Last month, NIKE announced a new strategic partnership with Apollo Global Management – what was the world’s leading sports apparel company doing with a global alternative asset manager best known for managing private equity and hedge funds?
Their joint press release stated that the partnership “will increase regional manufacturing capabilities, enable quicker delivery of more customized product to consumers, and drive investment in sustainability.”
The partnership has established a new supply chain company, which has already acquired two existing businesses – New Holland, an apparel manufacturer (with manufacturing facilities in Central America) and ArtFX, a warehousing and logistics operator.
So why in particular is NIKE doing this?
Manufacturing Comes Back to the U.S.
Manufacturing has been perceived as a low margin, labour intensive industry best outsourced to regions with cheap labour such as Asia. However, with labour costs rising in Asia and inefficiencies in the global supply chain, global apparel manufacturers are re-thinking the way they have done business for the last half a century.
They are questioning the established idea of centralised manufacturing and heading down a more localised route, which allows them to source raw materials in the same region, reduce shipping costs, and better serve local markets by being nimbler to fickle consumer tastes and refreshing product styles more often.
It also comes in an age where issues such as sustainability, waste reduction, workers’ rights, increasing local employment, and responsible sourcing are becoming increasingly important for socially conscious consumers.
The strategic partnership with Apollo intends to build up NIKE’s manufacturing infrastructure in the U.S. with a view to deliver a broader and more advanced product offering, including technical and customised apparel, and delivering it to customers in a speedier fashion. It intends to invest in new technology as well as additional textile and apparel suppliers in North and Latin America to “create a more vertically-integrated apparel ecosystem – from materials suppliers and apparel manufacturers”.
A significant amount of the investment in technology is expected to be in automating both the design and manufacturing process to increase efficiency and ultimately, reducing costs.
With almost half of NIKE’s sales still coming from North America, localising some production back into the region is not too surprising.
NIKE is not alone in this trend of building a manufacturing base in the U.S. Adidas announced plans to open its first U.S. production plant in 2017 in Atlanta, which will also rely heavily on automation and production robots. Under Armour has also recently opened a new manufacturing facility, focusing on automation as well as product and process innovation such as 3D printing.
Logistics Is the Other Key in the Supply Chain
In recent years, NIKE has been criticised by some retailers of product delays due to logistical issues. This strategic partnership with Apollo is the latest step in addressing the increasing speed to market demanded by today’s consumers.
Of course, the strategic partnership is in its infancy and NIKE will continue to heavily rely on its existing manufacturing and logistics arrangements. However, it does point to a world now where innovation and technology are seen to be key drivers of profitability than simply cheap labour and materials.
Although NIKE has invested no upfront capital into the strategic partnership, time will tell whether any benefits will come to fruition and at the right cost to NIKE to make it a sustainable strategy.
One or more of AtlasTrend’s managed funds own NIKE shares.