China exported 3.4 billion hats and caps worth more than US$1 billion in 2004, up 22.7 percent from the overseas shipments of the previous year. At $155.7 million, exports in the first two months of 2005 were already up 29.7 percent compared with the same period last year.

Higher overseas demand is the main reason for the export growth. Many buyers from the United States and the European Union that used to source hats and caps from Indonesia, Thailand, Vietnam and Mexico are now importing from China because suppliers there can offer greater value for money.

In addition, many existing US buyers have increased their imports from China, some by as much as 50 percent, mainly because US quotas on cotton hat and cap imports were removed in early 2004, and those on polyester items were lifted this year. The removal of quotas on cotton hats and caps, which account for at least 80 percent of China's total hat and cap exports, resulted in a 22 percent growth in exports of the product category in 2004. Post-quota overseas shipments of polyester hats and caps are expected to register an even higher growth of 30 percent.

Because of the increase in demand, many China suppliers are constructing additional factories or expanding existing facilities. Many of those with in-house embroidery capability will purchase computerized machines to improve efficiency. Most of the new facilities will begin operating by the end of 2005, while some will open in early 2006.

However, despite these expansions many suppliers might not be able to achieve their targeted capacity increases because of the labor shortage that companies in the southeastern coastal regions have experienced since last year. The hat and cap industry is particularly affected because of the labor-intensive production process, which involves cutting and finishing each panel by hand before the hat or cap is formed.

The shortage of labor has forced some companies to increase subcontracted production in order to meet orders. Many makers in Guangdong, one of the provinces most affected by the shortage, are subcontracting to factories in Jiangxi and Anhui provinces, where the labor situation is not as bad. However, the logistics of subcontracting, especially to factories in a different province, are difficult and costly. In addition, quality control and consistency can become a potential problem with this arrangement.

Therefore, a few makers are trying to retain their employees by improving working conditions and giving additional benefits. Some are even building more comfortable dormitories and better staff canteens, while others are offering free meals. Many suppliers have increased salaries of technicians and skilled workers 10 to 30 percent over the past year.

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