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Shoes on the Other Feet

I remember going up to the Vale dos Sinos with George Lannon, the Consul in Porto Alegre.  Our mission was to talk to Brazilian shoe makers there.  There was a trade dispute back then. Brazilian shoe makers, many located in the Vale dos Sinos near Porto Alegre in Rio Grande do Sul, were producing inexpensive, good quality shoes that were beating the domestic producers in the American market. This was more than twenty-five years ago.

I recall hearing the competition talking about the various “unfair” advantages the Brazilian shoemakers enjoyed.  They were close to inexpensive sources of quality leather, because of all the cattle raised in the region; they had the advantages of cheap labor and a low exchange rate; some people complained that labor conditions were oppressive.  (At the factories, BTW, we found working conditions were good.  It reminded me of Germany in many ways, since many of the people there were of German descent and they seem to run their businesses on that model.)  On top of all that, they made good shoes  because the firms were well managed and the workers skilled.  They studied and brought back skills from the premier leather processors in northern Italy.  I really had to respect their initiative and follow through.

Times change. I understand that. Nevertheless, I was surprised to learn that many of those thriving factories were closed or suffering mightily, not only Rio Grande do Sul, but all over the Brazilian leather industry. They could not compete with the cheap imports from China.  Brazil tried to protect its leather industry, but the Chinese figured out ways around the barriers and their price advantage was just too overwhelming. 

Nobody has a permanent advantage and the apparently monumental Brazilian advantages evaporated in the last quarter century.  The Brazilian shoe makers complain that the Chinese have unfair advantages. They have access to cheap leather, a low exchange rate and labor that works under oppressive conditions. They might be right about some of these things, especially about the exchange rate, which the Chinese keep artificially low, but it doesn’t change the outcomes.

When American firms were faced with competition from cheaper products, one of the responses was to move to higher value added products.  Some of the Brazilian firms are doing that too. A report on Brazilian TV explains how Brazilian firms are making very high quality, customized products.  

Ironically, many of their most expensive shoes are aimed at the Chinese market. They evidently found a niche there among rich Chinese, who are willing to pay high prices and are impressed by the outward signs of quality as well as the snob appeal of having something expensive and custom made. 

People who study these things call them “positional goods” and refer to things that are valued less for their qualities than for their exclusivity. A rich person can only eat so much, drink so much or wear so many sets of clothes. In our modern world, even relatively poor people can partake in the luxuries once the exclusive domain of the rich. It makes it harder for the rich to express their status. The availability of tangible goods can expand. Everybody, or almost everybody, can have a refrigerator, good shoes or clothes of decent quality, but relative status is limited.  Status seeking rich guys look for things that are limited.   Returning to the example above, everybody can have good shoes these days, but the exclusive, handmade shoes are rare and so status enhancing for those who care about those things.   Thorstein Veblen wrote about this a century ago when he coined the term conspicuous consumption in his “Theory of the Leisure Class.”

For the time being, this redounds to the benefit of the Brazilian shoe makers.  The Chinese keep their currency artificially low against the Brazilian Real (against the dollar too, but that is another story), which makes Brazilian goods more expensive in China than they would otherwise be. But in the case of conspicuous consumption goods, price doesn’t matter.  In fact, the higher price, which keeps poorer people from owning the goods of desire, may actually heighten their attractiveness.  So the shoemakers get benefits from the high price they can charge enhanced by their overvalued currency, when they collect even more money from the Chinese fat-cats. 

Nevertheless, they should not rely on this situation lasting forever.

I have been following business stories for more than twenty-five years. I read about the decline and fall, and sometimes about the rebound and success.  Today's hero may turn into tomorrow's dog, as good times are followed by bad ones. But wait, you might make a comeback. Continued success depends on continuous adaption. The game is never over; there is no finish line. This is bad news when you are on top, but encouraging if you are not.  Veblen has an insight about this too. He talked about the advantage of borrowing and the penalty of taking the lead.  When you develop something that works, others can copy what works, leave behind the mistakes & then innovate some more. The Brazilian leather workers did this a quarter of a century ago, when they learned the best techniques from places like Italy & the U.S.  The Chinese did it after that. Everybody can do it, but we need to pay attention and be open to change.


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