Though New Balance’s pandemic-related supply problems have largely stabilized, a senior sourcing executive believes logistics-related bottlenecks will continue through 2024.
New Balance—like Nike, Puma, Under Armour and most of its sneaker competitors—suddenly saw its supply from Vietnam plummet last summer as Covid-induced lockdowns in and around Ho Chi Minh City forced factories to shutter production for nearly three months. “Fortunately,” New Balance was able to shift production to other countries, Duncan Scott, New Balance’s senior vice president of strategic sourcing and quality, said.
“We did not have an easy way out of it,” Scott, who participated in a discussion hosted by Cornell University Thursday, added. “We essentially had to spread out our production and concentrate it. We had more sources and then we had a shorter period of time to produce.”
Half a year later, New Balance has seen producing countries “come out of the most serious effects of the pandemic,” Scott said. Logistics problems, however, have persisted. It now takes New Balance two to four weeks to book a space on a ship once a product is completed, when it used to take “just a few days,” he said. Though West Coast port congestion appears to be easing, Scott estimated that transit times from key countries in Asia to markets in Europe and North America have grown 20 to 45 days.
Container costs have also soared, with New Balance seeing the price from Asia to the West Coast rising from $1,700 to “almost $22,000.” Air freight, up from $8 a pair to more than $35 a pair, has become “kind of cost prohibitive in some cases,” Scott said.
“These have been massive challenges,” he continued. “I think we are adjusting to that and planning better and changing our calendars but these have been some of the really significant challenges that we have been facing and are currently facing.”
In some cases, Scott said, adjusting New Balance’s calendars has meant “moving a little bit further away from the market” and making product decisions earlier so that materials and components can move through the pipeline faster. “Essentially, there’s a lot of modularity in the business, [which] means we’re converting materials into different products [and] if we can defer that and do it later in the process, then we can still deliver on time to the market.”
No ‘natural reason’ for reshoring
Though a November McKinsey & Co. report appeared to suggest broad appetite for increased nearshoring, Scott threw cold water on hopes that reshoring would, “in any meaningful way,” ever shift the concentration of industries out of Asia. “There isn’t any kind of natural reason for that to happen on a large scale,” he said.
As Scott sees it, Asia holds such a concentration of manufacturing power and innovation, that it will be “hard to shift that in any meaningful way.” Since athletic goods manufacturers left U.S. and Europe for Asia, he said, a confluence of factors—a good economy, lower retail prices, casualization trends—have combined to make the industry “much bigger than it was” in the West, he said.
“The technology for creating synthetic materials—both for soles and for wicking fabrics and lightweight fabrics—all of that has grown in Asia, so it is heavily concentrated,” Scott continued. “Now you have the Asian markets rising, so if you look at disposable income in China and India, the growth is greatly outpacing the developed Western economies and it’s creating this huge vortex and focus and concentration of power in terms of manufacturing power, manufacturing innovations, supply chain, economies of scale.”
On a smaller scale, Scott said he believes domestic production could make sense in some cases, particularly when it comes to fashion-driven and time-sensitive products. New Balance itself operates factories in the U.K. and U.S., including a new facility in Massachusetts that opened earlier this year. “We’ve been able to utilize those factories pretty well to meet some of the needs for specialized products and for really fashionable products that need to be delivered in real time,” he said.
“I think you’re going to see some products where you can go quick-to-market where cost is less of an issue and speed is absolutely imperative,” Scott added. “But, for the most part, I think you’re going to still see it concentrated either kind of in or near China or in or near India as we move forward.”
Though New Balance sources the majority of its goods in Asia, it also sells a line of dedicated “Made in USA” sneakers. The degree to which the shoes are actually made in the United States has gotten the company in trouble multiple times, including three years ago, when it settled a class-action lawsuit for $750,000.
Lawyers filed a similar complaint in December. The suit, which targets seven specific sneaker models—all but one include “Made in USA” printed on the shoe’s tongue—alleges that New Balance’s Made in USA positioning is false and misleading. A note that appears online and on the underside of the shoes’ packaging states that they “contain a domestic value of 70% or greater.” This amount, it alleges, does not meet the Federal Trade Commission (FTC) guidelines that “[f]or a product to be called Made in USA, or claimed to be of domestic origin without qualifications or limits on the claim, the product must be ‘all or virtually all’ made in the U.S.”
Though Scott expressed optimism that the sneaker industry will fare better than others in the current inflationary environment, he also said New Balance expects rising prices will affect demand “because obviously people have less disposable income, so they’re going to have a harder time purchasing products.”
The brand itself is feeling the impact from inflation in the form of rising material prices. “We cannot pass all of those costs onto our consumers, so that puts a squeeze on profits,” he said. Based on his nearly 30 years working production, however, Scott believes New Balance has enough “running room for increasing efficiency” to offset those rising costs.
Compared to other industries, though, the executive expects sneakers will fare relatively well. While consumers might delay a house or car purchase, Scott said that, in his experience, they will still spring for a pair of athletic shoes or invest in athletic apparel.
“Our industry, if you’re an investor, is quite an interesting one because a lot of times in times of economic hardship, our industry, counterintuitively, does quite well,” Scott said. “Obviously, if it’s extreme, that may not hold true in all cases, but as a general rule, sometimes we defy gravity.”
Anne Patricia Sutanto, the CEO of Indonesia’s largest garment manufacturer PT. Pan Brother Tbk, also appeared in Cornell’s webinar Thursday. Like Scott, she said she sees room for factories to cut costs, specifically through automation and digitization.
“It’s not about reducing [the] number of people,” she said. “Every time we change the style, the learning curve is what [increases] cost[s]. So, we try to digitalize the movement of our process and then make sure that we can replicate that very fast so the lack of understanding [among] all the workers [is] less.”
Scott, who echoed Sutanto’s call for automation, noted that the roadmap already exists. “You can look at the car industry and the electronics industry, what they’ve already done, and it’s kind of a no brainer,” he said.
“It’s not easy, but the roadmap is clearly there,” he added. “We know what we have to do. If we can execute it, we can offset a lot of these costs.”