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NIKE in CHINA

Group 7
SUBMITTED BY :
ANURAG PRATEEK - 10
DIPANKAR SINGHAL – 21
MANEENDRA SHUKLA - 32
RAJAT SETH - 43
THAKOR DHARSHAN - 53
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NIKE

 Started in1964 Nike became America’s leading Sport shoe company with sales $1 Billion.
 It sourced it products from offshore producers e.g South Korea,Taiwan,Hong Kong &
Thailand.
 It held 30% market share mainly because of its high quality, economic offshore sourcing,
dependable delivery & outstanding brand image.
 Other competitors were Adidas , Converse , Puma & Keds.
 Growth rate declined in 1980’s due to various reasons e.g. PLC , Seasonality & pricing.
 It suffered a loss of $2.2 Million in 1984,
 Closed its US plant & reduced output of Korean plant by 1/3rd.
 Then Nike shifted in focus on apparel business which was majorly captured by Adidas.
 Sourcing was tough in case of apparel business.
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Developments in China

 Till 1978 China was a closed economy after 1978 they opened their economy
 By 1981 they were following more or less all the know trade policies known to
world
 Foreign investment in china reached $1.2 Billion by 1981
 Development priorities were set by party
 Policies were implemented by State Planning commission.
 Prices of goods produced were arbitrarily set .
 1978 reforms promoted performance based incentives
 Chinese were reluctant to do business with outsiders & wanted to be treated
equally
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NIKE in CHINA

 Nike shifted its focus towards china because of low cost of factors of production
 Contracts for 2 factories in Tianjin & Fujian were signed expecting 20% price advantage
 Major issues that came in negotiating were:
 Exclusivity Clause
 B-Grade production
 Defective returns
 Pricing
 Nike paid for the factory equipment due to lack of foreign currency with Chinese.
 In return for finished goods
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NIKE in CHINA

Operating Expenses
 700,00 pairs of shoes made in 1984 while the established forecast was 1 million per month
by 1984.
 Nike had to face multitude of problems like:
Problem : Technology transfer:
 South Korean factory system was brought to china.
 Communication gap was present between advanced technology and users.
 Political sensitivity over South Korean officials entry in china.
 Solution: Used video tape of south Korean managers and workers for knowledge transfer
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Problems

 Materials issue
 Lack of local material (only 1/3rd of nike’s need were available locally.)
 Bureaucratic obstacles (shipment of canvas to tianjin required approval of 6 ministries)
 South Korean and Taiwan reluctant to supply to china and Fine on south Korean Goods
 Solution: Nike increased trade via Hong Kong and Tokyo and kept track of material
Quality Control:
 After 4 years only 80% of A grade goods were exported (no sense of brand image in Chinese workers)
 High level of dust in cities which created problem in gluing the soles
 Discount issues on 20% discount rate on b grade shoes
 Solution: Nike educated Chinese workers about international standards, hired a quality inspector as
well as kept dust problem under control with Thailand model
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Problems

Inventory Control
 Inadequate inventory record
 Record keeper worked as door keeper
 Solution: Nike staff kept track of material required and taught material storage to prevent
damages
Production Flexibility
 Rigid production system
 No investment in advance equipment
 Suspicion on nike’s commitment
 Solution: Nike encouraged them to produce new tools as well as produced new patterns and
specification
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Problems

Worker and Manager Motivation

 There was no incentive or motivational factor and Lack of talent in production scheduling
 Inefficient management of factory facilities
 China had a planned economy which provided quotas in all areas
 Solution: Nike offered cash bonuses and tried own incentive program based on productivity, quality
and delivery
Transportation
 Lack of proper infrastructure ( small streets, no roads as well as rain problem on docks)
 Only few factories had access to container vehicles
 Solution: Nike used factories situated in Ghuanzau ( which had enough space for trucks) and
Fuijan(which were on the road)
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Problems

Plant Location
 Followed government recommendations because of less knowledge of area and Less support
from local authorities
 False allegations on Nike about sincerity, commitment, breach of agreement
 Solution: Nike diverted to areas having less red tape and areas with decentralized authority
for decision making
Expatriate Staffing
 Staff resisted the move to move from Shanghai
 Solution: Nike allowed staff to bring their families to China and paid living expenses and
30% salary supplements for working abroad plus a week vacation every 2month
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Problems

Government Relations
 Combination of decision makers kept on changing‡
 Officials failed to show up on appointments
 Emphasis on joint venture agreement
 Solution: Contributed to Chinese sports activities, Took Chinese officials to US, sent report
to Vice Premier Wan Li about progress and issues in1980-3 period
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Future Strategic Considerations

 Situation of Nike’s other Suppliers:

 Development and production startup time
 Quality
 Quantity
 Raw material sourcing
 Financing
 Transportation
 Labor costs
 Landed costs
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Future Strategic Considerations

 China’s changing business environment

 Ideological shift favourable for private and foreign investors
 Joint Ventures
 Subsidies available
 Firm can fire workers for violating work rules
 New factory location i.e. SEZ
 Preferential tax treatment, special facilities(infrastructure and services)
 Bureaucracy was simplified
 Protection to investor’s legitimate rights and privileges
 Favorable consideration in land rent, choice of land sites, corporate income tax of 15%(half
the normal rate), import duties waived
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Future Strategic Considerations

 Domestic Market
 To sell products in local market
 Competitors
 None of the competitors(Adidas, Puma, Bata, New Balance) are sourcing from
China yet
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Our Analysis

We are suggesting to carry on with the China as a production country. The

problems associated with the “Nike in China” is mostly external such as
 bureaucracy,
 demotivated workers,
 communication issues.
 Cultural
 Environmental
 However, labour wages in China was very low which is the main
motivation factor to be present in China

Our Analysis - PEST
Political Factor
 Promotion bas on seniority
 Communism in china
 Visa issue
 Changing decision delayed the
decision process
Social Factor
 Difficulty in aligning with
Chinese culture
 Trust and reliability factor
 China a major untapped
location for low cost labour
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Economic factor
 Prices were not based on
market needs and demands
 Iron Rice Bowl policy
 Pricing issues
Technological Factor
 Resistance in adopting new process
 Poor telecommunication method
 Lack in production technology to
produce A grade sports shoes

Our Analysis - SWOT
Strength
• Competitive organisation
• Strong R&D
• Global brand
• Strong presence
• Experienced player
Opportunities
• China as a huge market
• Develop other sports product
• Expansion into emerging
market
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Weakness
• Contract manufacturing
• Chinese culture
• Delivery time is high
• Dependent upon footwear
Threats
• Fluctuations in currency
• Communication barrier
• Lack of information,
resources and government
policies
• Fierce industrial competition
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Our Analysis

 Ex-ante

 Ex-post
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Our Analysis

 Transaction cost

 Search cost

 Renegotiation cost
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Our Analysis

Problem Solution
Proper training should be provided to labours to increase the Partner with some universities (e.g. - Zhejiang University) in China to
productivity. From 80:20 ratio to 99:1 standard. train workers as well as manager.
Improving the working process to meet the quality Follow DMAIC and PERT methods to improve quality.
standards.
Improving the perception of NIKE & instil the motivational          Follow better communication techniques
factor among employee          Empower employees
         Incentivise to motivate as per output & quality
Forecasting of material was highly un-reliable, so implement Considering seasonal and trend factor the forecasting technique should
proper forecasting technique. be based

Need to create demand Aggressive advertise and brand awareness among people to create
demand
Timely Audit and Internal research should take place to Regular audit should prevail in every department to keep check on
improve the process productivity, quality, maintenance, work environment
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Our Analysis

Improve logistics & reduce lead time Use strategic locations for plants to be close to market
“Iron Rice Bowl” kind of behaviour which didn’t allow the We can use outbound training methods to improve the behavioural
plant to follow the market tendency
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Thank You