China & Hogs: A Buying Opportunity In Harley?

ToddSullivan
December 6th, 2007

There is an interesting political event coming up that may be the impetus shares in Harley Davidson (HOG) need to go on a ride (yes, pun intended and sorry it is so bad).

NY Sen. Charles Schumer, Pennsylvania Sen. Robert Casey and Democratic Sens. Herb Kohl of Wisconsin and Claire McCaskill of Missouri are all calling for China to relax municipal regulations that limit or even ban heavy-duty motorcycle use in urban areas in a letter sent to Commerce Secretary Carlos Gutierrez and US Trade Representative Susan Schwab. The letter was sent just one week before Gutierrez and Schwab are set to lead a delegation to Beijing, where the Joint Commission on Commerce and Trade (JCCT) will take place.

The JCCT is generally held twice a year as a way of resolving trade disputes between the two countries, although China has failed to implement many pledges it has made to lift trade barriers at recent JCCT meetings.

Harley Davidson has been in China for nearly two years now but the regulation have lead the company to recognize almost no sales from its efforts.

How big could it be?

Currently Harley ship about 330,000 bikes a years with about 20% of them going to foreign countries. They shipped 13,300 motorcycles to Japan in 2006, up from less than 5,000 in 1997. Harleys have now become a “status symbol” in Japan. What happened? Japan dropped some regulatory barriers that had throttled sales, said Wayne Curtin, Harley Davidson’s government affairs director recently.

Curtin also said that opening foreign markets is a top priority for Harley Davidson. The Senate approved a free trade pact with Peru trade pact Tuesday, which should boost motorcycle sales there, Curtin said.

The U.S. also has free trade deals pending with South Korea, Panama and Columbia. These deals would make Harleys more affordable in those countries, Curtin said. “The free trade agreements take tariffs of 8 percent to 20 percent and takes them to zero,” he said.

This is huge for Harley Davidson. With the US credit situation not going away anytime soon, opening foreign markets is a must for the company to grow. Now, I am not going to jump into shares just because Peru has opened up, that will not offset US weakness. China is the big dog here.

The opening of the China market could prove immediate returns. Why? The infrastructure to market and sell the bikes is already there. The only thing that is waiting is not a willing buyer for them, but a buyer who can legally ride them.

Should we jump at shares now? No. Even the Peru pact with have to be ratified by both countries and that could take months. Any action next week in China, as large as the potential is, would probably not show up in results for at least two quarters. That gives us plenty of time to buy shares.

With the credit situation still deteriorating, Harley may see more downside before it turns around. I still think we will see shares in the lower 40′s. Then I am a buyer.

Here is my last post on Harley after Q3 results.

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