BUSINESS

Tariff fights bring what most companies try to avoid: Uncertainty

Paul Gores
Milwaukee Journal Sentinel
A Harley-Davidson employee works at the Menomonee Falls plant.

There are few things most companies like less than uncertainty.

But as President Donald Trump imposes tariffs on some foreign goods and threatens a trade war, uncertainty is what many American companies — including Harley-Davidson Inc. — are feeling.

The Milwaukee-based motorcycle-maker, already attempting to adjust to the changing market for its bikes, now suddenly finds itself the scornful target of Trump’s rhetoric amid the unpredictability of his efforts to fix trade practices he deems unfair.

Trump, in a series of tweets criticizing Harley, initially wrote, “Surprised that Harley-Davidson, of all companies, would be the first to wave the White Flag.”

The situation highlights the complications of tariffs, especially with the president ready to tweet-smack those he thinks might undermine his approach, as he apparently believes Harley would do by building more bikes overseas to help mitigate a big retaliatory tariff imposed by the European Union.

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 “Even if executives have a really good playbook, that’s no match for a changing rulebook,” said economist Brian Jacobsen, senior investment strategist for the Wells Fargo Asset Management and an instructor and Wisconsin Lutheran College.

Colin McWey, a vice president and portfolio manager at Heartland Advisors in Milwaukee, said Harley took the right step for its long-term good, even though Trump wants patience with his tariff plans.

“Look, the rules are changing, but frankly, you still don’t know much of this is going to be a lasting permanent change vs. how much of this is a lot of posturing,” said McWey. “For the time being the reality is, yes, they are a little bit of a pawn in a game.”

On June 22, the EU raised the tariff on imported American motorcycles to 31 percent from 6 percent. The EU jacked the tariff in response to higher aluminum and steel tariffs the U.S. had slapped on Europe.

Although Harley is just about as American as a brand can be, building more bikes overseas to sell overseas would be the correct move for the company, McWey said. Passing along tariff costs on imported bikes to dealers and customers in Europe would hurt Harley over time, he said.

“They cannot let customers and dealers in Europe bear the incremental cost of the tariffs,” said McWey, whose firm owns some shares of Harley among its holdings.

RELATED:Trump responds as Harley-Davidson announces plans to move more motorcycle production overseas

Industry research analyst Craig Kennison, who follows Harley for Milwaukee’s Robert W. Baird & Co., said the management of a public company like Harley is compelled by fiduciary duty to maximize returns on capital over time.

“It isn’t a fiduciary option, it’s a duty,” he said.

Kennison added, “To earn a sufficient return in Europe, Harley has to cover the cost of making a bike. That cost is now higher due to steel and aluminum tariffs — and the $2,200-per-bike tariff. Are those costs temporary? Who really knows? And that is the point. As Harley configures its global manufacturing footprint for the next decade and beyond, it has to consider how volatile its cost structure may be.”

McWey said it’s possible the situation with Harley might end up serving as an early example for the administration of the impact of a potential trade war. It could turn out to be “a little bit of an impetus for cooler heads to prevail in the longer term,” he said, but quickly added, “I don’t know.”

Analysts said one thing likely to happen amid the tariff back-and-forth is for American companies to stop making expensive investments until they have a better picture of the future.

Jacobsen said that, in general, “policy-induced uncertainty can lead executives to adopt a wait-and-see” attitude before company expansion.

But he noted that there are complaints about uncertainty during any presidential administration, not just Trump’s.

“Today, it just so happens to be affecting multinational businesses more than domestically focused businesses, and it’s hitting pretty close to home with our large employers that are also exporters,” Jacobsen said.

Noah Williams, an economics professor at the University of Wisconsin-Madison, said when firms face an uncertain future, particularly with political or policy implications, they may be reluctant to take on long-term investments that forgo income or profits today in the hope of higher revenue in the future.

“There has been a lot of discussion of this in economics over the past few years, and there was some hope that by lessening the fear of increased regulation that the Trump administration would lessen that uncertainty,” Williams said. “However, the uncertainties now about trade seem to be undoing much if not all of that.”

Doug Fisher, director of the Center for Supply Chain Management in Marquette University's College of Business Administration, isn’t a fan of tariffs in general.

“Business likes stability. I think the long game in this is a level playing field and protection of intellectual property. I get to protect my intellectual property, and I get to compete on a level playing field. That’s all good. Business would like that,” Fisher said. “I think the uncertainty now is, ‘What are my costs going to be and, oh by the way, how long is this fight going to last?’”

Despite critical remarks tweeted by Trump, analysts say Harley remains a good company.

“Naturally, what makes this decision especially hard is the impact on the brand in America,” said Kennison, who also is director of research operations at Baird. “Harley has a special bond with the American worker that still means something. That is why Harley will always build bikes in America for Americans. That has not changed and is not negotiable.”

Kennison added, “To be fair, the administration is trying to level the playing field for American businesses that face unfair trade practices. If global trade were truly free, Harley could bring its unique brand of freedom to far more people.”

Fisher said tariffs can cause “an incredible amount of disruption" in the short term.

“But I guess our (Trump’s) position is, 'Unless I create enough pain, I’m never going to get anybody’s attention on this stuff,'” Fisher said.

RELATED:Trump bashes Harley-Davidson again, tweeting: 'We won't forget'

Williams said that, overall, companies generally have held larger cash positions in the past several years, so they may be more able to wait for a while to see how the trade tensions turn out.

“But at the same time, for a company like Harley-Davidson, which had already been under some duress and facing cost pressures, the trade moves made by the EU have forced their hand,” Williams said. 

The stock of Harley has been hurt, but not crushed, since the company was singled out by Trump. It closed at $41.65 Wednesday, down almost 6 percent from its closing price of $44.21 Friday, before the controversy began.

“Investors aren’t as near-sighted as most people like to believe,” said Jacobsen. “Value can be better created by waiting to see how this plays out rather than hastily making a bet on the outcome. Still, businesses can make it clear what the unintended consequences of policy actions are.”