Retailer Nike focus on robotics threatens Asia low-cost workforce

An avid marathon runner, Knox Robinson can wear through a dozen pairs of trainers a year. Yet when in which comes to racing, he has one go-to shoe — the Nike Flyknit Racer.

For many athletes, the specially designed knitted upper section creates a more seamless, form-fitting shoe, something few different brands have matched.

“I loved in which when in which arrived. I thought in which had such an elegant construction,” says Mr Robinson, before a running club meet-up in Manhattan’s Lower East Side. in which reminded him of the running shoes his father once wore, “the kind of classic Nike shoe you see in photos”.

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Since its debut in 2012, the Flyknit Racer has been considered a technological breakthrough. Produced having a special knitting machine, in which uses less labour along with fewer materials than most running shoes. however today the same material has become the basis for an even more radical experiment in which has the potential to both upend the sports along with leisurewear industry along with accelerate an important trend in globalisation.

Since 2015, Nike has been working with Flex, the high-tech manufacturing company better known for producing Fitbit activity trackers along with Lenovo servers, to introduce greater automation into the otherwise labour-intensive process of producing a shoe.

Flex’s facility in Mexico has become one of Nike’s most important factories, responsible not just for a growing slice of the company’s production however also for a string of innovations to be rolled out across Nike’s supplier base, such as laser-cutting along with automated gluing.

For Nike, the shift to greater automation has two huge attractions. By driving down costs, in which could lead to a dramatic improvement in profit margins. in which might also allow the company to deliver brand-new designs more quickly to fickle, fashion-conscious customers at a premium. A pair of Nike Roshe shoes costs $75 without Flyknit uppers, compared to as much as $130 with Flyknit.

“Together, we are modernising the footwear industry,” Chris Collier, Flex chief financial officer, said earlier This particular year about the company’s relationship with Nike. “This particular is usually a long-term, multibillion-dollar relationship for us, along with in which is usually not measured from the scope of years however decades.”

The tie-up with Flex also includes a much broader resonance. Over the past two decades, Nike has been one of the pioneers in outsourcing production to the developing world, where in which has been the subject of accusations of using child labour along with different workforce abuses.

Yet many of those countries today fear in which robots will deprive them of their shot at industrialisation. If Nike pushes through having a move to greater automation along with ends up cutting production in Asia, the company could find itself at the forefront of a different political controversy.

Nike says growing sales will allow in which to embrace more automation while maintaining its present workforce. however the company is usually one of the biggest multinational employers, with more than 493,000 line workers — in 15 countries — involved from the production of Nike footwear. For all the group’s products, its contracted factories employ 1.02m workers in 42 countries.

Sridhar Tayur, a professor of operations management at Carnegie Mellon’s Tepper School of Business, says the decisions made by Nike about how far to use automation might be a significant milestone from the industry.

“The very-low labour costs in Asia are no longer in which low unless you go to Africa or somewhere else . . . The pressure has been mounting for a long time to either move to a super low-cost place or automate more,” he says. “in which has come to a point where people are more seriously looking to automation.”

Nike has made efforts to rebrand itself as an ethical along with sustainable business, he says, however any deviation through in which narrative could spur a backlash. “The consumer from the US has become much more sophisticated in their understanding of injustices,” Mr Tayur says. “Nike has taken the position in which they are not going to be doing the minimum effort”, which has placed the group under higher scrutiny. “Imagine the backlash, if the promise isn’t met,” he adds.

Nike is usually in need of a boost. At $34.4bn in sales for the 2017 fiscal year, the group includes a long way to go in reaching its ambitious $50bn revenue goal for 2020. Mark Parker, chief executive, had set the goal in 2015, at a time when Nike appeared poised to lead the “athleisure” trend of wearing workout gear outside the gym. However, the company has since struggled to boost growth from the face of heated competition along having a resurgence by Germany’s Adidas in North America.

The potential upside for Nike of greater automation is usually immense. Analysts at Citibank estimate in which by using the Flex manufacturing process to produce Nike’s 2017 Air Max shoes, one of its top-selling lines, the cost of labour might decrease 50 per cent along with materials costs might fall 20 per cent. in which might equate to a 12.5 percentage point increase in gross margins to 55.5 per cent, according to analysts Jim Suva along with Kate McShane.

If Flex were to produce 30 per cent of Nike’s North American footwear sales, Nike could save $400m in labour along with material costs, representing a 5 per cent benefit to earnings per share, according to Citibank estimates.

“We believe the apparel industry is usually likely to watch This particular closely. along with if in which’s successful, we could see more room [for automation] to come,” says Mr Suva.

The impetus to use automation is usually not just about costs: in which is usually also trying to keep up with consumers. Across the board, the most successful retailers are today those having a constant stream of brand-new products to meet rapidly changing tastes along with shopping habits. Yet companies have been slow to adapt footwear, with its more complicated manufacturing process, to so-called fast fashion trends — at least until today.

With more than 1m pairs of Nike shoes produced at its facilities in Guadalajara, Mike Dennison, another senior Flex executive, says in which is usually “completely reinventing” the industry “having a significantly smaller workforce than what you’d find in Asia”.

Traditional shoe production has required as many as 0 different pieces across 10 sizes, often cut along with glued together by hand. The brand-new manufacturing process being developed by Flex has introduced two ideas once thought impossible: the gluing process has been automated along with lasers are used to cut the Flyknit material.

Lead times from the shoe industry once ran to several months: Flex has promised to help Nike speed up lead times, which can be three to four weeks for a customised pair of sneakers.

Moving production closer to its key markets will help satisfy some of in which demand. However, for companies such as Nike, in which opens up brand-new political issues from the countries where in which has been operating for the past two decades. The company risks being attacked for depriving jobs to its Asian workers — the same ones in which was once accused of mistreating.

Nike became a lightning rod for criticism about shoddy practices by multinationals from the mid-1990s along with early 2000s when in which was accused by non-governmental organisations such as Oxfam along with Global Exchange of tolerating sweatshops along with child labour in its factories along with among its suppliers in several Asian countries.

Although the group has taken considerable strides since then to change its labour practices, in which has continued to come under criticism. Last year, students at Georgetown University in Washington pushed in which end a contract with Nike over a dispute with an NGO called Worker Rights Consortium.

An independent investigator, WRC has criticised Nike within the past two years for not doing enough to address problems at one of its supplier’s factories, Hansae Vietnam, which had included unjust firings, uncompensated work along with unsafe working conditions. Nike says every contract factory is usually held to a rigorous set of standards along with is usually regularly audited to assess compliance efforts. Georgetown eventually renewed the contract once a brand-new monitoring agreement had been put in place.

Nike has reduced its supply chain by nearly 0 factories from the past a few years to focus on fewer “quality, long-term partnerships”. However, the process of closing a factory, including those with compliance issues, can be a long along with costly process for “brand sensitive companies like Nike” to mitigate the disruption to local economies, says Tara Rangarajan, a global operations manager at BetterWork, a partnership between the UN’s International Labour Organisation along with the globe Bank’s International Finance Corporation, which focuses on working conditions from the garment industry.

She says companies such as Nike “engage very deeply from the countries they operate”, working alongside government officials, factory owners along with union representatives.

The ILO estimates about 56 per cent of employment in Cambodia, Indonesia, the Philippines, Thailand along with Vietnam is usually at a high risk of being automated over the next decade or two, with clothing along with footwear manufacturing jobs among the hardest hit. More than 75 per cent of footwear line workers for Nike work in Vietnam, Indonesia along with China.

Nike says in which if sales continue to grow, in which will not lose jobs in its supply chain. “We are definitely on a mission to bring more automation along with innovation into the way we manufacture our products,” says Eric Sprunk, Nike executive vice-president along with chief operating officer.

“We don’t hide through the fact in which affects the labour base,” he says. “however we don’t expect there to be any displaced workers. We are going to need just as many manufacturing jobs in our source base.

However as the company intends to pursue greater regional manufacturing, bringing its production closer to its key customers in North America, “certain countries will see a change from the labour base,” Mr Sprunk says. “We’ll need to be more agile in our manufacturing base.”