China Market: The New Frontier

Twenty years ago, the Chinese dragon stirred from a deep slumber. Few would have imagined then, that the measures introduced within a historically closed economy, would lead to rapid economic growth and transform the jewellery manufacturing and the diamond processing sector, practically non-existent, into a key global industry. The Chinese stratagem created a ripple effect and today there is talk of China even challenging the Indian giant and becoming a key player in the global diamonds and jewellery sector, as a manufacturer and consumer. But more is still needed for China to become a truly first class player.

Sanjay Kothari, vice-chairman, KGK group, comments, “Double digit growth in the Chinese economy made it the second biggest economy of the world. Compounded by economic growth, China today gives a big room for consumption of luxury and thus diamonds and jewellery.”

World’s Second Largest Jewellery Manufacturer and Consumer

The rise in the number of affluent Chinese has made China the second largest jewellery-consuming country in the world, after USA. In 2011, jewellery sales in China totalled Yuan 18.37 billion (US $2.9 billion), higher by 42 per cent from the previous year, as per China’s National Bureau of Statistics. China is also the second-largest jewellery manufacturing centre, after India, supplying for a vast domestic market with exports being over one-third of industry revenue. Over the five years through 2012, revenue for the Chinese jewellery manufacturing industry grew 12 per cent annually to reach US $53.8 billion, reported IBISWorld, in its industry research report on Jewellery Manufacturing in China, as released in November 2012. IBISWorld, an Australian market research organisation has produced reports on China's main industries in a joint venture with Chinese research company A C M R. Even the diamond cutting and polishing industry in China showed growth from US $600 million in 2007 to US $2 billion in 2011. As the second largest processor of small diamonds, after India, China annually imports about US $1 billion worth of diamonds.

Says Suresh Ghevariya, of Prism International, “For China, jewellery manufacturing is a distinct traditional activity. Secondly, global promotion of trade, supported by the government was the key ingredient of China’s growth. However, diamond manufacturing is still under a curve, but growing very fast.”

Unparalleled Growth

This growth was primarily possible through the singular vision economic reforms brought about by the Chinese government, which transformed Guangdong province, a densely populated and economically backward region into one of the most affluent, along with Shandong province in the north eastern part of the country. Today, Guangdong’s provincial capital, Guangzhou, also known as Panyu, and the city of Shenzhen, both being near Hong Kong, have become production hubs for diamond and jewellery.

While the city of Panyu, with its jewellery and gemstone factories, is known as the gems and jewellery capital of China, the city of Shenzhen is a leading jewellery manufacturing centre with more than 2,000 jewellery companies, employing 120,000 workers. Shenzhen also handles 90 per cent of China’s gold, platinum and diamond processing and 70 per cent of China’s total jewellery production, besides being the biggest jewellery manufacturing centre for exports. The geographical proximity of these cities to Hong Kong has contributed to industry growth.

Paresh Katrodia, who heads Walasons, a diamond trading company in Hong Kong, says, “Most of the diamond and jewellery manufacturing factories in China are located in Guangdong province, but company headquarters are based in Hong Kong, as it makes a convenient centre for their operations. Hong Kong has an efficient system in place and easy rules and regulations. It is also a major trading centre and most Chinese dealers come to Hong Kong for negotiations on diamond supplies.”

Economic Policy Reforms

The Chinese government also supported the industry through major policy decisions-- the VAT on diamonds was reduced, Import duty on its import was abolished and so on.

“Currently, there is zero duty on import of diamonds and VAT is just four per cent. The Chinese government also created a centralised infrastructure, investor friendly policies, single window clearances, and it has set up Shanghai Diamonds Exchange, for trading in rough and polished diamonds, which has worked to streamline and strengthen the diamonds business,” says Kothari. He is the vice-chairman of the KGK group that entered China as jewellery manufacturers in 1996 and ventured into the cutting and polishing of diamonds in 2000. Today, KGK is a major producer and exporter with an infrastructure of three offices in China, 1200 workers and a presence of nine shops in retail jewellery.

Kothari says, “In the past 15 years in China, we have witnessed many changes in terms of policy and infrastructure, which have been friendly to businesses and investors. The government has been responsive to our concerns and business requirements. Their effort on infrastructure improvement and creating the environment of business has been remarkable.”

Diamond and Jewellery Companies Flourish

Chinese efforts also brought in a huge flow of capital investment from diamond companies in Tel Aviv and Antwerp. Several privately owned foreign companies, mainly from the US and Europe, set up diamond polishing and jewellery manufacturing operations in China. Indian companies also entered the Chinese market and even domestic companies were set up.

“The majority of the jewellery companies in China are American, followed by Chinese, Indian and European,” informs Ghevariya.

However, the market is divided and China has few large scale enterprises. For example, the revenue of the top Chinese jewellery manufacturing companies, like Hong Kong-based Chow Tai Fook, Shanghai Laofengxiang, Conghua Donglin Diamond and Kinye group, accounts for just 20 per cent of industry revenue and no single manufacturer dominates the market.

Katrodia says, “There are many smaller Chinese diamond and jewellery manufacturers working for these bigger enterprises. Many do the processing for smaller diamonds as there is a greater demand for smaller pieces. For these small processing enterprises, contract work is an important source of income.”

The smaller Chinese enterprises also process jewellery for the large scale domestic companies and foreign brands, among which Cartier and Tiffany are established and much sought after, especially in tier one cities. As part of the initiatives by the Chinese government, Tiffany entered China and is involved in diamond processing, manufacturing operations and high-end retail.

Over the years, to meet the demand for diamond processing, technology training institutes were also set up along with communication and infrastructure. Skilled diamond craftspersons from Surat, India were brought in to train Chinese workers and impart skills. As in 2011, there were more than 60,000 skilled diamond workers in over 100 diamond cutting factories in Guangdong province, as per figures with Diamond Administration of China (DAC).

For instance, KGK has established diamond factories in India and China, but Kothari prefers his Chinese workforce. “The Chinese labour force is organised and skilled. There is no labour unrest,” says Kothari.

Agreeing to the same, Katrodia says, “China has cheaper labour power than India and the Chinese workforce provides better finishing of jewellery. Much of the work in Chinese jewellery factories is automated and operations are smoother, with timely delivery and necessary infrastructure for transport of goods. The only drawback is communication. Although the manpower has the skills and the knowledge, there is a need to better English language communication skills with the world. Otherwise, though they adhere to the delivery schedule, sometimes what they deliver is not what was required. Overall, technology and infrastructure in China are better.”

Infrastructure

For example, the Chinese government has recently launched its high-speed railway between the capital city of Beijing and the commercial hub of Guangzhou, a technological marvel, which offers the longest high speed bullet-train ride in the world (2300 kilometres) and will eventually allow high-speed trips between Beijing and Hong Kong, after the Shenzhen-Hong Kong high-speed link's completion, scheduled in 2015. This is expected to positively impact the diamond and jewellery industry, to touch US $200 billion by 2015, triple that of 2011.

Growth Potential

The potential for growth is enormous, especially in the wedding market. Katrodia explains with an example, as he says, “About 84 per cent of American women in USA, wear a diamond ring on their wedding day. In China, only about 12 to 15 per cent of women choose a diamond ring as against only about five to seven per cent of Indian women. So, there is huge potential for diamond jewellery in India and China.”

Even the IBISWorld research report states that currently the per capita jewellery consumption in China is well below that in developed economies and the world average. The future growth potential of the industry is substantial. The report expects “More jewellery retailers to adopt franchise-store expansion strategies and move into second tier and third tier cities to exploit those markets.”

According to IBISWorld, consumer demand in China’s urban and rural markets is very different. While urban consumers focus on design, quality, raw materials and brand, preferring high-end gold, platinum, silver, diamond and precious stone jewellery, rural consumers prefer traditional gold and silver jewellery at lower prices.

Jewellery Retail

There are more than 50,000 jewellery companies in China, most of them with retail presence, employing three million people. Kothari points out, “With the wealthiest consumers being concentrated in the region near Shanghai and Beijing, the tier-one cities, the retail market is rather fragmented.”

For instance, Chow Tai Fook, the largest jewellery brand in China has more than 1,800 retail outlets, mostly in mainland China, while hoping to touch 2000 by 2014. Laofengxiang, the largest gold jewellery company in China, has 700 plus chain-stores and 2000 sales networks across China, Chow Sang Sang, the first Hong Kong listed jewellery company, with two well-known brands, Chow Sang Sang and Emphasis Jewellery, has more than 300 stores spread in mainland China, Taiwan, Hong Kong and Macao. On the other hand, Tiffany had around 15 high end retail outlets in 2012, which it hopes to double in the next five years.

Thus the 30 largest jewellery retail chains control only about 30 per cent of the market and are concentrated in tier-one cities ilike Beijing and Shanghaai, which account for more than 30 per cent of diamond jewellery sales from only five per cent of China’s population. Therefore, for any future expansion, most retailers will have to focus on tier-two and tier-three cities.

Threat to India?

A big population and economic growth creates big potential for sales. China has thus rapidly shot into the global limelight and there is talk of China’s nascent sector threatening the diamond industry in India. However, Indian manufacturers in China pooh-poohed the threat.

Kothari says, “There is no comparison between China and India. For instance, India’s imports of rough diamond roughs is about 11 times higher than China. India is a huge manufacturing centre, while diamond manufacturing in China has shrunk in the past 10 years, due to increasing labour and operational costs. Today India produces every size and type of rough, while China is mostly manufacturing sawables. Yet, both countries have a different advantage. While manufacturing is India’s advantage, China is a major consumer of polished diamonds.

Diamond Import

As against India’s imports of US $11 billion worth of rough stones for processing, China annually imports rough diamonds worth US $800 million and polishes these stones creating value addition and increasing the worth to about US $1.1 billion. Therefore, to ensure the supply of diamond roughs, the Chinese government has signed multibillion dollar resources-for-infrastructure deals with various African governments, thereby securing its supply of rough diamonds. Reliable sources also informed Diamond World that China is one of the largest investors in Africa. There are also reports of China trading in blood diamonds although the country was selected as the Vice-Chair for the Kimberley Process in 2013.

Sustaining Growth

Although China started late, with clarity and support from the government, there has been rapid development. It is true that China is better than India in jewellery manufacturing, but not in diamond processing. Although China is not yet a threat for Indian diamond and jewellery industry, with its better system, technology and infrastructure, it is growing at a much faster pace and has made the competition for India intense. To maintain its edge, India has to buckle up, focus on infrastructure and the taxation system. To sustain its growth, China needs to create infrastructure for manufacturers, facilities for the workers, streamline the taxation system, focus on designing and manufacturing jewellery, aggressively promote its brands internationally and increase its participation worldwide. Practically, it needs to create the manpower for diamond assortment and English communication with the global market.

Now that the dragon has awoken, will it fly?