1.4 The supply chain of Nike footwear

• Aardrijkskunde
• Middelbare school
• havo, vwo
• Leerjaar 3

1.4 Case study: the supply chain of Nike footwear

Learning objectives

After studying this section, you will be able to:

• Describe whether stages of a supply chain are knowledge, capital or labour intensive;
• Explain why different stages of Nike’s supply chain can be found in different countries.

Research and development (R&D)

R&D activities are knowledge intensive: workers involved in the R&D process need to possess a high level of education, skill and experience (knowledge). 

It is also capital intensive, since it requires a lot of money (capital) to make these activities possible. Both the knowledge and capital-intensive activities of TNCs are predominantly found in MEDCs.

Most of the raw materials of Nike footwear derive from LEDCs (or NICs). The extraction of raw materials is predominantly labour intensive, meaning that a large workforce is required.

Firstly, most of the raw materials are converted into intermediate goods: for example, rubber sheets, cotton fabric and leather hides. Secondly, different parts of the eventual shoe are stamped out of these intermediate goods in a factory. Next, the assembly can take place: the different parts will be stitched or glued together and will step by step form the final good, a Nike shoe.

After the entire manufacturing process is finished, the final goods are ready for sale. All activities surrounding the sales of the products are summarised in the word marketing. Marketing refers to the process of promoting, selling and distributing a product or service. 

Rafael Nadal showing off Nike gear at the Olympics.

Talking point
Would you pay more for clothing when a famous athlete has connected his or her name to the product? Why, or why not?

The journey of a Nike shoe.

Essence

Nike footwear is produced using a globalised supply chain. Its design and marketing requires both knowledge and capital intensive work, which is carried out at the Nike campus in the USA. Sourcing and processing the raw materials is labour intensive and is mainly done in low wage LEDCs or NICs, in order to minimise costs. The manufacturing of the shoes is also labour intensive and has been outsourced by Nike to external parties in low wage countries. Although the products are sold worldwide, MEDCs account for the largest part of Nike’s sales market.

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Nike’s tax strategy: clever or shameless?

The offshoring and outsourcing of parts of its supply chain saves Nike costs in the form of wages. However, Nike has been accused of saving costs by avoiding taxes. Companies have to pay taxes on their total profit, just like an employee of a company pays tax on his or her income. Tax money is used by governments for all kinds of publicly funded projects, like healthcare, education and infrastructure. However, Nike has come up with a complicated construction to transfer part of its profit to countries that require no tax to be paid. In that way, they increased their net profit (the profit after tax deduction).

For a long time, Nike legally shifted profits away to a subsidiary in Bermuda, but this registered company had no offices or staff at all. Authorities try to oppose this strategy and tax regulations have been tightened, but so far Nike has always been one step ahead. Critics claim that Nike’s strategy is immoral and unfair, while Nike states that they comply with tax regulations completely and just run their business cleverly. What do you think? Is this tax avoiding strategy clever or shameless?

Talking point
What do you think? Is this tax avoiding strategy clever or shameless?

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