New Balance in fight to keep footprint in America

RELATED QUOTES

SymbolPriceChange
CAT103.38-0.31
NKE74.10-0.25
PG80.36-0.25
AAPL524.75-6.95
GEAPP107,958.00-1,542.00

New Balance is determined to make shoes in the US, but the challanges facing the company to keep doing so are growing.

'We went to Asia to learn lean manufacturing,” says Robert DeMartini, the chief executive of American trainer maker New Balance.

Inside a factory about 30 miles north of Boston, the efficiency of the assembly line suggests lessons were learnt. On one floor of the brick building that began life as a mill in 1909, there are four assembly lines all dedicated to making New Balance's latest running shoe, which is called the 990.

In the meticulously organised operation, a single shoe moves through 36 pairs of hands, with employees having exactly 22.5 seconds each to complete tasks from stitching leather to inserting the holes for the shoe laces. Electronic screens record how many pairs have been made and whether the total is matching that morning’s target.

“We can never rest,” says Brendan Melly, who manages the factory in the Massachusetts town of Lawrence, and is constantly looking for ways to improve the manufacturing process. New Balance, which was acquired when it was still a fledgling company in 1972 by entrepreneur Jim Davis, first contracted out manufacturing to Asia in the mid-1970s.

Since then, America’s footwear industry is estimated to have lost more than 30,000 jobs as behemoths such as Nike (NYSE: NKE - news) have shifted all of their production to low-cost economies and smaller US companies have crumbled under the economic challenge that exodus created.

New Balance still makes shoes in Asia, although it declined to say how much of its total production is done there. What makes the company stand out, though, is its determination to keep making trainers in America.

“The commitment is deep-rooted and long-standing,” DeMartini explains. “When the industry was forced offshore by economics, we already knew enough about how to manufacture shoes to stay competitive.”

The factory in Lawrence is one of five New Balance has in the northeast corner of America, the historic home of the country’s shoe-making industry. There is another in Massachusetts and three further north in Maine. The jobs they provide entail hard work, with employees in the Lawrence factory standing on non-fatigue mats and doing repetitive work in eight-hour shifts.

New Balance declined to comment on how much staff are paid, but said it is competitive with local rates and that all workers receive health-care insurance. New Balance’s private ownership has also allowed it to avoid the pressure to cut some of the 1,350 US manufacturing jobs that would have come if it was a public company.

However, as 2012 draws to a close, the company says that next year could see its effort to sustain manufacturing in the US fatally undermined. The threat comes from a trade agreement the White House is negotiating with nine Asian countries, including Vietnam. As part of the so-called Trans-Pacific Partnership, Vietnam is seeking the elimination of tariffs the US currently imposes on shoes it exports to the US.

New Balance, in turn, argues that the tariffs should be kept because Vietnam’s footwear industry is heavily subsidised by the government. With the latest round of negotiations having just finished in Auckland and more due in March, a deal is expected to be signed towards the end of 2013.

“A bad outcome would be the US government not to recognise that it is a subsidised industry,” says DeMartini. If the tariffs were removed “it would be very hard for us to continue to do what we do.”

The potential dark irony for New Balance, which also has a factory in the Cumbrian town of Flimby, is that the threat from the trade agreement is looming just as demand for trainers that are made in the US is rising. Its sales reached $2.04bn (£1.3bn) last year from $1.65bn in 2009. “The global demand for high-quality, crafted athletic shoes is ferocious,” says the New Balance chief executive. “We simply can’t supply enough US-made shoes to the market.”

The company says that sales are up about 15pc in most parts of the world over the past 12 months, with Asia recording strong growth. In China “there is a growing middle class that wants consumer goods”, argues DeMartini, who joined from consumer goods company Procter & Gamble (NYSE: PG - news) in 2007. “It will, without question, eventually be our biggest market.”

The challenge facing New Balance comes as corporate America begins to rethink a pattern of globalisation that has seen US companies relocate jobs overseas in the past 30 years. Truck manufacturer Caterpillar (NYSE: CAT - news) , General Electric (Other OTC: GEAPP - news) and, most recently, Apple (NasdaqGS: AAPL - news) are creating jobs in the US because of the economic advantages of manufacturing a product in the same country it will eventually be sold in.

DeMartini says the idea is not a new one to New Balance. “When the current ownership bought the company in 1972, we had one small factory in the US,” he explains. “The current ownership through 40-plus years has stuck with this commitment.”

The White House insists it is negotiating a trade agreement that will benefit the whole of the US and there are plenty of other American companies that do not want tariffs on trainers to be an obstacle to an accord.

The trickle of manufacturing jobs returning to the US has been welcomed by President Barack Obama, who is trying to expand America’s manufacturing sector after two decades of neglect before the financial crisis.

“We’ve never aspired to roll over and play dead,” DeMartini says when asked whether shoe-making might be one of those industries the US might have to let go of. “I do believe that making things matters.”

The next 12 months will show whether Obama and Congress agree that making shoes still matters.