Adidas’ Manufacturing 4.0: An opportunity to adjust to more restrictive trade agreements?

Adidas’ new bets on localization, automation, and customization not only provide competitive advantage in the sportswear industry but may also help the company build resilience to more restrictive trade agreements.

Isolationism and the apparel supply chain

Since the global financial growth meltdown of September 2008, protectionism has become a growth industry, with numerous nations opting for various direct and indirect barriers to trade [1].

Adidas, the largest sportswear manufacturer in Europe, is with its global and multi-layered supply chain particularly exposed to political risk surrounding multilateral trade agreements. Since it has outsourced most of its production to over 1000 factories in 63 countries, restrictive measures could lead to higher sourcing costs, restriction of sales to the producing countries, and higher tariffs [2]. These factors could significantly impact the company’s future market share, revenues, and profitability.

Adidas’s standpoint

While many global apparel and footwear manufacturers show increasing concern about possible changes in existing trade policies, Adidas CEO Kaspar Rorsted claimed not feeling too much pressure from a potential border adjustable tax (BAT). Instead, he views higher taxes due to protectionist policies as just another macroeconomic challenge global companies have to confront and argues that BAT would hit almost every global manufacturer evenly since approximately 80% of the sporting goods industry’s products are made in Asia [3].

Despite these claims, Adidas seems to be currently investing in new supply chain and manufacturing standards from which the company would largely benefit in case protectionist adjustments on trade agreements.

SPEEDFACTORIES and 3D printing

Starting a new era of footwear creation, Adidas is moving local and has announced the creation of “SPEEDFACTORIES”, in which customized sports shoes are manufactured with new production techniques and robots. These highly automated SPEEDFACTORIES reduce lead times, increase speed to market, allow customization to specific markets, and reduce transportation costs [4],[5],[6].

In these SPEEDFACTORY, Adidas is driving flexibility in customization to extremes through 3D printing. It has launched Futurecraft 3D, the first sneaker based 3D printed midsole in 2016 and is releasing in December 2017 the new Futurecraft 4D, a 3D printed running shoe midsole that is intended for larger scale production (100’000 pairs by the end of 2018) [8].

Adidas’ Futurecraft 4D [17]
The pilot SPEEDFACTORY in Ansbach, Germany, is the testing ground for this new manufacturing model and is since mid 2017 fully operational. A second SPEEDFACTORY facility is to be opened this Fall in Georgia, Atlanta. Even if the production of these SPEEDFACTORIES are still a small percentage of the total worldwide production, by 2023, nearly 20% of Adidas shoes would come out of automated factories [7].

Adidas’ new ways of manufacturing not only address cost efficiencies and new trends in the retail business but they also help Adidas build resilience to possible adjustments in trade agreements. Moreover, these innovations provide Adidas with significant competitive advantage that could boost revenues, with more direct sales, reduce discounts, improve margins and reduce operational risk [13]. This may be the reason why its CEO seems to be relatively unconcerned about the possibility of a BAT…


Other ways of mitigating political risks

As previously mentioned, around 80% of the production will still be outsourced by 2023. These new technologies will thus by far not suffice to mitigate the risk of changing trade agreements. To address the issue of increasing uncertainties in global trade policies, Adidas should also focus on (1) analyzing where the vulnerabilities in the supply chain are localized (e.g. manufacturing locations that are more prone to political instabilities) and (2) concentrate the production of Adidas’ more established product lines (as the Adidas Originals) in these countries. For these established product lines, future demand can more easily be forecast, allowing for supply chain optimizations and cost efficiencies (for example through lower inventory levels). These cost savings could help offset possible import tariffs that could compromise the profitability or demand for these products.

Not everyone is better off

While some high-skilled jobs may be returning to developed economies as Germany and the United States, automation and re-locating factories increases unemployment in the developing countries from which Adidas has for decades largely benefited.

Does Adidas now have the social responsibility to help find sustainable ways of relocating jobs that will be eliminated with a highly automated production? Or does this issue fall among the responsibilities of local governments?

Word Count: 727

Sources

[1] Joe Quinlan, “Insight: The perils of de-globalization”, financial times, 21 July 2009, https://www.ft.com/content/4747bc08-75fc-11de-84c7-00144feabdc0 , accessed in November 2017.

[2] Kevin O’Marah, “Trump and the supply chain implications”, Supply Chain Digital, 14 November 2017, http://www.supplychaindigital.com/logistics/trump-and-supply-chain-implications, accessed in November 2017.

[3] John Kell, “Adidas CEO Doesn’t Sweat Potential U.S. Border Tax”, Fortune, 8 March 2017, http://fortune.com/2017/03/08/adidas-ceo-usa-border-tax/, accessed in November 2017.

[4] Shoshanna Delventhal, “Nike, Adidas Adding Robots to Boost Supply by 2023”, investopedia, 8 June 2017, https://www.investopedia.com/news/nike-adidas-adding-robots-boost-supply-chain-2023/, accessed in November 2017.

[5] Adidas Group, “Supply Chain Approach”, https://www.adidas-group.com/en/sustainability/compliance/supply-chain-approach/#/supply-chain-structure/, accessed in November 2017.

[6] Adidas Group, “adidas expands production capabilities with SPEEDFACTORY in Germany”, 24 Mai 2016, https://www.adidas-group.com/en/media/news-archive/press-releases/2016/adidas-expands-production-capabilities-speedfactory-germany/, accessed in November 2017.

[7] Fox Business, “Nike, Adidas seen adding more robots to supply chain: Morgan Stanley”, 8 June 2017, http://www.foxbusiness.com/markets/2017/06/08/nike-adidas-adding-robots-to-supply-chain.html, accessed in November 2017.

[8] Michael Molitch-Hou, “Adidas Uses Carbon’s 3D Printing to Mass-Produce Futurecraft 4D Shoes”, Engineering.com, 5 July 2017 https://www.engineering.com/3DPrinting/3DPrintingArticles/ArticleID/14691/Adidas-Uses-Carbons-3D-Printing-to-Mass-Produce-Futurecraft-4D-Shoes.aspx, accessed in November 2017.

[9] Peter Yeoh, “Risk Issues in Global Supply Chain Management” (2017), Business Law Review, Issue 3, pp. 80-88.

[10] Dale Benton, “2016 the year of economic nationalism as supply chain risk reaches record high”, Supply Chain Digital, 17 February 2017, http://www.supplychaindigital.com/scm/2016-year-economic-nationalism-supply-chain-risk-reaches-record-high, accessed in November 2017.

[11] Timothy Apeppel, Mai Nguyen, “Sneakers show limits of trade policies in reviving jobs for Trump”, Reuters, 21 November 2016, https://www.reuters.com/article/us-usa-trump-trade-shoes-analysis/sneakers-show-limits-of-trade-policy-in-reviving-jobs-for-trump-idUSKBN13G1BF, accessed in November 2017.

[12] Suhas Sreedhar, “5 Things to Know About the 2017 Apparel Supply Chain”, apparel, 4 January 2017, https://apparelmag.com/5-things-know-about-2017-apparel-supply-chain, accessed in November 2017.

[13] Morgan Stanley, “Athletic Footwear Brands Chase Growth via Fast Fashion”, 5 July 2017, https://www.morganstanley.com/ideas/athletic-footwear-sneaker-brands-reset-for-fast-fashion/, accessed in November 2017.

[14] Adidas New Stream,“adidas Will Open Atlanta-Based Facility to Make Shoes in America”, 10 August 2016, http://news.adidas.com/US/Latest-News/ALL/adidas-will-open-atlanta-based-facility–to-make-shoes-in-america/s/4d105d93-794c-4282-9382-d50032585cc1 accessed in November 2017.

[15] The Economist, “Adidas’s high-tech factory brings production back to Germany”, 14 January 2017.

[16] https://www.fortiss.org/en/research/projects/speedfactory/

[17] https://www.stadiumgoods.com/futurecraft-cblack-black-glow-00na00

Previous:

Navigating New Storms: How The Body Shop is Building a Resilient Supply Chain

Next:

Which cow provided the milk for my Hershey’s chocolate bar?

5 thoughts on “Adidas’ Manufacturing 4.0: An opportunity to adjust to more restrictive trade agreements?

  1. While Adidas may gradually change how they employ the services of a supplier, they are not under any obligation to relocate jobs disrupted in their supply chain by automation. The suppliers can be viewed as simply vendors, and it is incumbent upon the management of the vendor firm to stay competitive. Much like we saw in Li & Fung, it’s quite possible to survive and thrive as a provider of commoditized services as firms find additional ways to add value. Creating added value never falls to the customer (Adidas), but always to firm serving the consumer.

  2. At first glance it seems like Adidas and its biggest competitor, Nike, are pursuing the same strategy. Similar to Adidas’s SPEEDFACTORIES, Nike recently announced the launch of ‘Express Lanes’ that are designed to cut lead time on a specific shoe design down from months to mere weeks. However, despite these major advances, I believe that speed of delivery to market will not be the primary factor that determines growth. Instead, I believe that geographic priorities will be the core difference that impacts future success.

    Adidas, a German-based company, has historically dominated the European market. However, at the end of 2016, Kasper Rørsted (CEO) announced the company would invest disproportionately in the United States in order to capture market share. Conversely, Nike, an American-based company, has historically dominated the US market but will look to move business internationally. During Nike Investor Day 2017, Mark Parker (CEO) announced that he anticipates 75% of growth over the coming years will occur outside of the US. These geographic priorities will require each company to locate their SPEEDFACTORIES/Express Lanes accordingly.

    By seeking to penetrate new markets, both companies have positioned themselves to be dependent on trade policies. Ultimately, success may depend less on consumer demand and more on who has developed a more resilient / flexible supply chain. I’m looking forward to seeing how this competition plays out!

  3. Interestingly enough, it appears Adidas is fighting one megratrend, isolationism, with another megatrend, increased digitalization in their supply chain. I agree with you that the CEO may be saying he is not worried about BAT because he is already proactively putting mechanisms in place to combat the possible repercussions. That said, I’m curious as to what Adidas’s competitors are doing. In many industries, competition is somewhat welcome, as long as there is a “level playing field”. In saying that BAT will impact competitors equally, I believe this level playing field is exactly what Rorsted is referring to. However, what you’ve pointed out is Adidas’s attempt to create a new competitive edge which will diminish the level playing field enacted by trade regulations. If other organizations are also exploring digitalization to create their own competitive advantages, Rorsted may not feel quite as confident considering Adidas’s large exposure to BAT.

  4. I agree with the author’s (and other commenters’) point about how BATs will generally impact all competitors within an industry evenly, so there isn’t much need to worry. But I think one element of that discussion which has not been explicitly mentioned is that this argument only holds true if the consumer is relatively price inelastic. I think it would be safe to assume that Adidas/Nike’s response to added BAT would be to pass that cost along to their customers through higher prices, but they are likely somewhat insulated in that there are not acceptable, cheaper substitutes readily available. This dynamic puts a little extra pressure on the branding to carry additional value for the consumer, who would now need to justify paying a higher price for the same pair of shoes they may have bought a year ago.

  5. It’s incredibly interesting how this article ties two trends together. What I’m still curious about is – how is Adidas planning to address its sourcing of raw materials? Will the costs of transportation mean that to keep competitive prices, raw materials will eventually need to be sourced from the same places that they place their SPEEDFACTORIES? I think management should keep this in mind, especially given the high level of investment that needs to into each SPEEDFACTORY.

Leave a comment