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12E.6.3 Estimated Cost Breakdown: Average Nike Shoe versus the Series 100 World Shoe (U.S. Dollars)
Data from a company document comparing production costs for the average Nike shoe with the Nike World Shoe Project Series 100 shoe.
While the global reach of Nike expanded, the company understood that there were large segments of the world’s population that could not afford Nike sneakers. In the early 1990s, Nike analyzed markets across the globe and determined that countries could fall into market tiers. Nike’s biggest market was in Tier 1 — countries with large populations (over 50 million people) and with a GDP per capita of $20,000 (the United States fell into this category). Tier 2 included countries with smaller populations (over 15 million people) and a GDP per capita of $20,000 (some European countries fell into Tier 2). China fell into Tier 3, with a very large population (around 1 billion people) and a relatively low GDP per capita ($2,000 PPP). Because of the number of people living in China, Nike was eager to tap into this market. In 1998, Nike began its World Shoe Project, which consisted of shoes produced and sold solely for so-called emerging or up-and-coming markets in Asia, Africa, and Latin America. These Series 100 shoes were made in China, where labor was inexpensive and where the shoes could easily be made available to a local market (with no import duties). Study this chart to see how much the factory is able to profit from the Series 100 shoes, and from Nike’s average shoes. This profit is one way to consider the effect of globalization on the nation that manufactures global products. The difference between the factory price to Nike and the wholesale price is the profit to Nike. What do these numbers tell you about the effect of globalization on the US economy, where Nike is headquartered and pays taxes? The difference between the wholesale price and the retail price is the profit to the store that sells the sneakers. These profits are one way to consider the effect of globalization on the nations that sell Nike shoes.
The World Shoe Project relied on local Chinese materials to construct the shoes and Nike’s existing manufacturing network, which lowered investment costs for Nike. The result was a relatively inexpensive Series 100 shoe when compared to the average Nike sneaker marketed in the United States. But Chinese shoe companies already produced low-cost sneakers, even less expensive than Nike’s Series 100 shoes. Students may examine the impact of international trade on national businesses, and the role that trade tariffs play in trying to protect national businesses from international competition.
Cost Component Average Nike Shoe Series 100 Shoe
Labor 2.43 0.72
Manufacturer's Overhead 2.13 0.67
Materials 10.72 3.47
Profit to Factory 0.97 0.33
Factory Price to Nike 16.25 5.19
Wholesale Price 32.50 10.00
Retail Price 65.00 15.00