NIKE’s Foreign Investments
Almost 85 percent of NIKE Inc’s total revenues is attributed to the NIKE Brand, which is considered its most powerful asset. To license foreign investment NIKE Inc. had been established as the Blue Ribbon Shoe before it was renamed NIKE Inc. Since then it used direct foreign investment as a strategy that has helped achieve great success. NIKE Inc. increased its foreign investments by acquiring Umbro. This has made it the world’s biggest company in respect to football. By the end of the fiscal year 2015, NIKE brand is expected to be valued at $23 billion. Some of the NIKE Inc. foreign investments include the following:
- Action Sports is NIKE Inc.’s investment that has reported rapid growth in the global market. By the end of 2015 it is estimated at $390 million. The common brands are NIKE SB and NIKE 6.0.
- NIKE Inc. has made foreign investments in basketball. The most popular brand in this category is Jordan. It has the most opportunities in China and the United States of America. This particular investment currently generates a profit of $1.7 billion.
- Another foreign investment of the company is the NIKE Brand Football that was used in a world cup, which includes the NIKE Football, national team kits and new footwear. This investment contributes around $1.7 billion to company’s revenues.
- NIKE Inc. has invested in running sports that produces a revenue of $2.1 billion. The brands in this category include Nike+ enabled footwear, Lunar Cushioning and Flywire.
- NIKE Inc. has also made a foreign investment in Sportswear that contributes about $4.9 billion. The most popular product in this category is Air Force 1.
- The company has made a foreign investment in Women’s Training. NIKE is the leading supplier of women’s training footwear in the top five European markets and the United States. The company has developed NIKE Free footwear that allows a person to move naturally due to the less shoe put between the foot and the ground. This contributes a revenue of $740 million on an annual basis.
- The company has also invested in the opening of around 300 NIKE brand retail stores globally. This investment is expected to bring a revenue of about $ 2.4 million at the end of the fiscal year 2015.
Current and Past Foreign Financing
Current foreign financing of NIKE Inc. is aimed at the establishment of several foreign subsidiaries. NIKE Inc. has put in place this mechanism to penetrate the global market. Foreign subsidiaries receive initial capital from the company to produce and sell their products to the available markets.
All foreign subsidiaries run according to the specifications and guidelines provided by NIKE Inc.. This kind of investment is cheaper for the NIKE company compared to buying an organization with existing operations. NIKE Inc. does not get any revenue from its foreign subsidiaries until it has set the requirements for production and established a customer base for the produced goods.
The main reason for the establishment of new foreign subsidiaries is to increase company’s participation in the global market. The company wants to increase the capital by exploiting new markets for its products. Through this foreign financing approach the company can increase its stock market motivating more people to buy its shares.
Prior foreign financing conducted by NIKE Inc. was licensing. NIKE signed a licensing agreement with Unitsuka Tiger Shoe Company to sell its shoes in the United States under the Blue Ribbon Sports brand.
Licensing agreements allow the owner organization to run in the foreign countries without making any investments. The organization can sell its products in the foreign country without incurring the exportation costs. This is what Unitsuka Tiger Shoe Company used to do when it licensed Blue Ribbon Sports to sell its products. Through license agreement, it is almost impossible for the licensing company to check the activities of the licensed company.
Blue Ribbon Sports products were exported to Canada without the consent of the producer in 1974. Knight was able to export his shoe brand to Australia. He went ahead to produce athletic shoes at licensed factories in Taiwan and Korea and then sold them to Asian nations. NIKE Inc. was formed from the BRS in 1998. NIKE used licensing to actually sell its goods. In 1978 NIKE established foreign financing of foreign direct investment, which contributed immensely to its growth in the global market.
Successes of NIKE Inc.’s Operations
Licensing was a success for NIKE Inc. because it helped develop the company from just a mere agent to the top athletic shoes producer in the world. Knight had an idea of building a giant athletic shoe producer in the United States. He wanted to cease the dominance of the Japanese shoe factories. Licensing agreement enabled him to develop a market for his brand (the Blue Ribbon Shoe) that laid a foundation for the current giant company, NIKE Inc.
Establishing new foreign subsidiaries by NIKE Inc. was also a success. It enabled the company to increase its business scope in the global market. Through this kind of financial investment, the company was able to control all the functions of its subsidiaries including the quality of the goods sold to the customers. Moreover, this helped the company expand its geographic opportunities, which include increased number of customers, access to raw materials and required labor (Raghubir et al. 66-77). Establishment of the foreign subsidiaries also allowed NIKE Inc. to become the best shoemaking company in the world. Eventually, NIKE surpassed the already established companies such as Unitsuka Tiger Shoe Company of Japan.
The management of NIKE Inc. has also set strategies that have promoted its development in the shoe making industry. A strategy of acquiring existing organizations is very risky for any company mainly due to a lot of resources that are required for this process. NIKE Inc. succeeded in this strategy after it acquired other companies and made them profitable (Ranganathan 540).
Failures of NIKE Inc’s Operations
Nevertheless, NIKE Inc. has failed to discuss the risks that are associated with its operations. It has not addressed the threat of competitors. Under Amour is a fast growing company that might pose a great threat to NIKE’s dominance in the shoe making industry. Moreover, the company has failed to control the Chinese market despite all its efforts.
NIKE Inc. was unable to overcome the threat exposed by its main competitor in the market. It aimed at destroying Reebok rather that encouraging healthy competition in the shoe making industry. NIKE has enjoyed a state of monopoly for a long period of time and has not been willing to tolerate any competition in the industry, which is considered a bad gesture according to the global market rules. The company should not show to the community that it is interested in remaining the only producer in the market. NIKE has refused to encourage other producers in the shoemaking industry to develop and maintain a fair competition ground.
Next failure exhibited by NIKE Inc. was its adamant attitude to harmonize the wages for all its workers across the world. The company invested in the establishment of foreign subsidiaries in several countries. However, it was noted that workers from the United States and Europe were well compensated compared to their counterparts in Asian countries, especially China. This attracted the attention of its customers most of whom started to boycott company’s products.
In addition, the company has failed to tailor their goods to the fashion trends. The sportswear and women’s training products produced by the company have been considered untrendy, which might cost the company a part of female customers globally.
Reasons for Overseas Investment
The reasons for company’s investment in overseas markets include increased capital returns, enhanced growth potential, increased profit margin and finally, enhanced stock movement. NIKE Inc. has realized its potential in expanding to the middle-class nations but it still has many goals to fulfil.
Since NIKE Inc. wants to increase its gross margin up to 44.8 percent by the end of 2015, it should consider investing overseas. The company is currently in a place to exert extra charges on its strong brands and product innovations. Through direct-to-customer business, NIKE Inc. can reach 22 percent on its growth margin, which will generate a profit of $28 million. Foreign investments can enable company’s further growth. Increasing the profit margin is a dream that any business organization strives to realize regardless of the situation. It is almost impossible for a business organization to increase its profit margin without participating in the global market. Businesses take part in the world’s market through investing globally (Xiao et al. 114-124). When a company such as NIKE Inc. wants to raise its profit margin, it has to follow the same procedure. The company should invest globally to continue market and develop more products that suit the cultural beliefs of a given society.
Stock movement is another reason for NIKE Inc. to invest overseas. The company experiences the prices of its shares escalate gradually, which encourages more people to buy the shares and thus, increases the capital base of the company. The share price of the company has reached $80 recently and is expected to continue rising. Therefore, NIKE looks forward to supporting the trend by creating more investments overseas.
Overseas investment markets the company and its products as it brings NIKE closer to the customers. They feel emotionally attached to the company and its products, which motivates them to buy the shares of the company. Moreover, company’s price per share will increase due to an increase in demand for its shares. Through overseas investments, the company has experienced an increase in the number of active investors. These investors provide the company with the required capital to expand business operations to areas where the company is less popular. Such long-term goal normally comes secondary after a company announces its participation in the overseas investment (Xiao et al. 114-124).
Additional reason for NIKE Inc. to invest overseas is company’s aim to expand its geographical presence. In expectations to generate extra revenues of around $3.3 million, the company is willing to expand its global operations to the following regions: Japan, North America and Western Europe. As a part of its overseas investment, NIKE Inc. plans to invest in the emerging markets, Eastern and Central Europe and finally, China. Eventually, these overseas investments might help the company achieve its goal of $3.3 million profit.
NIKE’s Cost of Equity Calculations
Cost of Equity = Risk- Free Rate + (Beta times * Market Risk Premium)
Risk –free rate= amount obtained from investing in securities
Beta- measure how the price of shares reacts against market
Market risk premium – returns for investors for risking to buy the shares
After-tax cost of debt = interest rate on debt * (100%-incremental income tax rate)
After-tax cost of debt= 2.95 ? (100-22) % = (2.95 ? 0.78) = 2.301
After-tax cost of debt = 2.3 %
Cost of equity = 2.36 + 0.7 ? (12.39-2.36)
Cost of equity = 9.38 %
Cost of capital = cost of equity – cost of debt
Cost of capital = 7.08 %
NIKE’s International Cash Management Program
Cash inflows and cash outflows are the two very important processes in terms of cash management at NIKE Inc. Company’s cash flows mainly refer to the money used to finance its business operations. NIKE Inc. has obtained several subsidiaries across the globe to manufacture and sell its products. These foreign subsidiaries receive the initial capital from NIKE Inc. and after they operate on their own. After the manufacturing process, foreign subsidiaries should transport the finished products to retail stores. Upon the sale of all products the collected money is taken to the foreign subsidiaries and then recorded on the income statement. Finally, the company compares sales revenues to the costs of production to record either profit or loss.
The actual program for cash management can be simplified to two important processes: NIKE Inc. outflows cash to the foreign subsidiaries to finance their operation processes and the foreign subsidiaries return cash to the company generated from its revenues.
Cash remittances from foreign subsidiaries are not considered the revenues of the company. NIKE’s financial staff has to subtract total expenses incurred by the company from the cash inflows to get the balance. If the balance is positive, the NIKE Inc. is considered to have made a profit, but if the outcome is negative, the company has incurred a loss. The loss may be generated directly by the foreign subsidiaries (Xiao et al.114-124).
Risks Associated with Countries NIKE Operates in
Despite its status of the top sportswear company in the world, NIKE also faces several risks in the countries of its operations. The first risk that NIKE is exposed to is a threat of competitors. The company is not exceptional when it comes to facing competition from other companies since it is not a monopoly. There are several companies in the sports industry that would like to displace NIKE’s reputation of the leading producer of sportswear globally. Under Amour exhibits a greater growth rate that poses a threat to NIKE Inc. in the near future. However, this company is five times smaller than NIKE Inc. in terms of capital.
By the end of 2014, NIKE Inc. has collected revenues of about $17 billion, while Under Amour Company only $3 billion. The total revenues collected by Under Amour Company were due to a 29 percent increase in the capital and the company is expected to register even higher percentage increase in its capital by the end of the fiscal year 2015. However, almost 90 percent of its revenues came from the US market. It becomes obvious that Under Amour is a quickly emerging threat to NIKE, which might begin investing overseas to increase its profit margin. Its international expansion is a risk that NIKE should address.
Next risk of NIKE Inc. is presented in the opportunities available in China. There are many business opportunities, which NIKE is willing to exploit since almost 10 percent of the company’s total revenue is generated from China. However, the country has not regained fully from the economic crisis that struck it in 2012. For NIKE Inc. to attract more consumers to buy its products, the management has to invest more resources into the production process. It is a risk because significant investment of resources into the project might not necessarily lead to success (Raghubir et al. 66-77).
The last but not least risk that NIKE Inc. is likely to encounter in the near future is the changing athletic trends in the fashion industry. The sportswear that is currently considered fashionable includes sneakers and yoga pants, which are not produced by NIKE Inc. It is a common trend that consumers buy the goods that are in trend. The most affected group of customers is women. Women always want to be trendy and thus, they choose respective products. Given that NIKE Inc. has made a foreign investment in the women training sportswear, it might be difficult to cope with the looming trend. NIKE’s women training gears manufactured and sold on the global market are expected to collect a revenue of $740 by the end of 2015. This can hardly be achieved because most of the women who buy NIKE Inc. products are in the ages of 20-40 years old. However, women in this group are also fascinated by fashion trends and it is just a matter of time before they shift their preferences from NIKE products to the trendy sneakers and yoga pants. In order to avoid this, NIKE must address the issue within the shortest time if the company does not want to lose this important group of customers (Raghubir et al. 66-77).