Prices of China-made slippers are expected to go up by about 10 percent in the next 12 months due to a number of factors that have been increasing makers' operational expenses. Raw material costs, which account for as much as 50 percent of a slipper's price, have been continuously rising. The cost of PU resin, one of the main materials for soles, increased from about US$1,100 per ton in February 2004 to more than US$1,800 by year-end.

In addition, the labor shortage that has been affecting nearly all industrial provinces in China's coastal regions is forcing companies to offer higher wages to retain or attract skilled workers, spend more on training, and improve factory and dormitory conditions. Over the past year, these measures have added at least 10 percent to most companies' operating costs.

The shortage of electricity in industrialized parts of China is likewise presenting a challenge to suppliers. Many have had to purchase generators in order to keep production running during the frequent power cuts.

Even with higher production costs, many slipper companies could not raise prices in 2004 because of intense competition in the industry. Growing overseas demand for China-made slippers has encouraged more and more companies to join the line, especially since production does not require high-technology investments. In addition, many slipper makers that used to focus exclusively on the domestic market have ventured into overseas trade, taking advantage of the China government's decision in 2004 to lower the registered capital required in acquiring export licenses.

Competition is especially severe in the low end, the line offered by most China suppliers. Prices of low-end slippers have dropped by up to 30 percent in the past five years, resulting in extremely low profit margins for makers. Because of this, an increasing number of suppliers that can afford to invest large amounts in R&D are now moving into more upscale production. Even some of the midrange makers are following suit, though to a lesser degree.

Apart from better-quality materials, design is a major element in the production of midrange and high-end slippers. Since their manufacture requires stronger R&D capability, only a few suppliers are currently producing these types of slippers. This enables companies to raise prices of their midrange and high-end slippers to compensate for overall higher production costs, without the risk of losing potential orders.

The prospects of higher profits have also encouraged some suppliers to shift from plastic to genuine leather slipper production, especially since overseas demand for the latter is growing, particularly in the European Union.

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