Does New Balance Have An American Soul?

For as long as he can remember, James S. Davis has competed against Philip H. Knight. For just as long, the two sneaker makers have listened to entirely different muses. Both make fine running shoes, there's no doubt about that. But Davis, chairman of New Balance Athletic Shoe Inc., makes most of those he sells in the U.S. in Massachusetts and Maine. Knight, the chairman of giant Nike Inc., has his made for him in Asia.

One needn't look far to evaluate the relative economic merits of the two visions: Knight's company is a $4 billion world-beater that has made him a billionaire twice over. New Balance--though it has surely made Davis rich--generates U.S. sales of about $135 million and worldwide revenue of $300 million, much of it via licensees. "We don't want to be Nike," Davis says plainly. "We have a different way of doing things."

Not different enough for the Federal Trade Commission. In early September, the FTC cracked down on tiny New Balance and Hyde Athletic Industries Inc., the maker of Saucony shoes, for what the feds insist are deceptive "Made in the USA" claims. The problem is imported components. While Davis' Boston-based company will, in fact, sew and glue the bulk of its 1994 U.S. production of 2.5 million pairs, it imports the soles for most of its shoes from China, as well as some pre-sewn "uppers." Hyde imports both its soles and uppers.

WIDE IMPACT. Consequently, the agency ordered both companies to stop using ads or labels that imply their shoes are made wholly in the states. Hyde settled without admitting guilt. But Davis is headed for court. He complains that nobody makes the right soles in the U.S. and they are too expensive to make himself. "This is ludicrous," he says. "We've done everything we can to manufacture here, and if some bureaucrat who has never met a payroll wants to sit back and say we can't put `Made in the USA' on our shoes, we're gonna fight it."

The two cases crack wide open a seemingly simple issue. Experts say they will set precedents that could affect U.S. manufacturers of goods ranging from personal computers to automobiles. "Everybody in almost every industry has to look at those cases and assume that the FTC would treat them the same way," says former FTC Commissioner Deborah K. Owen. Before her term expired this year, Owen voted against bringing the cases.

The FTC hasn't filed a similar "Made in America" complaint since the 1960s, and some speculate that its purpose this time is to build a fresher case history with which to go after bigger fish. Separate labeling laws exist for apparel and textile companies. But for anyone else, the rule as stated in the Hyde and New Balance cases is that a product may be labeled and advertised as made in the USA only if "all, or virtually all," of the labor and components are of U.S. origin.

NORTHERN SLEIGHT. If the agency gets tough, that could mean trouble for companies far and wide. Take, for instance, Converse Inc., whose U.S.-made All-Stars are assembled in North Carolina and Texas from Mexican-sewn uppers. Or consider Dell Computer Corp., which touts as "Made in the USA" the PCs it assembles at a plant in Austin, Tex.--even though the disk drives, motherboards, and monitors are made in Asia. General Motors Corp., meanwhile, advertises that its Chevrolet Camaro is "from the country that brought you rock-and-roll." Trouble is, Camaros are built in Ste. Therese, Quebec.

Is the labeling issue really so important? After all, consumers would likely keep buying All-Stars even without a "Made in the USA" label. The question is, would they buy fewer pairs? Several studies conducted by retailers indicate that some U.S. consumers truly do respond to "Made in the USA" claims. And to a manufacturer battling low-cost imports, those sales can be crucial.

The FTC maintains that its only concern is that consumers aren't deceived. Says C. Steven Baker, head of the agency's Chicago office, somewhat blithely: "All they gotta do is tell the truth." Unfortunately, companies already face a thicket of conflicting domestic-content regulation--from rules imposed by the U.S. Customs Service to standards defined by NAFTA. Given the choices, whose truth prevails?

In its settlement, Hyde accepted as a compromise a label reading: "Made in the USA from domestic and imported components." But Davis insists that's unworkable. What, for instance, would "domestic components" mean to a customer who bought the shoe in Canada? A company could label separately for Canadian exports, but imagine the inventory and production inefficiencies.

While most people agree that the integrity of a "Made in the USA" label is important, many argue that an increasingly global economy makes 100% U.S. content unreachable. "If you applied the FTC standard to our industry, there's no such thing as an American car," says Robert J. Wade, a spokesman for Toyota Motor Sales USA Inc.

The two biggest footwear lobbies suggest that the FTC adopt a blanket 51% rule, meaning that any product with 51% or more domestic content be allowed to carry a "Made in the USA" label. But percentages are difficult. Barry J. Cutler, former head of the FTC's Bureau of Consumer Protection, asks: "What does 51% of jobs mean? Is it high-tech jobs or lower-value assembly jobs that are retained? If it's 51% of materials, what's the incentive to go for more? Will that frustrate manufacturing innovation?"

One thing seems clear: New Balance is trying as hard as it can. According to the company, 70% of its U.S. production has just an imported sole. The remaining 30% has both an imported pre-sewn upper and a sole. When just the sole is imported, 75% of the cost of the shoe is derived from U.S. content--far above the 51% pushed by the shoe lobbies.

NO PLUGS. Since experiencing sluggish sales in 1991, Davis has completely revamped his factories, taking them from assembly lines to a team structure. He has also reinvigorated product development, while integrating design with manufacturing so products are easier to make. Davis plans to spend $25 million to expand capacity. He's also working with scientists to develop technology that will allow New Balance to make running-shoe soles itself. "That's maybe two years away," he says.

Gross margins remain some 10 points below Nike's. But Davis makes do by continuously improving productivity and mixing in foreign uppers at the low end of the product line. Also, he eschews spending tens of millions on athlete endorsements. "We could close our plants tomorrow and go over to China and make a hell of a lot more money," Davis says. "But I don't believe in it."

In the end, the best outcome would probably be for the FTC to submit the issue to a formal rule-making process. "There are a lot of competing interests here, and all are compelling," says Owen, the former commissioner. She advocates public hearings. Jim Davis, for one, would have plenty to talk about.