How Nike tricked the US Government

Imagine this… in 1980 instead of launching

an IPO that paved the way to future success,

Nike went out of business.

Because they were drowning in debt from a

never ending fight with the federal government

and their competitors Brooks and Converse.

Nike is forced to pay millions of dollars

of extra back tariffs on shoes that they imported

years earlier.

Nike goes bankrupt and dissolves.

Phil Knight quietly returns to being an accountant.

Bill Bowerman retires.

Michael Jordan signs with Adidas.

Tinker Hatfield never becomes a designer and

as a result the most iconic Nike sneakers

are never made.

The Swoosh disappears.

‘JUST DO IT’ never happens.

All this may sound like a far fetched episode

of Black Mirror but it almost happened.

And not only that but it turns out that the

rarest and probably the most important sneakers

that Nike has ever made don’t even have

a Swoosh on them.

Instead, they have a single generic stripe.

Welcome to Athletic Interest and the crazy

story of how Nike faked its own shoes to save

the company.

From the start, Phil Knight’s vision for

Nike was always to dethrone Adidas and become

the number one sports brand in the world.

As you can imagine, all of the other brands

in the pecking order were not happy to see

Nike come out of nowhere and take a bite out

of their revenue.

Brands like Converse or Brooks were founded

long before Nike and many were well established

in the athletic footwear market at that time.

While Nike was making moves to grow their

business, competing US brands tried to find

a weakness in Nike’s business model.

Besides their creative marketing, Nike’s

core advantage was importing high quality

sport shoes from Asia at a lower price than

their competitors – who produced in Europe

or America.

And those competitors, organized under the

RUBBER MANUFACTURERS ASSOCIATION, tried to

turn exactly that strength into a weakness.

The brands teamed up to lobby the government’s

Customs departments to use a very old law

to stop Nike’s momentum.

The list of players involved in support of

Nike or the Rubber Manufacturers bears some

interesting names:

Representing Nike’s interest in congress,

among others, was a certain Al Gore.

On the side of Nike’s competitors was Senator

Ted Kennedy.

But the two big names are not the only historic

thing about this dispute.

Its impact was so significant that it threatened

Nike to go out of business.

Phil Knight still recalls receiving the first

letter:

“I opened it and my hands started to shake.

It was a bill.

For $25 million.

(…) the federal government was saying that

Nike owed customs duties dating back three

years, by virtue of something called the “American

Selling Price,” an old duty-assessing method.

American Selling—what?

The American Selling Price, or ASP, was a

protectionist law from the era of the great

depression.

The ASP indicated that a tariff on an import

into the United States would be calculated

according to the price of a similar, American-made

good rather than the manufacturer’s price.

For example, the tariff on a particular good

might be 50% of a good’s price.

If a British company made that good for $20

and an American company for $50, the ASP standard

would put the tariff on the British-made good

at $25 (50% of $50) rather than $10 (50% of

$20).

So what did that mean for Nike?

To understand the financial implications,

we estimated some calculations based on the

information from a Washington Post article

by a Nike lawyer.

Nike had been paying a 20% import tariff on

manufacturing costs of $7.75, so $1.55.

But according to the ASP law, Nike had to

pay 50% of the price of a Brook’s competitor

shoe that was made in the US and priced at

17 dollars.

So instead of paying $1.55, Nike suddenly

had to pay $8.50 per pair.

That’s more than they paid to manufacture

the shoes!

So Nike had to pay $16.25 total import price

per pair, instead of $9.30.

The difference of $6.95 may not sound like

a lot of money but when you multiply that

difference over the millions of sneakers that

Nike was importing, it would add up to a gigantic

bill and many millions of dollars.

25 million to be exact.

To put that into perspective, that was the

sales that Nike made in a whole year at that

time.

As Phil Knight puts it: “if we actually

did owe $25 million to the government, we

were out of business.

Just like that.”

So what did they do?

The absurd next steps did not only solve all

of Nike’s problems and set the stage for

its success to this day – a byproduct was

the creation of the rarest Nike sneakers ever

made.

Nike simply launched a new shoe brand and

called it One Line.

It was a knockoff, dirt cheap and with a simple

logo, manufactured in the US.

They priced it low, just above cost.

Now customs officials would have to use this

‘competitor’ shoe as a new reference point

deciding on import duty.

The sole purpose of the collection was to

produce exact copies of Nike shoes made offshore

that could be used by Customs to make comparisons

rather than the higher-priced models by Converse

or Brooks.

The trick was that they had to make it look

like a different brand.

They even produced a real looking catalog

to make the brand look more credible to customs.

Imagine what it must have been like inside

of the Nike HQ the morning that they sent

in their One Line shoes to be assessed as

their ‘competitor’.

“Thus was born the One Line, which for a

couple years sold a couple thousand pairs

and reduced the increase in our duties by

two-thirds.”

It worked.

After years of fighting, Nike managed to reduce

its duties significantly and finally settled

the case.

For Nike, given the high stakes involved of

either going public or going out of business,

it meant everything.

Phil Knight later described how this was a

fight for the survival of Nike:

“Every day was life and death.

That was the ultimate competition.

(…) If we lost (…), it’s very unlikely

there’s a Nike today, and we knew that.”

The rest, as they say, is history.

As a result of winning this fight Nike was

able to:

Reduce their tariffs

Save millions of dollars in their settlement

negotiation with the government.

Setup a lobbying foothold in Washington DC

Successfully launch their IPO

Begin manufacturing in China

And the icing on the cake – Nike was then

involved in the legislative process to scrap

the law that was standing in their way.

Everything that Nike is today was only possible

because of this shoe.

You have to give Nike’s leadership credit

for reverse engineering the strategy that

was being used against them to turn the problem

into the solution.

They understood that the law was being manipulated

by their competitors and decided to manipulate

the same law in the opposite direction.

After the ASP fight Nike was off and running

to dethrone adidas as the #1 sports brand

in the world.

You could argue that a few of the Rubber Manufacturers

Association footwear brands involved are still

feeling the ripple effects and haven’t been

the same since.

Some of the brands mentioned in the lawsuit

are still around and relevant while others

are barely on the radar.

Over time Converse sank so much that it fell

into bankruptcy, changed hands, and was bought

by … Nike.

The outcome of this battle shook up the order

in the United States athletic footwear industry.

Outside of the impact on the brands and tariff

laws The One Line brand also represents business

trends that were going on at the time.

As globalization and seeking out lower cost

countries to manufacture products became a

standard business practice the migration of

footwear manufacturing away from America – and

later also Europe – sped up.

While they only have one simple generic stripe

on the side and no swoosh The One Line brand

shoes may be one of the most significant pieces

of Nike history.

The more we’ve learned about The One Line

story the more it seems to be a quintessential

‘Just Do It’ Nike story.

The One Line brand played a critical role

in Nike’s victory in their battle with the

Customs department and was a game changer

that enabled the brand to survive long enough

to become what they are today.

By our estimates it is a small miracle that

any of these ‘off-brand’ unknown Nike

sneakers survived 40 years without ending

up in the landfill.

There are 12 known pairs of Nike ‘Moon Shoes’

in the world but how many pairs of ‘The

One Line’ survived over the years?

We’d bet not many.

Setting aside the question of ‘rarest ever’,

they are still probably the most important

line of shoes that Nike ever made and stand

as historic grail symbols of the Nike hustle.

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