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If you listen to my wife, we would still be living in El Salvador, despite the fact that we worked there over forty years ago. At that time I was managing the tannery for the shoe company ADOC. We left because the beginnings of the long civil war were starting to make life both difficult and dangerous for all the family, as curfews, bombs and kidnappings made their impact on everyday life.
El Salvador is a great place, with fabulous people who deserved a much better 20th century. Even today, with the war long over, life is far from perfect as drugs and gangs combine to make it a dangerous place should you stray into the wrong areas. Just as we arrived in El Salvador via a leather industry network that involved close relationships between an Italian tanning group, an English chemical company and the Central American footwear business that was itself closely linked to the US footwear businesses of Genesco and Wolverine, the overlapping of the drug and gang business in El Salvador was a direct consequence of what can be best described using the ARA theory of networks.
This looks at Actors, Resources and Activities and recognises that if events happen in different parts of a network, such as new technology, currency depreciation or mergers, the implications will inevitably spread throughout the network. For drugs, the USA decided that the best way to stop the supply of drugs from Colombia to the US was to disrupt the supply routes across the Caribbean via small planes and fast powerboats. The drug dealers then began to explore an overland route through Central America and found in El Salvador (and elsewhere) large numbers of unemployed young men with too many guns left over from civil wars. When they became supplemented by Salvadoran gang members, deported from the US cities like Los Angeles, linking up and escalation was inevitable.
Despite the domestic turmoil, ADOC has done remarkably well. Most of its international customers have stayed faithful throughout the worst decades and been pleased with the dedicated way in which the company and its workforce have continued to perform. Over the years its linkages and ties with both the leather-making and the footwear networks have strengthened and expanded.
Network clustering reduces costs by 16%
Footwear networks are remarkably complex, since in most shoe types there are many different components, as well as threads, adhesives, lacing and finishing chemicals. So much so, that when the current Director of Trade and Manufacturing Policy in the US, Peter Navarro, wrote his 2006 paper on the “economics of the China Price”, he said that network clustering alone in south China lead to a 10% to 16% reduction in fixed and manufacturing costs. The study was based on case analysis in the air conditioning and tanning industries.
This suggests a huge benefit in costs in having a strong local area supply network and explains why many smaller emerging markets have struggled to achieve a breakthrough. Even so, it ignores the opportunities that arise in terms of creativity, which in industries like leather and footwear is worth many more % points. Innovation is much easier and infinitely faster when the various elements are clustered closely. So it was no surprise seeing Wolverine Global Operations President Mike Jeppesen quoted in the international press saying “There’s a reason we are in China today, that’s because … all the raw material suppliers and support functions today are residing in China”. In an incredibly competitive market place, where consumer prices have been largely unchanged for a decade, the efficiencies offered by Chinese infrastructure, network and cluster effects, along with continuous factory upgrading have been compelling.
Volumes of footwear exported to the US have nevertheless been dropping as Chinese costs have risen, but despite this, China has retained more than was thought possible a few years ago. The volumes big production lines have been producing in China are formidable, and difficult to replicate elsewhere. Forcing the industry to move quickly through punitive tariffs will disrupt long established relationships and create costs for American consumers in a basic category.
Perhaps it might lead to more footwear production back in El Salvador and help occupy all those unemployed young people. Although, that prospect has not been helped by the United States cutting off aid to El Salvador, Guatemala and Honduras, known collectively as the “Northern Triangle, after a Presidential Instruction in March this year.
Globalisation used to be easy, and you could take your business anywhere in the confidence that barriers to trade were steadily continuing to fall. Right now it is a minefield.
Dr Mike Redwood
May 29, 2019
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