6 March 2014
Jewellery Industry in Hong Kong
Hong Kong's jewellery industry is dominated by the precious jewellery sector. Its development has been facilitated by the expansion of the local market, including sales to tourists.
Jewellery production in Hong Kong encompasses a wide range of medium- to high-priced products. Hong Kong manufacturers are good at producing small stones fashion jewellery. Hong Kong is leading in the production of pure gold items, and has long been recognised as a major centre for the production of jade jewellery. It has also evolved into a leading trading and distribution centre for pearls in recent years.
Although high value-added processes are still retained in Hong Kong, manufacturing processes are increasingly shifted to the Chinese mainland, mainly to Shenzhen and Panyu, by means of building factories or outsourcing. Meanwhile, more manufacturers have made use of computer-aided design to shorten the time cycle for product development.
Under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), the mainland has given all products of Hong Kong origin, including jewellery, tariff-free treatment starting from 1 January 2006.
Note: * Industry statistics cover activities in Hong Kong only.
Hong Kong's jewellery industry can be broadly classified into two sectors: jewellery made of precious metal and imitation jewellery. In terms of value, some 86% of Hong Kong's total exports of jewellery are made of precious material.
Hong Kong's jewellery industry is known for its flexibility in accommodating customer needs. Production of fine jewellery encompasses a wide range of medium to high-priced products. The most popular product category is gem-set jewellery, particularly diamonds set in 14K or 18K and yellow/white gold. Hong Kong manufacturers are good at producing small stones jewellery with elements of contemporary fashion. Their gem-setting skills and design capability are competitive compared with world-class European manufacturers.
Hong Kong has a highly skilled and productive labour force capable of handling small orders and making elaborate designs at reasonable prices. The overall technology level of the precious jewellery industry is perceived by manufacturers to be above competitors like Thailand but below the world leaders such as Italy and Japan. Most notably, Hong Kong is leading in the production of gold items. Although high value-added processes are still retained in Hong Kong, manufacturing processes are increasingly shifted to the Chinese mainland, mainly to Shenzhen and Panyu.
Hong Kong has long been recognised as a leading centre for the production of jade jewellery. Major items are bangles, rings and pendants. Hong Kong has also evolved into a leading trading and distribution centre for pearls in recent years, partly due to the fast emerging Chinese and South Sea pearl industry and the recent decline of the Tahitian pearl industry.
Performance of Hong Kong's Jewellery Exports^
Note: ^ Since offshore trade has not been captured by ordinary trade figures, these numbers do not necessarily reflect the export business managed by Hong Kong companies. * Insignificant.
Hong Kong’s exports of precious jewellery remained resilient, though slowing down in recent years. After expanding by 7% in 2013, export growth experienced a 13% year-on-year decline in January 2014. Yet this may be somewhat distorted by the different timing of the Chinese New Year. The US and the EU remained Hong Kong’s dominant markets for precious jewellery, accounting for some 48% in 2013. Export growth to these two markets increased 7% and 10% respectively in 2013. Besides, Macau, Switzerland and ASEAN are increasingly important markets for Hong Kong. In 2013, Hong Kong’s exports of precious jewellery to these three markets increased 83%, 21% and 12% respectively, bringing their total market share from 20.6% in 2012 to 26.5% in 2013. On the other hand, Hong Kong’s exports of pearls, gem-stones and rough diamonds increased 12% in 2013 and 18% year-on-year in January 2014.
Hong Kong's jewellery exporters are facing intensifying competition from suppliers in the Chinese mainland and other countries, particularly India and Thailand. This, together with the price fluctuation of precious metals, diamonds, precious stones and materials, has somewhat trimmed down their profit margins. Yet, compared with other industries, jewellery makers are already in a better position to pass cost increases onto buyers and end users if they are caused by price surges of precious materials, which make up the most part of a jewellery article's value. On the other hand, overseas retailers and importers often press Hong Kong suppliers for extended credits, exchange for unsold items, shorter delivery lead time and better designs.
The impact of the RMB's appreciation on the precious jewellery industry is modest compared with other industries because mainland content only accounts for a relatively small part of a jewellery article's value, compared with costs of precious materials, which are primarily imported into the mainland for export processing. On the other hand, Chinese government’s policy on encouraging consumption will continue to shore up the purchasing power and import appetite of Chinese residents, and facilitate the sales of jewellery articles to the mainland, as well as retail sales in Hong Kong contributed by Chinese visitors.
Hong Kong is the world's second largest exporter of imitation jewellery after the Chinese mainland. In 2013, total exports of imitation jewellery amounted to HK$8.9 billion, unchanged from the previous year. Unlike fine jewellery, imitation jewellery is rarely domestic-made but re-exported from origins outside Hong Kong, notably the Chinese mainland, which accounts for 93% of all exports from Hong Kong. In January 2014, Hong Kong’s exports of imitation jewellery increased 13% year-on-year, but this may be somewhat distorted by the different timing of the Chinese New Year.
The jewellery industry of Hong Kong is by and large export-oriented. The trade is characterised by a subcontracting system under which small- and medium-sized factories provide subcontracting services, such as mould making, precision casting, gem-setting, polishing and electroplating, to larger manufacturers or local jewellery retailers. Mass production of jewellery products is normally restricted to established manufacturers which are equipped with more sophisticated and automated production machines. The jewellery items made for exports usually bear buyers' brand names or logos. Some jewellery makers have set up overseas offices and outlets to promote sales. Online display is another growing trend.
Some Hong Kong manufacturers are making inroads into retail and distribution in Hong Kong, helped by the flourishing tourist industry. According to Hong Kong Tourism Board’s survey, in 2012, vacation overnight visitors spent some HK$17.6 billion on jewellery, accounted for 18% of their total spending on shopping; as for those from the Chinese mainland, the share was higher at 20%.
A few Hong Kong jewellers have expanded their retail network to the Chinese mainland through franchising and cooperative arrangement. They have successfully earned a recognised brand image there. A recent survey conducted by the HKTDC showed that, when buying low-to-medium and medium-to-high-end brands, Hong Kong brands were the top choice, compared with local and foreign brands, of mainland consumers. The survey also discovered that Hong Kong brands have a premium of 35.9% over their domestic counterparts.
Promotion via participation in trade fairs is an effective way for Hong Kong companies to explore export opportunities (below is a list of selected trade fairs in the industry). Besides, HKTDC from time to time organises study missions for Hong Kong manufacturers to visit specific markets for establishing new business relations.
Articles of jewellery are getting more fashion oriented. Innovative designs are important for moving up-market. In doing so, it is necessary for manufacturers to have more metallurgical knowledge. New technology also allows the development of new or innovative designs. Jewellery, which used to target the high-end market, is also following more closely with the fashion trend and targeting at the younger, middle income level market segment, some in the form of brand jewellery.
Recent technological development allows massive production of jewellery products with good quality and competitive prices. While Hong Kong's jewellery industry remains basically a handicraft industry, a number of larger establishments have made use of sophisticated and automated production equipment. These manufacturers integrate advanced production techniques, such as electroforming, with handicraft skills to enhance their efficiency. They install computer-aided design and manufacturing (CAD/CAM) systems, as well as computer numerically controlled (CNC) machine tools in their product design and manufacturing processes. New technologies also enable Hong Kong manufacturers to develop new materials for fashionable jewellery items other than fixing defects and to increase the accuracy of the designed output.
Like other industries, the trend of consolidation also happens in the jewellery industry, especially in the US. In the past decades, the numbers of jewellery manufacturers and retailers in the US have declined substantially. At the same time, the business of the smaller retailers has steadily declined as they struggle to compete against mass merchants such as Wal-mart, Target and Costco, which have successfully captured a bigger share of consumer spending. Wal-mart, for example, has risen to be the leading jewellery retailer in terms of sales turnover in the US. A recent survey by Research and Markets Ltd also reported that 20% of fine jewellery shoppers in the US made their purchases at these outlets. Mass merchants usually have stronger bargaining power than their suppliers; Hong Kong exporters are expected to face downward pressure on their ex factory prices and provide more value-added services to win buyers' orders.
On marketing and distribution, some Hong Kong jewellers have built up their own branded jewellery or licensing agreements. While this is an effective strategy to enhance long-term competitiveness, it may also require local jewellery manufacturers to move into distribution. Apart from establishing direct retail outlets, the rapid development of online shopping in recent years is also noteworthy. It is expected that the application of e-commerce in the jewellery sector will continue to proliferate. Over the longer term, the development of internet shopping represents a new direct sales method for Hong Kong jewellers in promoting their products.
Under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), the mainland has given all products of Hong Kong origin, including jewellery, tariff-free treatment starting from 1 January 2006. According to the stipulated procedures, products which have no existing CEPA rules of origin can enjoy tariff-free treatment upon applications by local manufacturers and upon the CEPA rule of origins being agreed and met. Non-Hong Kong made jewellery products remain subject to tariff rates of as high as 35% when entering the mainland.
The promulgated rules of origin for jewellery to benefit from CEPA's tariff preference are basically similar to the existing rules governing Hong Kong's exports of these products. Generally speaking, for jewellery articles of precious metal, moulding, identified as the principal process for the purpose of delineating their origin, is required to be carried out in Hong Kong. If assembling is required, it must also be done in Hong Kong. For jewellery articles of pearls, precious or semi-precious stones, both moulding and setting have to be done in Hong Kong. Detailed information is available from the following hyperlink: http://www.tid.gov.hk/english/cepa/tradegoods/files/mainland_2014.pdf
General Trade Measures Affecting Jewellery Exports
In China, all gold trading at the wholesale level for producers and wholesalers now takes place in the Shanghai Gold Exchange, introducing market prices to the transactions. In 2004, China removed all barriers to gold licensing for manufacture, distribution and retail of gold jewellery products, and allowed some mainland companies to import gold jewellery. In August 2010, China announced to let more banks import and export gold, open trading further to foreign companies, increase foreign members on the Shanghai Gold Exchange, and also study ways to allow foreign qualified bullion suppliers to deliver to the exchange.
Effective from May 2005, the value added tax (VAT) on exports of jewellery articles of gold and precious materials under general trade is exempted, but the VAT on the import content of such trade, collected when imported into China, is not rebated. Starting from July 2007, for certain pearl, precious stones and precious metal, the rebate rate was reduced from 13% to 5%. On the other hand, effective from April 2009, the export tax rebate on imitation jewellery has been lifted from 5% to 9%.
Diamond (including rough diamond and unset polished diamond) imports and exports under general trade are required to go through the declaration formalities with the customs located inside the Shanghai Diamond Exchange (SDE). Diamonds directly entering SDE from overseas are exempted from import duty, value-added tax and consumption tax. All diamonds traded in SDE are exempted from value-added tax. Diamonds entering SDE from domestic sources can enjoy tax refund, and the tax collected at the processing stage shall be fully refunded when diamonds are exported, while those flowing from SDE to overseas cannot enjoy tax refund. For diamonds channeled from SDE to the domestic market, no import duty is required but the value-added tax (4% for polished diamonds but none for rough diamonds) shall be duly paid. The consumption tax is not collected until the stage of retailing, at a rate of 5%.
In response to the concern that diamonds from a few African sources might have been sold through illegal channels to finance civil wars and conflicts among neighbouring countries, the World Diamond Council (WDC), with some participating countries, have come up with a certification scheme to keep track of the rough diamonds exported from the African conflict areas (the so-called Kimberley Process). Both Hong Kong and China, as signatories to the Kimberley Process, has introduced this certification scheme since 2003. Accordingly, all parties in Hong Kong carrying on a business of importing, exporting, carrying (including carrying rough diamonds in transit and transhipment), buying or selling rough diamonds must now be registered with the Trade and Industry Department (TID). They are also required to obtain Kimberley Process (KP) Certificates issued by TID before the import and export of rough diamonds.
In July 2008, the US extended the economic sanctions against Burma (Myanmar), which include a prohibition on virtually all imports from that country. Separately, effective from September 2008, imports of rubies and jadeite mined or extracted in Burma as well as articles of jewellery containing such gems into the US are banned. This ban is noteworthy for Hong Kong and mainland jewellery exporters because it applies to jewellery from any location that contains Burmese rubies and/or jadeite. In addition, exporters of rubies, jadeite and jewellery thereof from non-Burmese sources are required to implement measures to prevent trade in Burmese covered articles.
In the EU, environmental and health concerns continue to be major issues. The EU has banned the imports of jewellery containing nickel, which can cause allergic reactions when in contact with skin. While this measure provides Hong Kong jewellery products made of other materials a niche in exporting to the EU, other suppliers have started to catch up as they adjust to the requirement. In addition, imitation jewellery containing lead is also under strict regulations under the US Consumer Product Safety Commission.
Other than the above official regulations, various organisations are issuing qualifications to various jewellery materials. They include the World Gold Council, the Natural Colour Diamond Association (NCDIA), and the Diamond Trading Company (DTC). For example, Tanzanite Foundation has developed a grading system for tanzanite. Gaining their qualification is an increasing trend, and their measures are expected to be a standard in the future.
In terms of materials, white metal will remain the mainstream, while there has been a renewed interest and demand for colour stone jewellery. Demand for yellow gold is on a rise again, albeit with a fashionable twist. Titanium is gaining popularity for its light weight, strong nature and non-sensitivity to human body. It is also worth-noting that, in recent years, consumption of diamond jewellery has increased rapidly, particularly in emerging economies such as China and India where incomes are rising fast and consumers' purchasing power is strong. Yet, lower-priced items with more creative use of karat gold and alloys may also become more popular with less affluent customers.
The number of younger consumers has increased over the past few years. They are fashion-conscious and putting a great stress on the design element. In many cases, they are influenced by the trends in clothing fashion, mainly through magazines, TVs or movies. In Asia, for example, the biggest jewellery buyers are the rising numbers of women entering the workforce, according to De Beers.
In terms of product trends, jewellery designs have been increasingly influenced by clothing fashion. Consumers, especially women, are opting for more accessories like jewellery to express their sense of style. While feminine, romantic pieces are expected to be sought-after in the luxury market, wearability is getting important in the young girl market, and this reflects in the increasing trend to wear jewellery with jeans in a mix-and-match fashion.
Demand for male jewellery is on a rise, as men are becoming more fashion-conscious. The concept that “jewellery is feminine” is fading. Men have realized that jewellery can be masculine. They begin to understand that fine jewellery is essential to a complete look, and jewellery is becoming an integrated part of men's dressing. They may buy bracelets, rings and pendant necklaces to suit their looks. They may also wear jewellery such as cufflinks and tiepins to build up a smart look. Yet, articles of men jewellery are still quite limited, and thus the market may be of huge potential.
Costume jewellery is making a return. Increasingly, more garment boutiques offer jewellery as accessories complementing their new lines of fashion. Such development would contribute to an increased demand for elegant and romantic diamonds, which are expected to top the list of jewellery buyers, while semi-precious stones and coloured crystals targeting at the medium to lower-end segment are likely to sell well.