Make Shoes in U.S., or Pay Tariffs? A Footwear Company Seeks a Third Option

Date: Tuesday, September 3, 2019
Source: The New York Times

Before the trade war threatened to upend everything, Lena Phoenix spent most of her hours puzzling over how to expand the thriving footwear business she and her husband had founded in their home in Colorado.

Now, she is mostly consumed with finding a way around the tariffs that President Trump just imposed, bringing expensive complications. The latest round took effect on Sunday, increasing the costs that Americans pay for $112 billion worth of goods imported from China, among them the shoes and sandals designed and sold by Ms. Phoenix’s company, Xero Shoes.

Mr. Trump has hailed his tariffs as a means of forcing American companies to abandon China and make their goods at home. Ms. Phoenix has taken the trade war as impetus to seek alternatives to the Chinese factories that now make her company’s products. But the United States presents no viable options, she says. The tariffs have forced her to slow her business while exploring manufacturing plants in Southeast Asia.

“It’s just crazy,” Ms. Phoenix said. “There’s a lot of scrambling going on, and a lot of figuring out what to do.”

The story of Xero Shoes presents a challenge to Mr. Trump’s notion that tariffs are the key to an American manufacturing revival, revealing how they can jeopardize existing jobs by disrupting access to the global supply chain. Many American brands use Chinese plants to make their goods. American factories depend on China to ship parts and electronics.

“It’s hard to imagine shoes and clothing coming back to the United States just because they are so labor intensive,” said Chad P. Bown, an international trade expert at the Peterson Institute for International Economics in Washington. “What matters is wage costs. It’s just cheaper to make those things in other places.”

Even if tariffs succeed in forcing production back to the United States, Mr. Bown added, human beings are unlikely to secure the jobs. “The companies will figure out how to do the work with robots and technology,” he said.

In recent months, Xero has reacted to Mr. Trump’s threats in the very way he hoped: It has contemplated moving away from China.

But it has not considered the United States. “There’s no capacity,” Ms. Phoenix said. She and her husband started their business a decade ago using credit card debt. They do not possess the tens of millions of dollars required to construct their own plant.

Instead, Xero has been researching alternatives. Vietnam is the obvious place, a country that has been gaining investment as multinational companies shift manufacturing work outside China to avoid American tariffs. But space has gotten tight there.

Xero’s manufacturing agent in Asia has suggested that the company consider Bangladesh, Indonesia and Kenya. Ms. Phoenix, 51, knows nothing about these places, and the thought of new variables fills her with dread. The company previously shifted production from South Korea to China, and then switched Chinese factories. In every move, mishaps cost time and money.

“It’s a really challenging and dangerous thing to do, and especially for a small business,” Ms. Phoenix said. “You’ve got to re-educate the factory. There are likely to be delays. You could run into quality problems.”

Her biggest source of frustration is the gnawing sense that the trade war seems not only futile but damaging. She and her husband have managed to forge a fast-growing business in Broomfield, a town of 69,000 people north of Denver. Now, ill-conceived government action is menacing their success, she said.

“When you are growing fast, it’s hair on fire a lot of the time,” she said. “These tariffs are putting an enormous amount of pressure on us.”

Like many small-scale entrepreneurial ventures, Xero Shoes was born by accident, as the outgrowth of the pursuit of a solution to a personal problem. Ms. Phoenix’s husband, Steven Sashen, was a serious runner who had reached his mid-40s and was suddenly suffering injuries like pulled hamstrings.

The running world was then in the thrall of the barefoot movement, spurred by the best-selling book “Born to Run,” which argued that ditching cushiony shoes would restore balance and eliminate muscle strain.

Mr. Sashen tried a pair of five-toed minimalist rubbers sneakers that were then selling like mad in response to the book. His own feet could not fit comfortably, so he sought to make his own.

He ordered sheets of rubber and cut them into shoes. He bought laces from Home Depot. To save on costs, he bought materials in bulk, which left him with more shoes than he needed. An internet marketer by trade, he made a website and sold the shoes there. Demand proved intense.

A pair of former executives from Reebok, the major running shoe brand, worked without pay to fine-tune what would become a line of minimalist footwear that landed just as the United States was embracing nontraditional approaches to wellness.

Ms. Phoenix had worked as a mortgage broker out of college. She had self-published a novel, traveled widely, studied psychology and generally “tried to figure out what I wanted to be when I grow up.”

She has an answer: She is the chief financial officer for this start-up footwear company.

Over the last four years, Xero’s sales have grown at an average annual pace of 84 percent, she said, reaching $8.8 million in 2018. The company employs 34 people.

It sells 90 percent of its footwear in the United States while shipping the rest to markets around the planet — to Japan, Singapore, Britain and the Czech Republic.

Growth had been poised to accelerate even more rapidly this year, as Xero wrapped up a test with REI, the outdoor clothing and equipment retailer, bringing an order worth $830,000 for the 2020 season.

“It’s by far our biggest order ever,” Ms. Phoenix said.

But the tariffs that hit Sunday could alter the economics of that deal. Xero could presumably try to renegotiate a higher price with REI that would cover the tariff, but Ms. Phoenix has been reluctant to pursue that route given the importance of the relationship. Instead, she has waited and hoped that a deal between Washington and Beijing would end the threat.

When Mr. Trump started the trade war a year ago, Ms. Phoenix and her husband assumed he would leave footwear out of it because China makes 70 percent of the shoes sold in the United States. How could a president seeking re-election next year put a tax on a product needed by everyone with feet?

But in early August, as the trade war intensified, Mr. Trump threatened to affix 10 percent tariffs on Chinese-made footwear. Last week, after China’s announcement of retaliatory tariffs on $75 billion worth of American exports, Mr. Trump took to Twitter to declare that the tariffs would be increased to 15 percent.

Even before those tariffs take effect, Xero is tallying losses from the trade war. Its new line for the spring of 2019 was delayed as American retailers placed a surge of orders from China to try to get ahead of the tariffs, resulting in congestion at ports.

Normally, Xero receives its new stock by late January. But this year, as the spring line sat in wait at the port in Long Beach, Calif., those goods did not reach its Colorado warehouse until late February. By then, the company had unleashed an advertising campaign to lure customers to its website.

“People were like, ‘Well, you don’t have our size, so we are leaving,’” Ms. Phoenix said. “We probably left at least $1 million on the table.”

The company’s fall line has been similarly impaired. When Mr. Trump first threatened shoe tariffs in May, a major international footwear brand that uses the same Chinese factory as Xero drastically increased production so it could stockpile in the United States.

“We are small, so they stuck us at the back of line,” Ms. Phoenix said. “That probably cost us another $1 million in lost sales.”

The hardest part is figuring out what to do. Ms. Phoenix was contemplating factories in Vietnam when Mr. Trump tweeted that could be the next country to face tariffs.

“Do we make the move to Vietnam, and then we are right back to where we started?” Ms. Phoenix said. “How do you make a decision in this sort of environment?”

She has been huddling with consultants to explore slight design changes that could alter the classification of her products and incur lower tariffs. Substituting a vegetable fiber material for synthetic webbing can lower the tariffs rate, but will the new material perform as well? These calculations matter.

So does the pursuit of finance to enable the next order, a process rendered exceptionally difficult by the trade war.

“It’s been a question for every single lender,” Ms. Phoenix said. “They want to know about the tariffs and my plans.”

She was galled to learn that among the Chinese imports set to face higher tariffs is the machinery used to make shoes.

“Trump says he wants to bring manufacturing back to the States,” she said. “How does that work exactly?”

 

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