INTRODUCTION
Nike has always had a global presence in the ‘outsourcing’ of its shoe manufacturing throughout
the world. This paper will discuss Nike’s beginnings with founder Phil Knight, its core strategy
as it relates to globalization and its marketing strategy. From there, we will discuss rational for
Nike to move from country to country in the East. This tradition was published by Jardine
Fleming as the Nike index. From the implications of the Nike Index we will look at factors that
may determine why Nike is currently in certain countries. To conclude, we will discuss the
cultural implications of moving factories from South Korea to Vietnam, the effects of South
Korean expatriates in Vietnam, and how Nike has tried to address these issue.
PHIL KNIGHT IS NIKE
As the largest sportswear retailer in the world, Nike began as the
brainchild of controversial but ever-passionate Phil Knight. As he
epitomizes the Nike approach to sportswear marketing, Phil Knight
has always been considered a free-spirited and resourceful
competitor. In 1959, he graduated from the University of Oregon,
receiving his undergraduate degree in accounting. He was a middledistance-runner for the Oregon Ducks, running a 4:10 mile. In 1962,
he earned his MBA from Stanford, developing a strategy to build a
business around sports shoes. One term paper – “Can Japanese
Sports Shoes do to German Sports Shoes what Japanese Cameras did
to German Cameras?” – described a “you're-crazy-it-will-neverwork- or-someone-would-already-be-doing-it” idea about bringing
low-priced, high-tech athletic shoes from Japan to dislodge German domination of the U.S.
athletic footwear industry.
From this term-paper, Phil Knight established the Nike business model: “We don’t sell shoes we
sell sports fashion.” Nike has always outsourced manufacturing. In light of Nike’s model that
focuses on sourcing from low cost manufacturers, the purpose of this paper is to outline the
strategic process Nike undergoes when selecting markets from which to outsource and the
process of moving outsourcing operations from various countries throughout Asia. More
specifically, this paper will address the strategic implications that result from these moves, with
specific emphasis on Nike’s outsourcing shift from South Korea to Vietnam.
MARKETING AS NIKE’S CORE COMPETENCY
Nike is a marketing company. Nike is not a manufacturing company. “Global and transnational
capitalism has brought with it industries where commodities are themselves symbols. No firm
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better fits this model than Nike whose symbolic capital has acquired a huge global reach. The
primary vehicle through which Nike has built its cultural icon and its symbolic capital has been
its advertising and sports marketing.”1
According to US Business Week in 2005, Nike is ranked 30th in brand recognition with an
estimated $10.1 billion in brand value. CEO Phil Knight boasts of Nike’s success model: “For
years, we thought of ourselves as a production-oriented company, meaning we put all our
emphasis on designing and manufacturing the product. But now we understand that the most
important thing we do is market the product. We've come around come around to saying that
Nike is a marketing oriented company and the product is our most important marketing tool.”2
In support of Nike’s position as a company with one of the largest marketing budgets, Nike has
succeeded in reaching top rank as the world leader in tennis shoe and sportswear sales. A major
percentage of Nike’s marketing dollar is spent on celebrity endorsement including multi million
dollar contracts signed by athletic demi-gods Michael Jordon and Tiger Woods. In 2000, Tiger
Woods signed a five-year $100 million contract to represent Nike. In spite of highly capitalized
strategic marketing know-how, the company’s underlying success is dually-attributable to a
scrupulous and tactical outsourcing strategy. This strategy has typically removed Nike from the
risks involved in light manufacturing of shoes and sports apparel in foreign countries. This
outsourcing model is the primary topic of this paper.
RELATIONSHIPS WITH OUTSOURCED SUPPLIERS
As of April 20053, Nike has reported that 703 factories are producing their “Nike branded
finished products” in 524 countries around the world, including the United States. All of these
factories are outsourced manufacturing vendors; Nike does not own any part of any of these
factories. Fifteen countries contain about 80% of all Nike factories; 60% of all Nike factories are
located in Asia, and 32% specifically in S.E. Asia. The reduction from 850 factories in 1998 to
703 factories today is best explained by the phasing out of the WTO quota system called the
Agreement on Textiles and Clothing (ATC)5.
1
Nike Culture, The Sign of the Swoosh, pg. 168, Robert Goldman and Stephen Papson, Publisher Sage 1998
Phil Knight, last 1980's, NIKE: the 'Goddess of Marketing' ICMR.
3
http://www.nike.com/nikebiz/nikebiz.jhtml?page=25&cat=activefactories [RAW data synthesized]
4
SWITZERLAND, PERU, BELGIUM, NEW ZEALAND, CAMBODIA, MOLDOVA, MACEDONIA,
DOMINICAN R, ECUADOR, LITHUANIA, FIJI, GREECE, GUATEMALA, ALBANIA, SINGAPORE,
COLOMBIA, CHILE, JORDAN, MACAU, PAKISTAN, EGYPT, PHILIPPINES, MOROCCO, SPAIN, UK,
BANGLADESH, ISRAEL, EL SALVADOR, SOUTH AFRIC, ARGENTINA, BULGARIA, HONDURAS, HONG
KONG, TUNISIA, AUSTRALIA, CANADA, ITALY, INDIA, BRAZIL, TAIWAN, PORTUGAL, MEXICO,
JAPAN, SRI LANKA, TURKEY, MALAYSIA, VIETNAM, KOREA, INDONESIA, USA, THAILAND, CHINA
5
http://www.wto.org/english/thewto_e/minist_e/min96_e/textiles.htm
2
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Top 15 Countries
CHINA
THAILAND
USA
INDONESIA
KOREA
VIETNAM
MALAYSIA
TURKEY
SRI LANKA
JAPAN
MEXICO
PORTUGAL
TAIWAN
BRAZIL
INDIA
0
25
50
75
100
125
Nike has been committed to creating long-term relationships with its suppliers, with attempts to
maintain exclusivity. Yue Yuen Industrial Holdings, Ltd. is an example of one such vendor that
has worked with Nike for many years, although its relationship is by no means exclusive.
Today, Yue Yuen is the largest manufacturer of shoes in the world supplying both Nike and
Reebok. One manager from the company was quoted in the Wall Street Journal to say that Yue
Yuen’s annual profits are higher than its buyers (Nike’s or Reebok’s) profits6. It’s not
surprising that Goldman Sach’s has invested heavily in this supplier.
In 2001, it was reported that “37 out of its 40 current footwear suppliers manufacture 100%
Nike product. This prevents competitors seeing new Nike shoes coming down the line, or
learning how Nike makes its shoes.”7 Nike factories produce much more than footwear today,
but it evident that a small cluster of factories produce most of its shoes. The overall driver for
maintaining relationships with shoe factories in a region was their ability to deliver quality:
Nike had a worldwide policy that its B-grade shoes could not constitute more than
5% of supplier’s total production during the first year, and 3% thereafter. Bgrade shoes had cosmetic defects but were structurally sound. [C-grade shoes
had to be destroyed to prevent brand erosion.] 8
6
Email from Jeff Ballinger to Monte Shaffer (February 12, 2005) with a citation to DAILY EXPRESS NEWS
(Sabah, E. Malaysia). Manufacturers in China sing Pearl River Delta blues. 20 June, 2004
7
http://www.new-academy.ac.uk/publications/keypublications/documents/nikereport.pdf
8
HBS 390-092, page 8.
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In 1997, a Hong Kong-based financial group named Jardine Fleming International Securities Ltd.
released a report Tracking Nike’s Footprints Across Asia describing the trends of Nike factory
movements. This report coined a predictive index, named the Nike Index, which describes
factors that determines when and why Nike will leave a country and how the determine a new
location for factories. This index gives credible insight as to the metrics Nike evaluates when
selecting markets from which to outsource.
Long-term relationships with original suppliers from South Korea and Taiwan (when Blue
Ribbon Sports became Nike) have defined Nike’s outsourcing model: as wages rose in these
developing countries, Nike suggested that these major suppliers move to other countries, as
described by former Nike VP Neal Lauridsen:
We say "We're in a position to give you 'x' amount of orders" to take the
uncertainty out of the move. They go to the country. They bring management.
That formula has worked really well9.
Nike’s relationships with its suppliers were strong in 1990, and today are even stronger. Most
financial analysts identify eight major suppliers that are involved in much of the production of
Nike ‘shoe’ products in Asia. Over the past 15 years, these companies have established
operations in several low-cost labor locations. Flexibility has been refined through the years of
learning and experience. Not only can they quickly adjust to market demands of a specific Nike
shoe model, they have also learned how to quickly open and close factories in given countries
based on economic predictors. Opening a large factory in the low-tech, intensive-labor
manufacturing process is as simple as renting a warehouse and bring in sewing machines. Raw
materials and labor costs are bigger concerns than the factory location and facility management.
This was exemplified in the early 1990’s when South Korea was rapidly vacated—over 380,000
employees10 lost their job in Pusan, South Korea as Nike encouraged suppliers to go elsewhere
as daily wages rose from $9.71 per day in 1986 to $24.40 in 1990. South Korean and Taiwanese
suppliers relocated where Nike asked them too—at this time, the move consisted of setting up
new shops mostly in Vietnam and Indonesia. China was also pursued as an option, but
bureaucratic barriers and poor production quality made China a difficult entry, especially for
Taiwanese and South Korean companies11.
NIKE INDEX
9
HBS case 394189, page 4.
Competitors generally followed Nike’s pre-emptive moves, so these employment numbers also include employees
producing shows for Reebok, etc. The ‘move out’ of South Korea was not a complete departure (120,000 jobs
remained), but this move has had a major impact on the economy of South Korea.
11
HBS Case 390092, pages 4-6.
10
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The Nike Index12 described all economic and political factors related to the factory moves:

Large pool of available labor. [Measured through several sub factors: country’s
unemployment rate, % of agricultural/rural workers, labor force participation potential
among female workers.]

Cheap labor [Not only cheaper relative to other countries, but agricultural/rural
labor is cheaper than urban labor.]

Developing country [Measured by current GDP per capita and reinvestment of
GDP into country’s infrastructure]

Governments that are pro-business and have liberal trade regimes.

Stable governments (usually authoritarian in nature—e.g., Indonesian dictator
Suharto—which limits the ability for workers to unionize)
This index can even be applied within a country as demonstrated by closures of factories in
highly regulated provinces of China (Shanghai and Tianjin) and opening factories in Guangzhou
(similar in culture/distance to Vietnam) and Fujian (rural area close to Taiwan). These new areas
had fewer regulations and restrictions which made them more appealing. Further, they were
physically close to Vietnam and Taiwan, which was obviously beneficial to both South Korean
and Taiwanese suppliers.
Analyzing Nike’s current choice for factory locations for shoes, apparel, and other
products, it is evident that economic factors are considered when positioning a factory. As seen
12
It is not surprising that the actual report is difficult to find (not even available via Inter Library Loan). References
to this index are as follows:



http://www.businessweek.com/1997/18/b352523.htm
http://www.new-academy.ac.uk/publications/keypublications/documents/nikereport.pdf
http://www.emergingmarkets.co.uk/html/Labour%20Intensive%20Manufacturing%20Industries%20Case%20Study.pdf
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below, data including available rural labor and GDP Reinvestment suggests why China is
currently an ideal location for factories and product manufacturing:
Number of
Country
Factories
INDIA
18
BRAZIL
18
TAIWAN
19
PORTUGAL
20
MEXICO
20
JAPAN
22
SRI LANKA
25
TURKEY
26
MALAYSIA
33
VIETNAM
34
KOREA
35
INDONESIA
39
USA
49
THAILAND
73
CHINA
124
Labor Force
482.2
89.0
10.2
5.5
34.7
67.0
7.3
25.3
10.5
43.0
22.9
111.5
147.4
36.4
760.8
Current
Unemployment
9.2
11.5
4.5
6.5
3.2
4.7
7.8
9.3
3.0
1.9
3.6
9.2
5.5
1.5
9.8
Agricultural
Percentage
60.0
20.0
8.0
10.0
18.0
5.0
38.0
35.9
14.5
63.0
8.0
45.0
0.7
49.0
49.0
Per capital
GDP
GDP
Reinvestment (%)
$3,100
23.8
$8,100
19.8
$25,300
18.0
$17,900
22.3
$9,600
19.4
$29,400
24.0
$4,000
22.4
$7,400
17.3
$9,700
21.7
$2,700
36.6
$19,200
28.7
$3,500
16.6
$40,100
15.7
$8,100
22.5
$5,600
46.0
This data was collected from the CIA World Factbook and in some ways is dated13; however,
these indicators show some economic evidence that correlates to the Nike Index. As will be
discussed specifically in the Vietnam instance, and as was alluded to above, there are major
cultural implications of having expatriates from Taiwan and South Korea manage workers in
Vietnam, Indonesia, and China.
OUTSOURCING RELOCATION FROM SOUTH KOREA TO VIETNAM
Naturally there are strategic implications of each of Nike’s sourced relationships in Asia;
however the remainder of this paper will focus on South Korean manufacturers’ move to
Vietnam. The actual decision for South Korean manufacturers to move Nike-sourced shoe and
apparel production specifically to Vietnam as opposed to another S.E. Asian location was risky,
although still highly calculated, as described by Phil Knight in 1998:
So when we saw the need for advanced production going to Southeast Asia, one of the most
adventurous things that we did was decide to make shoes in Vietnam, which is an area that has
had a lot of observation and criticism over this last couple of years. It is a grand and bold
adventure, and there are a lot of aspects of it that I believe that you have not heard. […]
There was no existing shoe industry. So essentially, if we were going to make it work, we would
once again have to take our Taiwan and Korean managers with us.
13
The quality of the information is limited; however, Nike and its suppliers have indicators similar to these, and
most likely, much more timely and accurate.
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There were two problems with that. First of all, foreign owned factories by law in Vietnam must
pay a minimum wage 50% higher than Vietnamese owned factories. So if we were successful, we
would then in turn create a shoe industry in which our competitors would be able to come in and
start their businesses with Vietnamese owned factories and have a competitive advantage.
The second thing, of course, is very simplistic, but it's true. There was truly historical hatred
between the two ethnic groups which would go in there and manage those factories in Vietnam.
But we did it anyway. A couple months ago I had dinner with my friend David Halberstam who's
had quite an experience out in Vietnam as well. When we told him that we were using Korean and
Taiwanese managers in Vietnam, his comment was simple: "How could you have been so stupid?"
But the flip side is equally simple: No Koreans and Taiwanese; no Vietnamese shoe industry. And
for all you have read, Nike shoes make up 5% of the total export of the whole nation of Vietnam.
So we contribute on two counts: to give jobs and to generate a significant amount of foreign
currency.
But there are, with all of that, lots of problems. The management of the Vietnamese work force by
foreign managers has complicated the whole process, and it has come under a great spotlight […]
We have about 530,000 workers working on Nike shoes and clothes on a given
day. There are going to be incidents. There have been some in the past, and there
certainly will be more in the future. There are too many workers, too many
interactions daily; and in Vietnam, too much tension based on nationality to avoid
any incidents. That there have been as few as you have read about I think in many
ways is remarkable.14
Based in Ho Chi Minh City, in 2001, Nike’s Vietnamese operations consisted of 43,000 workers
making 22 million shoes annually and exporting income of $450 million. “Nike production
accounts for 8 percent of Vietnam’s manufactured exports and 32 percent of its footwear
exports.”15 In 2001, of Nike’s 850 supplier factories worldwide, 5 footwear and 7 apparel
factories are located in Vietnam. Outside of agricultural production, Nike is the single largest
employer in Vietnam with 46,000 workers16.
14
Phil Knights address at the National Press Club. May 12, 1998.
Program Studies of Innovation in the Management of Global Labor Challenges, Nike Inc, Rising Above
Sweatshops, pg. 149.
16
More than any other ‘foreign’ business. Ivey Case: 9A99C034, page 4
15
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Based on Jardine-Fleming Index factors discussed above, Nike’s pressure towards South Korean
suppliers to move operations to Vietnam was not solely economically driven.
It is often argued that globalisation of production means that the developing
world is highly vulnerable to decisions in the developed world to shift production
contracts from country to country in the search for ever cheaper labour rates and
poorer conditions. This is the so-called race to the bottom.17
Even while decreases in labor costs shifted from Japan to South Korea to Southeast Asian
markets, Nike was systematically weighing index consideration. Index factors that justified the
move to Vietnam were not solely limited to Vietnam’s lower labor costs, burgeoning economy or
an industrious and quality oriented work force. Vietnam’s gradual shift from primary
agricultural markets to light manufacturing was critical to Nike’s decision. Concurrently, as
Vietnam experienced drastic increases in women’s labor force participation rates, Nike
encouraged manufacturers to relocate to Vietnam. Another key driver that initially drove Nike to
move beyond other Asian markets including China and Indonesia was the quality issue. In
general, shoe manufacturing in Vietnam focused more on quality intensive products like
sportswear and tennis shoes. China, on the other hand, supplied a wide variety of shoes with
varying degrees of quality and labor intensity, products not always exclusive to the sportswear
industry.
Another factor that positioned Vietnam as a viable sourcing location is the fact that it is a country
with less risk for copyright infringement and exposure to mass distribution of imitation products
than neighboring China. As Vietnam experiences lower rates of capital inflow, Nike had less
concern for sourced Vietnamese suppliers to overturn barriers to entry and start their own private
retailing business. Whereas operations in Macau, Hong Kong, or Beijing left Nike susceptible to
lax copyright protection and excess supply of lower quality, lower cost overflows from mass
production.
17
http://www.new-academy.ac.uk/publications/keypublications/documents/nikereport.pdf
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Although Nike’s interest in sourcing from Vietnam was not solely cost driven, low labor wages
were definitely a consideration. In 1997 Vietnamese employees earned between $32-$45 a
month or about $1 a day on average. Compared with rising costs in South Korea that
compensated Nike-sourced employees at $24.40 per day in 1990, the cost benefit of moving lowend manufacturing with minimal capital outlay to Vietnam becomes very obvious.
Nike’s 1995 move to Vietnam marked a significant evolution in the company’s approach to
global labor issues. The shift in outsourcing actually signaled a new beginning in Nike’s attitude
towards supporting higher labor standards. Historically targeted as the evil exploiter of low
wage labor, Nike had been highly scrutinized for their operations in Indonesia, as well as other
emerging Asian markets. Based on a USAID funded survey, Nike endured criticism as the
culprit for low wage compensation violations, child labor exploitation, and overworking sourced
employees.
In 1998, CEO Phil Knight accepted responsibility for low level labor standards and implemented
six initiatives for the firm including expanding worker education programs, involving NGO’s in
factory monitoring, and funding university research and forums to educate on global relations
issues. Later after Nike got burned in 1996 and 1997, the move to Vietnam also constituted a
strategic PR repositioning and an opportunity for Nike to clean up tainted consumer perceptions
of other operational exploitation in Asia’s low wage labor market.
As a sporting goods marketing giant, Nike has been able to leverage bargaining agreements in
Vietnam to their advantage. Because of their muscle as a large US firm, Nike is able to require
Vietnamese manufacturers, including those managed by South Koreans, to align with their new
socially responsible labor practices. Nike required sourced Vietnamese manufacturers to agree
to, pay for, and undergo a pre-sourcing audit conducted by a third party. Additionally,
Vietnamese plants are required to undergo Nike directed audits four times per year. Although
these controls and audits paint Nike as a socially responsible outsourcer, realistically, the
primary reason Nike implemented these labor standard reforms is because of pressure and
litigation from labor activist groups.
Despite years of experience outsourcing from other Asian markets, Nike encountered strong
barriers of integration when they moved sourced manufacturing from South Korea to Vietnam.
Naturally there are major cultural and compensation issues that are beyond the limited scope of
this paper. However a discussion of Nike’s outsourcing challenges and shortcomings cannot be
overlooked. The major global management challenges include, but are not limited to, cultural,
language, economic, and logistical differences. In 1997, Nike asked Andrew Young, a labor
consultant to evaluate and provide recommendations of how to overcome drastic cultural barriers
that hindered productivity. The greatest cultural gap Nike had to bridge, manifested in the way
South Korean managers related to Vietnamese employees, consists of the following factors:

On the most basic level, there are wide language difference between South Korean
Managers and Vietnamese employees.
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


South Korean supervisors managed Vietnamese workers according to their home
standards, rather than by cultural standards indigenous to Vietnam
Vietnamese employees were accustomed to rural, non-technical, self-paced
agricultural work routine. Vietnamese employees struggled to adjust to a more
regimented factory routine.
Typically, Vietnamese workers did not have a great deal of formal education and
therefore were not aware of their basic rights as workers.
In response to the cultural and language barriers that divided South Korean managers and
Vietnamese workers, Nike implemented special human relations and cultural sensitivity
programs. Specifically, Nike raised manufacturing standards by introducing an after-hours
education program that fostered idea generation and integration into factory life. Employees
benefited from after-hours classes that were co-sponsorred by Nike and the Ministry of
Education. Nike also introduced the Nike Jobs and Microenterprise Program which provided
economic support through micro-loans to women in the communities surrounding its suppliers.
Perhaps the most integral program Nike implemented to overcome culture barriers and foster
integration between South Korean managers and Vietnamese workers was the Cultural
Sensitivity Training Program. This program trained South Korean managers on the cultural
differences between their home and host countries.
Dusty Kidd, VP of Corporate Social Responsibility
–
The strategic concept for Nike entering the new century is to be an archetype of the
responsible 21st century global company, in the sense that we are providing a sustainable
footprint everywhere, not only with environmental performance, but with people performance
as well. The triple bottom line of people, planet and profit is our goal.
V. Rich -Conclusion
Wrap-up. China is kind of the last stop. Going forward, what will happen in China? Naturally
Nike is looking at China for their next outsourcing stop. What are the implication. (short
conclusion). Chinese wants Nike to commit to a JV so they know that Nike is staying rather than
taking a hands off approach like they generally have done in other Asian markets. A JV would
allow the Chinese manufacturer greater security in the relationship with Nike, even though
typically Nike has been pretty hands off in their outsourcing relationship. The Foreign Trade
Minister is trying to protect themselves from the bad things that have happened in other countries
in Asia. There is a paragraph in one of the cases that discusses this. (I’ll see if I can find a blurb
on it).
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