that they are doing exactly that as hard and fast as they can.

20050529153007_thunder3
The Pentagon’s parking lot the morning of the annual Rolling Thunder ride.

Harley-Davidson reacted, of course, by coming out with a new engine and redesigning a number of the bikes that use their new “Milwaukee Eight” engines (there are two, air/oil cooled at 107 ci/1750 cc and liquid cooled at 114 ci/1870 cc). Nobody will know until their 2017 annual report comes out if that effort will translate into a slowdown in the loss of market share, and Harley still owns close to 50 percent of the large-displacement, cruiser-style motorcycle market in the USA. However, in the same year (2015) that Polaris’ motorcycle income surged 67 percent, Harley’s fell 5 percent.

However, if Harley continues to lose market share in the United States, long its most lucrative market, they will obviously have to do something to boost their bottom line. Unlike Honda and Polaris, Harley doesn’t have other vehicle sales to fall back on. They cannot afford to continue losing market share year after year, not even to a brand as iconic as Indian. Expanding overseas makes sense, and doing so in a fashion that allows them to minimize their tax burden and maximize their profits makes even MORE sense.

They also have to find a way to reduce labor costs. They’re doing it to a certain extent through layoffs, and Harley has reduced the number of workers at its York, Pennsylvania, facility by over 50 percent since 2009. They recently announced that another 118 jobs will leave the York factory, as the company transfers construction of its Softail line to its Kansas City factory. Nobody is under the illusion that labor costs in Thailand are anything but FAR lower than what they are in the USA, where the average union worker earns about $1,000 a week. In Thailand, the average weekly wage in manufacturing jobs is about $230 a MONTH (based on exchange rate on 24 May 2017).

There’s an old saying in scientific circles that a species that fails to adapt to its changing environment is doomed to become extinct. When it comes to capitalism, the same can be said by substituting in a few words: Any company that fails to adapt to the changing market is doomed to go bankrupt. The people running Harley-Davidson clearly see this, which is exactly why they’re following BMW Motorrad’s lead in India and building a factory in Thailand.

While the “slap in the face” referenced by Robert Martinez Jr. and the United Steelworkers may indeed be more literal than metaphorical, there are solid economic reasons why Harley-Davidson is building a motorcycle factory in Thailand. It has little to do with the American worker and everything to do with the company’s future profit-and-loss statements.


SOURCES

protective tariffs, motorcycles and the beef lobby

In April 1983, President Ronald Reagan ordered a rise in tariffs – taxes on imported or exported goods – on “heavyweight” motorcycles from 4.4 percent to 49.4 percent. If you ever wondered why the 1980s were littered with Japanese motorcycles that topped out at 699cc, now you know why. The tariffs kicked in at 700cc because half of all Japanese motorcycles imported into the US displaced 750cc. This rise in tariffs was based on the 1974 Trade Act, which gave the government broad authority to do exactly this kind of thing to help American companies.

“We’re delighted,” said Vaughn Beals, Harley-Davidson’s chairman at the time. He couched that statement by claiming The Motor Company would improve their manufacturing processes and practices, but we all know that didn’t happen until the introduction of the 80-horsepower Fathead (officially the Twin Cam 88) engine in 1999. The 15-year focus on the 1340cc Evolution engine, released in 1984, ushered out the venerable 1200cc Shovelhead power plants that HD had been relying on since the mid-1960s. The Fathead vibrated so viciously that HD revised it (but not until the 2000 model year), adding counterbalance shafts in an attempt to mollify long-complaining riders.

In other words, Harley had 20 years, give or take, to improve their product, but refused to even make a half-hearted attempt do so until Japanese motorcycles started seriously threatening their market share on America’s highways.

I digress, however, and I do not want you to think this article is out to bash Harley-Davidson. They had 50% of motorcycle registrations in the USA in 2015 for a reason. It is important to note that in 1983, they had only been out from under the disastrous, destructive leadership of AMF for about two years and were struggling for survival. Harley-Davidson is a legitimate American icon, and nothing I say can take that hard-earned status away from them.

Instead, let’s jump back and look at those tariffs. In 1983, the import duty (another word for tax) jumped from 4.4 percent to 49.4 percent. This affected about 20 percent of the over one million motorcycles imported into the USA, and about 80 percent of the motorcycles affected were manufactured in Japan. According to President Reagan’s five-year plan, the tariffs would gradually reduce from 49.4 percent in the first year to 14.4 percent in the fifth, after which they would return to 4.4 percent.

The law carved out an exception for a growing number of motorcycles manufactured in West Germany – our beloved BMWs. By the end of the program, 10,000 German motorcycles would be exempt from the import duties. British and Italian motorcycles (Triumph and Ducati) were also granted a number of exemptions, with up to 9,000 bikes allowed imported at the old 4.4 percent rate by the end of the program.

The justification for these tariffs was twofold. First, the US International Trade Commission determined that imported Japanese motorcycles were hurting Harley-Davidson. Second, Harley testified before the USITC that they planned to start manufacturing motorcycles in the 750cc segment, what today we call a “midweight” motorcycle.

Harley’s 1986 Sportster came in at 883cc, well above the 750cc mark. The only 750cc motorcycle Harley built in the 1980s was the XR750, a well-known flat-track racing bike, which also saw action in other styles of racing. When HD finally made a street version of the XR750 in 1983, they put out a Sportster with a 1000cc engine based on the XR750 design. The bike sold so poorly they made it for just two years, ending its production well before the protective tariff law’s five-year plan expired.

Harley brought back the XR in 2008, with the XR1200, but discontinued that bike after the 2012 model year due to poor sales. (It’s too bad, too, because I rode an XR1200 and it was a fantastic motorcycle.)

The “motorcycle wars” of the 1980s spurred the Big Four – Honda, Kawasaki, Suzuki and Yamaha – to innovate. They couldn’t rely on big profits from large-displacement bikes such as Honda’s CBX – a 1047cc six-cylinder behemoth – so they simply stopped making it and many other similar bikes, focusing instead of smaller displacement motorcycles that weren’t affected by the giant tax increase.

In the end, Harley was still making motorcycles, and the Japanese companies were still importing huge numbers of bikes into the US. Nobody really won the motorcycle wars, but nobody really lost, either, except for maybe motorcycle riders who loved big-bore Japanese bikes.

Looking back, we can understand why this all happened.  Harley was hurting after a recession. Their technology was stuck in the previous generation. At the same time, the Japanese and European motorcycle manufacturers were leaping forward as fast as they could – remember, BMW introduced the first ABS-equipped motorcycle (the K 100) in 1988 – and their economies weren’t as hindered by the 1981-82 recession as the USA’s was.  It made sense for Harley to go to the government to ask for help, and the help they got in the form of protective tariffs made sense in the grand economic scheme, even if it ultimately did not show Harley-Davidson a huge amount of benefit.

Which brings us to today. As you may know, Europe’s economy is in a weird holding pattern and right on the verge of chaos. The turmoil comes from a set of poorly performing countries (PIIGS – Portugal, Italy, Ireland, Greece and Spain) and the impending exit of Britain from the EU. There are motorcycles made in those countries, but other than Italy, none of them sport a first-line street bike manufacturer.

It may come as a surprise to you to learn that, once again, it seems as if protective tariffs may come to imported motorcycles. This time, however, the target is exclusively European motorcycles. The government institution involved is not the International Trade Commission, but the United States Trade Representative. The reason for the hoped-for protective tariffs is not a flailing Harley-Davidson, but rather the beef industry.

Wait, what?

Since 1981, the European Union has banned the importation of any meat from any animal raised with synthetic hormone treatments; it was a gradual ban that took full effect in 1989. You may have heard of BGH – bovine growth hormone – and substances like that are exactly what they’re keeping out of their food supply. Europe has a troubled history with beef in the 20th century, largely due to several outbreaks of bovine spongiform encephalopathy, more commonly known as “mad cow disease.” Britain suffered the continent’s worst outbreak of the deadly disease, with millions of cattle slaughtered between 1986 and 1998 to prevent the spread of the disease. While BSE’s causes lie in cows consuming the remains of other cows and not the treatment of cattle with hormones (natural or synthetic), the fact remains that Europe is wary of beef, period, and imported beef is granted a high level of scrutiny.

When the EU’s ban on US beef went into full effect in 1989, the US responded by putting 100% tariffs on a variety of European food products.  Like the 1980s tariffs on imported Japanese motorcycles to protect Harley-Davidson, these tariffs on food make sense. They were a simple tit-for-tat measure to hit back against the EU’s meat ban.

What doesn’t make sense is that the USTR is now considering imposing tariffs on sub-500cc European motorcycles imported into the US over an argument about beef. After losing an appeal to the World Trade Organization, the “beef lobby” seems to think a 100% tariff on all sorts of scooters and dirt bikes as well as street bikes like the KTM RC 390 and BMW G 310 R will force the EU to rethink its ban on hormone-treated meat. This is the third time the beef lobby has tried to get these tariffs imposed; previous attempts in 1999 and 2008 failed.

When it comes to BMW, the proposed tariff is, at best, symbolic. BMW sold 13,730 motorcycles in the USA in 2016 and not a single one of them was under 500cc. BMW announced its first sub-500cc motorcycle since the R 51/3 in 1956 last year, the single-cylinder G 310 R and its sister, the G 310 GS. The 310 R isn’t even expected to make it to dealerships until the third quarter; a 100% tax on it would obviously double its $4,995 price tag and destroy any sales potential the motorcycle has.

The American Motorcycle Association has naturally spoken out against this measure, but it is incumbent upon all American motorcyclists to act when our sport is threatened unreasonably. I am all for protecting American companies when they need the help, but it is unfair to punish European motorcycle manufacturers for the EU’s meat importation policies. The AMA says the 2008 attempt to get these tariffs in place received about 600 thumbs-down comments. If that was all it took to defeat the measure, imagine what we could generate in these politically charged times.

There are three ways you can make your voice heard on this matter:

  1. Point your web browser to the USTR’s website and leave a comment about this measure on the appropriate page, which is https://www.regulations.gov/comment?D=USTR-2016-0025-0001. You must do this no later than 30 January 2017.
  2. Attend the public hearing on this issue. The hearing starts at 9.30 in the morning on Wednesday, 15 February 2017 in Rooms 1 and 2 of the US Civil Service Commission building, located at 1724 F Street NW, Washington DC 20508. This building is also known as the US Trade Representative Annex and it is on the Department of the Interior’s National Register of Historic Places. If you attend the hearing, plan ahead and allow plenty of time for the D.C. area’s notoriously terrible traffic. 1724 F St NW is just a few blocks from the White House. Parking is limited. Farragut West is the nearest Metro station.
  3. Contact your federal senator and/or representative in the US Congress and express your opinion on this matter and ask them to get involved. If you don’t know who your senator or representative is, head over to the website whoismyrepresentative.com and plug in your ZIP code.