There is perhaps no more frequently asked question in the global shoe business than ‘What’s the next China?’ The short answer is ‘The next China is China.’

This is so even after a decade of intense global scrutiny by the world’s best shoe sourcing executives.

Nevertheless, the ‘scramble’ to find suitable alternative sourcing options for China has produced a good pool of substitutes in some important niches. The pros and cons of the leading alternative sourcing countries are the subject of this article.

The biggest issues are costs, worker availability and investment in shoe making infrastructure.

As the following demonstrates, neither any one alternative country nor any combination of other sources will, anytime in the foreseeable future, draw the massive infrastructure investment needed to supplant China.

While cost and labor availability issues will continue to plague shoe production in China, they will not derail its dominance as new sourcing options open up in China and existing infrastructure is modified to be more efficient.

Of course a drastic run up in the value of the China Yuan versus the US dollar could make China production so expensive as to make sourcing companies desperate enough to try more producers in other countries.

A shift to a much stronger currency in China does not seem too likely given the devastating effect it would have on millions of jobs in China’s vast export sectors. China’s leaders are much attuned to the adverse consequences that such a shift would have on social stability.

Global Sourcing Leader-- China. In 2012 China accounted for about two thirds of global shoe production among the largest producers and about the same proportion of global shoe exports. With shoe production estimated at some 13.5 billion pair and footwear exports nearly 10.1 billion pair, China dwarfs all other producers. In fact it has more production and exports than the entire group of other major shoe producers in the world, as the table below demonstrates.

In 2013, it is estimated that China’s shoe exports will increase by some 4.0% in units and nearly 7.0% in value, the largest export gain in recent years.

This impressive export performance comes despite the quadrupling of factory worker costs to an average of about $2.00 per hour from less than $0.50 per hour in 2005. The run up is due to

1. large and relentless government mandated minimum wage increases,

2. stricter enforcement of overtime and social cost payments,

3. chronic and systemic labor shortages,

4. environmental law implementation,

5. inflation in food, fuel, electricity, water, and perhaps most important

6. a China currency that is nearly 30% stronger today against the dollar than it was in 2005.

Many producers are working to improve productivity in their existing investments. Others have added living space for couples, improved dormitory/meals conditions, expanded educational opportunities, etc., to help entice migrant workers to remain with the company longer.

Increasingly though, entrepreneurs are recognizing the limits of improving worker labor issues at existing facilities in the Pearl River Delta. They are establishing either factory and/or stitching facilities inland in China where workers are still available and costs are lower than those in the Pearl River Delta area. Key inland destinations include (1) Jiangdu, Danyang, and Suzhou in Jiangsu, (2) Zhoukou in Henan, (3) Putian in Fujian, among many others in provinces such as Anhui, Jiangxi and Hunan.

China’s road and rail infrastructure has made moving materials and executives (by the high speed rail system) all over China easy and efficient, opening many new and profitable options for keeping shoe production in China.

Indeed, many overseas buyers have moved sourcing programs to well established China shoemaking clusters that have not traditionally been used by such buyers. These areas include (1) Wenzhou and Wenling in Zhejiang, (2) Jinjiang and Putian in Fujian, and (3) Chengdu in Sichuan, among others.

China’s dominance is perhaps best seen in its huge presence in the US shoe market. In 2013 China accounted for some 82% by volume of shoes imported into the US, about the same level it enjoyed a decade ago, but less than its all-time high of 89% of shoe imports it achieved before the Great Recession in 2008. (China has an import volume share in the EU of about 76%, but in Europe imports only account for 85% of the market, while they are 99% of the US market.)

The decline in China’s share of the US market has been matched by increases from several other countries. As is detailed below, much of the shift out of China has been in sports shoes and in outdoor items, with additional, but far lesser amounts, in low price plastic and leather women’s products.

The shifting has largely been due to the ample supply of workers and to significantly lower worker costs in other producing countries.

Workers and their Cost Matter. What is most striking about the results, reproduced below, of the GFP survey of worker costs among the main shoe producing and exporting countries around the world is the fact that China today has the highest worker cost of any major producer in Asia.

Those countries with hourly worker cost less than half of China’s include Ethiopia, Bangladesh, Cambodia, Vietnam, and India. The strengths and challenges of each are discussed below in order of their worker cost attractiveness.

Cost per hour includes all costs to the factory including wages, social benefits, bonuses, food, lodging, etc. The exclusive data base is information provided to GFP by shoe factories from all over the world.

Ethiopia. At present, there are at least three China investments in export shoe production including the major one by Huajian, the large Dongguan-based producer ofbetter ladies shoes. This group now has some 3,000 workers in Ethiopia in four factories and is selling its output to leading customers in the US, which recorded shoe imports of more than 1.0 million pair from Ethiopia in 2013, up by more than 200% over 2012.

Huajian has an ongoing intensive training program for groups of select Ethiopian workers at its China factory and its efforts at bridging the cultural divide are showing marked progress. (Given the linguistic and cultural distance between Ethiopians unaccustomed to disciplined factory work and the quality expectations of China producers, investment in worker acculturation is imperative.)

The outlook for more foreign investment is optimistic, and the prospect for shoe production inmaterials other than the local leather, especially textile, is promising.

In addition to its ample and super low cost labor force (about $0.32 per hour), Ethiopia has a government that is supportive of foreign investment in labor intensive projects with pro-investment regulations and a new industrial park. Its currency is stable and favorable to the dollar, and it enjoys duty free treatment on imports into the US.

The United Nations has sponsored leather industry projects there for decades and the result is a capable tanning sector, producing world quality sheep and goat leathers suitable for footwear. Regrettably, the dozen or so local shoe producers have not been up to sharing much in the export shoe business, and sector expansion seems to be solely dependent on outside investment.

Long lead times and logistics remain a challenge with lengthy shipping periods and costly rates, but determined innovations by customers are narrowing the gap with China, and overtime, as volumes increase, they may be much in line with Asian cycles/costs in the not too distant future.

Most of the export factories for shoes and garments (the exports of which topped $100 million in 2012) are located in the area of the nation’s capital, Addis Ababa, a fairly modern city of some 4.2 million inhabitants, with a world class international airport.

The East African nation, with some 92 million inhabitants, is poor by any standard with GDP per capita less than $1,000 and with unemployment officially at near 20%. Located in the northeast of Africa, the nation is surrounded by Somalia, Kenya, Sudan, South Sudan and Eritrea with its tiny west coast neighbor, Djibouti, offering its only ocean port outlet. Despite the political turmoil among its neighbors, Ethiopia has a good record of stability and is a prime destination of investment from China, whose government is eager to develop its natural resources.

Bangladesh. Much in the news lately for its labor strife in its huge export garment business, this South Asian country located east of India, has had a good sized foreign invested shoe sector for some time. Powerhouse export producers including Pou Chen, Stella International, and Golden Chang, have invested in the country, principally to manufacture outdoor product, utilizing the local heavy leathers, for customers like Timberland, Wolverine World Wide, etc.

The largest shoe producer is YoungOne, a South Korean sport shoe and garment enterprise, with a 30,000 worker footwear facility that makes some 100,000 pair per day. The group has numerous other plants in the country that make shoes and garments for export.

The US recorded shoe imports from Bangladesh in 2012 of 1.4 million pair with a value of $26.7 million or about $19.00 per pair. Growth in volume to the US was modest in 2013 at about 6%. (Bangladesh is a bigger supplier to the EU with 14.9 million pair shipped in 2012, but with a lower priced product mix with an average FOB at $11.08.)

With an ample supply of young workers and an hourly worker cost of only $0.44 per hour, the country has obvious advantages. The government is supportive of foreign investment offering tax advantages and other investment incentives. (Government implementeda significant minimum wage increasein December 2013. This is an attempt to placate unions and demonstrators, but it will move up hourly costs, possibly threatening the country’s appeal to some foreign buyers.)

While logistics are workable and not exorbitant, lead times are at least a month longer than China and inputs, except the local leather, are largely imported from China.

Bangladesh is a huge country with some 155.0 million inhabitants, nearly 15.0 million of which reside in the capital of Dhaka, perhaps the most densely populated locale on the planet, and it is one of the poorest countries with a GDP per capita of less than $2,000. While unemployment is officially only 5%, it must be noted that Dhaka has some 400,000 rickshaws, whose human haulers cannot make very much.

Bangladesh’s future as a destination for foreign shoe production investment is uncertain owing to its political instability, labor unrest (strikes are a way of life) and its largely ineffectual governments, local and national, neither of which has found a formula for keeping theirconstituents from protesting in the streets.

Still, the contortions that EU and US garment importers have gone through to address the social responsibility issues arising from deadly fires and building collapses make clear that Bangladesh is likely to be an export garment hub going forward. In light of the garment commitment, it is not inconceivable that some additional shoe production investment could tag along – provided the labor and safety issues are resolved satisfactorily, which is by no means a certainty at this time.

Cambodia. Among small scaleAsian producers, none has taken advantage of the cost gap with China more than Vietnam’s neighbor to the west, Cambodia. Its US shoe imports are up nearly 75% in volume, and it is on track to send more than 6.0 million pair to the US in 2013. Most of the product is sports types or casuals with average FOB prices between $9.00 and $13.00. We know of only one large investment for production of low cost product for the US mass market.

Nearly all the factories are China based investments and most groups have facilities in both countries. There are about 45 such factories in Cambodia. Most of these were launched to avoid the anti-dumping orders against Vietnam and China that were put in place 2006-2011 by the European Union (all of the orders are now permanently ended). Much of the production is still destined for customers in the EU which recorded shoe imports from Cambodia of some 29.0 million pair in 2012 with an average FOB value of $13.55.

Because nearly all shoe making inputs must be imported either from China or Vietnam, lead times are often several weeks longer than China.

While the currency is stable and worker cost per hour is low ($0.61), there is officially no unemployment in the country of about 15.0 million. It is therefore a challenge sometimes to secure all the workers that shoe factories need. Moreover, the labor unions representing the workers are quite active, pressing for higher wages, shorter hours and in some cases air conditioned dormitories.

With the labor supply situation already tight, the prospect for new and large scale investment in the shoe sector is questionabledespite having one of the lowest annual per capita incomes in the world at about $2,100. Most production is within short driving range of the capital, Phnom Penh, a fairly modern city of some 1.4 million.

With global shoe exports at about 40.0 million pair currently, the outlook for large increases is doubtful, but increased output from the current group of factories is anticipated.

Vietnam. This is the country that has captured the largest quantity of production from China. The vast bulk of it has been in branded athletic items, although there have been some recent increases in low price models for mass distribution in the US and EU, as well as some in better women’s product.

With shoe exports topping 600 million pair in 2012, Vietnam is the world’s second largest footwear exporter behind China.

Beginning from virtually no shoe exports in the mid-1990s, Vietnam has drawn the most foreign shoe investment except China, and today is the world’s fourth largest shoe producer, turning out some 725 million pair in 2012 with nearly 90% exported.

The foreign investment originally came about in response to the restrictive quotas that the EU imposed on shoe imports from China 1994-2004.

US imports from Vietnam have soared during the last five years, doubling to 191 million pair in 2012 from 97 million pair in 2007. Sales to the EU have remained around 200 million pair per year during this period, reflecting the earlier and broader scope of supply provided to Europe.

Given its low worker costs ($0.80 per hour) and its large population, over 90 million inhabitants, Vietnam would seem to be the best alternative to China for the shoe industry.

Unfortunately, many other industries including high tech have the same idea, and there is presently stiff competition for workers especially in the nine million inhabitant Ho Chi Min City (HCMC) area in the south where most factories are located. Not surprisingly, there is also a high premium on land in the HCMC area and factory investment is, as a result, quite expensive. Also, the fact that there is virtually no unemployment in the country makes it pretty clear that there will be no large scale relocation of new shoe production from China to Vietnam.

The one major shoe manufacturing investment in recent years was many hours away from HCMC, quite literally in the jungle area south and west of the city (an area that was hotly contested during the Vietnam War in the 1960s, as evidenced by the North Vietnam cemeteries in the region). This appears to be a ‘one of’ as the project seems to have used up just about all of the available labor in the surrounding villages.

Much like Cambodia, there does not appear to be enough available workers or enough reasonably priced land near to where workers live (unlike China, dormitories are not used in Vietnam) to support large scale new shoe making capacity.

The huge shoe making infrastructure already in place will, no doubt, be leveraged to maximum capacity and exports of Vietnam’s core products, branded athletic shoes especially, will likely continue to grow smartly in the near term.

India. As the world’s second largest producer of shoes, India seems a natural venue for replacing some of China’s shoe exports, but with only 115 million pair in annual shoe exports, the country is well out of the list of top global shoe exporters. According to industry reports, there does not seem to have been any marked increase in its export performance in recent years.

Officially, India produces some 2.1 billion pair each year, but it must be noted that a large portion(as much as half or more) is made in small workshops for local consumption and is not of the type/quality suitable for export.

With its low worker cost ($0.85 per hour), its weak currency against the dollar, its vast population of some 1.2 billion inhabitants, and its low per capita income(below $3,000), India’s lack of export sales must be explained by factors other than cost and worker availability. Several key ones follow.

1. India production is in leather product dominated by men’s and sandals, thus, leaving it out of the vast export businesses in other items.

2. Foreign investors have been few in the shoe sector in part due to India’s inflexible labor laws on hiring/firing, although there have been two fairly successful pilot programs in the branded export sport shoe business.

3. India has two major shoe producing clusters – one in Chennai on the southeast coast and the other in Agra in the north central – separated by the length of the entire country, a situation that adds costs and challenges to buyers trying to manage production.

Still, India has a robust export sector with most of its product going to the EU, whose smaller retail groups and smaller brands work more comfortably with smaller suppliers (a reverse of China where mega factories service mega retailers and brands, principally from the US). India’s exports to the EU have hovered around 70 million pair annually in the $1.0 billion range, but there has been no growth in recent years (likely due to the dreadful shoe retail climate in Europe, which has been in recession since the financial crisis of 2008/9).

While India has a much smaller market in the US, its place has expanded in recent years doubling to 13.5 million pair in 2012 from 6.6 million pair in 2002. Shipments to the US are better grade leather goods with an FOB around $20 per pair, concentrated in men’s casuals and ‘handsewns’ for brands like Cole Haan.

No doubt India’s shoe exports will increase in the near term, but unless and until it draws significant foreign investment, it is not likely to break out of its current pattern and become a major force in global shoe exports.

Many Others.

Indonesia. As the world’s fifth largest shoe producer, Indonesia is also the world’s third largest shoe exporter by volume. It is the world’s third largest producer of branded athletic shoes and is a probably the second largest exporter of these items after Vietnam (China has lost much of its sport shoe exports to these countries as the athletic brands take advantage of the lower costs, although China still produces these items in huge quantities for its local market).

Again, lack of new foreign investment in the shoe sector is holding back a big export break out, and that lack of new funding is likely due to the escalation of worker costs (at $1.75 per hour), which now are close to China’s, and probably will go higher as the government pushes for a more equitable society.

Like Vietnam, higher levels of exports from the infrastructure in place are anticipated but no large displacement of China product outside the sports space appears to be in the cards at the moment.

Central America. The leader here is the Dominican Republic (DR). It has worker costs ($1.81 per hour) similar to Indonesia and China. Unlike the two Asians, it is only days shipping away from the US and it enjoys duty free status into the US. It sent some 8.7 million pair to the US in 2012 with an average FOB of $24.21, reflecting the concentration of production in factories owned by leading US outdoor product companies including Timberland, Wolverine World Wide, Rocky Boot, etc. Despite the use of very low cost labor in its next door neighbor, Haiti, by some to feed the DR factories, the DR’s exports have not grown dramatically in recent years. A major investment recently by a large Brazilian group means that new exports of better leather women’s products are in the pipeline.

There is also Brazilian investment in Nicaragua in the leather casual’s space and there may be more as its worker costs are attractive ($1.22 per hour)as is its proximity to the US and its duty free status to the US. It must be noted, however, that another even larger Brazilian shoe producing investment recently closed up permanently (perhaps more due to management decisions and less to do with the country).

Although there has been no recent foreign footwear investment in El Salvador or Guatemala, the situation in these places is not too dissimilar to Nicaragua (although costs are higher). Unlike Nicaragua, both have well developed local shoe producers.

Mexico. With a population of some 100 million, and a long history of blocking imports from China (currently the market is open with only regular duties applied to shoes from China), Mexico has a large and diverse local shoe industry.

While its worker costs are nearly double those of China ($3.87 per hour, although it is lower in some rural areas), its strong skills in making women’s leather shoes as well as Western boots, along with its proximity to and duty free status from the US make it a good sourcing alternative to China for these niche products, especially if the brand relies on fast replenishment of its stock as a key business strategy.

Mexico sent some 18.9 million pair to the US in 2012, up only marginally from the 15.7 million pair sent to the US in 2004.

Brazil. The macroeconomic changes that have transformed this Latin giant into a world-beating exporter of iron ore, soy beans, meat, juice, sugar, etc. have in the process ruined just about all labor intensive exporting. The currency has risen in value to the point where these previously formidable sectors have seen their exporting diminished substantially.

Today, Brazil still makes some of the finest value women’s leather shoes in the world but its exports of them have fallen sharply due to the strong local currency. Much of its competitive shoe exports today are in the up market injected plastic space with global brands like Havaianas.

Since much of the great exporting shoe capacity has shifted to local demand, moved to other countries or been shut down, it does not appear that there will be a large export increase even if the currency were to weaken significantly, which does not appear to be likely in any case.

The Europeans. Some of the finest shoes in the world still come from Italy, Spain and Portugal. There is no doubt that the first two will continue to excel in the leather luxury/fashion space, and the last one will move forward in the export of innovative designs and styles especially in the euro-comfort space. Sadly, none are likely to play any major role in the shifting of product out of China to alternatives.

Myanmar. Formerly known as Burma, this country west of Thailand has some 60 million inhabitants and is one of the poorest places in the world, largely owing to its nearly two decades of isolation imposed by its military dictatorship. Recent political progress has resulted in the lifting of trade embargoes by the US and the EU.

As perhaps the last frontier in Asia, Myanmar has drawn a lot of exploratory interest from the shoe sector and a few leading China producers have taken positions on land in the country.

The major shoe producer in Thailand has also explored the possibility of feeder factories in Myanmar near the border with Thailand.

At this time, it does not appear that any projects are moving forward, owing to the woeful lack of basic infrastructure and to the exorbitant costs for basic amenities in the major city, Rangoon, where the China investors seem most likely to establish their first projects.

Summing Up. Despite dire predictions and endless talk, China seems destined to continue its dominance of the global shoe export sector for years to come, barring macroeconomic upheavals.

Overall, just about all the alternatives to China covered in this article have obstacles that limit their potential to become a really big player like China. Vietnam and Cambodia have tight labor availability and land costs in Vietnam are now a barrier, while Indonesia has worker costs almost as high as China’s, India lacks foreign investment and has tight labor regulations, and Bangladesh is hampered by labor strife. The Latin American countries have not drawn much overseas shoe sector investment and probably will not absent big upheavals in Asia.

Perhaps the greatest potential is in Africa, and especially in Ethiopia, which seems to have not only a most attractive worker situation, but also has the support of the China government, which makes the place most welcoming to the vital foreign investment (most likely by China entrepreneurs) that will determine the shoe industry’s future.

Peter T. Mangione, Managing Director, Global Footwear Partnerships LLC, December 9, 2013