Firms try to redefine art of the deals for Trump
Warning that exiting trade pacts will result in higher costs, not more jobs
COMPANIES from appliance makers to car-parts suppliers have lined up to offer a quiet caution to US president-elect Donald Trump as he considers pulling his country from trade deals: most lost manufacturing jobs are not coming back, but higher costs for consumers could.
Consider the sneaker industry, one of the first to move to Asia because of the sharply lower cost of production in China and Vietnam.
Nike and its smaller, privately held rival New Balance Shoes split over the question of whether the US should back the Trans-Pacific Partnership trade deal. But if Trump and a Republican-controlled Congress nix that trade deal as expected, both companies and the analysts who track them agree Asia is poised to keep its dominance as the industry’s manufacturing hub.
Companies such as Nike have invested too much in those lower-wage economies to consider moving factories, even if tariffs rise and push up costs for US consumers, analysts say. Any new hiring in the US will be years down the road and depend on refining production technologies such as 3-D printing that could make it profitable to hire relatively small numbers of US production staff.
The same dynamic applies to other industries, such as car parts, which have moved production to Mexico over the past two decades, executives say.
That suggests a problem that the Trump administration will bump against if it tries to pursue a harder line on trade agreements from the North American Free Trade Agreement to TPP. Shoe companies, like other manufacturers, may well pass on higher costs to consumers, but few executives see a serious case for new hiring in the US because of a change in tariffs on imports.
“The idea of moving shoe manufacturing to advanced countries is a little bit of a farce,” said Ed Van Wezel, CEO of Hi-tech International Holdings, an Amsterdam-based shoemaker that sells about 30% of its shoes in the US. The US imports about 98% of its footwear — 2.5 billion pairs last year, or nearly eight pairs for every man, woman and child.
Shoemaking went offshore decades ago, mainly to China, because the process is so labour intensive. Making a single pair of running shoes can require up to 80 production steps.
The average shoe worker in Vietnam earns about $245 (about R3 500) a month, while shoe tariffs can range from zero up to 48%, according the US International Trade Commission. The average is just over 13%.
“The ones that stand to lose out here are consumers, because if we start to eliminate trade deals, they’ll be paying a lot more for shoes,” said Matt Priest, president of the Footwear Distributors and Retailers of America.
The same dynamic is seen in other industries. Ford Motor Company CEO Mark Fields said last week that big tariffs on cars and trucks imported from Mexico would hurt the auto industry and the US economy. He remained committed to making small cars in Mexico because the profits on making those cars in the US are so low.
New Balance, based in Boston, makes only about a quarter of the shoes it sells in the US at its five New England factories, and figures that costs 25% to 35% more than it would to make them in Asia.
The private company, owned by former marathoner Jim David and his wife, Ann, makes up for that cost disadvantage in part by producing higher-end and customised shoes in those US plants. If the company were publicly traded, it would likely face pressure from shareholders to move all its production abroad.
Nike imports nearly all its shoes, and fought for TPP, a trade deal that became a lightning rod in the recent presidential campaign. Nike said last year that it would create 10 000 manufacturing and engineering jobs in the US if the deal were adopted. Nike has clarified that those jobs would largely be aimed at creating more automated factories, not old-style production that would employ thousands of assemblers.
New Balance fought TPP, arguing that it would jeopardise its US plants by giving competitors such as Nike more profits they could pour into developing new machines, products and advertising.
That opposition has proved costly for the brand. In the wake of the election, a New Balance spokesman welcomed what he saw as a likely defeat for the trade deal.
Many critics seized on his comments as an endorsement of Trump, and some consumers burnt their shoes in protest. Backlash flared again after a neo-Nazi website proclaimed New Balance the “official shoes of white people”. The company said the original comments were only meant to reflect its opposition to the trade deal, not support for Trump.
“For us, this is and always has been about the creation and retention of manufacturing jobs in support of our five New England factories,” it said.
Beyond the furore, shoemakers are experimenting with ways to take human labour out of manufacturing their goods, wherever they are made.
Reebok, which is owned by Germany’s adidas, is building a laboratory in Rhode Island to refine a process to make shoes with liquid plastic.
“We’re looking at the entire process of shoe making from end to end with a clean sheet,” said Bill McInnis, who heads the programme to develop the manufacturing process.
Sceptics such as Van Wezel emphasise that the industry’s advanced automation efforts are still years away from being able to produce whole shoes at large scale and at low prices.
He said that at least for now, many of the materials used to make shoes would continue to come from Asia because that’s where suppliers were clustered.
“At this point, what you have is what we call ‘lick and stick’, putting together uppers and outsoles imported from Asia,” Van Wezel said. “It’s as much about a public relations story — that you’re producing close to the market.”
Matt Powell, an analyst who follows the shoe and other sports industries for NPD Group, a market research group, said the main problem with the new technologies is that Americans like cheap shoes and demand them in huge quantities.
“The only process of scale today is Nike’s Flynet,” he said. “They’ve made a million of those. But it’s important to remember that they sold 400 million shoes last year. So it’s still tiny.” —
Companies such as Nike have invested too much in those economies to consider moving