By Rajesh Kumar Singh
CHICAGO (Reuters) - When Donald Trump became president last year he vowed to make American manufacturing giants, such as Harley-Davidson and Caterpillar great again. But a year later, the two companies stand to take a hit from his policies.
Trump's plan to impose import duties of 25 percent on steel and 10 percent on aluminum to protect U.S. producers have left consumers of the metals worried that the higher tariffs will inflate their costs and make them less competitive in exports markets.
Take Harley-Davidson. Struggling to overcome the slump in U.S. demand, the company is aiming to boost sales of its iconic motorcycles overseas to 50 percent of its total annual volume from 39 percent currently.
But the new tariffs, which the White House has said Trump will authorize by the end of the week, could place the company in the middle of a trade war, with the European Commission threatening to slap duties on Harley's motorcycles.
European business accounted for about 19 percent of Harley's motorcycle sales last year. Harley and Caterpillar shares slumped on Wednesday as it appeared Trump would move forward with tariffs.
"We support free and fair trade," Harley said this week. "Import tariffs on steel and aluminum will drive up costs for all products made with these raw materials, regardless of their origin."
The proposed tariffs are putting steel suppliers at odds with their customers. William Hickey, whose company Lapham-Hickey Steel supplies to both Caterpillar and its U.S. competitor, Deere & Co, supports Trump's tariffs and said they should be applied without any exception or exemption.
"Chinese imports are killing the domestic producers," he said. "In fact, the volume of steel produced in the U.S. dwarfs in comparison to the imports from China."
But the manufacturers' fears are supported by the Thomson Reuters Global Industrial Index, which has fallen about 2.0 percent since the end of last month.
CAT'S EXPORT RISK
In Caterpillar's case, more than half of its machines are sold outside the United States. The proposed tariffs would not only increase imported steel prices, but also domestic steel prices, putting the company at a disadvantage against its non-U.S. competitors, Caterpillar's director of investor relations, Amy Campbell, said.
Dennis Slater, president of the Association of Equipment Manufacturers (AEM), said he fears that tit-for-tat retaliatory policies also could hit U.S. farm exports, exacerbating the troubles of farm equipment makers, which have been battling weak domestic demand for the past four years.
The AEM represents both Caterpillar and Deere. Slater said domestic steel prices have been on the rise for a while in anticipation of the tariff increases.
Caterpillar's supply costs rose at their fastest pace in at least four quarters in the three months ended December. The annual increase in Deere's costs in the latest quarter was the steepest in at least five quarters.
Caterpillar said it was still assessing what impact the tariff hike would have on its supply costs.
In the meantime, it has been using long-term supply contracts to give itself cushion against rising prices. The contracts can shield it from higher costs for at most two quarters, Campbell said.
"We are seeing some material cost increases," she said. "The news last week (has) put some more pressure on material cost."
(Reporting by Rajesh Kumar Singh; Editing by Peter Szekely)