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Analysis

Thai Farmers Research Center


July 17, 2018




Strategic Position of the

Thai Jewelry Industry


The Jewelry Industry benefits because Thailand is a trading center for precious stones and because of Thailand’s excellent reputation worldwide. The industry faces an immediate threat from China which will call for some strong strategic moves.

Thailand is the market leader in several segments of the jewelry market – especially gold or silver jewelry with combined colored gem and diamond settings, silver jewelry, and rubies and sapphires. It achieved this position because it used to be a primary location for the mining of rubies and sapphires, and so the market for those stones was here. Over the years, a cottage industry revolving around the cutting and processing (“cooking” of the stones to reduce impurities) grew up which supports the precious gems market today. Although Thailand is no longer a major producer of rubies and sapphires, the cooking stone cottage industry helps keep the market in Thailand.

Other jewelry segments, such as diamond jewelry, silver jewelry, imitation jewelry, diamond cutting, and gem sales all arose as benefits of that original trading in colored stones. Some of those segments also were attracted by cheap Thai labor. Nowadays, most of the segments are under significant attack by the jewelry industry in other countries. Although Thailand is still the market leader in several categories, now is not the time for complacency. The competitive challenge, particularly from China, but also India requires an ongoing effort in designing strategy for the jewelry industry. Further steps need to be taken to support the already significant progress so far.


Current Situation


Exports of jewelry did well in 2001, despite slower world growth and recession in the US, Japan, and Europe. Exports for 2001 were about 6 percent higher than the year before, with the best growth in the middle eastern market (not affected by recession), and surprising into the US. Several factors contributed to this growth. India has NOT been eligible for US GSP benefits on jewelry for the last several years as punishment for its role in missile tests in 1998. That has subjected India jewelry to tariffs that Thailand has not had to pay. However, in August 2001 GSP benefits for India were reinstated. In addition, due to the strong US dollar, consumers in the US did not slow their purchases of most products for most of the year. It is likely that history will show this recession to be due largely to a slowdown in the US corporate sector. The strong dollar and the collapse of the telecoms-based investment frenzy has reduced the competitiveness of US businesses. In 2002, the greatest risk is probably the chance of a weaker dollar, which could strongly reduce US consumer spending including on jewelry.
The jewelry industry is finally recovering from the crisis of 1997. This industry uses many expensive raw materials and many companies were caught buying raw materials at high prices and having to sell them at low prices. In addition, companies with large debts denominated in US dollars suddenly found those debts to be doubled with a drastic effect on cash flow and the bottom line. Finally, local demand all but evaporated.
Five years later, the situation is much improved. Debts have mostly been reduced to sustainable levels, the local economy is reasonably strong, especially relative to other parts of the world last year, and the cheap baht makes Thai exports competitive.

China

Despite this positive growth, there are still significant challenges. Exports of jewelry of all sorts from China has been growing extremely rapidly. Although this will probably not eliminate the existing jewelry industry in Thailand, it is likely to stifle our future growth, as it has done in many other sectors already.

China is an enormous magnet for foreign investment. Jewelry from countries with higher labor costs is losing its competitiveness. In many cases, the companies in high income countries respond by moving some of their operations to China. Labor costs are cheap in China, but not significantly cheaper than many other countries, including Thailand. The main driving factors are the enormous Chinese market, the GDP growth rate (about 8 percent a year), and the easy access to capital.
Some additional factors which make Chinese jewelry competitive include the new popularity of Chinese fresh water pearls, known for their pretty colors and large sizes, which is giving fresh impetus to their exports, and the access to sophisticated Hong Kong fashion and design houses.
Another challenge may be keeping the trade in colored stones in Thailand. Trade in colored stones has risen quickly in India in the last few years, and to a lesser extent to Sri Lanka. In large measure this is because Thailand has concentrated on the market for rubies and sapphires to the exclusion of many other gemstones. To be successful in marketing a certain type of gemstone, a country must be active in sending buyers to the far reaches of the world where the stones are first mined. The country must also have expertise in cutting the stones, and especially in processing the stones to reduce the faults which are present in all of nature’s works, and finally to be active in grading and marketing the stones, especially by providing a trading base complete with trade shows and merchants.

Thailand has done an excellent job of doing this with rubies and sapphires, but has left other countries to specialize in other areas. Demand for rubies especially, has been quite weak in recent years, which may partially be due to supply problems, but in even more due to fashion. Jewelry is first and foremost a clothing accessory, and if red does not match current fashion trends, then ruby sales will be slow.


Trends in a nutshell


Trade in precious gems and jewelry (HS71) is very big, accounting for 92 billion US dollars per year. Mostly this is trade in diamonds or gold, since these are such high value items. Jewelry is a small share of the total.
(The following three tables of data from UN Comstat are for the year 2000.)


Thailand’s share of the broader grouping is quite small...


…but it’s share of the jewelry market is more significant.

In some sectors, such as silver and sapphires/rubies, its share is much higher.

Total world trade in jewelry rose 8 percent from 1999 to 2000.

The US has the best available data on international trade, and also accounts for nearly 30 percent of world GDP, so it is used here as a rough indicator of Thailand’s market success in different market sectors. Data for other countries can be found later in the report.
The following tables show market share of jewelry imports into the US over the past years. Some trends will be immediately obvious.


Source: US Dataweb

Thailand is the world’s biggest exporter of precious and semi-precious stones. Thailand’s exports of colored stones was adversely effected by the crisis in 1997. In recent years we have regained our market share and dominance. A serious challenge to our position can be seen in the rapid rise in market share of India.




Source: US Dataweb
Thailand is a small player in the market for imitation jewelry. As in many labor intensive sectors, China continues its extraordinary dominance with other 50 percent of the total in the US. (In other markets slightly less, but still the dominant supplier.) In 2001, China’s market share of imports of costume jewelry into the US increased from 51 percent to 57 percent. It is likely that Korean firms will continue to lose out to China, but that Thailand will not be strongly affected at this point.



Source: US Dataweb
Thailand is the world’s biggest exporter of silver jewelry. Thailand has been able to keep its first-place market share of silver jewelry into the US in spite of having lost its GSP benefits for most silver jewelry in 1998 (note the drop in that year). Clearly it is China that is the biggest threat to our dominance in silver jewelry. It is likely that China will steal market share from Mexico and Italy for another few years before seriously challenging our position.



Source: US Dataweb

As Italy loses its competitiveness in gold jewelry, a number of countries are moving to take up the slack, among them Thailand, India and China. Each produces a different product, with Thai jewelry emphasizing precious gems mixed with diamonds for fashionable jewelry, India producing diamond rings and other jewelry, China copying many styles but also incorporating domestically produced freshwater pearls and jade. Turkey produces gold chains, but recently has been saddled with loss of its GSP benefits for political reasons.

It is likely that Italy and Israel will continue to lose market share, and that the competition will not get really fierce for another three or four years.

In short, most of our products show a stable or increasing trend, but are faced with rapid growth in other countries, especially China and India, that is likely to eventually challenge our position.
Thai performance in other main markets show similar patterns, although Thai performance in Japan seems to be weakest –especially considering the close relationship between Thailand and Japan.


Through the Looking Glass, Darkly - Thai Customs Data


Trade flow data is generally available from two sources – the importer, and the exporter. The next step is to look at Thai export data. Although Thai data is more complete, as it covers exports to all countries, it is also likely to be less accurate because of incentives not to report some of the high-value, low-volume transactions on which tariffs must be paid. It is, after all, pretty easy to put a million dollars worth of diamonds in your pocket – especially when there might be a hundred thousand dollars worth of tax to be paid on them. The same bias does not exist in US data since gems, gold and diamonds enter duty free. With these caveats in place, we will take a quick look at Thai data.
According to customs data, Thailand is rapidly losing its market for precious and semi-precious gems. Diamond exports are volatile with a strong negative effect from the 1997 crisis, and some rebound since. Jewelry is doing fairly well. The jewelry and precious gems export outlook using this data is not as positive.



Source: Dept of Business Economics, MOC

Overall, the portfolio of all Thai jewelry and gem exports can be seen in the chart below. More than half of Thai exports are due to jewelry, with 30 percent of the remainder coming from diamonds, and another 14 percent from gems. If some of the gems are hand carried, and are therefore not declared, the gem proportion may end up being higher, perhaps 25-30 percent.


Source: Based on 1999-2001 customs data, Dept of Business Economics, MOC

The next table shows the widening disparity between Thai and US data with respect to gems. The same anomaly occurs with jewelry, but to a lesser extent.




Source: US Dataweb and Dept of Business Economics, MOC
The above two series should be exactly the same, as they are two different sources recording the same transactions. Yet somehow the US records more than twice as many gem imports from Thailand as we register as leaving Thailand.
Everyone knows that there is a large volume of gems and jewelry that never enters the customs records because it is hand carried across borders, often for the purpose of avoiding tariffs. Usually the shortfall would be registered on the importing side, since that is where tariffs are paid. Gems enter the US duty free, however, and have for a number of years so there is no reason to under report them, which matches with the greater volume which seems to be entering the US using US data.
But why would gems not be reported when leaving Thailand? Generally companies pay taxes on gems entering Thailand, and then those taxes are reimbursed when the gems are later exported. Therefore it should be in the company’s interests to over report gem exports to include gems that were really imported for domestic use (for which companies would not get a rebate)

It turns out that most gems entering Thailand enter without paying duty, and are not being reported. So duty on those stones could not be reimbursed and the companies could get in trouble for trafficking in stones for which there is no record. In addition, I have heard that by claiming fewer exports, corporate taxes in Thailand could be reduced. Anyway, the mystery remains, hopefully to be answered more fully by the readers of this report.


Historical Background


People assumed that jewelry would be a fading industry when the ruby and sapphire mines in Kanchanaburi and near Cambodia were played out. Mostly those areas now consist of rusting jigs and the beginnings of ghost towns. Some of them have turned into tourist attractions glorifying the good old days.
The death of these mines, however, did not kill the industry that depended on them however, and the world market for rubies and sapphires is still in Chanthaburi. Strangely, this is a common pattern around the world. The countries that produce gems and diamonds are seldom the ones who market them. These days, our rubies and sapphires come from our neighbors or countries further afield such as Burma, Cambodia, Sri Lanka, Madagascar, Tanzania, and even the US. There is little trade in finished stones in any of these countries, partially due to their lower stage of development.
Even more odd is the pattern of trade in diamonds. The biggest producers of rough diamonds are Russia, Canada, Southern African countries, and Australia. Most of those stones are then routed through Antwerp, Belgium, thanks to De Beers.

The big trading centers for diamonds, New York City, Tel Aviv, Antwerp, London, and Mumbai (was Bombay), India have except for the last, all been located in countries that have never or no longer play a significant role in producing diamonds. Where are the markets in the big producing countries like, Australia, Russia, Canada, and South Africa?


What holds the market for rubies and sapphires here in Thailand is the traditional knowledge about cutting and processing gemstones, and the knowledge that this is the place to trade. The downstream jewelry industry also supports the gemstone industry and is the biggest customer.

Not surprisingly, Thailand is also the world’s leader in jewelry made with rubies and sapphires, as well as a dominant player in silver jewelry.

Economic Crisis

The 1997 currency devaluation/crisis presented a big challenge for the Thai jewelry industry . Usually Thais are travelling around the world buying up rough jewels to bring back to Thailand. The crisis resulted in a giant cash flow problem for gem buyers, and the supply of gems through Bangkok mostly dried up. At that time, some important gem merchants packed up and went back to Colombia or India. One key institute that did research on gems closed up, which gave an opportunity for a corresponding competing institute to open in New York. Rough gems were routed to competing cutting countries such as China, Vietnam, Sri Lanka and India, even though they lack the same infrastructure and market control that exist here. Since then, the jewelry industry has been gradually recovering with the start of the Thai Gemology Institute at Chula, the gradual recoup of lost markets in gems, and a gradual return of gem merchants to Bangkok. Surprisingly, Thailand has become a leader in selling gems over the internet, much to the credit of Thaigems (the Amazon of colored stones), Gemkey, a private trading marketplace, and Ganoksin, a public forum for the jewelry industry, hosted in Bangkok.


In September 1998 Thailand established the Gems and Jewelry Institute of Thailand. The GIT includes a certification laboratory, implements overseas marketing campaigns, and participates in local training and technological advancement.

At roughly the same time, the Thai government did away with the Value Added Tax for gold and silver to be re-exported, (This tax must still be paid on entry, and is reimbursed afterwards) and the jewelry industry is working to reduce or eliminate the 20% import duty on semi-finished raw materials.


The Industry

Precious Jewelry Makers

Many, many firms, from very small to very large. There are probably about a dozen firms that are over 500 persons in size. The smallest firms produce for the domestic market.
“Hand Made” jewelry
These are mostly store front operations with a workshop out back. Everything in the store is made on the premises, and some stock may be twenty or more years old. These are supposed to be neighborhood shops, although nowadays there is a trend for young people to buy jewelry through hotels or malls, and these stores are suffering. The hand-made stores have not yet found a way to enter this new marketing channel. The center of this industry is in Bangkok’s China town (Yawarat).
Silver Jewelry Makers
Silver jewelry has been a traditional specialty in Thailand. In the past, much of the jewelry Thai’s wore was of silver, though now tastes have mostly switched to gold. Older jewelry may be quite ornate, but based on silver.
Imitation Jewelry Makers
At first imitation jewelry was for the local market, but developed into exporting. Imitation jewelry is made by about ten large, mostly international companies from Taiwan, Korea and Hong Kong, which came to Thailand because labor costs were cheap, and because of local skill in jewelry. Lately this sort of company has been going to China instead, although some firms may still come to Thailand if they want a little higher skill level in their workers.
Gem Cutting
Gem cutting is not capital intensive, nor is it complicated, so this section of the industry tends to be dominated by small enterprises, which cluster around gem trading centers such as Bangkok and Chanthaburi, but are also dispersed throughout the country via outsourcing. As with diamond cutting, and indeed with many parts of this industry, workers are limited in age mostly to under thirty or possibly forty years of age, due to the natural result of aging on their eyesight.
Diamond Cutting

Diamond cutting is much more technically demanding and requires far more sophisticated equipment, as well as a hefty investment for raw materials, so that diamond cutting is most often controlled by larger, foreign-owned or joint-venture firms. Foreign firms come here because of low labor costs, highly skilled labor, and BOI promotions, and mostly as a complement to the existing trade in colored stones.

Global competition in diamond cutting is especially fierce, with strong promotional efforts by a number of producers such as India, Israel, and now Russia. (Russia, now a giant producer of rough diamonds, just signed a new agreement with De Beers in which it will keep 50 percent of its production to supply its nascent diamond cutting operations.
Processing
The cooking of rubies and sapphires is a closely guarded secret and rightly so. It occurs at low temperatures and does not use borax.
Size of Industry
Even big firms do not feel that they have any market power – to the contrary they feel that they are out in the open with 100s or thousands of other big factories around the world in direct competition.. Pricing is very important, as is building the trust of their customers. Having a reputation for being able to satisfy big orders on a timely and quality basis is the most valuable asset they have. There is enough competition, and prices are similar enough, that reputation counts for a lot.

Location in Thailand


The jewelry industry is a strange combination of high capital costs, but high labor input. The high capital costs tend to keep out the lowest end of developing countries, while the high labor content keeps the industry out of developed countries. Therefore it is ideally placed for middle income countries such as Thailand.
The lower end of the industry is under severe attack by China, presumably due to cheaper costs. China now controls more than fifty percent of the market for imitation jewelry into the US, and more than 30 percent of the silver market. More expensive, gold jewelry and gems are doing somewhat better, although in terms of growth China is far outstripping us as well. Precious gems are the most successful in terms of market share at the moment.

Design

Design in the jewelry business is mostly based on imitation. Big famous jewelry companies in Italy or the West produce new designs and publish them in catalogs so that their customers can order them. Little jewelry companies all over the world buy these expensive catalogs, and instantly go about copying them, so the designs rapidly enter the mainstream, perhaps being toned down as they move down into a broader audience. This is not unlike the way fashion works in the clothing business as well. The leading companies make money on catalogs as well as the new high end fashion buyers, but they also must come up with an endless supply of new fashions.

Fashion is one of the biggest selling points in the jewelry business, and is easily copied. Firms do not put their top fashions on the website, since they would not want them copied. However, they must show their customers the designs. They also must be endlessly wary in distinguishing true customers from competitors who are looking for samples of their work.
As in many other businesses, many sales arrangements occur at trade fairs, of which there are about a dozen big ones and many little ones during the year. A firm might go to four or five of these which are most appropriate to its market. Trade fairs are a chance for big producers and wholesalers to get together. The fairs are like attending a spy convention, with everyone watching what everyone else is doing. Entry to the fair is often strictly controlled with evidence of a business license etc, required to enter the biggest fairs. The danger, however, is mostly from industrial espionage rather than casual observers. Probably small or low cost competitors who don’t do their own design work are the biggest threat.
Design is strongly benefited by domestic competition, and by a fashion sense in the producing market. Competition in the domestic market provides the incentive and focus that leads to many new designs. It also allows for a cross-pollination of ideas as designers move between firms, start their own firms, and build on each others designs. This is something singularly lacking in Thailand.
In Thailand, designers are mostly poorly paid and undervalued. As such, there is little incentive for clever Thais to enter the design field. There are, however, some excellent Thai designers including some who have studied at famous design schools abroad. Almost invariably, these bright designers find that they must start their own businesses in order to capture the benefits of their own skill and training.

Thai Disadvantages in Fashion

Fashion is a marriage between the manufacturers and the domestic wearers of jewelry. It cannot be dynamic without a demand for interesting fashions in the consuming market. That is what drives the successful markets in Italy and France where wearing fashionable (read unique) clothes and jewelry is what drives the industry to innovate. The desire of the Thai woman to appear conventional is the greatest problem for the jewelry and clothing fashion markets. Fashion is also highly individualized by markets, with Italians preferring passionate and dramatic jewelry and Germans preferring square everything in designs that emphasize control. These domestic styles form the basis for whole branches of jewelry. Without domestic fashion sense (beyond convention or brand names, which is just fawning on prestige abroad) a domestic style cannot evolve.

Developing countries also have problems with design because their consumers do not have money to buy fashionable clothing. This is especially true in the jewelry market, where each item can be very expensive. That is why it is important for Thailand to sponsor design competitions of low cost jewelry that could inspire the general public.

Technology


Virtually all gemstones undergo some sort of treatment after being cut. Polishing, of course, takes care of any surface blemishes. Some stones, such as emeralds, have many fractures that detract from their beauty, while rubies and sapphires have many inclusions, or dark spots, caused by impurities on the inside of the stones. Common treatment processes for the four precious stones are as follows.


Gem

Treatment

Purpose

Industry outlook

Ruby

Heating

Reduce inclusions

Accepted, permanent

Sapphire

Heating

Reduce inclusions

Accepted, permanent

Emeralds

Oiling, Waxing

Hide fractures

Accepted, care required when cleaning

Pearls

Dying

Improve the color

Not accepted, not permanent

Recently, the use of heat treatment on Thai sapphires has been in the news. Some of the sapphires that Thailand produces are similar in color to the famous pink or orange Padparadshas (lotus blossom sapphires in Sinhala) from Sri Lanka. Thai producers argue that heat treatment to enhance color and reduce inclusions is a time-honored and accepted practice. Another process, practiced by some unscrupulous producers, is surface infusion. Surface infusion involves impregnating the surface of the stone with a different color. Akin to dying the stone, this process is not accepted by the industry.


Reputation


Because of Thailand’s long tradition of producing colored jewelry, it has a strong reputation for quality jewelry. A good reputation makes it easier for everyone in Thailand to sell gems.
Reputation is hard to build up and easy to destroy, so it needs to be protected. The reputations of other countries are growing quickly, and although Thailand has the advantages of being a leader, it has the weaknesses too- a certain carelessness, and sometimes even ignorance about competitors and its own market position. It is important to know about Thailand’s competitor’s strengths and weaknesses as a complement to studies of local competitiveness. This makes research about our competitors and the situation in foreign markets quite critical.
Thai jewelry does well in places where brand names are not important and price is, such as in the US. This is precisely the same place where Chinese jewelry does well. It is possible Thailand may be forced to move out of the value segment at some point.

In addition, consumers in some countries strongly prefer branded jewelry. An example is Japan, where silver jewelry sales from the US firms Chrome Hearts and BWL are extremely popular. Thailand is the number one source of imported silver jewelry, but in Japan Thailand is third with merely 10 percent of the market. The leaders are the US and Italy.


A brand name is a way for a firm to save benefits of past good performance at the customer level. Good performance will be rewarded by higher markups later on. However brand names entail costs as well as benefits, and may be difficult to implement without private distribution channels.

Most of all, a brand is a copy of a successful business model – in this case a marketing business model. The most appropriate way for Thai firms to build a brand name is to start with the domestic model and gain experience. If the business model works – try to export it.

It is not appropriate to use “Thailand” brand name which is used for many diverse commodity products, for a product such as jewelry.

Jewelry and the US GSP


Over the past five years, Thailand has been the biggest beneficiary of the US GSP program bar none. A significant share of those benefits went to the jewelry industry. GSP benefits (special tariff considerations given to developing countries) allow the majority of Thai jewelry to enter the US free from tariffs. Normal US tariffs on jewelry ranges from 5 to 13.5 percent, while gems and diamonds normally enter with zero tariffs. Since 1996, Thailand has imported about 3 billion dollars worth of jewelry into the US, more than half of it under the GSP program.
Normal trade relations do not automatically give China GSP privileges as well, although all other countries and regions with the GSP program do give GSP benefits to China. US law currently states that communist countries cannot be given GSP benefits. Any motion to give China GSP benefits should be of Significant Concern to Thai producers. India just had GSP privileges reinstated on 42 products, originally revoked after the 1998 Pakistan and Indian showing off their nuclear weapons. Forgiveness occurred during a state visit last August, and was part of a new US policy to improve relations with India, recognizing its political importance in containing the influence of China in the region.

These renewed GSP benefits will have a significant effect on Thailand’s competitiveness in leather and rugs as well as jewelry.


In 2001 our share of HS71131920 rose to over 50 percent of the US market. That may make us liable to lose GSP benefits for that class. We have already lost GSP benefits for HS71131150, the higher value silver jewelry. The threat to gold jewelry is less severe.

Clusters


The jewelry industry in Thailand is an example of a “cluster”, a popular notion of a business group which succeeds through external returns to scale. The idea of clusters arose from Michael Porter’s influential book “The Competitiveness of Nations”, and refers to the idea that some industries thrive through the close ties between many neighboring producers and firms that do all different stages of the business cycle in a little industry. Italy is usually the example used, with the jewelry industry, footwear, and ceramic tiles all examples of successful cluster growth.
The concept has many similarities with the backward/forward linkage literature, input-output analysis, and in many ways is a fresh marketing of an old idea. However there are some new aspects, especially regarding institutional economics and the role of associations.
With clusters, firms benefit from both competition and cooperation resulting from close proximity. It is the author’s feeling that neither of these two benefits are fully realized in Thailand. Competition is mostly for the world market since the domestic market is quite small. Cooperation is hindered by political infighting. Another major factor is the presence of a skilled labor pool. Although this may be important, there does not seem to be a lot of job switching in Thailand.

Markets


Thai jewelry products are sold around the world, but most especially in the largest developed countries.
The following table shows the main markets for Thai gems and jewelry including the main products to each market. The large developed countries are the main markets for jewelry, while diamonds and gems tend to be routed through a few big entrepots such as Israel, Belgium, Hong Kong, and Switzerland.

Source: TFRC after data from Dept of Business Economics, MOC

The following tables are based on Thai Customs data which show exports by country. Each table shows the 5 biggest markets for that kind of jewelry.


Source: Dept of Business Economics, MOC
Almost all of the diamonds Thailand cuts are sent to distribution centers for further export. The actual location reflects changing patterns of distribution of diamonds, with Israel the favored distribution point at present. This is especially true for diamonds destined for the USA.



Source: Dept of Business Economics, MOC
As noted above, Thai data for gems shows a big decline, which US data does not show. According to the Thai data, exports of gems fell sharply during the 1997 crisis and have not rebounded since. Exports to almost all markets have fallen from pre-crisis levels. Exports to Hong Kong and Switzerland are probably re-exported to other countries.



Source: Dept of Business Economics, MOC

This is the most positive and largest category with significant growth overall, and big increases in the US in the last three years, especially of gold jewelry. Exports to the UK have been rising steadily, and exports to Israel are also up, though those are most likely destined for further export. Exports to Japan have been down significantly due to this country’s continued economic malaise.





Source: Dept of Business Economics, MOC

The surprise number one country for export of imitation jewelry is Liechtenstein. This is due to the strength of just one company, Swarovski, which sends many of its products to Liechtenstein for trans-shipment. Otherwise, our products do well in the US and France. Overall, exports were up about 14 percent last year. We remain a very small player in this sector exporting only a few percent of the world total.


Fashions Around the World


Although the author was unable to travel to other markets for extended market research, much can be learned through a careful study of trade data.
The following tables can help to illuminate the demand for different types of jewelry and gems in different parts of the world. The first table looks at the relative share of gold/platinum, silver and costume jewelry.

Note: UK data does not include internal trade between Scotland, England, etc.


In the six markets studied, the highest share of gold jewelry in total jewelry imports was to the United Kingdom (82%). The US was nearly as high, with gold making up about 80 percent of its total jewelry imports from the world. Demand for gold jewelry was lowest in Germany and in Japan. The countries most preferring silver jewelry were Japan and Germany. Demand for imitation jewelry was highest as a share of the total in Germany, Italy and France. Generally the market for imitation jewelry was bigger than for silver jewelry.
Unfortunately, trade statistics do not generally divide platinum from gold jewelry. Traditionally the biggest market for platinum jewelry was Japan, though recently China, and to some extent the US, have also become big platinum markets. In the case of Japan, platinum jewelry makes up about a third of the gold and platinum category. Platinum jewelry is probably a much smaller share in the other markets, especially in Europe.

According to the Platinum Guild in New York City, of the approximately 3 million ounces of platinum used for jewelry in 1999, a little over 1 million oz were used in jewelry for Japan, about 1 million were used in jewelry for China (growing rapidly), and the rest of the world split the last 1 million ounces, though likely a significant share went to the US.

Another table looks at the relative importance of pearls, precious gems and semi-precious gems in each country.


Pearl imports, as a share of total gems, are highest in Japan (although many of them may be re-exported) and in Germany. Pearls are least popular in France. Precious Gems, including rubies, sapphires, and emeralds have the greatest relative demand in France, the US, and in Italy where they may be reincorporated into jewelry exports. Semi-Precious Gems are most popular in the US, Italy and Japan, and are not popular at all in France.
It is also possible to get an idea of how much consumers in each country are willing to spend on imported jewelry by dividing imports by the population or by per capita GDP.

In no case did per capita expenditure on imported jewelry exceed 1/10th of a percent of annual income. The highest level was in the United Kingdom, while the highest absolute amount spent on a per capita basis was in the US at more than $22 dollars a year. It is not surprising to find that the highest expenditures on jewelry were in countries that prefer gold over silver or costume jewelry.

Without doubt total expenditure on jewelry per capita is actually higher, since the above does not include domestically produced jewelry. In the case of the US, a Commerce Department study estimated that for gold/platinum jewelry, domestic production was about 49% of consumption in 1999, while imports were 51%. Given the trend towards greater imports, and the fact that gold/platinum jewelry makes up much of the total value, we can approximate that about half of all jewelry bought in the US is imported, and that the average person purchased about $45 worth of jewelry in 2000. Clearly the share of domestically produced jewelry in Italy, a major producer, should be significantly higher, so their jewelry purchases may be more in line with the rest of Europe.

Some common stereotypes about jewelry in different countries suggest that Germans like symmetrical and square shapes, Italians (and the French?) like flowery, dramatic styles, young Japanese wear heavy silver jewelry which is referred as the “English’ style. Chinese like platinum, jade and diamonds in single settings.
In many countries the market for jewelry is dominated by the wedding ring and the engagement ring. For many lower class families, this may be almost the only “real” jewelry they ever purchase. In recent years these two markets have been successfully attacked by the platinum industry, especially in Japan, China and the US. The popularity in China is probably due partly to restrictions on private ownership and trading of gold, which were just relaxed late in 2001. Platinum is used primarily with simple diamonds of large size.
Thailand does not have a major role in matrimonial jewelry, rather concentrating on jewelry for gifts or for fashion. As such, demand for Thai jewelry is concentrated amongst wealthy people on the high end, and young single women on the low end.
Contemporary young Thai women seem to prefer thin chain necklaces or bracelets in either gold, or a white gold color. Medium width chain bracelets are also seen. Strings with baubles – often black or dark in color, are also popular. Rings with a single gemstone, sometimes surrounded by small diamonds are popular with older better-off women, and some men. Earrings are small, simple rings or with small designs. Costume jewelry is used frequently during the daytime by working women to complement their outfits. Wedding rings are often not worn, but are often purchased and stored away. Men do not wear much jewelry, except some rings and an occasional white gold colored bracelet or neck chain. No big gold chain necklaces. For women especially, designer watches are an important jewelry element.

Competitors


China

As mentioned above, China is an enormous magnet for foreign direct investment, and many international companies are locating their production bases there. Perhaps two thirds of Chinese jewelry firms are foreign owned. Other strengths include Chinese production of fresh water pearls, the very efficient and productive synthetic stone industry, a more effective way of avoiding VAT on precious metals that will be re-exported (Helps keep the industry near Hong Kong, since this tax scheme is run from there), access to professional design work through Hong Kong, and of course the oft-mentioned large market, fast growth rate, and cheap labor. On the weak side, they have a very high VAT (35%). Firms require one of a limited number of licenses to avoid the VAT which makes the business less flexible. Although China produces much of its own gold, it must import many precious stones from Thailand and India, and these often must be smuggled into the country to avoid taxes. China does not have its own brands, so it is stuck in the value segment, the same as is the case with Thailand. The level of design, and especially China’s reputation are not as high as is Thailand.

India

India produces about 70 percent of the cut diamonds used in the world, many of them industrial grade rather than gems. Although bigger diamonds are cut in Israel and Belgium, India is the biggest cutting place the world knows. Because of the diamond cutting business, no one can compete with India on price when it comes to diamond jewelry. “They’ll throw in the ring for free just to sell the diamond” one jewel expert said. For this reason, although Thailand cuts some of its own diamonds, it sells very little pure diamond jewelry, instead concentrating on mixes of diamonds and colored stones. The direct competition in colored stone jewelry from India occurs because five years ago many of the diamond factories in India participated in a plan to produce colored and diamond mixed jewelry as well. Although diamonds were cheap, they did not have so much experience with design. The cutting of gem stones is not difficult, but the processing of the stones (cooking) still limits their efforts in this market, especially for rubies and sapphires.

Italy

Italy is where the modern jewelry export industry got its start and still is the biggest exporter. Italy is most famous for gold chain and pure gold jewelry, where it still commands an impressive market share greater than 50 percent into the US. It’s comparative advantage is its incomparable dramatic fashion sense, its innovative designs of chain and other jewelry, and the production of many of the machines used for jewelry production around the world.


Turkey

Turkey has done very impressive things with its gold chain industry moving from 1 percent of the US market to 10 percent in 5 years. They are now handicapped by having their GSP privileges revoked probably due to (renewed) US concerns about Turkey’s possession of half of Cyprus and the resulting civil war there. They have also just gone through a huge devaluation which should make their products more competitive. Turkish exports to Italy suggest some out-sourcing by Italian firms.

Israel

The biggest exporter of diamonds into the US also is showing an increase in the export of emeralds. Israel is famous as a cutting center for stones. Because of the US’s special relationship with Israel, it has a special trade pact with Israel quite similar to NAFTA. However, costs in Israel are high, and it is far away. Diamonds and jewelry are therefore the biggest export of Israel into the US, making up almost 50 percent of the total. Israel would like to trade gemstones as well as diamonds, and to support that it has very strong technological skills including those related to jewelry. They have recently invented an improved technique for treating emeralds. However, the cutting of colored stones is (so far) a labor intensive operation in which the Israelis have no advantage. If robotic cutting of stones becomes common, they might be more of a threat.

Belgium

Belgium is the home base of De Beers and is the center through which nearly all rough diamonds must pass. A good number of better (bigger) diamonds are also cut in Belgium, and Belgium has traditionally been the supplier of better diamonds in the Thai market. Although they would also like to trade gemstones there is little evidence that they are doing so now. They are not a direct competitor for jewelry.


Colombia

Colombia is the trading center for emeralds, the third of the four “precious” gems after sapphires and rubies. They have done a very good job of marketing emeralds, including a grading center, and certification much as we have done. Maybe some sort of joint relationship would be possible with them. The majority of emeralds are now mined in neighboring Brazil.


Japan

Although not a big producer of jewelry itself, Japan has traditionally controlled much of the market for pearls, both the smaller ones it produces locally, and the big south sea pearls it produces in Australia. This role has been significantly challenged by the increasingly sophisticated freshwater pearls that are produced in China, and are all the rage at jewelry shows around the world for the last couple of years because of their large size, and interesting new colors. Producing in fresh water has allowed much greater control over the pearl making process including much rounder stones, control over color, etc. The luster does not as yet match the ocean pearls however.

Conflict Diamonds and Tanzanite

It seems likely that illegal trade in Diamonds and Tanzanite had some role in financing Al Quada and bin Laden. Although only a tiny percent of trade in these two jewels would have played a part in raising money for this terrorist organization, it has brought to the forefront attempts to label the origin of gems and jewelry. As a trading center, but no longer a mining center, this would be disadvantageous for Thailand. If labeling became mandatory, it might have serious tax implications for gem dealers as well. The role of “conflict diamonds” will be debated in the US congress.


Recommendations


To encourage jewelry exports :


  1. Thailand needs to find a better way to manage the VAT on precious metals and gems so that firms do not have to tie up capital for months at a time. Currently, firms must pay VAT on precious metal (except gold) and gems when they enter the country, then get reimbursed afterward, losing interest and tying up lots of capital. This creates a serious disincentive for working with high value materials, and for working within the legal system as well. A pattern of trade free zones might be one option.



  1. Thailand needs to concentrate on understanding the Japanese market better. Silver jewelry is more popular in Japan than in any other major market, yet Thailand only has about 10 percent of total market share. Thailand has gone from being the major supplier of platinum jewelry to Japan with more than 30 percent of the market share to less than 5 percent in about 8 years. Part of the answer may be brands. It is NOT about price, at least from judging who is taking the market.




  1. Thailand needs to take gold chains more seriously. This may include learning how to make the clasps for them as well. Thailand has been doing well in gold chains, even without trying, and with Turkey constrained by the loss of its GSP benefits in the US there should be some additional opportunities there.


To protect and expand the gem industry :


  1. Thailand needs to continue doing a great job of protecting the ruby and sapphire market – through Thai’s international gem buying network, the market here in Chanthaburi which gives returns to scale and good prices, the system of gem “cooking”, and the advanced work on grading and certifying.


  1. Thailand needs to expand that expertise to some chosen semi-precious gems, perhaps Zircon, since it is mined with Sapphires, or any types of gems tat typically have problems with inclusions. To be successful we need to think about how to be able to buy, to process and to grade the stones, as well as how to cut them.





  1. Support international gem traders. Perhaps the most important factor in allowing Thailand to be competitive in a type of gem, is having access to that gem through buyers near the point of mining. In addition Thailand could support these traders by allowing them to bring in gems for export without VAT, and by encouraging government-to-government relations with gem producing countries.




  1. Thai ruby and sapphire jewelry competes with pearl jewelry from China, diamond jewelry from India, gold jewelry from Italy and Turkey. Lately, rubies have not been doing very well, and sapphires are just holding steady. Thailand needs ways to promote its segment, e.g. Valentine ruby rings, or an annual valentine catalog, perhaps a valentine jewelry contest? Although Thai jewelers are constrained by what colors are fashionable or what fashion dictates, they can have some influence over demand themselves.


To encourage better design work in Thailand :


  1. Serious cash prices should be attached to local design contests. Since the only way to be successful as a designer is as an entrepreneur, this could help to provide the seed money to the right talented people, as well as to encourage talented people to enter the design field.



  1. The government should sponsor more qualified Thais to study in international design schools. These individuals would mobilize the industry much as has happened in science or economics when the government has sponsored study abroad. Foreign study will give designers a feel for world fashions as well as language skills to be able to operate businesses internationally



To increase domestic consumption and interest in jewelry :


  1. Thailand should hold design contests particularly for low-cost jewelry. Low cost jewelry designs could actually be used in production, as opposed to the traditional fancy designs which are quite expensive. It could also increase the interest of Thai consumers in jewelry, since designs would be affordable.




  1. It would be helpful if foreigners associated Thailand with jewelry. Thailand is one of the biggest jewelry exporters in the world, yet most tourists do not even know that Thais make jewelry. Compare that to Thai silk. Thailand has an insignificant share of the world market for silk, yet every tourist is pressed with Thai silk from the moment they arrive. Some sort of subtle advertising such as having Thai traditional models on TTT posters, or stewardesses on Thai Airways wear rubies or sapphires would be a big start.


To increase trade fair participation :


  1. Thailand should try organizing a fair around a popular, but less common product, such as Zircon. It would inspire interest and expertise here among Thai producers, as well as getting international participants to come. Thailand badly needs a more modern image that comes with a new product. Since the fair comes twice a year, it would even be possible to make every second fair be based on an innovative theme. Not to get into politics, but it could even be possible to split the responsibility for the fair between two groups, which would lend an atmosphere of competition as they competed for the most participants



  1. Thailand is an enormous tourist destination. Perhaps a trade fair could be held somewhere besides Bangkok, such as at the beach? If the issue of security could be resolved, it might encourage stay-overs of several days. It might also be possible to subsidize the hotel costs of foreign fair participants.



Trade strategies :


  1. If we lose our GSP benefits in the US then we might try to argue for free trade in US jewelry. At the moment the US GSP is giving us some buffer from Chinese competition, so it is very valuable. Without that buffer we might have troubles, but it is better to fight fairly with other developed countries. Also the chance that the US will pass an Americas free trade pact is increasing, which could move jewelry production towards Latin America, just as apparel has been drawn by special programs with low tariffs.



  1. If the US needs something, keep restoration of Thai silver GSP benefits as something to ask for.

Conclusion


Thais should remember that jewelry is about fashion – not just about being the lowest cost producer. Although the global jewelry market is very price competitive, there is still lots of room for strategy, marketing and design. Thailand can do this. It will take smarts, it will take dedication, it will take working together, but with effort Thailand we can compete very successfully in jewelry.



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