Taiwan’s Hidden Shoe Giant
If you want to watch the video, it is below:
Sometimes you make a video and you think it’s beautiful but it doesn’t do too well. This is one of those videos. I have been interested in this company ever since someone pointed them out to me during a visit in Taichung. And to learn that there’s a company out there that’s basically Nike’s Foxconn, that’s so interesting.
Many of the people who know me personally reached out to tell me that they liked this video a lot, and I appreciate that. It didn’t so well, but I think people should take a second look at it. Because we all wear shoes.
People love their shoes and sneakers.
Nike is a $250 billion company. Athletes make hundreds of millions endorsing their own athletic shoes.
And vintage Jordan 1s are trading for thousands of dollars on sites like StockX.
You also might vaguely know that the big shoe brands outsource their manufacturing to third parties. And that the shoes are made by low-wage labor overseas. "Somewhere in Asia," they usually say.
But we don't hear all that much about the actual companies running those production lines. As it turns out, the biggest branded maker of athletic and casual footwear comes from Taiwan - making 300 million pairs each year.
In 1969, a dude named Cai Yu-yuan started a company in the town of Fuxing, Changhua county. This little enterprise was called Pou Chen Group or PCC (寶成工業). It started out as a small factory with ten people, producing traditionally woven footwear for its local surroundings.
At this time, Japanese makers dominated the American market, providing nearly 48 million pairs of shoes each year or 80% share.
South Korea and Taiwan would eventually come to win the shoe export market, overthrowing the Japanese. This shoe dominance began with some technological savvy in plastics.
One Word: Plastics
In the 1950s, the newly established KMT regime seized an oil refinery complex in Kaohsiung left behind by the Japanese. Armed with American aid money, the government looked to refine raw petroleum into more valuable items. The industry started producing plastics.
But what to do with these plastics? Manufacturers first experimented with weaving plastic fibers with the goal of eventually making straw hats.
But soon after that these manufacturers used those same techniques to weave the uppers of shoes. They then combined these uppers with cheap plastic insoles to make a fully plastic shoe.
Pou Chen had been one of these companies, switching their production from woven shoes to plastic shoes. Most of what they made then was for the domestic market.
Then in the mid-1960s, Japanese shoe manufacturers experienced labor shortages. A few shoe companies from the Kobe and Himeji areas moved their factories to Taichung. Taiwanese companies exported to Japan for a little while.
This small success hinted at greater things ahead. So in the late 1960s, the industry established its first trade association - the Taiwanese Plastic Shoe Exporters’ Association, or TPSEA - and redirected their export efforts towards the world's major market: the United States.
Taichung soon became the heart of the Taiwanese shoe industry. The first American company to start building factories in East Asia for import to the United States was E.S. Original.
Their president Ellis Safdeye said that he first went to Taiwan to find someone who can make a sandal for him. He took a long taxi to a garage and he says:
> I gave the man an order for 50 thousand dozen - in those days you bought in dozens. They built the factory for me. The sandals were sold to J.C. Penney for 62.5 cents a pair, to retail for US$ 1. The factory grew.
Between 1968 and 1973, Taiwan exported 200 million pairs of shoes and the number of footwear factories increased ten times over. Shoe exports doubled from 1969 to 1970 alone.
In 1973, Taiwan replaced Italy as the United States’ leading country of import for shoes. The export boom made Taiwan the world's largest footwear manufacturer.
The Costs of Cheap Imports
Taiwan's manufacturing gain would be the United States' manufacturing loss. Coming out of World War II, the US made all of its shoes within its own borders. Employment and production briefly collapsed in the wake of the war, but surged back as strong as ever.
By the early 1960s, the American footwear industry employed a quarter of a million Americans. Over 700 different companies produced 600 million pairs of shoes a year.
The East Asian cheap import wave, which began in 1966, would start to clean out the American industry. Americans started losing their jobs. This led to pressure on the politicians to raise the import barriers and protect the American shoe industry.
Thus in 1977, Taiwan reluctantly agreed to conditions set by the Americans and froze its export production at 1976 levels, with 3% growth rates built in. Presumably, this would give the American shoe industry some cover. But rather, the opposite happened.
By 1978, PCC had grown to be about 10,000 employees large, with facilities in two cities. The company at this time produced boots, shoe parts, and women's shoes.
Suddenly forced to limit how many shoes they could make, PCC and the rest of the Taiwan footwear industry looked to move upmarket. They decided to make other types of shoes, with higher-value add. In doing this, they invaded and cleared out much of what remained of the American shoe manufacturing industry.
In PCC's case, they decided to make athletic footwear. Why athletic shoes? Two reasons:
You can make sports shoes for a lot longer as compared to women's shoes, which had to be retooled each year to keep up with changing fashions.
And second, sports shoes sold for $5 per unit, far more than what they could get for women's shoes, which cost just $2-3 per unit due to intense competition.
The Athletic Shoe Industry
Nike and Adidas dominate the athletic footwear market. The former is most famous for pioneering the use of athlete endorsements to sell high-end athletic shoes. Back in 1984, Nike signed NBA superstar Michael Jordan to a shoe deal, stealing him away from Adidas.
Today, the Jordan Brand anchors Nike's 85% market share in the performance basketball shoe market, and the company gives the subsidiary its own line item in the annual report.
Jordan brand made $4.7 billion revenue in fiscal year 2021. It is Nike's fastest growing segment, growing over 30% year over year. The guy has not played in over 15 years, but his name still sells stuff.
Other sports stars and even non-sports personalities like Kanye West have joined in on the fun - issuing their own line of shoes. Notably, Kanye's Yeezy shoe line.
Behind all the slick and beautiful branding, producing the actual footwear remains a very labor intensive process. Over the years, Western footwear companies have moved upstream out of that complex, dirty work to occupy the most profitable role of the whole value chain. Thus, they accrue most of the industry's profits.
When PCC bought their equipment for their sports shoe line, they had no customers. It was not until a year later in 1979 that the company managed to strike a deal with Adidas to serve as one of their original equipment manufacturers or OEMs.
Designing an Athletic Shoe Industry
In 1971, Adidas first started looking for Asian OEM companies to augment their German production line. Adidas originally thought to look in India, but a Taiwanese sourcing agent in Germany happened to know Adi Dassler's son-in-law and invited them to try Taiwan.
Brands and OEMs work closely together to design and produce their shoes. A customer like Adidas will first draw and approve some designs - usually in conjunction with the athlete or some other endorsement figure. The OEM then evaluates the feasibility and cost of the production run for the design.
This process involves very close collaboration between the two companies - requiring private trade secrets to be shared. In these early days, Adidas transferred a great deal of its advanced manufacturing knowledge and expertise to its Taiwanese OEMs. This greatly boosted the industry.
Later in the decade, Phil Knight of Nike sought to bypass his Japanese suppliers and source directly from Taiwan. He partnered with a former employee of the Mitsubishi Trading Company's footwear department and persuaded their factories to make shoes for him.
Athletic Shoe Production
After the shoe is designed, it then goes into full production. Athletic shoes are some of the most difficult and varied products to make in the entire garment industry. These are 3D items that have to be high quality and comfortable.
An athletic shoe has two major components: A "lasted upper" and the sole.
The lasted "upper" is in turn made up of an insole made of paperboard and fabric, and a leather upper.
These two bits are fitted together into a comfortable foot-shape in a critical, highly skilled stage called "lasting".
Here, you attach the insole to a foot-shaped cast called a "last" and then stitch the leather upper around it.
The sole is comprised of the outsole and the midsole glued together. The outsole is made of rubber, and the midsole is made of foams like EVA or PU foams.
The shoe is finished by gluing the lasted upper and the sole together in a delicate, dexterous step.
The whole thing is still very labor intensive. Manual processes include material cutting, stitching, lasting, finishing, and inspection. Producing a single shoe can have up to 200 separate steps and involves over 120 pairs of hands. People knit sweaters for fun. Nobody makes a running shoe for fun.
PCC Group acquired the OEM business of other companies including Nike and expanded very rapidly. Athletic shoe production requires close coordination between various disparate industries - leather, plastic, textile, cementing, chemical, paper, so on - in order to create this single, very ordinary-seeming product: A shoe.
In order to feed its massive supply chain, PCC expanded vertically. The company expanded into a variety of related industries, at first establishing joint ventures and eventually wholly owned subsidiaries.
For instance in the 1990s, Nike consumers wanted more environmentally friendly shoeboxes. PCC started a joint venture with Cheng Loong Corporation, one of the world's biggest paper companies, so to make boxes of acceptable quality at the necessary prices and volume.
Shortly thereafter, PCC started joint ventures with other companies in Taiwan's industry. The company started producing its own resins, glues, and shoe parts. They even founded their own logistics company to manage and orchestrate production.
These joint ventures and subsidiaries run their own P&L. And they are free to deal with outsiders if they cannot find what they want. The individual brand managers compete with one another for a brand's business.
In 1996, PCC transferred ownership of its shoe manufacturing business along with its 67 supply subsidiaries into a Hong Kong listed company called Yue Yuen Industrial Holdings or YY.
This allowed the parent company to continue expanding into things like general sportswear, retail, hotels, and dentures of all things. This has also allowed the Taiwanese parent company to somewhat distance itself from the various labor issues involved with footwear manufacture.
In the late 1980s, Taiwanese labor started to get expensive. People's lifestyles were improving, the government had passed new environmental regulations, and the Taiwan Dollar had appreciated against the US Dollar. These higher labor costs started cutting into the already-tight margins of manufacturers like PCC.
The thing to do would be to either start automating athletic shoe production - replacing labor with capital - or go abroad in search of cheaper labor. But since the athletic shoe-making process remains extremely resistant to automation, the companies chose to go abroad.
In 1988, encouraged by warming relations between the PRC and the ROC, PCC set up their first production facility in Zhuhai City, Guangdong. They’ve since expanded from there. Today most athletic shoes are made in China, but they also are being made in Indonesia, Vietnam, Cambodia, and Myanmar.
These people work in massive facilities with 15-20,000 employees. Like with Foxconn, these companies provide dormitory style living.
Workers are made to be more productive with a piece-rate quota system, lots of overtime, and a rather ... authoritarian style of enforcement.
Workers have often tried to organize or strike in a bid to gain better pay or working conditions. Member states have often responded with repression and uncivil treatment. These have often made the news from time to time.
In 2014, 40,000 workers at a YY factory in Dongguan stopped working. Workers had found out that local government employees were pocketing social insurance contributions from the company.
With many of them aging and the factory facing wage pressures of its own from yet cheaper places like Vietnam, they struck. Perhaps ironically, the Communist Party of China is not very friendly to large spontaneous labor movements like this one.
Police were brought in to quell the crowds, and the national government directly intervened in the negotiations between YY management, the local government, and the strikers.
YY eventually raised monthly wages by $36 (230 RMB), reimbursed the missing social insurance funds, and added some more benefits.
In total, the strike cost the company $60 million. Production shifted from China to other factories abroad.
A few strikers remained unsatisfied and continued striking, but the police eventually repressed any further activity.
YY experienced another big strike in Vietnam two years later in 2016. The company has since then been shuffling production between its various factories in order to adjust to labor shortages, the unrest in Myanmar, and of course, the pandemic.
There are a few other athletic shoe manufacturers in Taiwan. Probably the most prominent large one is Feng Tay, a big supplier for Nike. The majority of the big OEMs in footwear mostly hail from Taiwan and South Korea - the Foxconns of shoes.
It is interesting to chart these conglomerates' journeys from simple factories to design service providers to massive vertically integrated supply chains.
Today, a new athletic shoe - an extremely complicated and well-made object - can get conceptualized, designed, and mass produced in the span of a few months. We should respect the work that went into making that possible ... and the costs we pay to have it.