Adidas dumps China in search of lower costs
Jul 27, 2012 (WiC 160)
In the 1920s two brothers, Adolf and Rudolf Dassler, started making leather goods in their mother’s kitchen. The two moved on to make sports footwear and they did well: in 1936 they even equipped Jesse Owens for his gold medal wins at the Berlin Olympics.
The pair then fell out in the late 1940s and Rudolf set up his own firm, Puma, as a rival to his brother’s business, which took the name Adidas in 1948 (both companies are still based in Herzogenaurach, a small town in Bavaria).
Adidas first came to China in the 1980s, when it began shifting production offshore to reduce costs during a period of financial difficulty.
Thirty years later, the cost-cutting exercise continues and Adidas is ready to move again. But this time that means leaving China. Last week the company announced that it is closing its only wholly-owned apparel factory in the country as part of a move to improve efficiency.
An Adidas spokeswoman told reporters that it will close its 160-worker factory in Suzhou, Jiangsu province, at the end of October. The closure is part of Adidas’ efforts to restructure its business globally in pursuit of greater efficiency and scale, the company advised.
Of course, this doesn’t mean that Adidas has retreated entirely from China. Far from it: the company currently works with 300 Chinese suppliers. But rumours started circulating a few years ago that the German company was looking to move its manufacturing operations from China to a southeast Asian country, says NetEase Finance.
More recently it has become clearer where Adidas could be going. The speculation is that it is probably moving its owned operations to Burma after the closure of the Suzhou plant.
Adidas is not the first major sportswear brand to close its own factories in China. Rival Nike made the same decision three years ago. shutting down its only footwear factory and laying off 1,400 workers. Since then Vietnam has become Nike‘s biggest production base worldwide.
Of course, the closure of a single factory isn’t going to shake the industry to its foundations. But it is symbolic move from a huge international brand, and potentially an indicator that companies like Adidas will take more of their third-party production contracts to countries like Vietnam, Burma and Cambodia in future.
The closure signals that as China’s labour costs rise, its status as ‘workshop of the world’ is threatened.
“If one by one Nike, Adidas and other companies implement large reductions in the production lines, this will greatly affect all the suppliers in the production chain,” Li Peng from the Asian Footwear Association told Western China Metropolis Daily. “And if the suppliers still want to rely on orders from these companies like Adidas and Nike, they must follow suit to transfer to Southeast Asia.”
“China’s clothing manufacturing industry is facing a big crisis and has two basic ways out,” agrees Ma Gang, an industry expert. Ma reckons the first option is to move away from products that are low-tech or labour-intensive, such as T-shirts and cheap trainers. Instead, the focus should be on cultivating manufacturing capabilities for products that require greater technical requirements, such as footwear products with more complex designs.
Second, rather than assembling sophisticated products designed elsewhere, Chinese manufacturers need to do more design work themselves. Even though Ma admits the transition to become ODMs (original design manufacturers) is not going to be straightforward, he says innovation is the key to survival.
Others worry that the latest relocation suggests Adidas is growing more cautious on sales prospects in the Chinese market.
The move comes at a time when sportswear makers are struggling with a slump in sales. In June Nike announced that sales in its fiscal third quarter fell 3.9% to $694 million in Greater China (which includes Hong Kong and Taiwan) from the same period a year earlier. Homegrown brand Peak Sport also issued a profit warning for the first half and full year of 2012, citing industry-wide inventory issues, and saying weak economic conditions are hurting a number of other sportswear firms.
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