Upward and inward.

This story first appeared in the May 2, 2012 issue of WWD. Subscribe Today.

That’s the future of the Chinese jeans market, according to Robin Kosari, co-founder and chief executive officer of Golden Win Group Ltd., a major denim and jeans supplier based in Hong Kong. Higher labor, commodity and energy costs have driven prices up, forcing Golden Win and others who manufacture in China to set their sights on higher-end products, such as premium jeans, as well as the growing desire for better fashion products among Chinese consumers.

While 60 percent of the market for jeans produced in China has been through exports and 40 percent for the domestic market, “a reverse of that should happen soon,” Kosari said, as China’s middle class continues to expand and become more inclined to personal consumption.

In his remarks, Kosari outlined both the inflationary pressures hitting producers in China and the related development of a young, fashion-conscious middle class in the country that’s primed to buy more — and higher-end — apparel in the years to come.

Inflation has pushed the wages of Chinese workers to $500 a month or more in the last two years, while plants in neighboring countries like India, Vietnam and Indonesia are paying less than $200, and those in Bangladesh and Cambodia are closer to $100. That’s ended China’s run as a low-cost producer of commodity products and, in the denim hub of Xintang, cut the number of jeans factories by more than half to less than 2,500. Lack of demand and overcapacity soured the environment for many producers, and more stringent environmental standards, both in China and elsewhere in the world, led them to either trade up, as Golden Win did with a $30 million investment in its production, or curtail their output.

“The government says the future of the Chinese economy cannot depend too much on exports,” Kosari noted. “We need to boost domestic consumption.”

Even with recent signs of a slowdown in purchasing, the Chinese are primed for that opportunity as retail sales in the country, about $2.9 trillion last year, are expected to grow at a double-digit pace and hit $4.6 trillion by 2014 with middle-class families in urban areas accounting for much of the growth.

Whereas personal consumption accounts for 71 percent of U.S. GDP, 60 percent in Europe and 55 percent in Japan, the figure in China is 36 percent. And while North American consumers buy two pairs of jeans a year, while those in Japan and South Korea buy one pair and citizens of the euro zone 0.8, Chinese consumers buy just 0.3. The Chinese spent about $5 billion on jeans last year, which represented between 18 and 20 percent of the world’s jeans units but just 9 to 10 percent when measured by their dollar or yuan value, implying a low price per unit and an indicative of a market with plenty of room to trade up.

Kosari thinks those statistical gaps will close as disposable income becomes more plentiful and Chinese consumers, 85 percent of them aged 35 or younger, indulge their fashion desires. Young Chinese, he noted, “like the Western influence and the Western lifestyle.”

There are already signs that Chinese jeans production is moving toward more upscale products. Between January and August of last year, the value of Chinese apparel exports was up 23 percent and price up 43 percent while units dropped 13 percent.

“There’s plenty of room for Chinese people to spend to boost domestic consumption,” Kosari noted.

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