10 ms·

> For a shoe-factory job paying $12 an hour, the actual cost of shoemaking — when adding benefits — grows to $16 an hour, compared with about $3 an hour in Chin

> For a shoe-factory job paying $12 an hour, the actual cost of shoemaking — when adding benefits — grows to $16 an hour, compared with about $3 an hour in China, said Mike Jeppesen, head of global operations at Wolverine Worldwide, which owns brands like Merrell, Sperry and Keds. 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 strikes me as a naive way to think about pricing (though it's probably consistent with the way finance people think about it). The only reason to charge that same ~4x markup on the additional labor cost is to keep gross margins (as a percentage) unchanged, but that would actually increase profit (as a dollar amount). If you just want to keep the same profit you'd get from offshoring, you can probably increase the price by much less - $13 if demand were perfectly inelastic, somewhat more in practice. Also, that sentence shifts from cost per hour to cost per pair without an explanation. Is 1 pair/worker/hour a realistic estimate? That seems way lower than I'd expect. Surprisingly I couldn't find a good answer to this in 30 seconds of searching. After learning how many manufacturers essentially use slave labor for their products, I've stopped buying clothes manufactured outside the US and EU. I'm sure there are better ways to do this, but that's the simplest reliable one - even e.g. Patagonia, which seems to be trying its best to maintain an ethical supply chain in developing countries, has had its share of issues. The price difference hurts a little bit when I actually make a purchase, but clothes are cheap enough to begin with that the difference ends up being a pretty negligible piece of my overall spending, probably something like $100/year on average.

coliveira 5y ago
The issue with manufacturing has nothing to do with labor prices as they try to say in the media. For example, Germany has higher labor costs than the US, and it continues to produce way more than other nations. The true reason has to do with use of capital. The US has perfected a system where capital is highly rewarded for pure financial operations: stock market, futures speculation, banking, real state lending. Manufacturing requires a lot of capital that US players don't want to tie to a lower reward structure. Germany and Chinese capitalists are completely Ok with employing their capital for manufacturing for political/structural reasons. That's why American economists will make thousands of excuses that really make no sense when it comes to the fact that they want to invest as little as possible in manufacturing.
- unyttigfjelltol 5y ago
  Great points. With decent sneakers selling for $90 to $150, I'm baffled by business people who focus on wringing the last $10/hr out of their manufacturing staffs.
  - kennywinker 5y ago
    Because nike’s ceo needs a bonus and the shareholders need their dividends. Because the return on capital is given more value than the labour that actually made the thing. Your shoes say they were made by nike, but they were 100% made by a person, who was underpaid, and designed by a person who was underpaid, and shipped by a person who was underpaid - all so that someone who put in some cash and laid back waiting could get a big return.
- tfehring 5y ago
  I'm not sure I follow. The cost of capital is lower in the US than in developing countries because of the generally lower risk of investing in the US. For example, long-term AAA corporate bond yields seem to be about 150 bps higher in China than the US; estimating the cost of equity rigorously is much harder but most estimates would suggest an even wider gap.
  - fastaguy88 5y ago
    Perhaps it’s less the cost of capital, and more the relative return. If I can only get a 10% return from a manufacturing investment, but I can get 20% in finance or technology, why would I settle for 10%. The thing that puzzles me is, if all that money is flowing into the 20% industry, why don’t the returns go down?
    - kevin_thibedeau 5y ago
      Why would a grocery store bother with selling food when they only get 3% margin?
      - 5y ago
lowercased 5y ago
Most of the players in the chain in terms of percentages. "We need to make x% profit" and "we have to sell at x% markup", etc. If I buy something wholesale for $27, I want to retail it for $54 (or more)... because... ? Rather than "I need to make at least $10 per item to be profitable", it's percentages. At least... that's the little I've seen.
- deleted 5y ago
  [deleted]
- tyingq 5y ago
  "return on invested capital", or "shareholders have expectations". Private companies, of course, have more leeway.
- whynotkeithberg 5y ago
  you're completely right. It's because they want to keep increasing their percent of return. They refuse to accept profit and instead have to return more profit over quality or worker health.
fsckboy 5y ago
> a naive way to think about pricing (though it's probably consistent with the way finance people think about it) you don't understand finance, and why it has to work the way it does, hence your naive thinking :) when a manufacturer sells a product to a distributor, the mfr ships the goods but they don't get paid right away, they get paid later. Invoices are marked "net 10" or "net 30" or "net 60", where the numbers refer to how many days the buyer gets to pay the bill after receipt of the goods. (length depends on your credit worthiness and potentially the goods in question, dairy for example is perishable) And the same goes for the distributor selling those same goods to the retail merchants. (and, with credit cards, the same goes for the consumer buying the item) but let's go back to the mfer above: they've sold the goods, but they haven't been paid... and they still need to manufacture more goods to have on hand for the next order that comes in, and they need to keep paying rent on the factory, and they can't just lay off all the workers till the money comes in and then rehire them, and they don't want to tell new customers to wait for their orders. So the manufacturer has to buy more raw materials and keep the lines operating. So they go to the raw materials suppliers and say "hey send us more stuff, so we can manufacture more, we promise we'll pay you later" and the raw materials supplier said "you said that with the last order and you haven't paid it yet" and the manufacturer says "well we didn't get paid yet..." so, as you can see, already there is debt ("financing") at every stage of the supply chain. Now consider that the manufacturer has introduced a product that's growing in popularity, and growth is the goal if you want to make more money and or spread your costs. In this instance the manufacturer is asking his suppliers for a double or triple order of supplies, because the retails and the distributor are clamoring to double or triple their orders over the previous orders... that they haven't paid for yet. To smooth this process out, these different entities go to their banks and say "hey, I can sell triple my previous orders if I can just borrow some money short term, demand is so good that I can pay you interest". And the bank says "yes, borrow the money, it's the same interest rate, but borrowing triple at the same rate is triple the interest you have to pay, right?" or the bank might say "that's waaaayyy too much money to borrow, look someplace else" and the manufacturer might instead be forced to sell stock on a stock exchange, giving partial ownership to investors in exchange for the cash they need for expansion. This is why banks exist; this is why the stock market exists; and this is why it is not naive but incredibly sophisticated how finance works. Most people on HN love to hate on MBAs, but this is just what they teach you in the first couple weeks of your first accounting class, a tiny piece of the curriculum. For anybody who really wants to grok thinking this way, I'd highly recommend a book titled "The Goal" by Eliyahu Goldratt. It's written as a novel, it's a breezy and fun read with some deep ideas in it. EDIT: addressing the complaint about something I susposedly left out: When you want to start a company, you need some seed money for a computer, a chair, a desk and a place to sit. If you are going to manufacture, you need equipment; if you are going to sell, you need space to store and display. This entails money which you get from somebody else who will want interest, with higher interest for higher risk; or which you fund yourself from your savings but you were making money on your savings which you need to forego (cost of capital) so that's essentially the same thing. And when you are successful and expand, at some point you run out and need to go outside to finance anyway. It has nothing to do with fixed percentages of profit on goods or services. Instead look only at the flow of money and what you are required to pay your financiers. You can tell your financiers "I'm willing to make less profit, so charge me less interest" but they will say back "you're making less profit? you just got riskier, we need to increase your interest rate" if less profit is charged at any stage in the chain, that stage will have less money to reinvest in the next round of growth, and will need to borrow more. Sellers are not choosing their own profit margins, these numbers come from market bid-ask norms.
csours 5y ago
How many person hours do you think it takes to assemble an automobile? By my estimate it's something like 20 person hours for a reasonably complex product. I used to work in an automotive assembly plant, but if you want real numbers you can buy or find a Harbour Report. Note this does NOT include indirect labor (skilled trades), salaried employees, or the time taken to make the parts installed at the assembly plant (engines, transmissions, bolts, glass, etc)
behringer 5y ago
> After learning how many manufacturers essentially use slave labor for their products, I've stopped buying clothes manufactured outside the US and EU You should probably stop buying clothes made in the US then. A lot of clothes are made by prison (very nearly slave) labor. https://laborrights.org/in-the-news/your-valentine-made-prison https://laborrights.org/in-the-news/your-valentine-made-pris...
- fy20 5y ago
  Maybe avoid "Made in Italy" too, as many items are manufactured by Chinese immigrants. Some legal, some not so legal. https://www.newyorker.com/magazine/2018/04/16/the-chinese-workers-who-assemble-designer-bags-in-tuscany https://www.newyorker.com/magazine/2018/04/16/the-chinese-wo... https://archive.is/Kwt7u https://archive.is/Kwt7u
  - beebeepka 5y ago
    A not insignificant amount of Italian clothing is produced in places such as Bulgaria. I personally know a ton of people with decades of experience making stuff for high end brands. These people are not technically slaves but their pay is often way below what is legal, AND they are denied basic worker rights like breaks and days off.
fhdch 5y ago
Your profit margin sets the return on investment, which must be on the tangent portfolio line or investors drop you. Of course thats simplistic thinking, the tangent portfoglio is unknowable. And there are other benefits of not charging the same profit margin. But, in general, you’re going to have a bad time w/ investors if your profit margins are industry standard.
paulcole 5y ago
> Is 1 pair/worker/hour a realistic estimate? That seems way lower than I'd expect. Surprisingly I couldn't find a good answer to this in 30 seconds of searching. Do you have any relevant clothing industry/manufacturing experience to base your expectation on?
- tfehring 5y ago
  No I don't, that's why I'm asking.
1vuio0pswjnm7 5y ago
"... I've stopped buying clothes manufactued outside the US and EU." "Indeed, many of the remaining 200-some U.S. footwear factories serve the military, said Tom Capps, whose Capps Shoe Co. in Virginia mainly makes uniform shoes for the government." Thats 200 sources of American-made shoes. The quality is not bad in the ones I have owned. The US government is probably getting better quality and value from its contractors in shoes than it is in, say, software, including "cloud services". :) Patagonia used to source fleece from Malden Mills, a US manufacturer. Malden Mills, now Polartec, is a government contractor so maybe that has helped them to remain in business. https://www.encyclopedia.com/social-sciences-and-law/economics-business-and-labor/businesses-and-occupations/malden-mills-industries-inc https://www.encyclopedia.com/social-sciences-and-law/economi...
- germinalphrase 5y ago
  Polartec is the industry standard for synthetic outdoor clothing fabric. It’s like boots with Vibram soles - not exciting, but reliable and long wearing.
  - deleted 5y ago
    [deleted]
- colechristensen 5y ago
  The military has really intense product specification and testing requirements (you can find a mil-spec for pop tarts), they are essentially getting exactly the quality they specify and reject what doesn’t meet spec. This is necessary because of scale and part of why things are so expensive.
  - deleted 5y ago
    [deleted]
- loonster 5y ago
  The us sourced is only about materials. Too bad they don't require US machines too.
roenxi 5y ago
Although I agree with your logic, I suspect that consumers are extremely price sensitive so shoes in the same category are roughly the same price & it makes sense to talk about %. Shoemakers are already charging what they believe to be the highest price they can regardless of costs. They don't believe they can raise the price, or they already would have.
- BobbyJo 5y ago
  > Shoemakers are already charging what they believe to be the highest price they can regardless of costs. They don't believe they can raise the price, or they already would have. The highest price you can charge for shoes made in China is different than that of shoes made in the USA. Whether or not it's enough to support a market is a different question, but it's an undeniable difference. Personally, I'm willing to pay around 2X to get American made goods, and routinely go out of my way to do so.
  - roenxi 5y ago
    > Personally, I'm willing to pay... Unfortunately, the consumers who matters is the rather less well off one who is making decisions based on how much money they have in their bank account today. A number which is rarely large, if the stats are to be believed. I agree with the sentiment. But I'm overpaid. Most people aren't willing to double their expenses on something because they want to support a political outcome. They would quickly run out of money.
    - zarzavat 5y ago
      Or rather people will buy one thing made in $HOMECOUNTRY, get their dopamine hit from supporting the motherland, and then proceed to buy everything else from China.
  - angio 5y ago
    As a european I wouldn't pay twice for american made shoes, while I (and many people) routinely pay a premium for italian and french made shoes. The problem is that made in america is not considered premium for clothes the same way that made in italy or france is.
throwaway91321 5y ago
> Also, that sentence shifts from cost per hour to cost per pair without an explanation. Is 1 pair/worker/hour a realistic estimate? I did some work with manufacturers who were in the process of moving manufacturing overseas some years ago. From my experience, the way the article presents the issue is detached from what really happens. For instance, people look at a labor difference of $3 and $12, and assume that if these things were manufactured in the U.S. they would cost five times as much. But the thing is, labor is just one part of the cost. You also have things like R&D, advertising, raw materials, transportation, machinery, the cost of the manufacturing plant, etc. Some of those (like advertising) are going to stay the same no matter where you make your product, some would probably cost less overseas (real estate needed for factories), some would cost more overseas (transportation cost). There are also other issues that come up (like quality control issues) that come up when moving operations overseas that can be quite costly. Here's the thing, though - let's say that a manufacturer makes a product for $10 and sells it for $12.50 - they're making $2.50 per unit sold. Now let's say that moving things overseas, when everything is taken into consideration, they can now make a product for $9.50, of which they keep 25 cents and pass the remainder 25 cents forward. Now they've increased their profit 10%, which is pretty big for them. But what about the consumer? For simplicity, let's say that the 25 cents goes directly to them and the middlemen don't take a cut. And let's say that the final retail price doubles (the results would be even more extreme if they quadrupled like the article says). So the price goes down from $25.00 to $24.75 - they save 1%. Now, obviously things are a lot more complex, and things are going to vary greatly depending on what's being manufactured. But from my experience, moving manufacturing overseas can often be profitable for companies while being only negligibly beneficial - or even detrimental (for instance, with poorer quality control) - for the consumers.
- joe_the_user 5y ago
  Just guessing, would another factor be that these are highly capitalized, highly leveraged, highly competitive industries, so a 10% increase in profits can multiply and where anything that increases costs must avoided at all costs because your competitors are lowering their cost constantly. Edit: I think we can see huge companies tightly locked into their paradigm because it involves so much capital and so many connections to suppliers etc.
notsureaboutpg 5y ago
> 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. Shoes have such a huge price range, from $20 to $200 for pretty similar shoes, so a $50 hike in prices for made in USA sneakers should be a slam dunk for a company with some good marketing.
perl4ever 5y ago
>I've stopped buying clothes manufactured outside the US and EU Is it really possible to make anything that isn't a product of the global economy? When something is labeled as "manufactured in the US", I always thought that was a term of art that meant final assembly. It is said that around 1/5 of the world's cotton comes from forced labor. This has been reported on by the BBC and The Guardian.
- forty 5y ago
  Purchase clothes made in linen ;) 75% of the world production of linen is done in France, where labor laws are fine (I'm French ;) ). More seriously we have a bunch of clothes makers here that makes cloths 100% made in France (incl material). linen is one of the trick they use. Another is recycled materials. One of them makes a jeans made out of plastic from the sea, which (sadly) we can harvest abundently here :)
  - gizmondo 5y ago
    > 75% of the world production of linen is done in France That's interesting, why is it so concentrated? Is it subsidized heavily?
    - forty 5y ago
      I have no idea. Probably a mix of factors like tradition, know-how, proper soils and climate, subsidies and/or big local demand
    - rmah 5y ago
      That stat is probably only true if you look at things in a certain way -- for example, a highly restrictive definition of "linen". Pretty much every source I've seen says that the top five producers of linen fabrics are China, Italy, Ireland, Belgium and the USA -- with China dominating by far.
      - forty 5y ago
        That makes sense. Reading a bit more about it, it seems that currently, 80% of the French (raw) linen production goes to China to become fabric (sorry I'm missing some vocabulary here) :/ https://www.peclersparis.com/en/blog/will-linen-spun-in-france-become-the-new-cotton/ https://www.peclersparis.com/en/blog/will-linen-spun-in-fran...
rendall 5y ago
Can you recommend some good clothing manufacturers with ethical supply chains?
- knubie 5y ago
  I'm a little late here, but check out asket. Each product has a transparency report.
- baybal2 5y ago
  Bangladesh, if rouge socialists on the loose are better than outright communists in your world outlook.
ezconnect 5y ago
China is not about cheap labor, most manufacturer love to put up factory there because they have access to almost all raw materials for their products. That's the hardest part to move to another country all the logistics and supply chains.
spacebanana7 5y ago
Manufacturing costs can multiply through a supply chain because many retail costs are defined in percentage terms. For example, in some European countries where VAT + transaction fees get close to 25% a $10 decrease in manufacturing costs would allow a product to suffer a nearly $12.50 reduction in price whilst keeping the company’s absolute margin constant. Naturally this channel doesn’t apply to most transport and logistics costs though.
- abe_m 5y ago
  VAT = Value Added Tax When the input cost of something increases in the supply chain (prior to sale to consumer), the buyer doesn't pay VAT on the input. So if the input costs $10, and there is s 25% VAT, the buyer pays $12.50, but then gets a credit for the $2.50 VAT they paid. When the buyer does their thing to add value, and sell to the next person in the chain, they charge VAT on the sale prices. Say the value add is $10, and they sell for $20 + $5 VAT. When they go to pay VAT to the government their payment is only the difference between the input VAT payment, and the output VAT collected, in this case $5-$2.50=$2.50 goes to government. If the input goes up to $16, they pay $4 input VAT. If they still add $10, their sale prices is $26, with $6.50 VAT. The amount that goes to the government is $6.50-$4 = $2.50 The VAT doesn't compound.
jasode 5y ago
> The only reason to charge that same ~4x markup on the additional labor cost is to keep gross margins (as a percentage) unchanged, but that would actually increase profit (as a dollar amount). If _you_ just want to keep the same profit you'd get from offshoring, _you_ can probably increase the price by much less - $13 if demand were perfectly inelastic, somewhat more in practice. I emphasized the _"you"_ in the above quote to show that your explanation inadvertently combines separate business entities into one. The following are separate independent businesses in the chain with their own profit markups: - manufacturer e.g. Wolverine Worldwide makes and sells shoe for $25 - distributor (importer wholesale buyer) (e.g. Bonvita Aps[1]): add 100% markup or ~2x price which increases to $50 - retailer (e.g. H&M clothing retailer): buys for $50 from distributor and adds another 100% markup or ~2x price which increases it to $100 So the counterintuitive ~4x markup math happens because the separate businesses don't add a fixed flat margin but instead, a ~100% percentage margin. This multiplier effect (2x times 2x) across layers of middlemen causes the ~4x increased price difference the consumer sees. So it's not just labor cost but any component cost by the manufacturer can be multiplied by the chain. If a raw material like polyurethane goes up +50 cents, the final cost to the consumer can be increased ~4x to ~$2. This is what Wolverine Worldwide's Mike Jeppesen means in his quote "that cost quadruples after wholesale and retail markups,. This is a great example where journalism on financial topics would actually easier and clearer with spreadsheets so readers can easily see the cause & effect of input costs to final costs. Using a narrative structure and isolated quotes from vice presidents just confuses readers because it seems like "4x" got invented out of thin air. Btw, your explanation that assumes a flat fixed profit margin would be more realistic in a direct-to-consumer model. It looks like Wolverwine Worldwide does run some direct customer websites to sell Keds shoes but most retailer contract agreements require that the manufacturer never undersell the retailer. Therefore, you'd still have the ~4x increase in price but in the D2C channel, the manufacturer captures more of the profit instead of middlemen. [1] https://www.wolverine.com/US/en/international-distributors/ https://www.wolverine.com/US/en/international-distributors/
baybal2 5y ago
Salaries are not by much a do, or die determinant. Even Switzerland has a number of mass market shoes companies with 100% of manufacturing inside the country. And Swiss manual labour salaries are out of this world. The problem is Americans suck at doing business: lack of entrepreneurial spirit, creativity, wits, and grit. A universal solution of overcoming adverse conditions: "exit, and sell." I worked in OEM manufacturing my whole career, soon to be 10 years of full time work. Every time I hear we get a big new buyer, and he/she is American, I feel joy, and dread at the same time. Joy, because big American companies are as a rule well moneyed. Dread because there is so much truly unnecessary tedious work, and ceremony with them. Once upon a time, a buyer demanded our "risk management," and "crisis management plan," I dropped from a chair laughing. Any problem faced by a big company is solved by throwing consultants, and attorneys at the problem, which don't solve anything 9 out of 10 times.

coliveira 5y ago

The issue with manufacturing has nothing to do with labor prices as they try to say in the media. For example, Germany has higher labor costs than the US, and it continues to produce way more than other nations. The true reason has to do with use of capital. The US has perfected a system where capital is highly rewarded for pure financial operations: stock market, futures speculation, banking, real state lending. Manufacturing requires a lot of capital that US players don't want to tie to a lower reward structure. Germany and Chinese capitalists are completely Ok with employing their capital for manufacturing for political/structural reasons. That's why American economists will make thousands of excuses that really make no sense when it comes to the fact that they want to invest as little as possible in manufacturing.

unyttigfjelltol 5y ago
Great points. With decent sneakers selling for $90 to $150, I'm baffled by business people who focus on wringing the last $10/hr out of their manufacturing staffs.
- kennywinker 5y ago
  Because nike’s ceo needs a bonus and the shareholders need their dividends. Because the return on capital is given more value than the labour that actually made the thing. Your shoes say they were made by nike, but they were 100% made by a person, who was underpaid, and designed by a person who was underpaid, and shipped by a person who was underpaid - all so that someone who put in some cash and laid back waiting could get a big return.
tfehring 5y ago
I'm not sure I follow. The cost of capital is lower in the US than in developing countries because of the generally lower risk of investing in the US. For example, long-term AAA corporate bond yields seem to be about 150 bps higher in China than the US; estimating the cost of equity rigorously is much harder but most estimates would suggest an even wider gap.
- fastaguy88 5y ago
  Perhaps it’s less the cost of capital, and more the relative return. If I can only get a 10% return from a manufacturing investment, but I can get 20% in finance or technology, why would I settle for 10%. The thing that puzzles me is, if all that money is flowing into the 20% industry, why don’t the returns go down?
  - kevin_thibedeau 5y ago
    Why would a grocery store bother with selling food when they only get 3% margin?
    - 5y ago

lowercased 5y ago

Most of the players in the chain in terms of percentages. "We need to make x% profit" and "we have to sell at x% markup", etc. If I buy something wholesale for $27, I want to retail it for $54 (or more)... because... ? Rather than "I need to make at least $10 per item to be profitable", it's percentages. At least... that's the little I've seen.

deleted 5y ago
[deleted]
tyingq 5y ago
"return on invested capital", or "shareholders have expectations". Private companies, of course, have more leeway.
whynotkeithberg 5y ago
you're completely right. It's because they want to keep increasing their percent of return. They refuse to accept profit and instead have to return more profit over quality or worker health.

fsckboy 5y ago

> a naive way to think about pricing (though it's probably consistent with the way finance people think about it) you don't understand finance, and why it has to work the way it does, hence your naive thinking :) when a manufacturer sells a product to a distributor, the mfr ships the goods but they don't get paid right away, they get paid later. Invoices are marked "net 10" or "net 30" or "net 60", where the numbers refer to how many days the buyer gets to pay the bill after receipt of the goods. (length depends on your credit worthiness and potentially the goods in question, dairy for example is perishable) And the same goes for the distributor selling those same goods to the retail merchants. (and, with credit cards, the same goes for the consumer buying the item) but let's go back to the mfer above: they've sold the goods, but they haven't been paid... and they still need to manufacture more goods to have on hand for the next order that comes in, and they need to keep paying rent on the factory, and they can't just lay off all the workers till the money comes in and then rehire them, and they don't want to tell new customers to wait for their orders. So the manufacturer has to buy more raw materials and keep the lines operating. So they go to the raw materials suppliers and say "hey send us more stuff, so we can manufacture more, we promise we'll pay you later" and the raw materials supplier said "you said that with the last order and you haven't paid it yet" and the manufacturer says "well we didn't get paid yet..." so, as you can see, already there is debt ("financing") at every stage of the supply chain. Now consider that the manufacturer has introduced a product that's growing in popularity, and growth is the goal if you want to make more money and or spread your costs. In this instance the manufacturer is asking his suppliers for a double or triple order of supplies, because the retails and the distributor are clamoring to double or triple their orders over the previous orders... that they haven't paid for yet. To smooth this process out, these different entities go to their banks and say "hey, I can sell triple my previous orders if I can just borrow some money short term, demand is so good that I can pay you interest". And the bank says "yes, borrow the money, it's the same interest rate, but borrowing triple at the same rate is triple the interest you have to pay, right?" or the bank might say "that's waaaayyy too much money to borrow, look someplace else" and the manufacturer might instead be forced to sell stock on a stock exchange, giving partial ownership to investors in exchange for the cash they need for expansion. This is why banks exist; this is why the stock market exists; and this is why it is not naive but incredibly sophisticated how finance works. Most people on HN love to hate on MBAs, but this is just what they teach you in the first couple weeks of your first accounting class, a tiny piece of the curriculum. For anybody who really wants to grok thinking this way, I'd highly recommend a book titled "The Goal" by Eliyahu Goldratt. It's written as a novel, it's a breezy and fun read with some deep ideas in it. EDIT: addressing the complaint about something I susposedly left out: When you want to start a company, you need some seed money for a computer, a chair, a desk and a place to sit. If you are going to manufacture, you need equipment; if you are going to sell, you need space to store and display. This entails money which you get from somebody else who will want interest, with higher interest for higher risk; or which you fund yourself from your savings but you were making money on your savings which you need to forego (cost of capital) so that's essentially the same thing. And when you are successful and expand, at some point you run out and need to go outside to finance anyway. It has nothing to do with fixed percentages of profit on goods or services. Instead look only at the flow of money and what you are required to pay your financiers. You can tell your financiers "I'm willing to make less profit, so charge me less interest" but they will say back "you're making less profit? you just got riskier, we need to increase your interest rate" if less profit is charged at any stage in the chain, that stage will have less money to reinvest in the next round of growth, and will need to borrow more. Sellers are not choosing their own profit margins, these numbers come from market bid-ask norms.

csours 5y ago

How many person hours do you think it takes to assemble an automobile? By my estimate it's something like 20 person hours for a reasonably complex product. I used to work in an automotive assembly plant, but if you want real numbers you can buy or find a Harbour Report. Note this does NOT include indirect labor (skilled trades), salaried employees, or the time taken to make the parts installed at the assembly plant (engines, transmissions, bolts, glass, etc)

behringer 5y ago

> After learning how many manufacturers essentially use slave labor for their products, I've stopped buying clothes manufactured outside the US and EU You should probably stop buying clothes made in the US then. A lot of clothes are made by prison (very nearly slave) labor. https://laborrights.org/in-the-news/your-valentine-made-prison https://laborrights.org/in-the-news/your-valentine-made-pris...

fy20 5y ago
Maybe avoid "Made in Italy" too, as many items are manufactured by Chinese immigrants. Some legal, some not so legal. https://www.newyorker.com/magazine/2018/04/16/the-chinese-workers-who-assemble-designer-bags-in-tuscany https://www.newyorker.com/magazine/2018/04/16/the-chinese-wo... https://archive.is/Kwt7u https://archive.is/Kwt7u
- beebeepka 5y ago
  A not insignificant amount of Italian clothing is produced in places such as Bulgaria. I personally know a ton of people with decades of experience making stuff for high end brands. These people are not technically slaves but their pay is often way below what is legal, AND they are denied basic worker rights like breaks and days off.

fhdch 5y ago

Your profit margin sets the return on investment, which must be on the tangent portfolio line or investors drop you. Of course thats simplistic thinking, the tangent portfoglio is unknowable. And there are other benefits of not charging the same profit margin. But, in general, you’re going to have a bad time w/ investors if your profit margins are industry standard.

paulcole 5y ago

> Is 1 pair/worker/hour a realistic estimate? That seems way lower than I'd expect. Surprisingly I couldn't find a good answer to this in 30 seconds of searching. Do you have any relevant clothing industry/manufacturing experience to base your expectation on?

tfehring 5y ago
No I don't, that's why I'm asking.

1vuio0pswjnm7 5y ago

"... I've stopped buying clothes manufactued outside the US and EU." "Indeed, many of the remaining 200-some U.S. footwear factories serve the military, said Tom Capps, whose Capps Shoe Co. in Virginia mainly makes uniform shoes for the government." Thats 200 sources of American-made shoes. The quality is not bad in the ones I have owned. The US government is probably getting better quality and value from its contractors in shoes than it is in, say, software, including "cloud services". :) Patagonia used to source fleece from Malden Mills, a US manufacturer. Malden Mills, now Polartec, is a government contractor so maybe that has helped them to remain in business. https://www.encyclopedia.com/social-sciences-and-law/economics-business-and-labor/businesses-and-occupations/malden-mills-industries-inc https://www.encyclopedia.com/social-sciences-and-law/economi...

germinalphrase 5y ago
Polartec is the industry standard for synthetic outdoor clothing fabric. It’s like boots with Vibram soles - not exciting, but reliable and long wearing.
- deleted 5y ago
  [deleted]
colechristensen 5y ago
The military has really intense product specification and testing requirements (you can find a mil-spec for pop tarts), they are essentially getting exactly the quality they specify and reject what doesn’t meet spec. This is necessary because of scale and part of why things are so expensive.
- deleted 5y ago
  [deleted]
loonster 5y ago
The us sourced is only about materials. Too bad they don't require US machines too.

roenxi 5y ago

Although I agree with your logic, I suspect that consumers are extremely price sensitive so shoes in the same category are roughly the same price & it makes sense to talk about %. Shoemakers are already charging what they believe to be the highest price they can regardless of costs. They don't believe they can raise the price, or they already would have.

BobbyJo 5y ago
> Shoemakers are already charging what they believe to be the highest price they can regardless of costs. They don't believe they can raise the price, or they already would have. The highest price you can charge for shoes made in China is different than that of shoes made in the USA. Whether or not it's enough to support a market is a different question, but it's an undeniable difference. Personally, I'm willing to pay around 2X to get American made goods, and routinely go out of my way to do so.
- roenxi 5y ago
  > Personally, I'm willing to pay... Unfortunately, the consumers who matters is the rather less well off one who is making decisions based on how much money they have in their bank account today. A number which is rarely large, if the stats are to be believed. I agree with the sentiment. But I'm overpaid. Most people aren't willing to double their expenses on something because they want to support a political outcome. They would quickly run out of money.
  - zarzavat 5y ago
    Or rather people will buy one thing made in $HOMECOUNTRY, get their dopamine hit from supporting the motherland, and then proceed to buy everything else from China.
- angio 5y ago
  As a european I wouldn't pay twice for american made shoes, while I (and many people) routinely pay a premium for italian and french made shoes. The problem is that made in america is not considered premium for clothes the same way that made in italy or france is.

throwaway91321 5y ago

> Also, that sentence shifts from cost per hour to cost per pair without an explanation. Is 1 pair/worker/hour a realistic estimate? I did some work with manufacturers who were in the process of moving manufacturing overseas some years ago. From my experience, the way the article presents the issue is detached from what really happens. For instance, people look at a labor difference of $3 and $12, and assume that if these things were manufactured in the U.S. they would cost five times as much. But the thing is, labor is just one part of the cost. You also have things like R&D, advertising, raw materials, transportation, machinery, the cost of the manufacturing plant, etc. Some of those (like advertising) are going to stay the same no matter where you make your product, some would probably cost less overseas (real estate needed for factories), some would cost more overseas (transportation cost). There are also other issues that come up (like quality control issues) that come up when moving operations overseas that can be quite costly. Here's the thing, though - let's say that a manufacturer makes a product for $10 and sells it for $12.50 - they're making $2.50 per unit sold. Now let's say that moving things overseas, when everything is taken into consideration, they can now make a product for $9.50, of which they keep 25 cents and pass the remainder 25 cents forward. Now they've increased their profit 10%, which is pretty big for them. But what about the consumer? For simplicity, let's say that the 25 cents goes directly to them and the middlemen don't take a cut. And let's say that the final retail price doubles (the results would be even more extreme if they quadrupled like the article says). So the price goes down from $25.00 to $24.75 - they save 1%. Now, obviously things are a lot more complex, and things are going to vary greatly depending on what's being manufactured. But from my experience, moving manufacturing overseas can often be profitable for companies while being only negligibly beneficial - or even detrimental (for instance, with poorer quality control) - for the consumers.

joe_the_user 5y ago
Just guessing, would another factor be that these are highly capitalized, highly leveraged, highly competitive industries, so a 10% increase in profits can multiply and where anything that increases costs must avoided at all costs because your competitors are lowering their cost constantly. Edit: I think we can see huge companies tightly locked into their paradigm because it involves so much capital and so many connections to suppliers etc.

notsureaboutpg 5y ago

> 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. Shoes have such a huge price range, from $20 to $200 for pretty similar shoes, so a $50 hike in prices for made in USA sneakers should be a slam dunk for a company with some good marketing.

perl4ever 5y ago

>I've stopped buying clothes manufactured outside the US and EU Is it really possible to make anything that isn't a product of the global economy? When something is labeled as "manufactured in the US", I always thought that was a term of art that meant final assembly. It is said that around 1/5 of the world's cotton comes from forced labor. This has been reported on by the BBC and The Guardian.

forty 5y ago
Purchase clothes made in linen ;) 75% of the world production of linen is done in France, where labor laws are fine (I'm French ;) ). More seriously we have a bunch of clothes makers here that makes cloths 100% made in France (incl material). linen is one of the trick they use. Another is recycled materials. One of them makes a jeans made out of plastic from the sea, which (sadly) we can harvest abundently here :)
- gizmondo 5y ago
  > 75% of the world production of linen is done in France That's interesting, why is it so concentrated? Is it subsidized heavily?
  - forty 5y ago
    I have no idea. Probably a mix of factors like tradition, know-how, proper soils and climate, subsidies and/or big local demand
  - rmah 5y ago
    That stat is probably only true if you look at things in a certain way -- for example, a highly restrictive definition of "linen". Pretty much every source I've seen says that the top five producers of linen fabrics are China, Italy, Ireland, Belgium and the USA -- with China dominating by far.
    - forty 5y ago
      That makes sense. Reading a bit more about it, it seems that currently, 80% of the French (raw) linen production goes to China to become fabric (sorry I'm missing some vocabulary here) :/ https://www.peclersparis.com/en/blog/will-linen-spun-in-france-become-the-new-cotton/ https://www.peclersparis.com/en/blog/will-linen-spun-in-fran...

rendall 5y ago

Can you recommend some good clothing manufacturers with ethical supply chains?

knubie 5y ago
I'm a little late here, but check out asket. Each product has a transparency report.
baybal2 5y ago
Bangladesh, if rouge socialists on the loose are better than outright communists in your world outlook.

ezconnect 5y ago

China is not about cheap labor, most manufacturer love to put up factory there because they have access to almost all raw materials for their products. That's the hardest part to move to another country all the logistics and supply chains.

spacebanana7 5y ago

Manufacturing costs can multiply through a supply chain because many retail costs are defined in percentage terms. For example, in some European countries where VAT + transaction fees get close to 25% a $10 decrease in manufacturing costs would allow a product to suffer a nearly $12.50 reduction in price whilst keeping the company’s absolute margin constant. Naturally this channel doesn’t apply to most transport and logistics costs though.

abe_m 5y ago
VAT = Value Added Tax When the input cost of something increases in the supply chain (prior to sale to consumer), the buyer doesn't pay VAT on the input. So if the input costs $10, and there is s 25% VAT, the buyer pays $12.50, but then gets a credit for the $2.50 VAT they paid. When the buyer does their thing to add value, and sell to the next person in the chain, they charge VAT on the sale prices. Say the value add is $10, and they sell for $20 + $5 VAT. When they go to pay VAT to the government their payment is only the difference between the input VAT payment, and the output VAT collected, in this case $5-$2.50=$2.50 goes to government. If the input goes up to $16, they pay $4 input VAT. If they still add $10, their sale prices is $26, with $6.50 VAT. The amount that goes to the government is $6.50-$4 = $2.50 The VAT doesn't compound.

jasode 5y ago

> The only reason to charge that same ~4x markup on the additional labor cost is to keep gross margins (as a percentage) unchanged, but that would actually increase profit (as a dollar amount). If _you_ just want to keep the same profit you'd get from offshoring, _you_ can probably increase the price by much less - $13 if demand were perfectly inelastic, somewhat more in practice. I emphasized the _"you"_ in the above quote to show that your explanation inadvertently combines separate business entities into one. The following are separate independent businesses in the chain with their own profit markups: - manufacturer e.g. Wolverine Worldwide makes and sells shoe for $25 - distributor (importer wholesale buyer) (e.g. Bonvita Aps[1]): add 100% markup or ~2x price which increases to $50 - retailer (e.g. H&M clothing retailer): buys for $50 from distributor and adds another 100% markup or ~2x price which increases it to $100 So the counterintuitive ~4x markup math happens because the separate businesses don't add a fixed flat margin but instead, a ~100% percentage margin. This multiplier effect (2x times 2x) across layers of middlemen causes the ~4x increased price difference the consumer sees. So it's not just labor cost but any component cost by the manufacturer can be multiplied by the chain. If a raw material like polyurethane goes up +50 cents, the final cost to the consumer can be increased ~4x to ~$2. This is what Wolverine Worldwide's Mike Jeppesen means in his quote "that cost quadruples after wholesale and retail markups,. This is a great example where journalism on financial topics would actually easier and clearer with spreadsheets so readers can easily see the cause & effect of input costs to final costs. Using a narrative structure and isolated quotes from vice presidents just confuses readers because it seems like "4x" got invented out of thin air. Btw, your explanation that assumes a flat fixed profit margin would be more realistic in a direct-to-consumer model. It looks like Wolverwine Worldwide does run some direct customer websites to sell Keds shoes but most retailer contract agreements require that the manufacturer never undersell the retailer. Therefore, you'd still have the ~4x increase in price but in the D2C channel, the manufacturer captures more of the profit instead of middlemen. [1] https://www.wolverine.com/US/en/international-distributors/ https://www.wolverine.com/US/en/international-distributors/

baybal2 5y ago

Salaries are not by much a do, or die determinant. Even Switzerland has a number of mass market shoes companies with 100% of manufacturing inside the country. And Swiss manual labour salaries are out of this world. The problem is Americans suck at doing business: lack of entrepreneurial spirit, creativity, wits, and grit. A universal solution of overcoming adverse conditions: "exit, and sell." I worked in OEM manufacturing my whole career, soon to be 10 years of full time work. Every time I hear we get a big new buyer, and he/she is American, I feel joy, and dread at the same time. Joy, because big American companies are as a rule well moneyed. Dread because there is so much truly unnecessary tedious work, and ceremony with them. Once upon a time, a buyer demanded our "risk management," and "crisis management plan," I dropped from a chair laughing. Any problem faced by a big company is solved by throwing consultants, and attorneys at the problem, which don't solve anything 9 out of 10 times.