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> And that cost quadruples after wholesale and retail markups, he said, ballooning into a $50 price difference between a pair made in the U.S. versus in China.

> And that cost quadruples after wholesale and retail markups, he said, ballooning into a $50 price difference between a pair made in the U.S. versus in China. This is the part that the child part of my brain always has trouble dealing with. This always seems ridiculous in my brain. I can intellectually understand why businesses want to scale their margins with costs, but it just seems so self-destructive (from a systemic standpoint) for something like shoes. I don't know how this could really be different, but I hate it.

deycallmeajay 5y ago
I actually would appreciate if someone could explain what this is.
randallsquared 5y ago
The cost of inventory is a gamble that you'll be able to sell it. If that cost grows but the upside doesn't, you literally cannot afford to take the risk of buying inventory that you hope to sell.
- torstenvl 5y ago
  JIT supply lines, sales tracking and inventory software integration, and the sophisticated sales forecasting that enables, change the risk calculation. But parasitic margins seem just as bad now as ever. I'm not convinced by this argument.
  - lotsofpulp 5y ago
    > But parasitic margins seem just as bad now as ever. What parasitic margins? Retail operations have 2% to 4% profit margins, and even Nike has around 10%, maybe 12% some years.
    - Clubber 5y ago
      Isn't most of that outside cost to manufacture though?
      - lotsofpulp 5y ago
        What does that mean? My point is starting a clothing company and using manufacturers in Asia is not going to bring any notable amount of riches due to not being able to earn “parasitic margins”.
    - adventured 5y ago
      That's pretty close. To put some numbers to it - Operating income margins for 2019 (this is before taxes, and using pre-Covid). Deckers 16%, Nike 12.2%, V.F. Corp 12%, Adidas 11.3%, Crocs 10.4%, Skechers 10%, Steve Madden 10%, Foot Locker 9.3%, Wolverine 7.5%, Shoe Carnival 4.8%, Under Armour 4.5%, Caleres 4%, Designer Brands Inc 3.7% Look at what Under Armour charges and look at those horrific margins. By comparison, big tech's operating income margins: Facebook 42.5%, Microsoft 41.6%, Oracle 38.5%, Adobe 35.4%, Nvidia 33.3%, Qualcomm 31.7%, Intel 29.2%, Apple 28.7%, Google 28.4%, Cisco 27.5%, Netflix 21.8%, and so on.
  - randallsquared 5y ago
    All those can help for some types of business. But as we've seen from the supply-chain disruptions since the start of the pandemic, there's also a cost of cutting things close. You can choose whether to typically err on the side of too much or too little, and you can do things that lower the likely size and probability of the error, but you can't just decide not to ever get it wrong, and getting it wrong will cost money.
  - nradov 5y ago
    That doesn't actually work very well for shoes and apparel. Demand is hard to forecast due to changing consumer tastes, and lead times are too long to adjust orders up or down quickly.
- smhost 5y ago
  Why is it so inefficient?
  - randallsquared 5y ago
    Maybe it only looks inefficient because we're comparing against a fantasy economy where nothing bad happens and no losses have to be recouped. :)
    - lotsofpulp 5y ago
      Just like the fantasy that these companies that outsource are earning giant profits, when a look at their 10-Ks shows pretty average profit margins for a business that wants to stay in business.
- ralfd 5y ago
  Sure, but why does the cost quadruple? If a china shoe costs 15 dollar less to make, why doesn’t it stay 15 dollars at the price the consumer sees?
  - tomnipotent 5y ago
    It costs money to sell shoes. You have duties, warehousing, distribution, employee salary, marketing costs, rent, insurance, expensive photo shoots. And if you're manufacturing original designs, you also have a year-long lead process, manufacturing obligations and scheduling, sample management, maybe even material procurement. The cost of the shoe ends up only being a third of overall costs. I'm also not going to sell everything, but I still need to keep buying inventory to keep the machine going. If I don't sell the product at least 3x what I paid for it, there's no way I can maintain sufficient capital to keep a business running and hedge against risks.
    - NickNameNick 5y ago
      Of the costs you list: > duties, warehousing, distribution, employee salary, marketing costs, rent, insurance, expensive photo shoots Only the Duties automatically scale with inventory cost. like the top-of-thread poster, I get that there are overheads. I don't understand why overheads seem to scale with the cost of purchasing the inventory.
      - icegreentea2 5y ago
        One of your biggest risks is that you end up the hook for stuff that you can't sell. That severity of that risk scales with price of goods, so your margins have to have a component that scales with price of goods to cover that risk.
        Dylan16807 5y ago
        Yes, a component. But it shouldn't be roughly the entire cost that scales that way.
wizardforhire 5y ago
This and also once an industry declines the infrastructure to support that industry disappears so a cottage industry has to increase their margins to compensate to even have a chance to break even. Given the risk to reboot its natural to want to recoup as much as possible with scale. Add to this increased wages, inflation etc etc and the breakeven threshold is sufficiently high to be prohibitive save for the overly optimistic, ambitious and well funded. Business is hard sometimes. However business is not a zero sum game and everyone wins when there are wins. Especially when those wins create new secondary industries Adding to the overall infrastructure that make possible and lower the barrier to entry for everyone else.
coliveira 5y ago
The true reason is not the costs involved in manufacturing, but the fact that American capitalists can get better returns just using speculative instruments.
rrrrrrrrrrrryan 5y ago
There's a trade-off between specialization and vertical integration (doing everything in house). By specializing in just one thing (e.g. making shoes), and letting someone else package them, transport them, market them, help customers try them on a store, etc., you can get really damn good at just making shoes. The shoes you make will almost assuredly be cheaper and of higher quality than the guy that tries to do all the other stuff himself (in addition to making shoes). In America, for physical goods, specialization almost always wins out despite the profit taking at each step, because labor is so much cheaper in other nations. Tesla and Trader Joe's wine are two great counter examples of vertical integration winning out big in industries that had become over-specialized over time.
perl4ever 5y ago
People who buy something labeled as made in the US, because they think it's the right thing to do, are by definition not price sensitive at least to a point. $50 has nothing to do with the cost, it's an entirely made up amount that is the estimated maximum increase the market will bear. It's the price of the conscience of the consumer who feels they should buy American. Remember, nobody is trying to make a "fair" profit, they're trying to make as much as possible.

deycallmeajay 5y ago

I actually would appreciate if someone could explain what this is.

randallsquared 5y ago

The cost of inventory is a gamble that you'll be able to sell it. If that cost grows but the upside doesn't, you literally cannot afford to take the risk of buying inventory that you hope to sell.

torstenvl 5y ago
JIT supply lines, sales tracking and inventory software integration, and the sophisticated sales forecasting that enables, change the risk calculation. But parasitic margins seem just as bad now as ever. I'm not convinced by this argument.
- lotsofpulp 5y ago
  > But parasitic margins seem just as bad now as ever. What parasitic margins? Retail operations have 2% to 4% profit margins, and even Nike has around 10%, maybe 12% some years.
  - Clubber 5y ago
    Isn't most of that outside cost to manufacture though?
    - lotsofpulp 5y ago
      What does that mean? My point is starting a clothing company and using manufacturers in Asia is not going to bring any notable amount of riches due to not being able to earn “parasitic margins”.
  - adventured 5y ago
    That's pretty close. To put some numbers to it - Operating income margins for 2019 (this is before taxes, and using pre-Covid). Deckers 16%, Nike 12.2%, V.F. Corp 12%, Adidas 11.3%, Crocs 10.4%, Skechers 10%, Steve Madden 10%, Foot Locker 9.3%, Wolverine 7.5%, Shoe Carnival 4.8%, Under Armour 4.5%, Caleres 4%, Designer Brands Inc 3.7% Look at what Under Armour charges and look at those horrific margins. By comparison, big tech's operating income margins: Facebook 42.5%, Microsoft 41.6%, Oracle 38.5%, Adobe 35.4%, Nvidia 33.3%, Qualcomm 31.7%, Intel 29.2%, Apple 28.7%, Google 28.4%, Cisco 27.5%, Netflix 21.8%, and so on.
- randallsquared 5y ago
  All those can help for some types of business. But as we've seen from the supply-chain disruptions since the start of the pandemic, there's also a cost of cutting things close. You can choose whether to typically err on the side of too much or too little, and you can do things that lower the likely size and probability of the error, but you can't just decide not to ever get it wrong, and getting it wrong will cost money.
- nradov 5y ago
  That doesn't actually work very well for shoes and apparel. Demand is hard to forecast due to changing consumer tastes, and lead times are too long to adjust orders up or down quickly.
smhost 5y ago
Why is it so inefficient?
- randallsquared 5y ago
  Maybe it only looks inefficient because we're comparing against a fantasy economy where nothing bad happens and no losses have to be recouped. :)
  - lotsofpulp 5y ago
    Just like the fantasy that these companies that outsource are earning giant profits, when a look at their 10-Ks shows pretty average profit margins for a business that wants to stay in business.
ralfd 5y ago
Sure, but why does the cost quadruple? If a china shoe costs 15 dollar less to make, why doesn’t it stay 15 dollars at the price the consumer sees?
- tomnipotent 5y ago
  It costs money to sell shoes. You have duties, warehousing, distribution, employee salary, marketing costs, rent, insurance, expensive photo shoots. And if you're manufacturing original designs, you also have a year-long lead process, manufacturing obligations and scheduling, sample management, maybe even material procurement. The cost of the shoe ends up only being a third of overall costs. I'm also not going to sell everything, but I still need to keep buying inventory to keep the machine going. If I don't sell the product at least 3x what I paid for it, there's no way I can maintain sufficient capital to keep a business running and hedge against risks.
  - NickNameNick 5y ago
    Of the costs you list: > duties, warehousing, distribution, employee salary, marketing costs, rent, insurance, expensive photo shoots Only the Duties automatically scale with inventory cost. like the top-of-thread poster, I get that there are overheads. I don't understand why overheads seem to scale with the cost of purchasing the inventory.
    - icegreentea2 5y ago
      One of your biggest risks is that you end up the hook for stuff that you can't sell. That severity of that risk scales with price of goods, so your margins have to have a component that scales with price of goods to cover that risk.
      - Dylan16807 5y ago
        Yes, a component. But it shouldn't be roughly the entire cost that scales that way.

wizardforhire 5y ago

This and also once an industry declines the infrastructure to support that industry disappears so a cottage industry has to increase their margins to compensate to even have a chance to break even. Given the risk to reboot its natural to want to recoup as much as possible with scale. Add to this increased wages, inflation etc etc and the breakeven threshold is sufficiently high to be prohibitive save for the overly optimistic, ambitious and well funded. Business is hard sometimes. However business is not a zero sum game and everyone wins when there are wins. Especially when those wins create new secondary industries Adding to the overall infrastructure that make possible and lower the barrier to entry for everyone else.

coliveira 5y ago

The true reason is not the costs involved in manufacturing, but the fact that American capitalists can get better returns just using speculative instruments.

rrrrrrrrrrrryan 5y ago

There's a trade-off between specialization and vertical integration (doing everything in house). By specializing in just one thing (e.g. making shoes), and letting someone else package them, transport them, market them, help customers try them on a store, etc., you can get really damn good at just making shoes. The shoes you make will almost assuredly be cheaper and of higher quality than the guy that tries to do all the other stuff himself (in addition to making shoes). In America, for physical goods, specialization almost always wins out despite the profit taking at each step, because labor is so much cheaper in other nations. Tesla and Trader Joe's wine are two great counter examples of vertical integration winning out big in industries that had become over-specialized over time.

perl4ever 5y ago

People who buy something labeled as made in the US, because they think it's the right thing to do, are by definition not price sensitive at least to a point. $50 has nothing to do with the cost, it's an entirely made up amount that is the estimated maximum increase the market will bear. It's the price of the conscience of the consumer who feels they should buy American. Remember, nobody is trying to make a "fair" profit, they're trying to make as much as possible.