Sole Survivor

By Daren Fonda

For a forward-minded executive, Jim Davis is an old-fashioned guy. Sitting in a conference room at New Balance headquarters in Boston, he jokes that he still employs a third of the work force he inherited when he bought the company in 1972. O.K., so it consisted of six folks back then, stitching 30 pairs of running shoes a day in the back of a store. Two of those workers are still with him, he points out, even as New Balance has long since hit the big leagues. In the U.S. sneaker wars, the company took the bronze in 2003 with 11% of the market, just behind Reebok (and miles behind Nike in first). Perhaps more impressive, while Nike and Reebok shower millions of dollars on superstars like LeBron James and Yao Ming, New Balance has soared to near the top of the sneaker charts--dusting even international powerhouse Adidas--by running solo, proudly proclaiming that it is "endorsed by no one."

Yet Davis is at a critical juncture. Lately New Balance has lost share at the high end of its core runners' market to rivals like Brooks, while Adidas, Nike and Puma have been battering the brand in the more fashionable arena. New Balance is still mainly known for its running shoes and for having a lineup in multiple widths, and Davis may have missed a key opening with young shoppers a few years ago when New Balance had a hit with a hot trail-running shoe. Instead of following up, he kept other shoe designs relatively conservative compared with stylish models like Nike's Shox. "We have an internal issue here," Davis acknowledges. "They have been after me for years to make more shoes for 14- to 15-year-olds. I don't want to do it."

To bulk up sales, Davis has gone on a shopping spree. He signed seven licensing deals last year to get the New Balance logo on gear from sunglasses to exercise equipment. He recently signed on to sponsor major league lacrosse and in February bought a lacrosse-equipment maker, Warrior. He has also expanded into hiking footwear with the purchase of the Dunham brand, and he is working with retailers to open more single-brand New Balance shops, aiming to have "a couple hundred" in the U.S. by 2006. Worldwide, Davis projects sales growth of 10% to 12% over 2003, to more than $1.4 billion this year.

Perhaps the riskiest bet he's making, however, is on domestic manufacturing. New Balance is the only major U.S. sneaker brand still manufacturing in America; most others have fled to China, Indonesia and Vietnam. Roughly 25% of New Balance shoes are assembled at five factories in New England and one in California owned by a foreign supplier. Over the past two years Davis has spent $14 million to upgrade a high-tech shoe plant down the road from his Boston office, and in 2001 he expanded his distribution center in the old mill town of Lawrence, Mass. Davis figures he can overcome the higher labor costs in the U.S. and turn his plants into strategic assets--shipping directly to retailers from the factory and saving a bundle on inventory costs. His goal: to make New Balance more like Toyota, a model of lean manufacturing in his own backyard.

Is he on a runner's high? Davis pays his U.S. factory workers an average wage of $12 an hour, plus benefits, compared with 40-c- an hour for a worker in mainland China, where 76% of U.S. athletic footwear originates. The tax breaks Congress just passed for U.S. companies to keep manufacturing jobs at home amount to chump change given that gap. Overall, the U.S. footwear industry has shed nearly 200,000 jobs since the early 1970s, leaving fewer than 21,000. More to the point: What teenager clamoring for Air Jordans really cares where the shoe is stitched?

Davis, who played football at Middlebury College, concedes that he could probably make more money by shipping all his production overseas. He has increased his domestic payroll by 65% since 1995, adding some 500 blue collar jobs, but the percentage of New Balance shoes assembled in the U.S. has fallen by half as Davis has ramped up production in Asia and at a plant in England to keep up with sales.

At the same time, New Balance has proved that it's possible to manufacture in the U.S. and compete. The company's plant in Brighton, Mass., for instance, features robotics and a high-tech molding process that can produce an outsole in 12 seconds--allowing New Balance to make a sneaker from scratch and fill orders rapidly as they come in. Another advantage Davis sees: better relationships with retailers. New Balance's domestic factories play a key role in filling special orders for hard-to-find sizes and widths and give the company more flexibility to help out independent retailers--a lucrative niche. The firm has a reputation "as the easiest company to do business with," according to the trade publication Sporting Goods Investor. As for the wage gap, Davis says it's overblown. All his U.S. plants are highly automated, with bar-coded parts and computerized stitching and embroidery machines, resulting in about 25 minutes of manual labor to produce a pair of shoes versus more than four hours in a less automated Asian plant.

To make his operations more efficient, Davis is borrowing a page from Toyota. Last summer, managers re-engineered a factory in Norridgewock, Maine, following Toyota's famously flexible production system. Isolated departments for cutting, stitching and embroidery were replaced by cells of workers clustered in a line, saving 40% of floor space. Smaller batches of sneakers are now assembled rapidly, down the line, and if anyone identifies a faulty stitch, for instance, the problem is fixed before a large batch of defective shoes can pile up. Factory workers, who aren't unionized, are encouraged to point out mistakes, and they help one another finish jobs instead of standing around. Overall, the changes have cut the production cycle from eight days to eight hours, slashing inventories and yielding big savings.

None of this will matter, of course, if Davis can't sell a hot product. New Balance sneakers are still basically known for their technical aspects, comfort, stability--and dowdiness. One model, the 991, has barely changed styles since its launch in 1981. New Balance calls it a "heritage" shoe, which means middle-aged joggers still like it. Recent models such as the 900 running shoe have more color pop, and Davis is trying to lure young shoppers with a marketing program aimed at high school teams and Division III college athletes Nike hasn't picked off. "If we hit on fashion, that's fine," he says. "But our shoes are really designed to run up hills."

Ultimately, keeping the company in the family is the key to Davis' plan. Davis wants to maintain as much of his operations as close to his New England home as possible, and without Wall Street pressure to eke out maximum profits, he can invest where he pleases and patiently wait for the returns. His wife Anne sits next door to him at work, running the human-resources department, and most of his senior executives have been with him for a decade or longer. Turnover rate at his plants: just 5%. Innovation, meet tradition.