ECONOMICS OF WORLD SHOE PRODUCTION TRENDS
Economics, Ethics, and the Impacts of the Global Economy:
The Nike Example
Prof. Andrews, Prof. Nick Didow, Prof. James Peacock
April 30th, 1998
In just two years, we shall be in a new century and wondering if the economic order, which prevailed in the 1990’s, will continue into the next millennium. The laws of economics are not written in tablets of stone, judging by the different interpretation put on them by their practitioners, the economists. In the case of a product such as foot wear, there are those that say it is a ‘low-tech’ product and, as such, should be left to countries with low labor costs to produce. Just as water flows to the lowest level, so should footwear production fall to the lowest cost producer. This, to some degree, is theoretically correct. However, it ignores the requirement for high skill content, fast response to market requirement, political stability, availability of appropriate materials, infrastructure, marketing support, design and branding.
So, the picture is not one-dimensional and is affected by all these factors. The shoe industry has become truly global, with American styles popular in Europe, Italian experts upgrading Chinese leather production, US suppliers participating in Asian joint ventures, and firms from everywhere pursuing new markets such as Russia and newly developing markets in the Far East. A look at the movement of footwear in the last ten years will show that we cannot ignore the influence of price and costs, for example, in 1996 the average wage rate in Western Europe was around $7 per hour, in China, only $0.3 per hour.
There have been basic trends, which support this. For example, the governments in China and Thailand are offering incentives to companies willing to relocate from the towns to the countryside to help reduce labor and manufacturing costs.
The basic trends of the shoe industry have not necessarily been profound influences on the economies of South East Asia, but, since late 1997, severe economic problems have hit many Asian countries. This has caused currencies to devolve greatly, made many major domestic banking problems and a created great slow down in domestic markets, especially South Korea, Thailand and Indonesia.
Graph: Regional breakdown of footwear production around the world 1996
It is too early to know what the long-term effect will be – possibly the currency devaluation could even strengthen exporting companies. In the short term, however, some shoe companies are facing severe liquidity problems and significant numbers of bankruptcies are expected.
Nevertheless, worldwide footwear production is rising at about 2% per annum, exceeding 10 billion pairs in 1996. More people in the world are wearing footwear and less developed countries are starting to produce shoes for their domestic markets. Also people in the Far East are becoming more affluent and able to buy better quality footwear.
KOREA AND TAIWAN – PRODUCERS TO MANAGERS
The most obvious trend since the early 1980s has been the movement of footwear production from Taiwan and South Korea to China, Vietnam, India, Indonesia and Thailand, above all to China. This has been carried out, virtually exclusively on cost grounds alone. Looking more deeply into the reasons, it can be deduced that this change was predictable. Taiwan and South Korea themselves were chosen because of their, low costs, at the time, and they expanded through their (Original Equipment Manufacture) basis. Nike was among the first companies that started resourcing in Asia, based on a business plan that Phil Knight wrote at university, on the premise that all athletic shoes would be manufactured in the economies of East Asia. The South East Asian countries were not chosen for their inherent skills, quality levels, brands or country reputation. Nike moved in, in the early 1980s and it makes sense, therefore, that when their advantage – low cost – disappeared; they were vulnerable and lost that large part of their industry that had nothing to offer.
Graph: South Korea, India, Indonesia & Taiwan. Footwear Production 1996
What South Korea and Taiwan contractors picked up during their ‘good years’ were the contracts, the confidence of their Western partners, material and machinery, support industry and so on. So the strategy of South Korea and Taiwan emerged as a two-part operation. This looked to retain part of the industry that was able, with support from the Government, to upgrade its product and ‘attack’ the higher quality shoe sector. It also looked to retain a foothold in the low cost sector by assisting the newly developed shoe industries in countries such as China, Indonesia, Thailand and more recently Vietnam. Joint ventures with manufacturers in these countries became widespread as the need for technical knowledge, design skills, material supplies and contact/liaison with Western buyers brought about these new alliances. It is probably true to say that some of these ‘alliances’ were ‘marriages made in hell’ as partners quickly fell out. Inability to meet deadlines or to meet quality requirements became a problem and the use of ‘strong arm’ methods by supervisors from Korea or Taiwan to impose more rigid discipline on a slack workforce, were often ineffective, not to mention completely unacceptable. This became symptomatic of the relations and led to the widespread problems that Nike and the whole shoe industry is having to clean up today. Exhaustible production targets and stringent quality standards levied on completely inexperienced factories led to desperate measures on the Asian supply side – just to keep the contracts. However, for the majority of joint ventures the advantages of Koreans and Taiwanese running the factories meant that there is a convenient entrée for the Western buyer - dealing with the modern cities and established ports of Seoul, Taipei or Hong Kong rather than trying to find his or her way though the complexities and authority structures of China, Indonesia and Vietnam. This facilitates the trade but also places a real gap, both physical and cultural, between the Western Company and the actual factories. Although recently, more companies are beginning to deal more directly with China, India, Indonesia and Vietnam; training indigenous managers and receiving compliance from the governments and authorities.
It can be predicted that the Taiwanese and Korean industries will continue to decrease in volume terms and probably looking at core industries of no more than 100 million pairs by the end of the century with emphasis very much on higher cost and specialized products. The example of Reebok, which at one time was sourcing over 60% of its requirements from South Korea and now is down to the odd production line only, is an indication of the fate of volume production in these ‘original’ low cost shoe producing countries.
NEW ASIAN TIGERS
Whilst South Korea and Taiwan have lost out, three new ‘Asian tigers’ have arrived on the footwear scene with a vengeance, and being followed by another recruit to the big league, offering lower wages and keen work forces. Whilst Indonesia and Thailand have snapped up much of trainer business and increasingly also casual and town shoes, China has flattened everything in sight with an output of over 4,500 million pairs that represents one in every three pairs of shoes produced in the world. At a tenth of world wide shoe production, Thailand and Indonesia still have some way to go. Thailand at least, has established itself as capable of producing the more technically demanding items, whilst Indonesia enjoys cost advantage i.e. cheap labor. India is also becoming a major shoe producer, although mainly domestic brands for an increasing domestic market.
Vietnam relative new player already produces over 200 million pairs a year but the major sports companies, especially Nike, are already there and are expanding production in Vietnam. Now relations with the United States have become less frosty, Vietnam is considered almost as a matter of course in the deliberations of Western buyers when drawing up their sourcing lists.
Vietnam is certainly the new hot bed of production in the Pacific Basin – again largely due to low regulations and lowest costs. South Koreas average monthly wage rate in 1996 was $792, Vietnams was $45. Nike now constitutes over 5% of total Vietnam exports. Those companies that have taken the plunge and begun cooperation with firms in Vietnam have reported satisfaction with the quality of the work and attitude of the workforce. Investment to the value of US$100million has resulted from the joint venture partnerships in the last two to three years. There are some 80 significant shoe producers with a work force of 80,000 people. The potential is quite extensive, with over 70 million people, availability of local raw materials and the lowest labor costs in the Far East. The lifting of the US embargo is significant and the next stage is for the introduction of even more modern equipment.
Although there are more factories in the north, around Hanoi, the capacity is virtually the same between north and south (Ho-Chi-Minh City area). The Government is looking to triple exports in the next two or three years. Presently over 100 million pairs are exported. Some companies such as Hiep in Ho-Chi-Minh City have been privatized. Saigon Shoe is an example of a company that is working with an international company (Bata Malaysia).
CHINA – 1/3 WORLD SHOE PRODUCTION
Graph, Leading Footwear Producers 1996
Having said that the new interest in footwear production is in the ‘new Asian tigers’, we inevitably have to return to the major question of China and what is going to happen in the run up and into the 21st century. Currently China produces over 4.5 billion pairs of shoes a year and exports over 2.6 billion pairs (mainly to the United States); Nike alone employs over 90,000 workers. China has been fighting several battles despite having unparalleled success in selling its shoes through Hong Kong to the major shoe markets of the world, particularly those of European Union and the United States of America. The two main areas of concern for the Chinese are their ‘most favored nation’ status with America and the quotas proposed by the European Union. Despite calls from Congressmen and others for the MFN status to be dropped because of Human Rights claims, China continues, at least for the time being, to keep its favored trading status. How long the US president can sustain this is debatable and must be a factor to be considered in the future.
Of more immediate concern, because it has already happened, is the imposition of quotas by the EU on Chinese shoe imports. Unless shoes can be proved high-tech, then they are subject to those restrictions and already importers and resourcers have been feverishly making plans to source from elsewhere. It is not simply a matter of switching to a neighboring Asian country to circumnavigate the rules, companies are looking at other sources including Eastern and Western Europe so there may actually be an advantage for the European industries. For the Chinese, they must look at an over capacity situation and decide how best to react. Not everyone in China has welcomed the explosion of a market economy. Whilst Guangdong has prospered, not all regions have shared success. Much of the business with China is being conducted out of Japan or Hong Kong, so these ‘middle men’ will be considering their options in the light of the European initiative. For example, Hong Kong imports and exports approximately 1.4 billion pairs per year (mainly from China).
ITALY AND THE REST OF EUROPE
The most important footwear country in Europe has for many years been Italy. It has traditionally been the largest producer, the largest exporter of shoes in Italy counting for nearly half of Europe’s total shoe production. Home to the best designers, craftsmen and even, in Ars Sutoria, arguably the best seat of learning.
The worldwide recession hit Italy as it did every other country, and loss of volume, exports, jobs and particularly the low cost sector of the market ensued. This may have had the beneficial effect of focusing the Italian mind on doing what it does best – designing and producing high quality shoes. Certainly it can no longer compete at the bottom end of the market. After some bad years, there are signs that things are getting better, dependent as they are on a favorable movement in exchange rates and the devaluation of lira. This has been particularly important in a market such as the United States of America, although for some years now, Germany has been the principle destination of Italian made shoes.
It is all but impossible to produce some types of footwear in Italy now, unable to compete with so many of the low cost Asian economies. Sports footwear has almost disappeared from its traditional home of Barletta where New Play basket and Master Sport have closed. In the north, Diadora, Lotto and Simod continue with increasing reliance on overseas sourcing. Walking boots from the likes of Technica continue to hold a specialized sector. Nike, itself, has a very small line of exclusive golf shoes made in Italy.
The largest shoe company of all, Filanto in the ‘heel of Italy’ is perhaps so far removed from the rest of the industry as to go its own way. It is a very successful company under the tutelage of Antonio Filograna. Recently, it has set up production capacity in Albania due to convenient location and low production costs and regulations.
Italy is the largest supplier of footwear to the lucrative German market and the signs that Germany is coming through its unification problems will be encouraging to the Italian exporters. Whilst Italy remains a major shoe country in Europe, other countries have not been without their problems, and an inability to compete with low cost imports has seriously eroded production levels, culminating in the imposition of quotas on Chinese imports. Some countries are more at risk than others, being attractive because of the high prices they offer (Germany) or centralized nature of the sector (United Kingdom) or lack of domestic industry (Scandinavia, Benelux).
The largest, most lucrative market in Europe, is Germany. This has meant that every country has been trying to send its exports and consequently the domestic industry has been decimated with production not much more than fifty million pairs although it has to be said that many German subsidiaries are to be found in Portugal and Austria. Adidas and Puma seem to have weathered their personal storms and have learnt it is virtually impossible to produce sports shoes in Europe and that they have to produce American products for America. Germany itself has battled its way out of unification problems but it is more problematic to see their shoe industry retaining anything other than a core domestic production.
Spain is producing over two hundred million pairs of shoes a year. But Spain is not without its problems – an embarrassingly high unemployment level has dogged the Socialist administration although favorable increases in exchange rates have helped the trade balance in shoes. Virtually all the shoe companies are very small – unlike most of its European partners, and, at best, are grouped together for export purposes and to give greater flexibility. This flexibility and small scale is an advantage, on the one hand, but does not always lead to the creation of strong brands, which is something the Spanish shoe industry lacks. There are some established brands but not enough. Sara Navarro is a well-known fashion name, for example, and ‘Panama Jack’ with its life style connotations is a name for the 1990s, which has found success, particularly in Germany. Spain is also well known for its textile shoes – espadrilles especially – and leather shoes, not to mention the more ‘niche market, product of Western boots.
France has been vying with Spain for some years for the right to be the number two producer of shoes in Europe after Italy. Both have been ‘hovering’ around the two hundred million pairs production level but of late France with its tendency to ‘delocalisation’ has lost some production capacity.
The European Union has looked at Eastern Europe to see if short term gains in terms of low wages and proximity outweigh the problems of overmanning, pollution, land and property ownership disputes, lack of a market economy attitude and essential raising of wages and costs. Some progress has been made in the Czech republic with the split up of the giant SVIT empire into more manageable units and the emergence of new companies such as Inter compact and Novesta. Poland has had big problems with the large public concerns being forced close down and being replaced by very small-scale private enterprises. Hungary is very much reduced in size with privatization program still continuing. The former USSR has severe political, social and economic problems and these have impinged on it satellite footwear supplying countries in Eastern Europe.
In the Americas, asides from the sweat shop issue, the main talking point in the shoe industry continues to be the expansion of NAFTA (North American Free Trade Agreement) between Canada, the United States and Mexico. The effect of this on the shoe industries in the three countries is varied. Overall production in this region increased slightly in 1996, due almost entirely to Mexico, which increased by 32million pairs to become the 9th largest producer in the world. Exports from Mexico rose by a massive 44%. This may or may not have a major impact on shoe productions in America, particularly in respect to the vast volumes that are already being pumped into the United States from China. Any inroads that Mexico can make are likely to be small compared to China and, in any case, limited by the Chinese competition. However, in the garment industry more and more production is moving over the Southern boarder. Companies like Guess, under sweatshop pressure in the United States, have moved most of their production to Mexico.
China sends over 800m pairs to the United States and Mexico less than 10% of that. However, Mexico will enjoy proximity to the market, ability to react to market demands and supply, and repeat orders more quickly. It is also ‘putting its house in order’ with Government support, to improve quality, skills of the workers, marketing and design. The US shoe industry has struggled to contend with imports over the last few years and faces an import level of some 1000m pairs. Production is around 280m pairs, much of which is made or part-made offshore in the Dominican Republic, Puerto Rico and elsewhere. Exports of American lifestyle brands such as Timberland, Sebago, Bass, Wolverine and Dexter are seen in the high streets of Europe and elsewhere – not to mention its athletic shoe contributions world wide.
On the South American continent, Brazil is the long-term high profile country with a significant export performance, 90% of which has traditionally gone to the United States. Brazil saw a decrease in its shoe production in 1995, only to be reversed in subsequent years. Despite the increase of 86 million pairs, Brazil has fallen from second to fourth in the Top Ten World Producers. The Brazilians have been anxious to reduce this dependence upon one market and have been actively trying to develop others, especially in Europe. Exports (haven risen 10%) of 150m pairs represent about 25% of production. Again, a trading ‘bloc’ Mercosur is operating in South America and one can only speculate as to how this will affect the two principal shoe industries of Brazil and Argentina. Of the other South American countries, Chile appears to be ‘on the up’ whilst Columbia – problems of all types – and Venezuela are going through difficult periods.
Over the years, the sports footwear market has changed considerably and today covers, as illustrated by Nike’s product offering, covers much more than training shoes. It is reported to be worth an estimated $25 billion, with Asia once again being the largest sports footwear producer. The abundance of cheap labor within the region is one of its greatest advantages, as in the rest of the industry (as shown above), as price plays such a crucial role in the sports footwear market. Over 95% of branded athletic footwear have reported to be produced in Asia and many of the worldwide sports companies source their shoes from this region. Previously South Korea and Taiwan dominated production in Asia, but as labor costs have increased, there has been significant shift to other cheaper countries. China, Indonesia and Vietnam, for example, have all become major sports footwear producers. Indonesia has around 24 factories producing shoes for the three top brands (Nike one of them) and supplied about 35% of the shoes sold under these names. Vietnam is developing close links with the major brands, including Nike. Adventure shoes are the fashion item for 1998 in the American teenage market and leather is still the most popular upper for all sports shoes. Synthetic materials are, however, becoming more popular, where fashions require textile meshes etc… as seen on new Nike products.
As Phil Knight asserted, the ‘needle industries’ represent a crucial first rung on the ladder of Economic Development. Providing employment and training for a relatively unskilled workforce. After his pioneering efforts to import athletic shoes from Japan, Taiwan and Korea in the 1960s and sell them out of a backpack at California track meets. The world has witnessed Nike develop into a multi billion dollar corporation and Japan, Taiwan and Korea develop their economies to become arguably the most profitable countries in the 1990s. As Phil Knight so clearly declared, trade is the most important factor for the development of economies. The needle industry, as the first stage to industrialization, is labor intensive and apparently, can only be competitive in an economy as long as the labor costs are at rock bottom, i.e. until the average wage reaches approximately $10,000 per year (in 1998 parities). The end to the road of relocating on a lowest cost basis is not in sight in the near future.
Phil Knight proclaims the Needle industries to be the major ‘first-step’ of the economic fruition of the Asian Tigers. To this logic, currently countries like Vietnam are in line for similar economic ‘success’. There are other factors to be considered, like government policy, historical factors and culture. Mexico is an interesting comparison to Vietnam (both countries are experiencing the major investments and growth in the needle industries presently). Phil Knight clearly argues, trade is the only way for these countries to achieve prosperity. He would go even further, not only is trade important to economies, but to world peace, "if trade does not cross boarders, soldiers will". So, if trade is the answer:
Economic ‘blocs’ are becoming increasingly important whilst free trade and import restriction battles (along the same principles of military battles of the bygone era) are continuing, as is Chinese imports into Europe and China’s MFN status in the USA and the latest GATT round. However, underlying all this will still be the cost of labor and the exchange rate. Or will, the shoe industry reach new levels of automation? Unlikely as leather remains the key material (leather shoes still count for over 50% of worldwide shoe production) and machines cannot yet read the grains and stress lines of an unpredictable ‘animal’ material. Shoe manufacture does not look likely to experience any major revolution in the near future; so the question becomes, how to maximize the present system, currently under so much scrutiny – exploited workforces, cultures ignored, outrageous profit margins to multi-national corporations, environmental degradation and massive increases in inequality.
As the governments decrease in size and power, seemingly proportionally to the increase in the size and power of corporations - the global economy brings countries closer together, and we are faced with a new corporate world-rule. Who will monitor trade violations? Ideally a world body, (one does not exist yet) will be set up to set industry wide standards and expectations. But, the fundamental contradiction is that in a culturally heterogeneous world, how can a worldwide systemic model be imposed? In a neo-libertarian world, who will keep corporations like Nike in check, when their number one concern is the bottom line and the leading product at the best price?
Governments seem wholly incapable of responding. We are experiencing a crisis of governance born on a convergence of ideological, political, and technological forces behind a process of economic globalization that is shifting power away from governments, responsible for the public good and toward a handful of corporations and financial institutions driven by a single imperative – the quest for short term financial gain. This has concentrated massive economic and political power in the hands of an elite few whose absolute share of the products of a declining pool of natural wealth continues to increase at a substantial rate – thus reassuring, people like Phil Knight, that the current ‘trading’ system is working perfectly well.
Watch this space for the solutions…
World Footwear Markets 1998, SATRA Technology Center, 1998
World Footwear Markets 1997, SATRA Technology Center, 1997
Various Articles from Footwear News.
"Minority rules", March23, 1998
"Merging edges (footwear fashions)". March9, 1998.
"Putting time machine in reverse." Feb16, 1998
"The information age: today’s consumers are hungry for knowledge." Feb9, 1998.
"Behavioral Science: how footwear firms crawl inside men’s heads."Feb9, 1998.
"US shoe Brands in Asia clawed by tiger’s woes", Jan5, 1998.
"1998, an auspicious year for footwear?" Jan5, 1998
"Hoping for better times ahead." Jan5, 1998.
"Cool comfort gains admirers." August 11, 1997
"Developing Monitoring Systems in the footwear Industry", July8, 1997.
"Tough styles: low-tech shoes made with high-tech fibers." August 12, 1996.
Korten, David. When Corporations Rule the World. Earthscan, 1995