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Gemstones and jewellery have uniformly epitomized culture, heritage, aesthetics and social status around the world and across diverse civilizations. From being an adornment accessory and occasion-based gift item in developed countries to a dependable investment in developing economies, even today, they represent a diverse set of human needs and aspirations. The global gems and jewellery industry has come of age, it is sized at about USD 95 billion with key markets having registered an average Compounded Annual Growth Rate (‘CAGR’) of 5-10 percent over the last decade.
In the recent past, the gemstones and jewellery industry has witnessed substantial changes across multiple factors. On the demand side, consumers across the globe have demonstrated a greater propensity towards purchasing jewellery priced at the lower end of the spectrum (i.e. below 500 USD). This in turn has spurned the need for lower costs and higher productivity in jewellery manufacturing. On the supply side, the diamond industry has witnessed the emergence of multiple suppliers, thus putting an end to the cartelization that had existed for a long time. Also, suppliers have tried to control the excess capacity in the processing industry by controlling the number of sightholders while simultaneously undertaking demand generation and market expansion initiatives. Some mining companies have also engaged in forward integration to retain more value. Technology has started to play a very important role in the industry, with widespread adoption of laser based techniques for processing, decoration and fitting, and usage of computer aided design for modelling and prototype development. Another area of change that deserves mention is the heightened sensitivity to social issues, which manifested itself by the way of sanctions against conflict diamonds and rising concerns for child labour and health and safety standards.
The future outlook for this industry is good, with key markets (i.e. USA, Japan, the UK and Italy) slated to sustain existing growth rates, and emerging markets like China and India expected to grow at an accelerated rate. This growth is expected to drive high levels of competition across gemstone processing and jewellery manufacturing, with several countries vying for a substantial portion of the overall pie. Predicting the winner of the future would be difficult, but one thing is certain – being a winner would require a cohesive effort with equal involvement from industry players and the government. Branding at a country level (the “country of origin effect”) would be as important as cost advantage.
Gems and Jewellery in India and Sri Lanka – Common Threads
The gems and jewellery industry in India and Sri Lanka has two important things in
common
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It’s an age-old industry in both cases, and different areas of this industry have become synonymous with these two countries. Whereas India is today the largest processing centre for diamonds, Sri Lanka retains a world market position as a producer of fine quality gems.
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The industry is of strategic importance to both these nations, and is one of the largest foreign exchange earners. It provides employment to over 4 million workers in India and 150,0001 workers in Sri Lanka.
The gems and jewellery value chain has four key stages – mining, gemstone processing, jewellery manufacturing and jewellery retail. If one were to analyse the value chain, it is evident that a substantial portion of value addition occurs downstream, with the highest value addition occurring in the jewellery manufacturing and retailing stages. This has been elucidated in Exhibit 1, The Diamond Pipeline (2004). India has enjoyed a world leader position in the gems processing segment, but its contribution to jewellery manufacturing and retailing is still small, and Sri Lanka makes negligible contributions to both these areas. It is evident that both these countries need to strengthen their current positions and must try to maximize in-country value addition.
While common threads exist across the gems and jewellery industry in India and Sri Lanka, there also lie differences with respect to strategic advantages and challenges. When viewed independently, these advantages and challenges may only be of significance to their respective countries, but when viewed together, they present an entirely different picture. The importance of this picture is dependent on the way in which it is developed; in other words, how the two countries collaborate to use the advantage of one to address the challenge of the other in a manner that reaps benefits for both.
Snapshots – Gems and Jewellery
in India
From its cottage industry status in its earlier years, the gems and jewellery industry today occupies a preeminent position in the Indian economy contributing to foreign exchange earnings, domestic growth and significant employment. From a humble base of exports worth a mere USD 0.43 million in 1960-61 to approximately USD 15,0002 million in 2004-05, the growth of this industry has been phenomenal. The industry today employs over 4.5 million workers.
Diamond processing has driven the strong export growth over the last four decades, and occupied 71%3 of India’s total exports in 2004-05. India today is the world leader in processing near gemstone quality (low caratage) stones. 11 out of 12 diamonds set in jewellery worldwide are processed in India. India contributes over 92 percent of global output in terms of pieces, 85 percent in terms of caratage and 60 percent in terms of value.
Almost all large Indian diamond processing companies have a similar beginning – one entrepreneur from the Gujarati community in India and one polishing wheel. Through the 1970s and 80s, this community developed this industry despite severe obstacles like import restrictions, exchange controls and high customs duty. A combination of entrepreneurial zeal and availability of skilled labour at a low cost fuelled the growth in the initial years. Key components of this entrepreneurial zeal were the ability to take risks and build relationships. People from the community set up offices in Europe (especially Antwerp) and build strong relationships with suppliers (sightholding) and customers. The opening up of the economy in the 1990’s, recognition of the industry by the Indian Government as a thrust area and subsequent creation of an enabling regulatory environment propelled the industry further. After a negative growth trend between 1999-01 and 2001-02, due to the slow down in the global economy, the diamond processing industry registered a sharp turn around, and has registered a growth of 23%4 between 2001-02 and 2004-05.
The turn of the century also witnessed the entry of the second generation into the family owned businesses (FOBs) of the diamond processing industry. In an environment that posed multiple challenges like over capacity, squeezing of processing margins, and forward/backward integration by countries with upstream/downstream facilities, some Indian gemstone processing FOBs combined the wisdom of the old, school and the education and professionalism of the new school, to take substantial steps forward – adoption of new technology to improve productivity and quality, standardizing trading practices, brand building and maximizing value through forward integration. These efforts have led to the Indian diamond processing industry maintaining its world leader position and the emergence of the Indian jewellery manufacturing industry.
Jewellery exports from India have witnessed a growth of over 25%5 between 1999-2000 and 2004-05, and are expected to cross USD 4000 million in the current year. However, sustaining this growth rate may be difficult over the years to come due to substantial cost based competition from other developing countries.
Coloured gemstones is the other large segment of the Indian gems and jewellery industry. The manufacturing industry in this segment is still characterized by numerous small, fragmented and unorganized players undertaking production with skilled labour. Still, there are some players that have established large manufacturing units, producing international quality output and have deployed state-of-the-art technology in core operations. Exports from this industry have not grown substantially over the last five years and have hovered around the USD 2006 million mark. Value addition and jewellery manufacture are the new mantras in this segment, with several large units undertaking studded jewellery manufacture for both the export and domestic markets.
The Gems and Jewellery Export Promotion Council (‘GJEPC’) operating under the supervision of the Ministry of Commerce, Government of India and consisting of elected representatives from the industry, is the apex body for exports in this industry. It has played a crucial role in achieving and sustaining export growth, by promoting the industry in both domestic and international markets.
In what might seem to be an irony of sorts, India’s production of raw materials (precious metals and gemstones) is negligible and therefore both the domestic and export industries are primarily reliant on imports for sustenance and growth. Imports were expected to scale the USD 11,0007 million mark in 2004-05, and have grown at a CAGR of 13% in the last 15 years and at 21% between 2000-01 and 2004-05. This is clearly illustrated in exhibits 3A and 3B.
Snapshots – Gems and Jewellery
in Sri Lanka
The gems and jewellery industry is an age-old industry in Sri Lanka and is one of the largest foreign exchange earners in the country. The country has a large deposit base of coloured gemstones, and geological opinions estimate 90% of Sri Lanka as potential gem bearing land. While Sri Lanka produces various types of coloured stones (i.e. Sapphire, Ruby, Star Stones, Alexandrite, Topaz, Chrysoberyl, Cat’s Eye, etc.), it is the Ceylon Blue Sapphire that has attracted the imagination of buyers worldwide. It is one of the few sapphires in the world that can be sold as a completely natural stone, without any heat treatment.
Sri Lankan gems and jewellery exports have increased rapidly since 1990. The first wave of acceleration was due to demand from the Japanese market. Post 1997, demand from the Japanese market decreased, and today, the United States has emerged as the primary market. Gems and jewellery exports amounted to USD 312.148 million in 2003, and have registered an estimated growth of over 20% in 2004 and 2005. In 2003, the industry provided employment to over 150,000 people.
Contrary to the Indian scenario, Sri Lanka has a large repository of fine quality natural gems. This however has not been translated into value addition across the gems and jewellery value chain. Participants in the value chain in Sri Lanka (i.e. miners, heat treaters, diamond cutters, lapidarists, jewellery manufacturers, brokers and retailers) largely demonstrate insular behaviour and are independent in their functioning. Lack of mutual coordination over time has led to external influences dominating the behaviour of this industry. Today, a significant portion of financial gains arising out of the Sri Lankan gems produce are enjoyed by third parties outside the country. Also, frequent re-mining together with the absence of a broadly accepted mining policy, unproductive mining methods and little research into mineral deposit reserves have been threatening the Sri Lankan gems’ resource base for some time.9
Strengths and Challenges
A Comparative study
Today, the industry is growing at a fast rate, but one has to throw in a bit of caution by stating that the export base is low. To sustain this growth rate, the industry needs active support from the Sri Lankan government and guidance from the Sri Lanka Gem & Jewellery Association (SLGJA). To this effect, the current activities taking place with support from the competitiveness programme set out by the association are a step in the right direction.
Looking Ahead
A ‘cautiously optimistic’ demand pattern has emerged in the biggest gems and jewellery markets worldwide. The growth in this industry has for years lagged behind that of luxury products and the gross domestic products. However, the last few years have witnessed a change in this trend, and the years ahead promise a sustained growth rate of 5-10 percent. At this rate, the global gems and jewellery industry is expected to reach USD 130 billion by 2010. Consumer purchase behaviour indicates a movement towards jewellery in the sub-500 USD price band. This presents an enormous opportunity to low cost gems and jewellery producing countries like India and Sri Lanka. Exports from these countries have the potential of growing at a rate higher than 10 percent.
The gross domestic product of India is expected to grow at 6 – 6.5 percent, and if the local jewellery market grows at the same rate, it may touch the USD 10 billion mark by 2010. The market today is one where there is a strong preference for gold jewellery and traditional designs. But, there has been a slow movement towards gemstone studded jewellery and contemporary designs. The Indian jewellery market is turning out to be one to watch out for.
The global market, together with the local Indian market, presents substantial opportunities for gems and jewellery industry players in India and Sri Lanka, but there will be fierce competition from China, Malaysia and Thailand. The need of the hour is for these countries to work together in a manner that benefits both.
The socio-economic importance of this industry is extremely high for both India and Sri Lanka. In both these countries, the industry is old, and has offered unique learnings. Each country has a distinct set of strengths and challenges and a few common ones. Some of these strengths are also complementary in nature. This background presents two ways of working together – by creating a platform to share market knowledge and technical innovations, and working in a collaborative manner to enable the distinct strengths of one country to address the challenges of the other. These efforts would have to be spearheaded by GJEPC and SLGJA, with active support from the government in both these nations.
Collaborative Efforts
One important aspect of working together is the reduction of structural difficulties. In the first case, the Indian import duty on processed gemstone could prove to be a major deterrent, whereas, the Sri Lankan import duty on Indian jewellery could have a similar effect in the second case.
The first step towards working in a collaborative manner is the identification of opportunities that are embedded in the strengths and challenges inherent to each country, while the second step would definitely have to be an ongoing initiative towards converting these opportunities by the way of bilateral agreements which reduce structural inefficiencies and the formation of an alliance between industry participants.
The Future
Could be one where both countries establish themselves as key players in the global order in the gems and jewellery industry by working together and gaining from each others’ experiences and strengths.
But, to convert possibilities into reality would require a strong, well guided and cohesive effort from the government and industry apex bodies in both these countries.
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