material costs, intense competition and the labor
shortage that affects nearly all industrial
provinces in China's coastal regions have
considerably cut profit margins of school and casual
backpack suppliers. Many makers in this sector are
increasing their focus on midrange and high-end
products such as fashion and specialty backpacks,
which yield higher profits.
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
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.
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
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