School and casual backpack suppliers face rising production costs that are widespread in nearly all manufacturing industries in China. Increasing material costs have hit backpack makers particularly hard since, depending on type and density, fabrics account for 30 to 60 percent of a product's cost.

Raw material costs have increased significantly in the past year. The price of locally sourced 600d nylon, the most commonly used fabric for backpacks in China, surged 22 percent in 2004. Although nylon fabric costs are expected to stabilize in 2005, an unexpected rise in oil prices could result in an upward movement.

Backpack makers have also had to increase migrant workers' wages up to 15 percent to keep them from moving back to the inland provinces, where economies are improving. In all, total operational costs have gone up an average 20 percent in the past year, but suppliers have been able to pass only 10 percent of these additional costs to buyers.

Apart from rising production costs, manufacturers have also had to deal with increasing competition, which has been fueled by the China government's decision in 2004 to lower the registered capital requirement for companies applying for an export license from US$1.21 million to US$600,000. While this is applicable for all export industries in China, school and casual backpack suppliers have been quick to respond, especially because only about half of the country's 900 school and casual backpack suppliers currently have export licenses.

The competition is especially intense in the knapsacks and school bags segments, as nearly all backpack suppliers in China produce these lines. This, coupled with the fact that design is not a crucial factor in knapsack and school backpack manufacture, gives less room for suppliers to raise prices of these products.

In contrast, design is a major element in fashion and specialty backpacks, and since their manufacture requires strong R&D capability, there are fewer suppliers producing these backpacks. This enables companies to raise prices of their fashion and specialty backpacks to compensate for overall higher production costs, without the risk of losing potential orders. Therefore, in the next 12 months, many backpack makers are expected to increase prices of fashion and specialty backpacks by about 10 percent on average.

Higher profit margins have also encouraged suppliers to boost their output of fashion and specialty backpacks, especially since demand for the products is growing overseas.

Although suppliers will be increasing production of fashion and specialty backpacks, knapsacks will still make up the majority of output in China. Despite lower profit margins, most suppliers are more adept in manufacturing basic knapsacks than fashion or specialty types.

Industry composition
China is the world's largest producer of school and casual backpacks. In 2004, it exported more than US$200 million worth to the United States alone making that country China's largest export market for school and casual backpacks. The European Union is also a major market.

The majority of the 900 suppliers engaged in the manufacture and export of school and casual backpacks are based in four provinces. Although the cost of entering the line has decreased, we have not yet seen an influx of manufacturers to other provinces. If the labor shortage continues to be a problem, it is likely that some suppliers will move facilities to the inland provinces.

Seventy percent of these companies are locally owned, some of which were previously state-run. The remaining companies are private enterprises funded by investors from Taiwan, Hong Kong, South Korea and Japan.
 

And more... To see the full Industry Overview order now.