More Companies See Advantage to Manufacturing in the U.S.


Master Lock's manufacturing plant in Milwaukee, Wisconsin

Photograph by Andy Manis/Bloomberg  Master Lock’s manufacturing plant in Milwaukee, Wisconsin

It began as a ripple and is becoming a powerful wave.

I’m talking about the reverse migration of manufacturing from China to the U.S.—known as reshoring—that appears to be gaining momentum.

At first the evidence was primarily anecdotal, as companies such as NCR (NCR), All-Clad Metalcrafters, Master Lock (FBHS), Peerless Industries (PMFG), and Ford Motor (F) announced plans to shift certain manufacturing operations from China to the U.S.

Now, as more companies make similar announcements, what began as a trickle is building into an unmistakable trend. Further evidence can be seen in a new BCG survey of U.S.-based executives, more than half of whom told us they already have plans to bring production back to the U.S. or are actively considering it.

What we learned from the more than 200 survey respondents was eye-opening (though not surprising): Some 54 percent of the respondents told us they’re planning to reshore or seriously considering it. Asked the same question in February 2012, just 37 percent of respondents were considering such plans.

The new survey also found a significant increase in the percentage of companies that already have taken steps to shift production back to the U.S. On this question, 21 percent of respondents said they’re “actively doing this” or will do so “in the next two years.” This was more than double the 2012 percentage.

The main factors driving the reshoring decision were labor costs (cited by 43 percent of respondents), proximity to customers (35 percent) and quality (34 percent). Other factors included access to skilled labor, transportation costs, and supply-chain efficiencies.

The findings confirm that reshoring is more than just a buzzword; it’s a fact of life.

When executives consider the total cost of production for many products, especially those intended for the U.S. and other developed markets, the advantage now often shifts to the U.S. Labor costs, workplace flexibility, energy costs, productivity, proximity to market—they all add up to a growing U.S. advantage, which means more and more companies will continue to shift production to the U.S.

This means jobs. As we explained in August in one of our recent “Made in America, Again” reports, Behind the American Export Surge, reshored production from China, combined with production that’s being shifted from Europe and Japan to the U.S., could create 2.5 million to 5 million new factory and related service jobs by 2020.

As China gradually shifts its manufacturing emphasis from the export market to the domestic market, reshoring is likely to have less impact on the Chinese economy than it will on the U.S. economy. Assuming the Chinese economy doesn’t tank—and there’s no reason to believe it will—Chinese factories will have plenty to do to keep up with growing consumer demand at home and elsewhere in Asia.

And don’t forget: The fact that it makes good economic sense to reshore some manufacturing doesn’t mean it makes good economic sense to reshore all manufacturing. Chinese factories are not about to go silent. As the global economy continues its slow-but-steady recovery, there will be plenty of work to go around.

Hal_sirkin
Harold L. Sirkin is a Chicago-based senior partner of The Boston Consulting Group (BCG), a professor at Northwestern University’s Kellogg School of Management, and co-author, most recently, of The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback (Knowledge@Wharton, November 2012).
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China’s Coming Economic Slowdown

History shows that every economic miracle eventually loses its magic. How much longer can China sustain such astounding growth? 

The big question of the 20th century has not disappeared in the 21st: Who is on the right side of history? Is it liberal democracy, with power growing from the bottom up, hedged in by free markets, the rule of law, accountability and the separation of powers? Or is it despotic centralism in the way of Stalin and Hitler, the most recent, though far less cruel, variant being the Chinese one: state capitalism plus one-party rule?

The demise of communism did not dispatch the big question; it only laid it to rest for a couple of decades. Now the spectacular rise of China and the crises of the democratic economies—bubbles and busts, overspending and astronomical debt—have disinterred what seemed safely buried in a graveyard called “The End of History,” when liberal democracy would triumph everywhere. Now the dead have risen from their graves, strutting and crowing. And many in the West are asking: Isn’t top-down capitalism, as practiced in the past by the Asian “dragons” (South Korea, Taiwan, Japan) and currently by China, the better road to riches and global muscle than the muddled, self-stultifying ways of liberal democracy?

Workers at the Innovation Fulfillment Center at the Foxconn factory complex in Shenzen, 2010. China’s cost advantage is already plummeting; average wages have quadrupled since 2000. Tony Law/Redux

The rise-of-the-rest school assumes that tomorrow will be a remake of yesterday—that it is up, up, and away for China. Yet history bids us to be wary. Rapid growth characterized every “economic miracle” in the past. It started with Britain, the U.S. and Germany in the 19th century, and it continued with Japan, Taiwan, Korea and West Germany after World War II. But none of them managed to sustain the wondrous pace of the early decades, and all of them eventually slowed down. They all declined to a “normal” rate as youthful exuberance gave way to maturity. What is “normal”? For the U.S., the average of the three decades before the crash of 2008 was well above 3%. Germany came down from 3% to less than 2%. Japan declined from 4.5% to 1.2%.

What rises comes down and levels out as countries progress from agriculture and crafts to manufacturing and thence to a service and knowledge economy. In the process, the countryside empties out and no longer provides a seemingly limitless reservoir of cheap labor. As fixed investment rises, its marginal return declines, and each new unit of capital generates less output than the preceding one. This is one of the oldest laws of economics: the law of diminishing returns.

The leveling-out effect also applies to industrialized economies that emerged from a catch-up phase in the aftermath of war and destruction, as did Japan and West Germany after World War II. In either case, the pattern is the same. Think of a sharply rising plane that overshoots as it climbs skyward, then descends and straightens out into the horizontal of a normal flight pattern. The trend line, it should be stressed, is never smooth. In the shorter run, it is twisted by the ups and downs of the business cycle or by shocks from beyond the economy, such as civil strife or war.

Only hindsight reveals what has endured. In the middle of the “Surging Seventies,” Japanese growth flip-flopped from 8% to below zero in the space of two years. South Korea, another wunderkind of the 1970s, gyrated between 12% and -1.5%. As the Cultural Revolution burned through China in the same decade, growth plunged from a historical onetime high of 19% to below zero. Recent Chinese history perfectly illustrates the role of “exogenous” shocks, whose ravages are far worse than those wrought by a cyclical downturn. Next to war, domestic turmoil is the most brutal brake on growth. In the first two years of the Cultural Revolution, growth shrank by eight, then by seven, percentage points. After the Tiananmen Square massacre of 1989, double-digit growth dropped to a measly 2.5% for two years in a row.

The Cultural Revolution and Tiananmen hint at a curse that may return to haunt China down the line: the stronger the state’s grip, the more vulnerable the economy to political shocks. That is why the Chinese authorities obsessively look at every civic disturbance through the prism of Tiananmen, though that revolt occurred a generation ago. “Chinese leaders are haunted by the fear that their days in power are numbered,” writes the China scholar Susan Shirk. “They watched with foreboding as communist governments in the Soviet Union and Eastern Europe collapsed almost overnight beginning in 1989, the same year in which massive pro-democracy protests in Beijing’s Tiananmen Square and more than 100 other cities nearly toppled communist rule in China.”

Today, the world is mesmerized by awesome growth in China. But why should China defy the verdict of economic history from here to eternity? No other country has escaped from this history since the Industrial Revolution unleashed the West’s spectacular expansion in the middle of the 19th century.

What explains the infatuation with China? Western intellectuals of all shades have had a soft spot for strongmen. Just think of Jean-Paul Sartre’s adulation of Stalin or the German professoriate’s early defection to Hitler. The French Nobelist André Gide saw the “promise of salvation for mankind” embodied in Stalin’s Russia.

And no wonder: These tyrants promised not only earthly redemption but also economic rebirth; they were the hands-on engineers, while thinkers dream and debate, craving power but too timorous to go for it. Too bad that the price was untold human suffering, but as Bertolt Brecht, the poet laureate of German communism, famously lectured, “First the grub, then the morals.”

Harry Campbell

Today’s declinists succumb to a similar temptation. They survey the crises of Western capitalism and look at China’s 30-year miracle. Then they conclude once more that state supremacy, especially when flanked by markets and profits, can do better than liberal democracy. Power does breed growth initially, but in the longer run, it falters, as the pockmarked history of the 20th century reveals. The supreme leader does well in whipping his people into frenzied industrialization, achieving in years what took the democracies decades or centuries.

Under Hitler, the Flying Hamburger train covered the distance between Berlin and Hamburg in 138 minutes; in postwar democratic Germany, it took the railroad 66 years to match that record. The reasons are simple. The Nazis didn’t have to worry about local resistance and environmental-impact statements. A German-designed maglev train now whizzes back and forth between Shanghai and the city’s Pudong International Airport; at home, it was derailed by a cantankerous democracy rallying against the noise and the subsidies.

Top-down economics succeeds at first but fails later, as the Soviet model shows. Or it doesn’t even reach the takeoff point, as a long list of imitators, from Gamal Abdel Nasser’s Egypt to Fidel Castro’s Cuba, demonstrates. Nor are 21st-century populist caudillos doing better, as Argentina, Ecuador and Venezuela illustrate.

Authoritarian or “guided” modernization plants the seeds of its own demise. The system moves mountains in its youth but eventually hardens into a mountain range itself—stony, impenetrable and immovable. It empowers vested interests that, like privileged players throughout history, first ignore and then resist change because it poses a mortal threat to their status and income.

This sort of “rent seeking” is visible in every such society. As the social scientist Francis Fukuyama explains, reflecting on the French ancien régime: “In such a society, the elites spend all of their time trying to capture public office in order to secure a rent for themselves”—that is, more riches than a free market would grant. In the French case, the “rent” was a “legal claim to a specific revenue stream that could be appropriated for private use.” In other words, the game of the mighty is to convert public power into personal profit—damn markets and competition.

The French example easily extends to 20th-century East Asia, where the game was played by both state and society, be it openly or by underhanded give-and-take. Raising the banner of national advantage, the state favors industries and organized interests; in turn, these seek more power in order to gain monopolies, subsidies, tax breaks and protection so as to increase their “rents”—wealth and status above and beyond what a competitive system would deliver.

The larger the state, the richer the rents. If the state rather than the market determines economic outcomes, politics beats profitability as an allocator of resources. Licenses, building permits, capital, import barriers and anticompetitive regulations go to the state’s own or to favored players, breeding corruption and inefficiency. Nor is such a system easily repaired. The state depends on its clients, just as its clients depend on their mighty benefactor. This widening web of collusion breeds either stagnation or revolt.

What can the little dragons tell us about the big one, China? The model followed by all of them is virtually the same. But some differences are glaring. One is sheer size. China will remain a heavyweight in the world economy no matter what. Another is demography. The little dragons have completed the classic course. Along that route, toilers of the land, just as in the West, thronged the cities in search of a better life. This “industrial reserve army” held down wages, driving up the profit rate and the capital stock.

And so South Korea, Taiwan and Japan turned into mighty “factories of the world,” whose textiles, tools, cars and electronics threatened to overwhelm Western industry, as China’s export juggernaut does today. Once it empties out, the countryside can no longer feed the industrial machine with cheap labor.

China still has many millions of people poised to leave rural poverty behind, so don’t confuse it with Japan, whose shrinking and aging population won’t be replenished soon by immigration or procreation. Japan ranks at the bottom of the world fertility table, one notch above Taiwan and one below South Korea. Call it East Asia’s “death wish.” China’s “reserve army” still has a long way to go. Nor has this very poor country exhausted the classical advantages of state capitalism, such as forced capital accumulation, suppressed consumption and a cavalier disregard for the environment.

But beware the curse of 2015. Despite its rural masses yearning to go urban, China’s workforce will start to decline while its legion of graying dependents keeps ballooning—the result of an abysmally low fertility rate, better health and rising life expectancy. As China gets older, America will become younger thanks to its high rates of birth and immigration. An aging society implies not only a smaller workforce but also a changing cultural balance between those who seek safety and stability and those who want to risk and acquire—traits that are the invisible drivers of economic growth.

At any rate, China’s cost advantage is plummeting. Since 2000, average wages have quadrupled, and the country’s once spectacular annual rate of growth no longer registers in the double digits.

Discontent there, as measured by the frequency of “public disturbances,” is rising, but it is about local corruption and elite rent seeking, not about cracking the political monopoly of the Communist Party. One Tiananmen demonstration does not a revolution make. There is no shortcut to the mass-based protests that dispatched the tyrants of Taipei and Seoul.

Nor is there an imminent ballot-box revolution in China’s future. It took Japan’s voters a half century to dismantle the informal one-party state run by the Liberal Democratic Party, and this in a land of free elections. The Chinese Communist Party need not fear such a calamity; it is the one and only party in a land of make-believe elections.

And yet.

History does not bode well for authoritarian modernization, whether in the form of “controlled,” “guided” or plain state capitalism. Either the system freezes up and then turns upon itself, devouring the seeds of spectacular growth and finally producing stagnation. (This is the Japanese “model” that began to falter 20 years before the de facto monopoly of the LDP was broken.) Or the country follows the Western route, whereby growth first spawned wealth, then a middle class, then democratization cum welfare state and slowing growth. This is the road traveled by Taiwan and South Korea—the oriental version of Westernization.

The irony is that both despotism and democracy, though for very different reasons, are incompatible with dazzling growth over the long haul. So far, China has been able to steer past either shoal. It has had rising riches without slowdown or revolt—a political miracle without precedent. The strategy is to unleash markets and to fetter politics: “make money, not trouble.”

Can China continue on this path? History’s verdict is not encouraging.

This essay is adapted from Mr. Joffe’s “The Myth of America’s Decline: Politics, Economics and A Half Century of False Prophecies,” which will be published by Liveright on Nov. 4. He is the editor of Die Zeit, Germany’s most widely read weekly newspaper, and a fellow of the Hoover Institution and the Freeman-Spogli Institute for International Studies at Stanford University.

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Cheaper Sugar Sends Candy Makers Abroad

Price Squeeze in U.S. Is Sticky for Confectioners

Despite a prolonged slide in domestic sugar prices, U.S. candy makers are expanding production in other countries as federal price supports and a global glut of the sweet stuff give an ever-greater advantage to foreign rivals.A 50% drop in U.S. sugar prices in the last two years hasn’t been enough to eliminate problems from a longtime price gap between domestic and foreign sugar.

On Friday, the U.S. sugar contract in the futures market settled at 22.28 cents a pound, or 14% higher than the benchmark global price.

Jelly Belly, whose facility in Fairfield, Calif., is shown above, is expandingits factory in Thailand. Bloomberg News
A Jelly Belly portrait of Marilyn Monroe. Associated Press

U.S. prices can’t fall much lower because of a federal government program that guarantees sugar processors a minimum price. The rest of the world also has a surfeit of sugar, but fewer price restrictions, and big growers like Brazil are expecting a record crop for the current season.

The squeeze explains why Atkinson Candy Co. has moved 80% of its peppermint-candy production to a factory in Guatemala that opened in 2010. That means it can sell bite-size Mint Twists to retailers for 10% to 20% less.

“It wasn’t like we did it for profit reasons. We did it for survival reasons,” said Eric Atkinson, president of the family-owned candy maker, based in Lufkin, Texas. “These are 60 jobs down there…that could be in the U.S.,” he added. “It’s a damn shame.”

Jelly Belly Candy Co. is finishing its second expansion of a factory in Thailand that was opened by the Fairfield, Calif., company in 2007. The sixth-generation family-owned firm sells about 20% of its jelly beans, made in flavors from buttered popcorn to very cherry, outside the U.S.

Sugar makes up about half of the ingredients and cost of a typical jelly bean, said Bob Simpson, Jelly Belly’s president and chief operating officer. Thailand is the world’s fourth-largest sugar producer and gives Jelly Belly access to cheaper sugar, labor and other raw materials than the candy maker has in the U.S.

“You can’t compete shipping finished U.S. goods” anymore, Mr. Simpson said. In the U.S., Jelly Belly has had to raise prices “several times” in the past 10 years due to high sugar prices.

Some U.S. candy makers blame the federal government’s sugar policy, set by Congress and administered by the Agriculture Department. Loans, marketing allotments and import restrictions guarantee a minimum price of about 21 cents a pound to domestic sugar processors. Sugar users say the protections inflate wholesale prices, hurt profit margins and sap the competitiveness of U.S. candy makers in the global market.

The price-support program’s defenders say it is an essential safety net for domestic sugar growers and processors besieged by record imports from Mexico. U.S. government-backed loans are the only option for some processors that need access to financing, according to the American Sugar Alliance, an industry group. Without the current U.S. sugar policy, 90% of the 142,000 sugar-growing and processing jobs in the U.S. would be in danger, the industry group estimates. The alliance also says that sugar makes up an extremely small percentage of the retail cost of candy and has little impact on U.S. jobs.

From 2000 to 2012, the average price of U.S. sugar was more than double the world-wide average, according to pricing data from the ICE Futures U.S. exchange, where both the U.S. and global contracts are traded, and the Agriculture Department.

Total U.S. confectionary-manufacturing employment sank 22% to about 55,000 jobs in 2011 from 1998, according to an analysis of U.S. Census Bureau data by The Wall Street Journal. The number of industry manufacturing locations fell 7.7% to about 1,600 in the same period.

Three candy-making jobs are lost for each sugar-growing and processing job saved by higher sugar prices, according to a Commerce Department report in 2006.

In a sign that candy makers are taking advantage of lower sugar prices elsewhere, the amount of sugar contained in imported products surged 33% from 2002 to 2012, according to the Agriculture Department.

For many types of candy, there is no substitute for sugar. The gap has caused some U.S. companies to abandon their longtime resistance to moving at least some production to cheaper countries.

Candy-cane maker Bobs Candies Inc. moved half of its manufacturing to Mexico between 2001 and 2002 from the family-owned company’s hometown of Albany, Ga. The remaining 250 jobs left after the company was sold in 2005 to Farley’s & Sathers Candy Co., now called Ferrara Candy Co. “No one cared if [the candy canes] were ‘made in the U.S.A.’ They just cared if they were cheaper,” said Greg McCormack, who ran Bobs Candies at the time. Eliminating candy-making jobs in the U.S. left “a bad taste in your mouth, but it was the medicine you had to take to stay in business.”

Financial pressures have grown because rising costs for labor, utilities, packaging, freight and health care in the U.S. make it impossible to lower candy prices when the cost of sugar drops, some candy makers said.

“There are years where we are at a great disadvantage to the world users of sugar when prices are rising,” said Pierson Bob Clair, president and chief executive of Brown & Haley, a Tacoma, Wash., candy maker that produces 55,000 pounds of Roca butter-crunch candy a day in the U.S. Mr. Clair said he would “lower the price of my products” if the sugar program was eliminated. Proposed legislation to overhaul the sugar program was narrowly defeated in the House and Senate earlier this year, and aides to lawmakers don’t see any changes in the coming farm bill.

Goetze’s Candy Co., a 118-year-old, family business in Baltimore that sells caramel candy under the Caramel Creams and Cow Tales brand names, would rather close its factory “before we move it out of the country,” said Mitchell Goetze, president and chief operating officer. Still, “when you’re selling a $1 bag of candy, it’s hard to be competitive and absorb these costs.”

Atkinson’s move to Guatemala didn’t affect production of brands such as the Chick-O-Stick and Coconut Long Boys because they contain less sugar than Mint Twists. They are still made in the U.S. But the individually wrapped peppermint candies, made with natural cane-sugar syrup and peppermint oil, are 60% sugar. Less than one-fourth of the candy maker’s total production has been moved outside the U.S., but the percentage being produced abroad is growing, said Mr. Atkinson. The foreign expansion, including a second shift just added at the factory in Guatemala, helps the company sell its products at lower prices that appeal to larger retailers.

“We would prefer to be able to make candy in the United States,” he said.

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What the World Would Look Like If Countries Were As Big As Their Online Populations

Helloooooo China!

The Internet we each see every day is an infinitesimally tiny sliver of the whole—the parts we have curated for ourselves, the parts our network of friends and family sends to us, and the sites that we have made parts of our routines.

But beyond this micro-level editing, there are also macro forces at work: The Internet largely exists for and is created by the people who are on it. The map above gives a rough idea of who those people are—or, at least, where they are.

The map, created as part of the Information Geographies project at the Oxford Internet Institute, has two layers of information: the absolute size of the online population by country (rendered in geographical space) and the percent of the overall population that represents (rendered by color). Thus, Canada, with a relatively small number of people takes up little space, but is colored dark red, because more than 80 percent of people are online. China, by contrast, is huge, with more than half a billion people online, but relatively lightly shaded, since more than half the population is not online. Lightly colored countries that have large populations, such as China, India, and Indonesia, are where the Internet will grow the most in the years ahead. (The data come from the World Bank’s 2011 report, which defines Internet users as “people with access to the worldwide network.”)

Another map, from Nature (in 2006, so slightly outdated), provides a good point of comparison. This map shows countries by their population size, visually portraying the data that the shading in the first map is based on:

China, of course, dominates both. But what is interesting in comparing the two is how outsized Europe and South Korea are in the Internet population map, captured in their darker shading. In fact, all but four of the countries with more than 80 percent of their populations online are in Europe: South Korea, New Zealand, Qatar, and Canada. Together with much of Europe, these are the parts of the world that have gotten the vast majorities of their people online the fastest.

Mark Graham and Stefano De Sabbata, the creators of the top map (and also ofthe “Internet Empires” map from last week), highlight two additional trends:

First, the rise of Asia as the main contributor to the world’s Internet population; 42% of the world’s Internet users live in Asia, and China, India, and Japan alone host more Internet users than Europe and North America combined.

Second, few of the world’s largest Internet countries fall into the top category (>80%) of Internet penetration (and indeed India falls into the lowest category, at <20% penetration). In other words, in all of the world’s largest Internet nations, there is still substantial room for growth.

They also note that although many African countries appear relatively very small on the Internet penetration map, many of these countries have experienced the fastest growth since their last such map, from 2008, when they didn’t even appear:

Graham and De Sabbata write:

In the last three years, almost all North African countries doubled their population of Internet users (Algeria being a notable exception). Kenya, Nigeria, and South Africa, also saw massive growth. However, it remains that over half of Sub-Saharan African countries have an Internet penetration of less than 10%, and have seen very little grow in recent years.

The portrait of the world that the map depicts is one of very uneven access to the Internet, with the vast majority of people disconnected from this global network. Bear in mind, the authors say, that overall “only one third of the world’s population has access to the Internet.”

 

Afghan Business Tale: Don’t Try This

Take Earth’s Toughest Startup Conditions, Add Army Veterans, Then ‘Beat Your Head Against the Wall’

Dion Nissenbaum. WSJ.com

Matthew Griffin had an unusual swords-to-ploughshares business plan he hoped would help bring a measure of economic security to one of the least secure places in the world.

The shaggy-haired former Army Ranger wanted to hire scores of factory workers in Kabul to assemble flip-flop sandals from poppy-patterned soles and other Chinese-made parts trucked across Afghanistan’s unstable border with Pakistan. And, he wanted to decorate the straps with the butt ends of AK-47 shell casings, a detail he figured would appeal to trend setters in the U.S., where he planned to sell the finished footwear.

Afghan workers making the ill-fated first batch of Combat Flip Flops in 2012. Reuters

What could go wrong? For Mr. Griffin and his business partners at Combat Flip Flops, it turns out, just about everything.

The first batch of the flip-flops was a failure. The factory he hired on his second try went out of business before it could make a single sandal. Now, Mr. Griffin and his partners are setting up shop in Colombia, thousands of miles away from Kabul’s perch on the edge of the rugged Hindu Kush mountains.

“What a long, strange trip it’s been,” said 36-year-old Donald Lee , another former Army Ranger, who helped found Combat Flip Flops with Mr. Griffin, 34.

Afghanistan was once fertile ground for aspiring entrepreneurs who knew how to take advantage of the billions of dollars that flooded the country after the U.S. invaded in 2001. They succeeded in setting up Thai restaurants on military bases, beauty spas with armed guards and incense-scented yoga studios surrounded by blast walls. But making beach wear in a landlocked country?

While it isn’t uncommon to see Afghan soldiers or Taliban fighters wearing rubber sandals that they can slip off many times a day for prayer or before entering homes, a common courtesy in the region, Combat Flip Flops were aimed at a different clientele. The company’s slogan: “Bad for running, worse for fighting.”

“We wanted to take something 180 degrees from combat and make a product for people going to a beach and having a good time,” said Mr. Griffin. “Our flip-flops are weapons for change.”

Mr. Griffin got the inspiration for Combat Flip Flops in 2009 when he toured a Kabul boot factory run by John Boyer , a former U.S. Marine captain and Iraq war veteran who had no previous experience operating a manufacturing plant.

Mr. Boyer, 34, said he first came to Afghanistan in 2008 because he wanted to impress his then girlfriend with his sense of adventure. “I was young enough and dumb enough to go for it.”

Though he decided to help set up the boot factory, he said he thought that making boots for the Afghan army was a bad idea. Afghan soldiers kept their boots unlaced for easy removal at prayer times, and they didn’t really seem to like wearing them. So, Mr. Boyer helped design an alternative: flip-flops with combat soles from the factory line.

The U.S.-led military, which had invested millions of dollars in the local boot-making business, wasn’t interested in Mr. Boyer’s prototypes, but they were just the inspiration Mr. Griffin was looking for. Combat Flip Flops was born.

Mr. Griffin turned to China for cheap raw materials, but by the time the first supplies were ready to ship to Kabul, Pakistan had shut its border with Afghanistan to protest an errant U.S. attack that had killed more than two dozen Pakistani soldiers in November 2011.

Mr. Griffin had the shipment rerouted through Tajikistan into Kabul, where Mr. Boyer was preparing to produce the first 2,000 Combat Flip Flops.

Those flip-flops ended up being too poorly made to pass muster in the U.S. So Mr. Griffin gave them away in Kabul, got his money back and went back to the drawing board.

The second Kabul factory Mr. Griffin hired abruptly went out of business when it lost its major contracts with the U.S.-led military coalition.

After that Mr. Griffin had his flip-flop making supplies shipped from China to his home in Issaquah, Wash., where he spent hours with a hacksaw fruitlessly trying to cut thousands of AK-47 bullet casings for use on the flip-flops. He eventually resorted to using replicas.

Mr. Griffin and his friends then transformed his garage into a mini-factory that churned out 3,400 pairs of Combat Flip Flops. The flagship AK-47 style, which sells online for $65 a pair, features the replica bullet parts and a poppy design on the sole—a nod to Afghanistan’s reputation as a major heroin source.

For now, the company has given up on making flip-flops in Afghanistan and is instead pinning its hopes on a factory in Colombia, which Mr. Griffin says has “more security per square foot than any other country in the world.”

Despite all his setbacks, Mr. Griffin is willing to go to great lengths to promote his flip-flops. Earlier this year, he vowed to wear them for the traditional running of the bulls in July in Pamplona, Spain, if his company got 10,000 “likes” on Facebook. It got just 3,000, but he went ahead anyway, wearing the flip-flops for a short part of the run. Afterward, in the bull ring, he tried—and failed—to hang his sandals on a bull’s horns.

“Flip-flops are bad for running—and we proved it,” he said.

Combat Flip Flops is still looking to give Afghanistan a chance. The owners want to transform a shipping container into a mobile factory that they can set up in western Afghanistan. But the export route for the flip-flops would lead through Iran, which could be a violation of U.S. sanctions.

Mr. Boyer, whose factory in Kabul shut down last year after it lost its military contracts, is sympathetic to the company’s cause. “In Afghanistan you’ve just got to beat your head against a wall until you understand how things get done,” he said. “I’m just not sure whether flip-flips can happen anytime soon.”

Kenya Siege Damages African Success Story

Major Retailer Whose Flagship Store Was Destroyed Struggles to Recover, as Fears Rise Over Broader Economic Impact

 

By  PATRICK MCGROARTY, WSJ.com

Nakumatt, a homegrown corporate success story in Kenya, is now a charred husk in the wake of the Westgate mall terror attacks. Patrick McGroarty joins the News Hub with a look at what the tragedy means for Africa’s premier emerging economy. (Photo: AP)
NAIROBI, Kenya—When Islamic militants killed dozens of people at Nairobi’s Westgate mall last week, they also battered one of Africa’s homegrown corporate success stories and set back a rising economy.
Gunmen entered the Nakumatt retailer shortly after the assault began on Sept. 21, spraying bullets across the aisles as some shoppers tried to climb the shelves and others cowered with their children in a store room. Those who failed to recite Islamic prayers were executed. The four-day standoff killed at least 67 people, injured hundreds and left a shining symbol of emerging Africa, Nakumatt Holdings Ltd., in tatters.
Nakumatt, which sells everything from bananas to bicycles, earns more than a 10th of its $500 million in annual revenue from its flagship Westgate store, whose destruction is a major blow to the company, said Atul Shah, managing director of Nakumatt Holdings Ltd. Three of his employees were slain in the attack. “We are still trying to believe this is not real,” he said. “‘What next?’ is the question I’m asking.”The question is also weighing on the minds of many investors in Kenya. Like Africa’s other dynamic economies, the country has troubled neighbors, in this case Somalia, whose terror group al-Shabaab claimed responsibility for the attack. The Westgate attack is a reminder of how easily extremists with guns can move across porous borders to strike at pockets of African prosperity.
“There’s always going to be that lingering fear now: Can this happen again?” said Biniam Yohannes, who manages a fund in Nairobi with $150 million invested in East Africa. Somalia is still emerging from two decades of civil war. African peacekeepers have pushed al-Shabaab out of its Somalian strongholds, including the capital, Mogadishu, but militants have shown they are still capable of violent attacks inside the country and beyond.
A similar pattern has surfaced in other parts of Africa. After Libyan dictator Moammar Gadhafi was deposed in 2011, arms from his arsenal seeped south across the Sahara, bolstering militants that took control of northern Mali this year and continue to attack civilians and soldiers in northern Nigeria. South Africa is hampered by its northern neighbor Zimbabwe, where the failed economic policies of strongman President Robert Mugabe have sent millions of his citizens fleeing across the border. “A state isn’t failing in isolation,” said Clare Allenson, an Africa analyst at Eurasia Group. “When it’s your neighbor there are really problematic linkages.”
Before the Westgate attack, Kenya’s economy was humming. Nairobi, the capital, is a hive for African technology firms and multinationals. Kenya’s statistics agency said Tuesday that the economy grew at an annualized rate of 4.3% in the second quarter and 4.4% in 2012.Moody’s Investors Service said last week that the Westgate attack would likely shave 0.5 percentage points off Kenya’s economic growth this year and curtail critical foreign currency earnings mainly due to the likelihood of fewer tourist visits to the country’s national parks and beaches.Among the biggest potential victims are the companies riding Kenya’s emerging consumer class. Restaurants, hotels and consumer-oriented manufacturers are expected to all feel the pain if Kenyans stay home and foreign visitors curtail spending.
“Kenyans need to be urged to spring back and continue doing whatever they are doing, defy all the doings of terrorists and support growth,” said Nakumatt’s Mr. Shah.  Mr. Shah, 53 years old, was raised in the dusty Rift Valley town of Nakuru, where he grew up working in his father’s mattress store. In the late 1980s he dreamed of converting it into a chain of Western-style grocery and retail outlets, opening his first store in Nairobi in 1992.Today Nakumatt is East Africa’s top retailer by sales and revenue, with 40 stores across Kenya, Uganda, Rwanda and Tanzania. Before the Westgate attack, Mr. Shah was developing plans to open six stores this year in Kenya and Uganda. He still hopes to do so. Its Westgate store, in the heart of Nairobi’s embassy district, attracted the city’s comfortable and cosmopolitan upper crust. Mr. Shah visited the store himself on the morning of the attack, and he had just settled into his office near the airport when his wife called him screaming. 
image

Associated Press

A Kenyan policeman walks through the remains of the Nakumatt store in Nairobi’s Westgate mall on Tuesday, days after Islamist militants attacked.
“There is firing going on like mad, mad—they are going to kill us,” Ms. Shah said from her car, parked outside Westgate, Mr. Shah recalled. She cowered beneath the steering wheel while attackers fired 10 bullets into her car. Mr. Shah rushed to the scene, hoping to help her and a regional manager taking cover on the store’s loading bay as militants gunned down shoppers and workers inside. “I was just trying to be hopeful,” Mr. Shah said. “I could do nothing else.”
After avoiding malls for a week, Mr. Yohannes, the private equity director, said he started shopping again at a Nakumatt two blocks from Westgate. Such a yearning for normality, says he and others, points to the potential recovery for Nakumatt, a pillar of daily life for many East Africans, and other retailers. “Consumer demand is still intact—people still need reliable goods and services and suppliers need to keep up,” said Vimal Shah, who heads an edible oils manufacturer that supplies Nakumatt and isn’t related to its owner.On Tuesday, Kenya’s President Uhuru Kenyatta pledged to keep the country on track and punish the perpetrators. “We fought back as one people and continue to heal our grievances together,” he told a multi-faith prayer service in honor of those killed.He also announced a government inquiry into the police and army’s response to the attack.
Business owners in the mall have accused those forces of looting their stores, and Kenya’s Red Cross says 39 people may still be missing in connection with the attack. The government maintains no one has been reported missing to police.Meanwhile, Mr. Shah is trying to mend his business. He spent the last 10 days meeting with tight-lipped security personnel and insurance companies, discerning what he’ll recoup from a store that contained up to $11.6 million worth of stock and equipment. Reassuring those who work for him and buy his goods could take longer. “We’re in trouble. There’s a lot of pressure,” he said. “We have to bring customers back.”

Write to Patrick McGroarty at patrick.mcgroarty@wsj.com

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