The Rise and Bottlenecks of Baigou’s Luggage and Bag Cluster
The Rise and Bottlenecks of Baigou’s Luggage and Bag Cluster
This article was written after the author’s field visit to Baigou in July 2021 and was first published in Chinese on the WeChat public account “Realworld_Econ.” The version presented here was translated with the assistance of AI. Also participating in the fieldwork was Chen Fanghao, my PhD classmate, who is now an Assistant Professor of Economics at Jinan University.
Baigou, in Baoding, Hebei Province, is about an hour south of Beijing by high-speed rail. The station is called Baigou. Although people still casually refer to it as a “town,” it was officially upgraded in 2010 to Baigou New City, a sub-prefectural-level administrative unit. It borders Xiong’an New Area to the south. According to local accounts, when Xiong’an was designated, Baigou was left out because its economy was already relatively developed, which would have made relocation too costly.
Baigou has long been a commercial center for the surrounding region. Back in the Song and Liao Dynasty (10-13th Century), after the Chanyuan Treaty, the Baigou River became the boundary between the two states, and Baigou, located on that frontier, became a site of cross-border trade. Even before the 1980s, Baigou was already well known in the surrounding area for its thriving commerce, with market fairs held on average twelve times a month. Even today, villages around Baigou and in neighboring Xiong County still display a kind of “one village, one product” specialization: some make gloves, some hats, some plush toys, some plastic goods. Most of these products are also brought to Baigou’s specialized markets for sale.
What made Baigou truly famous, however, was its luggage and bag cluster. In Gaoqiao Village in Baigou, people initially bought discarded leather materials from state-owned factories in Tianjin and used them to make bicycle seat covers, which they sold at local fairs. But while doing business there, they noticed that the handbags carried by passing merchants were also something they could make. So they switched into bag-making. One household learned from another, then another followed, and over time a full-fledged luggage and bag cluster emerged in Baigou.
In its early years, the cluster relied mainly on a sales model similar to the old Wenzhou pattern: salespeople going out to find markets. Families would send someone off carrying product samples to department stores and small shops in nearby consumer markets. If a buyer liked the samples and placed a large order, the family would go back home and begin production on a larger scale.
As local production expanded, more and more merchants became willing to come directly to Baigou to inspect products, visit workshops, and place orders. Specialized markets then began to appear in town. At first, households from the surrounding area that made bags would simply rent a small spot and set up makeshift stalls in these markets. In 1992, the government built a formal luggage market, and the specialized market gradually entered a more regularized phase of development.
In 2002, Baigou experienced a major industrial safety accident, which led directly to the dismissal of the town leadership at the time. After the new leadership took office, it not only tightened control over workplace safety but also took steps on multiple fronts to improve the quality and branding of the luggage cluster. For example, it worked with the developer Longjitaihe to expand the specialized market from two floors to three; promoted the “Baigou Luggage Festival” to raise the town’s profile; established a labor bureau to mediate labor relations; and in 2008 led Baigou firms to the Canton Fair, helping them reach low-end domestic and overseas markets. This leadership team remained in office for ten years, during which the Baigou cluster grew rapidly.
Around 2000, the local government and Longjitaihe jointly developed an industrial park. Later, however, when the government ran short of funds, it transferred the rights to the park’s revenues directly to the developer, which then took charge of attracting investment. The park brought in several firms from Tianjin, Henan, and nearby areas, which produced in standardized factory buildings in Baigou. These firms became local benchmarks for the industry.
Image: low, orderly factory buildings in the industrial park (and, of course, the famous Hebei smog…)
The job of distribution is to move products from producers to final consumers. More specifically, it has to solve four problems: first, the movement of goods across space; second, the mismatch between production volume and consumption volume; third, the mismatch of supply and demand information; and fourth, transaction costs.
To begin with, distribution has to move goods across space. Products are passed along from one layer of intermediaries to the next, almost like a relay. In several industrial clusters I have studied, first-tier wholesalers are often located in the cluster’s specialized market—local stalls, or in some cases stalls run directly by manufacturers. Second-tier wholesalers are often found in regional wholesale markets, serving areas such as North China or the Northeast. There may also be third- and fourth-tier wholesalers, with each additional layer serving a progressively smaller geographical area. At the end of the chain are retailers: department stores, big-box stores, street shops, and so on. This spatial movement of goods comes with transport costs.
The mismatch between production volume and retail demand refers to the fact that, for most consumer goods, the quantity demanded by each end consumer is far smaller than the output of a manufacturer producing at scale. At the same time, the range of styles each end consumer wants to choose from is far broader than what a manufacturer can efficiently produce in a single batch. Manufacturers therefore need to expand their market reach and aggregate dispersed demand so as to achieve large-scale production with fewer varieties. Distribution, by contrast, performs the opposite function: it breaks large volumes down into small ones. The closer an intermediary is to the final consumer, the smaller each batch tends to be, and the more styles it may need to carry. As a result, transport costs per unit rise because shipment sizes are smaller, and rent per unit also rises because final consumers are concentrated in cities.
The mismatch of supply and demand information means that, in an era of relative product abundance rather than shortage, manufacturers need sales channels in order to understand local market conditions in different places. In general, the closer a seller is to the end consumer, the more local demand information it holds, the more sensitive it is to changes in consumer tastes, and the stronger the local sales networks and relationships it commands. All of this gives it an advantage in pushing products into the market.
Transaction costs refer to the costs incurred when intermediaries deal with their customers—whether those customers are the next tier of intermediaries or end consumers. These costs include, but are not limited to, search, price inquiries, bargaining, explanation, quality assurance, and after-sales service. All of this requires a specialized division of labor. The closer one gets to the final consumer, the more customers one must deal with, and the higher these transaction costs become.
By the time a product moves layer by layer from the factory gate to the retail shelf, its final price may be several times the ex-factory price. It would be mistaken to assume that these intermediaries are simply “greedy middlemen” exploiting consumers. Part of the markup covers transport costs, warehouse rent, and management costs at each level—costs that rise when large volumes are broken into smaller lots. Another part covers transaction costs, and another part reflects the “rent” mentioned above: the rent intermediaries earn by controlling local information and commercial networks.
Distribution is itself a form of specialization. Without intermediaries, consumers would have to go to Baigou to pick out bags, to Puyuan for knitwear, and to Foshan for home appliances. That would be exhausting.
This is not to say that every layer of markup in the traditional system was justified.
The rise of e-commerce allowed manufacturers to face consumers more directly and gave them greater knowledge of market demand, thereby reducing some of the “rent” previously captured by traditional intermediaries. At the same time, the development of specialized courier services lowered per-unit logistics costs. This made it possible for manufacturers to bypass some wholesalers and sell directly to individual consumers, squeezing the rent-seeking space of traditional channel intermediaries.
Even so, traditional wholesalers did not become entirely irrelevant under the impact of e-commerce. Selling directly to consumers online did not fully resolve the four problems described above. Instead, new types of intermediaries emerged.
To sell on an e-commerce platform, one has to understand platform rules, compete for traffic, decorate the online storefront, produce attractive product photos, write persuasive copy, and seed products through soft marketing. Every consumer may want to message customer service to ask about the product, so someone has to monitor the store around the clock. Every order may also bring after-sales issues. Add it all up, and the transaction costs are enormous. Large firms with deep pockets may be able to set up a dedicated e-commerce division to deal with all these frictions. For small and medium-sized firms, however, a specialized division of labor often makes more sense.
As a result, a group of people emerged who specialized in running online stores and dealing directly with consumers on the internet. They listed products online, and when consumers placed orders, they would then go back to factories to source the goods. Online stores did not need to be physically close to consumers; what mattered more was being close to where they could conveniently obtain products. In the early years, running an online store was a relatively asset-light business: no warehouse, no inventory—just taking product photos from factories and putting them online for sale.
In Baigou, young people would often rent a room in a residential building, buy a few computers, and start an online store. Their role resembled the “internet sellers” I saw in e-commerce clusters in northern Jiangsu: a distinct group of people specializing in selling things and in dealing with consumers. Today the fashionable term would be “livestream influencers,” but the underlying skills are many: writing copy, planting recommendations, taking photos, livestreaming, persuading consumers—there is real craft involved in all of it.
But online stores alone were still not enough. Even if factories supplied online stores directly, the mismatch between production volume and retail demand remained. When manufacturers face consumers directly, demand becomes highly diverse and each order becomes very small. More variety and smaller batch sizes inevitably raise producers’ costs. At the same time, e-commerce demand is hard to predict, yet orders have to be shipped quickly once they arrive. Firms therefore need to hold inventories of at least some styles. Manufacturers find it difficult to strike a balance between economies of scale and the need to offer many varieties in small quantities.
This gave rise to another group of intermediaries specializing in B2B business. In Baigou they are called wanggong, or online suppliers. Put simply, they are also wholesalers, except that their customers are online shops, whereas the customers of physical stalls are downstream wholesalers. We visited one such supplier whose online-store clients numbered more than one hundred, while its upstream suppliers consisted of only a dozen or so physical workshops in the surrounding area. That is precisely where their role lies: they break larger supplies into smaller lots and reduce transaction costs.
Online suppliers typically operate out of street-front shops. Baigou even has an “online supply street,” where shop signs display the names of these suppliers. When we visited in 2021, there was also a local app called Baoniuniu, through which one could search the names of street-side online suppliers and instantly see their latest product information. Online stores would list the supplier’s photos, and once a consumer placed an order, someone from the store would ride a tricycle over to the supplier to pick up the goods. The quantity collected each time was usually small. Payment was made on the spot by scanning an Alipay code, after which the goods would be taken to a nearby courier outlet and shipped directly to the consumer.
Image: “Online Supply Street”
Since both are wholesalers, could physical stalls and online suppliers sell to each other’s customers? In practice, very few businesses do this, because it is difficult to make it work operationally. Geographically, the physical stalls are located in the government-planned luggage market, while the online suppliers are spontaneously clustered along a separate street. Their customers simply do not go to the same places. But this is only the surface reason. The deeper reason is that the products sold through physical stalls and online shops are not really the same.
The online market is dominated by women’s bags, with more styles and much faster turnover in trends. This may be because product information spreads more cheaply online. Walking through the physical stalls, one often sees curtains drawn shut, with signs reading, “No entry for competitors” and “No retail sales.” Information moves much less efficiently offline than online. Bags sold online also tend to be of a lower “grade” than those sold through physical channels: poorer workmanship and cheaper materials. This may be because quality is harder to assess online; it may be because online consumers are more price-sensitive; or it may be because online products chase fashion and care less about durability. I will not dwell on that here.
Image: stalls with curtains drawn
Around 2010 to 2012, the Baigou luggage market began to decline. Local officials say that one important factor was the shock of e-commerce. Many of the larger firms were unfamiliar with the logic of e-commerce, unable to adapt to the increasingly fragmented and personalized demands of the market, and also unable to compete on cost with the lower-quality products sold online. Their development therefore ran into a bottleneck.
Could the cluster use e-commerce to overtake competitors? In fact, e-commerce itself has not been easy. Around 2014, there were only a little over 200 online suppliers in Baigou. Today, even a conservative estimate would put the number at more than 3,000. The logic is the same as always: once too many people enter, traffic becomes more expensive, and it is the e-commerce platforms that make the money. High-quality product photography can cost tens of thousands of yuan; photography, photo editing, and similar producer services have also profited handsomely. The only people finding business harder and harder are the actual operators.
In 2013, Longjitaihe relocated the entire specialized market—the luggage city—to a more remote site in the southeast and also built an accessories market nearby. The relocation brought grander facilities, but also much more expensive stall costs. Some stall operators gritted their teeth and paid for the new stalls; others simply chose to shut down.
As the expansion of the cluster slowed, the share of new customers declined and repeat customers became more important. Under such circumstances, some producers simply withdrew from the specialized market. They relied mainly on repeat business and attracted only a small number of new customers through reputation and word of mouth. When we visited that year, both the luggage city and the accessories market were almost empty of customers. This may also have had something to do with the pandemic’s disruption of trade and circulation.
In 2017, Xiong’an New Area was established. Since housing in Xiong’an itself could not be traded, property prices in neighboring Baigou surged. High-rise buildings sprang up to the north, east, and west of town—but without much human activity inside them. Quite a few entrepreneurs who had already made their first fortune shifted into property speculation. The way rising house prices eroded entrepreneurial energy was immediate and obvious.
When my teachers and senior schoolmates conducted fieldwork in 2014, many stalls still had their own factories. By the time we visited in 2021, both stalls and online suppliers had outsourced production almost entirely to small workshops in surrounding villages. I tracked some of these workshops down and found that they, too, subcontracted further—sending work to poor villages in the Taihang Mountains, and even to prison labor. Rising labor costs had made family workshops increasingly hard to sustain, and outsourcing had become a necessary choice.
Overall, Baigou serves mainly the northern market and is positioned in the low- to mid-end segment. High-end products are still made by the established leaders in Guangdong; Shiling, in Guangzhou, remains one of the country’s major luggage and bag clusters. Dozens of Baigou firms have gone to Guangzhou to produce, but one rarely hears of Guangzhou firms relocating to Baigou. On the contrary, many stalls in the Baigou luggage market act as agents for Guangzhou brands. The word “Guangzhou” alone can bring a price premium.
This suggests that regional reputation may matter in explaining why upgrading product quality at the cluster level is so difficult. Business owners who had been to Guangzhou told us that Baigou’s reputation is that of a producer of low-end goods. Even if a bag made in Baigou is of good quality, the moment buyers hear it comes from Baigou, they discount it mentally, and naturally the price cannot be pushed very high. Despite being one of China’s major luggage and bag clusters, Baigou still lacks any truly heavyweight brand and has yet to secure a place in consumers’ minds.
Costs are rising, but product prices cannot keep up. Firms are under real pressure, and industrial upgrading has run into a bottleneck. Between 2015 and 2019, the value added of Baigou’s luggage industry fell from RMB 3.1 billion to RMB 2.5 billion, reflecting the weakness of the sector. Yet there is another side to the story: labor-intensive industry truly does spread wealth among ordinary people. During those same years, residents’ incomes grew at close to 9 percent annually.
Image: Baigou statistics (Baigou Museum)
Could export markets provide a way out? Even in exports, Baigou mainly serves low- and middle-income countries, including parts of Africa, as well as Uzbekistan and Papua New Guinea. On top of that came the pandemic, which was especially damaging to exports in the past two years. Bags are not necessities; their income elasticity is high. Consumers cannot stop eating for a day, but they can certainly stop buying new bags so often. When the pandemic remained uncontrolled abroad, demand suffered. At the same time, overseas production was also disrupted, which meant containers returned empty and freight rates rose sharply.
This was what the taxi driver we met at Baigou Station told us. His family had been in the luggage export business, but the past two years had become so difficult that he simply switched to driving a taxi. Through him, I also met several owners of rural family workshops. Their factories were small and unimpressive, but the owners—men in their fifties—were sharp and capable. In the early 2000s, they wanted to attend the Canton Fair but lacked the proper qualifications, so they had to piggyback on other people’s booths to promote their own products. Later, they kept going year after year and gradually built relationships with foreign buyers.
Image: family workshops in surrounding villages
But in the past two years, after the Canton Fair moved online, one of them simply refused to participate. He said bluntly that he could not learn how to do online exhibitions. He had also thought about cross-border e-commerce, but he did not know foreign languages, and in his view Baigou simply lacked cross-border e-commerce talent. If he wanted to do it, he would have to open an office in Baoding or even Beijing to recruit people. He told us, “I can’t be bothered with all that anymore. I don’t understand how cross-border e-commerce works.” I asked him, “But when you first started going to the Canton Fair, didn’t you also have to learn the ropes then?” He could only reply, “I’m older now. I can’t learn like that anymore.” When asked whether his children were willing to take over, he said no: “It’s too exhausting. They’d rather find a stable job.” His factory was piled high with inventory, some of which had been sitting there for more than a year. But he still could not stop production, because he had workers to keep employed.
Grassroots rural entrepreneurs often have limited education, limited exposure, and limited capacity to keep learning. In an era of shortage, none of this mattered very much. When relatives and neighbors could lead the way, and demand was easy to find, a bit of shrewdness was enough to do business. But things are different now. If one does not know how to face consumers, respond to demand, and use new technologies, one can only go on struggling.
With so much excess capacity, a market shock that eliminates some firms may, in the end, help resources be reorganized and consolidated.