With the industry bouncing back, a number of top footwear players say that orders are up as much as 30 percent for fall, which should be good news for everyone.
But the past two years were calamitous for Chinese manufacturers — with thousands of factories closing and many workers leaving for more lucrative jobs — resulting in a perfect storm for footwear firms.
“Factories back then were calling us desperate for orders,” said Joe Ouaknine, CEO of Huntington Beach, Calif.-based Titan Industries. “Now, they just have so many orders they are overwhelmed.”
Matt Priest, president of the Washington, D.C.-based Footwear Distributors and Retailers of America, said the association recently polled its members on the situation in China. The survey found that 88 percent felt the industry had a significant labor shortage, with 86 percent reporting that the problem had caused deliveries to arrive from one to four weeks late.
“There is definitely a labor shortage, and it has a lot to do with workers wanting to stay closer to home or moving to higher paying industries,” said Priest. “This is also a generational change. Young people there have higher expectations of their career paths, even relative to manufacturing.”
Labor has gotten so tight that bidding wars have erupted for workers in the coastal manufacturing areas, said Rick Darling, president of New York-based Li & Fung USA.
“Footwear companies are feeling it the worst of any segment,” he said. “It’s not going to get much better for a long time.”
Aliso Viejo, Calif.-based American Sporting Goods CEO Jerry Turner said part of the reason of a dwindling labor pool is by design. According to Chinese government policy, workers are encouraged to remain in their home provinces, rather than migrate to the south of the country for work. And heeding that call, hundreds of workers opted to remain home after leaving the production centers in the south of the country in February to celebrate the Chinese New Year.
“They’ve changed the rules in China that make it economical to stay,” Turner said.
Priest said that, over the past year, various provinces in the country have also raised the minimum wage by more than 20 percent. “Workers also want better benefits, and it’s coming at a time when orders are picking up,” he said. “It’s a unique problem to have. It’s indicative of a recovery, but it’s also a challenge for footwear manufacturers.”
The Chinese government used the economic downturn of the last couple of years as an opportunity to encourage low value-added exports to move away from the coast, said Darling.
The government invested significantly in infrastructure improvements and in incentives for new factories in the rural provinces.
But moving away from the coast doesn’t necessarily mean lower prices and abundant labor are to be found in inland areas, either.
For example, Turner opened a new shoe factory five months ago in one of the provinces, closer to what he thought was a large pool of rural workers.
“We only got about 60 percent of the workers we need, and we were happy to get even that,” he said.
Labor shortages aren’t the only problem. During the recession, many factories were forced to close, downsize or shift to producing other products.
“Now that the business has improved, there is less capacity and more demand,” said Andrew Cohen, CEO of footwear, accessories and retail at New York-based Jones Apparel Group. “That’s a formula for price increases. It’s getting more expensive to make shoes in China.”
Just how much more expensive is hard to say. Most executives said they are preparing for a hike in the near future, but much depends on raw material prices, production methods, complexity of footwear designs, as well as currency fluctuations.
“The Chinese currency appreciated about two and a half percent just last month,” said Ouaknine. “Prices are going to keep going up, I’d say five to 10 percent in the immediate future. In the longer term, we have to get out of China. The panic button has not been pushed yet, but it will have to be.”
And for most companies, no clear alternative yet exists, though all executives interviewed said they were actively exploring possibilities inside and outside of China.
“It is definitely a growing issue and concern,” said Jim Monahan, VP of footwear for Asics America, Irvine, Calif. “Up to this point, Asics has not been affected by this, however, we are currently being proactive and looking for alternative solutions and factories.”
The problem is that no other country offers the expertise and efficiency that Chinese factory owners still offer.
“Vietnam has even longer deliveries,” said Bob Goldman, CEO of Los Angeles-based Chinese Laundry. “India is pretty one-dimensional, meaning they only can do leather. Indonesia and Malaysia have stability issues. No one offers the assortment that China has to offer.”
Ouaknine said the problem is even tougher for smaller manufacturers. “It’s not like I have many choices today,” he said. “[India and Vietnam] are not ready for our size of business. Maybe for bigger businesses with huge volume, but not our business.”
His solution? “I go to China as often as I can. I try to be on the good side of the factories and call in favors to get my goods to the front of the line. It’s all I can do right now.”
Turner said that while India has often been cited as a possible alternative to Chinese production, he doesn’t think it will be viable due to a lack of coordination among factories there, as well as infrastructure issues.
“We have no conclusion but to stay in China,” Turned said. “Factories in China have to become more efficient and reduce labor.”
To accomplish that task, Turner said there would be no single solution to containing costs.
“You will have to do designs that are less labor intensive,” Turner said. “Or else decide if a design is really worth the extra labor — maybe do smaller lots as opposed to larger runs.”
Still, even though these tactics might slow the rate of increase, all agree that prices are going up.
“Prices will rise or we will figure out how to make shoes cheaper,” said Goldman. “Those are really the only two options.”