Nowhere To Run, Nowhere To Hide

Let's start right off with a quote from a recent news story.

Jim Issler, president and CEO of H.H. Brown, said the footwear industry is entering a new era, where cheaper labor will no longer be an alternative to raising wholesale prices. “It’s definitely a turning point in our industry and it’s not going to be solved easily,” he said. “We chased labor around the world. Now, we’re at the end of the maze and there is nowhere else to go.”

Funny it should be a footwear company that said that, as almost a couple years ago we predicted that would happen, using the phrase "time to strap on the sneakers again."  Chasing cheap labor can work for a while, but some competitors will be looking deeper into their organizations and creating change that saves more than cheaper labor ever can.  But this article tells a story of woe that goes beyond just rising labor costs, and basically indicts the entire offshore outsourcing mantra.

Many firms are bracing for steep increases in the costs of raw materials, labor, ocean freight and transportation. Skyrocketing petroleum prices, the weak dollar, new labor policies in China and increased competition for workers in the Guangdong region are all pinching the bottom lines of many companies.

Let's see... if you manufactured in the U.S. you could take advantage of the cheap dollar and significantly reduce transportation costs.  Which is why some foreign companies are outsourcing to America.  Now where are all the protectionists that want to erect artificial trade barriers?  In which direction?

Some companies expect the customer to just absorb the cost if their inherent inefficiency.

Skechers CEO Robert Greenberg said prices at Skechers could rise 3 percent to 8 percent. However, he won’t be looking for ways to substitute lower-cost materials. “We’re certainly not going to sacrifice our product just to make them cheaper,” he said. “[If the product is right] consumers will pay the prices and retailers will make more per pair.”

But perhaps the end of the cheap labor road is going to force some companies to see the light.

Wolverine is also reexamining its sourcing strategy and looking for savings wherever possible. “Competitively, we constantly have to try to find ways to do things better because it’s very difficult to pass it along to the consumer,” [President Ted Gedra] he said.

And some companies have already been working toward lean.  We told you about Nike's lean efforts in China just last month.  They aren't the only ones.

Adidas AG CFO Robin Stalker said the company was well situated. “We believe we are extremely well positioned competitively, vis-à-vis our competitors, in terms of lean manufacturing and engineering of our product."

Nike likewise said its efficiencies would mitigate cost increases. “Continued progress on gross margin initiatives and favorable selling currencies more than offset the impact of sourcing cost pressures such as higher oil prices, labor rates and stronger Asian currencies,” said VP and CFO Donald Blair.

I never thought I'd sound like a pompous diplomat and use the term "vis-à-vis" in this blog.  Oh well.  What's really sad is that the best option is completely outside the blinders of some of these execs.

While many footwear firms are tweaking sourcing plans for China, few plan to leave the country anytime soon.

“Going farther north may be an interim approach, but the reality is that as we see economies changing in China, it’s what the future is going to be, and we’re going to have to adapt as an industry,” said [Deckers exec Pat] Devaney. “Everybody has looked at India and talked about India, but there isn’t an infrastructure of support there to make it more cost effective. Yes, they make shoes and there are leather suppliers, but it’s not up to where it needs to be.”

At H.H. Brown, Issler said the economics of relocating manufacturing to India and Vietnam wouldn’t likely yield any significant savings.

[Sketchers CEO Robert] Greenberg agreed. “There is no moving to another country,” he said. “People talk about India, but that is light years away. There’s nowhere to hide anymore.”

Why hide?  Instead of devoting so much energy to finding the next cheap labor outpost in Timbuktu, setting up a new factory, training new people, enduring initial quality problems, and then doing it all over when labor inflation ruins your business model (again)... why don't you look internally to drive process efficiency?  You might find and remove so much waste that you could be competitive from North American factories.

New Balance and Allen-Edmonds do it.  Why can't you?

Comments

[Ken McGuire]

The adventure is over for those too clever companies that chased the 'low wage folly' into the emerging China. hopes of salvaging a business with cheap outsourced omponents from China. Some 10% to 15% of the 'least cost' of the low cost factories in Southern China are becoming extinct as China moves up the value-added chain. Costs are rising fastest at the factories that could quote the lowest prices due to their lack of infrastructure (things like actual engineering capability and administrative skills). Many of these places could only exist in the midst of staggering growth and a herd like mentality on outsourcing on the cheap.
Now with the RMB at 7.0 down from 8.23 against the dollar during the past 18 months, prices are beginning reflect significant increases on those past bargains. Pricing forward, as many of the more qualified factories are doing, is a bet that the RMB/$ will settle at 3-5 exchange and strengthen at 0.1 Rmb per month.
A lot of US Purchasing Agents, who won't pay the doubling/tripling Chinese prices are collecting their tools and looking elsewhere. Unfortunately, since the skill sets are no longer employed at the home base, these tools are unlikely to return to the USA. Those unheeded warnings about not eating your seed corn were right. The retraining expense to develop the needed skills to bring the manufacturing back home far exceed the savings of the original outsourcing.

When will more of our executives learn that developing any company that is unable to master those skills to make their own product competitively, cannot expect to play a leading role in its own industry.

[newg]

My company is just now looking at Low Cost countries to outsource manufacturing. Talk about getting in late in the game. I guess the Peter Principle is alive and well in senior management....