Analysis of Adidas Supply, Demand, and Hong Kong Economic Factors

This report provides a comprehensive analysis of Adidas's supply and demand dynamics, examining the influence of various determinants. It delves into factors affecting supply, such as input prices, expectations, the number of suppliers, technology, and weather conditions. The report also explores the determinants of price elasticity of demand, including the availability of substitutes, the nature of goods as luxuries or necessities, and the proportion of income spent on the goods. Furthermore, the report analyzes Hong Kong's Gross Domestic Product (GDP) and discusses the current economic challenges faced by Hong Kong, along with potential solutions. The analysis covers Adidas's background, goods and services, and provides insights into the company's operations and market position.

Table of Contents
No. Item Page
1.1 Adidas’s background 1
1.2 Adidas’s goods / services 2
1.3 Five determinants of supply that affect the Adidas’s supply of goods:
1.3.1 Input prices 3
1.3.2 Expectation 4
1.3.3 Number of suppliers 5
1.3.4Technology 6
1.3.5Weather 7
1.4 Three determinants of price elasticity of demand that affect the
consumer’s demand of Adidas’s supply of good:
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1.4.1 The availability of close substitutes
1.4.2 Luxury or necessity
1.4.3 The proportion of income spent onthe goods
2.1 Hong Kong’s Gross Domestic Product 10-12
2.2 Current economic challenges faced by Hong Kong and the ways to
overcome the problems 13-15
References 16-17

1.1 Adidas’s background
Adidasis a multinational company which has business operations or manufacture facilities in many countries across the world. Adidas is
headquartered in Herzogenaurach, Germany. This company designs,develops, manufactures and sells a broad range athletic and sport lifestyle
productall around the world.The company’stwo core brands are Adidas and Rebook.Now, Adidas is the biggest sportswear producer in Europe,
and the second biggest in the world, after Nike.
The founder of Adidas,Adolf Adi Dassler, started the business of makingshoes in his mother's wash kitchen. In 1924, his elder
brother Rudolf joined him and formed Dassler Brothers Shoe Factory (“GebrüderDasslerSchuhfabrik”). Dasslerassisted in the development of
spiked running shoes (spikes) for multiple athletic events. In 1949, following a breakdown in the relationship between Adolf and Rudolf,
Adolfregistered “Adi Dassler adidas Sportschuhfabrik” which is Adidas, and Rudolf created Puma, which became Adidas’s business rival.
Adidas has a mission which is to be the best sports company in the world, and their core belief is “through sport, we have the power to
change lives”. The 7 keys location of Adidas are the HQ inHerzogenaurach, Germany, Amsterdam, Portland, Boston, Shanghai, Hong Kong and
Panama.Recently, the CEO of Adidas is Kasper Rorsted, and the company has employed over 59,000 people from about100 countries.
In year 2019, Adidas produced over 1.1 billion sports and sports lifestyle products with independent manufacturing partners worldwide
and generated the sales of € 23,640 million. Compared with the net sales in 2018 which is € 21,915 million, it had increased 7.9%.The net
income of Adidas had increased by 16% which is from an amount of € 1,704 million in year 2018 to € 1,977 million in year 2019.
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Picture 2Picture1
Picture 1: Adidas Ultra Boost 20 ‘Silver Metallic’ Picture 2: Runner tee ‘DGH Solid Grey’
(Net sales and net income refer to Appendix 1)
1.2 Adidas’sgood / services
One of the products of Adidas is Adidas Ultra Boost 20 shoes. Ultra Boost 20 shoes cost RM780 and it is first release in the 14th May
2020 with Primeblue adidas Ultra Boost 20 ‘White’. Later, Adidas release different colors such as gold metallic, silver metallic with the same
design in June and July 2020. There is a total of 22 colors available. Ultra Boost 20 shoes is a high performance running shoes with the
stretchweb outsole with Continental™ Rubber, snug and sock-like fit, lace shoe closure, adidas Primeknit plus textile upper, Tailored Fibre
Placement locked-in fit, weight is about 310 g and with a Midsole drop of 10 mm (heel 22 mm / forefoot 12 mm). The whole design of this
running shoes gives the best running experience to the runner. The design of Ultra Boost 20 midsole contains thousands of small energy capsules
that store and release more energy when running, helping the runner to boost their running performance.Themidsole also helps in support and
cushion the runner’s feet, giving a comfy feeling and do not hurt the runners’ feet and ankle while running.
In addition, Adidas also manufactures clothing products for sports such as the runner tee. Runner tee is a reflective running t-shirt,
crewneck designed, and it is made up of 100% recycled polyester that hasa smaller impact to the environment. It is sold at a price of RM150
with optional sizes and three colors available. The tee has been made with Primegreen,a high-performance fabric which contains no virgin
plastic.Adidas has introducesPrimegreen and Primeblue as sustainable technologies that contain 100% recycled polyester. Although it is made of
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recycled material, the tee is comfortable, soft and breathable. The runner tee in not only giving a fashion and sporty look while wearing it, but
also regular fits and strikes a comfortable balance between loose and snug.
1.3 Five determinants of supply that affect Adidas’s supply of goods
1.3.1 Input prices
The inputsused in the production of goods and services arealso known as factors of production,for example:labour, capital, land and
entrepreneurship. Lower input prices will decrease the cost of production, causing an increase in the supply of goods or services. Whereas, if the
input prices are higher, the cost of production will increase and causing the supply of a good to decrease. Adidas reducestheir input pricesfor
their products so that the cost of production will be lower. When the cost of production is lower, Adidas can earn more profit as the products are
more profitable.Therefore, Adidas will supply more products to its consumersto earn more money and the supply curve will shift rightwards.
Adidas used recycled materials in their production that have a lower price compared to other expenses advanced material. Adidas produce
more than 5 million shoes that involving the use of the recycled material. The upcycled plastic waste is made into a yarn that is a key component
of the upper material of adidas footwear without purchasing expensive advanced materials. For example, recycled polyester (rPES) is a synthetic
fiber that consisting of waste, including plastic bottles and used garments. Although the products are making from recycle materials, Adidas still
could produce high performance footwear. The materials that use in production are sustainable cotton, recycled polyester, recycled nylon,
recycled rubber, algae-based EVA, TENCEL, water-based polyurethane (PU), and recycled thermoplastic polyurethane (TPU).
Adidas also uses natural fibers like cottons, leather, synthetics, recycled polyester, recycled rubber, and wool in footwear production. They
obtained the production materials they needed from other countries. Most of the factories that supply the raw materials are in Asia countries such
as Pakistan, India, Indonesia, and Vietnam. These countries have enough labour to support the demand so that the cost of labour is lower as
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compare to other countries. Adidas can reduce the cost of labour for planting, fertilizing, and collecting raw materials by purchasing in related
countries. Therefore, Adidas can reduce the input prices with purchasing raw materials in these countries instead of planting in German that
requires high cost of labour.
(supporting documents: refer to Appendix 2)
1.3.2 Expectations
Expectations are one of the determinants of supply.When a company expects a higher price in the future, the company will tend to decrease
its current supply of goods to the market so that it could supply more during the phase of increase in price. This causes the supply graph of the
company to either shift to the left of right. This is due, the producers are willing to wait and supply during the phase of increase in price just to
maximize the profit that the company gets as goods will be more valuable. Similarly, when the company expects the price of its goods to reduce
in the future, it will tend to increase its current supply in order to get a higher profit while the price is still high.
If the expected future price of Adidas shoes, Jersey or other things under the brand increases, the supply of the clothes or shoes under the
brand of Adidas will decrease and the supply curve will shift leftwards. Adidas will decrease their products today so that they will have
sufficient supply in the future, and they can earn more profits when the prices of shoes are high.
Adidas will have higher prices in the next five years because the labor cost willincrease. Therefore, during the current time, Adidas will try to
supply less as they expected to rise their price in the future. This strategy is able to help them to supply more during the high price and earn more
money during that year.
(Supporting Document: refer to Appendix 3)
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1.3.3 Number of suppliers
Based on Adidas’s announcement, its intention to move its Speedfactory technology to Asia, Adidas has outsourced most of its
production and working with around 631 independent worldwide manufacturing products in 52 countries. Most of their suppliers’ factories are
located at the Asia-Pacific region, America, and EMEA.
It has a global and multilayered supply chain with several types of suppliers in the chain, some of which are direct contractors, and many
are not. Besides, the major suppliers have a contractual relationship with Adidas to provide products for export or domestic market consumption.
Then, the subcontractors are subcontracted by Adidas suppliers to perform manufacturing operations that cannot be completed by the main
suppliers. Materials and other service providers are those suppliers that don’t have a direct business relationship with Adidas but they supply
goods and services to the main suppliers.
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The number of suppliers willing and able to supply a goods affects the overall supply. If the number of suppliers in the market increases,
then the supply of goods increases, and this will cause the supply curve shift rightward. Adidas’s number of suppliers increase, so the supply of
Adidas products will increase.
(Supporting document: refer to Appendix 4)
1.3.4 Technology
Adidas changes their manufacturing from using manual labour to using digital technologies, including automation, digital design, and 3D
printing. By using these digital technologies, the cost of production is lower, and they can produce more quality products efficiently and
productively. These changes raised the supply of adidas products.
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Adidas is the first to innovate the industrial supply chain, which is known for basing on manual labour and has a very long delivery time. In
recent years, this has become the focus of Adidas, customers are increasingly asking for more convenience and quick delivery. The production
process involves high fixed costs, it is often difficult to customize at a reasonable cost. Adidas is the first company to figure out how to adapt
shoes to everyone’s unique needs will have an important first-mover advantage. Besides, if the company cannot continue to understand and
respond to changing tastes, it will risk losing customers.
For these reasons, Adidas believes it is crucial to invest in digital technologies, including automation, digital design, and 3D printing, which
are all part of a new movement called Supply Chain 4.0. Historically, the production process includes the design stage and the manufacturing
stage. Adidas’s design process becomes faster because it can be done digitally through virtual prototypes without the need to create molds and
make physical samples. Due to heavy investments in automation and 3D printing, manufacturing time has decreased.
As a result, design and manufacturing are no longer separate processes; they are now happening at the same time. This automatic linking
increases efficiency because the company can switch to producing another stock-keeping unit without having to stop production to set up
machines or training workers. This provides a competitive advantage because Adidas can respond quickly to changes in consumer preferences.
On the other hand, improvements in design and manufacturing have also reduced the cost of producing shoes. Morgan Stanley estimates that the
new production model maybe 10% cheaper than the traditional production model. On top of that, the fixed cost has been greatly reduced. This is
because fewer tools and samples are required. When the fixed cost decreases, making smaller-sized shoes becomes more economical. Adidas
Chief Information Michael Voegele once said: “the capability we are building…is suitable for mass production”.
(supporting documents: refer to Appendix 5)
1.3.5 Weather
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Weather causes a lot of influences towards most of industry around the world especially for commodities, but it also affectsome
productions that needednatural raw materials. If the weather is good, then the supply for the good will increase; on the other hand, if the weather
is bad, for example: flooding or drought happened in that planting area, it will damage the crops and cause the supply to decrease. Weather
changes affect the supply of Adidas’s products.
Adidas uses natural raw materials to manufacture their products that made of natural fibers like cottons, leather and wool. These natural
fibers are fibers that made out of natural materials from plants or animals. Among these materials, cotton has occupied the most important role.
For example, one of the clothing product of Adidas,which is the ‘essential three stripes tee’, is made up of 100% cotton.
According to McKinsey’s report, about 30% of the raw materials may be affected by the weather. As the weather change, the growth of
cotton will be affected. As temperatures rise and climate patterns fluctuate cotton’s ability to grow may be hindered reducing yields and directly
impacting Adidas’s operations. Bad weather causes a decrease in the cotton production, leading to a shortage of cotton. In this case, the supply
of Adidas’s goods in the market would fall.If the weather is good, the environment for growing the cotton will be good. Therefore,production of
cotton will rise. With sufficient cotton, Adidas could produce more products and supply more, and shifting the supple curve to the right.
To reduce the impact of the weather changes to Adidas production, Adidas has taken some useful steps. In 2004, Adidas is a founding
member of Better Cotton Initiative (BCI)andjoining the Sustainable Apparel Coalition (SAC) in 2010. Adidas partner with BCIto improve cotton
farming globally. BCI a global not-for-profit organization and the largest cotton sustainability program in the world that aim to make global
cotton production better for the people who produce it, better for the environment it grows in and better for the sector’s future. Thus, Adidas can
maintain their products’ supply.
(supporting documents: refer to Appendix 6)
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1.4 Three determinants of price elasticity of demand that affects the consumer’s demand of the Adidas’s supply of good
1.4.1 The availability of close substitutes
If a product can be easily substituted, its demand is elastic; If a product cannot be substituted easily, its demand is inelastic.
Adidas operates in a market where substitutes are easily available and the market has been flooded by numerous brands of athletic and
sport lifestyle such as Puma, Nike, New Balance, etc. Hence, the demand is elastic. A small increase in the price levels of the products will
causes consumers to switch to relatively cheaper substitutes. This will decrease the sales of the products. The formula, which is the cross
elasticity of demand, measured the demand elasticity of goods with close substitutes by dividing the percent change of the quantity demanded of
one product by the percent change in the price of a substitute product.
Adidas should not increase the price of their products because the demand for its products is elastic. People will be very sensitive on the
changes of the price. If they increase the price, then the demand will decrease because consumers will switch to other substitute goods which are
cheaper in the market.To prevent a decrease in the demand, Adidas should not increase the price of their products. Instead of increasing the
price, Adidas can reduce their price. Thus, the consumer will buy more, and this increase the quantity demanded.
1.4.2 Luxury or necessity
Price elasticity of demand also depends on whether the product is a luxury or a necessity. Luxury brands such as Gucci, Louis Vuitton,
Chanel are elastic in their demand; the demand for necessity goods such as petroleum, rice, oil are inelastic because there is no other substitution
for the them and people need necessity goods to live.
Adidas’s product is not a necessity, sothe price elasticity of demand is elastic. People are more sensitive to the price changes in luxury goods
and they will pay full attention to the price fluctuations. If the price of Adidas falls, then the percentage of quantity demanded will rises more
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than the percentage change inprice; If the price rises, the demand will definitely decrease. People can choose not to buy the products because
without the products they still can continue living. However, for some certain reasons, it becomes very difficult at times to draw a distinction
between luxury and necessity. This is because what is a necessity goods to one individual may be a luxury goods to other individual.
Although Adidas’s products are luxury goods, Adidas do not need to reduce its products price to cater to the public. They can remain
their price because their targeted market consumers are theupper-middle class or people who have high income. Therefore, the rich people are
still able to buy the luxuries though the price is high. However, due to its price elasticity of demand for its products, Adidas can have some
promotion or discount to its consumer to lower the price of the products during a certain period of time. Thus, this will attractsome other
consumers to buy their products,and increase thequantity demanded.
1.4.3 The proportion of income spent of the goods
The proportion of the income spent on a good is also one of the determinants of price elasticity of demand.The higher the percentage of
income spent on a good, the more elastic in its demand. On the other hand, the smaller the percentage of the income spent on a good, the less
elastic in its demand.
Adidas Yeezy Boost 350 V2 ‘Zebra’ cost RM 1,227. If the average income earned by a household in Malaysia is RM5,228, then the
percentage of the income spent on this Adidas product for a household is 23.5%. However, the percentage of the income spent on a RM2 pen is
only 0.0383%. As a comparison, the proportion of the income spent on Adidas product is larger than buying a pen. Therefore, the demand of
Adidas goods is more elastic.Peoplewill have high sensitivity on the changes of the price. If Adidas rises 10% in the price, then thepercentage of
demand will decrease greater than the changes in percentage of price.
Since the price elasticity of demand for Adidas products is elastic, Adidas should not increase their products’ price. If they increase the price,
the demand for the products will decrease and causing the demand of Adidas productsto decrease. The total revenue will decrease as well.
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2.1 Hong Kong Gross Domestic Product (GDP)
Highest GDP rate
Based on the graph above, Hong Kong has the
highest gross domestic product (GDP) growth rate
in year 2004 in these 20 years period, which is
8.7%.The GDP figure in 2004 was $169.10 billion,
and the GDP figure increased by $7.72 billion
compared to the GDP figure in 2003. Furthermore,
the GDP per capita was $24,928 in 2004. GDP per
capita is calculated by dividing the GDP with the
country’s population. Compared to the GDP per capita in 2003 which was $23,856, the GDP per capita in 2004 increasedby 4.3% which is an
amount of $1,072.
The highest Hong Kong’s GDP growth rate was in 2004 because Hong Kong economy entered into a full-fledged upturn in 2004,
following a V-shaped rebound in the second half of 2003 after the waning of the negative impacts due to the Severe Acute Respiratory
Syndrome (SARS). The spread of SARS in Hong Kong hit Hong Kong economy hardly. The demand side was affectedthe most, with local
consumption and the export of services related to tourism and air travel severely affected in the short run. The economy did not experience a
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
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-2
0
2
4
6
8
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Hong Kong Gross Domestic Product (GDP)
GDP Growth Rate (%) Average
Year
GDP Growth Rate (%)