The China Market: Poised To Take Off

This really is a story for the 21st century. But if you plan to be around after we hit the 2000s, it’s probably a good idea to think about what’s coming.

What’s coming is a world jewelry market in which China is the No. 1 player, the nation where demand for gold, diamonds, cultured pearls and a variety of colored gemstones will dictate prices in all markets.

China will be the leader in jewelry manufacturing and retailing, but the two ends of the business will be so intertwined that they’ll be hard to tell apart. Chances are that the Gemological Institute of America, which already has seven outposts in the Far East, will be a big-time operator in China; so will many other gem labs and educators. The country also will be host to a dozen or more major jewelry shows.

A huge slice of international consumer advertising dollars will be directed at China’s 1.3 billion consumers.

Anyone who expects to be involved in the U.S. jewelry business, at any level, as the 21st century starts rolling better prepare for what’s coming. The start of the new millennium is only six years off.

Of course, China won’t be a full-fledged consumer market by the year 2001. Far from it. Change won’t come so suddenly. But by the year 2010 or 2015 – watch out!

What are the odds that this scenario will come true?

About 70/30, estimates Zhuang Shu Feng, China’s first De Beers sightholder and a leading figure in the thriving Shanghai jewelry community. Everything depends on the central government relaxing its tight control of the industry and the economy – and he figures there’s a 70% chance this will happen. He won’t hazard when.

If the 30% holds, then all growth bets are off.

Salivating: The prospect of one-billion-plus consumers is a powerful lure. Many of them already have cash to burn – though many, many more still eke out a subsistence life. Consider these facts:

· Last year China consumed about 220 tons of gold. But Jonie P.K. Lai, area manager, North Asia, for the World Gold Council, estimates that if China used as much gold per person as Taiwan does today, demand would soar to 10,000 tons a year.

· De Beers is taking well-publicized steps to build its presence in the region, staffing up its Hong Kong office with a front-line team. In 1990 it launched an infant $100,000 ad campaign in China that had grown to $3.4 million by 1994.

· Jewelry industry dollars are flowing into China, mostly to Guangdong province, Hong Kong’s across-the-border neighbor. Hundreds of new jewelry manufacturing plants, almost all with Hong Kong investment, have opened in the past three or four years.

· Diamond cutting is emerging as a sizable industry. Today more than 60 cutting factories are scattered around the country. Six are in Shanghai which likely will become – as it once was – the premier cutting center. Much of it will be located in the Nan Hui Jewelry City, an ambitious development in East Shanghai.

· Per capita income may be minute, but China has a goodly share of Mercedes-driving millionaires and a nascent middle class.

· Consumer spending is soaring. Retail sales totalled about $141 billion last year, up 26% from 1993 – though the real growth is much smaller when an overall inflation rate of about 20% is factored in. Sales growth and inflation both are significantly higher in major cities such as Guangzhou, Shanghai and Beijing.

Not all roses: Is this potential wonderland without pitfalls and blemishes? Of course not.

Much of China is a mess. Such fundamentals as decent housing, drinkable water and working sewer systems are desperately needed in many parts of the nation. Lack of meaningful environmental rules endangers urban areas with endemic pollution, which probably will worsen as more and more motorbikes and cars come into use. A modern transportation system is only beginning; the bicycle still is the most common means of getting about in major cities.

Telecommunications are in their infancy. Partly as a result, banking and financial markets are inefficient. Import duties, while beginning to fall, can be astronomically high; they average around 90%. Thousands of state-run factories are in dire trouble as they face competition from China’s new generation of entrepreneurs. Some are closing, some cutting back and creating a new social problem – widespread unemployment in the cities.

Thus social unrest joins poverty as a major national issue. Add in ruthless government suppression of political and social dissent, corruption and bribery as an economic way of life, a state-controlled media and a national government with no clear successor to an aged and ailing leader. The result is a country where you’d think no sane person would want do to business.

But many do.

They do because China represents one-fifth of the world’s population. They yearn to serve the huge economic and consumer needs and desires of nearly 1.2 billion Chinese people, a total projected to top 1.3 billion by the year 2000. These people are the magnet.

Young and restless: China’s population is young. Almost half of these people are between the ages of 15 and 39 – all born after the creation of the Chinese Communist state and the mythic Great March of its founders. At least in urban centers, where just over one quarter of the total population lives, young people increasingly acquire tastes for hi-fi systems, color TVs and gold jewelry – not to mention the ever-present jeans. And they want more.

Marketing people are ready and anxious to sell more product. Advertising, much of it consumer-directed, is booming. Saatchi and Saatchi, the international agency, estimates that ad dollars spent in China will hit $3.3 billion by 1996, a staggering advance from well under $100 million in 1993. In a report from the Hong Kong Trade Development Council, the agency predicts that in the next decade China will be the fastest-developing advertising market in the world, in dollar terms.

Local entrepreneurs also are getting into the act in a big way, to the concern of competing state-run firms. As of August 1993, the HKTDC reports there were 15.4 million individually-run businesses – mostly small family enterprises – and another 140,000 private enterprises employing about 30 million people. The Council figures that private business that year accounted for roughly one-fifth of the country’s entire wholesale and retail sales.

Many of these urban entrepreneurs earn more than $1,200 a month, a total that leaves a tidy number of disposable dollars available after modest basic living costs are met. A stroll along Shanghai’s Nanjing Road, the city’s principal shopping artery, gives vivid proof of how willing people are to buy all manner of goods. Stores featuring jewelry, electronic devices and clothing all are jammed. There’s scarcely room to move in the street’s landmark emporium, the No. 1 Shanghai Department Store, where sales topped $230 million in 1993, a gain of 45% from the year before. It’s name is no idle boast; the store is the nation’s number one retailer.

China’s big retailers may get new competition before too long. Last September, Chinese Minister of Trade Zhang Haoruo visited the U.S. headquarters of both Wal-Mart and Kmart to discuss opportunities these firms might have in China, according to a report in the Asian Wall Street Journal Weekly. The paper reported that China is anxious to encourage major U.S. and European retailers to set up shop in China and is willing to cut a lot of red tape to attract them.

If shopping comes, can credit cards be far behind?

More than four million credit cards were in use in China at the start of last year, according to the Bangkok-based Jewelry Newsline, with total card transactions reaching more than $23 billion. China plans to issue 200 million more cards by the turn of the century in a “crucial step in modernizing the nation’s financial industry and creating a better environment for economic development,” says Li Ye, an official of the People’s Bank of China. The goal is to wean shoppers from traditional cash purchases so that more money can go into savings.

A bent for jewelry: Gold is the ultimate store of value and medium of exchange in China, the World Gold Council’s Jonie Lai told the Sanwa McCarthy Institutional Gold Conference in Toronto in January 1994. Throughout “China’s written history, gold has had a special significance as a symbol of prosperity and happiness.”

Today, gold jewelry is considered the third most important purchase in a Chinese household, after a color TV set and a refrigerator, said Lai, adding that consumers’ rapidly growing purchasing power makes the potential for gold sales “phenomenal.”

Chuk Kam, or 24k gold, dominates the market, accounting for almost four-fifths of all gold purchases. To the cautious Chinese, such a gold item is as much an investment as an adornment.

This stress on the traditional is inhibiting sales among younger, fashion-conscious women. They want but cannot yet get many new or exciting designs. The World Gold Council, however, is working on the problem, strongly promoting design though being careful not to go too far out. “There is a danger of `over-aspiration,'” Lai told JCK in an interview in her Hong Kong office. “Research told us that if the design is too high-style, then the women believe the piece is beyond their reach. You can’t go too far beyond their normal aspirations.” But the Council is so sold on the potential of the Chinese market that it is setting up offices in Shanghai and Beijing.

De Beers has a much bigger marketing job ahead of it on at least two counts: diamonds are not a traditional purchase and they usually cost much more than gold. “The desire for diamonds is there, but it’s a bit early for some of our campaigns,” explains James Courage, a De Beers veteran with service in Johannesburg and London who last year took over as manager of the Hong Kong office. Thus a campaign called “Diamonds for the Modern Woman,” which is getting wide exposure in such places as Hong Kong, Malaysia and Thailand, is considered too sophisticated for the Chinese market.

Courage also say it’s too soon to promote the diamond engagement ring. The stress right now is on diamond wedding bands, on diamond-intensive pieces retailing in the $300 to $1,500 range and above all on education. Last year, De Beers ran a series of six educational ads for six weeks in three different provinces, with a small quiz in each ad and the promise of a very limited number of prizes for winning replies. The result: 40,000 consumer replies!

Courage says the Chinese campaign is being expanded with a goal of reaching as many as 130 million urban women in nine separate markets. The campaign combines educational leaflets and posters, print and TV.

Growth, potential and politics: The tensions in China between new and old, free and controlled markets, growth and status quo permeate all levels of business and the economy.

Take gold as an example. It is in heavy demand, much of it for jewelry; the country used 223 tons last year. But gold is the exclusive preserve of the central bank, the Peoples Bank of China, and its official supply figure was 50 tons. Hong Kong with its free trade in gold, on the other hand, used 38 tons – but imported 224. Guess where the surplus 186 tons went.

The massive smuggling of gold is just one illustration of economic pragmatism at work. Kick-backs and bribes are another. “They’re a part of business,” says David Diniz, the Chinese-born owner of a Hong Kong jewelry business. “It’s not a matter of bribery. People see this as commission. It’s been going on for 4,000 years.”

Foreigners who understand the rules and can live with the tensions can do well. Johnny Lu, a Taiwanese whose Lucoral jewelry firm operates as comfortably in China as it does in the U.S., says the basis for success in China is to persuade the Chinese that you can do something for them –create jobs, invest capital and/or bring in high-tech equipment and knowledge.

“The attitude is, `What can you do for me?'” he says. “Well, you can bring in management techniques, you can train local people, you can use local components and create new products.” You also need local sponsors or contacts. Says Lu: “You need people to introduce you and your product to the Chinese. They want to know who you are. Good ideas are not enough. How honorable was your father?”

Lu now has a major gemstone cutting and jewelry plant, five freshwater pearl farms and one saltwater farm in China and has his eye on a stake in the new Nan Hui Jewelry City venture in Shanghai. This is part of a government business/industrial development showpiece called the Pudong New Area. Eventually it will have four special sections – financial, high-tech, free trade and manufacturing, with jewelry part of the latter section.

The Jewelry City will contain diamond, jewelry and pearl companies along with apartment houses, a health club, a research institute, a college and an exhibition center. But it has a long way to go. Today only one diamond cutting plant is operating and a few other factories are taking shape.

Zhuang Shu Fen, the De Beers sightholder, is a major investor in the project and owns the one plant in operation. He believes eight to ten factories will be operating within two to three years and that Shanghai will be a major diamond cutting center within five. But he frets about government control. “Today there is too much,” he says. “All gold, silver and diamonds are under government control.”

But he’s obviously a believer in the future. And, as it seems any successful Chinese businessman must be, he’s a pragmatist.

HONG KONG, FREEDOM AND THE RIGHTS ISSUE

As a next-door neighbor scheduled to move from British to Chinese control in less than three years, Hong Kong watches what goes on across the border with a mixture of excitement, fear, curiosity and fatalism. The truth is no one knows what is going to happen after July 1997 when the last British governor flies home to England.

Optimists hope that China will honor its pledge to give Hong Kong special status for 50 years after reunification. They argue that China needs Hong Kong as its “window to the world” – particularly the world of international trade and finance. It’s a fair claim. About two-thirds of the 167,500 foreign-funded enterprises in China at the end of 1993 were tied to Hong Kong investors and from the start of China’s economic liberalization in 1978 through to 1993, Hong Kong supplied $87 billion or two-thirds of the direct foreign investment committed to China.

The idea of a continuing free Hong Kong economy appeals to many Chinese as well, among them state officials and new entrepreneurs. They like to make money and the good life it can bring.

One important worry in the Hong Kong business community is that America’s concern about human rights in China will estrange leaders in the two countries to the point where trade between them will atrophy. That, say the worriers, could well stifle China’s economic boom, hurting Hong Kong and all Southeast Asia in the process.

“The Chinese look at Russia and they see too much democracy coming too fast and they say, `Look what happened there!'” comments David C. Diniz, director of Hong Kong’s Excel Jewellery Ltd. and a consultant to the industry. “They say, `Leave us alone. We’ll get to human rights. But we don’t have time for fancy principles now.'”

The Chinese take an equally direct view on using prison labor, Diniz says. “Their attitude is, `So what if we use it? The prisoner will make a few bucks. If the goods aren’t made for export, they’ll be made for the domestic market. Stopping prison labor isn’t going to alleviate any hardships.'”

Thomas Wong, president of King’s Diamond Trading Co. and chairman of the Hong Kong Diamond Importers Association, also cautions that personal freedom should not be judged a number one priority in China. “You must give education before too much freedom,” he says. “Educated people want freedom, they dislike corruption. But freedom must be guided.”

Wong is convinced that amicable U.S./Chinese relations are key to a continued opening up and expansion of the Chinese market – and he welcomes the Clinton Administration’s delinking of trade and rights. Letters of intent signed by U.S. firms with China during a tour of China by American business leaders last fall were a big confidence builder, Wong says. “They gave a psychological boost. China is going to be the biggest market in the world and that’s going to lead to more U.S. investment and more U.S. contracts. Then that will lead to more jobs, more consumer buying and more entrepreneurs.”

These happenings won’t come overnight. Wong says a sophisticated Chinese economy is at least 20 years off.

SHANGHAI JEWELRY SHOW IS A SIGN OF THE TIMES

The birth of the first Shanghai International Jewelry and Watch Fair was a signal last September that China’s largest city – with a metropolitan population of 15 million-plus – is aiming to stake a place in the international marketplace. The show, officially named Jewel Time `94, was organized by Brilliant-Art Trade Fairs of Hong Kong with the support of more than a dozen Shanghai jewelry firms or groups.

It was a modest beginning. About 100 firms exhibited, almost half of them from Hong Kong. Most of the others –except for the watch companies –were from China, though there were a couple of Israeli exhibitors and American firms. A number of Swiss firms were represented in the special watch pavilion.

Cultured pearls and jade featured prominently in many displays. There also was a good display of diamond jewelry and the Hong Kong office of De Beers’ Diamond Promotion Service staffed a booth.

In general, the jewelry on display was of lower to mid quality, with prices running from a few dollars to a few hundred. Although there also was a significant amount of high-end merchandise with price tags well into the thousands of dollars, exhibitors said these goods were much admired but little ordered.

Attendance also was modest, but very enthusiastic. Many attendees were young and it seemed that they couldn’t get enough information about the products on display. Kenny International, a Hong Kong firm which showed high-quality Colombian emeralds in its showcases and in a video movie, drew a lot of attention. “We were too far out of their financial reach,” a Kenny official commented. “They’ve never seen goods like this before.” She added, however, that the show offered her company good exposure and public relations.

Other companies offering high-end (and high-priced) jewelry, such as Beverlly Jewellery, also of Hong Kong, had much the same type of comment: Few sales but good PR. One of the two Israeli exhibitors, SKR Diamonds, was upset that the show did not have more international firms. “The market has yet to reach its potential here,” an official said, adding that SKR will consider exhibiting again in 1995.

Firms offering lower-priced lines, particularly in pearls, appeared to do quite brisk business. Over-the-counter sales were common and sometimes actively encouraged.

More than 30 lines were represented in the watch pavilion but only about half were displayed in manned booths. The others were shown in free-standing displays with information on how and where to contact the company if a buyer wanted to place an order (some jewelry firms similarly limited their involvement). The pavilion drew fairly steady traffic, although here, too, there appeared to be more looking than buying. An official of Jean Lassale said the firm was in the show principally to identify “boutique-type” stores that might carry the line.

The show was held in the Shanghai Center, a modern facility immediately adjacent to the Portman Shangri-La Hotel. Brilliant-Art arranged a series of seminars, with speakers from Europe, the U.S. and Asia, on the first three days of the show. The sessions were well attended.

Jewel Time `95, this year’s event, is scheduled to be held in the same location Sept. 26 to 29.