China's exports of hand tools are still on the upswing. Overseas shipments increased 28 percent to US$630 million in 2004 from US$493 million in 2003, according to customs statistics. This is a significant increase over the 20 percent growth rate the country has been averaging in the past several years. In addition, exports grew about 14 percent in terms of volume, indicating an increase in overall export prices. Much of this is due to the fact that suppliers are passing on part of raw material cost increases to buyers.

The high growth in value terms also indicates a rising number of midsize and large makers that are exporting professional tools, which are more expensive than models for the DIY market.

China has a long history of hand tools manufacturing. This highly mature industry already has a 4,000-strong supplier base, more than 80 percent of which are small makers that export mostly through trading companies. And as more makers, attracted by the low entry barrier, join the line, the supplier base and the resulting competition will grow.

There is very little product differentiation in the line and the only obvious competitive strategy for makers is to break into the midrange and high-end markets, particularly in the European Union, with a selection of tools designed for professional use. However, only midsize and large suppliers can afford the substantial investments necessary to upgrade their manufacturing lines to produce high-end tools.

Many of these companies are now importing advanced machinery from Germany, Sweden, Japan and Taiwan, especially to use in making tools such as wrenches and sockets that require high-precision, sophisticated equipment. Wrench factories need at least two production lines equipped with friction pressing machines, while facilities for the manufacture of sockets need cold-forging machines.

Suppliers are also automating their production process to boost capacity, in view of increasing demand for hand tools.

Aside from improving precision and quality of output, these automatic machines serve another purpose. They cut down on material wastage and other operating expenses in the long run, thus helping suppliers cope with another difficulty: the continuously soaring costs of raw materials. Some makers are in fact automating their production facilities solely for this reason.

The majority of China's hand toolmakers, however, feel there is no urgent need to shift upmarket or invest in advanced machinery, as demand for low-end hand tools remains high, especially in the United States. These suppliers manufacture mainly DIY hand tools using conventional production processes that require only the simplest drilling, grinding and punching machines.

Nevertheless, investments in advanced automatic equipment will eventually become necessary as more suppliers are forced to expand their hand tool selections to include midrange and high-end products for the professional market.

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All information contained in China Sourcing Reports is the result of exclusive, ground-level and definitive research conducted by Global Sources' analysts. Companies featured in these reports may or may not be clients of Global Sources.