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March 07, 2011 11:00 PM

Low labour costs or full automation: what is the future for PU footwear production?

Simon Robinson
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    By Steve Lee, Steve Lee associates, 8 Ash Lane Wells, Somerset, BA5 2LU, UK

    Whilst a lot has been written about the dominance of labour costs as a key factor in the production footwear, very little has been done to quantify this, or to assess how increased automation in countries with high labour costs might help those regions compete more effectively.

    There is little data to make comparisons, so the approach here has been largely qualitative.

    Footwear production and demand

     

    As the footwear market grows or decreases, demand for sole materials reflects that, and the main factor driving rising demand for footwear is population, which is steadily increasing. Another influence is the amount of disposable income, the footwear competes with other consumer items.

     

    World Bank data shows that the GDP drop as a result of the recession has not been as high as first thought. Global GDP grew 9.3% in 2006, 12.4% in 2007, 9.8% in 2008 and fell 1.2% in 2009.

     

    GDP is set to grow by only 1.7% in 2010 and then grow more slowly for the next few years – at around 3 to 4% a year.

     

    This shift in global GDP is reflected by a drop in footwear, as shown in Table 1.

     

    Table 1 world footwear production by region ( million pairs)
    Region 2004 2006 2007 2008 2009 2010 2011 2012 2014 2016
    Americas 1347 1328 1325 1306 1243 1255 1269 1285 1315 1344
    Asia 14587 16307 16873 16430 16194 16353 16157 16834 17591 18606
    Europe 1036 917 900 854 806 793 784 779 775 777
    Middle East 579 514 507 493 483 491 501 513 539 575
    Africa 667 728 754 771 781 809 838 869 934 1006
    Total 18216 19794 20359 19854 19507 19701 19549 20280 21154 22308
    This shows the effect of the recession even more clearly. Footwear production grew 5.5% in 2005, 3% in 2006 and 2007, dropped 2.5% in 2008 and 1.8% in 2009, and is predicted to increase by only 1% in 2010 and 1.1% in 2011. The corresponding drop in the total amount of solid material required is shown in Table 2. Demand for polyurethane as a solid material is shown in Table3, has seen an even more dramatic drop. From a high of 557 kT in 2006, demand drops to 469 KT in 2009 and will not recover to 2006 level until about 2014. This means the polyurethanes solely market will be essentially flat for 5 to 6 years.

    Table 2 world footwear sold material production by region (KT)
    Region 2004 2006 2007 2008 2009 2010 2011 2012 2014 2016
    Americas 689 680 678 669 636 643 650 658 673 688
    Asia 7055 7935 8233 7993 7859 7936 8016 8169 8529 9019
    Europe 520 460 451 428 404 397 393 390 388 389
    Middle East 281 250 246 240 235 239 243 249 262 279
    Africa 282 303 313 319 323 334 345 357 383 410
    Total 8827 9628 9921 9649 9457 9549 9647 9823 10235 10785
      Producing footwear   Conventional footwear production is obviously labour-intensive, due to the need to produce three-dimensional closed uppers from mainly two-dimensional components. Some styles of footwear can have up to 100 components a pair – all of which need stitching, joining, fastening or gluing to be connected.   This also has to be done so that when the upper has been placed on the moulding last and the sole attached, by whatever means, the finished shoe has the exact shape and fit required from the initial design.   And it also needs doing millions of times in a reproducible what manner, to produce the global volume of footwear made every year.   Life would be simpler if there were a limited number of designs for men’s, women’s and children’s footwear. But in reality there are hundreds of thousands of styles being produced in any one year. The number could be over 1 million, or 20,000 pairs per style.   Conventional production of footwear requires a high input of manual labour, by workers with the relevant skills.   Because of the complexity inherent in designing and manufacturing different types of footwear, and the necessity to train and keep skilled and semi-skilled labour, footwear producers tend to specialise.   Thus companies such as the UK’s C & J Clark’s specialise mainly in casual footwear, whilst Vibram, for example focuses on boots, and Mike and new balance specialise in sports footwear.   Labour costs   Cost of labour is also a key factor in footwear production: Table4 shows the minimum wage levels for three developed countries in comparison to lower-labour-cost countries.   Manufacturers looking for the lowest Labour costs will have to look with a wider area than the traditional moms of Thailand, Indonesia and Chinese coastal provinces.  

    Table 3 world polyurethanes Soling demand by region (KT)
    Region 2004 2006 2007 2008 2009 2010 2011 2012 2014 2016
    Americas 67 62 59 58 55 56 57 58 60 61
    Asia 267 325 307 283 266 282 291 306 336 363
    Europe 109 88 81 76 71 70 70 70 70 71
    Middle East 58 59 59 57 56 57 58 60 63 67
    Africa 19 22 23 22 21 22 22 23 24 24
    Total 520 556 529 496 469 487 498 517 553 586
    However, Labour costs are not the only crucial factor: another key factor is efficiency. But more important is having access to a well-established infrastructure, capable of providing all the components in a timely and cost-effective manner.   The senior economist at the HKTDC (the Hong Kong Trade Development Council), Billy Wong, was recently quoted as saying, “the average output per (Chinese) mainland worker is significantly higher than that of Vietnam, Bangladesh and Cambodia.” Mainland Chinese manufacturers are known to benefit from well-developed industrial clusters, where upstream supplies can easily be sourced and essential services such as freight forwarding and lab-testing are also available.   Wong said, “this not only boost efficiency, but shortens delivery lead time.” He also noted that garment and shoe manufacturers in Vietnam import most of their raw materials from China. This indicates that Vietnam is rising garment export benefits China’s textile exports. Wong also said that Mainland Chinese upstream production also works with other emerging Asian production bases that have low-cost labour, forming a network of production for overseas markets.   This is confirmed one another key factor is recognised: apart from China, with a 13% share in 2008, the share of the world market is taken by other Asian countries remains at 1% (India) or less.   US imports from Cambodia and Bangladesh consist almost entirely – 90% – of garments. This indicates that, whilst US imports from these emerging Asian production bases are increasing, they are not at the expense of China.   The Chinese mainland continues to gain in import share in the US for traditional consumer goods – garments or footwear – and a similar situation exists in the European Union market.   Whilst it is clear that in the coming decades, China can no longer sustain the cost advantages that defined its initial export success, it may be a mistake to think that China’s manufacturing will stagnate or decrease.   Compared to many developing countries, China’s government is stable and embraces foreign investment. Industrial clusters have been established in many parts of the country, where business connections can compensate for rising costs. And domestic consumption is growing.   Furthermore, as low-end, low-cost Labour jobs changed towards higher-end, higher-cost jobs, China will move not only into the manufacture of more valuable goods, but also into the service industries such as design.   It is clear that extremely low-cost labour will not be the major deciding factor in the location of footwear manufacture: other factors – labour efficiency, ready availability of components and services, and market scale – are also important.   What may happen, though, is that the long run production of simple designs of footwear will migrate more to these lower-labour-cost countries. The bulk of footwear production, however, seems likely to continue to take place in China which will hence be the growth market for polyurethane soles.   This leaves us with a question about where for automation of footwear manufacture fits.

    Table 4 minimum wage ($/month)
    Country wage ($/month)
    France 1997
    UK 1650
    US 1445
    Thailand 145
    China, Coast 141
    Indonesia 89
    China, inland 66
    Cambodia 53
    Vietnam 52
      Automation in the high-labour-cost countries It is of course possible to produce footwear close to the selling point – but not using normal, labour-intensive production methods. But if Labour costs can be cut drastically, it is feasible to produce footwear in high labour-cost countries, close to the marketplace.   And there is evidence that such automated footwear production is taking place. Three examples of automated shoe production are Ecco, a Danish company with production units in Portugal, Slovakia, Indonesia, Thailand and China; Hotter, a company producing in the UK; and new balance, a US company predominantly producing in North America.   Profiles of how these companies achieve cost-effective production whilst coping with high labour costs are offered in the stories below. It is clear from these that it is quite feasible for companies in high-labour-cost, developed countries to produce competitively priced footwear. It is also clear that this is probably only possible in the mid-to high-priced end of the footwear market. And it is also interesting that in all three cases, the companies were using direct moulded polyurethane as a solid material. It is clear that such production will only satisfy niche markets and not be competitive at the low price end of the footwear market.     Conclusions   Neither extremely low-cost labour, nor high automation are going to dominate in the footwear market of the future. As evidence for this, countries with extremely low-cost labour are currently not taking too much production from China.   It is also plain that, whilst for automation can be used to produce competitive footwear, this is only really applicable to the mid-to-high price end of the shoot market and hence only fills a niche need.   All types of production will continue to exist side-by-side in the future this some slight to moderate movement between the countries. In terms of effect on demand for polyurethane Soling material, this will still be dominated by the Chinese market.   About the author   Steve Lee has over 40 years’ experience in the footwear industry, with a particular focus on solving materials, especially polyurethane. He has been involved with many aspects of polyurethanes from the introduction of caprolactone polyols to footwear and cast elastomer systems at Laporte industries in the early 1970s. He was also editor of the last edition of the Huntsman PU book in 2002.   He has worked in R&D, technical service, sales and international marketing, the latter at ICI polyurethanes from 1990 to 1993. For the past 18 years he has been a consultant covering all aspects of PU with the major focus on elastomers and especially footwear applications.   Hotter shoes in Lancashire.   Potters comfort concepts managing director Stewart Houlgrave said a while ago: “it’s our 50th birthday in 2009 and we are aiming for 20% growth. We plan to invest £3 million ($5 billion) over the coming year to create a state-of-the-art website and boost our overseas market presence stop over the past six years we’ve invested £6 million in the company and now have one of the most successful production facilities anywhere in the world.”   Hotter makes around 1.3 million pairs of shoes a year in the UK, in one of the world’s most technologically advanced shoemaking factories.   Hotter designers claim to secretly hide “comfort concepts” features in each pair of shoes, and the company targets the lucrative active over-50s market. The shoes are designed, manufactured and packed from a Lancashire factory which 10 years ago employed 57 people.   As one of the last bastions of shoemaking in the UK, hotter, now with 380 staff, as a strategy which includes selling direct to customers. Hotter has invested in Desma automated PU machines, similar to those used by Ecco, enabling it to keep costs down and produce highly competitive direct-moulded PU-sold casual shoes. Hotter also uses multiplatform selling, with an e-commerce website. It sells direct to customers from a 100-strong call centre, linked to the website, and from five branded stores and 300 independent retailers. Automation footwear, it seems, also involves selling and marketing concepts.   Cutting US footwear costs   US athletic footwear make it New Balance has opened factories in England, to accommodate a growing European market, and also in China to take advantage of lower costs.   But it maintains five US factories – a rarity in the days of globalisation and cheap overseas labour.   Also, New Balance has a strict “endorsed by N no One” policy that refuses to cater to the bank books of celebrity athletes. In many ways, this benefits consumers, as five dollars of every Nike shoe, for example district to Michael Jordan or Tiger Woods.   New Balance has been able to make footwear profitably in the US by automation, mainly of upper production. In the new balance factory in Noridgewock, Maine, for example, workers use high-tech skills to make a low-tech product.   Well-trained, $14/hour employees work in small teams, each performing half-a-dozen jobs, which they then switch every few minutes. Some operate computerised equipment with up to 20 sewing machine heads running at once. Others control and automated stitcher guided by cameras, allowing one operator to do the work of six using ordinary sewing machines. This allows new balance to produce closed up is as cost effectively as in Asian countries.   New Balance managers also seek out new technology to adapt it to their needs. For example, the company’s 70 see-and sew machines, which cost $100,000 each, come with standard metal templates, designed for the clothing industry.   New Balance set up on-site machine shops to grind its own templates, which guided needle in the shape of each shoe part. It takes a week to create the 30-odd templates needed for a typical shoe.   This approach has slashed the cost disadvantage of producing in the US. New balance is US workers make a pair of shoes in 24 minutes, as opposed to 3 hours in Asian factories for the same product.   If the US workers were no more efficient than those in China, new balance as Labour costs in the US would be an untenable $44 per pair of shoes. But the company has whittled the labour cost down to 4 dollars a pair, versus $1.30 in China.   New Balance can remain competitive at these levels, since the remaining $2.70 labour cost difference is a manageable 4% of a typical $70 shoe. This difference is also offset by the advantages of producing in the US, which means the company can fill store orders faster than rivals and change styles more quickly.   Ecco making shoes in Europe Ecco led the way confusing innovative technology, European design and craftsmanship with an understanding of how the human foot works, in order to produce a new type of casual shoe.   The company, set up in the 1960s, has always used “advanced direct injection technology” to mould lightweight polyurethane soles in a unique anatomical shape that fits the contours of the foot.   Ecco has always focused on vertical integration. It bought unbuilt tanneries around the world to make his own types of very fine other. It is one of the largest suppliers of leather in the world.   These aspects give Ecco good control over quality, and the ability to optimise lead times.   It she production factories use Klockner DESMA Schuhmaschinen and fully automated PU system. This utilises direct moulding PU machines to attach salt uppers. The polyurethane not only forms a sole but also replaces the adhesive normally required to attach it sold to upper.   These machines use conveyors and robots to handle the following, with a limited labour force:
    • Surface roughing of the uppers;
    • Robot spraying of release agent;
    • Trimming of flash;
    • Handing of lasts, shoes and soles; and
    • Guiding the PU pouring heads
    ECCO must also produce uppers in a cost effective way, and it does this in its Asian factories.   Many competitors have tried to copy echoes styles but the production technology and supply chain is difficult imitate. Echoes technology and securely “direct-injection” technology, have proven to be difficult to replicate.   Ecco also stresses that, whatever level of automation users, no Ecco shoes are ever made entirely by machines.   Its original intention – to integrate design, traditional craftsmanship and automation – seems to achieve the best of all worlds     About this paper This paper looks at the overall footwear market, the position of PU as a sole material and the changing criteria for production. The focus is on evaluating whether the move towards making footwear in regions of extremely low labour costs will continue to dominate, or whether a trend to full automation will see regions with such high-technology production take a larger share of production. The paper considers how this split in production has changed in different regions and what will happen to the producers in between these two extremes.
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