Sporting Goods Sales of Nike and Avia Products in Ecuador

UNCLAS QUITO 000126 SENSITIVE SIPDIS PASS TO USTR FOR RHODE, EISSENSTAT, HARMAN DEPT FOR WHA/AND AND EEB/TPP/MTAA FOR CRAFT USDOC FOR ITA TREASURY FOR YUAN E.O. 12958: N/A TAGS: ETRD ECON USTR WTRO EC SUBJECT: Sporting Goods Sales of Nike and Avia Products in Ecuador Fall Due to BoP Safeguards REF: QUITO 96 ¶1. (SBU) Summary. Less than a week after an information technology delegation met with GoE officials to encourage them to dismantle balance of payments safeguards that have been in place since January 2009 (septel),representatives of Nike and a local sporting goods retailer met with the Embassy's Senior Commercial Officer (SCO) to detail the negative repercussions of the safeguards on their sector. Sales of Nike products fell significantly over the past year, and the prospect of continuing safeguards is increasingly problematic. Similar quality products are not manufactured in Ecuador, and according to local footwear producers, domestic industry is not pressing the GoE for protection. End Summary. ¶2. (SBU) On January 22, SCO met with Rodrigo Rivadeneira, General Manager for Marathon Sports, and Margarita Ormaza, Manager for Nike brands in Ecuador. Rivadeneira asked for the meeting to discuss the negative impact on Marathon/Nike sales due to the balance of payments safeguards (tariff surcharges) the GoE has had in place since January 22, 2009 (reftel and previous). Marathon is a major sporting goods retailer operating 34 stores throughout Ecuador. Overall, Ecuador imports about one million pairs of athletic shoes per year, with a value of almost $40 million. ¶3. (SBU) According to Rivadeneira, sales of Nike products in Marathon outlets fell substantially over the past year as a result of the balance of payments safeguards -- equipment fell by 8%; apparel by 18%; and footwear by 10%. In addition, the safeguards increased Marathon's tax burden by $4.8 million due to the import tariff surcharges. Rivadeneira claimed the damage to Nike sales would have been worse were it not for Marathon's ability to place and promote Nike products at its various retail outlets, noting that another U.S. brand, Avia, had seen sales decrease by 50%. Rivadeneira said Marathon had not cut employment, per an agreement signed with the GoE last year, but that extension of the safeguards beyond the one-year anniversary was increasingly problematic. He also claimed the safeguards have been pushing imports into the grey market, with deleterious effects on Marathon, though not as much on suppliers (i.e., Nike). ¶4. (SBU) Marathon, through its subsidiary, Equinox, locally manufactures Nike cotton tee shirts for regional export as well as fleece and polo shirts for the local market. Due to the lack of local expertise and technical capabilities, Nike does not manufacture footwear or "performance" attire locally. Local production of athletic shoes is basically non-existent. Local manufacturing of footwear is characterized as a semi-industrial cottage industry focused mostly on artisanal, leather products. Although GoE interlocutors have told Emboffs the government is considering some form of protection specifically for footwear, during a recent visit by Rivadeneira and Ormaza to the city of Ambato, Ecuador, center of Ecuadorian footwear production, local producers denied they were pressing the government for protection. ¶5. (SBU) According to Rivadeneira, Marathon is now taking a more aggressive stance against the safeguards. It is forming a trade association for athletic apparel and footwear to unite and magnify the voice of local distributors. Marathon has expressed its concern with the Coordinating Ministry for Production in person and in writing. Due to the GOE's stated desire of increasing local footwear production, Marathon has also discussed the possibility of working with local footwear manufacturers on a joint venture, or introducing some lines of locally-manufactured footwear into Marathon's retail outlets in an effort to gain relief from the safeguards. In a conversation with Minister for Sports Sandra Vela, she mentioned to Marathon that the GOE was considering establishing a factory to manufacture sporting goods with Iranian financing. ¶6. (SBU) Comment. While import dependent businesses by and large were willing to wait out the one year the safeguards were supposed to last, as in the case of Marathon, we expect they will become increasingly vocal in their criticism of the measures as their bottom line calculations continue to suffer. However, despite practical arguments that the safeguards have produced significant negative consequences -- higher consumer prices, increased smuggling, and lost tax revenue -- the government appears set in its present course to eliminate the safeguards only gradually over a six month period. HODGES