Harley Davidson (A) _ Protecting Hogs

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  • 1. International Business, Update 2003 Cases Harley-Davidson (A): Protecting Hogs On September 1, 1982, Harley-Davidson Motor Company and Harley-Davidson York, Inc., filed a petition for “relief,” or protection, with the U.S. International Trade Commission (ITC). The filing, a request under Section 201 of the U.S. Trade Act of 1974, was a request for escape clause relief from the damaging imports of heavyweight motorcycles into the United States. Harley-Davidson Motor Company, and more specifically its traditional large engine motorcycle, the hog, 1 was facing dwindling domestic market share. This was a last desperate act for survival. Import Penetration Throughout most of the first half of the twentieth century, there were more than 150 different manufacturers of motorcycles in the United States. By 1978, however, there were only three, and only one, Harley-Davidson, was U.S.– owned. The other two U.S. manufacturers were Japanese-owned, Kawasaki and Honda America. By the early 1980s, Harley-Davidson was in trouble. Imports held a 60 percent share of the total heavyweight motorcycle market by 1980, and they continued to grow. Harley’s difficulties worsened as its products suffered increasing quality problems, with labor and management facing off against one another instead of against the competition. By the end of 1982, in a total domestic market that had seen no growth in three years, import market share rose to 69 percent. The declining market share of domestic producers in a flat market translated into a fight of Harley against all competitors, because Harley was up against two domestic competitors who were really not domestic. Kawasaki and Honda America were producing in the United States essentially the same products as those being imported. In fact, Harley argued that the two domestic competitors were only assembling foreign-made parts in the United States and were therefore not domestic producers at all. The Harley Law What has become known as the “Harley Law” was the resulting finding of the ITC that imports were a contributing cause of injury to the domestic heavyweight motorcycle industry. The ITC recommended to then–President Ronald Reagan that import duties be increased for a period of five years. Duties were to be raised to 45 percent the first year (1983), with the duty declining steadily over each following year until reaching 10 percent in the fifth and final year of protection (1988). The president and his staff agreed with the finding but wanted a tariff rate quota (TRQ) instead of a straight tariff increase. A TRQ is a combination of tariffs and quotas; in this case, the increased tariff rates would be imposed only on imports (by volume) above a specific number per year. This was intended to allow specific small foreign producers to have Page 1
  • 2. International Business, Update 2003 Cases continued access to the U.S. markets, while still providing Harley with protection from the large-volume importers who were rapidly gaining domestic market share. Table I provides a listing of the major tariff rate quotas as specified by the ITC. The domestic industry that was to be protected was defined as those motorcycles “with a total piston displacement of over 700 cc.”2 This was strategic success for Harley, in that most of its motorcycle sales were actually 1000 cc and higher. This meant Harley was able to hinder competitor sales in product categories other than those reflecting the head-to-head competition. Harley had also requested that the imported parts that were being used by its two domestic competitors also be subject to tariff restrictions. Harley argued that the lower-cost product that was damaging the domestic industry was composed of the same parts, whether assembled in Japan or in the United States by Kawasaki and Honda America. On this last point, however, they were unsuccessful. Domestic producers would be protected against final product sales only, and no restrictions would be placed on imported parts. Competitive Response: Competitors TRQs were implemented for the 1983 through 1988 period. As seen in Table 2, the first two years of protec-tion did have the desired result: import market share fell precipitously. Imports fell from a high of 69 percent in 1982 to just 24 percent in 1984. It is also interesting to note, however, that total market sales fell dramatically over this same period. After two years of significant protection, domestic production had increased only 20 percent (from 100,000 to 121,000 units per year), although the total market had fallen by 130,000 from 1982 to 1983 alone (and 1983 was a year of rapid economic growth in the United States following the severe recession of 1981 – 1982). The response of Harley’s major competitors to the TRQs was rapid and predictable. First, the two major domestic producers, Kawasaki and Honda America, immediately stepped up production of heavyweight motorcycles within the United States. The ITC estimates that imports of parts other than engines increased 82 percent in the first year of protection (1983) and more than 200 percent in the second year (1984). The ITC also estimates that between 50 and 70 percent of the final value of the domestically produced Kawasaki and Honda America motorcycles was imported as parts. Second, the same Japanese-owned producers altered the product manufactured outside the United States, primarily in Japan, to reduce engine displacement from the designed 750 cc to between 690 and 700 cc in order to fall below the TRQ coverage. Third, the Japanese government, on behalf of its own producers, filed a complaint under Article XIII of the General Agreement on Tariffs and Trade (GATT) that the European competitors (Germany) were receiving discriminatory treatment (although filed, there were no formal findings ever made on this complaint). Competitive Response: Harley Harley-Davidson used the period of import relief to restructure, retool, and retrain. Two specific actions were taken to strengthen Harley to once again be a competitive firm. Page 2
  • 3. International Business, Update 2003 Cases 1. A Rededication to Quality—Although Harley had instituted quality circles in manufacturing as early as 1976, renewed efforts in quality monitoring and labor involvement dramatically improved the quality of the product. 3 By 1988, Harley had 117 quality circles in operation with more than 50 percent of all employees involved in the improvement of their own product. The implementation of a just-in-time materials-management program, which Harley termed “materials as needed,” also aided greatly in reducing costs of production. 2. Diversification of Earnings—In 1986, Harley purchased Holiday Rambler Corporation of Wakarusa, Indiana. Holiday Rambler is a recreational vehicle manufacturer that was expected to provide Harley with broadened earnings flows as the domestic motorcycle industry was increasingly stagnant in growth. Harley has also continued to increase production and sales of other products, such as metal bomb casings and liquid-fuel rocket engines for the U.S. Department of Defense. Harley’s measures were indeed effective in returning the company to profitability and competitiveness. In 1987, a year ahead of schedule, Harley requested that the tariff rate quotas be removed from imported motorcycles. In 2001, Harley-Davidson was named company of the year by Forbes. Despite the global recession, sales grew to $3.3 billion, a 15 percent increase over the previous year. Share value increased by a staggering 40 percent. Questions for Discussion 1. Were the tariff rate quotas (TRQs) really effective in protecting Harley-Davidson against Japanese manufacturers’ import penetration? What was the role of imported parts in this effectiveness of protection? 2. Did Harley-Davidson “adjust” to changing market conditions during the period in which the U.S. government afforded it protection from foreign competition? Do you believe it responded to the expectations of public policy-makers to reclaim competitiveness on world markets? References Beals, Vaughn. “Harley-Davidson: An American Success Story.” Journal for Quality & Participation 11, 2 ( June 1988): A19– A23. Fahey, Jonathan. Forbes Global, January 7, 2002, www.forbes.com. Gelb, Thomas. “Overhauling Corporate Engine Drives Winning Strategy.” Journal of Business Strategy 10, 6 (November/December 1989): 8–12. Grant, Robert M., R. Krishnan, Abraham B. Shani, and Ron Baer. “Appropriate Manufacturing Technology: A Strategic Approach.” Sloan Management Review 33, 1 (Fall 1991): 43–54. Hackney, Holt. “Easy Rider.” Financial World 159, 18 (September 4, 1990): 48–49. “How Harley Beat Back the Japanese.” Fortune (September 25, 1989): 155–164. Hufbauer, Gary Clyde, Diane T. Berliner, and Kimberly Ann Elliot. Trade Protection in the United States: 31 Case Studies. Washington, D.C.: The Institute for International Economics, 1986. “Mounting the Drive for Quality.” Manufacturing Engineering 108, 1 ( January 1992): 92, 94. Page 3
  • 4. International Business, Update 2003 Cases Muller, E. J. “Harley’s Got the Handle on Inbound.” Distribution 88, 3 (March 1989): 70, 74. Pruzin, Daniel R. “Born to be Verrucht.” World Trade 5, 4 (May 1992): 112–117. Reid, Peter C. Well-Made in America. New York: McGraw-Hill, 1989. Rudin, Brad. “Harley Revs Up Image Through Diversifying.” Pensions & Investment Age 15, 3 (February 9, 1987): 21–23. Sepehri, Mehran. “Manufacturing Revitalization at Harley-Davidson Motor Co.” Industrial Engineering 19, 8 (August 1987): 86–93. Source: This case was written by Michael H. Moffett. This case is intended for class discussion purposes only and does not represent either efficient or inefficient management practices. 1The motorcycles produced and sold by Harley-Davidson have traditionally been known as hogs. The nickname is primarily in reference to their traditional large size,weight, and power. See http://www.harley-davidson.com. 2Hufbauer, 1986, 263. TABLE 1 Tariff Rate Quotas for Heavyweight Motorcycles Country Pre-1983 Share1 1983 Quota2 1983 Share 1988 Quota3 West Germany .4% 5,000 33.3% 10,000 Japan 93.0% 6,000 40.0% 11,000 Others 6.6% 4,000 26.7% 9,000 1Pre-1983 shares are percentage of total imports into the United States originating from that country. 2These quotas and tariff schedules applicable to motorcycles with engine displacement of 700 cubic centimeters and greater, only. Volume quotas are per engine. 3All quota shares rise 1,000 units per year after 1983, with the terminal quotas of 1988 being effective only for that final year (after which there would be no further Tariff Rate Quotas). Source: Adapted from Trade Protection in the United States: 31 Case Studies (Washington, D.C.: Institute for International Economics, 1986), 263–264. TABLE 2 Import and Domestic Heavyweight Motorcycle Market Shares (thousands of units) Year Total Sales1 Domestic Share (%) Import Share (%) 1980 326 (100%) 130 (40%) 196 (60%) 1981 327 (100%) 125 (38%) 202 (62%) 1982 324 (100%) 100 (31%) 224 (69%) 1983 (TRQ) 194 (100%) 100 (52%) 94 (48%) Page 4
  • 5. International Business, Update 2003 Cases 1984 (TRQ) 159 (100%) 121 (76%) 38 (24%) 1Total sales is the sum of domestic production and imports; exports were negligible over the subject period. Sources: Adapted from Trade Protection in the United States: 31 Case Studies (Washington, D.C.: Institute for International Economics, 1986, and various publications of the U.S. International Trade Commission) 3When the first quality circles were created in 1976, it was estimated that the first 100 motorcycles off the production line were costing an additional $100,000 to “repair” before they were up to standards for sale. This had to change. Page 5