Part 2: China Jewellery Market Structure

1
Part 2 China Jewellery Market Structure
2
Jewellery Market Structure

• Production Centre concentrated in China South,
  which occupies 70 of nationwide production.
  Shenzhen, Panyu, Shunde, Dongguan are the key
  production centres.

3
Production Centre
4
Key Production Centres
5
Export Production Centre

• 2,000 Hong Kong export manufacturers with 300
  being the major exporters.
• Manufacturing centered in the Guangdong area.
  Mainly gem-set jewellery for export

6
Domestic Manufacturing/wholesaling
Gold Jewellery 450 official licensed manufacturers/ wholesalers
Platinum Jewellery Over 100 platinum manufacturers Some also manufacture gold
Diamond Jewellery 500 domestic manufacturers
7
Retailing
Gold Jewellery 10,000 domestic retail outlets Additional of 200 chain store operation by HK retailers
Platinum Jewellery Sharing the same gold retail outlets Additional of over 380 chain stores from HK
Diamond Jewellery Sharing the same pt and gold retail outlets Additional of over 300 chain stores from HK
8
Retail Consumption Centres

• Shanghai, Beijing, Guangzhou and Shenzhen are the
  first tier jewellery consumption centres
• However, 2nd tier markets are growing. Markets
  like Hangzhou, Nanjing, Wuhan, Tainjin,
  Chongqing, Shenyang, Dalian, Wenzhou, Chengdu are
  the key centres.

9
First Tier Markets
10
Second Tier Markets
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Jewellery Retail Shops Well-Covered Nationwide
Coverage of HK Jewellers
12
Part 3 Policy and Regulations
13
Jewellery Market in China
Gold Market Regulated

• Platinum /
• Diamond Markets
• Free

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Taxation
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Jewellery Market Taxation
Import Tax 17 VAT Tax Consumption Tax
Gold Jewellery 26.7 Special license for import and export 17VAT on added value of manufacturing and retailing 5 at retail level
Platinum Jewellery 35 3 for raw material 17 VAT on added value 5 at retail level
Diamond Jewellery 26.7 for diamond set with gold/silver 35 for diamond set with other precious metal 17 VAT on whole value 5 at retail level
As of Jan 1, 2003
16
Chinas Tariffs Reduction Schedule for Jewellery
Imports
HS Code Description Rate () at date Of accession Committed Rate() Under WTO Agreement 2002 2003 2004 2005
71131100 Jewellery parts thereof, Of Silver 33.3 30 26.7 23.3 20
71131910 Jewellery parts thereof, Of Gold 33.3 30 26.7 23.3 20
71131990 Jewellery parts thereof, Of other precious metals 36.7 35 35 35 35
71132000 Jewellery parts thereof, Of base metal clay with precious metals 36.7 35 35 35 35
71141100 Silversmiths wares parts thereof 36.7 35 35 35 35
71141900 Goldsmiths wares parts thereof, of precious metals 36.7 35 35 35 35
71142000 Gold/silversmiths wares parts thereof, of base metal clad with precious metals 36.7 38.75 35 35 35
71161000 Articles of natural or cultured pearls 42.5 38.75 35 35 35
71162000 Articles of precious or semi-precious stones 36.7 35 35 35 35
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Part 4 Gold, Pt, Diamond Market Highlights
18
Gold Market Highlights

• Jewellery retail market opened in 1984
• Gold was highly regulated and tightly controlled
  by the PBC under Gold Monopoly Policy for 50
  years. State control purchase, operation and
  distribution of gold. Special license are needed
  for production. No bars or foreign gold coins
  allowed.
• However, de-regulation of the gold market was
  approved by the State Council and freeing of the
  market is divided in 3 phases-

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Gold Market Highlights

• Phase 1 End of gold monopoly system and
  establish the Shanghai Gold Exchange
• Phase 2 Gold licensing system will gradually be
  removed
• Phase 3 Import and export control will gradually
  be lifted

20
Gold Market Distribution System
New regulations subject to change in June, 2003
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Platinum Market Highlights

• Platinum entered the market in 1996, starting
  from a zero base market with now a 40-60 tonnes
  market
• Under the Gold Silver Administration
  Regulation, there is no control on platinum for
  import/export, manufacturing, wholesaling and
  retailing
• No special license required for foreign and
  domestic players for production, wholesale and
  retailing for domestic market

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Platinum Market Distribution System
Smuggled Pt Jewellery supply from domestic/HK
Wholesalers, or direct from overseas suppliers
Smuggled Pt Jewellery to wholesalers
Mostly ILLEGAL Pt RAW MATERIALSUPPLY FROM HK
No need to apply License
No need to apply License
Finished Jewellery
SHANGHAI GOLD EXCHANGE Currently only 108
members can trade In the Exchange. Will recruit
more members
MANUFACTURERS/ WHOLESALERS
Finished Jewellery
R E T A I L E R S
Official Importers- China Platinum Cooperation
Finished Jewellery
17VAT ON ADDED VALUE
17VAT ON ADDED VALUE 5 CONSUMPTION TAX
17VATEXEMPTED WHEN TRADED IN THE EXCHANGE
23
Diamond Market Highlights

• Rough Diamond is traded in Shanghai Diamond
  Exchange. The Center has 94 members, 63 of which
  are foreign-funded or from overseas. It was
  authorized to deal with all diamond import and
  export for general trade.

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Diamond Market Highlights

• China imported nearly US1 billion worth of
  diamond and related products through the Shanghai
  Diamond Exchange Center, the only legal trading
  channel in China, in 2002.
• The figure marks a rapid growth in the import of
  diamond through legal channel since the central
  government allowed the center to be exempted from
  tariffs on diamond products last June.
• However, such an import volume lags far behind
  consumer demand for diamond products in China.
  Diamond smuggling is still a widespread problem.

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Diamond Market Distribution System
Smuggled diamond Jewellery supply from
domestic/HK Wholesalers, or direct from overseas
suppliers
Smuggled diamond Jewellery to wholesalers

• Illegal supply to
• Manufacturers
• Smuggled from HK

No need to apply License
No need to apply License
Finished Jewellery
SHANGHAI DIAMOND EXCHANGE Only 94 members can
trade In the Exchange
DIAMOND
MANUFACTURERS/ WHOLESALERS
Finished Jewellery
R E T A I L E R S
DIAMOND
Import of Rough Diamond
DIAMOND
Finished Jewellery
3 IMPORT TARIFF, VAT AND CONSUMPTION TAX ARE
EXEMPTED IF TRADED IN THE EXCHANGE
17VAT ON WHOLE VALUE 5 CONSUMPTION TAX
17VAT ON WHOLE VALUE
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Recent Development
27
Recent Development

• Free gold jewellery retail price control by State
  Price Bureau Aug 1, 2001
• License system for gold jewellery retailing
  abolished in Nov 1, 2001
• Shanghai Gold Exchange officially operated in
  Oct, 2002
• - PBC relinquished its role for the purchase and
  
• allocation of gold
• - Raw material purchased in the exchange
  exempted from the 17 VAT
• - Gold Price quoted daily by the exchange

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Gold Transaction in SGE
Oct 2002- Aug 2003, 166 tonnes of gold was traded
in SGE
Month/Year Au 9995(KG) Au9999(KG) Total (KG)
Oct/2002 232 418 650
Nov/2002 4,869 1,266 6,135
Dec/2002 13,570 2,700 16,270
Jan/2003 13,570 2,700 16,270
Feb/2003 9438 7,547 16,985
Mar/2003 6768 7,667 14,435
Apr/2003 12,648 6,526 19,184
May/2003 13,932 1,676 15,608
Jun/2003 17,748 1,314 19,062
July/2003 15,974 5,217 21,191
Aug/2003 18,242 2,138 20,380
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Recent Development

• State Council announcement made on March 25, 2003
• Abolition of special license for Gold
  manufacturing and wholesaling from PBC, only
  register in the provincial Business Registration
  Bureau. Only apply to Chinese entities
• The liberalization implemented in June 2003
  (actual provincial implementation may take longer
  time)
• Though not allow participation by foreign
  entities yet will provide a springboard for easy
  entry into domestic markets
• Special license for gold import / export still in
  place

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Pt Trading in SGE

• On July 30, Shanghai Gold Exchange (SGE) started
  trial platinum trading among its 108 members and
  their agents. Now Pt99.95 is the 3rd transaction
  product following Au99.99 and Au99.95 since
  SGE opened on October 30, 2002.
•  
• Aug 13 official pt trading in SGE
• According to the authentication of Ministry of
  Finance and State Administration of Taxation,
  China Platinum Cooperation is the only authorized
  importer of platinum at SGE.

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Recent Development

• Platinum traded in the SGE is exempted from 17
  VAT on raw material
• 5 consumption tax charge on retail level rather
  than at manufacturing level.

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Platinum Traded in SGE Since Launched
August 13 - August 30 Sept 1- Sept 17
4,276 KG 1,485 KG
33
Recent Development

• Shanghai Diamond Exchange, open in Oct 2000, but
  officially operated in June, 2002
• - Exempted from 3 import tariff

34
Recent Development

• Beginning Feb 2003, foreign-owned diamond
  companies who are members of the Shanghai Diamond
  Exchange (SDE) can now sell diamonds in the
  domestic market in China without going through
  some native Chinese company.
• This new measure has brought the privileges
  enjoyed by overseas members in line with those
  given to the native Chinese company members

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Recent Development

• The overseas company members can apply for the
  import and export right with the Shanghai Diamond
  Exchange Administration office located at the
  exchange. The processing is free of charge and is
  likely to take one month. The import and export
  right is permanent.
• With the import and export right, these overseas
  company members can apply for temporary
  exemptions from various taxes with the Customs
  office at SDE and are free to visit their
  customers with the goods or exhibit and sell
  their merchandise at trade fairs taking place all
  over China. They are only required to pay the
  duties once the deals are closed.

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Part 5 CEPA Advantage
37
CEPA

• A Landmark Free Trade Agreement -Cepa Signed on
  June 30 between the Chinese govt and HKSAR
  promises to give Hong Kong companies a 2 Year
  head start into the vast Chinese market over
  their international rivals.
• Zero tariff will apply to 273 products, including
  many high-tariff sectors, such as jewelry and
  watch.  

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CEPA

• Cepa will enable HK made jewellery products
  entering the China market with zero import tariff
  as of Jan 1, 2004
• ?
• CEPA contains no agreed-upon definition for the
  "made in Hong Kong" designation. Hong Kong and
  Chinese negotiators have until the deal takes
  effect Jan. 1, 2004, to come up with a definition
  for goods and services originating in Hong Kong,
  the primary requirement for eligibility for the
  zero tariff rating.

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Serial No Mainland 2001 Tariff Codes Product Description Mainland 2003 MFN Tariff Rates Mainland 2004 Tariff Rates Under CEPA
149 71131100 Articles of jewellery parts, of silver 26.7 0
150 71131910 Articles of jewellery parts, of gold 26.7 0
151 71131990 Articles of jewellery parts, of other precious metal 35.0 0
152 71132000 Articles of jewellery parts, of base metal clad with precious metal 35.0 0
153 71141100 Articles of silversmiths wares parts 35.0 0
154 71141900 Articles of goldsmiths silversmiths wares parts, of precious metal 35.0 0
155 71142000 Articles of goldsmiths silversmiths wares parts, of base metal clad with precious metal 35.0 0
156 71151000 Catalysts in the form of wire cloth or grill, of platinum 3.0 0
157 71159000 Articles of precious metal or of metal clad with precious metal, for technical laboratory use 3.0 0
158 711459090 Articles of precious metal or of metal clad with precious metal, for other use 35.0 0
159 711461000 Articles of natural or cultured pearls 35.0 0
160 711462000 Articles of precious semi-precious stones 35.0 0
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Latest Development of CEPA

• Principal Processes likely to apply as Hong
  Kong Made Products like stone casting and
  setting.
• Criteria regarded as too narrow

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Latest Development of CEPA

• Even if HK made products could enjoy zero
  tariffs, the 17 VAT and 5 consumption tax on
  the total value will make the products not
  competitive in the China market.

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Latest Development of CEPA

• Hong Kong Manufacturers Associations submitted
  proposal to the government
• Principal Processes should also include
• Stone Cutting and polishing
• Stone Matching
• Design and Model Making
• Relaxing licensing for gold jewellery
  manufacturing, wholesaling, retail and
  import/export for Hong Kong manufacturers
• Details of the requirement has yet to finalize in
  end Sept. No immediate action will be taken by
  the trade.

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CEPA Impact

• Low end jewellery will not be benefited more
  cost effective to produce in China
• High value-added jewellery will have the potential

44
CEPA Impact

• Italian companies in corporation with HK
  companies
• Setting workshops in HK to quality for HK made
  products
• Potential for Italian Branded Jewellery
  officially entering into the market.
• Potential at medium to high end market

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Part 5 Consumer Insight
46
Preference of Jewellery in China



Source HK TDC Survey
47
Preference of Jewellery in China

• Platinum is the most preferred jewellery,
  especially in Beijing and Shanghai
• People in Shanghai comparatively prefer to
  diamond
• Gold is more preferable in Guangzhou Beijing
• K-gold in Guangzhou is more acceptable, rather
  than in Shanghai

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Ownership of Piece Type



Source HK TDC Survey
49
Piece Type Purchased in Last 12 Mth



Source HK TDC Survey
50
Favourable Piece Type

• Necklace is the most favourable item, followed by
  ring nearly 80 people owned these product
• Earrings and bracelet/bangle are the next
  ownership over 40
• Therere differences between cities
• More people in Guangzhou have bracelet/bangle
• More people in Shanghai prefer pendant/charm
• In Beijing, ownership of ring and earring is
  higher than other cities, but bracelet/bangle and
  brooch was comparatively lower

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Spending
52
Average Spending by City
Overall Average Spending was RMB 1,400 (Euro
158) Shanghai got the highest, RMB 2,000 (Euro
225)


RMB

Source HK TDC Survey
53
Jewellery Spending

• Shanghai and Beijing were comparatively higher,
  RMB 2,000 (Euro 225) and RMB 1,700 (Euro 191)
  respectively
• Nearly 40 respondents are willing to spending
  RMB 1,000
• 13.5 of respondents willing to spend over RMB
  5,000 (Euro 563)

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Average Spending by Jewellery Type
Ring The Highest Ave Spending, RMB 1,200 (Euro
135)

RMB


Source HK TDC Survey
55
Brand Preference
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Brand Preference in China
HK Brands are more preferable while Intl Brand
does not have advantage.
44.10
37.90
4.40
Source HK TDC Survey
57
Intl Brand Preference in China
Consumers in BJ more prefer Intl Brand



Source HK TDC Survey
58
Brand Preference

• Hong Kong brands are popular in China, especially
  in the South
• In Shanghai and Chengdu, famous local brands have
  firm foothold
• Local brands are popular at their own cities
  only, but theres no dominant nation-wide local
  brands

59
Shopping Behaviour
60
When to Shopping



Source HK TDC Survey
61
When to Shopping

• 70 people go to shopping during weekend or
  holiday
• Its popular for people in Beijing and Shanghai
  go to shopping at weekend/holiday
• Long holiday was the second highest occasion,
  like Chinese New Year, Labours Day and National
  Day are the peak shopping season

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Where to Shopping
Consumers prefer Jewellery Counter in Dept Store



Source HK TDC Survey
63
Where to Shopping

• Department store is the hottest place for
  shopping, chain/independent store follow suit
• In Beijing, dept store is the overwhelming
  shopping place
• Chain/Independent store is more preferable in
  Shanghai because therere many famous local
  jewellery brands which have good reputation among
  consumers
• In Guangzhou, dept store, chain/independent store
  and store at mall are evenly accepted by consumers

64
Reasons of Purchase
Reason of Purchasing Jewellery Percentage
To Please Myself 53.7
Good Design 37.2
For Gifting 22.0
Discount 16.5
To Please Someone 13.1
For Work 8.1
For Wedding 6.6
For Special Occasion 5.5
To Relatives/Friends Wedding 5.0
Investment 4.6
No Special Reasons 12.5



Source HK TDC Survey
65
Reasons of Purchase

• People buying jewellery is mainly To please
  oneself
• Good design is another reason attracting people
  to buy jewellery
• Gift market is also important for jewellery

66
Impulse vs Planned Purchase
Impulse Purchase occupied two third in Purchase



Source HK TDC Survey
67
Buying Behaviour

• Over 50 people buying jewellery is to please
  herself/himself, which is mainly for
  self-satisfaction. That is why people tend to
  impulse purchase
• Impulse purchase is popular in Shanghai, then
  Beijing and Dalian
• People in Guangzhou is comparatively more
  pragmatic, more planned purchase

68
Considerations for Purchase Jewellery



Source HK TDC Survey
69
Satisfaction on Current Jewellery Store



Source HK TDC Survey
70
Consumers Expectation

• Reputation, quality and price are the three most
  important areas when people consider buying
  jewellery
• Consumer expectation in Shanghai and Dalian are
  the highest. Shanghai consumers request more
  trendy and fashionable designs.
• In Beijing, people look more serious to
  word-of-mouth, brand image and popularity.

71
Consumers Expectation

• Most consumers satisfy with current jewellery
  stores in the areas of store, product, services
  and branding.
• Respondents suggested areas to improve
• More choice in fashionable and trendy design
• Craftsmanship could be further improved to
  international standard
• Warm and courtesy service more professional
  advice free maintenance
• Consumers are still looking for better Design
  and Craftsmanship

72
Effective Advertising/Promotion



Source HK TDC Survey
73
Advertising/Promotion

• Undoubtedly, TV is the most effective vehicle.
  However, effectiveness of advertising/promotion
  are varied in different cities
• In Beijing, instore promotion is the best vehicle
  after TV Celebrity works the best in Guangzhou

74
Effective Communication Channel



Source HK TDC Survey
75
Effective Communication Channel

• Nearly 40 respondents stated department
  store/mall is the best channel to get jewellery
  information
• As a result, we could see both instore and
  above-the-line are important for consumer
  communication

76
Summary and Insights
77
Summary Insights

• Jewellery market growth rate average at 8-10.
  Expected to growth to RMB150 billion (Euro 16.9b)
  by 2010
• Gold consumption is not making much headway has a
  lot to do with the regulations and close control
  by the government. The under-development of the
  domestic market, which still has broad prospects
  and is waiting to be tapped

78
Summary Insights

• Central policy is to liberalize the market
• New management team from the PBC (from the
  governor to the directors of the Gold Silver
  Administration dept) will only be interested to
  manage the central gold reserves. Liberalization
  of the gold market is high on the agenda.
• China is still traditionally an important
  consumer nation for gold. But in the large and
  medium-sized cities, gold is slowly being taken
  over by platinum and diamond-set jewellery.

79
Summary Insights

• Diamond market will dominate the future jewellery
  market and platinum overtaking 24-Karat gold as
  the new market "favourite
• Weve also seen a trend of Karat gold penetrating
  well in the retail sector driven by the higher
  price of platinum and the good craftsmanship,
  varied designs and high profit margin of Karat
  gold.

80
Summary Insights

• CEPA advantage for medium to high end Italian
  products to market brand jewellery into China.

81
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