Nike: Made in the U.S.A?
Andrew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Anybody who has owned a Nike (NYSE: NKE) athletic shoe has probably noticed a tag associated with their shoes that says “Made in Indonesia” or “Made in Vietnam.” A quarter of a century has passed since Nike began moving their shoe production out of the United States to countries that have more lenient wage rules in an effort to curb rising costs and increase profitability. Today, 96% of all Nike shoes are made in three Asian countries - Indonesia, China and Vietnam. At least for now.
Shoemaking hasn’t had a major technological breakthrough in decades. Manufacturers must stamp out all of the required materials, which then must be sewn together in a time-consuming, labor intensive process. Later this summer, Nike is introducing the Flyknit, a lightweight shoe that is constructed by a vastly different process that could revolutionize the way athletic shoes are manufactured. The Flyknit is a lightweight shoe that is woven together by a machine instead of pieced together by hand. Nike estimates that the construction of the Flyknit produces 66% less waste than Nike’s popular Air Pegasus shoe.
So what is the big deal? Nike didn’t just reinvent a new shoe; they reinvented a new manufacturing process. If the Flyknit is successful, single body, knitted shoes could become the gold standard of athletic shoe manufacturing. With rising fuel and oil costs, Nike could move the new manufacturing process for these shoes from Asia to the United States, despite a higher labor cost and still significantly increase profit made from the sale of the Flyknit, which will retail for $150.
By incorporating this new manufacturing technique into athletic shoe production, Nike has once again given themselves a strategic advantage over their competitors such as Under Armour (NYSE: UA). Under Armour has long been known for their high-tech, innovative products, primarily their clothing garments which have revolutionized athletic clothing performance. Even though shoes are not a major revenue stream for UA, it still represents 12% of their bottom line, which has been $712 million over the past year. The new manufacturing process that Nike has created will allow them to challenge UA from a innovation standpoint and recapture some of the sales that UA has been taking off the table.
The bottom line is Nike has created a manufacturing process that is able to create a superior product. All while driving down labor costs and increasing the customer expense of a product by over 50%. This process could very well be the beginning of a new paradigm shift in the way athletic shoes are manufactured. This very well could become a pivotal moment for Nike and the rest of the athletic shoe manufacturers.
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