|Higher raw 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 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
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
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
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