Nike Tries to Outrun Nationalism

Nike is in a precarious position as global superpowers fight over free trade agreements. Can Nike and its global supply chain successfully confront the rise of nationalism?

In May 2015, Nike joined President Barack Obama in supporting the Trans-Pacific Partnership (TPP), a trade agreement among a dozen countries including the United States and Vietnam [1].  The deal, if approved, would reduce or eliminate the approximate 20% tariff on athletic shoes imported from Vietnam, where Nike currently manufactures approximately 46% of its branded footwear [2,3].  Wall Street analysts estimated the deal would improve Nike’s gross margins by 0.5% and result in a ~4% increase in earnings [4].

It is unsurprising that Nike is a fervent supporter of free trade considering the financial impact and the company’s global reach.  Nike products are manufactured in 566 factories, distributed through 75 distribution centers, and sold in over 30,000 retailers located in more than 190 countries [5].  Mark Parker, President and CEO of Nike, has said, “we believe agreements that encourage free and fair trade allow Nike to do what we do best: innovate, expand our businesses and drive economic growth” [1].  Unfortunately for Nike, the United States withdrew from the TPP deal with the election of Donald Trump, and free trade is being increasingly rejected by voters in the United States and Europe as demonstrated by the United States’ 2016 election, Brexit and the growing power of the nationalistic movement in both regions.

Of all the threats President Trump has made against free trade, the potential trade war with China would have the most negative impact on Nike’s operations [6,7].  Nike views China as a tremendous growth opportunity with sales growing 18% per year since 2015 while still only representing 13% of total branded revenue [3].  Conflict between the two global powers could have disastrous effects on supply chain costs and the Chinese retail opportunity.

In response to these nationalistic threats, Nike has taken the offensive by lobbying public policy, shifting to more onshore manufacturing, and increasing manufacturing automation.  Nike hired the Alpine Group, a lobbyist firm, in 2013 to help influence trade policy [8].  Although at first successful during the Obama administration, their lobbying efforts have stalled under the nationalistic Trump administration.

Additionally, to confront nationalistic trends in the medium term, Nike launched a “manufacturing revolution” initiative which will move manufacturing onshore or nearshore to serve major markets.  The company formed North American strategic partnerships with Flextronics in 2015 to manufacture footwear and with the private equity firm Apollo Global Management in 2016 to manufacture apparel.  Not only will this initiative allow the company to avoid costly tariffs, but it will also shorten the time it takes to bring a product to market from 60 days down to 10.  As a result, Nike can better align consumer demand with product supply, which will lead to better sell through and lower markdowns [9].

Nike plans to further optimize their supply chain by investing in innovation and automation.  Through new digitization and robotics technology, Nike can now manufacture a pair of uppers in only 30 seconds with 30% fewer steps and up to 50% less labor [5].  Automation has drastically decreased labor content per unit allowing Nike to move some manufacturing onshore.  However, Nike’s actions illustrate that isolationist policies may help bring manufacturing back home, but the expected jobs may not follow.

Even though Nike has made some effective moves to confront isolationism, they can do more.  Specifically, they should change their lobbying approach and prepare a contingency plan if trade wars ensue.  Instead of taking their free trade message to D.C., they should speak directly to consumers.  Nike can educate consumers that free trade will create savings that will be passed along to consumers through lower prices.  To avoid being labeled as anti-American, they can continue to tout their commitment to bring 10,000 manufacturing jobs back to the United States [1].

In addition, the company should have a plan in place to move manufacturing from China to the United States or alternative low-cost countries in the result of a United States versus China trade war.  If President Trump follows through on his threat to halt all trade with China, it would spell financial disaster for Nike [9].  Not only would Nike no longer be able to sell China-made goods in the United States but China may also respond by restricting American companies’ access to the Chinese market.  Even if the President takes a more modest approach and fulfills his campaign promise to increase Chinese tariffs to 45%, Nike would likely need to find alternative locations to manufacture goods [10].  Nike should decrease their supply chain exposure to China where possible and develop a supply chain restructuring plan to implement if a trade war begins.

However, questions remain.  How best can Nike advocate for free trade policies that protect their financial interests?  How worried should Nike be about Trump’s threats against China, and what precautions should they take?

(796 words)

Sources:

  1. “Nike Welcomes President Obama to its World Headquarters,” NIKE, Inc. press release (Beaverton, Oregon, May 8, 2015).
  2. Dennis Green, “Trump’s policies have Nike facing one of its biggest threats in history,” Business Insider, January 26, 2017, www.businessinsider.com/how-trump-will-affect-nike-2017-1, accessed November 2017.
  3. NIKE, Inc., 2017 Annual Report (Beaverton, Oregon).
  4. Peter Pham, “The TPP-Induced Love Triangle Between Nike, The U.S. And Vietnam,” Forbes, October 29, 2015, www.forbes.com/sites/peterpham/2015/10/29/the-tpp-induced-love-triangle-between-nike-the-u-s-and-vietnam/#69a45d1a5587, accessed November 2017.
  5. NIKE, Inc., October 25, 2017 Analyst/Investor Day.
  6. Donald Trump (realdonaldtrump), “We are in the NAFTA (worst trade deal ever made) renegotiation process with Mexico & Canada.Both being very difficult,may have to terminate?” Twitter post, 27 August 2017, 6:51 a.m., https://twitter.com/realdonaldtrump.
  7. Ylan Mui, Matea Gold and Max Ehrenfreund, “Trump threatens ‘consequences’ for U.S. firms that relocate offshore,” The Washington Post, December 1, 2016, www.washingtonpost.com/politics/trump-threatens-consequences-for-us-firms-that-relocate-offshore/2016/12/01/a2429330-b7e4-11e6-959c-172c82123976_story.html?utm_term=.d8761e07b265, accessed November 2017.
  8. Catherine Ho, “Nike fights to lower duties on foreign-made shoes; Freedom to Marry lobbies to repeal DOMA,” The Washington Post, February 17, 2013, www.washingtonpost.com/business/capitalbusiness/nike-fights-to-lower-duties-on-foreign-made-shoes-freedom-to-marry-lobbies-to-repeal-doma/2013/02/15/d417750a-7496-11e2-95e4-6148e45d7adb_story.html?utm_term=.e095b0f4f070, accessed November 2017.
  9. Cathleen Decker, Jonathan Kaiman and Jessica Meyers, “Trump tweets that U.S. might end trade with countries doing business with North Korea,” September 3, 2017, www.latimes.com/politics/la-pol-updates-trump-tweets-north-korea-trade-sanctions-htmlstory.html, accessed November 2017.
  10. Maggie Haberman, “Donald Trump Says He Favors Big Tariffs on Chinese Exports,” January 7, 2016, www.nytimes.com/politics/first-draft/2016/01/07/donald-trump-says-he-favors-big-tariffs-on-chinese-exports/, accessed November 2017.

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15 thoughts on “Nike Tries to Outrun Nationalism

  1. By withdrawing from the TPP, the current administration ensured that companies such as Nike will have a more difficult time competing in international markets. The other 11 nations involved in the deal are all granting one another preferential market access, leaving the United States exposed to a number of dangers that are beginning to come to light. If I were Nike, I would highlight the American lobster producers whose prices are being undercut by Canadian producers in the wake of a new Canadian-EU trade agreement. This will show the affects of a nationalistic approach and the threat of many more stories like these under our current administration’s policies. Unilateralism in trade is generally not sustainable, and Nike should leverage its size and voice to show how dire the consequences of it can be.

  2. It’s always interesting how anti-trade measures designed to keep jobs within borders fail to acknowledge the consequences of doing so. As you allude to, replicating Nike’s current operations in the U.S. (with its minimum wage rates, unions, and high capital expenses) would likely decrease the number of Americans actually able to afford Nikes. Alternatively, Nike could rely more heavily on automation, dramatically reducing variable costs and severely cutting their workforce. I’m also curious how the current administration weighs the benefits of increased tax revenue against local job growth since the former seems achievable even under a largely automated system. Either way, I couldn’t agree more that Nike should use its marketing might to speak directly to consumers (and voters) for whom these alternatives would perhaps be deemed undesirable or come as a surprise.

    Tangentially related, I wonder if Nike’s considered the impact of a “Made In America” line and whether and to what extent it could (with a strategic ad campaign, anyway) increase willingness to pay. Otherwise, I’m curious how Nike plans to offset the increased costs. Will they pass them on to the consumer? Also, while the shorted production cycle time is of note, I am skeptical that decreasing days to market is of much value for Nike when their marketing strategy is largely celebrity and sport driven, and (as far as I can tell) less reactive to consumer wants than it is the creator of them. It will be interesting to see if this actually results in better sell through rates and fewer markdowns.

    One thing you didn’t touch on, but I’m curious about, is the procurement of raw materials. Are all necessary components available within the U.S. (or China, for that matter) or will Nike have to pay tariffs on importing raw materials? I would love to know more about the specifics of the supply chain and how nationalism will affect not just the cost of goods but also the quality. Assuming raw material availability and consistent quality, is it possible that America’s isolationist movement will actually result in even higher margins for Nike as they consider largely automated manufacturing plants in the U.S. such that they avoid tariffs, high transportation costs, and increased labor expenses?

  3. The withdrawal from the TPP deal is just one of many initiatives to increase isolationist trade by the Trump Administration. With these new anti-trade regulations, all companies with even the slightest international presence will be affected. I agree that Nike should talk to its customers and educate them on the negative effects isolationism will directly have on them (increase costs, access to less choices on goods, etc.) but they should also continue to lobby the government. Nike should be clear on its long-term strategy to reduce costs through factory automation if the government does not allow free trade, which as mentioned will reduce the available job opportunities domestically. Sharing this information will hopefully demonstrate to the government why certain policies may not work as they intended, and may cause them to think more long-term. The more companies that can lobby against these restrictions and share similar stories, the better chance the government will listen and make changes.

  4. Nike should be worried enough about Trump’s threats against China to develop contingency plans. Trump understands that many American businesses that are vital to the U.S. economy would suffer significantly if a trade war with China is realized. Many companies manufacture a majority of their products in China but sell in the U.S. If those companies were no longer granted access to China, or could not sell in the U.S., then their entire business model suffers. Instead of choosing this extreme scenario, I do believe Trump could impose significant tariffs for Chinese-manufactured goods. In this scenario, Nike must determine how to best redirect its manufacturing operations to other low-cost countries, with the goal of minimizing cost increases. Ironically, this solution only shifts manufacturing to the next low-cost country, and does not generate more American jobs, which is one outcome Trump is hoping to achieve by imposing tariffs.

  5. This is an interesting piece that clearly lays out all of the ways in which a shift to isolationism would be detrimental to Nike’s supply chain. If Trump really did get us into a trade war with China, Nike would be among a large number of companies that would stand to lose enormously from the increase in import costs or potential halting of the flow of goods altogether. I wonder whether, in their lobbying efforts, Nike could team up with other companies who stand to lose and push their collective agenda on capital hill. In doing this, I would hope that they could effectively counter the arguments in support of isolationism and show the overall detrimental effect of a trade war to the American economy. While it is all well and good for Nike to move some of its manufacturing to the U.S., there is no way they could afford to produce everything domestically and keep their current pricing structure. They must do everything they can to protect the free trade that enables their supply chain and the supply chains of so many other brands we enjoy.

  6. Interesting piece on the impact for Nike of withdrawing from the TPP. For multinationals such as Nike (especially ones that manufacture so much of their products overseas), free trade is essential to business. Even though China’s overall growth has “slowed” to about 5% over the past couple years, the country is still a huge potential growth area for China (as well as other countries in Asia and, in my opinion, South America). If a trade war persists, would China move manufacturing back to the US? I’m not so sure, but they would need to act quickly in any case. Like the author mentioned, Nike needs to continue to lobby in DC and educate consumers on free trade policies. More than anything, they need to continue to innovate in their supply chain to reduce costs so that manufacturing in the US won’t be [as] costly for them, should they decide to ultimately go that route.

  7. Interesting read! One important action that I believe Nike needs to take in this effort is addressing the other side of the argument (e.g. pro-nationalism), as I believe it would strengthen their argument. I do agree that Nike educate consumers about nationalism and its potential drawbacks, because it can also mobilize these consumers as a powerful way to spread its message. After educating consumers, media campaigns featuring real consumers presenting how the issue affects them could also be powerful. If Nike does decide to take precautions and begins to move manufacturing to the U.S., however, I would recommend that they do so very quietly. If it becomes known that they are doing so, it could be seen as a sign of them giving up their efforts.

  8. After reading the post, I wonder about how countries (and especially China) will think about a given company’s nationality in the event of a trade war. That is, is Nike an American company because it’s based in Oregon, or can you make the argument that if the majority of their manufacturing is overseas, they are really a global company. The answer to that question is important, because the tariffs you’re worried about could be levied against Nike regardless of where they manufacture; isolationism could convince countries that they need to protect domestic companies over American ones, regardless of where the American company is manufacturing its goods. Moving production to a given country, then, doesn’t necessarily solve Nike’s concerns about isolationism and potential trade wars — they could be penalized regardless of their place of production.

  9. This is an interesting subject. I think Nike’s move to bring manufacturing closer to market as part of its “manufacturing revolution” initiative is an interesting response. I wonder how this move will play out in the long term. The shortening of lead times and potential for better inventory management are additional incentives for them to make this change. Can they use these other metrics to somewhat offset the increased manufacturing costs?

    As they look into the future, the advantages of bringing manufacturing closer to market may go beyond hedging against isolationist movements. This change may also allow Nike to make a strategic change enabling them to be more agile and quick-to-market in their supply chain. They can put innovations on shelf more quickly, adapt to demand more easily, and ultimately save on expenses incurred while expediting products around the world. Perhaps, these other aspects of moving manufacturing will give them savings in the long term that will help offset the additional costs these trade agreements will lead to in the short term.

  10. I think this article is informative on a complex topic. One of the catch 22s of the topic is that Nike is in fact bring manufacturing back to the US because of isolationist views and changes in policy, signaling that the policies are being effective. However, another catch 22 is that the policies are designed to bring back manufacturing so more workers are employed and instead Nike (and other manufacturers) is increasingly utilizing automation as a way to reduce cost.

    However, even with the TPP off the table, I do think Nike has valuable manufacturing assets in the right place for the growth of the company. The article mentions that China is growing at 18% per year, so in a world with high tariffs from China and Asia as a whole, Nike can fulfill the growing Chinese demand with onshore manufacturing, and continue to invest in US onshore and nearshore manufacturing, utilizing automation. The one flaw in this plan is if President Trump pushes China too far and US companies are penalized abroad.

  11. I agree with the risks and concerns of a trade war with China. Promoting US manufacturing while lobbying for free trade policies could garner Nike more favor with the public in today’s nationalistic culture. The rise of automation and technology in manufacturing along with other competing factors also push Nike to develop nearshore / onshore manufacturing and supply chain capabilities. Nike’s projected future growth is coming in the direct to consumer sector (e.g. nike.com, retail stores) of their business and not their traditional wholesale partners (e.g. Footlocker). (1) This Direct to Consumer channel will require Nike to manage inventory better because they will own the consequences of holding too much inventory including markdowns and write-offs. Shorter lead times from production to consumer will increase the flexibility that Nike has to get back into better-selling products and should decrease safety stock inventory levels.

    Personalization is another large growth engine for companies like Nike who are using this concept to develop custom sneakers (e.g. Nike ID’s) and T-shirts for their consumer (2). While customization has increased, consumers expectations on delivery speed have also increased. Creating new custom products, while still impressing the customer with service in days/weeks, not months, will require onshore / nearshore capabilities. For certain basic products with stable demand signals, the longer product development and supply chain lead times from China will be sufficient, but for growth sectors of Nike’s business such as personalization, a more flexible, closer to consumer supply chain will be required.

    1 https://www.fool.com/investing/2017/10/30/nike-inc-is-totally-rethinking-north-american-reta.aspx, https://www.fool.com/investing/2017/09/20/in-pursuit-of-growth-nike-is-playing-offense-to-wi.aspx
    2 https://www.bcg.com/publications/2017/retail-marketing-sales-profiting-personalization.aspx

  12. Question: How worried should Nike be about Trump’s threats against China, and what precautions should they take?

    I believe it’s in Nike’s best interest to prepare to shift a significant amount of their development operations currently based in Asia back to the States with a heavy focus on automation. I say this for two reasons. The first is to increase their efficiency and supply chain management. Nike’s “manufacturing revolution” cited above shows the impact of automation reducing the timeline for bringing a product to market from 60 days down to 10[9]. If Nike were to shift more of their manufacturing investment to the States with a focus on automation, I believe they would be able to surpass high labor costs and their capex investment over time will pay off as they benefit from higher efficiency. The second reason I think it’s important for Nike to focus on this is because of the potential whiplash of President Trump’s decisions in the risk cited above of China restricting access to American companies.

  13. Interesting article. Free trade is without any doubt essential to Nike’s success, and I agree that Nike should continue lobbying for free trade and emphasize its intentions to invest in automation, which will reduce job availability. I am wondering whether US consumers would be willing to pay for the additional costs that nationalism brings, and I therefore believe Nike should focus on educating consumers about drawbacks of the current nationalist trend. If Nike is successful in changing public opinion, policymakers are likely to follow.

  14. Thanks for posting! To take the contrarian view, I wonder if there are overall positives that will develop out of Nike’s response to protectionist policies? For instance, US manufacturing could have some distinct advantages over offshore including: lower shipping costs, decreased lead time, less markdowns, and higher customer responsiveness. Additionally, by expanding their factory footprint in the US, it’s possible that Nike will develop more automated manufacturing processes in order to avoid paying the substantially higher US labor costs, and thus in doing so create long-term cost saving advantages within their supply chain. I’m curious to see how this discussion develops and whether protectionist policies have the intended effects of bringing jobs back to the US or simply lead to companies choosing alternative offshore countries and/or increasing automated factories in the US.

  15. Thank you for sharing! This topic is very relevant. I believe Nike’s initiatives to hire a lobbyist firm and to move its production facilities location make sense, however I was somewhat confused and concerned if Nike has a clear strategy for value proposition to customers or if it is just reacting to the current isolationism risks. The company talks about using trade agreements to improve its global supply chain and decrease prices, but at the same time it says that bringing the manufacturing closer to the end consumer is important to decrease time-to-market and be able to respond faster to consumer demands. I see these actions as two different value propositions: the former is more aligned with products whose demand is easier to predict (high sellers and / or standardized products) while the latter is more aligned with more fashion and customized products. Therefore, first, I believe Nike should have a clear view on what the company wants to focus on and treat each problem in a specific way. I believe Nike has enough scale and a brand strong enough to play in the two segments, however, it’s important to define which SKUs are more aligned with one strategy or the other and split the production accordingly.

    Regarding the TPP specifically, I believe that leveraging consumers to put pressure on governments is a good strategy. However, Nike won’t be able to do it by itself. So, I would recommend Nike to contact other companies operating in other sectors that would benefit from the agreement and appeal to the consumer together. The lobbyist firm could actually help getting alignment among all these firms and could also advise on how to best leverage the population support.

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