The bank stated that the issue of overcapacity in China's sports footwear production is manageable, and it is more bullish on local Chinese brands, with ANTA SPORTS (02020) being the primary choice.
According to Zhitong Finance APP, Macquarie released a research report stating that based on tariff scenario analysis, original equipment manufacturers (OEMs) with higher profit margins have more room to withstand potential adverse factors. Price adjustment mechanisms, procurement location shifts, and weak end-demand may compress OEM's gross margin, and order volume may face downside risks in the second half of 2025. Although existing production capacity in China aimed at the USA market may shift to the domestic market, the issue of overcapacity in China's athletic footwear is controllable, and there is a more bullish outlook on local Chinese brands, with ANTA SPORTS (02020) being the preferred choice.
Macquarie's latest ratings and target prices for sports industry chain stocks.
Macquarie's main viewpoints are as follows:
Greater China sportswear supply chain.
In light of the recent related news regarding US tariffs, the study researched the ultimate destinations and production locations of top athletic apparel, footwear, and outfit brands as well as OEM products. Overall, European and Japanese brands have relatively low risk exposure to the US market, while most Other brands consider the USA/North America as their primary market. For major footwear and apparel OEMs, the Americas account for 16% - 70% of their revenue risk exposure.
Despite the unstable situation, the 90-day tariff suspension period has provided some breathing space for brand clients. Recent channel surveys of different OEMs indicate that while they continue to execute existing Orders, they are closely monitoring the negotiation progress between the USA and ASEAN countries before making significant investment and relocation decisions. Goods in transit or Orders confirmed before the tariff announcement are unlikely to change, but due to the increased negative impacts from rising inflation on terminal demand, there may be uncertainty with future Orders.
Since the visibility of Orders typically spans the next six months, Orders for the third quarter of 2025 are likely already placed by brand clients. Negotiations between the USA and other countries, along with changes in consumer sentiment, may still affect the final confirmation of Orders. Brands might place Orders at the last minute to retain maximum flexibility in the face of uncertainty. This will also put greater pressure on OEMs to meet the changing demands of brand clients. In the long run, those OEMs that can operate flexibly without impacting their net margin may have better opportunities to gain market share.
International brands are actively adjusting their supply chain strategies to mitigate risks and uncertainties from tariff increases. Adidas is shifting to a 'China for China' model, with its products for the Chinese market primarily sourced and produced in China. For the USA market, Adidas relies on its supply chain in Vietnam and other Southeast Asian countries (with less than 4% sourced from China). Puma has adopted a similar localization approach to efficiently manage its global Business while alleviating tariff impacts. For the USA market, about 10% of Puma's products are sourced from China, with the remainder coming from other regions. In China, Puma also operates a local supply chain, producing products domestically to serve the Chinese market. For non-USA regions, Puma utilizes a mix of local and international suppliers to ensure a balanced and resilient supply chain. These strategies are proactive but not foolproof. They reduce China's capacity risk exposure to the USA market, but as USA trade policies evolve, continuous adjustments are needed (for example, after 90 days, ASEAN countries may resume reciprocal tariffs).
The impact on local sportswear brands in China is manageable.
According to data from the USA Textile and Apparel Office (OTEXA), in 2024, China will export approximately 1 billion pairs of shoes to the USA, with an import value of about 8.4 billion USD. Among these, if athletic shoes are limited to the Harmonized Tariff Schedule (HTS) code 640411 (defined as 'athletic shoes, including tennis, basketball, and gym shoes, with rubber or plastic outsoles and textile uppers'), this portion of athletic shoes accounts for 5% of the total export volume and 7% of the export value. This roughly corresponds to 47 million pairs of shoes worth about 0.611 billion USD.
Considering that the Chinese government may redirect these export products towards domestic demand, the impact on athletic shoes is relatively manageable as this quantity is relatively small compared to the overall volume or value of shoe exports to the USA. From a macro perspective, the domestic brand Xtep sold about 55 million pairs of shoes in 2023. According to third-party data provider Euromonitor International, Xtep holds a market share of 6% in China. Therefore, the estimated contribution of athletic shoe export volume to domestic market share is a single-digit percentage.
The reason for the relatively small contribution of export volume/value is likely due to brand companies having shifted their shipments to the USA to Southeast Asian countries over the years. Other 'non-functional' footwear may be more significantly impacted, especially on China's leisure shoe brands.
Domestic manufacturers may consider selling products directly to consumers through live-streaming channels and other online platforms to digest China’s production capacity while seeking new customers who can take over their capacity meant for non-USA regions or the domestic market. For the former, it is not easy for manufacturers to establish initial trust with consumers because shoe sizes may differ and return costs could be high. The target consumers for these products may differ from those of branded products due to the manufacturers' lack of brand influence, making 'premium positioning' less likely.
For the latter, it is questionable whether international brands have the end demand to absorb more Chinese production capacity, as they have been reducing their purchases from China in recent years. On the other hand, higher-quality manufacturers may have the opportunity to collaborate with domestic brands, which could help improve product quality or reduce costs, as brands have greater bargaining power in negotiations with suppliers.
Existing sports brands can remain competitive by continuing to produce functional products, as this may still be a key factor in distinguishing themselves from both old and new competitors. Brands may need to invest further in research and development, brand building, and marketing to better connect with consumers. Brands may leverage their product development and design capabilities to stand out, as sportswear OEMs are often stronger in the commercialization of product design. Brands may also find it easier than OEMs to access different upstream supply chain partners for more innovative product development, which is another area brands can capitalize on.
Most footwear brands and OEMs have reduced their reliance on sourcing from China.
According to disclosures from brands and OEMs, Vietnam, Cambodia, and China remain major sourcing locations, with some brands listing Indonesia and India as emerging sourcing locations. The tariff terms between the USA and Vietnam may significantly impact brands and OEMs. Most brands that disclosed the proportion of their sourcing from China reported this proportion ranging from single digits to one-third of their total global procurement. Brands utilize China's production capacity to meet demand in the local Chinese market and non-USA regions due to shorter production cycles, hence the proportion of goods shipped from China to the USA may be quite small.
For brands that do not disclose quantitative sourcing shares, the following is qualitative information:
VF Corporation (VFC.US): Products are primarily manufactured by approximately 320 independent contracting factories across about 35 countries.
Under Armour (UAA.US): About 63% of apparel and accessories are made in Jordan, Vietnam, Cambodia, and Indonesia, while almost all footwear products are produced by nine major contract manufacturers, who primarily operate in Vietnam, Indonesia, and China.
Deckers (DECK.US): Most manufacturers are located in China and Vietnam, and the company is starting to diversify its footwear sourcing in Indonesia.
Dick's Sporting Goods (DKS.US): Most vertical brand Commodities are manufactured abroad.
Skechers (SKX.US): Most products are manufactured in China and Vietnam.
New Balance (not publicly listed): According to the supplier list as of September 2024, products are sourced from factories in 26 countries.
Asics (7936.JP): Products are mainly sourced from Vietnam, Indonesia, China, Cambodia, Japan, Portugal, and Brazil. In 2023, more than 95% of Asics' Footwear products were produced in Vietnam, Indonesia, and Cambodia. The company plans to expand sourcing from India starting in 2028.
Crocs (CROX.US): The Crocs brand primarily sources from Vietnam, with other third-party manufacturers in countries such as China, Indonesia, India, and Mexico.
1. Analyze the impact of tariffs on the Footwear value chain.
When assessing the impact of tariffs on the entire USA value chain, it is helpful to understand the distribution of a pair of shoes' retail price between upstream and downstream. Currently, import tariffs are calculated as a percentage of the Free On Board (FOB) price, and the tariffs are borne by brand customers. In the basic scenario, assume the tariff is 15%. In the tariff increase scenario, assume the import tariff rises from 15% to 25%.
(1) Basic case assumptions (based on channel research).
Retailers: Assume a marked price of $100, which is four times the FOB price (manufacturing cost); assume an overall discount of 30%, considering both full and discounted price sales; gross margin is assumed to be 43%, referencing leading sportswear retailers like Footlocker with a gross margin of around 40% and Dick's Sporting Goods with a gross margin of around 50%, excluding rental costs from sales costs, assumed to be a fixed amount; net margin is assumed to be 5%, referencing sportswear retailers such as Footlocker, Dick's Sporting Goods, and Hibbett Sports.
Brands: Assume that brands sell to wholesalers at a wholesale price of 40% of the retail price of $100, which is $40; it is estimated that the brand's gross margin is 38.75%, which is the profit after deducting tariffs, freight, and insurance as well as the manufacturer’s ex-factory price; assume that freight and insurance together account for 7.5% of the ex-factory price / FOB cost; assume that the tariff is 15% of the ex-factory price / FOB cost; assume that the net margin is 7.5%, referencing the average net margin of various footwear brands in the USA, with other costs including taxes and inter-company indirect expenses.
Manufacturers: Assume that the footwear manufacturer's gross margin is 20% and the net margin is 5%, referencing major footwear manufacturers like Yue Yuen's profit margins.
(2) Tariffs increase from 15% to 25%, with consumers bearing the full cost transfer.
This means that the tariffs to be paid increase by $2, reaching $5. Assuming that retailers and brands maintain the same profit margin, retailers would need to increase the retail price by 7.1%, raising the transaction price from the previous $70 to $75, leading to a price increase of 8.2% for consumers. In this case, brands maintain their profit margin (7.5%) by raising wholesale prices, retailers can also maintain their profit in dollar terms ($3.50), and the manufacturer's profit margin (5%) remains unchanged.
(3) Tariffs increase from 15% to 25%, with all parties sharing the tariff impact.
In this case, assume that each party (retailers, brands, and the supply chain) bears an average tariff burden of $0.67 (the additional $2 tariff divided by 3). In practice, the sharing of the tariff burden may depend on the negotiations and relative bargaining power of the parties in the supply chain. For OEMs, assume they can transfer part of the tariff burden to upstream suppliers (here it is assumed that the transfer ratio is 50%, or $0.34). This would result in manufacturer revenue (FOB price) declining by 3.5%, and sales costs declining by 1.9%, leading to a 1 percentage point decrease in manufacturer gross margin and a 37% negative impact on net income.
For brands, the wholesale price will rise by 3% from $40 to $41.20, leading to a 16.7% negative impact on net income. Due to the decrease in the FOB price, brands benefit slightly when actually paying tariffs (based on an FOB price of $19.30, they only need to pay $4.80 in tariffs, rather than the $5.00 calculated when determining the tariff burden).
For Outfitters, after bearing the additional tariffs, the net income drops by 20%, indicating a 1 percentage point contraction in net margin. Assuming fixed indirect costs, tax, and rental costs remain unchanged, Outfitters will increase the retail price from $70.00 by 0.7% to $70.50. Conversely, assuming the brand owners sell to Outfitters at a 60% discount (unchanged), the marked price will increase by 2.9% to $102.90.
Tariffs increase from 15% to 25%, and the supply chain bears all additional tariffs.
Assuming again that a tariff burden of $1.00 (half of the $2.00 additional tariff) is passed onto suppliers, and manufacturing indirect costs and taxes remain fixed relative to the base case. It is calculated that OEM can still make a profit of $0.20, while it was $1.00 in the base case (if OEM bears the remaining $1.00 of tariffs, it should not profit). In this case, manufacturing income (FOB price) will decrease by 8%, cost of sales will decrease by 5%, leading to a decline in manufacturer's gross margin by 2.6 percentage points, and net income will be negatively impacted by 80%. It is assumed that as long as the brand owners can maintain the total cost (FOB price plus tariff) unchanged (in this case, $23), some of the profits will be allowed to transfer to OEM (due to a decrease in FOB price, the actual tariffs paid reduce). Due to the decrease in FOB price, the actual additional tariffs paid also decrease from $2.00 to $1.60.
In this case, the brand's wholesale price and the retailer's transaction price remain the same as in the base case, and consumers are not affected.
2. The impact of tariffs on the Outfitters value chain.
Following the example of Footwear, now analyze the impact of an increase in tariffs in the Apparel sector. A similar analytical approach is adopted, assuming a tariff of 15% in the base case; in the example of the tariff increase, it is assumed that the import tariff goes from 15% to 25%.
(1) Basic case assumptions (based on channel research).
Outfitters: Assuming a marked price of $40, which is 4 times the FOB price (manufacturing cost); assuming an overall discount of 30%, considering sales at full price and discounted price; gross margin assumed to be 44%, as Outfitters are generally more profitable than Footwear Outfitters. Rental costs are not included in the cost of sales, assumed to be a fixed amount; net margin is assumed to be 6.5%, as the net margin of Outfits is usually higher than that of Footwear.
Brand: Assuming the brand sells to wholesalers at a wholesale price of $17.60, which is 44% of the retail price of $40; the estimated gross margin for the brand is 50%, which is profit after deducting duties, shipping and insurance fees, and the manufacturer's ex-factory price; assume that the total shipping and insurance fees are 7.5% of the ex-factory price / FOB cost; assume that the duties are 15% of the ex-factory price / FOB cost; the assumed net margin is 11.7%, as the profit margin on apparel is usually higher than that on footwear, with the remaining costs including taxes and corporate indirect expenses.
Manufacturer: Assuming that the gross margin of the apparel manufacturer is 30% and the net margin is 18%, which aligns with the net margin of 17-18% for vertically integrated apparel manufacturers like Shenzhou International Group Holdings Limited Unsponsored ADR.
(2) Duties increase from 15% to 25%, with the entire cost passed onto consumers.
Assuming that retailers and brands maintain the same profit margin, retailers would need to increase the retail price from $28 in the base case by 8.6% to $30.40. The listed price would rise from $40 to $43.30, resulting in a price increase of 8.25% faced by consumers. In this case, brands maintain their profit margin (11.7%) by increasing the wholesale price, while retailers can also maintain their dollar-denominated profit ($1.80), and the manufacturer's profit margin (18%) remains unchanged.
(3) Duties increase from 15% to 25%, with all parties sharing the impact of the duties.
In this case, assuming all parties (retailers, brands, and OEMs) share an average tax burden of $0.27 (the additional tax of $0.80 divided by 3). In practice, the burden of taxes may depend on negotiations and relative bargaining power among supply chain parties. OEMs may pass some of the tax burden onto the suppliers, here assumed to be passed on at a ratio of 50% ($0.13). Thus, manufacturing revenue (FOB price) will decrease by 3.4%, sales costs will drop by 2.4%, leading to a decrease in the manufacturer's gross margin by 0.7 percentage points, and net income is negatively impacted by 19%.
For brands, the wholesale price will increase by 1.7% to $17.90, negatively impacting net income by 8.4%. Due to the decline in FOB price, brands benefit slightly when actually paying taxes (based on an FOB price of $7.73, only $1.90 in taxes need to be paid, rather than the $2 calculated initially when distributing tax burden).
For retailers, after bearing the additional taxes, net income decreases by 14.7%, meaning a contraction in net margin of 1.2 percentage points. Assuming fixed indirect costs, taxes, and rental costs remain unchanged, retailers will raise the retail price from $28.00 by 3.2% to $28.90. Conversely, assuming brands sell to retailers at a 56% discount (unchanged), the listed price will increase by 2% to $40.80.
(4) The tariff has increased from 15% to 25%, and the OEM bears all additional tariffs.
Again, assuming that the tax burden of $0.40 (half of the $0.80 new tax) is passed on to suppliers, and that manufacturing indirect costs and taxes remain fixed relative to the base case. It is calculated that the OEM can profit $1.10, while in the base case it is $1.40 (if the OEM bears the remaining $0.40 tax, then it should profit $0.70). It is assumed that as long as the brand can keep the total cost (FOB price plus tariff) unchanged (in this case $9.20), some profits will be allowed to be transferred to OEM (because the decrease in FOB price reduces the actual tariffs paid). Due to the reduction in FOB price, the actual additional tariffs paid also decrease from $0.80 to $0.60.
In this scenario, the brand wholesale price and retailer transaction price remain the same as in the base case, and consumers are not affected.
Emerging sourcing locations.
Before the 90-day tariff suspension period, India and Indonesia have lower reciprocal tariffs compared to existing major athletic apparel manufacturing countries such as China, Vietnam, and Cambodia. It is currently difficult to predict the final tariff levels of different countries, but brands are more likely to allocate more orders and capacities to India and Indonesia. Data from 2024 shows that India and Indonesia account for 6% and 5% of the total U.S. clothing imports, respectively. In terms of footwear, India accounts for 0.3% of U.S. footwear imports, while Indonesia accounts for 15.5%.
Compared to Vietnam and China, India and Indonesia have lower labor costs, giving them an advantage in sourcing, as sourcing from lower-cost countries helps reduce ex-factory prices. This will lower the total landed costs for brand clients, provided that the OEM has trained its employees, or introduced enough streamlined processes for workers to quickly improve productivity.
On the other hand, a concern that may impact the relocation time of the supply chain is the speed of relocation of upstream components suppliers, as their relocation is critical for the product to obtain country of origin status (thus being considered sourced from low tariff countries). Since footwear components suppliers are often smaller in scale, and footwear production involves numerous components, they require commitments from OEM manufacturers to invest in certain countries before relocating, because considering their limited scale, relocation involves significant investment.
