China's middle class growth offers shoe export opening

CEO Paul Grangaard of Allen Edmonds Shoes dodged bankruptcy in 2008, regrouped around a new strategy and led the Wisconsin-based premium men's shoemaker to record financial results over the last three years.

Now, in an industry that lost most of its U.S. manufacturers to Asia over the last 30 years, Grangaard is opening Allen Edmonds stores in Hong Kong, Shanghai and Beijing starting next month to sell U.S.-made shoes in China.

Well-heeled Chinese companies and consumers increasingly are stepping up to buy made-in-the-USA medical products, small aircraft, meats, machinery and shoes. Minnesota exports to China last year totaled $1.93 billion, up 89 percent from three years ago. In the first half of 2012, Minnesota exports to China are up 15.4 percent to nearly $1.3 billion.

"China has a huge population of 1.3 billion people, a growing middle class of consumers and increasing prosperity and money to spend," said Alan Thometz of accounting and advisory firm Grant Thornton, who advises U.S. firms on Chinese investments and acquisitions. "All of these conditions translate into greater demand and greater imports from everywhere, including Minnesota."

Both Allen Edmonds, which is majority-owned by Minneapolis private equity firm Goldner Hawn Johnson & Morrison, and Red Wing Shoes are capitalizing on the Midwest export surge to China.

"A $300 pair of shoes over here is $580 over there," Grangaard said in a recent interview. "A guy who makes $60,000 over there doesn't spend it on an [expensive] home. They spend it on clothing and shoes. I think [China] could be $100 million in sales by 2020."

That's impressive for 900-employee Allen Edmonds, which only crossed $100 million in total sales in 2011.

Exporting advantage

Peter Engel, a Red Wing Shoes vice president, said the company's footwear exports to Hong Kong nearly doubled to $8.5 million between 2009 and 2011, although some of that product ended up in Vietnam and other Asian destinations.

In 2006, Red Wing Shoes, which employs 1,135 at Red Wing-area plants, shipped $900,000 worth of prepared leather from its Red Wing tannery. Last year, the company shipped $10 million worth of prepared leather to Chinese factories for production of higher-end shoes.

"This leather exporting has allowed us to run our Red Wing tannery at or near capacity, which creates favorable efficiencies in our cost structure for our U.S.-made work boots," Engel said. "Leather and labor are the major cost components in footwear, so this helps us remain competitive. It also allows us to make a better product in China at two factories we work with there."

The Minnesota Trade Office recently reported that state exports to China in the first half of 2012 are up 15 percent -- the biggest percentage gain among all Minnesota's trading partners.

America still imports about $4 in Chinese goods for every $1 of goods we sell to them. However, we're growing exports faster lately.

U.S. exports to China grew 32 percent in 2010 and 13 percent, to $104 billion, in 2011, according to the U.S.-China Business Council. That compares with Chinese imports to America that grew 23 percent in 2010 and 9.4 percent, to $399 billion, in 2011.

The United States, with about 325 million people still boasts an economy that is larger than China. U.S. GDP per capita is $49,000; China's is about $6,000.

The Chinese economy has slowed in recent years from a torrid 12 percent annual growth rate in September 2010 to about 7.4 percent in September. Despite the slowdown, China still has the fastest-growing economy among the major trading nations. China should grow about 8 percent this year compared with about 2 percent for the more-mature U.S. economy.

Some U.S. manufacturers have pulled back from Chinese manufacturing for a variety of reasons, including increased wages for Chinese laborers and problems meeting U.S. specifications and delivery timetables.

"U.S. companies continue to see strong growth and profitability in China," said John Frisbie, president of the U.S.-China Business Council, earlier this month. "Two-thirds of companies surveyed said revenue from their businesses in China grew by 10 percent or more in the past year. Seventy-five percent said profit margins from their China operations were the same as or better than their company's global margins."

Jim Graner, chief financial officer of Minneapolis-based Graco Inc., said the company, which makes industrial paint sprayers and fluid handling equipment, followed customers such as GM, Volkswagen and Toyota 20 years ago to China when the carmakers opened factories there.

Graco's Chinese sales have grown about twice as fast as the overall company, Graner estimated. That includes lubrication products for wind turbines as well as vehicle servicing and paint sprayers for auto factories, housing and commercial buildings.

Grainer said lower-cost Chinese competitors try to copy Graco's equipment.

"They try to knock us off with lower-price equipment," Graner said. "But we get fantastic product and very good productivity from our [Minnesota] workforce."