“… the game of Snakes and Ladders captures, as no other activity can hope to do, the eternal truth that for every ladder you hope to climb, a snake is waiting just around the corner, and for every snake a ladder will compensate,” Salmon Rushdie, Midnight’s Children.
With the approach of China’s ‘Year of the Snake,’ the diamond industry is well aware of the dualities that exist in the market. In 2012, while growth in China and India slowed, the vast U.S. consumer market was a source of stability. In contrast, tremendous growth in the east in previous years dwarfed even positive news that came from the U.S. and upheld the global industry through the recession.
At least in recent years, polished suppliers have noted that diamond demand tends to shift from west to east, with one compensating for weakness in the other. Seasonality plays its part as the calendar stimulates diamond demand during Christmas then the Chinese New Year, followed by Valentine’s Day and other holidays such as the May Day or October Golden Weeks, or India’s Diwali festival, and so on.
Currently, the industry is looking toward the Chinese New Year, beginning February 13, to set a more positive tone for the market, stimulate growth and improve sentiment.
The verdict is still out whether the season will live up to that promise.
The country is not expected to recapture its double digit economic growth experienced in the past decade. Rather, the World Bank expects China’s economy to grow by 8.4 percent in 2013, compared to growth of about 7.9 percent in 2012, forecasted before the government publishes its official reading after press time on Friday. The last reported period showed the slowest quarterly growth in three-and-a-half years of 7.4 percent in the third quarter.
Retail sales growth, pinned at around 15 percent per year, will be encouraged as the Chinese economy emerges from a slowdown and income distribution reform stimulates consumption.
Much depends on government policy and whether China’s new leadership, the first change in a decade, will implement reforms to clamp down on corruption, tackle its wide income disparity, move to an open market currency, and fast track its shift to being a consumer-driven, rather than investment-driven economy. Many expect the new premier Xi Jinping to act to alleviate doubters in his first year. Possible social reforms, such as an effective health care and pension system, could free up cash for consumers to spend in the retail space that would otherwise be saved.
Granted, Chinese economic growth is still reliant on exports and local consumer sentiment is largely influenced by the global economic environment. Another year of sluggish growth and political meandering in Europe, its largest market, could curb local consumer confidence, as it did in 2012. Similarly, prospects in the U.S. could well influence Chinese consumers’ spending decisions.
Narrow diamond demand
Many in the diamond industry therefore expect a steady but cautious Chinese market in 2013. They project stronger progress in 2014 once political and economic policy has settled and global confidence will hopefully be restored.
The long term outlook is reason enough for diamond businesses to maintain their focus on the east in 2013. Rio Tinto expects China to account for as much as 29 percent of global diamond jewelry demand by 2020, slightly below the U.S. level of 33 percent. Opportunities are therefore abundant and the country is still relatively unexplored in terms of diamond and diamond jewelry consumption.
Different regions require different attention. While the big cities are growing in terms of brand awareness and luxury sophistication, with a rising presence of international brands in Beijing and Shanghai, volume is being stimulated by growth of generic product sales in the tier-3 and tier-4 centers where economic growth is faster. Such expansion opportunities helped Chow Tai Fook, the region’s dominant jewelry retailer, salvage a 7 percent year on year sales increase in its recent fiscal first half, while same-store sales disappointingly fell 1.7 percent.
In the larger cities, branding is becoming increasingly important, even as there is a relatively small diamond brand penetration in the country. Winston Chow, deputy manager of Chow Sang Sang, the second largest jeweler, noted in a recent online conference hosted by JewelryNews Asia that branded jewelry only accounts for a small portion of China’s total diamond sales, while bridal is the key motivator for diamond purchases.
Chow, along with other panelists including Rio Tinto’s chief commercial officer for diamonds Jean-Marc Lieberherr and Kiran Gems vice president Rajesh Lakhani, noted that diamond consumption has traditionally been quite narrow in China. There’s a strong appetite for solitaires with medium size H-K, VS-SI1 goods dominating the market as consumers are extremely price sensitive and somewhat conservative, they explained.
Rio Tinto sees an opportunity to expand that offering and Lieberherr pointed to a growing interest in design and using diamonds as an accessory in everyday wear. “Fashion jewelry is not yet developed and that is creating a tremendous opportunity for retailers to capture this gap in the market,” he said. As supply of gem quality diamonds used to manufacture solitaires is not expected to meet growing Chinese demand for these goods, he stressed, “The Chinese will need to expand the range of diamonds they use.”
In late 2010, Rio Tinto forged a partnership with Chow Tai Fook to capitalize on and help grow the local fashion jewelry market. Lieberherr noted the project has exceeded expectations to date.
The appeal of fashion jewelry follows the growth of China’s middle class, along with consumers becoming more worldly and trend conscious. To illustrate this, Hong Kong retailers have expressed concern that a growing number of tourists from Mainland China are traveling to Europe or the U.S. rather than Hong Kong to do their luxury shopping.
Luxury brands have also taken note of the global Chinese consumer. This Christmas, Bulgari decorated its stores in New York, Tokyo and Rome wrapped in a giant lit-up serpent. Apart from its unavoidable eye-catching appeal to lure customers to its Serpenti Collection, the high-end jeweler was clearly thinking beyond Christmas, aiming at Chinese shoppers and tourists to those cities ahead of the February Chinese New Year.
Targeting Chinese consumers abroad is an easier alternative than marketing in China. A report by L2 Think Tank noted that the Chinese government continues to place restrictions on traditional luxury advertising as it attempts to ease public concern about the widening wealth gap. Similarly, government’s control over the internet and mobile content continues to tighten, L2 observed stressing that the success of prestige brands in China is inextricably linked to their digital competence.
China therefore remains a challenging market for international companies and brands to penetrate. The same is true for diamond suppliers. Whether these restrictions will be eased in 2013 remains to be seen. Doing so, can only encourage growth.
As a result, it may prove to be a year of both snakes and ladders for China’s economy and the diamond industry.To paraphrase Salmon Rushdie, who saw implicit in the game – known in the U.S. as Chutes and Ladders – the duality of up against down. He explained, “The solid rationality of ladders balances the occult sinuosity of the serpent so that in the opposition of staircase and cobra we can see, metaphorically, all conceivable oppositions.”
Such may be China’s story in 2013. And just like in the game, which ends when the winner reaches the top, diamond demand in China will continue to grow amid the ups and downs.