The U.S. tariff hike on exported Chinese goods that went into effect today creates a challenge for powersports OEMs — but particularly for Polaris Industries, Morningstar Ratings analyst Jaime Katz told Powersports Finance.
In the ongoing trade war between the U.S. and China, the U.S. hiked tariffs to 25% from 10% on $200 billion worth of Chinese exports after negotiations held in Washington fell through. The hike went into effect at 12:01 a.m. ET on Friday.
The higher tariffs will impact Polaris and Harley-Davidson, which do business in China. However, the tariffs could have larger implications for Polaris, which sources about 15% of its components from China and assembles them in the United States.
Polaris is expected to take a hit between $195 million and $200 million with the Chinese tariffs, which would be “downright catastrophic” for the company, Polaris Chief Executive Scott Wine told CNBC on Tuesday.
Increased tariffs could erase a third of the company’s net income, the CEO added.
The effects of adjusting business operations to offset the tariff cost could eventually have an impact on consumers, as any price or product changes in the near future could halt buying habits.
“There is going to have to be a material reset to consumer expectations,” Katz explained. “If your net income is getting sliced by a third, then you don’t have that money to reinvest back into innovation, research, and design. So that means your newness cycle could theoretically slow down and could slow your share gains and then your top line growth. It’s this domino effect.”
The tariffs will likely not impact second-quarter results, as vehicle shipments have already been made. The market is currently “not unhealthy,” as Polaris reported that vehicle sales increased 15% to $1.5 billion in the first quarter, Katz added.
“I think the [volume of] consumers still coming to the table with dollars to spend and share of wallet hasn’t been necessarily shrinking,” Katz said. “But all of these bigger economic overhangs eventually trickle down to the consumer and could provide a hard stop to that spending at some point.”
Polaris remains hopeful that its tariff exemption will be approved, Wine told CNBC.