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 . 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 .
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 . 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” . 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 . 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 . 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 .
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 . 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 .
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 . 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 . 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?
- “Nike Welcomes President Obama to its World Headquarters,” NIKE, Inc. press release (Beaverton, Oregon, May 8, 2015).
- 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.
- NIKE, Inc., 2017 Annual Report (Beaverton, Oregon).
- 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.
- NIKE, Inc., October 25, 2017 Analyst/Investor Day.
- 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.
- 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.
- 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.
- 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.
- 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.