Nike Against the US Government

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In 1969, Phil Knight left his teaching job to focus on Blue Ribbon Sports. By 1972 they launched the Nike shoe at a trade show. Despite imperfections in the product, it sold well. Blue Ribbon had a reputation for telling the truth. Their relationship soured with Onitsuka, their Japanese supplier. When Blue Ribbon launched Nike, Onitsuka ended their contract, claiming damages. Phil pushed for independence. He recognized the opportunity to launch Nike. His company secured credit to survive, but struggled to maintain liquidity. In 1975, Blue Ribbon faced a severe cash shortfall, resulting in bounced paychecks. Desperate, they took a loan from a local box company, to cover payroll. It was the same vendor which depended on Blue Ribbon to stay in business. That’s when the Bank of California severed ties. Phil couldn’t pay the $1 million he owed to his equity partner, Nissho. He asked them to lend Blue Ribbon another $1 million. At that point, his former bank called in the FBI to investigate possible fraud.

Part 71. Phil Knight (conclusion)

You can find this week’s TL;DR here.

Key Lessons:

• Give your enemy a chance to save face.

• Get a big player on your side.

• There’s always a way to win.

• Make a great product.

• Be known as truthful.

• Never back down.

• Always fight back.

• Hire great talent.

Now there’s a collectible version of this newsletter! Methods of Prosperity newsletter number 34 is available to collect as of October 18, 2024. If you’re so inclined you can permanently own it!

The judge believed Phil and his team more than he believed Kidami and team Onitsuka. “Truthfulness is all I have to go on”, the judge declared. Kidami insisted on a translator, when it became obvious that he spoke perfect English. Blue Ribbon won their case against Onitsuka. Phil hired Blue Ribbon’s lawyer in court to be his company’s permanent, in-house lawyer.

Now that Blue Ribbon had a company lawyer, they were going to need it. On the hook for debt to Nissho, the Japanese trading company and Blue Ribbon’s capital partner, Phil had them pay. Blue Ribbon needed a factory, and Nissho would pay for it. But they wouldn’t know. It was accounting slight-of-hand.

Leading up to their audit by Nissho, many of Blue Ribbon’s checks were bouncing. The intermediary account representative between Blue Ribbon and Nissho hid invoices. It looked like a conspiracy. Meanwhile, two separate creditors showed up during the audit. Blue Ribbon owed them each millions of dollars and they showed up to collect. Phil organized a game plan to coordinate the chaos. None of the individual, angry creditors bumped into each other in the halls. At the end of the day, the creditors received their payment and Nissho forgave the secret factory.

Blue Ribbon survived Nissho’s audit, but still had to face the FBI. The next morning, Phil and his associates representing Nissho met with the bankers. The Bank of California had accused Blue Ribbon of fraud. The bank refused to do business with Blue Ribbon, who was still in debt to the bank. Nissho offered to pay Blue Ribbon’s debt in full. The bank had been pursuing an account with Nissho, wanting their business. Uki Ido, who Phil called the ice man, informed the bankers that it would be a waste of their time. That made the bank managers recognize that they had mistreated their former customer. There would be no FBI investigation.

Money wasn’t Phil or Blue Ribbon’s end game. Money is a means to get things done. But they had a cash flow problem. To keep growing, he had to take the company public. That would solve their cash flow problem, but it could also mean losing control. He was hesitant, and instead chose to keep borrowing from banks. Which required a personal guarantee that his partner, Bowerman, refused to do. Nearing his retirement, Bowerman sold two thirds of his stake in Blue Ribbon to Phil. Bowerman agreed to stay on as President. Nissho had been funding Blue Ribbon Sports, but it wasn’t enough.

It was 1976. They needed to ramp up production to meet demand. For the first time, athletic shoes were becoming everyday wear. Most of their factories were in Japan. For the first time, athletic shoes were becoming everyday wear. Nike made a waffle trainer that wore well with jeans. Supply couldn’t meet demand. Nike was about to become a household name. Blue Ribbon Sports changed their name to Nike Inc. They expanded to factories in Taiwan.

By 1977, Nike was becoming a solid brand, but the company was still cash poor. If they couldn’t grow, they wouldn’t survive. Going public was the best way to sustain growth. They had no focus groups. They only guessed what customers wanted. Then one day, Farrah Fawcett appeared on a 1977 episode of Charlie’s Angels wearing a pair of Nike Señorita Cortez. Stores started selling out of them. Nike ramped up manufacturing, and still ran out out of cash.

Korean knock-offs of Nike shoes inspired a cease-and-desist order from Phil. It also inspired Phil to absorb that Korean factory and hire the counterfeiter. With that move, Nike didn’t have to be over reliant on Japanese factories. They hired a new ad agency who came up with the slogan: There is no finish line. The ad didn’t focus on the product. It focused on the spirit behind the product. That was rare form in the 1970s.

In June 1971, Blue Ribbon offered 2,000 shares of debentures, now the holders expected a return. By 1977, they wanted to cash in, and Nike couldn’t deliver unless they went public. It was no longer an option. It was a necessity. Phil consulted with his mentor, Chuck Robinson. He was a former government official who advised him on how to take Nike public. It was possible to do without sacrificing control. Robinson suggested dividing shares into two classes. Knight could keep control through Class A shares while offering Class B shares to the public.

That would solve Nike’s cash flow problem, but that’s when a bigger problem surfaced. In 1977, Nike received a $25 million bill from the U.S. Customs Service. Old laws resulted in the American Selling Price (ASP) method. A competitor could produce a similar shoe which assessed duties at 20% of Nike’s selling price and go after Nike. Converse and other competitors exploited this law. They produced expensive “similar” shoes to increase Nike’s duty costs. This caused an unexpected financial burden. It threatened Nike’s stability, as it equaled almost their entire sales for that year. Nike responded by lobbying and adjusting their product strategy to mitigate the impact. One of the ways they did this was to make a shoe priced to undercut competitors. Nike created ads positioning the brand as a small, Oregon based company. They were fighting against a greedy US government agency that only wanted money. They’d rather put an American company out of business than lose tax revenue.

Nike fought back with an antitrust lawsuit against its competitors. They colluded, using the U.S. Customs Service to impose excessive duties on Nike’s imports. The US government backed down, lowering the amount down to $11 million. Phil didn’t want to pay a penny but had to let the US government save face. Nike settled the case for $9 million.

In conclusion, Phil Knight’s net worth is around $40 billion to $43 billion. The majority of his wealth comes from his significant ownership stake in Nike, Inc. Knight and his family own approximately 300 million shares of Nike. The family holds a substantial portion of which through a family trust called Swoosh.

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– Sean Allen Fenn

Methods of Prosperity newsletter is intended to share ideas and build relationships. To become a billionaire, one must first be conditioned to think like a billionaire. To that agenda, this newsletter studies remarkable people in history who demonstrated what to do (and what not to do). Your feedback is welcome. For more information about the author, please visit seanallenfenn.com/faq.