For the past decade, importers of footwear had a basic sourcing philosophy: China first, China only. Rising production costs and occasional quality issues in China are placing that business model under stress.
Last year, China’s share of total U.S. footwear imports dropped to about 85 percent from 87 percent in recent years, according to the Footwear Sourcing Forecast released by the Footwear Distributors and Retailers of America.
On a volume basis, China’s market share will decline to 80 percent by 2016, the FDRA projects. China’s loss will be Vietnam’s gain: The FDRA projects Vietnam will increase its share of the U.S. market to 13 percent in 2016 from 7 percent now.
There is a noticeable decrease in imports when footwear prices increase. U.S. footwear imports in 2011 declined 3.4 percent as the price of shoes increased 12.2 percent. “With costs expected to continue to rise in China, many in the industry are searching for alternative sources of supply,” the FDRA study concluded.
The FDRA launched its first footwear sourcing study a year ago when the association noted rising production costs in China and the resulting inflationary pressures in the U.S. market were causing cost-conscious consumers to scale back footwear purchases, FDRA President Matt Priest said. FDRA members — from giant manufacturers such as Nike and K-Swiss to retailers such as Wal-Mart and J.C. Penney — account for 80 percent of U.S. footwear sales.
While China remains the overwhelming source of most U.S. footwear imports, the country’s market share experienced a dramatic drop in 2011, hitting its lowest percentage in seven years.
PIERS, a sister company of The Journal of Commerce, uncovered the same development when measuring footwear imports in 20-foot container units. China’s market share slipped 0.3 percentage points, and Hong Kong’s market share declined 1.6 percentage points in 2011 from 2010. By contrast, the market shares of Vietnam and Indonesia grew 0.9 percentage points each.
While these numbers represent a relatively small shift, the rapid response in just one year to increasing costs in China signaled to the FDRA that a longer-term trend is under way.
As China responds to labor unrest and the desire of its citizens for upward mobility, production costs will continue to increase, said Jim Toms, vice president of sourcing at Paccess, a supply chain integrator whose accounts include footwear companies. Toms said wage increases in China for at least the past three years have been in the double-digits. In addition, companies have been directed to increase the housing allowances they provide to workers, and taxes are increasing.
Footwear importers, however, have developed close working relationships with contract manufacturers in the coastal regions, so the decision to source outside of China isn’t an easy one to make. “It is with trepidation that one moves from one country to another, unless you move with an existing partner,” said Mike Jeppesen, head of Wolverine Worldwide Sourcing Group.
Footwear companies have invested a great deal of time and resources into building a business relationship with contract manufacturers to ensure the factories are complying with social responsibility requirements, Jeppesen noted. Payment processes are established to the satisfaction of both parties.
That’s why for some contract manufacturers, the first shift may not be to another country, but rather to inland China. “It’s the least painful option,” Jeppesen said. Labor costs are significantly lower there, and companies based in the coastal regions have fewer problems moving inland.
But inland infrastructure isn’t fully developed, so longer lead times are necessary in getting materials to the manufacturing plants and finished products to the seaports. In addition, workers in the rural areas have little manufacturing experience, so they must be trained, Jeppesen said.
So far, however, the large base of companies that supply materials and components to footwear manufacturers hasn’t moved inland. This would be necessary if there is to be significant production in inland locations, Toms said.
Vietnam appears to be the favorite destination for contract manufacturers looking to leave China. Vietnam has a highly skilled labor force with a good work ethic, Toms said, and the government is setting up economic zones and taking other steps to encourage foreign direct investment.
Vietnam’s potential will be somewhat limited, however, because it has a relatively small population, by Asia standards, of about 87 million, and its infrastructure is still under development.
Indonesia, with a large population and relatively good infrastructure, also offers potential for footwear manufacturing. Indonesia had a thriving footwear industry 20 years ago, but political instability stopped its development. Manufacturers and suppliers are now returning to Indonesia, Toms said.
Mexico, Central America and the northern tier of South America would appear to have an advantage for an industry that values short lead times and proximity to the U.S. market. The footwear industry is in fact well-established in Mexico and Brazil, but those countries have large local markets, Toms said, and producers haven’t felt the need to engage in exports in a big way.