Global Footwear Manufacturing: C1321-GL

Transcription

1 IBISWorld Industry Report : C1321-GL DISCLAIMER This product has been supplied by IBISWorld Inc. ('IBISWorld') solely for use by its authorized licenses strictly in accordance with their license agreements with IBISWorld. IBISWorld makes no representation to any person with regard to the completeness or accuracy of the data or information contained herein, and it accepts no responsibility and disclaims all liability (save for liability which cannot be lawfully disclaimed) for loss or damage whatsoever suffered or incurred by any other person resulting from the use of, or reliance upon, the data or information contained herein. Copyright in this publication is owned by IBISWorld Inc. The publication is sold on the basis that the purchaser agrees not to copy the material contained within it for other than the purchasers own purposes. In the event that the purchaser uses or quotes from the material in this publication - in papers, reports, or opinions prepared for any other person - it is agreed that it will be sourced to: IBISWorld Inc.

2 Contents Industry Definition...3 ACTIVITIES (PRODUCTS AND SERVICES)...3 SIMILAR INDUSTRIES...3 DEMAND & SUPPLY INDUSTRIES...3 Key Statistics...4 CONSTANT PRICES...4 CURRENT PRICES...4 REAL GROWTH...5 RATIO TABLE...5 GRAPHS...5 Segmentation...7 PRODUCTS AND SERVICE SEGMENTATION...7 MAJOR MARKET SEGMENTS...8 INDUSTRY CONCENTRATION...9 GEOGRAPHIC SPREAD...9 Market Characteristics MARKET SIZE...12 LINKAGES...12 DEMAND DETERMINANTS...13 DOMESTIC AND INTERNATIONAL MARKETS...13 BASIS OF COMPETITION...14 LIFE CYCLE...15 Industry Conditions BARRIERS TO ENTRY...17 TAXATION...17 INDUSTRY ASSISTANCE...17 REGULATION AND DEREGULATION...18 COST STRUCTURE...19 CAPITAL AND LABOR INTENSITY...20 TECHNOLOGY AND SYSTEMS...21 INDUSTRY VOLATILITY...22 GLOBALIZATION...22 Key Factors KEY SENSITIVITIES...23 KEY SUCCESS FACTORS...23 Key Competitors MAJOR PLAYERS...25 PLAYER PERFORMANCE...25 OTHER PLAYERS...27 Industry Performance CURRENT PERFORMANCE...30 HISTORICAL PERFORMANCE...32 Outlook... 37

3 INDUSTRY DEFINITION Industry Definition Operators in the industry manufacture footwear. This includes footwear for men, women and children. Operators may manufacture rubber and plastic footwear, plastics, or fabric uppers and rubber and plastics protective footwear. They may also manufacture house slippers and slipper socks. Operators may manufacture men's or women's footwear designed for dress, street and work. ACTIVITIES (PRODUCTS AND SERVICES) The primary activities of this industry are: Athletic shoes manufacturing Ballet slippers manufacturing Children's shoes manufacturing Cleated athletic shoes manufacturing House slipper manufacturing Infants' shoes manufacturing Men's footwear (except athletic) manufacturing Other footwear manufacturing Rubber and plastics footwear manufacturing Women's footwear (except athletic) manufacturing The major products and services in this industry are: Women's shoes (except athletic) Men's footwear (except athletic) Athletic shoes Rubber and plastic footwear Children's shoes Slippers Protective footwear Other SIMILAR INDUSTRIES Industry: C1311-GL - Global Apparel Manufacturing Description: Companies in this industry cut, sew (i.e., purchasing fabric and cutting and sewing to make a garment) and manufacture garments. DEMAND & SUPPLY INDUSTRIES A-GL - Global Agriculture, Hunting, Forestry and Fishing C1931-GL - Global Resin and Synthetic Rubber Manufacturing F-GL - Global Wholesale and Retail Trade F4311-GL - Global Wholesale Trade F4511-GL - Global Department Stores and General Merchandise Stores Copyright 2010, IBISWorld Inc. 3

4 KEY STATISTICS Key Statistics CONSTANT PRICES Industry Revenue *118.5 *122.1 *125.3 *125.9 *126.9 $Bill Industry Gross Product *54.8 *54.9 *57.5 *57.8 *58.3 $Bill Number of Establishments *106,848 *109,940 *111,039 *109,930 *111,030 Units Number of Enterprises *95,400 *98,161 *99,142 *98,150 *99,130 Units Employment *6,705,225.0 *6,835,818.0 *6,979,371.0 *7,118,959.0 *7,154,600.0 People Exports *75.2 *77.9 *81.9 *82.5 *83.7 $Bill Imports *75.2 *77.9 *81.9 *82.5 *83.7 $Bill Total Wages *21.7 *21.5 *21.7 *21.1 *21.0 $Bill Total Assets N/A N/A N/A N/A N/A Acres Domestic Demand *118.5 *122.1 *125.3 *125.9 *126.9 $Bill Millions of Pairs *11,630 *11,777 *12,024 *12,060 *12,150 Units CURRENT PRICES Industry Revenue *109.2 *115.8 *121.4 *123.7 *126.9 $Bill Industry Gross Product *50.5 *52.1 *55.7 *56.8 *58.3 $Bill Number of Establishments *106,848 *109,940 *111,039 *109,930 *111,030 Units Number of Enterprises *95,400 *98,161 *99,142 *98,150 *99,130 Units Employment *6,705,225.0 *6,835,818.0 *6,979,371.0 *7,118,959.0 *7,154,600.0 People Exports *69.3 *73.9 *79.3 *81.0 *83.7 $Bill Imports *69.3 *73.9 *79.3 *81.0 *83.7 $Bill Total Wages *20.0 *20.4 *21.0 *20.7 *21.0 $Bill Total Assets N/A N/A N/A N/A N/A Acres Domestic Demand *109.2 *115.8 *121.4 *123.7 *126.9 $Bill Millions of Pairs *11,630 *11,777 *12,024 *12,060 *12,150 Units Copyright 2010, IBISWorld Inc. 4

5 KEY STATISTICS REAL GROWTH Industry Revenue *4.1 *3.0 *2.6 *0.5 *0.8 % Industry Gross Product *4.4 *0.2 *4.7 *0.5 *0.9 % Number of Establishments *0.4 *2.9 *1.0 *-1.0 *1.0 % Number of Enterprises *0.4 *2.9 *1.0 *-1.0 *1.0 % Employment *3.4 *1.9 *2.1 *2.0 *0.5 % Exports *3.6 *3.6 *5.1 *0.7 *1.5 % Imports *3.6 *3.6 *5.1 *0.7 *1.5 % Total Wages *-4.0 *-0.9 *0.9 *-2.8 *-0.5 % Total Assets N/A N/A N/A N/A N/A % Domestic Demand NC *3.0 *2.6 *0.5 *0.8 % RATIO TABLE Imports share of domestic demand *63.46 *63.80 *65.36 *65.53 *65.96 % Exports Share of Revenue *63.46 *63.80 *65.36 *65.53 *65.96 % Average Revenue per Employee *0.00 *0.00 *0.00 *0.00 *0.00 $Bill Wages and Salaries Share of Revenue *18.31 *17.61 *17.32 *16.76 *16.55 % GRAPHS Revenue Revenue Growth Rate Copyright 2010, IBISWorld Inc. 5

6 KEY STATISTICS Employment Imports and Exports Note: Unless specified, an asterisk (*) associated with a number in a table indicates an IBISWorld estimate and references to dollars are to US dollars. Copyright 2010, IBISWorld Inc. 6

7 SEGMENTATION Segmentation PRODUCTS AND SERVICE SEGMENTATION Product/Services Share Athletic shoes 20.2% Children's shoes 8.0% Men's footwear (except athletic) 24.0% Other 1.0% Protective footwear 3.3% Rubber and plastic footwear 8.2% Slippers 4.1% Women's shoes (except athletic) 31.2% Women's shoes Women's shoes (excluding athletic) should account for the largest product segment with about 31.2% of industry revenues. While the economic prosperity of the US is declining in 2010, the relative affluence in the country means that women in the US are more likely to purchases multiple pairs of shoes than women from most other parts of the world. Women's footwear should make up about 42% of total shoe imports into the US, the largest market for imports. Women's shoes regularly change in style which allows for high competition levels between firms. Men's footwear Men's footwear (excluding athletic) should account for about 24% of the industry's revenues. Slower changes in the styles of men's footwear allow existing machinery, equipment and inputs to be used each year. This product has increased in recent years at the expense of women's footwear. Men's footwear is more generic and is better suited to mass production in low labor cost countries. Athletic Athletic shoes are estimated to make up 20.2% of industry revenue and were produced in Asia. Large athletic shoes companies like Nike and Adidas often utilize contractors in Asia and other developing countries to produce their athletic shoes. Children's shoes Children's shoes should account for around 8.0% of industry revenue. Most children's shoes are produced in low labor cost countries as only a very small percentage of consumers purchase children's shoes for design, quality and brand names. Copyright 2010, IBISWorld Inc. 7

8 SEGMENTATION Rubber and plastic Rubber and plastic footwear should make up about 8.2% of industry revenue. These products, which exclude sandals and slippers, have vulcanized, molded or cemented components. Slippers Footwear in the slippers segment usually includes house slippers, slipper socks and leather slippers. This segment should account for 4.1% manufactured footwear. Work and protective footwear, which typically includes steel cap shoes, water shoes and overshoes, should account for 3.3% of industry revenue. The other segment is expected to include, ballet slippers, hiking boots, golf shoes, moccasins and theatrical shoes. These product categories are further segmented into: fashion shoes, work shoes (including school shoes), work boots, sports shoes, and footwear components. MAJOR MARKET SEGMENTS Market Segment Share Exports 66.0% Domestic retailers 15.3% Domestic wholesalers 14.1% Other 4.6% Domestic footwear wholesalers account for an estimated 14.1% of the industry in Manufacturers tend to distribute footwear items directly to wholesalers that, in turn, market the goods to specialty retailers such as sports stores, mass merchandisers and department stores. Footwear exports account for the largest segment in the industry with an expected 66% of the market in It should be noted that many international wholesalers are also purchasers of exports. Major exporters of manufactured footwear include China, Vietnam, Brazil, Thailand Indonesia and India. Destinations include Canada, Korea, Japan, Mexico and the UK. Exports are primarily made to international wholesalers and retailers with the major destinations being the US, Hong Kong, Germany, UK and France. In many cases, wholesalers are bypassed; this is particularly relevant to larger manufacturers that can exert some supplier power. These manufacturers often have their own retail outlets and tend to distribute footwear items directly to their stores to avoid unnecessary costs with wholesalers. Domestic retailers are forecast to account for an estimated 15.3% of the market in 2010 Copyright 2010, IBISWorld Inc. 8

9 SEGMENTATION The "Other" market segment includes footwear manufacturer direct outlets, government, military and online sales. INDUSTRY CONCENTRATION Industry concentration is low The Industry is considered to have a low concentration level. The four largest players in the sector are expected to account for around only 6.9% of industry revenue in The high labor intensity of most of the industry's production lends itself toward small operations. While large scale manufactures operate in the industry, developing countries also have a large number of microenterprises that manufacture footwear. The top eight major players in the sector are expected to account for about 8% of total industry revenue. While industry concentration is considered to be low, based on the top four and eight companies, the overall footwear market is more consolidated than other apparel markets. Concentration within the industry has increased in recent years due to mergers and consolidation of industry participants. This trend is expected to continue in the future. For example, the major player in this industry, Yue Yuen, has absorbed several footwear manufacturing operations over the last year. The level of industry concentration is expected to increase in the next five years as firms merge or consolidate operations. GEOGRAPHIC SPREAD Year: 2009 Industry employment Region Percentage North Asia 53.4 India & Central Asia 19.8 South East Asia 12.0 South America 5.5 Europe 5.2 North America 1.9 Africa & Middle East 1.4 Oceania 0.8 Industry production (footwear - pairs) Copyright 2010, IBISWorld Inc. 9

10 Region SEGMENTATION Percentage North Asia 59.6 India & Central Asia 9.6 South East Asia 13.2 South America 6.9 Europe 5.3 North America 2.5 Africa & Middle East 1.7 Oceania 1.2 North Asia will be by far the largest footwear manufacturing region. In 2009, it is estimated to have contributed 59.6% of world production and 53.4% of employment in the industry. China will be the largest producer in the Global Footwear Manufacturing Industry and manufactured approximately 7 billion pairs of shoes or an estimated 58% of total world production. Taiwan and Korea were previously large regional producers. While many large footwear manufacturing companies have headquarters in these countries, nearly all of the manufacturing takes place in China. South East Asia is expected to be the second-largest region in terms of pairs produced, making up about 13.3% of total production and 12% of employment. These regions included Vietnam, which has grown from about million pairs produced in 2004 to an estimated million in Vietnam's emergence illustrates how China itself has become vulnerable to cut-rate competitors. This is in contrast to other Asian economies such as Thailand, which sought to align themselves with China. Countries such as Thailand and Indonesia are still significant manufacturers, although not to the extent that they were in the 1990s. India and Central Asia should make up about 9.6% of world production with India the largest contributor and Turkey the second largest. Despite this, this region still made up about 19.8% of employment due to the large number of micro businesses that are involved in footwear manufacturing in India. The Indian industry has grown considerably over the last few years as larger levels of overseas investment from US, Europe and Taiwan has seen the country become a viable location for producing mid-priced footwear products. The large domestic market also gives India the potential to grow considerably from an estimated 7.4% of world production in South America should make up 6.9% of world production and 5.5% employment. The Brazilian footwear industry is expected to be the main contributor in 2009 with about 6.5% of pairs produced and 4.9% of employment. While some Eastern European regions such as Romania are growing, most manufacturers in Western and Southern Europe have struggled to compete against the increasing level of import penetration from Asia. Europe is expected to make 5.3% of world production and 5.2% of employment in Italy is expected to be largest producer in Europe, contributing about 1.9% of total pairs produced, the majority of which are high- to medium- priced shoes. Many Italian companies have changed their business models and shifted production to other viable areas - some in Eastern Europe, others in China and some in India. North American footwear manufacturing has declined substantially over the last ten years after years of offshoring and import penetration in the US. In 2009, it represented only about 2.5% of world production and 1.9% of employment. Copyright 2010, IBISWorld Inc. 10

11 SEGMENTATION Mexico has also been struggling against import competition but still contributes about 1.9% of world production and 1.6% of employment. Growth in US manufacturing is likely to occur in niche markets as demand from middle-class consumers from developing nations such as China and India grows. Copyright 2010, IBISWorld Inc. 11

12 MARKET CHARACTERISTICS Market Characteristics MARKET SIZE A global economic downturn saw consumer spending on footwear slow in 2009, and is expected to be low in The Industry is expected increase by 0.8% in 2010 to $126.9 billion. As consumer spending power in the US, Europe and other parts of the world falls and unemployment rises, demand for basic, non-discretionary footwear will continue to remain stable. Demand for mid- to high-priced European manufactured footwear is projected to fall as consumers tighten their belts in the face of tight economic conditions. Demand from developing countries, such as China, India, Russia and parts of the Middle East, for high-end and mid-priced manufactured footwear is expected to be flat in International trade is expected to continue to grow, albeit slowly in 2010, as the supply chain in the footwear manufacturing industry becomes increasingly globalized and developed countries continue to outsource production to lowcost labor countries. Total global trade in manufactured footwear should rise by 1.5% in This rate compares to an expected annualized rate of 2.9% per annum in the five years to Footwear manufacturers in Europe still dominate the high-priced, higher value-added end of the market. However, Chinese dominance has risen over the last five years, especially in the international trade of lower-priced footwear. In 2010, it is anticipated that China will represent 57% of production, 32% of global exports and 53% of industry revenue. Rising wages in China present an opportunity for other countries in Asia to enter the industry as cheap alternatives to China, both as a source of production and as a source of low-priced imports. Output and exports from China will also be constrained in 2010 after several years of strong growth as demand from the US and Europe falls. LINKAGES Demand Linkages F-GL - Global Wholesale and Retail Trade Wholesalers and retailers purchase footwear from manufacturers F4311-GL - Global Wholesale Trade Wholesalers purchase manufactured footwear. A rise in demand from footwear wholesalers should lead to rising levels of footwear manufactured. F4511-GL - Global Department Stores and General Merchandise Stores Department Stores and General Merchandisers purchase manufactured footwear from wholesalers or directly from manufacturers Supply Linkages A-GL - Global Agriculture, Hunting, Forestry and Fishing Hides and skins are part of the supply chain for footwear. Hides and skins are treated at a tannery or involved with chemical processes. After this, they are used in the manufacture of footwear. C1931-GL - Global Resin and Synthetic Rubber Manufacturing Synthetic products are used in the production of various shoes. Copyright 2010, IBISWorld Inc. 12

13 MARKET CHARACTERISTICS DEMAND DETERMINANTS Real household disposable income levels are an important demand factor for footwear. This factor can influence the quantity, quality and frequency of footwear purchases. As the level of real household disposable income increases, it can prompt greater demand for footwear. Accordingly, as real household disposable income declines, so too does the frequency at which consumers purchase discretionary items. This is also related to the price of footwear. If the price of clothing and other related goods increase at a faster rate than footwear, people will tend to purchase greater volumes of shoes. Advertising and marketing of brand names are important ways for footwear producers to differentiate their products. Consumers are influenced by advertising and brand image. Improving these can lead to higher sales. Established products such as Nike, Adidas and high-end fashion brands, like Manolo Blahnik, Prada, DKNY and Gucci, can limit the effect of new footwear styles on the market as they hold such a large portion of the market. Greater spending on advertising is attributed to the power of branding and the larger the manufacturer the greater the success of creating a strong and popular brand. Fashion is also a form of differentiation and has influenced advertising and marketing. Fashion and social trends lead to changing demand for certain footwear styles in the same way that the popularity of sporting activities affects sales in athletic footwear. The level of fitness awareness and the age of the population are social factors that affect demand. These affect the demand for particular types of shoes. For example, with an ageing population in some developed countries, the demand for walking shoes may gradually increase over sport shoes and school shoes. Seasonal factors and weather conditions also cause changes to demand conditions. Footwear sales vary according to seasonal and weather conditions around the world. For example, during the cold winter months, the sale of sandals will decrease and the sale of galoshes will increase. Population growth is key driver in this industry. A higher global population leads to greater demand for consumer products, particularly for basic necessities such as basic footwear. This can lead to growth in the industry. The quality of locally made shoes compared to imports can also create changes in demand and consumer perceptions, especially for shoes categorized as discretionary purchases. Domestic consumers may prefer local products due to a sense of loyalty to local firms. Consumers may also be willing to pay more footwear made in certain countries, such as Italy, over footwear manufactured in developing countries. DOMESTIC AND INTERNATIONAL MARKETS Domestic and International Markets Trade Trade in this industry is high The trade trend is increasing Domestic and International Markets Analysis International trade makes up a large proportion of trade in the Industry, and is expected to account for approximately 66% of industry revenue in The international trade level has risen steadily from 63.5% of industry revenue in 2006 at $75.2 billion, to a forecast $83.7 billion in 2010, which represents an annualized average rise of 3.3%. In 2010, China is expected to be the largest source of international exports. China dominates the industry, especially the cheaper end of the market. China is projected to export $26.6 billion worth of manufactured footwear, or 31.8% of total global exports in 2010 from 29.1% of exports in Exports from China have increased as most major international Copyright 2010, IBISWorld Inc. 13

14 MARKET CHARACTERISTICS footwear companies around the world invested heavily in developing manufacturing operation in the country to take advantage of the lower labor and production costs. Italy is the second-largest exporter of footwear in the world. Italy leads the market in the production of highly-priced shoes from prestigious designers and brands. In 2010, Italy is expected to export $9.3 billion worth of footwear or 11.1% of total exports. The country specializes in providing a wide range of designs to suit current trends and satisfy customer demands, with the "Made in Italy" label being a significant value-adding component. Italian exports declined from 15.7% of world exports in 2004 as the Italian industry faced rising competition from Asia. The abolition of quotas on Chinese products and the consequent flooding of the European market with Chinese footwear decreased exports, especially of medium-priced Italian footwear. The European Union's two-year anti-dumping duty on China-made leather shoes took effect in October Under the EU's new policy, European shoe importers paid a 16.5% tariff on Chinese-made leather shoes and 10% on shoes made in Vietnam. To counteract the impact of EU's anti-dumping tariffs, Chinese shoe manufactures have shifted their focus on new markets in South East Asia, South America and Oceania, as well as speeding up the expansion of the domestic market. Vietnam has emerged over the last few years as a major exporter, expected to rise from 5.2% of total exports in 2006, to an estimated 7% of exports in As wages in China rise, many international firms have been creating footwear production facilities in Vietnam to take advantage of lower labor costs. Other export countries in 2010 are expected to include Belgium (3.9%), Germany (3.7%), Spain (3.4), Brazil (3.1%), and Romania (3.0%). The US is the largest purchaser of imports in the industry. The level of imports entering the US will be stable in 2009 as US consumers hold back on spending. In 2010, imports to the US are projected to be worth $23.2 billion, or 24.8% of total world imports. This is down from 26.8% in 2008 and 26.9% in As with many other developed countries in this industry, the US local footwear manufacturing industry has declined as demand for cheaper overseas imports, particularly from China grows. Most large firms in the US set up manufacturing facilities overseas via third party contractors and transformed themselves into importers and wholesalers in America. Hong Kong is expected to be the second largest importer with 8.1% of total imports. This is down from 10% of imports in The majority of footwear manufacturers in Hong Kong have set up offshore production facilities on the Chinese mainland to reduce operation costs and stay competitive, leaving only limited capacity in Hong Kong to meet small orders. Because of this, many manufacturers, after relocation of production facilities offshore, are classified as import-export establishments. Cheaper footwear imports, particularly from China and Vietnam have increasingly penetrated the European market. Fears that these may be disrupting the European economy saw the introduction of tariffs on Chinese and Vietnamese footwear imports from October Cheaper footwear imports to Italy, the UK, Belgium, France and Germany have risen considerably over the last five years. BASIS OF COMPETITION Industry competition is medium Industry competition is increasing Firms compete with each other on the basis of price, quality and service. Price can be construed to signify the quality of the product. A firm can gain an advantage in the market by providing good quality products at a reasonable price. The Copyright 2010, IBISWorld Inc. 14

15 MARKET CHARACTERISTICS main factor for imported footwear having such a strong competitive position is that generally, footwear comes from low labor cost countries such as China, which allows consumers in developed nations to take purchase cheaper shoes. At the other end of the market is high quality footwear, which is usually sourced from Western European countries such as Italy, who are renowned for their high-quality inputs, such as leather and fabrics. Product innovation is a significant differentiating factor. This is increasingly becoming a large competitive consideration for manufacturers. Design teams are constantly creating various ranges of new style footwear, which include added features such as air pocket soles for outdoor activity shoes. This product differentiation is perceived as one of the main factors on which consumers choose specific products, aside from price. Apart from innovation, product branding is crucial to compete in this industry. Established brand names, such as Nike and Adidas, have created brand image and recognition through varying marketing activities. This has created a loyal consumer base and companies can use their market share to influence buying habits and create greater market strength. Similarly, up-market shoe manufacturers may serve a niche market by charging a high price for high-quality shoes that provide a certain image. Further, a company that supplies retailers and fills orders in a timely manner can also gain a good reputation and achieve repeat orders. Developing or newly developed countries generally compete on their low labor costs. Apart from this, many of them have large domestic markets with growing middle classes that are experiencing a rise in spending power. Examples of such counties are China and India. The competitive strengths of developed countries in the industry include: design of shoes and footwear; quality of material, particularly leather; brand strengths associated with quality and design; quality of product; and technological competence. While the technological competence of footwear manufacturers is stronger in the developed world, this is expected to be limited to a short time span with firms in developing economies increasing their use of similar technologies with some companies in China already more advanced. LIFE CYCLE Life Cycle Stage This industry is in the mature stage of its life cycle Life Cycle Reasons There is positive growth in both industry revenue and value added The number of establishments is rising US and European footwear manufacturers have greatly increased outsourcing manufacturing to offshore companies Footwear is a product required by most consumers in the world. Therefore, a base level of footwear purchases will generally exist Employment is rising but wage levels are decreasing Life Cycle Analysis The Industry is deemed to be in the mature phase of its life cycle. In the five years to 2010, industry revenue is projected to increase at an annualized rate of 2.2%, from $113.8 billion to $126.9 billion (constant 2010 dollars). Similarly, value added is projected to rise from $52.5 billion to an estimated $58.3 billion over the Copyright 2010, IBISWorld Inc. 15

16 MARKET CHARACTERISTICS corresponding period. This represents an annualized rise of 2.1%, less than expected growth in world real GDP over the same time frame. There have been an increasing number of manufacturers leaving the US and Europe and setting up operations in the Asia-Pacific region or using contract manufacturers from these regions. Many operators have chosen this path in a bid to take advantage of the lower wage and production costs which countries such as China offer. This is seeing a larger percentage of low-cost products enter the market and constrained the growth in value added. The number of footwear manufacturers operating in this industry has increased, which in turn has increased employment levels. In the five years to 2010, employment and establishment numbers are expected to rise 2% and 0.9% each year on average. Despite this, total industry wages are projected to fall 1.5% a year as firms continue to take advantage of cheaper labor costs, mainly in the Asia-Pacific region. Copyright 2010, IBISWorld Inc. 16

17 INDUSTRY CONDITIONS Industry Conditions BARRIERS TO ENTRY Barriers to entry in this industry are medium These barriers are increasing The industry is deemed to have a medium barrier entry level, although this is increasing given the general availability of offshore contract manufacturing. Barriers to entry are lower in countries such as Vietnam, China and India. Governments and companies in these countries actively seek foreign investment in order to develop the industry and exploit the comparative advantage they have over more developed countries. Firms in these countries also have greater access to cheaper labor. Companies from developed countries looking to manufacture have to compete with low-cost countries as well as large multinational companies that have the capability to set up manufacturing operations overseas. Over the years, footwear manufacturers in the US, Europe, Hong Kong and Taiwan are increasingly shifting their operations offshore to developing countries to take advantage of low production and wage costs. This has, in turn, increased the level of import competition in the industry, which has made it extremely difficult for domestic manufacturers from developed countries to compete with low-priced imports from countries such as China, Brazil and Vietnam. Manufacturers need access to wholesale and retail distribution networks. For example, Taiwanese major player, Yue Yuen, which mostly manufacturers in China and Vietnam, provides footwear under contract for most of the larger sporting good brands around the world. There are high costs associated with establishing brand names. In addition, there is competition from existing brands such as Nike and Reebok. This heightens the costs associated with advertising and maintaining brand awareness. Apart from brand names, it can be costly to acquire capital equipment and machinery to manufacture footwear on a large scale. TAXATION There are no specific taxation regulations specific to this industry. INDUSTRY ASSISTANCE The level of Industry Assistance is medium The trend of Industry Assistance is steady Key Tariffs Goods Low Rate* High Rate* Tariffs on Footwear Imported into the US *Percentage of value unless otherwise specified The World Trade Organization sets global rules of trade between nations participating in the Footwear Manufacturing Industry. WTO agreements lay down the legal ground rules for international trade as well as the market-opening commitments taken up by its members. These agreements are negotiated and signed by all members of the WTO, and Copyright 2010, IBISWorld Inc. 17

18 INDUSTRY CONDITIONS ratified in their parliaments. Most of the WTO's current work comes from the negotiations called the Uruguay Round, and earlier negotiations under the GATT. The organization is currently the host to new negotiations, under the Doha Development Agenda (DDA) launched in The Doha Development Agenda (DDA) comprises both further market opening and additional rule making. The agenda takes measures necessary to integrate developing countries into the world trading system, notably by strengthening assistance to build capacity. The main objective of the new round is to put development at the heart of the world trade system in a way that will help them combat poverty. The European Union operates a system of trade defense instruments. These instruments - Anti-Dumping, Anti-Subsidy and Safeguard measures - are designed to protect EU producers against unfairly traded or subsidized imports and against dramatic shifts in trade flows if they are harmful to the EU economy. The use of these instruments is based on rules derived from WTO agreements. Between January 1995 and December 2004, the EU imposed 189 definitive anti-dumping measures. The US imposed 262 and India 306. In the same period, the EU initiated 300 investigations, the US 352 investigations and India 383 investigations. As of 31 October 2006, the EU has 12 anti-subsidy measures in force. The United States and the European Union are becoming more forward in holding China to account over its WTO obligations. Investigations carried out by the EU's Trade Commission showed that China and Vietnam were benefiting from cheap bank loans, tax holidays and other government subsidies which had allowed them to export footwear at below-cost prices. Protectionist advocates urged EU officials to strictly enforce anti-dumping regulations and impose retaliatory duties, if needed, against their rivals from the developing world. A new EU anti-dumping scheme to tackle Chinese and Vietnamese leather shoe imports put a two year duty of 10% on all leather footwear imports from Vietnam, and 16.5% on all imports from China from October The biggest users of anti-dumping measures in the global economy, since the signing of the WTO Anti-dumping Agreement in 1995, in terms of absolute numbers of definitive measures imposed are India, the US, the EU, Argentina, Australia, South Africa, Canada, Turkey, Brazil, Mexico and China (in that order). Countries such as Mexico, Canada, Colombia, Chile and South Africa, continue to maintain restrictions on footwear imports from China where many US companies manufacture most of its footwear. However, many US manufacturers are able to serve these markets through exemptions or alternative sourcing from outside China. Duties on footwear into the US range from zero percent to 37.5%. This rate will depend upon manufacture and whether the principal component is leather or other materials such as rubber, plastic or pig skin. REGULATION AND DEREGULATION The level of Regulation is light The trend of Regulation is steady Industry regulations vary greatly between countries. However, on the whole, the industry is regulated at a light level. As with other sectors of apparel industries, the Industry is subject to several environmental laws and regulations as well as the requirements deemed by many local and international laws. Copyright 2010, IBISWorld Inc. 18

19 INDUSTRY CONDITIONS Activity within this industry is influenced by several regulations and issues. The United Nations strongly urges many corporations in manufacturing industries to embrace the standards set by the International Labor Organization, which are set to protect the human rights of all labor workers globally. Companies must also abide by various occupational health and safety legislation. Rules regulating working conditions vary from country to country. After the criticism of exploitative practices of large companies such as Nike's use of "sweatshop labor", large footwear companies are encouraged to monitor the labor conditions of companies they contract in countries with less strict work-place laws as opposed to the "hands-off" approach that took place in the 1990s. Manufacturers must abide by patent and trademark laws that relate to the protection of intellectual property. Penalties are imposed on the infringement of patents. Companies within this industry are subject to environmental and anti-dumping laws regarding the discharge of material waste of some footwear material such as synthetic and leather made footwear. "Anti-dumping" trade (separate to environment laws) restrictions prevent manufacturers in one country exporting a product to another country at a price which is either below the price it charges in its home market or is below its costs of production. While not prohibited by the WTO, GATT allows countries the option of taking action against dumping. COST STRUCTURE Year: 2010 Item Cost % Purchases 45.7%* Wages 16.5%* Tax and Interest 9.8%* Depreciation 4.9%* Contract Labor 2.3%* Rent 2.2%* Management and Administration 1.8%* Utilities 1.7%* Research and Development 1.1%* Other 6.7%* Profit 7.3%* The cost structure of individual firms within this industry varies and depends on: the type of footwear products being manufactured, the country, the labor and technology mix, and the structure and size of the company. Companies operating in this industry are forecast to generate profit margins of around 7.3% of industry revenue in High levels Copyright 2010, IBISWorld Inc. 19

20 INDUSTRY CONDITIONS of competition from domestic and foreign companies, and pressures from downstream retailers and consumers for lowerpriced footwear, tend to keep returns at a medium level. This is down from about 7.9% of revenue in 2007 with falling demand for high-priced shoes hurting margins and order numbers in The major component of a company's expenses is made up of purchases, which includes leather, natural and synthetic rubber, plastic compounds, foam cushioning materials, nylon, canvas, polyurethane films, packaging items, buckles, laces and other materials. Purchases are expected to account for 45.7% of industry revenue in To minimize wastage and maximize returns, footwear manufacturers need to control material usage and monitor changes in industry demand trends to supply the market accordingly. Labor costs should make up a large proportion of a firm's expenses at a forecast 16.5% of industry revenue in This is down from about 18.3% in 2006, and a peak of 24.1% in 2001, as firms continue to seek to manufacture in countries with low labor costs. The current level of labor costs is still high and indicates the industry is quite labor-intensive. However, the high technological requirements for some of the industry's products, particularly for specialized and molded shoes, means some firms in the US and Europe are able to further reduce their reliance on wages and compete with low labor cost countries in Asia and South America in these niche industries. Large firms, such as Taiwanese company, Yue Yuen, also spend substantial amounts of revenue on improving production efficiency and reducing reliance on wages. Contract labor and other labor costs, such as management, administration, research and development, and contract labor are forecast to account for 5.2% of industry revenue in An indication of the level of capital costs within the industry is the moderate percentage of depreciation allowed for. This is expected to be around 4.9% for the typical firm and is allocated for manufacturing equipment and machinery, office equipment, computer technology and software. Other expenses include other conversion costs - such as dyeing and processing, advertising and promotion, insurance, and freight costs - and are expected to make up 6.7% of expenses. As firms attempt to gain an advantage in the market, advertising and promotion costs increase. Insurance costs have increased in the past years due to corporate scandals, current financial instability and increased anxiety about terrorism with firms attempting to maximize security. While dipping in 2008 and 2009, high oil prices have caused freight prices to increase in the past and threaten to do so again as crude oil prices remain relatively high. CAPITAL AND LABOR INTENSITY The level of Capital Intensity is medium A significant labor component of footwear manufacturing is the cutting and stitching of materials Machinery can be used to assist the manufacturing processes. However, they still require human operations Capital expenditure is relatively low compared to labor inputs There are a number of manual steps involved in footwear assembly processes According to IBISWorld estimates, footwear manufacturers will utilize approximately 4.4 units of labor for each unit of capital in A labor to capital ratio of 4.4:1.0 indicates a medium capital intensity level. There are many manual steps involved in the assembly process of shoes and as such, even large technological innovations in the manufacturing Copyright 2010, IBISWorld Inc. 20

21 INDUSTRY CONDITIONS process will not alter this significantly. It is difficult to replace labor with automated processes in particular parts of production. For instance, shoe-making still requires workers to operate machines for stitching leather and other material. The typical process of producing shoes includes: the design, pattern making, cutting and upper making, lasting, bottoming and finishing. Many of these processes are manual in nature. Although machinery, such as sewing and cutting machines, can be used to assist the processes, they still need human operation. Automation levels in footwear manufacturing vary depending upon styles. Plastic shoes that are injected molded require a great deal of capital equipment. In contrast, high-quality, all-leather shoes may be individually hand stitched and assembled. Firms have increased investment in technologically advanced footwear manufacturing equipment in recent years. Capital investment has predominantly been on equipment to produce niche products such as specialized and molded shoes. TECHNOLOGY AND SYSTEMS The level of Technology Change is low Technological advancement in the industry is deemed to be low. Much of the production is still very labor intensive as it comprises of sewing and cutting machines that still need to be operated with human intervention. Internet technology has connected the world and is used to communicate product information globally. This has further internationalized global supply chains in the worldwide footwear manufacturing industry with companies operating in various international locations. For example, product design, strategy and marketing are often done in developed countries while manufacturing often takes place in other parts of the world. While this still took place before the advent of internet technology, the speed of conversion from footwear design to manufacturing has increased. Most research surrounds the development of new material components and improved production procedures. The implementation of production cost saving measures at all levels is ongoing. Companies such as Adidas have recently made significant progress to increasing their speed to market, including taking 30 days out of the footwear production process. Computerizing functions performed by machines, such as the introduction of computerized stitching improved efficiency aided efficiency. Machines now perform the functions of "roughing", which is the removal of the top surface of leather, which previously required highly skilled labor. Injection molding (which enabled mass production of items such as synthetic soles and heels) and computerized cutting by water jets (to replace manual cutting processes) were both significant developments. Tagless labeling technology is expected to allow for increased consumer comfort, branding opportunities, cost savings and security management. The garment manufacturer or contractor can incorporate brand logos, anti-counterfeiting tools, barcodes and potentially radio-frequency identification (RFID) technology into labels, in one relatively simple process. Copyright 2010, IBISWorld Inc. 21

22 INDUSTRY CONDITIONS INDUSTRY VOLATILITY Industry revenue volatility is low While revenue from footwear manufacturing changes from year to year, it is a product that most consumers in the world purchase. Growth is mainly driven by world population growth and GDP growth. The world's population will continue to grow in 2010, despite weaker global economic conditions. Because of this, revenue from footwear manufacturing is still expected to grow. Volatility can be created by fashion changes. These can fluctuate rapidly and are difficult to predict. A change in fashion can make footwear styles outdated and lead to poor sales. Changing fashion can also make some footwear more popular. Styles of footwear and the popularity of different products may change, but as long as world population is growing, in the long term, revenue from footwear manufacturing is likely to continue to grow steadily. Fluctuating competition from imports can create volatility. Import levels vary as price competitiveness relative to domestic footwear changes. This is also influenced by exchange rates and the presence of tariff restrictions and quotas. GLOBALIZATION The level of Globalization is high The trend of Globalization is increasing The Industry is highly globalized with many firms pursuing new markets around the world. This is attributed to the fact that this type of manufacturing has a high labor component. Footwear manufacturing is difficult to totally automate and as such, is highly labor intensive. Consequently, manufacturers tend to contract work to countries that have low labor costs or establish production facilities offshore. Export supply chains from low-cost countries are organized mainly on a global basis. Major players operating in this industry, such as the Taiwanese firm, Yue Yuen, have set up extensive manufacturing operations and distribution networks in China and other Asian locations. Large shoe wholesalers and retailers, such as Nike Inc, outsource manufacturing mostly to Chinese contractors due to the cheaper labor and overall low production costs within the Chinese market. Footwear is then imported around the world and distributed to retail outlets for resale to the final consumer. Increasingly, as wage levels begin to rise in China, manufacturers are looking to the other locations such as Vietnam, Brazil and India to source manufactured footwear. It is anticipated that in the coming years, more companies will shift part of their production overseas in the pursuit of cost savings. Another contributing factor to the move toward a more globalized market is import competition around the world increasing in the past five years. The increasing liberalization of international trade in the industry has also encouraged greater flows in exports and imports. Manufacturers from developed nations have been unable to compete with cheaper overseas imports. It is expected that this trend will continue as the demand for footwear increases and greater cost pressures are placed on manufacturers. Exports from developing and newly developed nations have consistently increased over the last five years while import penetration into Europe and the US has risen. Copyright 2010, IBISWorld Inc. 22

23 KEY FACTORS Key Factors KEY SENSITIVITIES The key sensitivities affecting the performance of the industry include: Air Cargo Prices This Industry can be affected by the level of downstream demand from footwear retailers. In times of high footwear consumption, retailers will demand more footwear items from manufacturers. Downstream Demand - Wholesale Trade The Industry can be affected by the level of downstream demand from footwear wholesalers. In times of high footwear consumption, wholesalers will demand more footwear items from manufacturers to sell to retailers. Import Taxes (Duties) - Footwear mfg Tariff rates applicable will affect the global demand for the products in this industry. A rise in footwear tariffs on products from particular manufacturing countries can limit output as the demand for exports may reduce. Population Growth - World The level of population growth will influence the type and number of footwear products manufactured and purchased. Price Index - Articles Produced: Clothing and Footwear A rise in the price of footwear, especially low-cost footwear, can lead to a reduction in demand. Real Household Disposable Income Changes in real household disposable income levels can have a significant effect on this industry's profitability. Regular footwear is not a luxury item, but a rise in real household disposable income can lead to increased demand for more expensive footwear, as well as increase the average number of shoes purchased by a consumer. KEY SUCCESS FACTORS The key success factors in the industry are: Establishment of brand names Brand strength and consumer demand for branded footwear products (i.e. Nike). Effective quality control Firms that have an emphasis on quality are able to build up a base of loyal customers. Establishment of export markets Footwear manufacturers that have an export marketing capability are able to earn additional revenues. Copyright 2010, IBISWorld Inc. 23

24 KEY FACTORS Economies of scope Footwear manufacturing firms need to produce a wide range of footwear products to satisfy consumer demand Understanding government policies and their implications Tariff rates and import duties of competing footwear imports and own imported items. Automation - reduces costs, particularly those associated with labor Technical efficiency, as well as an emphasis on improving labor productivity and increasing capacity utilization, can benefit footwear manufacturers. Economies of scale To produce footwear items at the lowest marginal cost. Copyright 2010, IBISWorld Inc. 24