Manufacturing Outside China: Nike Likes It And You Should Too

Manufacturing Outside China: Nike Likes It and You Should Too

With the cost of manufacturing in China and shipping from China having increased so substantially of late, and with all signs pointing to those costs continuing to rise, many companies are looking at doing their manufacturing outside China and you should too.

This post was originally written in the summer of 2019 — in pre-COVID times. But when I checked our most read China Law Blog posts, this is number one. This tells me two very important things, the first of which I already knew. One, companies are looking at moving their manufacturing outside China. Some are looking at this so as to diversify their manufacturing and some are looking to get out entirely. Two, we should update this post, which is exactly what I have done below.

Companies are moving their manufacturing out of china

Nike’s Manufacturing History

Nike has always been at the forefront of international manufacturing. So much so that I can remember a time (before China became THE factory to the world) when many companies would base their decision on where to do their manufacturing on Nike.

Nike began international manufacturing early in its history and started in Japan. In the 1980s, the company moved nearly its entire manufacturing efforts to South Korea and Taiwan. In 1981, Nike opened its first factory in China.

Back in the mid-1990s, Jardine Fleming Securities came up with the Swoosh Index, which was its theory that once Nike selects a country for its newest factory site, economic growth, rising stock markets and other foreign companies follow. A Business Week article entitled “The Swoosh Index for Emerging Markets” explained it:

Nike first started using Japanese plants in 1964. When labor costs there climbed in the mid-1970s, it gave South Korea and Taiwan a run. In the 1990s, production jumped to Indonesia and China, which now account for two-thirds of Nike output. Nike pulled back from Thailand recently ahead of a collapse in stock and property prices. Next up: Vietnam. While production there is now only 2% of Nike output, that’s expected to double within a year.

When choosing factory sites, Nike looks for cheap labor. However, it also picks countries with stable–usually authoritarian–leadership, decent infrastructure, a pro-business government, and a liberal trade regime. When it decides to leave, that doesn’t signal the end of prosperity. It often means that countries are ready to move on to high-end manufacturing. And democracy.

Many companies watch Nike and then follow Nike to whichever country the company locates. I bring this up because hardly a day goes by without my discussing with a client “where to manufacture” something — mostly in the context of the client inquiring about moving their manufacturing out of China. As one of our international manufacturing lawyers told me the other day: it feels like the old days when manufacturing in China was not a given and companies needed to make international manufacturing decisions. With China no longer the automatic choice for manufacturing, things have gotten more complicated and more interesting for someone who thinks of himself as an international lawyer and not a China lawyer.

Con of manufacturing in China

Cons of Manufacturing in China

Low production costs are typically what draw people to China for their manufacturing needs. However, there are many disadvantages of choosing this country for your company, including:

  • Finding a factory: One of the biggest headaches of moving your manufacturing to China is finding a factory with the capacity to take on your products. Choosing a reliable and upstanding manufacturer is especially important because one in five North American corporations say Chinese companies have stolen intellectual property from them.
  • Shipping logistics: Another con of manufacturing in China is complications with logistics. Shipping in China can take longer than in other countries because of congestion due to the high volumes of goods they send out.
  • Minimum order requirements: Because of their slim margins, Chinese manufacturers often have high order minimums. If you have a business just starting out, investing in high quantities of products can be a financial disadvantage.
  • Unpredictability: The Chinese economy and political landscape can be quite unpredictable. Unexpected price hikes and changes to trading regulations can be stressful for businesses manufacturing products in this country.
  • “Made in China” stigma: Products made in China sometimes have a negative connotation, making consumers question the quality of goods manufactured here. While there are factories in China that uphold excellent quality, other options may be better for your business.

Manufacturing in “Sleeper Countries”

I had a long talk with the leading company for providing necessary inspections of an important, rapidly growing and hugely in-demand product. And as so often happens these days — we quickly found ourselves talking about what we are saying by way of companies moving their manufacturing out of China. Because the product this company inspects is huge, transportation costs are a big factor and we talked about how Mexico (for shipment to the United States and elsewhere in Latin America) and Poland (for shipment to Europe) is becoming the new focus of this industry. I have had at least twenty conversations like this in the last few months about at least 15 different sorts of products.

One of the things I often say to clients is how nobody has made manufacturing easier than China — especially contract manufacturing and SMEs (small and medium-sized enterprises). No country even comes close to China on that count. China has a great “soft infrastructure” for manufacturing and most other countries are just not very helpful. This is a major factor in how slowly companies are moving their manufacturing out of China, especially with COVID making multiple in-country visits difficult or impossible.

But on the flip side, I can cite plenty of companies that have come to one of the international manufacturing lawyers at my firm for legal help with their China manufacturing only to end up manufacturing in another country at lower cost and with no tariffs. Some of these country changes were initiated at our urging and these discussions nearly always go something like this:

Lawyer: Why China for X product? Did you consider Thailand (or whatever other country seems to make better sense)?

Client: I actually wanted to have my X product made in Thailand but I could never figure out how to accomplish that.

Lawyer: We have people who can help you with that.

We then talked about the pros and cons of manufacturing in various countries. We discussed the nations we like and the “sleeper countries” — those that we believe more companies should be considering for their manufacturing.

Depending on the product, I often throw out Spain, Portugal, Poland, Thailand, the Philippines, Mexico, South Korea, and Guatemala.

Nike’s International Manufacturing

But what about Nike? What countries does Nike like? The answer to this question is easy because Nike has a manufacturing map that lists exactly where it manufactures its products. Below is what that map told us back in August 2022 regarding its factories/facilities.

I’m breaking down some major changes from 2019 to 2022. The company currently operates in 37 countries in total. The first difference I noticed is that Nike has fewer factories in 20 countries than it did in 2019.

Check out all the changes for yourself:

  1. Argentina — Went from 13 to 4 factories.
  2. Bosnia and Herzegovina — 1 factory.
  3. Brazil — Went from 24 to 11 factories.
  4. Bulgaria — 1 factory
  5. Cambodia — Went from 10 to 18 factories.
  6. Canada — Went from 3 to 1 factory.
  7. China — Went from 109 to 90 factories.
  8. Croatia — 1 factory
  9. Egypt — Went from 5 to 7 factories.
  10. El Salvador — Went from 3 to 2 factories.
  11. Georgia — Went from 2 to 4 factories.
  12. Guatemala — Went from 4 to 2 factories.
  13. Honduras — Went from 5 to 6 factories.
  14. India — 8 factories.
  15. Indonesia — Went from 38 to 37 factories.
  16. Israel — 1 factory.
  17. Italy — Went from 18 factories to 12 factories.
  18. Japan — Went from 12 to 7 factories.
  19. Jordan — 3 factories.
  20. Lithuania — 1 factory
  21. Malaysia — Went from 7 to 6 factories.
  22. Mexico — Went from 16 factories to 5 factories.
  23. Moldova — Went from 4 to 2 factories.
  24. Netherlands — Went from 2 to 1 factory.
  25. Nicaragua — When from 2 to 1 factory.
  26. Pakistan — Went from 6 to 5 factories.
  27. Poland — 1 factory.
  28. South Africa — 1 factory.
  29. South Korea — 8 factories.
  30. Spain — Went from 2 to 1 factory.
  31. Sri Lanka — Went from 17 to 18 factories.
  32. Taiwan — Went from 13 to 12 factories.
  33. Thailand — Went from 29 to 24 factories.
  34. Turkey — 4 factories.
  35. United Kingdom — 1 factory.
  36. United States — Went from 42 to 29 factories.
  37. Vietnam — Went from 105 to 104 factories.

What can be learned from all of this Nike info? That depends. Nike actually lists out the specific companies it uses in each country and there can be little doubt that Nike has thoroughly vetted each of these companies and their facilities. Do these companies engage in contract manufacturing for companies other than Nike? I would think most do.

So this listing ought to be very helpful for anyone in the apparel, sports equipment or footwear industries. Does that mean you should have your t-shirts made in the United Kingdom? I highly doubt that. It’s possible Nike has very limited amounts of apparel made in Britain in order to ensure fans in Europe can get their customized jerseys quickly when a new Liverpool, Barcelona or Inter Milan star is born.

What about this list surprises you? I’m surprised to see an expensive country like the United States on here and not the Philippines. I’m surprised to see the decrease from 2019 to today in factories based in Mexico. Though it is quite possible that other factories in Mexico won out and are making more products, and that the actual quantity of goods made in this country has not actually declined at all.

I also will bet that Mexico’s numbers (and those of other Latin American countries as well) will be higher in the future due to the “new NAFTA” trade agreement and greatly increased China tariffs and shipping costs for products coming from China to the United States.

Manufacturing Outside of China

But what if you make toaster ovens? What can you learn from what Nike is doing? You can learn that there are plenty of countries other than China that manufacture quality items at a price that makes sense for a highly sophisticated international company like Nike and that alone ought to open your eyes to the manufacturing world outside China.

But, what is good for Nike may not be good for you and, quite frankly, there are countries listed above that I would immediately write off as too dangerous, too corrupt, too risky, too lawless or just too difficult for the average company. One thing I feel compelled to mention though is that I would have written off Pakistan two years ago but all of our clients who have moved their apparel manufacturing from China to Pakistan in the last couple of years now swear by it and not at it.

Considerations for Choosing Your Manufacturing Location

Before committing to a location for your manufacturing efforts, your business can benefit from considering the following factors:

  • Political climate: When looking into countries for your manufacturing, it is essential to consider the political conditions of that nation and its regulations regarding labor and environmental laws.
  • Labor: Another important factor is the people who will work in the factory. You want to ensure adequate wages and that laborers are skilled and qualified to manufacture your products.
  • Operating environment: The factory itself must have safe working conditions and effective regulations in place to ensure products are manufactured to the greatest quality.
  • Shipping: Be sure to calculate the estimated time and costs associated with shipping from the country to which you are considering moving your manufacturing efforts.
  • Taxes: Different countries have very different taxes. Your business will benefit from familiarizing itself with the relevant duties and taxes you’ll need to pay in the country you are interested in.
  • Intellectual property: Consider the protections and steps you need to take to ensure your company’s intellectual property is safe.

Where are you looking for your manufacturing these days? What countries do you see as manufacturing sleepers and why? For the nuts and bolts of moving your manufacturing out of China, check out How to Move Your Manufacturing Out of China Safely.