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Polaris Industries May Be Hit Even Harder by Tariffs Affecting Harley

Harley-Davidson (NYSE: HOG) isn't the only American motorcycle company hit by the retaliatory actions of the European Union for tariffs President Trump imposed on imported aluminum and steel. Polaris Industries (NYSE: PII) is also looking at moving its Indian motorcycle production overseas, though it says it is also studying a "range of mitigation plans."

Yet as difficult as the higher tariff costs will be for both of these bike makers (not to mention increased domestic raw-materials expenses), Polaris may be the one put at a greater disadvantage.

Not only are motorcycles getting whacked by tough new import duties, but the EU, Canada, and Mexico have all imposed higher tariffs on boats. And Polaris Industries just closed its $805 million deal on Boat Holdings, the world's largest manufacturer of pontoon boats.

People waving to others on a pontoon boat
People waving to others on a pontoon boat

Image source: Bennington Marine.

Exports are a small but growing segment

According to the National Marine Manufacturers Association (NMMA), Europe, Canada, and Mexico account for 70% of all boat exports from the U.S., with Canada representing about 38%; the EU, 22%; and Mexico, 10%.

While exports remained a fraction of the total $39 billion in sales of boats, marine products, and services in 2017, Trump's import tariffs are also raising the cost of aluminum and steel, two key components of boatbuilding. The NMMA has said, "Tariffs give domestic producers license to raise their prices." That move could jeopardize the sale of 111,000 aluminum boats, such as pontoons and fishing boats, that account for 43% of all new powerboat sales.

The boating industry has been enjoying a renaissance. Sales are at a 10-year high, helped in large part by the proliferation of aluminum boats, which cost less than fiberglass boats. Data from Statistical Surveys shows that sales of aluminum boats have been outpacing those of fiberglass for the past few years.

A tidal wave of repercussions

Polaris, though, isn't the only recreational vehicle (RV) manufacturer turning to boats to juice sales. Motorhome maker Winnebago (NYSE: WGO), which just purchased Chris-Craft, will also face a double whammy from the higher duties and raw-material price hikes (though it only exports its RVs to Canada, which accounts for about 7% of total sales). Bloomberg reports the duties will cause the cost of a wakeboard boat from Malibu Boats, the world's largest manufacturer of such towboats, to rise by about $10,000 Canadian, or about $7,600.

Although most of Boat Holdings $560 million in annual sales are in the U.S. and Canada, its individual brand divisions have dealerships worldwide. For example, its Bennington unit has dealers in Australia, Mexico, Europe, and South Africa, as well as the U.S. and Canada. Rinker also makes it boats available worldwide. Polaris said it was hoping to capitalize on the 11% compounded annual sales growth that pontoon boats have been witnessing since 2010, but a protracted trade war could end those ambitions.

Polaris has been fortunate that sales of its motorcycles have not been hurt like those of Harley-Davidson, but it may eventually choose to follow its rival and ship some of its motorcycle production overseas. Boatbuilding is largely a homegrown business, and though Boat Holdings sales are just a small portion of Polaris' total $5.4 billion, the higher tariffs and raw materials costs could ultimately make the acquisition an expensive new revenue stream.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Polaris Industries. The Motley Fool has a disclosure policy.