Beyond the Sweat: How Under Armour Manages Oil, Foreign Exchange, and Ethical Challenges - Part One5/26/2017 Image via fortune.com By Josh Allman Under Armour (UA) was founded by Kevin Plank in 1995. Plank’s motivation to create a sports apparel company was born out of his desire to solve a single issue: sweat-soaked shirts. Today, UA is one of the most innovative apparel and footwear companies in the sports apparel industry and possibly the clothing industry as well; and innovation is what sets the UA brand apart. Under Plank’s leadership, UA has continued to innovate what athletes wear, how they look, and most importantly how they feel. However, a transition from moisture-free shirts to today’s advanced wearable technology has not been without its challenges.
UA’s products are petroleum-based and require the usage of conflict minerals. Beyond that, UA’s products, including its advanced wearable technology, require the conversion of raw materials and minerals into specialized intermediate and final products, which inherently leads to complex operational obstacles, environmental backlash, and even human rights issues. In this first segment of this series, we examine the impact of oil price stability on UA’s production, while in subsequent articles we will look at UA in terms of foreign exchange and international sourcing, as well as environmental and human rights issues inherent in oil and mineral dependent companies. Oil and mineral-based products might provide great fabrics and are certainly essential for advanced wearable technology; but they have not been without controversy. The Dodd-Frank Wall Street Reform Section 1502 (“conflict materials”) provides insight into where companies source and transport materials, offering a lens into their supply chain risks. Conflict minerals are comprised of four main raw materials, coined “3TG”: tin, tungsten, tantalum, and gold; all of which are vital to the production of numerous manufactured goods, including UA apparel. These minerals are primarily derived from the mines of war-torn or “corrupt” countries, like the Democratic Republic of Congo and Rwanda. This is an obvious challenges to supply stability and pricing as regimes change and policies regarding mineral extraction change. Conflict zones also have supply chain reliability issues as infrastructure and employment are not primary concerns for the governments, leading to risky supply chain practices. Regarding oil’s relationship to conflict minerals, as the supply and demand of oil impact its price, entire systems of production can fluctuate, creating variability and risk. Oil directly impacts the freight costs of shipping and receiving goods, the running of plants and equipment, and the production of goods and services. UA’s exposure to fluctuations in the price of oil can impact the company in several ways, creating an almost continuous cycle of change. These fluctuations in the price of oil due to political regime changes, war, and terrorism, and UA’s dependency on oil seen through its conflict minerals report, affect how UA can manufacture, transport, and forecast the price of its goods. Over the past two years oil has seen a dramatic fall in its price because of several interrelated factors. This change began with Saudi Arabia refusing to limit supply, Russia increasing its productivity, and Iran’s gearing up for its sanctions being lifted. Additionally, given the advent of fracking, the United States is now a marginal producer of oil. The United States' production of oil is highly elastic to changes in price. Thus, there is an oversupply of oil, and a huge drop in the per-barrel price. However, Saudi Arabia recently agreed to limit supply if Iran and Russia also agree to hold back – thus, the volatility is reflective of political maneuvers. The production of UA’s goods and its patented sweat-free shirts are stained with a dependency on oil, and therefore, a dependency on the political maneuvers of unstable regimes. In the next segment, we’ll discuss foreign exchange’s direct impact on UA.
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