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Will shoemaking return to the West?

Investigating the possibility of footwear production moving back to its roots of a century ago.

by Phil Shaw

The current global footwear industry has seen the establishment of reliable supply chains which, in the main, create and move finished footwear from Asia (including the Indian sub-continent) to the major areas of consumption in North America and Europe. The most recent data indicates that Asia produced over 86 per cent of all footwear and China itself made almost 64 per cent of the global production. The reasons for the progressive shift of production to Asia in recent years are well documented. They are, principally, i) reduced labour costs, ii) greater production capacity and iii) availability of labour.

While the overall situation is unlikely to change significantly in the short term, production companies within Asia are moving between counties. Vietnam and Cambodia are experiencing an increase in footwear manufacturing as conditions for shoemakers in China gradually become less favourable. However, there is also something of a resurgence of shoemaking in the West. In this article, we examine the main reasons for this and its likely impact.

Demand for quality products

The cost of labour in Europe and North America generally has meant that nowadays any footwear produced there is of medium to high value. The ‘middle class’ markets in these regions are, in the main, the intended market for these premium products (see 'What is the 'middle class'?'). However, some commentators now believe that the growth of this group in China and India is close to the size and purchasing power of Europe and North America, and thus reflects the demand for premium products. China, India and Brazil have propelled their economies to equal the size of the industrialised G7 countries. By 2050, these three economies are forecast to account for nearly half of world output, far surpassing the G7.

What is the 'middle class'?
While difficult to define, 'middle class' in this context covers the section of society which has a reasonable amount of discretionary income and is prepared to spend this to achieve what its members regard as products of quality and durability.

In addition, within a decade, the middle class in Europe and North America will be less than one-third of the world's total, down from more than a half at the current time. A recent Organisation for Economic Cooperation and Development (OECD) study estimates that there are currently 1.8 billion people in this group, which will grow to 3.2 billion by the end of the decade. Asia will be almost entirely responsible for this growth, with a middle class forecast to triple in size to 1.7 billion by 2020. By 2030, Asia will be the home of three billion such people. It would be ten times more than North America and five times more than Europe. There is also substantial growth in the rest of the emerging world. The middle class in Latin America is expected to grow from 181 million to 313 million by 2030, led by Brazil. In Africa and the Middle East it is projected to more than double, from 137 million to 341 million.

Why does this matter?

The middle class predominantly purchases medium and high priced footwear, and some commentators believe that shoemakers in Asia will struggle to meet this rapidly increasing demand. If this is true, there is a potential opportunity for shoemakers in the West – who can and are manufacturing high-end products – to expand.

Changing costs

 

A typical shopping mall in China

Whereas the growth in middle classes is a long-term factor in terms of global shoemaking, the more immediate factor to consider is the gradual closing of the cost differential between footwear made in Asia and the West. A recent study by the Boston Consulting Group suggested that the average difference in costs has declined from 55 per cent in 2013 to 39 per cent in 2015. The differential is even less for ‘landed products’ at the docks once the high costs of transportation, insurance and any customs duty has been added.

This is not to say that there will be a major move in terms of shoe manufacturing globally. China will continue to dominate the mass production markets. However, the steadily increasing wage rates, pressure to move shoemaking from the traditional Guangdong Province to less industrialised areas of the country with the attendant start up and retraining costs, and the significant reduction on energy prices (especially in the USA, where the unlocking of shale oil and gas reserves has resulted in lower energy prices) are impacting on decisions about where shoes can be made most cost effectively.

 

The new ‘middle classes’ in China, India and Brazil are a growing market for high quality European- and US-made footwear

As ever, the real cost of producing footwear is more than the sum of the individual direct costs. Large volume production can significantly reduce the additional cost items – such as indirect labour, factory overheads and administration – as these are often fixed and, therefore, when spread over large production will represent lower additional costs.

For the level of manufacturing usually carried out in Europe and North America – significantly fewer pairs in total and considerably fewer in terms of pairs per style than the casual and sports footwear made in Asia – these overheads are a much more important factor in the cost build-up of a shoe. The traditional Western footwear manufacturing company produces small-scale, mixed footwear, and generally relies on labour saving techniques and high levels of efficiency. As a result, the likelihood is that footwear made in these areas will be medium- to high-end products able to recover the additional costs in the selling price from their niche markets. In most cases, these niche markets can be expanded as demand increases.

Companies in Asia that have been set up to mass produce footwear consistently find it much more difficult to maintain the cost effectiveness on these smaller, fast-changing patterns of production.

We should not expect any major increases in footwear production in Europe in the short term. However, there are signs of higher output in some individual countries (see table 1). For example, France recorded a small positive change and Portugal produced almost 80 million pairs in 2013.

Table 1: Footwear production in western Europe 2006-2013
Country Production (million pairs)*
2006 2007 2008 2009 2010 2011 2012 2013
Austria 4.0 3.8 3.5 2.9 3.1 2.6 2.4 2.2
Belgium 1.2 1.1 1.0 0.9 0.9 0.9 1.0 1.0
Denmark 7.9 8.2 7.8 7.4 7.6 8.5 8.6 8.9
Finland 2.8 2.7 2.8 2.7 2.7 2.8 2.7 2.8
France 38.6 37.6 31.0 30.5 30.0 28.1 29.5 30.3
Germany 26.5 26.8 25.6 26.8 29.2 30.6 28.1 27.5
Greece 5.1 5.0 4.8 4.5 4.1 3.5 3.1 3.4
Ireland 0.9 0.9 0.8 0.8 0.9 0.9 0.9 0.9
Italy 244.0 241.9 225.2 218.8 219.0 227.7 218.4 228.8
Netherlands 3.2 3.0 2.7 2.5 2.3 2.2 2.0 2.0
Norway 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.6
Portugal 71.7 74.5 67.7 67.0 61.5 69.8 74.4 79.7
Spain 118.3 108.4 107.9 100.0 94.9 93.5 92.0 92.0
Sweden 0.5 0.4 0.4 0.4 0.4 0.5 0.6 0.8
Switzerland 1.3 1.2 1.1 1.1 1.1 1.0 1.0 1.2
United Kingdom 5.1 5.0 4.4 4.3 4.2 4.7 4.9 5.2
Total 531.8 521.1 487.3 471.2 462.5 477.9 470.2 487.3
*World Footwear Markets 2015, available from SATRA

There are also positive signs from North America, with some shoemakers reconsidering how they source footwear. ‘Reshoring’ – moving production back from Asia – is becoming a more viable option (see case study).

Case study: Back in the USA
One American businessman decided to leave his job with an internationally-known footwear brand owner to set up a shoemaking company with a manufacturing plant in the USA. Experience working with producers in Asia was said to have convinced him that while there were considerable savings in labour costs when using these factories, the constant need for retraining – due to the level of labour turnover – was proving expensive and time consuming. By engineering his shoes to reduce the adhesive and stitching content, and using lean manufacturing techniques, he reportedly realised that it would be possible to manufacture these in the USA.

The goal of this new company is to employ up to 200 workers in the USA. Having initially moved half of his current production back from China, the owner aims for all manufacturing to be done in the USA by 2017. He has calculated that although there is a considerable difference in the apparent cost of labour, when efficiency and reliability is taken into account, the gap is sufficiently close to enable a viable production in the USA.

In a survey by the Boston Consulting Group (BCG), most US-based manufacturing executives are at least considering bringing production back to the USA from China. The study focused on companies with sales of more than $1 billion. The survey results, released in June 2015, showed a 47 per cent rise in reshoring consideration among respondents over an 18-month period. The percentage of executives who are already moving production to the USA from China, or who plan to do so within the next two years, more than doubled, to 21 per cent, during this period, according to BCG.

Key factors in reshoring – or the reversal of overseas outsourcing – include labour costs, proximity to customers and product quality.

How can we help?

Please email membership@satra.com for further information on SATRA’s services to companies in the footwear and leather industries.

Publishing Data

This article was originally published on page 6 of the January 2016 issue of SATRA Bulletin.

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