A pile of running shoes from many companies

Will New Balance Win Marathon Debate to Outfit US Soldiers?

June 6, 2016
The Pentagon budgets about $15 million every year for athletic shoes vouchers, but not all of it goes to buy American-made footwear. New Balance hopes a 75-year-old law will force the Senate to change that.

New Balance Athletic Shoe Inc. is close to winning an almost decade-long marathon: A buy-American provision in the massive defense policy bill the Senate will debate this week could force the Pentagon to purchase the company’s sneakers for new military recruits.

Currently, the Pentagon issues about $15 million in vouchers a year, covering 225,000 to 250,000 pairs of athletic shoes, New Balance estimates. If the provision survives in the final version of the fiscal 2017 defense authorization bill and recruits are required to wear American-made apparel, the vouchers could no longer be used for shoes made overseas by Nike Inc. and other companies.

Boston-based New Balance long has lobbied the government to follow the letter of a 1941 law that it perceives as requiring made-in-the-U.S.A. attire for soldiers. That means providing U.S.-made athletic footwear instead of giving recruits allowances to shop for the shoes they prefer. The Pentagon and the White House oppose the new provision, contending that costs could rise and new recruits could be injured if they are wearing shoes that don’t fit them well.

“New Balance is doing their job; they want to sell their shoes,” Ryan Alexander, president of the nonpartisan watchdog organization Taxpayers for Common Sense, said in an interview. “For Congress to jump in and say ‘the best value happens to be with my constituents,’ that is the wrong way to do business. This is a politically-driven amendment to make sure that certain manufacturers have preference.”

The debate over sneakers is illustrative of how, despite the ban on earmarks, members are still able to tailor legislation to provide specific benefits to their districts.

The House-passed fiscal year 2017 defense authorization bill, H.R. 4909, contains a provision, sponsored by Massachusetts Democrat Niki Tsongas, that directs the Pentagon to issue American-made athletic footwear. New Balance has a factory in her district. The language is similar in the Senate’s bill, S. 2943.

Tsongas has help from her fellow Northeastern lawmakers. New Balance has two factories in Massachusetts and three in Maine, with a total of about 1,400 employees. Materials such as laces are manufactured in Rhode Island, the home state of the Senate Armed Services Committee’s top Democrat, Jack Reed. Maine independent Angus King offered the amendment during the bill’s consideration in committee.

“I am cautiously optimistic,” King said in an interview. “It’s the right thing to do. I don’t understand why anybody would oppose American jobs.”

Adding her voice to following the 1941 law, known as the Berry amendment, is Maine Republican Senator Susan Collins. She points to the benefit of providing jobs in the U.S. rather than manufacturing products in countries such as Vietnam.

“New Balance and the other companies that have stayed in this country ought to be rewarded for doing so,” Collins said in an interview. “It is the law under the Berry amendment, which has been on the books for decades, that our troops are supposed to be outfitted in American-made clothing and footwear.”

How Many American Jobs Can You Create?

One of the more influential boosters of New Balance is Senate Democratic Leader Harry Reid.

“We need to help companies that build their products here in America. I go out of my way to buy New Balance shoes, running shoes. Why? They are made in America,” Reid said on the Senate floor in 2014.

The Defense Department isn’t sold on the buy-American policy for running shoes. It doesn’t consider such shoes part of the officially issued uniform, and thus shouldn’t be covered by the World War II-era law, according to Pentagon policy. For example, T-shirts and training shorts are considered uniform, but the shoes aren’t.

Nike, one of New Balance’s competitors, also isn’t keen on a restrictive shoe purchase policy.

“As a U.S. company with 26,000 employees across the country, Nike believes our servicemen and women should continue to have access to the best possible athletic footwear to fit their foot type and to meet their training needs,” Nike spokesman Greg Rossiter said in an e-mailed statement.

“There’s another side to this story,” Representative Earl Blumenauer, an Oregon Democrat whose district is close to Nike’s headquarters in Beaverton, said in an interview. “It’s more about marketing and it deals with underlying policy.”

Blumenauer said he’s concerned that Nike and other apparel companies in his district would be disadvantaged by a change in Pentagon policy.

“The people that I represent in the Northwest produce quality products, and don’t think I am interested in having them undercut by somebody else with a different agenda,” Blumenauer said. “I don’t want them disadvantaged, and they create more American jobs than the few hundred that you are talking about with New Balance.”

The dispute between New Balance, its supporters and the Obama administration has spilled into a much larger issue: the Trans-Pacific Partnership Trade Pact. Under the deal, shoe and sneaker tariffs would be phased out in countries like Vietnam. After keeping silent on the deal for almost a year, New Balance is now coming out in force against it because it says the administration backed out of a commitment to offer the company a chance for a contract to sell sneakers to the military, according to spokesman Matt LeBretton.

Not only did the Pentagon drag out testing of the shoes New Balance offered, Pentagon officials canceled meetings with New Balance CEO Robert DeMartini three times in the last few months, LeBretton said in a phone interview.

“Our CEO canceled plans to meet with retailers and it cost us business,” LeBretton said. “It showed a complete lack of respect for what we do.”

Pentagon spokesman Mark Wright declined to comment because of pending legislation.

The White House chose to highlight the sneaker provision in its statement of administration policy issued when the House last month voted on its $610 billion defense authorization bill, which sets Pentagon funding levels and policy for the fiscal year starting Oct. 1.

“This provision essentially serves as preferential arrangement for a particular company,” administration officials wrote. “Mandating that a specific article of clothing be provided to new recruits is unprecedented and, in the case of athletic shoes, runs counter to research that indicates a strong correlation between the variety of athletic shoes available, fit, and comfort, and reduced injury rates.”

Opening the Door for Other US Manufacturers?

A provision sponsored by South Carolina Republican Mark Sanford to strike the sneaker requirement from the House measure never made the cut for debate on the floor when the chamber debated the bill.

John McCain, the Arizona Republican who leads the Senate Armed Services Committee, voted against the buy-American provision in committee. He plans to introduce an amendment this week that would strike the running shoes language, according to a congressional aide. Unless that amendment is successful, the final defense authorization act containing the requirement will likely end up on President Barack Obama’s desk. The Senate’s defense appropriations draft bill acknowledges the proposed change in law without taking sides.

About three years ago, New Balance bought an expensive machine to make mid-soles, which until then were made overseas. In 2014, the Pentagon said it would consider sneakers made in the U.S. Still, New Balance and its congressional supporters say the Pentagon has rebuffed the company by saying shoes didn’t stand up to testing or would be too cost-prohibitive.

“New Balance has a completely domestically manufactured shoe and spent millions of dollars in time and energy last year responding to a solicitation from the Department of Defense only to have the department to pull the rug from under them at the last moment,” Collins said in the interview. “I just don’t understand the resistance to it, particularly since it would not be a sole-source situation.”

Wolverine World Wide Inc., of Rockford, Michigan, the makers of Saucony athletic shoes, can produce U.S.-made footwear. Other companies might follow suit if the route opens, according to Collins.

“When this legislation passes, there is going to be plenty of choice for soldiers, sailors, airmen and Marines from Saucony and New Balance,” Wolverine World Wide spokesman David Costello said in a telephone interview. Wolverine is no stranger to outfitting the U.S. military. The company’s Bates Footwear brand in Big Rapids, Michigan, makes combat boots and uniform dress footwear for all military services. Saucony, based in Lexington, Massachusetts, will have a completely domestically manufactured athletic shoe this summer, according to Costello.

Meanwhile, the companies don’t expect a big revenue boost. Any increase in New Balance’s sales probably would be marginal, because the company has said its total revenue in 2015 was close to $4 billion. Even though New Balance can produce sneakers domestically, about a quarter of its shoes sold in North America come from U.S. factories, according to the company. The rest are made in other countries including Vietnam, China and Indonesia.

Financially, the policy change would mean more to a smaller company like New Balance than it would for Nike, according to Chen Grazutis, Bloomberg Intelligence equity research analyst.

“If we assume Nike holds about 30% to 40% of the athletic footwear market, and virtually all of their sneakers are made in foreign factories, their exposure is about $6 million annually,” he said. “For a company that sells about $14 billion in the U.S. alone this is clearly not enough to move the dial.

“Yet, the public discussion around the subject of manufacturing in the U.S. has to potential to be a little uncomfortable for Nike.”

By Roxana Tiron, with assistance from Steven T. Dennis and Kathleen Miller

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Licensed content from Bloomberg, copyright 2016.

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