Perspective: Looking Forward Part 1 – How Imported Sources Became Favored Over Local

This is the first in a series of entries which will discuss the local shoe/footwear industry as seen from ground level. I will be talking a bit about the history of the problem, a few current developments, and how the crafted experiment of Black Wing can offer an alternative solution to small and micro scale manufacturers as an escape from the trap which we are in right now.

I remember having a discussion with my elders about how the local shoe industry will suffer with the advent of cheap imports 12 years ago. At that time, I was thinking more like a traditional businessman in the sense that I knew that the industry had to go to either China or Taiwan to find suitable suppliers with can produce footwear cheaper and quicker than our local sources. To understand why businessmen shifted sources from local to imported, you must first know the situation of the local shoe manufacturing industry back then (which still applies to this day actually).

The Philippine shoe industry can be divided into two groups, the retail brands and manufacturing groups. For the purpose of this entry we will be referring to the small and micro scale manufacturers which form the majority population of manufacturers. Retail brands are companies which retails products that are either produced in-house and outsourced to smaller manufacturers. They focus on marketing and brand building often selling through malls and independent retailers. Small-micro scale manufacturers focus on developing and producing various styles for sale to retail brands and small, independent retailers who use basic/generic footwear brands (i.e. Saenz Footwear or Camino Shoes). The small-micro scale manufacturers usually replicate and follow trends and compete in a price war with each other. There are other small/micro brands which operate in between these two models but it is these two groups which played a vital role in shaping the local shoe industry into what it is today. The context of this narrative would be from the late 1990s to the early 2000s where the shift towards importing instead of locally manufacturing happened.

Small – Micro Scale Manufacturers

Small/micro scale manufacturers are usually family owned and run. This has been the way since the glory days of Marikina. They would usually have a small revolving capital and cannot fund larger orders so they normally resort to cash advances. These cash advances are usually paid off after deliveries are completed with the buyers/traders getting discounts in the form of interest deductions. This led to slim margins which are enough to maintain operations but not enough to create savings which can be used to purchase more advanced machinery to improve production. This also caused our small/micro scale manufacturers to not be able to keep up with higher production requirements and improved build quality as seen with their counterparts in mainland China. The limited capacity to produce coupled with the inability to keep up with more advanced styles created an environment where the small and micro scale manufacturers continued to limp on while opportunities to modernize became even more limited due to the high risk of investment. Some small scale manufacturers with enough revolving capital though still supply to some major department stores and have continued to survive throughout the years but styling has become limited due to the available materials and cost prohibitions.

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image from http://www.interaksyon.com

Retail Brands

On the retail brand side, the advent of mall expansions required them to keep supplying inventory to each branch that opened. To maintain uniformity, style inventories should be the same across branches. This has caused a boom in supply at the expense of the retail brands. They tried to source locally but the small/micro scale manufacturers which formed the backbone of the industry were unable to answer the demand. Tight production deadlines led to purchase order cancellations since local sources are having production issues. The market also started looking for styling that is similar to the imported brands which the local manufacturers cannot provide due to the limited materials and technology available to them. The ease of having a HK or Taiwan based agent offering new styles for cheaper and faster is just too good of a deal to pass up for retail brands. The retail brands who decided to stick to local sources that time eventually were not able to keep up with the trends and soon became not big business viable which is why there has been a reduction of local brands in the lime light in recent years in terms of presence.

A Change in Market Environment

The exposure of the Filipino public to international brands has spurred a demand for cheaper variants offering the same style. This has led to price based marketing (for entry level products) which took prevalence  for the past 20 years. It didn’t help that cheaper Chinese imports were coming in without much control from the government, allegedly through undervaluation and smuggling. Thus the price war has begun. In order to remain relevant, local small/micro scale manufacturers started dropping prices or were forced to drop prices by the wholesale traders. For the last decade, value of a product was undermined in favor for cheaper price. It has only been recently that consumers are starting to shift from price point to an added value proposition in considering their purchases.

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image from http://www.interaksyon.com

From a retail brand perspective, the local manufacturing industry has not yet reached that level wherein it can offer entry level products at low price points which some added value. Generic products now are often seen as not to have any added value for the consumer since there is no face which represents the product. The lack of investment and development in the small/micro scale manufacturing has resulted in limited offerings at higher prices hence is only used to fill in orders for smaller quantities. The limited offering has resulted in the retail brands looking for other sources which can supply the unending demand of the market for something new. There is also the issue of cash advances. Most micro scale manufacturers do not have the capital to fund the purchase orders, so however good the team is, with no funding the order cannot proceed. This is why small and micro scale manufacturers turned to cash advances, offering their purchase orders as collateral for funding. The problem here is that as the margins are slimmed down, any unforeseen personal expenses can easily jeopardize the manufacturing process/schedule. This has happened many times as cash advances have been made with the orders being delivered late often resulting in cancellation or disenfranchisement on the side of the buyer (retail brand). Thus dealing with the small and micro scale manufacturers became a bigger risk than dealing with a funded manufacturing facility abroad.

The problem grows as there is less interest in developing the local small/micro scale manufacturing industry for entry level products. It is too much work for the small returns. Although my elders would say otherwise, the risk involved in investing in setting up a production line is still high here in the Philippines. It is harder for local companies to comply as compared to economic-zone multinationals who enjoy many perks while being backed by a stable parent company. The local manufacturing industry also has to cut on labor costs and scrimp on materials just to be able to compete with imported items in terms of pricing on the entry level market. This diminishes the product both on the value side and price side because even with the cost cutting, the product still cannot match imported ones in terms of style and appeal (build quality is different though). This is where I think local can still shine though, the build quality of our entry level products are better but often undermined by the low cost materials used in order to compete still.

Challenges and Opportunities

So in summary, the small/micro scale industries failed to develop their core competency during the mercantile years of the Philippines when the industry was heavily shielded by the Marcos Administration from foreign imports. This has led to the inability to supply the retail brands with the high volumes and styling required of them. The culture of cash advances to fund purchase orders became the norm and has turned off buyers from funding the small scale manufacturers. This became favorable for foreign based manufacturers as they needed a demand to supply to without even asking for cash advances to start the manufacturing process. So the local industry is operating with limited materials and skills, all of which date back to the old days where shoe making is a labor intensive process.

Smaller local brands and manufacturers limped on for the next decade, surviving on local demand without truly expanding (of course there are success stories as well, but in general a lot of small and micro manufacturers are suffering). Big local brands produce part of their inventory locally but majority is still imported. But new brands have started to come out as well, trying to fight for and revive the industry through each’s individual effort. Strong players started emerging, taking advantage of the current business trends occurring in the industry.

There has been a trend towards supporting local for the past 5-6 years which has given opportunity to revive the glory days which is now being capitalized by the smaller players in the industry. An opportunity which I hope, will not go to waste when the market opens up especially since ASEAN economic policies are already in effect this year. The spirit of Marikina lives on and it is up to us to learn from past mistakes in order not to repeat them.

*I will be talking about the trends and current concerns in the industry in the next “perspective” entry which will be out in a couple of weeks. I would like to apologize in advance if I have misinterpreted some events and would appreciate more information so please do not hesitate to contact me. I am basing these writings on what I have experienced through the years that I have been in the industry growing up with owners of small/micro scale manufacturing operations.*

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