Snakes & ladders

Avi Krawitz

“… 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. ‎

Fashion opportunity

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. ‎

Climbing ladders

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.‎

Source Rapaport