Why Is NIKE Manufacturing In The US Again?
Last month, NIKE (NKE US) announced a new strategic partnership with Apollo Global Management (APO US) – what was the world’s leading sports apparel company doing with a global alternative asset manager best known for managing private equity and hedge funds?
In their joint press release, the two companies stated that the strategic partnership “will increase regional manufacturing capabilities, enable quicker delivery of more customized product to consumers, and drive investment in sustainability.”
Moving up the supply chain
The strategic partnership has established a new supply chain company, which has already acquired two existing businesses – New Holland, an apparel manufacturer (with manufacturing facilities in Central America) and ArtFX, a warehousing and logistics operator.
So why in particular is NIKE doing this?
Manufacturing comes back to the U.S.
Manufacturing especially has been perceived as a low margin, labour intensive industry best outsourced to regions with cheap labour such as Asia. However, with labour costs rising in Asia and inefficiencies in the global supply chain, global apparel manufacturers are re-thinking the way they have done business for the last half a century.
They are questioning the established idea of centralised manufacturing and heading down a more localised route, which allows them to source raw materials in the same region, reduce shipping costs and better serve local markets by being nimbler to fickle consumer tastes and refreshing product styles more often.
It also comes in an age where issues such as sustainability, waste reduction, workers’ rights, increasing local employment and responsible sourcing are becoming increasingly important for socially conscious consumers.
The strategic partnership with Apollo intends to build up NIKE’s manufacturing infrastructure in the U.S. with a view to delivering a broader and more advanced product offering including technical and customised apparel and being able to deliver it to customers in a speedier fashion. It intends to invest in new technology as well as additional textile and apparel suppliers in North and Latin America to “create a more vertically-integrated apparel ecosystem – from materials suppliers and apparel manufacturers”.
A significant amount of the investment in technology is expected to be in automation through both the design and manufacturing process, making it more efficient and ultimately, reducing costs. In 2015, NIKE announced a similar partnership with Flextronics (FLEX US) to create new automation and customization systems for NIKE’s manufacturing supply chain.
With almost half of NIKE’s sales still coming from North America, localising some production back into the region is actually not too surprising.
NIKE is not alone in this trend of building a manufacturing base in the U.S. with Adidas (ADS GR) announcing plans for its first U.S. production plant to open in 2017 in Atlanta. Adidas will also rely heavily on automation and production robots in this plant. Under Armour has also opened a new manufacturing facility in recent months that will focus on automation as well as product and process innovation such as 3D printing.
Logistics is the other key in the supply chain
In recent years, NIKE has been criticised by some retailers of product delays due to logistical issues in its supply chain. This latest strategic partnership with Apollo is the latest step in addressing the increasing speed to market demanded by today’s consumers.
It follows a 2012 agreement with LLamasoft to co-develop supply chain solutions that offer both logistics and environmental benefits to NIKE’s supply chain as well as expanding its distribution centre coverage in the U.S. (such as its new 2.8 million square foot distribution centre in Memphis) and Western Europe over the last two years to meet growing demand in those regions.
Of course, the strategic partnership is in its infancy and NIKE will continue to heavily rely on its existing manufacturing and logistics arrangements. However, it does point to a world now where innovation and technology are seen to be key drivers of profitability than simply cheap labour and materials.
Although NIKE has invested no upfront capital into the strategic partnership, time will soon tell whether the benefits espoused by strategic partnerships will come to fruition and at the right cost to NIKE to make it a sustainable strategy.
One or more of AtlasTrend’s managed funds own NIKE shares.
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Kent Kwan is a co-founder of AtlasTrend, a global equities fund manager that makes it easy for anyone to invest in the world's most thriving trends.
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