'Nike makes expensive shoes... It makes them in $18...': Deepak Shenoy weighs on reciprocal tariffs

US President Donald Trump on Thursday introduced an expansive and assertive "reciprocal tariff" policy aiming to counter nations imposing high tariffs on American goods. The implications of reciprocal tariffs, particularly on countries where US companies manufacture their products, have been a topic of discussion among experts. 

Deepak Shenoy, the founder and CEO of CapitalMind, provided a more prudent and discerning perspective on the potential consequences, using Nike as an example.

In a post on X, Shenoy noted that Nike produces high-end shoes, with half of them manufactured in Vietnam through a subsidiary that significantly reduces production costs compared to retail prices. He highlighted the production in Vietnam is a supplementary aspect, where it costs $18 to manufacture a shoe sold for $115.

"Nike makes expensive shoes. It makes half of them in Vietnam, in a subsidiary that effectively costs them a fraction of what they sell these shoes at. This is the business model - own the brand and marketing - and keep manufacturing costs low. Most of the cost - ads, marketing, R&D, distribution - are in the US. The Vietnam thingy is a sidebar. It costs $18 in Vietnam to make a shoe that sells for $115," Shenoy noted in his X post.

Shenoy pointed out that the 46% tariffs would result in a mere $9 increase to the current $115 price of the Nike Air Force 1, equating to an 8% rise. This allows Nike the flexibility to potentially raise the price to $124.

Yesterday, Shenoy warned that the implementation of reciprocal tariffs could potentially have a lasting negative effect on the global economy. He emphasized the likelihood of Americans bearing the brunt of these repercussions for an extended period as the situation unfolds.

“There isn't even a need for retaliation, honestly. Let Americans pay for this for a while and see how it pans out,” Shenoy said in a social media post on 'X'. 

Shenoy described the tariff strategy as a "very aggressive approach by the US," pointing out potential market turbulence in the near future.

“I suppose it's not crazy if all central banks dump the US dollar and move to euro bonds or JPY for reserves. No point using USD as currency any longer since they won't import from you meaningfully. Things will change slowly but surely."

How tariffs might hit Nike

Stocks of Nike and apparel companies slumped on Thursday after President Donald Trump announced new tariffs on Vietnam and other critical production hubs. On Wednesday, the United States implemented a 46% reciprocal tariff on goods from Vietnam, as part of the expanding trade dispute initiated by President Trump. Additionally, new tariffs of 49% on Cambodia, 34% on China, and 32% on Indonesia have been imposed. 

Over the past decade, both Nike Inc. and Adidas AG have heavily invested in Vietnam. According to regulatory filings, approximately half of all Nike shoes and 39% of Adidas shoes are now manufactured in the country. Vietnam has become the primary supplier of footwear for these companies, generating over $20 billion in annual revenue.

Nike experienced a 7.3% decline in share price during extended trading hours at 6 PM New York time. Lululemon Athletica Inc., known for producing 40% of its products in Vietnam and 17% in Cambodia, also saw a significant drop of nearly 11% in late trading. Conversely, Abercrombie & Fitch Co., which sources 35% of its merchandise from Vietnam and 22% from Cambodia, quickly recovered after an initial decrease of almost 8%. Gap Inc. faced a drop of up to 11%, attributable to the fact that around 27% of its goods come from Vietnamese factories and 19% from Indonesia.

According to a report in New York Post, the introduction of a new tariff on April 9 could result in an additional $18 being added to the current $180 price tag of Nike's Air Jordan 1 High sneakers. 

Similarly, other popular Nike sneakers may see price increases ranging from $15 to $35. According to UBS, consumers can expect a 10% to 12% rise in prices for goods originating from Vietnam.

For instance, a Nike sneaker priced at $115, such as the Nike Air Force 1, has a production cost of approximately $18 at an overseas factory. With a 46% tariff imposed on products from Vietnam, an extra $8.28 would be incurred per pair. This cumulative cost increase becomes significant when multiplied by the quantity of sneakers that can be shipped in a container, which is typically around 8,000 pairs.