Why India can become a bigger player in Global footwear manufacturing?
The world is reeling under the effect of massive disruption to supply chains caused by the Global pandemic. Surprisingly, as the pandemic raged, companies in all industries saw increased demand from consumers shopping online during lockdown. However, post-pandemic demand has softened drastically resulting in a huge inventory build-up, causing brands to go into deep discounting and reduction of forecasts. Companies are faced with multiple issues such as supply chain glitches, inflation and softening of demand. The apparel and footwear industry is seeing one of the biggest hits, with biggies such as Nike and Adidas cutting their forecasts by as much as 50%. Their stock prices have tumbled by similar numbers.
For the first time, companies have realised the risk they have taken on by a moving significant part of their manufacturing to very select countries in Asia, as they chased lower costs. For example, the footwear industry sources as much as 70% of their product from China and Vietnam As a result of the pandemic, factories in these countries shut down as workers got quarantined, ports stalled and containers got stuck. Even today the effects of this continue to impact supply chains globally. During the pandemic - shipping cost from Asia to the biggest market of US increased 10X from $1500 to $15000, shipping times increased from 45 days to 90 days, and port unloading times increased from 5 days to 2 weeks, all of which caused massive disruptions. The geopolitics of the Asian region and the tension between China and US is also adding to this problem.
Terms such a Near-shoring (manufacturing closer to the markets), Reshoring (making it in markets where it is consumed) and Regionalisation are making it back to the boardrooms of Fortune 500 companies. Economists estimate that the cost of a complete reversal of strategies to take manufacturing out of China would cost $1trillion. In footwear, over the last 40 years, all brands have moved their manufacturing to Asia in search of lower labor costs, and increased bottom-lines. As manufacturing moved, so did the entire material source base from US and Europe into China.
Reshoring or Near-shoring in footwear is inherently a risky strategy for three reasons.
- Footwear continues to be a highly labor-intensive industry in the absence of any innovation in manufacturing. Today's large footwear factories is run with as many as 10,000 employees. Total cost of labour in US is 4X-5X that of Asia, which could result in a doubling in the final price of a shoe, which brands can ill afford if they move back to US. The soft nature of materials, and multiple small components in shoemaking have defied automation all these years.
- Absence of a footwear material source base: As manufacturing moved to China and Vietnam, material suppliers from US and Europe followed, under cost pressure from brands. Any attempt to reshore manufacturing would required materials to be either shipped from Asia or material suppliers to reshore as well. Both these are expensive and extremely long term strategies.
- It would also be difficult to imagine that blue collar workers in US and Europe would flock to work in footwear manufacturing, an industry that may not be as aspirational for them.
Both Nike and Adidas, who announced Near shoring projects called ‘Manufacturing Revolution’ and ‘Speedfactory’ respectively a few years ago, and spent hundred of millions on those have shut down those initiatives for the above reasons.
We believe that India may be poised to gain from China and Vietnam as footwear giants start to look outside these countries to lower risk. Nike and Adidas already operate atleast 5 large factories in Tamil Nadu to service their global demand. These factories, making some of the most premium footwear models are considered to the amongst their best factories in terms of quality and on-time deliveries. They are also the largest employers in Tamil Nadu.
Paul Saunders, the former Chief Supply Chain Officer of Converse, Toms shoes, and the former Head of Logistics for Nike says, “Footwear companies use the following evaluation criteria as they look to expand manufacturing into new countries”
- Can we get the right product quality- Does the location have manufacturing capability, development capability, management experience, a high-quality local source base?
- Can we get the product supply with reliability - Is there the ability to deliver ontime which is dependent on overall logistics infrastructure, labor availability, customs processes etc?
- Can we get the right cost?
- Can the factories meet the labor and environmental expectations of global brands-Compliance?
Paul adds, “India is already a competitor to China and Vietnam in footwear. It just a matter of scale. The biggest challenges I see is the availability of specialty materials and development experience. This is where China leads. They are the source of most specialty materials, and they have a wealth of product development experience. Vietnam is trying to catch up in these areas, but they still must import many specialty materials from China, and most Vietnamese footwear factories rely on Chinese development centres. It is the same with Indonesia”.
Why does India have an advantage that we can leverage?
India is the 2nd largest producer of footwear in the world with over 2 billion pairs of production, next only to China. India is also the third largest consumer of footwear in the world with a thriving domestic consumer market However, the global markets are evolving into athletic footwear which is an area that the Indian footwear industry has still not developed its capability.
- Large workpool availability: India has one of the largest pool of labour available to be tapped outside of China. The footwear industry could be a lifeline for employment in semi-urban and rural communities. The Special Economic Zones created in Kanchipuram and Krishnagiri districts of Tamil Nadu are great examples of the impact of the footwear manufacturing industry in rural areas.
- Government Focus - Gov of India is promoting the overall Manufacturing sector in India under “Make In India” initiative [ that includes PLI (Production Linked Incentive scheme), Single window clearance for all Govt approvals needed, Ample of land availability and allocation, energy availability etc ] which could be leveraged to FW industry as well.
- Synthetic and Natural material ecosystem: With India’s textile manufacturing capability in both natural and synthetic materials, the material eco-system already exists in India. Modern and characteristic textiles that the footwear industry (specially athletic footwear) requires in scale and scope has to develop locally if the footwear industry has to evolve in India. This will be the most critical element to be addressed.
- Machine development: India has a huge pool of machine suppliers in various industries like automotive, textiles, engineering etc. With these capabilities, there should be no problem in footwear specific machine development and customisation in India.
- Engineering Talent: India annually produces 1.5 million engineering graduates. India's technical education infrastructure includes 2500 engineering colleges and 1400 polytechnics. The surfeit of engineering talent in India will also be an advantage
- Design and Development talent: There are number of footwear specific institutes such as FDDI’s (Footwear Design and Development Institute), CFTI’s (Central Footwear Training Institute)etc. These institutes could be the feeder schools for the footwear industry. The graduates from these institutes need to be trained in understanding the needs of western markets to design and develop products in tune with those market requirements. The development of the National Institute of Design (NID) and National Institute of Fashion Technology (NIFT) into world class institutes is a great template to follow.
- Local markets: With a very large domestic market that is stable in consumption, the industry could de-risk itself significantly from any ups and downs of the global market. This is not a flexibility that any country other than China possesses.
In conclusion, India is poised to develop itself into a footwear manufacturing powerhouse if it can address the nervousness of foreign brands about consistent quality and delivery timelines out of India. This requires a change among Indian footwear manufacturers to bring in the cultural shift in the mindset of their organisations and in their employees. The government will have a role to play in making imports and exports easier and faster, since lead times is a critical metric that buyers use to measure the country's suitability for sourcing.
All global brands are looking for a China alternative. Just as the Covid pandemic was subsiding, the Ukraine war commenced, causing yet another supply Chain disruption. Companies now realise that these disruptions are here to stay.
It is left to India to strike the hammer when it is hot and emerge as a global player in Footwear manufacturing.
Ravi Kallayil is the of CEO of Plaeto shoes. Dharmendra Sunkara is the VP of Product Development and Sourcing of Plaeto.