Globalization vs. Isolationism: Finding Nike’s New Competitive Advantage? - Technology and Operations Management (2024)

Nike is synonymous with globalization. Over the past two decades, Nike has been one of the pioneers in outsourcing production to the developing world. Today, Nike’s contracted factories employ 1.02 million workers in 42 countries to produce all its products, with 29% of product made in China and 44% in Vietnam [1] [2]. While this global supply chain has undoubtedly been a competitive advantage for this international brand, the Trump Administration’s “America First” approach of economic nationalism and the reemergence of protectionist policies globally represent a significant challenge to Nike’s worldwide manufacturing strategy [3].

Today, Nike faces an average 11% tariff on shoes imported into the US, with the looming threat of an increase to 45% for goods coming from China [4] [5]. While such policies are designed to protect domestic industries, they can have perverse outcomes: import costs passed on to the consumer, drive up prices and leadto cost-push inflation. Lower consumption as wage growth trails price increases, would be a huge hit to Nike, where 48% of its revenue generated in 2016 was in North America [6]. As such, how should Nike respond in an era of protectionism and isolationism?

Strategy to Date

Lobbying: In the short term, the company has ramped up lobbying efforts in support of free trade and open boards. As an example, Nike has been a vocal proponent of the Trans Pacific Partnership. The US brand threw its weight behind the program, promising to create 10,000 jobs in advanced manufacturing domestically should TPP become law [7]. For Nike, TPP would have reduced tariffs on trainers made in countries like Vietnam [8]. However, with the US’ withdrawal from the deal, competitors in countries like Australia are reaping the rewards of trade deals negotiated, which the US might otherwise have won via TPP [9].

Automation: Nike’s medium-term solution to protectionist pressures is to reduce reliance on cheap foreign labor in its production process through automation. In partnership with Flex, a high-tech manufacturing company, Nike has introduced greater efficiencies into the otherwise labor-intensive process of making shoes, with an estimated 20% of production set to be automated by 2023 [10].

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Exhibit A: Nike and Adidas are expected to be industry leaders in manufacturing automation and innovation[10].

Reshoring: Increase in automation have bolstered the case for reshoring the manufacturing process where high domestic labor costs were previously a barrier to reentry. The benefits of addressing the issue of protectionism through this approach is twofold:

Tariff Reduction: local manufacturing implies zero tariffs. Nike already has a precedence for employing this strategy. Independent factories in Argentina, India, Brazil and Mexico were established in response to high import tariffs in these geographies [11] [12].
Supply chain reinvention: Historically, it can take up to 18 months to develop a new shoe – a sizable dilemma in the era of “fast fashion”. Footwear companies have had to predict trends ahead of time which often results in a mismatch between on-hand inventory and consumer demand. Faster delivery and shorter production cycles through onshore productions present an opportunity to cut costs and increase sales to meet consumer trends [13].

Is it enough?

Lobbying 2.0: While Trump aims to minimize US involvement in multinational trade agreements, Nike should continue to push for trade agreements even on a bilateral basis, particularly with the Asia Pacific bloc. Although automation allows cost savings and efficiency gains, manufacturing remains largely entrenched in Asia. As Kasper Rorsted, CEO of Adidas notes, complete reshoring is an “illusion” and “[by moving to the US] you are moving into a market where you have no competence…that goes for the entire industry, I’m not speaking just for Adidas.” [14] Moreover, as North America is expected to drive only ~16% of total company growth through to 2022, expanding its global footprint is key to Nike’s growth trajectory [15].

Vertical Supply Chain: For automation and reshoring to succeed, Nike also needs to consider and innovate on other parts of its supply chain. Today, China’s competitive advantage owes in part to its vertical supply chain, and specifically its extensive material base. For Nike’s onshore strategy to be competitive, R&D in materials manufacturing should also be a priority.

High skilled labor: Over the past two decades, the eclipse of domestic manufacturing brought on by offshoring, has starved the economy of high skilled labor in advance manufacturing. As Rose and Reeves write, “the US suffered a net loss of nearly 19,000 manufacturing firms between 2001 and 2015” [16]. To address this gap, Nike should invest in education, training programs and skill development to develop the talent pool needed to support reshoring and automation efforts, necessitated by protectionism.

Looking Ahead

As we look ahead, two key questions emerge: