Drip…Drip…Drip…

The Chinese water torture continues... Contrary to what might be a glimmer of hope, China’s answer to ‘Hank the Tank’s’ bailout plan won’t help the apparel/footwear industry in the US.
Adidas, Nike, and Puma all have announced recently that they are relocating manufacturing capacity outside of China. Interesting that Nike and Adidas only source about a third of their footwear in China, versus 90%+ at most other US companies. These companies have been around the block a few dozen times. Most other players have not. There’s massive tail risk for those lacking a proactive strategy here.

While I take any statistical evidence from Chinese authorities with a massive grain of salt, Government stats show that 67,000 factories were shuttered in China in the first half of the year, and more than 100,000 plants will have closed by year-end. My math suggests that about 8-10% of this is footwear and apparel.

An interesting story highlighted in the LA Times noted the closure last week of China’s biggest textile dye operation — with four factories, a campus the size of 31 football fields, 4,000 workers, and 300 local suppliers that also face bankruptcy. Not good at all…

Is China’s stimulus package going to help? My two cents is that we should not hold our breath. Do you REALLY think that a domestic stimulus plan that could very well end up being the same size (in US dollars) as Paulson’s bailout plan is geared toward amping up the firepower for low-end export goods? Quite the opposite… That’s the exact business that China is trying to shift away from in its quest to morph into more of a local consumer-driven economy instead of a sweat-shop economy. That’s great for companies who’s net revenue base in China is greater than its sourcing base (Nike and Adidas are the only ones that come close), but everyone else will suffer the imbalance.