Tariffs could make Vietnam a trap for shoe brands

The Cloudsurfer, a line of shoes produced by Swiss manufacturer On, has a soft surface, a thick sole and a white label on the inside. This proudly says «Swiss Engineering,» because the shoe is designed in Switzerland. But a closer look will reveal a bit more. The label also says «Made in Vietnam» – three little words that may become a big problem.

This is because Vietnam is one of the countries at the center of U.S. President Donald Trump’s tariff plans. Last Wednesday, a punitive tariff of 46% briefly went into effect on all imports from the country into the United States. Just hours later, Trump unexpectedly lifted these tariffs for 90 days, and replaced them with a universal tariff of 10%. But the threat remains. The U.S. president also kept in place the elevated duties on imports from China, which after a tit-for-tat exchange with Beijing are currently subject to tariff rates up to an astronomically high 145%.

But it is precisely these countries that are indispensable for the sporting goods industry. On, Nike, Adidas and Puma all have their sneakers and shirts produced in Southeast Asia, in huge factories with thousands of workers. In recent years, Vietnam has established itself as a key location for this industry. Many manufacturers relocated their production there after Trump initiated his first tariff dispute with China in 2019. They believed this would protect them from future disputes between the two superpowers.

Now it turns out that Vietnam, too, offers no protection against Trump’s erratic trade policy. The supposedly safe alternative could itself become a trap.

The biggest loser? An American company

Cristina Fernández is an analyst at the New York-based Telsey Advisory Group. She monitors the companies On and Nike, both of which are traded on Wall Street. Punitive tariffs, she says, would «really upset» sporting goods manufacturers’ business model.

A look at the underlying figures shows just how important Vietnam has become for the industry. About 90% of On’s shoes are produced in Vietnam, along with 60% of its clothing and accessories. At Adidas, the comparable shares are about 40% of the company’s shoes and nearly 20% of its textiles. And then there is Nike: The Oregon-based market leader manufactures about 50% of its shoes and 28% of its clothing in Vietnam.

If these shares are expanded to include production in Indonesia and China, 95% of all Nike products come from the countries that Trump is threatening with the highest tariff rates. This makes the American company a clear loser in the trade war – even though the policy is ostensibly supposed to benefit the United States’ domestic industry.

Markup of $24?

On is reacting calmly to the escalating tariffs dispute – at least outwardly. The company says it has a «good and robustly configured» supply chain that is regularly reviewed and modified as necessary. Its spokespeople declined to go into any more specifics. Neither Nike nor Adidas responded to a request for comment. However, the companies’ strategists are presumably already hard at work in the background.

Telsey Advisory Group analyst Fernández says manufacturers have three options for responding to the tariffs. First, they could negotiate price reductions with their suppliers. Second, they could pass the additional costs on to consumers by increasing the products’ end prices. Or third, they could absorb the additional costs themselves by accepting lower profit margins.

Option two, a retail price increase, is the most likely outcome, says Fernández. But this would not come overnight. «Price adjustments are complex,» she says. For many brands, prices have already been agreed with retailers, she notes. Consequently, the effects are unlikely to be seen in stores for at least six months.

The extent to which prices will actually rise depends on the effective tariff rate. No one knows where Trump will set this at the end of the 90 day pause. Moreover, many manufacturers already benefit from the so-called first-sale doctrine. This means they do not pay import duties based on the relatively expensive price paid by end consumers, but rather based on the lower price paid as the item leaves the manufacturer’s premises. This saves millions of dollars.

Nevertheless, price increases are considered a given in a trade war. Fernández offers a rule of thumb for sporting goods: One-third of the customs duty is ultimately reflected in the retail price. This aligns with an analysis carried out by Swiss banking giant UBS.

Thus, an increased tariff of 46% would correspond to a consumer price markup of around 15%. According to this calculation, an On shoe that costs $160 today would suddenly cost $184. This price boost is so substantial that the companies would have to swallow some of it themselves, Fernández says. It would be possible to pass on a 15% boost, «but no competitor does something like that voluntarily,» she notes. Especially not in an important market like the United States, where 99% of all sneakers are imported.

Another option would be to relocate production to other countries. For instance, firms could consider locations such as Turkey or Egypt, whose potential tariff rates under Trump’s plans are lower than those threatening Vietnam. However, London-based UBS analyst Robert Krankowski argues that this is unrealistic. «Moving away from Southeast Asia would be difficult,» he says. Simply building a new manufacturing site can take one to two years, he notes. And at this point, it is impossible to say what tariffs will apply at that future date, or how high they will be.

Krankowski says companies are more likely to try to optimize their existing structures. Some manufacturers are already in talks with suppliers to negotiate lower prices, he notes. Whether this succeeds will largely depend on the individual companies’ market power.

On better off than Nike

The trade war will not hit all sporting goods manufacturers equally hard. Some are currently doing surprisingly well in the market, and thus have more maneuvering room. Adidas, for example, has closed the difficult chapter surrounding Kanye West’s Yeezy shoes, and is currently benefiting from a trend toward retro designs. Its models such as the Samba and the Gazelle are selling well worldwide.

For its part, On is growing robustly. The Swiss manufacturer recently increased its annual revenues to 2.3 billion Swiss francs (about $2.8 billion), which corresponds to an increase of 30%. With a gross margin of 60%, the company is today significantly more profitable than many of its competitors. This provides room to cushion the effect of the tariffs.

The situation is different at Nike. The firm is under pressure. Business in China is weakening, even as new competitors such as On and Hoka are eating into the company’s overall market share. After a series of disappointing quarterly figures, previous CEO John Donahoe stepped down last fall. Nike did what companies often do when they are in trouble: It brought back a company veteran, in this case Elliott Hill, who served as president of the firm’s consumer division before retiring in 2020. However, Hill has also presented disappointing figures to date.

Ups and downs on the stock market

While the companies themselves have yet to settle on their future courses, investors are reacting to Trump’s every move. Following the initial announcement of the new tariffs on April 2, the shares of the sports brands lost double-digit percentages. They recovered some of this ground last Wednesday, when the pause was put in place.

Vietnam, too, has much at stake. Its exports to the United States account for 30% of the country’s gross domestic product. The government in Hanoi therefore wants to strike a trade agreement with the United States. In this regard, the aim is to remove as many trade barriers as possible, as the government said last week after a meeting in Washington. Vietnam also wants to facilitate American investment in the country and strengthen the «fight against trade fraud,» the government said in a statement.

Sporting goods manufacturers will use the next 90 days to rethink their strategies. This will also include the fundamental question of how dependence on specific production sites can be reduced over the long term.

On, for example, is experimenting with so-called LightSpray technology. With this process, a shoe would no longer be sewn abroad and shipped by a company to its destination market, but literally sprayed by a robot on site in just a few minutes. This would not only be a break from existing production chains – but also a possible way out of the next tariff dispute.

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