By most measures, Harley-Davidson has been having a rough ride. Motorcycle sales are falling in 2010, as they have for each of the last three years. The company does not expect a turnaround anytime soon. But despite that drought, Harley’s profits are rising — soaring, in fact. Last week, Harley reported a $71 million profit in the second quarter, more than triple what it earned a year ago. This seeming contradiction — falling sales and rising profits — is one reason the mood on Wall Street is so much more buoyant than in households, where pessimism runs deep and joblessness shows few signs of easing.
Many companies are focusing on cost-cutting to keep profits growing, but the benefits are mostly going to shareholders instead of the broader economy, as management conserves cash rather than bolstering hiring and production. Harley, for example, has announced plans to cut 1,400 to 1,600 more jobs by the end of next year. That is on top of 2,000 job cuts last year — more than a fifth of its work force.
“Because of high unemployment, management is using its leverage to get more hours out of workers,” said Robert C. Pozen, a senior lecturer at Harvard Business School and the former president of Fidelity Investments. “What’s worrisome is that American business has gotten used to being a lot leaner, and it could take a while before they start hiring again.”
And some of those businesses, including Harley-Davidson, are preparing for a future where they can prosper even if sales do not recover. Harley’s goal is to permanently be in a position to generate strong profits on a lower revenue base…the ability to raise profits in the face of declining sales is a triumph of productivity that makes the United States more globally competitive. The problem is that companies are not investing those earnings, instead letting cash pile up to levels not reached in nearly half a century.
“As long as corporations are reinvesting, the economy can grow,” said Ethan Harris, chief economist at Bank of America Merrill Lynch. “But if they’re taking those profits and saving them, rather than buying new equipment, it hurts overall growth. The longer this goes on, the more you worry about income being diverted to a sector that’s not spending.” “There’s no question that there is an income shift going on in the economy…Companies are squeezing their labor costs to build profits.”
In fact, while wages and salaries have barely budged from recession lows, profits have staged a vigorous recovery, jumping 40 percent between late 2008 and the first quarter of 2010. Harley-Davidson’s profit gain last quarter was helped by a turnaround in its financing unit, as well as more efficient production, but the company is still cutting. Harley has warned union employees…it would move production elsewhere in the United States if they did not agree to more flexible work rules and tens of millions in cost-saving measures.
Even if sales do improve, a surge in hiring is unlikely. “The last thing we’re worried about is when are we going to have to add more capacity, because what we’re really doing is reconfiguring our entire operational system for greater flexibility,” Keith Wandell, the company’s chief executive, said.This working-man's apocalypse is partly a result of the paradigm shift that has occurred over the last few decades (a guerilla class-war in which the plutocrats smartly defeated and virtually destroyed the middle class before we even knew what was happening) and partly an inevitable outcome of the devil's bargain H-D made the last time it became a publicly-traded company.
I really hate to beat up on H-D and their customers*, but for a 100+ year-old company which made so much from brand loyalty and labelling—and so little from engineering and quality control—it is galling. It is orphan-grade chutzpah to so lavishly reward Wall Street through devastating and empoverishing the union workers who builds their products. This shows such an incredible disconnect between the public face of H-D and its business strategy that it defies comprehension.
Frankly, I hope all the good, hard-working, hard-riding H-D owners will take a good long hard look at what H-D has become—reflected in its utter comtempt for the middle class—before they send another dime in the direction of Milwaukee. There are plenty of alternatives available to what was once an American icon, but is now just another metastatizing tumor, a corporatist cancer sucking the lifeblood from our country.
*Okay, technically, there's nothing I enjoy more...