Harley-Davidson in Amazonia

Building the HOG in the jungle, who knew?! The most startling statistic from Manaus is that in 1998 Harley-Davidson, Inc. (NYSE:HOG) opened a new assembly facility in Manaus, Brazil, which is its first manufacturing plant that is not in the United States. The winter weather makes for a fair comparison with a hairdryer-in-your-face Pennsylvania August summer day like the major facilities for HOG in York, PA [it is equatorial so the whole north/south winter/summer seasons thing is a tossup]. The leased local facility is a fraction of the size of the PA facility owned by the firm [30,000 square feet vs. >1,3m] and is the exception to the HOG distribution model in Latin America: motorcycles sold in Brazil are assembled and distributed by the Manaus subsidiary, while the company supplies all products sold in the Latin America region directly to independent dealers from its U.S. operations. No tours though, that will have to wait for next time I am back in the US with some time in WI, PA or MO.

The period from factory opening to date has been a bumpy flat stretch for HOG shares, up barely 0.11% from 3 Jul 1998 – 1 Aug 2008. Ouch! With run-up’s [Q1 2000 and Q1 2007] peaking before the tech 2001 and sub-prime 2007 crashes, perhaps HOG should be pitching its stock, reflecting the underlying forty-something free riders riding the widgets, as a leading indicator for market corrections. The numbers on sub-prime still amaze me - Merrill is off 62% since Aug 07, Citi 58%, AIG 62%, Wachovia 61% - and the chart is bad, just bad...

A browse of HOG’s most recent [2007] 10K and their self-reported “investment risk factors” [p.15] makes for an interesting read of the companies own SWOT [strengths/weakness/opportunities/threats] analysis. Unlike what all our B-school case studies taught us, the distinctive patented HOG exhaust throb is down to four on the list with the rest of the brand. Two ESG factors, labour relations [including employee benefits for its 9,755 employees] and corporate citizenship are explicitly covered, perhaps with memories of the Q1 2007 strike still fresh. The looming shadow of the sub-prime and possible prime fallout [credit and financing risk for HOG and its customers] stalks the second tier of risk factors. But no mention of the sustainability meta-theme and its impact on purchasing of heavyweight motorcycles, not even as alternatives to SUVs as macho status symbols. I would have thought the Tahoe/F150/Hummer to HOG transfer would be an easy trade for a frustrated macho in Wisconsin, Texas or PA.

The environment is tucked down in legal end of the filings Commitments and Contingencies [p.46]

• [“The Company is subject to lawsuits and other claims related to environmental, product and other matters”], Environmental Matters [p.47] and
  
• Item 3. Legal Proceedings [p.21].
  

The language is suitably vague courtesy of their lawyers and accountants [“ground water remediation may continue for some time beyond 2012”]. But it seems the cash cost to the planet just in PA ranges from US$8m to US$28m [“involved with government agencies and groups of potentially responsible parties in various environmental matters, including a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility”], and HOG having pushed excess liability of course to a third party company, Ultimaster “for certain claims related to environmental contamination present at the date of sale, up to US$20.0 million”.

Now sitting here next to the black-brown water of the Rio Negro in Manaus stretching four miles wide chopped by the easterly wind heading to Peru, one wonders:

1. What is the environmental footprint of Harley Davidson’s only manufacturing facility in America outside the US in the context of local laws and regulations, and compared to the US standards, in this world-class biosphere?
   
2. What should the local pension fund investors conference in the Tropical Hotel Manaus here today be asking this prestigious, welcome manufacturing partner today in calculating the complete and integrated investment analysis profiles, including ESG factors?
   

Institutional owners account for 81% of equity. Whether in Brazilian Real or US dollars, I doubt clean water effluent nor deforestation upriver was factored into the US$40-42 trading range today on the NYSE.