Battered by escalating costs and worker shortages, footwear manufacturers brace for a tough year ahead in the People’s Republic—and begin to look elsewhere for sourcing. By Audrey Goodson
As the Chinese New Year winds down, many manufacturers find themselves faced with the same annual anxiety: How many employees will return after the 15-day hiatus ends? But footwear factory owners could be forgiven for being particularly concerned this year. As a country with an estimated 200 million migrant workers, predicting how many will return to work in February is a perennial challenge. But a number of ills plaguing footwear factories in China, from worker shortages to rapidly rising material costs, means the manufacturing scene in 2012 may be more unpredictable—and expensive—than ever.
“China is no longer the low-cost manufacturing platform that it once was,” says Erik Autor, vice president and international trade counsel at the National Retail Federation. “The economy is diversifying into less labor-intensive industries, labor costs have gone up 40 percent in the last year and a half, the Chinese currency continues to appreciate, the cost of raw materials has increased and there’s volatility in fuel prices. All of these things are really driving up the cost of doing business in China.”
In many ways, manufacturers in China have become a victim of their own success. As the country’s labor force increases, its workers have become more prosperous, developing their own desire for consumer goods—especially those with an American label. “Chinese shoppers like American brands, even if they are made in China, because they have cache and a reputation for quality,” Autor adds. Not to mention, as the economy grows, the Chinese government and foreign investors are increasingly encouraging manufacturers to switch to more profitable sectors, like aircraft, automobiles and technology, in the country’s prosperous coastal provinces like Guangdong—the world’s epicenter of footwear manufacturing. “That growth in the internal market means that if you are placing orders for export, it may be harder to find the production capacity in China that can meet the timetable for your orders,” Autor points out.
It translates into a “cash-and-carry way of doing business,” says Tom Romeo, CEO of Bearpaw. With a shrinking number of footwear factories, companies can no longer count on long terms to pay for goods and smaller orders often get pushed to the back of the line. “Now, more so than in the past, factories have higher minimums,” says James Matush, general manager for Restricted Footwear. “The more you buy, the more they move you up. Even if you pay first, they will move up the company that bought more material first.”
This new normal leaves little room for error—“You’ve got one hiccup and you’re late,” Romeo notes—and makes it nearly impossible to reorder hot styles without a warehouse of materials at the ready. “It’s been very hard to find in-season reorders, particularly on seasonal items like boots,” notes Bill Combs, CEO of Bogs Footwear and owner of Burch’s shoe store in Eugene, OR. And stocking a large supply of materials is especially precarious with the skyrocketing cost of commodities like leather, cotton and sheepskin. Romeo reports that sheepskin has gone up by as much as 20 to 40 percent, while Matush estimates leather costs have increased 20 percent for Restricted. In addition, overall material costs have been exacerbated by new regulations that require harder-to-locate lead-free materials.
It’s a perfect storm of problems that’s sent manufacturing costs spiraling in recent years—right at a time when cash-strapped shoppers are protesting every penny the price of goods are raised. “This year is the most I’ve ever seen consumers say, ‘No, I won’t pay that price. I’m not paying more,’” Romeo notes. It’s forced footwear manufacturers, Autor says, to absorb much of the increased costs. “Because of the precarious state of the economy, so far we’ve seen companies try to eat those excess costs or find other ways to cut back instead of passing them on to the consumer—because in this economy, raising prices will lead to a decrease in sales.”
For some brands, that’s meant cutting costs by moving away from the southern coastal provinces, where workers’ wages have steadily increased and will likely double within the next five years. “Some of our factories have moved from the coastline to further inland,” confirms Avi Ben-Zikry, co-founder of Spring Footwear, makers of Spring Step and Fly Flot. Matt Dragos, president of Rialto, says the brand started to move out of the Guangdong province about three years ago. “We are now producing footwear in several provinces in China and continue to look at new locations where we can establish the same strong partnerships,” he says, noting the majority of the brand’s product is now made outside of Guangdong province. Gary Champion, president of Earth, says the company has already moved some of its factories further north, with plans to move more in the future, and Romeo says Bearpaw is also looking to shift its remaining southern factories northward.
Yet Autor at the NRF remains skeptical that the move inland will solve what woes the industry. “The problem is that it increases your transportation costs and you’re going to have a more difficult time getting the skilled workforce,” he says, adding that it often becomes cheaper at that point to simply pull up the stakes and manufacture in another country.
And that’s, in fact, what some footwear brands are starting to do, says Matt Priest, president of the Footwear Distributors & Retailers of America (FDRA). He reports that the number of pairs coming into the U.S. from China decreased from 2010 to 2011, while the number of pairs coming from Vietnam and Indonesia increased by more than 21 and 24 percent, respectively. “What we’re seeing is companies looking for countries that they may have sourced from before,” Priest says. Vietnam, he adds, may become a particularly popular manufacturing spot, pending the passage of the Trans-Pacific Partnership Agreement, a free-trade agreement between the U.S. and nine Pacific-rim nations that would eliminate import duties on footwear.
In fact, in response to the shifting manufacturing scene, the FDRA is now offering educational clinics this year for manufacturers based in Indonesia and Vietnam. “We are educating factories that aren’t used to making footwear for the U.S. market on what the requirements are regulatory-wise and social compliance-wise, as well as about the expectation of customers here,” Priest explains. “We can’t control a lot of the cost variables, but we can make the transition easier for factories that aren’t used to working with U.S. customers.”
Making that transition, leaders say, is one of the toughest—and most expensive—parts of producing in another country. “We’re going to start some production this fall in Cambodia,” notes Combs at Bogs. “We think it takes approximately six months for a factory to get up and running, so we’ll have them start small with the simplest shoes that are easiest to make.”
That was the same tack German-brand Ara took when it opened factories in Ethiopia a year ago, says Tobias Zimmerer, CEO of Ara Shoes AG. Now its factories, located just outside of Addis Ababa, are producing 600 pairs of shoes a day from Ara’s regular collection. Zimmerer cites Ethiopia’s low labor costs and tanneries that produce “really good quality leather” as two of the country’s primary benefits. “We invested a lot of money in training people, and that is the biggest part when you start in a country like Ethiopia—they don’t have a lot of experience in shoe production. At the moment it has its challenges, but for the long-term, we think it will really be beneficial.”
Jordie Saliman, an international footwear business consultant, seconds Ethiopia’s potential as the next footwear and apparel manufacturing hotspot. “The average worker in Ethiopia makes $50 a month, while the average worker in China makes $350,” he notes, adding that the country enjoys duty-free shipping to the U.S. and is home to the largest cattle herd in Africa. “The World Bank and Asian markets are investing heavily—buying tanneries, building factories and building four-lane highways,” he adds, noting that there are 75 footwear factories in the pipeline for Ethiopia in the next five years.
Yet even with countries like Cambodia, Vietnam, Indonesia and Ethiopia poised to take a bigger piece of the world’s footwear manufacturing, an overwhelming portion of the pie still remains in China, which from October 2010 to October 2011 supplied the U.S. with almost 86 percent of its shoes, according to the U.S. Department of Commerce. “The labor force is in China, and it’s still relatively inexpensive to make the shoes there,” Champion points out, adding, “I don’t see any big chunks going to any other countries, because they simply aren’t prepared to handle that shift.” And Romeo at Bearpaw notes that moving is often more trouble than it’s worth. “A lot of our materials are sheepskin and wool, which come from far north in China. If we move, we may save money on labor, but we just raised our logistic costs,” he notes. “And even if the other countries have the factories, do they have the tanneries to dye our sheepskin? That’s where it becomes difficult.”
For Champion, the solution has simply been to base its operations—500 employees strong—in China. “That’s where we have our own tannery, development office, planners and quality control team. We’ve always had a strong base over there to watch over our business,” he says. Dragos at Rialto notes that maintaining those strong ties are key to keeping costs low. “Our biggest strength is our partnerships and relationships, both with our factories and with our customers,” he notes. “We’ve tried to minimize our pricing increases by stricter negotiations and by trying to meet all of the factory requirements. Factories trust us in China; we have an impeccable reputation of paying bills, and that partnership has helped us.”
But even for companies like Rialto that are committed to staying in China for the short-term, Dragos notes that the ability to maneuver amidst crisis is crucial. “A two-ton truck driving down the road 60 or 70 miles an hour is hard to turn,” he points out. “We’re very lean and we keep it very entrepreneurial so we can adapt very quickly to the changing times. We know things aren’t going to be the same four or five years from now.” Saliman believes that means now is the time to start lining up sourcing alternatives. “People have to position themselves, build those relationships and get started,” he says. “You have to get in these countries now, because three years from now you won’t be able to get in.”
In the meantime, as escalating costs out of China continue to ward off a price-conscious consumer, industry leaders agree that brands must be on-target style-wise and honest with their customers about price increases and shipping delays. “Communication is key. You must constantly stay in tune with them and tell them what’s going on,” Romeo maintains. “You have to be more relevant and more important to your customer than ever.”