Nike Versus New Balance: Trade Policy in a World of Global Value Chains

Name: SHUO MIAO

Date: 23/04/2016

Topic: Nike versus New Balance: Trade Policy in a World of Global Value Chains

Tough decision for abandon or support

Problem statement:

Froman is the president’s principal advisor. He needs to decide whether eliminating the import tariffs for Vietnam footwear is favorable or unfavorable for Americans to compete and win in the global economy. But this problem caused the divergence on U.S. companies. Froman can either make the decision to protect domestic economy or promote the whole economy using the impact of the global value chain.  

Background:

At first, from the reading “Political Environments and Business Strategy: Implications for Managers”, we know that in the USA, the company’s interest has relations with government’s interest, so the company will participate in the decisions of public policy. Government decision making meets the interests of the state, and it also needs to meet the interests of the relevant company. In this event, Froman can not make the decision, because whatever they choose will damage a part of the company’s interests.  

Next, we will analysis the different condition for Nike Inc. and New Balance.

New Balance

The fourth largest athletic footwear and apparel company in the world, they have $2.4 billion sales in 2012. The company focused on footwear innovation and “made in America” business strategy. Because of this strategy, although New Balance relies heavily on foreign contractors, but it does not outsource all of their footwear production to foreign contractors.  It has a lot of factories in small U.S. cities. It provides locals jobs to help the country to slow down the national employment pressure, and creates a higher GDP. Because of this, when the country has a higher import tariff, it will not bear the strong affect, it can keep the low price in the American market, and their competitive edge.

Nike Inc.

Nike is the largest athletic footwear company in the world. It has tenfold revenues compared to New Balance. It was outsourcing all the products to the low labor cost country, then back to the American market to sell. So Nike will have high profit margins. Most of the extra costs comes from transportation cost, import tariff and another value added tax. The extra cost prompts it raises the price in U.S. market. Because of this reason, the other local companies can have the competitive advantage.  Nike also provides jobs in America, but no factory workers. All are involved in designing, engineering, promoting and selling in Nike stores.

Assumption 1:

When the country cancels the import tariffs on Vietnamese footwear. 

Vietnamese product will save 25-35% cost than American product, it is a high profit rate in business. The cheap product from the low cost country will impacts the American market, the product prices were forced to decline. New Balance will lose competitive advantage, the company only can close U.S. factories and move the production facilities to the overseas. The local jobs would be lost. Small local manufacturing plants (represented by New Balance) will be damaged. American footwear industries will be adversely affected. But international business companies will have more and more profit. As we know from the case Implications for Managers, in America, the government interests associate with the company interests. When the company can make more interests from the business, the country also will have interests. The international business company is the most important components of national interests, because of the vast majority of the GDP from the international trade. When the global market became the global value chain governance mode, America can use less and less labor force on products, transfer the labor to higher value added products, such as research and development, system integration and software. This kind of link will have higher profit margins. The company will have greater autonomy and high market flexibility; they can control the global market; it is more advantageous to the country’s strategy.