Adidas Follows Nike's Production Shift Out of China

German sportswear brand Adidas is following the trend set by Nike and other international clothing brands by making plans to close its only production line in China and move it to southeast Asia.

The Adidas factory in Suzhou in eastern China’s Jiangsu province has stopped hiring but has not yet learned when operations will cease. Adidas itself has declined to comment on its impending closure, according to Shanghai’s First Financial Daily. Adidas currently gets about 10% of its global sales from Greater China. Its China headquarters is located in Shanghai with branch offices in Beijing and Guangzhou.

Adidas appears determined not to open itself up to negative publicity by labor activists. Last January Adidas had been targeted by activists for turning a blind eye to the workers of a manufacturing subcontractor who had been left unpaid after the shop closed down. Recent reports have surfaced to suggest that Adidas workers will receive much higher severance pay than the national standard.

Adidas has enjoyed rapid sales and profit growth in recent years. In the first quarter of this year global revenues increased 14%, to $4.7 billion, with sales in Greater China surging 26% — the fastest among all its regions — to $470 million. Adidas opened 1,175 stores and 6,700 outlets in China last year, with plans to boost the number of stores in Greater China to 2,500 by 2015.

Sales in North America and Europe grew much more slowly at, respectively, 11% and 7% on a currency-neutral basis.

The firm expects to achieve 10% growth globally this year thanks in part to the London Olympics. Adidas group revenues of $16.33 billion in 2011 made it the world’s second largest sportswear maker after Nike which posted annual revenues of $20.63 billion last year. Adidas had posted 17% growth in 2011.

But Adidas has seen its gross profit margins slip 0.7% to 47.7% in the first quarter of this year due mostly to rising labor costs in its Suzhou factory.

In fiscal 2010 Adidas’ largest China subcontractor, Yue Yuen Industrial Holdings, expanded its productions lines in Vietnam and Indonesia by 54% and 124% while growing its China operations by 41%. Earlier, Adidas CEO Herbert Hainer had said he hopes to move parts of Adidas production out of China to Laos, Cambodia and Vietnam.

Adidas is in the same shoes as most manufacturers in China. Many have been moving production from coastal China to the country’s hinterland in keeping with the government’s efforts to shift the coastal region upmarket into higher value-added industries like tech, biotech and software. Others have even moved to Southeast Asia. Among US and European firms Vietnam and Bangladesh have become increasingly popular as wages have risen by about a third over the past two years. The rise has been costlier for foreign firms due to an appreciating yuan.