A large number of companies focusing on low-end models in 2004 began offering midrange and even high-end designs in 2005. The trend is more evident among makers producing synthetic leather models. Many of these suppliers have already stopped or reduced the use of PVC in their products, and switched to the more environment-friendly PU or semi-PU.

In addition, a few companies have decreased their output of synthetic leather models and switched focus to genuine leather designs, which are more profitable. Some have stopped the production of synthetic leather products altogether.

One of the main reasons for this upscale shift is intense price competition. With a highly saturated low-end market, companies that cannot afford to lower quotes of mass-produced designs are trying to distinguish their products through value enhancement.

Another major factor is design copying, which over recent years has become even more rampant in the industry. It takes counterfeiters only a short time to reproduce new releases. This has prompted many companies to come up with more elaborate, upscale designs that are more expensive to make and not too easy to copy.

Even with the upmarket trend, most makers are not very optimistic about export sales in 2006. Suppliers are generally concerned about the combined effects of the possible appreciation of the yuan and the further reduction of export reimbursement rates.

The export reimbursement rate was reduced from 15 to 13 percent in 2003 and further to 11 percent in 2004. The yuan, on the other hand, appreciated by 2 percent in 2005. There is speculation that the government will let the currency's value continue to appreciate and reduce the export reimbursement rate further this year. While this remains to be seen, suppliers are nonetheless cautious and have become less optimistic about 2006 prospects.

Because of these factors, total export volume is expected to increase by only up to 20 percent in 2006, lower than the 30 percent average growth recorded over the past two years.

Suppliers have also been affected by other challenges such as higher production costs and labor shortage. With oil prices continuing to fluctuate, the cost of leather is also increasing. Over the past year, the cost of raw materials has risen about 6 percent. Although this increase may seem marginal, it is noteworthy in view of the fact that makers are running on wafer-thin margins. For this reason, a large number of companies will be increasing product prices between 5 and 10 percent in 2006.