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WHEN: Airing today, Monday, July 30, 2018
WHERE: CNBC's Business Day Programming
The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Harley-Davidson CEO Matthew Levatich and CNBC's Morgan Brennan. Clips from the interview are airing today, Monday, July 30th throughout CNBC's Business Day programming. The following is a link to video of the interview on CNBC.com: https://www.cnbc.com/video/2018/07/29/harley-davidson-ceo-on-new-strategies-trade-wars-and-going-electric.html?play=1.
All references must be sourced to CNBC.
MATTHEW LEVATICH: I don't want anyone to think that we're running away from our core customer, and the strength that the company has today. This needs to be thought of all of that plus more. So we're going to be doubling down on existing products. We're going to invest in an all new middleweight platform, which is a modular chassis and a very-- core-- engine technology-- to go in three dramatically different spaces. Adventure touring, custom and street fighter. And do that with multiple models, all this coming within the next two or three years. And then E.V. is that additional component, which really allows us to reach out and inspire a whole generation of people that aren't even yet thinking about freedom on two wheels.
MORGAN BRENNAN: And what you say here is, "Comprehensive cost reduction and reallocation of previously planned investment and resources." So how does that look? Especially because when I hear something like cost reduction I can't help but think job cuts.
MATTHEW LEVATICH: Yeah, so what we really are challenging ourselves as an organization, and -- we call it self-funding, but to do all of this in the same investment return and capital allocation profile that investors are accustomed to. So we're challenging ourselves internally, how do we need to think about how we approach the business differently, given times have changed and we have to accelerate our pace. One of the easiest examples is capital investment. Motorcycle product development takes a lot of capital investment. When you look at the investments that we've made to really solidify leadership in touring and soft tail in particular, a lot of that investment is behind us. So we have the capacity to invest in these new products, and we have the capability, because we've really refined and dialed in our product development excellence over the last several years. So a lot of this seems like big stuff, and it is big stuff, but we're very confident-- we're going to be able to execute it as planned.
MORGAN BRENNAN: Given the fact that you're growing international to 50% of sales over the coming years, how much of the production of these new motorcycles is going to happen in the U.S. versus other places?
MATTHEW LEVATICH: So, our preference in all cases is to supply the world from the United States. That's been our mantra since day one. And most of our customers around the world, they value that in the brand. We've invested in international manufacturing over the last 20 years, really, for the single reason that there are trade and tariff situations in certain markets that make it prohibitive of-- prohibitive of us to be relevant in those markets without that investment. We're only doing that because these are important growth markets for the company that without those investments we wouldn't have access to those customers, at any kinda reasonable price. And that's an important part of growing the company, and growing where the brand has tremendous appeal, but those prices that we would pay with all those tariffs are simply-- untenable for customers in those areas.
MORGAN BRENNAN: There's a lot of talk, a lot of debate right now about the whole idea of fair and free trade—
MATTHEW LEVATICH: Sure.
MORGAN BRENNAN: --but it doesn't sound like, at least from a motorcycle perspective, that that's been the case.
MATTHEW LEVATICH: Yeah, and-- and we-- we are committed to the idea of free and fair trade. And we have been dealing with these tariff situations for decades, in many cases, as I mentioned. So we're-- we continue to work with, you know, our administration, as well as other governments around the world, around reducing these-- economic and-- and frankly, in a lot of cases, non-economic trade barriers that make it difficult for us to compete. We still sell motorcycles in India that are shipped from the United States at full 100% duties. Right? They're very expensive, and we still sell them. Obviously that duty elimination would allow us to sell many more, and that is our prime path. And we're going to continue to work on that path as we go forward.
MORGAN BRENNAN: With that this accelerated strategy that you've just announced-- the fact that you're going to be funding it in house, this real-- reallocation of resources, et cetera-- I can't help but think that after you announced the shift in some production of motorcycles destined for the European market to overseas, that that move, in light of the tariffs in that market, that this played a part in that?
MATTHEW LEVATICH: We've been working on this for the last six months. This is an unfortunate condition in the middle of work that we would like to do. We'd like to invest that money differently. We'd like to spend our time differently. But we have to do what we have to do based on the facts and circumstances before us.
MORGAN BRENNAN: And I think-- I-- that's kinda the point I'm trying to get to. Is that when you're talking about $2,200 more for a motorcycle in a key market like Europe, which is such a growth point for Harley-Davidson, that money, that capital is-- you're looking to put it to use in other ways. So all of a sudden it becomes even more difficult of a conversation, I would imagine, with you and your board.
MATTHEW LEVATICH: Right. Well, it becomes-- a decision that carrying-- the-- the first decision is protecting our customers in the market. So that is us carrying that $2,200 per bike cost. And then obviously we have to figure out ways to mitigate that cost, because we'd rather invest that money in things that'll help us grow the business, not just maintain the business. We have to do what we have to do based on the facts and circumstances before us, and we're doing that. Rather not be spending our time and our money this way right now, but we're doing what we have to do.
MORGAN BRENNAN: Were you surprised by President Trump's reactions, the anger-- to your decision to--
MATTHEW LEVATICH: Well —
MORGAN BRENNAN: -- shift some of this production?
MATTHEW LEVATICH: You know, I-- I think of it as a business. We-- we-- we just deal with what we have to deal with, and this-- we are not a political organization. We've worked very hard to be apolitical in how we approach our business and our consumers, everywhere in the world. So we do what we have to do to maintain that integrity as a company and as a brand-- facing difficult decisions as we do. As we had in this case. And that was just an unfortunate-- you know, attention around-- a set of decisions that we made that where rational under the circumstances.
MORGAN BRENNAN: In light of that, it-- it seems like there's been a lot of information, a lot of suggestions, be it by union leaders, by the administration, by other folks that have come out very strongly against the decision to shift some of that production. The ar-- their argument being that this was potentially in the works for Harley-Davidson, even before the tariffs. I mean, you've got to have a response to that.
MATTHEW LEVATICH: Well I -- I would simply say that if we had planned this all along it sure wouldn't take us nine to 18 months to do it. We're doing a lotta tearing up to figure out how to-- we-- we don't have it actually all figured out yet. We're working very hard to figure out how we get and protect that market and eliminate that cost from our business as quickly as possible. And again, if circumstances change, we'll evaluate and course correct if we can.
MORGAN BRENNAN: You haven't been the only company to announce some shifts in production. Polaris, one of your rivals, has actually also said that they might shift some of their production of the Indian motorcycles to Poland in light of those tariffs. Why do you think-- why do you think Harley has experienced so much more attention over this than maybe some of the other companies?
MATTHEW LEVATICH: Well, you know, number one, we're a 115-year-old great American company, and we've manufactured our engines in Milwaukee since day one. Every one of our motorcycles is going to con -- for the U.S. is going to continue to be made in the U.S. We'd rather not do this, but faced-- faced with the significance and the durability of a lot of these tariffs, again, as I mentioned, Brazil, 20 years-- we can't see those important growth markets for the company and deny those customers the opportunity to get on a Harley-Davidson. So we do the best we can to preserve and protect the integrity of the American qualities of Harley-Davidson, because it's very important to our customers and it's very important to us.
MORGAN BRENNAN: Certainly here in the US it's very important that Harley-Davidson is made in America. It's pro-- you probably don't get more iconic in terms of an American brand. How important is that to your international customers?
MATTHEW LEVATICH: You know, it's important, but at some point if a product is twice as expensive or it-- or there's the potential for it to be half as expensive, and Harley-Davidson is the manufacturer, which we are. When you-- if you walk into our plants in Brazil or in India, and ultimately when we start up in Thailand, you will see the same exact methods, same exact equipment, the same approach to quality and safety that we have in every one of our U.S. factories. These are Harley-Davidson plants and Harley-Davidson employees. And so people gain a lot of confidence in that. And when-- you know, when this is made by Harley-Davidson and they can afford it, more than they otherwise would be able to, they're accepting of it.
MORGAN BRENNAN: What does electric mean for Harley moving forward? What's the opportunity there?
MATTHEW LEVATICH: You know, to me— the biggest opportunity-- with electric is the-- is the ease of use. It is a different feeling, the-- the combination of the power and the torque and the sound, even, creates a different feeling for the rider. Almost like you're flying. And that-- that to me was the moment where I said, "There's is something sort of incrementally valuable here in this technology." It's not instead of. It's in addition to. This motorcycle's easier to ride than a bicycle. No clutch, no gears, no heat. I'm-- I'm navigating. No pedals to pedal. You know? So the enabling technology of E.V. for-- creating new riders, inspiring them with cool product, meeting them where they are in the-- largely in the cities, with technology and ridership that is much more -- twist and go.
MORGAN BRENNAN: So in light of the strategy that you've unveiled today, what does the Harley-Davidson of the future look like?
MATTHEW LEVATICH: I think one thing motorcycles—motorcyclists-- identify with is other riders. So this is about opening up-- that community, making that community broader. Using product as a way to do that, but also distribution. We have this tremendous dealer network. And you walk into a Harley dealer anywhere in the world, and they are dedicated to this brand and to our product, and to the customers and to the experience of riding. And-- and leveraging that community of dealers and riders, existing riders and new riders, to just build the sport. And that to us is what this strategy's all about.
MORGAN BRENNAN: One of the things we didn't touch on yet was China and the growth opportunity there. How are you approaching that market, especially given the fact that there does seem to be some trade uncertainty?
MATTHEW LEVATICH: Yeah. So-- China is a very important market for us, as it is for a lot of companies and brands. And we see a lot of opportunity to invest differently to grow China. Number one, leveraging what the Thailand investment can do for us from-- an affordability perspective is a big help.
MORGAN BRENNAN: Would you have built this facility in Thailand if the U.S. had stayed in TPP?
MATTHEW LEVATICH: Depending on what that would have actually-- materialized as it was looking at the time, I think-- it was looking favorable to us. It certainly would have made the economics a lot more favorable to Harley-Davidson, as it would a lotta companies. Both candidates during the election were talking about existing TPP, and that's where we started looking at. Again-- I think TPP was in negotiation for seven or eight years. These are very durable arrangements, and they're complicated. Certain commodities like, you know, grain and soybeans are traded off against other things like motorcycles in the basket of trade between nations. And so picking on one specific thing like motorcycles and-- and assuming it's going to be easy to change, that's where it gets very complicated and very difficult. And the administration's working very hard on this very issue. We have endured tremendous economic and non-economic trade barriers in our international growth. We have competed on our merits. We've done very well. We're in over 100 countries now around the world, and we're doing well, despite some of these things. We would like a little bit more of a level playing field, because we think we can do even better.
MORGAN BRENNAN: Do you think we'll ultimately get that? I mean the administration has signaled that all of this is to get to that place. Do you think
MATTHEW LEVATICH: Yeah, and—
MORGAN BRENNAN: --it happens?
MATTHEW LEVATICH: They are absolutely in line with what we all want, free and fair trade. Both. We've been consistent on that point and I think they've been consistent on that point. It's a little hard to tell now-- with the direction things are going, where it will all land. And again, as a business, we're obviously paying very close attention to it. We're talking to as many governments as we can about what we're interested in as a business and a brand. And we'll make those best decisions when the time comes with-- when the facts and circumstances change.
MORGAN BRENNAN: Are you talking to anyone in the Trump administration?
MATTHEW LEVATICH: We're actually—
MORGAN BRENNAN: To the president directly?
MATTHEW LEVATICH: --you know, the-- the administration has been very-- we have been very engaged, they've been very engaged, since the election, in-- in particular in India. The USTR, our ambassador to India, the prime minister-- himself, I think with the president. I wasn't there, but there were discussions around-- the duties that we faced in India. And there have been discussions about how that could be changed. Again, we exist in a complex trading equation with India. So one piece is hard to move without some of the other pieces. And again, this has just reinforced that some of these things are very durable and difficult to change. Which is why when they do change, we have to take-- action and make decisions in the best interests of the company and our stakeholders.
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