At Olympics, Shoes Will Tell a Trade Lesson

In a few days the summer Olympics will open in South Korea, as seems fitting since that country of 44 million people manufactures more footwear than any other.

Nike, Reebok, Converse, Adidas--you name the shoe for track or basketball, and Korea makes it.

But that is changing. Korean shoe production is getting expensive, so the athletic shoe companies are looking to China and Thailand, the Philippines and Mexico to make the shoes. Korean exchange rates have gone up to roughly 720 won from 850 a year ago per $1 (U.S.), hiking the price 15% to U.S. importers. And wages have gone up by 28%, so that Korean shoe workers now make about $450 a month. Chinese workers, meanwhile, make $30 a month.

But more than low wages is involved. Korea wants to drop production of cheaper, simpler shoes but continue to manufacture the more technically complex, and expensive, running shoes that poorer nations aren’t yet capable of making. And Korean workers--among whom one family in six now owns a car--want to move up to higher paid and cleaner work, like that in electronics plants.

What is happening is a stage in economic development and, in fact, the running shoes you’ll see on Olympic athletes can tell you a lot about the vexing issues of world trade that even now are causing a dispute in Washington over a textile and footwear trade bill.

Right now the Korean government is phasing out assistance to shoe makers but encouraging electronics manufacturers with low-interest loans. Why are electronics better than shoes? Because there is higher value--in terms of developing Korean industry and often in the price of the item itself--in making $100 televisions and VCRs than $15-a-pair shoes.

Brawn to Brain

What Korea is learning is that there is more money to be made in the “brain” side of the product--the design and marketing--than in the “brawn,” or manufacturing, side. For even on the most technically sophisticated athletic shoe, the Korean manufacturer does skilled work but makes less than the people in the United States who design and sell the shoe. For example, the Nike Air Jordan shoe--named for Chicago Bulls basketball star Michael Jordan--costs $25 out of the factory in Korea. Then it’s shipped to Nike Inc. in Beaverton, Ore.--whose engineers designed the shoe and invented all the air-cushion soles and stabilizers that make it a high-priced product. Nike then sends the shoe to distributors at a wholesale price of $60. And the retailers may charge $100 to $110.

The story, and the pricing ladder, is similar for the Reebok Energy-Return shoe--so named because Reebok has developed a process that gives extra spring to your step--$20 to $25 out of the factory, $50 wholesale, $75 to $80 retail. Which gives you a decidedly different perspective on world trade and the trade deficit. Last year, Korea exported $1.8 billion worth of footwear to the United States--an amount included in the $170 billion trade deficit. But because of the brain-to-brawn ratio, that $1.8-billion figure translates to roughly $5.4 billion in design and marketing in the United States--$3 in American pockets for every $1 in Korean.

That’s why at least one Korean manufacturer--Kukje Corp.--wants to design, make and market its own branded athletic shoe--called Pro-Specs. And that’s why the rest of Korean industry has moved so quickly to making finished products in which it can get paid for Korean engineering--Hyundai cars, and Samsung and Goldstar VCRs, for example.

But a question: If we design and sell shoes in the United States, why can’t we make them here? Frank O’Connell, vice president of production for Reebok, explains: “It’s terribly labor-intensive. There are maybe 125 individual steps to making an ordinary tennis shoe, and it’s difficult to automate,” says O’Connell.

So it comes down to Korean wages at $2.25 an hour against U.S. workers who make at least $1 an hour more than that, if you can find them. And the Koreans, remember, don’t want to keep earning those wages. So the Chinese and Thais inherit the work.

But we do make shoes in this country. Converse makes 16% of its sneakers--including the popular Converse All-Stars--in Lumberton, N.C., aided by tariffs of 37% to 48% on imported shoes that make that production competitive. And a new bill that has passed the U.S. Senate, is pending in the House and which President Reagan has threatened to veto, would go beyond tariffs to set absolute limits on shoe imports.

Would that be likely to spur production in the United States? Yes, but only of the simpler sneakers, says Dave Taylor head of production for Nike, because the Koreans and other Asian manufacturers would fill their quotas with high-priced merchandise, as Japanese car makers did when auto quotas were imposed.

But in sophisticated running and basketball shoes, the Asian manufacturers would retain the competitive edge thanks to volume production and lower costs. And it would take a brave U.S. company to try to compete with them. That’s not saying it can’t be done, just that the calculations and gambles in world trade are often as close and demanding as any race you’re likely to see in the next two weeks in Seoul.