As the second largest diamond market in the world, the new frontier of coloured gemstones and an indisputable consumption powerhouse, China holds myriad growth opportunities for international players. Understanding the business environment, working with the right partners and steering clear of bureaucratic pitfalls are pivotal to success in this lucrative space, according to industry insiders.
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It has admittedly been a challenging year so far for China. The country’s jewellery business came to a standstill in end-January due to the Covid-19 pandemic. The peak retail season for brick-and-mortar stores during Chinese New Year 2020, which started on January 25, was interrupted by the nationwide lockdown that forced most shops to remain closed till March. Online jewellery sales were not immune to the impact of the virus-led slowdown, as financial uncertainties dampened consumer sentiment. Jewellery sales in China plunged 41.1 percent year-on-year to RMB 27.7 billion (around US$3.91 billion) in the first two months of 2020 amid the Covid-19 outbreak, according to data from the National Statistics Bureau of China.
The Chinese jewellery sector has gradually been getting back to business from the beginning of March, making it the first important pillar of the international gem and jewellery scene to reopen. While the road to full recovery may be long, China never really lost its shine among foreign establishments that continually seek to make headway in this promising market.
China’s jewellery trade developed rapidly in the 1990s and evolved further over the last decade. Today, the country’s gem and jewellery sector consists mostly of industry players who were born in the 1960s to 1990s. This current crop of stakeholders brings a new level of professionalism and sophistication to the business landscape. China’s second generation of jewellers have burst onto the scene, with younger, more tech-savvy and knowledgeable leaders running the business or taking up important roles. Their fluency in foreign languages and modern social network enable them to operate with ease in international environments.
The nature and perspective of the industry’s decision-makers is not the only new paradigm in China’s jewellery business. Compared to a decade ago, there are more moving gears in the system. These include wholesale, retail, import and export, cutting and polishing, jewellery manufacturing, design, advertising, marketing, IT, education, social network development, and even auxiliary functions such as photography/video and event planning.
These fundamental shifts in China’s jewellery sector have created more space for international players to get involved. Notable jewellery stalwarts such as Chow Tai Fook Jewellery Group Ltd, Forevermark and KGK Group have adopted various strategies to establish themselves in the market. Chow Tai Fook, for instance, has moved ahead of the curve with a multidimensional strategy covering multibrand merchandise, multichannel sales and multitier city development.
Making inroads in China
China’s potential may lure many international companies seeking a piece of this lucrative pie, but successfully tapping and thriving in the market requires careful planning and execution. Various avenues exist for a China strategy, depending on short-term and long-term goals as well as operating budgets and scales. Jewellery trade shows are tried-and-tested channels for most companies seeking to reach Chinese buyers. Many also work with local partners while others choose to establish their own companies in China.
One option is to collaborate with import and distribution agents, usually neutral, service-oriented companies that do not engage in the sales of their own products. The agent company in China acts as a working partner in the country. It handles the import procedures into China, provides official VAT invoices to Chinese buyers, collects payment from buyers and then wires this to the foreign suppliers. This working model is commonly adopted by small- and medium-sized operations.
The most independent way for foreign firms to do business in China is to set up a foreign-invested company, especially if they intend to engage in retail operations or maintain a long-term presence in the country. The law in China allows foreign firms and foreign citizens to invest in and establish companies that are known as a wholly owned foreign enterprise (WOFE).
Sectoral regulations however apply when transacting business. The Shanghai Diamond Exchange (SDE) is the only channel in China to import polished diamonds at only 4 per cent VAT under the general trade pattern. To import and wholesale diamonds directly in China, a company must be an SDE member and registered within the exchange.
SDE data shows that, as of April 2020, the bourse had 364 active members, around 60 per cent of which had foreign investors. SDE membership is recognised and respected in China’s diamond and jewellery industry, thereby providing foreign suppliers with a solid and reputable client base. SDE is the only World Federation of Diamond Bourses (WFDB) member in China. WFDB bylaws regulate the transactions between all members worldwide, and the federation expels members that do not honour their deals.
As the second largest diamond market in the world, China imports various specifications of melee diamonds, and non-certified and certified diamonds of bigger sizes.
Veteran buyer Wu Qiong, CEO of Fuletai Diamond, said, "Round brilliant diamonds ranging from 0.30 to 1 carat in D-I colour in VVS-SI clarity and 3EX cut, preferably with GIA grading reports, are very popular. Diamonds of 2 to 5 carats also move well. Many clients may however require a second certificate from a local Chinese laboratory." In recent years, the market for bigger-sized, fancy-shaped diamonds as well as fancy colour diamonds has grown too, she continued.
In the coloured gemstone field, demand for rubies, sapphires and emeralds remains robust, particularly with the introduction of fancy colour gradings such as Pigeon’s Blood Red, Royal Blue and Muzo Green. Tourmaline has been much sought after of late, and spinel is rising in popularity nowadays, explained Wu, who runs a wholesale and retail business through a network of 10 stores in China. "Prices of Akoya, South Sea and Tahitian pearls have also increased in the last few years due to demand from China," she added.
At the heart of many companies’ ambitions in China is the country’s consumer market. China’s burgeoning middle class with growing discretionary spending offers much opportunity for growth, with new geographic and demographic segments sweetening the pot. This business environment warrants diversified product and promotional strategies to cater to various age groups, budgets and locations.
Many jewellery retailers are setting their sights beyond Tier 1 and Tier 2 cities, where they already have firm footholds. Chow Tai Fook has over 3,500 shops in China, more than half of which are located in first- and second-tier cities. In recent years, it has ramped up its expansion into lower-tier and county-level cities. In similar fashion, Lukfook Jewellery aims to grow its presence in China beyond its current stores in top-tier cities including Beijing, Shanghai, Tianjin and Chongqing.
Chinese consumers often start their jewellery journey with solid gold pieces before acquiring smaller diamond jewellery pieces. As their tastes mature, they move on to bigger diamond jewellery and then those adorned with coloured gemstones. Tier 1 and Tier 2 cities are generally in the last two stages of jewellery acquisition. In contrast, gold and smaller diamond pieces move well in lower-tier cities that are just beginning their love affair with jewellery. Brand names with more points of sale in the city also flourish as quantity is often equated with reliability. In addition, consumers in northern China are more likely to buy bigger and bolder jewellery pieces than their counterparts in the south.
China’s digitally savvy generation of consumers likewise offers room for business creativity and growth.
De Beers’ diamond jewellery brand Forevermark launched in January its first-ever Next Generation Retail Concept boutique in partnership with Beijing Cai Shi Kou Department Store Co Ltd or Caibai. The store includes digital features such as a "discovery wall" and interactive "discovery bars." Lukfook, for its part, intends to promote affordable luxury jewellery products to China’s young, tech-savvy buyers to gain a stronger foothold in the market.
The online-to-offline-to-online (O2O2O) business model continues to deliver strong results for jewellery establishments. Bobby Liu, executive director of Chow Tai Fook, said, "Consumers are constantly embracing new social concepts and technologies and renewing their understanding of experience, aesthetic appreciation and lifestyle. Thanks to the rapid development and enhancement of online retail stores, as well as various digital marketing campaigns, diversified social media channels and the emerging online touch points such as live streaming, our brand successfully draws the customers to offline shops to experience the real products and services along with dedicated customer service that fosters customer loyalty and repeated purchase. Customers are afforded the flexibility to complete the transactions online or offline."
The O2O2O model continually evolves though. Retailers experiment with different variations to suit changing buying patterns, from the "Brick + Mouse" model of online shopping to the "Brick + Smartphone" concept of mobile purchases. Widespread Internet and 4G/5G networks have boosted social and mobile shopping by making it easier to view merchandise on mobile devices. Online stores and social media now serve as broadcast channels, with physical shops, points of sale and showrooms accommodating viewing, delivery and payment of jewellery.
Mobile, social and Internet research often precedes purchase decisions whether online or at stores. Lower-ticket items however move faster online. While Chow Tai Fook’s digital strategy covers 90 e-commerce channels, its online sales account for 4.9 per cent of retail sales value and 14.1 per cent of retail sales volume as of September 30, 2019. Many consumers still prefer to view higher-value jewellery pieces costing over RMB 2,000 (around US$283) physically prior to purchase.
Know your potential partner.
Although the credit score system for companies is not yet fully established, several smartphone-based applications list basic corporate information, including the legal representative of the companies in China. Users will be able to check if there are any lawsuits against a certain company, whether the company has been penalised by the government, and if the company or its legal representative is listed as having defaulted on court orders.
Know the law.
- The cost of breaking the law in China has gone up. The government has expanded the penalties and restrictions against companies and individuals who default on court orders. The legal representative of the company that defaults on court orders will be prohibited from travelling on planes and high-speed trains, and their loan and credit card applications will be rejected. Their names will be listed nationwide. The government has also taken measures to combat smuggling.
- Always import your goods through legal channels and always pay the taxes.
- Bin Zhang, managing partner of Rödl & Partner (China) Law Firm, has assisted in setting up over 200 companies in SDE and represents many jewellery companies in lawsuits. He said, "As a supplier in the process of business with other companies, you shall always sign a proper contract with detailed specification, exact amount, delivery and payment terms etc, even if it is a consignment where you are lending your merchandise to a retailer." When companies deliver goods, they must obtain the proper documents from their counterparts as proof that the goods have been received. "Signing a contract does not mean the goods have actually been delivered and received. If transactions and deliveries are only based on casual notes, it is difficult to get legal protection when any dispute arises," he stated.
Know your buyer.
- Chinese buyers favour suppliers who are prepared with stock lists, visuals and information on certificates. Buyers from midrange to large firms prefer to choose from a clear and detailed stock list to not waste time bargaining over a few stones.
- Trade buyers are placing increasing importance on efficient B2B software so they can choose goods on smartphones and computers.
- Frequently updated stock lists often grab professional buyers’ attention by giving the impression that goods are selling fast.
- Buyers and sellers often have different interpretation of grades, even for certified goods. All grades represent a certain range. Some buyers seek better goods within the range while others place greater emphasis on certificates required by their clients.
- Suppliers should start new working relationships by meeting their buyers in person to show samples and ascertain their product preferences.
- Use social media channels wisely to connect with buyers. Be direct while remaining mindful of the local business culture to give each other professional space. Do not call the buyer every day or contact them on different channels at the same time.