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China Enter the Dragon
When the world’s industrial centre of gravity shifted eastward many years ago, China rapidly emerged as the largest exporter of goods globally.
By: Diamond World News Service
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May 4 2011 3:54PM
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Since the early part of the 21st century however, it is the country’s rising importance as a centre of consumption, particularly in the luxury sector, that has caused ripples of excitement. As older, mature markets stuttered and slumped during and after the 2008 financial crisis, the Chinese dragon continued to breathe fire, taking the excitement to fever pitch. Analysts now believe that China will emerge as the world’s largest importer by the middle of the current decade.

The diamond and jewellery industry in the country has also mirrored this change – while the focus was on Chinese manufacturing skills for much of the last decade, currently it is the potential of the market that has taken centre stage. China was one of the countries (along with India) that glittered amidst the recessionary gloom, helping the beleaguered diamond industry ride out one of the roughest patches it had ever seen.

Briefly tracing the history of how a society where conspicuous consumption was once frowned upon is now one of the top diamond jewellery markets in the world, Stephen Rego takes a closer look at the new giant in the Far East.

In mid 2010, Stephen Lussier, CEO, Forevermark talking to a journalist in New York, described China as “the most visible incremental-demand driver”, while noting that the country, along with India, “may soon account for half of the diamond industry’s global growth over the next few years”.

Some years earlier, the same Lussier, in another interview, had recalled his first visit in 1989 to the land that had till then remained cut off from the social and economic culture of the west by a Great Wall. "There were no shops selling diamond jewellery. When I talked to people they said they remembered from their school textbooks that diamonds were used in drill bits and had some vague knowledge of American film stars wearing diamond jewellery. I left the country thinking it was going to be a long haul," he is reported to have said.

That ‘long haul’ has today begun yielding some dramatic results. The De Beers Annual Report for 2010 not only reports that its rise in profit and sales of diamond globally was driven among other things by “strong demand from India and China,” but Acting Chief Executive Bruce Cleaver explained further during a post results conference call that China and India delivered “extraordinary growth, well beyond our expectation at 25 per cent and 31 per cent respectively for the year.”

According to him, provisional data showed the U.S. bought about 38 per cent of diamond jewellery last year, with India making up about 10 per cent and China and Hong Kong combined about 11 per cent. Since Asian economies are growing faster than those in the U.S. and Europe, where consumers and governments are trying to cut indebtedness, Cleaver added that De Beers expects that “by 2015, China, Hong Kong, Taiwan, India and the Gulf will account for around nearly 40 per cent of global demand.”

In 1999 China accounted for a mere 2 per cent of the global market in diamond jewellery; by 2009this had risen to around 6 per cent and the country’s share is expected to touch 11 per cent by 2016.

China was in fact one of the first countries in which De Beers launched its Forevermark programme two years ago, and there has been rapid expansion in this market during that time. .

De Beers is not the only diamond miner looking eastwards. Bruce Cox, MD, Rio Tinto Diamonds, said that the company “is very confident in growth prospects of diamond jewellery in India and China”, and plans to “channel a larger proportion of our production from mature markets towards these faster growing emerging markets”.

Luxury Market: Rapid Expansion

Of course the growth and exciting prospects in the diamond jewellery market is a part of the larger picture – the economic boom and consequent rising affluence of Chinese consumers.

Speaking at the Shanghai Diamond Conference in December 2010, Vishal Mehta of Dimexon had noted that the luxury segment in China had witnessed “extraordinary growth” registering a 30 per cent increase in sales even during crisis-ridden 2009. The luxury segment was now estimated to be US$ 9.4 billion, making China the 2nd largest luxury market in the world, even ahead of the USA. He pointed out that well known brands like Cartier and Zegna were now reporting that China was their largest market in the world, while Tiffany’s had registered its highest growth rates in the world in the Chinese market. Even an auto brand like Bentley had its third highest sales from the Chinese market and for the first time had introduced two new variations of its existing models designed specifically for the Chinese consumer.

A report titled ‘Dipped in Gold: Luxury Lifestyles in China and Hong Kong’ prepared by CLSA Asia-Pacific Markets, majority owned by France's Credit Agricole SA, says that Louis Vuitton’s biggest customers are already Chinese buyers, while Greater China represents 28 per cent of sales for Swatch, 22 per cent for Richemont, 18 per cent for Gucci, 14 per cent for Bulgari and 11 per cent for Hermes.

It expects Greater China to become the world's largest luxury goods market over the next decade, and to account for as much as 44 per cent of global luxury sales by 2020, up from 15 per cent now. The agency notes that the growth will be driven by “rising affluence after years of solid wealth creation, and a steady transition from a saving to a spending culture.”

One of the main reasons for the shift, according to CLSA, is that mainland Chinese millionaires are on average 15 years younger than their overseas peers and the number of individuals with more than 1 billion yuan (US$151.7 million) has increased at an annual rate of 50 per cent from 24 in 2000 to 1,363 in 2010.

Affluent Consumers: On the Rise

Global management consultants McKinsey have also been tracking the Chinese market and their two most recent reports “Annual Chinese Consumer Study” published in August 2010 and “Understanding China’s Growing Love for Luxury” published in March 2011 provide a detailed snapshot of the nature of the consumer in the country.

These reports predict that by 2015 China would have more than 4 million wealthy households, making it the world's fourth-largest country in terms of this parameter after the United States, Japan, and the United Kingdom. The number of wealthy households—defined as urban households with annual income in excess of 250,000 RMB —reached 1.6 million in 2008. It also notes that while the wealthy currently account for less than 1 per cent of urban Chinese households, their numbers are growing at around 16 per cent per annum.

The McKinsey team believes that China would emerge as the world’s largest luxury market by 2015 with sales of about US$ 27 bn, or a 20 per cent share of the global sales, growing 18 per cent annually from its present level of US$ 12 bn.

Three classes of consumers will drive this growth --- the ‘very wealthy’ with incomes in excess of RMB 1 mn will account for 38 per cent of the luxury market growth; the ‘wealthy’ households with incomes between RMB 300,000 and 1 million, whose numbers will rise from the present 1 million to 5.6 million by 2015 and the 13 million ‘upper middle class households’ with incomes between RMB 100,000 to 200,000 who currently account for 12 per cent market share are expected to reach 26 mn by 2015 and account for a 22 per cent share.

The Annual Hurun Wealth Report 2010 published by The Hurun Research Institute shows that there were 875,000 people with more than RMB 10million (US$ 1.47 million) in China, an increase of 6.1 per cent from the figures reported in 2009. Of this, there were 55,000 super-rich individuals -- those with RMB 100 million, a 7.8 per cent rise on last year and 1900 RMB billionaires, almost double the number on the 2009 Hurun Rich List, released in October 2010.

A Demographic Profile

The McKinsey reports suggest that three-quarters of the growth in the wealthy consumer segment will come from consumers who do not currently live in the four biggest cities.

According to the Hurun Report, Beijing, as home to 151,000 millionaires, was the place with more rich people than anywhere else. Guangdong was in second place with 145,000 and Shanghai came in third position, with 122,000. These people accounted for 48 per cent of China’s total.

The Chinese millionaire population in Tier 1 cities is slightly younger than that in Tier 2/3 cities (40 years old vs. 43); there are also more women millionaires in Tier 1 cities than Tier 2/3. More wealth is created from salary and investments in Tier 1 cities compared to real estate in Tier 2/3.

They also note that on average, wealthy consumers in China are 20 years younger than those in the United States and Japan. About 73 per cent are under 45, compared with 50 per cent in the United States, and nearly 45 per cent are under 35 compared with 28 per cent in Western Europe.

A third of China’s millionaires are women. The country has 11 of the world’s 20 richest self-made women.

Shopping Patterns

Various analysts believe that there certain important changes have taken place in the Chinese market, and that companies need to understand these changes and build their strategies accordingly.

Besides the rise in the absolute numbers of the wealthy and the emergence of new potential markets in the western side of the country in addition to the four traditional coastal cities that fuelled earlier growth, the third factor that analysts stress is the increasing sophistication of the new consumer.

McKinsey’s reports that Chinese consumers, especially the wealthy, are extremely brand conscious, “with some 45 per cent believing that higher pricing corresponds directly to better quality, compared to just 16 per cent in the US and 8 per cent in Japan”, and so they are more willing to pay a premium for high-quality products.

In fact one of the key changes in consumer behaviour noted by McKinsey vis-à-vis an earlier study of 2008 is that “internationally well known brand” has become one of the top buying factors across most luxury goods categories, including jewellery, with ‘superior craftsmanship” continuing to be the most important.

Finally, most observers note that the Chinese consumer is also very Net savvy. There are some 384 million Internet users on the mainland by the end of 2009 – more than the entire population of the United States and Canada combined. The McKinsey report notes that the “dramatic increase in pre-purchase research (driven by growing internet use and numerous product safety scandals)” identified in earlier years continued, and that online product reviews are becoming increasingly important research tools, especially in higher-value categories, and for younger audiences.

On average, some 25% of mainland shoppers said they used the internet for product research vs. 12-16% in the US.

Compared to other parts of the world, instant messaging is wildly popular in China, with “chat frequency being about thirteen times greater than email in China, compared to roughly equal use of each medium in the US”, so that there is a possibility of exploiting word-of-mouth (especially via online media) as a conduit for product information.

The Diamond and Jewellery Market: Moving Ahead

How does this relate to the diamond and jewellery market? Mirroring the overall expansion of the economy, this segment too reported dramatic growth rising from US$ 230 million in 1995 to an estimated over US$ 2 billion. From the near zero figure in the early 1990s, today about 10-11 per cent of all families possess diamond jewellery and the figures are expected to rise dramatically on the back of the overall growth and spread of prosperity.

Reports from China indicate that where diamond jewellery was earlier seen only in high end, glittering boutiques in a few major cities, today it is available in many smaller stores in medium and small towns, as well as larger developed rural townships.

Besides the internationally known brands, other big names in the field include Hong Kong based Chow Tai Fook and Chow Sang Sang and local Chinese jewellers like Lao Feng Xiang all of whom have multiple outlets across the country. Chow Tai Fook for example, plans to open over 100 new stores this year and plans to expand into the Tier Three and Tier Four cities through franchisee run stores.

In the largest segment of the jewellery market – bridal jewellery – diamonds have carved out a strong niche in what was traditionally a jade and gold dominated segment. In the bigger cities, diamond engagement and wedding rings are now popular, and this category accounts for an estimated 70 per cent of total sales. Jewellers are going beyond the wedding market – diamonds are already penetrating the anniversaries and other life-stage related jewellery segment – into diamonds for daily wear and fashion needs.

Another category is diamonds as investment. In a recent interview, Hu Shugang, Chairman of the Board of Chinese jeweller Lao Feng Xiang said, "Investment diamonds have become a new darling toy among Chinese investors and collectors.”

As Vishal Mehta told the Shanghai Diamond Conference, “2010 marks the culmination of Chapter One of the relatively young diamond industry in China.”

The stage is now set for the next chapter to be written!

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