Lesson Guide September 2015

The Businessweek Education Program

September 14 — September 20, 2015

Briefs: United’s CEO gets bumped; Yahoo!’s tax hiccup 27

The race to bring Bollywood to India’s smartphones 24

Chobani’s founder keeps the keys to the corner o�ce 25

What’s overshadowing Israel’s solar industry 26

Stetson’s Cowboy Spirit Lives On

 �The brand wants hipsters to embrace its toppers

 �“I find American guys most self-conscious about a hat”

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In August, Izumi Kajimoto and four co-workers traveled to Salida, Colo., for the latest stop in the Gentlemen of the Road Stopovers concert series. The event, headlined by the folk rock group Mumford & Sons, features indie bands such as the Vaccines and Je� the Brotherhood—and thousands of concertgoers in their 20s and 30s. But Kajimoto wasn’t there for the music. The chief executive o�cer of 150-year-old Stetson was there to promote her company to the tattoo set. And rather than pushing its iconic cowbay hats, her team was there to sell fedoras, beanies, even Panamas.

The events filling Kajimoto’s travel calendar cover the cultural spec-trum. In October her team will head to Joshua Tree, Calif., for Babes Ride Out, a women-only motorcycle camp, to set up and run a Stetson hangout. Bikers can stop by, try on hats, and take selfies in a photo booth. During the SXSW fes-tival in Austin in March, Willie Nelson’s Luck Ranch was the site of a daylong Americana music festival with a pop-up Stetson shop. The events, Kajimoto says, are key marketing opportunities for the company as it attempts to reach beyond its classic cowboy hats and attach the Stetson name to toppers that appeal to a broader and younger demo-graphic. “We’re a lot of things that seem to be eclipsed by our overwhelm-ing identity as Western,” Kajimoto says. “I don’t want the urban contemporary, city, international guy to think, ‘I have nothing in common with Stetson.’ ”

Kajimoto joined Stetson as CEO in 2012 after stints at Betsey Johnson, Marc Jacobs, Donna Karan, and Calvin Klein. But her experience at Ralph Lauren in the ’80s and ’90s, as a vice president with some responsibility over global licensing and broaden-ing the appeal of the then-distinctly American brand, may prove the most useful as she cultivates hats as a fashion among hipsters.

Once a major U.S. manufacturer whose cowboy hats symbolized American frontier culture, Stetson more recently has struggled to survive. (The privately held company doesn’t disclose its revenue.) New designs will be critical to drawing younger custom-ers. “We have just as much credibil-ity in dress hats as in cowboy hats,”

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KEY: 1. INDIANA JONES, 2. BRAD PITT, 3. SPIKE LEE, 4. PRINCESS BEATRICE OF YORK, 5. BILL CLINTON, 6. JACKIE KENNEDY, 7. PHARRELL WILLIAMS, 8. THE QUEEN, 9. DALLAS, 10. OOPS, THAT’S NOT A HAT, 11. WINSTON CHURCHILL

Entertainment

Eros Would Love to Become India’s Netflix

� A Bollywood leader bets on a streaming service for smartphones

� “Getting people to subscribe on a monthly basis is a … cultural shift”

Movie-crazed Indians see Bollywood hits any way they can: crowding around family TVs, piling into dusty village cinemas and swank New Delhi multi-plexes, borrowing bootlegged versions friends stash on mobile phone memory cards. They’re just not in the habit of paying to watch online. Kishore Lulla plans to change that before Net�ix does.

Nudged by an activist investor, the executive chairman of Bollywood �lm house Eros International is making its Eros Now streaming service a prior-ity. He’s shelving a plan to create a tele-vision channel so the company can focus on video-on-demand optimized for mobile devices and priced at rock-bottom rates. The idea is to use the Mumbai studio’s catalog of more than 2,000 �lms, plus new exclusive series, to build a critical mass of streaming customers on the subcontinent before Net�ix and Amazon.com do. “We thought, ‘We have the market share, we have the movies,’ ” Lulla says. “Why don’t we create our own platform?”

Thanks to a production machine built by his father, Arjan, who founded Eros in 1977, the studio releases about 70 movies a year. Eros is “exactly where Net�ix wants to be in the next three to �ve years,” Lulla says. “I’m already there.”

Since its largely marketing-free soft introduction about a year ago, Eros

Noteworthy Lids

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Kajimoto says, noting that urban men wore Stetson’s various styles in the early and mid-1900s. Nylon boonies and satin-lined trilbys with tattoo designs hang alongside the clas-sics, including cowboy hats, in the company’s showroom in New York’s garment district, where Stetson is headquartered.

John Batterson Stetson started his business in 1865 in a small, rented space in Philadelphia. Ranchers and cattlemen considered his wares the highest- quality cowboy hats around, as much a neces-sity as boots and a saddle. A Stetson was also a status symbol among the ranchers, says Don Reeves, a curator and chair of cowboy culture at the National Cowboy & Western Heritage Museum in Oklahoma City. “If you had this kind of hat, it said, ‘I’ve made it,’ ” he says. By the early 1900s, Stetson ran the world’s largest hat factory, making several men’s and women’s styles.

The company survived the Great Depression and both World Wars. It produced tens of thousands of hats during World War II under a contract with the U.S. Army. And it benefited from the popularity of Western-themed TV shows and movies of the 1940s and 1950s featuring stars like John Wayne and Roy Rogers. “There was a romance of the Old West that they could play up in advertising,” says Sonya Abrego, a fashion historian at the Pratt Institute.

In 1947, sales of Stetson hats peaked at $29 million ($225 million in current dollars). The bustling factory employed more than 5,000 workers. Within a decade, as work in America moved away from the frontier and fields into the cities, sales began to decline. The business suffered as hats started to fall out of style among city dwellers. Stetson’s sales plunged to about $8 million in 1970, more than a 70 percent slide from the peak 23 years earlier. The Philadelphia factory closed in 1971. Stetson eventually donated the land to the city.

Without a factory, Stetson today is a licensing company. It con-tracts production to a number of manufacturers. RHE Hatco in Garland, Texas, annually makes almost half a million, including all of Stetson’s classic cowboy hats. Stetson has only 10 employees. All of them, Kajimoto says, are brand evangelists.

“I find American guys most self- conscious about a hat,” says Kajimoto. “What’s most important is that he feels comfortable.” Celebrity endorsers might help with that. Musicians Leonard

Cohen, Willie Nelson, and Brad Paisley, among others, aren’t paid for the product plugs—they get free hats and agree to wear them in public, onstage, and at media appear-ances.

Stetson’s hats are up against industry stal-warts such as Borsalino,

Biltmore Hats, and Kangol. Resistol, an 88-year-old brand currently owned by Hatco, is a cowboy hat rival.

Beyond the music festivals, the company is hosting launch parties in Los Angeles and New York for an upcoming hat designed in collabo-ration with artist and photographer Tasya van Ree, known for her black-and-white portraits of such celebri-ties as Michelle Rodriguez and Amber Heard. Kajimoto attends many of the events. Stetson is also making a big marketing push through designer col-laborations and appeared at New York Fashion Week in February 2014. The brand has expanded its product line in recent years to include fragrances, home goods, apparel, boots, even branded bourbon.

The products draw heavily on Stetson’s American frontier legacy, which it’s promoting as cool. Every December, company reps travel to the National Finals Rodeo, a 10-day cowboy extravaganza in Las Vegas, to main-tain what Kajimoto calls Stetson’s “core Western culture.” That piece of the business can’t be taken for granted. “You always have to replenish and support all of your efforts,” Kajimoto

says. “With the Western side, the chal-lenge would be complacency.”

Jaqui Lividini, founder and CEO of fashion branding consultancy Lividini, says Stetson’s push to appeal to hip-sters makes sense, especially given the company’s heritage. “It’s not like the cowboy hat they’re known for isn’t cool,” she says. “It’s a cool hat. It’s just cool for a different audience.” —Kim BhasinThe bottom line Stetson once had more than 5,000 workers and $29 million in sales; today the company is a 10-person licensing operation.

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AbstractStetson is struggling to survive and it knows that it must diversify its clientele to stay relevant. CEO Izumi Kajimoto, who took over in 2012, is trying to attract customers who are more ‘hipster’ than ‘rancher’ and more cool than cowboy. Her plan is to hook young, fashionable buyers by offering an eclectic, trendy mix of hats.

Kajimoto arrived at Stetson after a 27-year career in fashion. She got her start at Ralph Lauren and then held senior posts at Calvin Klein, Donna Karen, Marc Jacobs, and Betsey Johnson. The Stetson job is a return to her Ralph Lauren roots, bringing traditional Americana to a more diverse customer lineup.

Discussion Questions1. How realistic is it to take a legendary American “cowboy” brand and make it appeal to such a young, fashionable market?

2. Are there examples of other brands that have successfully made this transition?

3. Is this the best market for Stetson to pursue?

4. How would you promote the Stetson brand to a younger, fashion-forward audience?

5. Will Stetson successfully develop this new market?

Quiz QuestionsTrue or false1. By the early 1900s, Stetson's Philadelphia plant had grown into the world’s largest hat factory.

2. Stetson endured the Great Depression and both world wars, when it made thousands of hats for the U.S. military.

3. Stetson benefited from the popularity of Western TV shows and movies.

4. The company sends an unlimited supply of hats to celebrities, including Leonard Cohen, Willie Nelson, and Brad Paisley, with no expectations or requirements.

5. Celebrity endorsements do not play a significant role in Stetson's publicity strategy.

6. Stetson’s long-term strategy is to abandon its pres-ence in cowboy culture and exclusively target the hipster segment.

Multiple choice7. Stetson was founded in ______ by John Batterson Stetson, who started making the company's signature hat in Philadelphia.a) 1835 b) 1865 c) 1895d) 1905 e) 1935

8. Stetson’s product line includes _________________ .a) hatsb) fragrances and home goodsc) branded bourbond) apparel, boots and beltse) all the above

9. Stetson focuses on ___________________ because they get hats on heads, an important step in convincing shoppers to buy an optional accessory.a) online promotionsb) direct mailc) event-based promotionsd) in-store displayse) all the above

10. In 1947, sales of Stetson hats peaked at $29 million, the equivalent of more than $300 million today. But sales plunged to around ________ in 1970, a 70-plus percent slide from the company's heyday.a) $8 million b) $12 million c) $18 milliond) $28 million e) $32 million

Answer Key

1. True 2. True 3. True4. False 5. False 6. False7. a 8. e 9. c10. a

STETSON’S COWBOY SPIRIT LIVES ON

September 7 — September 13, 2015

Innovation: How bad was that hit on the 20-yard line? 37

ZTE’s cheap phones gobble U.S. market share 34

Lyft tries to master local accents 35

Tablets are invading Indian stores 36

Julio Hernández is a telecommunications engineer, but he has to get online like almost everyone in Cuba: crouched on a dusty Havana corner with his laptop, inhaling car exhaust in sweltering heat. Hernández, and scores of other people crowded around the same corner, endure the discomfort to make use of

a rare Wi-Fi hotspot, one of 35 installed around the island nation in July by state telecom monopoly Etecsa. It costs $2 an hour, pricey given that the average state-paid salary is $20 a month. “This is one of the busiest streets in Havana,” says Hernández, a former government employee, as cars roar past and antique

air conditioners drip moisture on the ground nearby. “It makes it impossible to even do a video call on Skype.”

Still, any Internet access is a huge improvement, says Ramón Mazón, a pizzeria worker who’s crouched nearby. “Before this we had nothing,” says Mazón, who traveled 15 miles to the

 �Cuba has set up 35 Wi-Fi hotspots for its 11 million citizens

 �“It’s stupid how much they’ve delayed the inevitable”

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hotspot to try to set up a video chat with American relatives, so far unsuc-cessfully. But, he says, “In this day and age we should have access to Internet a few hours a day, just like we have food ration cards.”

Cuba’s Internet access ranks among the worst on earth. Just 30 percent of its 11 million citizens used it at all last year, according to the United Nations’ International Telecommunication Union. (The number was 87 percent in the U.S. and 57 percent in Cuban ally Venezuela.) President Raúl Castro’s government says at least 50 percent of Cubans will have residential Internet service by 2020, and 60 percent will have mobile phones. O�cials haven’t detailed how they plan to achieve that.

“It’s stupid how much they’ve delayed the inevitable,” says Carlos Alzugaray, a onetime Cuban ambas-sador to the European Union and a former professor at the University of Havana. “Meanwhile, we’re losing ground. We’re in the Stone Age.”

Critics of the Castro regime say it’s slowing the expansion of broadband to restrict access to information. While the government’s �lters don’t compare to China’s— websites including those of Yahoo! and the U.S. Department of State are accessible, as are some blogs that criticize the government—sites that are explicitly anti-Castro are blocked, as is pornography. Internet connections are in a smattering of workplaces, top tourist hotels, select business centers, approved media outlets, and fewer than 4 percent of homes, including those of senior o�cials, foreign executives

and media, doctors, and artists. The Internet isn’t available on the country’s 1991-vintage cellular network.

In most connected public spaces, including government ministries, uni-versities, and hospitals, getting online requires the beeps and buzzes of a dial-up modem. State-run cybercafes charging $4.50 an hour for relatively low-speed broadband opened just two years ago, recently dropping hourly prices to $2.

In January, the Obama administra-tion’s push to normalize U.S.-Cuba relations made it legal for American telecommunications companies such as Verizon and AT&T to do busi-ness there. Since January, Airbnb and Net�ix have begun operating in Cuba, and other U.S. technology companies, including Google, have made quiet visits in the past several months to assess the market and weigh opportunities.

Google o¥ered the Cuban govern-ment a large enough supply of Internet-ready antennas to bring high-speed connections to 70 percent of the nation’s homes within three years at little to no cost, according to journalist Fernando Ravsberg, who writes the blog Cartas Desde Cuba (Letters From Cuba). Cuban o�cials told Ravsberg they didn’t accept the o¥er because they were suspicious of Google’s associations with the U.S. State Department and worried that the company’s technology could be used to spy on Cuba or promote sedition. Google spokeswoman Niki Christo¥ declined to comment.

The hotspot where Hernández and Mazón are squatting hints at the pos-sibility of change. Etecsa, the state- controlled telecom, says it’s testing 3G and 4G mobile phone service, but who will have access is unclear. According to a document leaked in July to the blog La Chiringa de Cuba (Cuban Kite), Etecsa plans to build residential broadband using Chinese providers such as Huawei Technologies and ZTE.

Harold Cárdenas, co-founder of the blog La Joven Cuba (Young Cuba), says that while he wants an open Internet as soon as possible, he understands why his government may be hesi-tant to make deals with U.S. compa-nies. “If you were in a dispute with your neighbor for 50 years and now you’re friends, it’s a little risky to give your neighbor access to your whole garden, because you might be �ghting again tomorrow,” he says. “A country’s

telecommunications is a matter of national security.”

At the same time, “The government has to give Internet to the people or it’s going to lose the hearts and minds of Cuban youth,” says Cárdenas. “That’s already happening.” In the lobbies of top tourist hotels, rare oases of broad-band Wi-Fi, tech-savvy young Cubans discreetly surf on their phones, sharing Wi-Fi connections or using apps to log in to servers overseas to circumvent fees as high as $17 for two hours. Memory sticks sold widely on the black market give Cubans access to foreign television, too. “To open or not open the Internet is a silly argument,” says Ravsberg of Cartas Desde Cuba, because to some extent, “Cuban censors have already lost control of the information people have.” —Indira A.R. LakshmananThe bottom line About 30 percent of Cubans used the Internet last year. The government has been slow to expand access.

$60

Mobile

The Cheap Phones Quietly Winning the U.S.

� China’s once-embattled ZTE almost doubled its share in 15 months

� “ZTE is a little shrewder in how to work in the American market”

In most AT&T, Sprint, or T-Mobile stores, it takes a while to �nd the ZTE phones, buried in the back, past the latest from Apple and Samsung. But they’re there. In AT&T stores it’s the ZTE Maven, which has a screen, speakers, and a processor with capabilities some-where between the iPhone 5 and 6. As Tony Greco, ZTE’s head of U.S. retail marketing, puts it, “These were state-of-the-art features two years ago.” The Maven’s draw, really, is price. Without any subsidies from a wireless carrier, the phone costs just $60. And it’s not even one of the company’s cheaper models.

ZTE is quietly becoming a force in the U.S. by selling good enough phones at low prices—smaller prepaid smart-phones for $30, basic phones with QWERTY keyboards for about the same, and so on. The Chinese company’s prod-ucts are among the cheap phones of choice at three of the big four U.S. carri-ers. (Verizon doesn’t carry them.) ZTE

Cuba’s Online Stone AgePortion of populace that used the Internet in 2014

DATA: INTERNATIONAL TELECOMMUNICATION UNION

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Technology

AbstractOnly a few workplaces and less than 4 percent of homes in Cuba have Internet access, with the cost at $2 per hour. The Internet is also not available on the country's 1991-vintage 2G mobile phone network. Although President Raul Castro realizes that there is a problem, the government still wants to maintain control of informa-tion.

However, officials maintain that by 2020, 50 percent of its people will have residential Internet service and 60 percent will have mobile phones. Even industries that do have Internet service run on dial-up modems.

Broadband service is allowed only in top tourist hotels, select business centers, and approved media outlets. Although some state-run cyber cafes opened two years ago, they charged $4.50 per hour. That's an extremely high price, given that the average state-paid salary is $20 a month.

Because of the new policies initiated by President Obama, companies such as Google Inc, AT&T, and Verizon could help bring Cuba into the modern informa-tion age; U.S. companies are assessing the markets in Cuba. However, Cuba may choose to turn to China to build its broadband network, due to concerns that American companies could be used by the U.S. State Department to spy on the country.

Discussion Questions1. How do you believe Cuban will react when more and more people begin to have Internet access? Explain.

2. Do you believe the government in Cuban will want too much control of what is allowed in Cuba via the Internet? Explain.

Quiz Questions1. True or false. Twelve percent of Cubans currently have residential Internet access.

2. Multiple choice. According to "Where the Internet Revolution Is Waiting to Happen" (Bloomberg Business-week, September 7–13, 2015), Cuba may turn to what country to build its residential broadband?

a) Argentinab) Indiac) Chinad) Venezuela

Short Essay3. Although Cuba recognizes that it needs to expand Internet access, what dilemma does it face when doing so?

4. What suspicions does Cuba have with allowing Google to provide antennas to bring in high-speed connections?

Answer Key1. False2. c3. The Cuban government wants to expand Internet access while also maintaining control of information.4. Cuba suspects that Google may have ties to the State Department and is fearful that the United States could use the technology to spy on Cuba or scheme for regime change.

WHERE THE INTERNET REVOLUTION IS WAITING TO HAPPEN

Focus On/ ManufacturingSeptember 7 — September 13, 2015

Big Steel can’t support the weight of the dollar 50

Trade talks hit a wall named Mexico 46

A sneak peek at China’s next industrial revolution 47

Chipmakers want to wire the factory floor 48

 �Companies threatened by China bet on Italian-grade quality and speed

 �“It’s proof our strategy is the correct one”Alberto Sousa and his son, Filipe, are survivors. When their shoe factory northeast of Porto began losing clients to China a decade ago, the family-owned business revamped its strategy. “My father said to me, ‘Our costs are higher, our team is better. We have to sell better shoes,’ ” recalls Filipe, who is general manager of Alberto Sousa. Rather than compete with Asia on price, the Sousas wooed high-end labels and launched their own line of leather shoes, Eureka. Today the 430-employee company is among the biggest in Portugal’s shoe industry, producing 2,200 pairs daily and operating almost 30 stores. Revenue was €28 million ($32 million) in 2014; the company estimates it will bring in €31 million this year.

Despite Portugal’s recent economic troubles, which forced its government

to seek a €78 billion bailout in 2011 and implement harsh austerity measures, the Sousas and other shoemakers are thriving. The nation’s roughly 1,500 shoe factories employ more than 37,000 people and last year exported 77 million pairs worth more than €1.8 billion, up 50 percent from 2009, according to the Portuguese Footwear, Components and Leather Goods Manufacturers’ Association. The industry’s evolution from low-end to high-end exporter is a “major success story for Portugal” and a bright spot amid the crisis, says José Neves, the Portuguese-born founder of Farfetch, a London-based fashion e-tailer that stocks products from hun-dreds of independent boutiques world-wide. Neves also founded a company that helps shoe designers ¡nd manufac-turers in his native country.

Portuguese shoes now command the world’s second- highest average export price after Italy—almost $32, com-pared with about $4.50 for shoes made in China, accord-ing to the manufacturers’ association. That’s up from $21.38 in 2004. Leandro de Melo, managing director of the Portuguese Footwear Technology Centre, an industry- and government-funded organization that helps shoemakers upgrade their oper-ations, points out that over the past decade, Portugal’s production has increased at a faster pace than those of other European countries, while Italy’s has declined. Hobbled by higher labor costs, Italy has concentrated more on ¡nishing shoes they import instead

Portuguese Shoemakers Get Fancy

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Autos

Mexico Throws a Wrench Into Trade Talks

� The nation is opposed to granting Japan concessions on autos

� Trying not to “allow Asian-Pacific car companies to game the system”

When exhausted o�cials from the 12 countries negotiating the Trans-Paci�c Partnership wrapped up a week of talks in Hawaii at the end of July without reaching a deal, Mexico’s economy min-ister, Ildefonso Guajardo, brushed o� e�orts to pin the delay on him. “What you can accuse me of,” he told the press with an amused smile, is advocating for

company’s annual revenue. “It’s so easy to put your own brand at the end of the line. And that is a big, big mistake,” says Sampaio. “Nobody can think we’ll have a rich country, a developed country, just working for others.”

The industry has been buoyed by a proliferation of homegrown brands, with most fetching at least €100 per pair at retail. At his company’s factory, Filipe Sousa shows o� €140 leather boots from his Eureka brand, noting that margins on the six-year-old line are better than they are on contract orders. Eureka accounts for about one-third of the factory’s output, he says, and will be half next year.

At 200-employee Macosmi, a Portuguese shoemaker that invested €2 million in a factory renovation that includes a vertical garden on a ware-house wall, commercial director Pedro Lopes says house brand Coque Terra already accounts for one-quarter of the company’s business, even though it’s just three years old. “Made in Portugal is selling,” he says. —Nick LeiberThe bottom line Portugal’s 1,500 shoe factories have increased the value of their exports by 50 percent since 2009.

“the interests of my country.”Guajardo is �ghting to ensure that

the TPP does not jeopardize gains his country has made under the North American Free Trade Agreement, which eliminated tari�s on goods shipped between Canada, Mexico, and the U.S. Ford Motor, General Motors, and Chrysler (now Fiat Chrysler Automobiles) all expanded produc-tion south of the Rio Grande after the deal took e�ect in 1994 to take advantage of duty-free access to the U.S. market and Mexico’s low wages. European and Japanese manufacturers did the same. Last year, Mexico overtook Japan to become the second-largest exporter of vehicles to the U.S., behind Canada.

Clinching a deal on the TPP, a trade bloc that would stretch from Chile to Japan and cover 40 percent of the world’s economic output, is a top pri-ority for President Obama. To speed the talks along, Washington provision-ally agreed that Japan’s automakers should be allowed to ship vehicles to North America duty-free, even if a sig-ni�cant proportion of their content comes from non-TPP countries. (The U.S. levies a 2.5 percent duty on autos and 25 percent on light trucks from outside the Nafta area.) In the eyes of

the Mexicans, that means “anyone who is willing, ready, and able to build pickups could become a chal-lenge,” says Guido Vildozo, an analyst with consultant IHS Automotive.

Technically, the tussle is over so-called rules of origin. Under Nafta, a vehicle must get 62.5 percent of its content from inside the free-trade area

to qualify for duty-free treatment. Japan has been pressing for a lower threshold of 30 percent, as its automakers, including Renault-Nissan and Toyota Motor, get many of their components from China and Thailand, countries that aren’t part of the TPP negotiations. Washington agreed to meet Tokyo some-where in the middle in bilateral talks that preceded the larger meeting in July in Maui. The Mexicans, as well as the Canadians, weren’t pleased.

Carmakers and others in the industry are taking sides on the issue. The Mexican Automotive Industry

of manufacturing them from scratch. “It’s proof our strategy is the correct one,” de Melo says.

The Portuguese shoemakers thriving today followed a strategy similar to the Sousas’: They used pro�ts reaped during the industry’s Golden Age in the 1980s, when foreign companies ¤ooded them with low-end work, to

buy better machin-ery. Equipped with tools like preci-sion, high-speed waterjet cutters, factories can prof-itably produce small batches of multiple styles for luxury design-ers. Thanks to such investments,

Portugal’s factories are more ¤exible than their Asian counterparts, and faster, says João Maia, executive direc-tor of the leather goods associa-tion. Craftsmanship is Italian-grade, says Neves of Farfetch, but costs are 20 percent to 30 percent less. “All the big luxury labels have some part of their shoe collections developed or produced in Portugal,” he says.

The world’s biggest apparel retailer, Inditex, described Portugal as “a very signi�cant” supplier in an e-mail, though it declined to dis-close the percentage of footwear it buys from the country. Danish shoe-maker Ecco, which operates facto-ries and more than 3,000 retail outlets around the world, last year reopened its Portuguese plant, which it had closed in 2009. Ecco returned in part to take advantage of “some of the

best shoemaking knowledge,” spokes-woman Eva Kloch Norlyk wrote in an e-mail. Alberto Sousa’s clients include Germany’s Birkenstock, U.K. designer Sophia Webster, and Hennes & Mauritz’s upmarket label COS. Filipe Sousa says he has so many orders he’s had to subcontract work to other factories to meet demand.

As orders begin ¤owing back to Portugal, the industry should take care not to neglect its own brands, says Vasco Sampaio, whose father started Sozé in 1976. The shoe manufacturer’s house line, Dkode, supplies about half of the

Portuguese Shoe Exports

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AbstractPortugal has approximately 37,000 residents employed in the shoe industry, exporting 77 million pairs of shoes worth about $2 billion. Output has grown 50 percent in the past five years.

Portugal's shoe industry competes by having high skilled workers use high-end machines to make quality shoes in relatively small batches. The average export price is more than $30, whereas the average export price is under $5 for Chinese shoes.

Doing work as contract manufacturers for famous European brands is how the Portuguese industry got going, but now about half the output of some firms represents sales of their own branded products. Profit margins are higher when the shoe manufacturers sell under their own label, but they also face greater risks in terms of managing inventories and adapting to changes in fashion.

Discussion Questions1. Describe the relative positions of Italy, Portugal, and China in the global shoe industry.

2. What factors are contributing to the growth of the Portuguese shoe industry?

3. Why is Portugal able to charge much higher prices than China, on average, for its shoes?

Quiz QuestionsTrue or False1. Ecco, a large European shoe manufacturer and retailer, operates its own factory in Portugal.

2. Italian shoe manufacturers do less manufacturing than in the past, purchasing partially completed shoes from foreign manufacturers, and performing the finishing steps.

Short Essay3. Describe the relative positions of Italy, Portugal, and China in the global shoe industry.

4. Describe the strategy typically followed over the past thirty years by successful Portuguese shoe manufactur-ers.

Answer Key1. True2. True3. Italy is known for its high-end design and quality leather shoe products. China is known as a low-cost manufacturer of high volumes of shoes. Portugal makes shoes that are between these ends of the market, with good quality and smaller batch production than China. Whereas much of Chinese production is contracted out to foreign brands, Portuguese firms both serve as contract manufacturers and produce shoes that are sold under their own brands.4. In the 1980s, Portuguese shoe manufacturers received large orders for low-end work as a result of their low costs. They used the profits from these orders to invest in better machinery, including precision high-speed water-jet cutters. They can now use their combi-ination of skilled labor and quality equipment to make small batches of many different styles for high-end labels. They have also started their own brands and supplement the profits from contract manufacturing with profits on their own branded products

PORTUGUESE SHOEMAKERS GET FANCY