Shenzhen: The Frontier of China’s Gem and Jewellery Industry

Tao Hsu

Andrew Lucas

January 25, 2016

INTRODUCTION

Over the past 35 years, Shenzhen has transformed from an extremely poor fishing village to one of the most economically developed cities in China, witnessing countless advances along the way. In May of 1980, the city was designated one of China’s first special economic zones, acting as a cradle for many start-ups. Today, it is China’s biggest jewellery manufacturing and trading hub.

Over the years, Shenzhen has been at the forefront of pioneering trade reform. The “China Jewelry Index” (CJI) was initiated, born, and is maintained in Shenzhen. It was launched in October 2014, after three years of preparation. The Index, like Rapaport’s diamond report, was the first national-level database to provide comprehensive information on China’s gem and jewellery industry. Considered a milestone of business development, CJI is fully supported by the local Shenzhen government, with intellectual support from the Gem and Jewelry Trade Association of China.

The city’s GDP rose from 1.96 million Chinese renminbi (RMB) in 1979 to 1,600.20 billion RMB (US $267 billion, GBP £168 billion) in 2013. The growth rate in Gross Domestic Product was 8.8 per cent from 2013 to 2014, which was higher than the overall growth rate for all of China. This fast growth attracted new migrants from all over the country and the world. The permanent population grew from 30,000 in the early 1980s to about 18 million today. Its demographic consists of 99 per cent migrants, although the exact population has never been consistent or easy to count.

Besides being home to numerous high-tech companies, the Shenzhen Stock Exchange and the world’s third-busiest container port, Shenzhen is also at the forefront of China’s gem and jewellery industry. There are more than 3,600 registered jewellery companies, more than 5,000 licenced individual dealers, and 29 gem and jewellery exchange centres in Shenzhen. The industry employs more than 150,000 people. The value of total wholesale jewellery production and total domestic jewellery retail sales in Shenzhen reached 100 billion RMB (about US $16.7 billion, £10.1 billion) and 140 billion RMB (about $23.3 billion, £14.1 billion) respectively in 2014.

In 2013, a group from GIA visited China to research the Chinese industry and market. During that visit, the team observed many of Shenzhen’s leading companies.

HISTORY OF SHENZHEN’S GEM AND JEWELLERY INDUSTRY

The beginning of Shenzhen’s gem and jewellery industry dates back to the early 1980s, when Hong Kong jewellery manufacturers started moving their factories and plants to mainland China. In addition to its ideal location as a neighbour of Hong Kong, Shenzhen’s development was also facilitated when the government started a trial of a new gold-trading policy in the city. Before that, between 1949 and 1982, it was required that all gold production be submitted to the central bank, which then distributed the gold to factories. Also, individual consumers were not allowed to purchase gold. The first stage in the opening up of the gold trade was to allow individuals to purchase gold jewellery in state-owned shopping centres.

In the 1980s, Shenzhen’s gem and jewellery industry was very small in scale. The main business model was called “three-plus-one”, a custom manufacturing arrangement that used the supplied materials, designs and samples, and—in compensation (the “plus”)—manufactured the desired product. Many industries adopted this model at the beginning of the reform process.

The industry experienced its fastest growth between the end of the 1980s and the early 2000s. During that time, gem and jewellery trading policy became more and more flexible and private businesses grew rapidly. Consumers had more and more disposable income to spend on luxury products like jewellery. Shenzhen Gold and Jewelry Association formed in 1990, with support from the local government, to serve as a bridge between government and business owners.

After 2003, the government further reformed its taxation policies in order to support the developing gem and jewellery industry. The formation of gold and diamond exchanges stimulated the fast growth of the industry in multiple areas all over the country. In Shenzhen, larger jewellery companies quickly expanded, and brand building took over as the core mission. In addition to being a manufacturing and trade centre, Shenzhen is also home to most major Chinese jewellery brands.

In 2005, several jewellery brands originating in Shenzhen were named “China Famous Brand”. This label helped them with brand promotion and sales, and caused many industry participants to realise the importance of brand building. Today, the leading brand in every sector of the gem and jewelery industry has operations in Shenzhen.

SHUIBEI: THE CENTRE OF SHENZHEN’S GEM AND JEWELLERY INDUSTRY

Shuibei Jewelry Park covers an area of less than one square kilometre, but it is the centre of Shenzhen’s gem and jewellery industry, encompassing more than 2,000 jewellery companies. Many companies originated there as small studios and became leading industry brands. Most of the area’s gem and jewellery exchange centres are clustered there as well. Gem-testing labs and industry services such as packaging, transport and storage also have offices in the area.

The GIA team visited two large exchange centres and the largest high-end jewellery club, managed by Shenzhen Creation Group. The Creation Group is one of the leading coloured stone companies in Shenzhen. It formed in 2000 and operates a group of companies engaged in high-end and commercial jewellery design and manufacturing, and in gemstone and jewellery trading. 

The Shuibei International Jewelry Trade Center opened in May 2004. It was the first centralised jewellery trading platform in Shuibei. Before that, people who wanted to buy wholesale gemstones and jewellery had to go from one shop to another. This centre provided the first one-stop service for large and small wholesalers and retailers.

The Shuibei International Jewelry Trade Center currently hosts more than 100 notable local and international jewellery shops. There are four main sectors: brands, jadeite jade, and carat gold and silver jewellery. The company evaluates all dealers at the end of each year. Contract renewals are based on many evaluation factors, including consumer satisfaction. Only qualified dealers can operate shops or stalls in the centre.

The company also invests in displays designed to educate consumers and reassure them about the centre’s reliability. This is especially important today since more and more trading platforms are being built and to be sustainable, owners have to make their facilities stand out.

The Royalland Jewelry Club was formed in 2009 to cater to the emerging high-end jewellery market. It is the largest high-end jewellery club in mainland China, with a showroom that’s more than 21,500 square feet in size. The showroom is located on the top floor of the building and has its own private access. The club regularly hosts jewellery salons for its clients and is also available for private events. Independent designers contract with the club to develop custom designs for luxury consumers. 

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BATAR: CHINA’S LARGEST GOLD JEWELLERY MANUFACTURER

Gold jewellery has a long tradition as a best-seller in China. Batar provides manufacturing services for almost all major gold jewellery brands and produces one out of five gold jewellery pieces in China. The company was registered in Hong Kong in 2001 and is now a member of the Shanghai Gold Exchange.

In addition to gold jewellery manufacturing, Batar also deals in other gold products and in gold inheritance and investment. Batar has more than 20 subsidiaries, and sold nearly 200 tons of gold products in 2014. The company is now the main supplier of 24K gold jewellery for more than 30,000 retailers and more than 400 brand names. 

Twenty-four carat gold jewellery is favoured by Chinese consumers, who feel that the purer the better when it comes to gold. This is unlike other markets in the world. Asian consumers, including those in the Middle East, are generally gold lovers, but the highest gold purity commonly found in those markets is 22K (91.6 per cent gold).

It is Chinese tradition to purchase gold jewellery as gifts for important life events. At the beginning of each lunar year, consumers buy all kinds of gold bars or decorations with designs featuring that year’s zodiac animal. Every holiday, stores that carry gold jewellery are packed with wealthy families and entrepreneurs who buy large gold decorative items to show off their success. Also, growing numbers of individual consumers are investing their increasing discretionary income in gold and gemstones. Batar has taken advantage of this opportunity by collaborating with banks to facilitate their gold investment programmes. 

When GIA visited a Batar store in Shenzhen on a regular business day, the store was crowded with clients. Based on the quantity of goods they were purchasing, it was easy to tell that most of them were wholesalers and retailers. Large quantities of gold jewellery were collected in baskets during the transactions, and the salespeople and buyers were busy counting and selecting items.

Batar started as a manufacturer for jewellery brands outside of China. When the domestic Chinese gold market opened up, the company became the main manufacturer for domestic jewellery brands as well. Later, Batar developed its own brands, including Batar Jewellery and Show King. The company has contracts with well-known jewellery designers and never stops inventing new techniques and designs.

To satisfy the demand for high-purity gold jewellery, the company invested in developing new gold jewellery manufacturing techniques in collaboration with China Science Academy. As all goldsmiths know, soldering is one of most important steps in making gold jewellery, but the standard solder used in China contains only 91.6 per cent gold, giving it a lower melting temperature than pure gold. In order to significantly improve the purity of gold items, they must use 24K material throughout the process and also try to avoid as many soldering steps as possible. This is the key technique that Batar uses to stay competitive.

To cater to young consumers, Batar developed techniques to make gold jewellery reflect different colours of light. While the result is popular with young consumers, the older generation still prefers the traditional designs and pays more attention to the value of the material than to its unique appearance.

A recent market survey indicated that of all 24K jewellery, chains—necklaces and bracelets—are the best sellers. Sales of gold chains account for 40 per cent of the market, with rings at 17 per cent and pendants at 11 per cent.

XINGGUANGDA: ONE OF CHINA’S LARGEST GEM SETTERS

The recipient of the 2014 JNA Manufacturer of the Year award for gem-set jewellery, Shenzhen’s Xingguangda Jewellery Industrial Co. Ltd., is one of the leading jewellery manufacturers in mainland China. The company was formed in 1997 and specialises in gemstone jewellery in 18-carat gold and platinum. In addition, Xingguangda also engages in jewellery design, manufacturing technique research, and jewellery wholesale and retail.

After more than 20 years of operation, Xingguangda now owns four well-known jewellery brands, more than 50 patents and more than 3,000 retail outlets countrywide. Working closely with the China Gem and Jewellery Industry Association, the company has been involved in the formalisation of multiple industry standards. Xingguangda had its origins in Shenzhen, and has built a very solid base in this world-class industry hub. The company’s core team includes its management staff and more than 1,000 professional technicians.

While continually increasing its manufacturing efficiency and product quality, the company also invests in developing its jewellery design team. Through the years, Xingguangda has won numerous awards in the National Jewellery Design and Manufacture competition. In the most recent 2014-2015 competition, several jewellery-making technicians from the company won individual awards.

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Besides its dealings in coloured stone jewellery, Xingguangda also collaborates with diamond-cutting factories to research new creative cuts. In 2014, they launched a new diamond cut called “ten heart and ten arrows”. This new cut has 71 facets—more than a regular round brilliant, which has 58. The manufacturer reports that this cut’s fire is generally 20 per cent stronger than regular round brilliants. Only one out of 300 pieces of rough is suitable for faceting this new cut and it takes six times longer to produce than the round brilliant.

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LORENZO JEWELRY INTERNATIONAL

Lorenzo Jewelry (LJ) International Inc. is the parent company of a wholesale business, called Lorenzo, and a retail jewellery brand called Enzo. The company is vertically integrated, with mining interests, direct purchases from mines, coloured gemstone manufacturing, jewellery design and manufacturing, global wholesale distribution, and retail sales. LJ International keeps its retail and wholesale businesses separate by selling wholesale to markets globally and selling retail through its stores in China.

The company can trace its origins back to February 1987, when the current company Chairman, President and CEO, Yu Chuan Yih, founded Lorenzo Jewelry Manufacturing in Hong Kong. Mr Yih was born in Brazil and started in the industry as a Brazilian gemstone trader. The company’s origins were very humble, with just five workers in the original coloured stone cutting factory.

Their first entry into China was in 1990, when they opened a 45,000 square foot coloured gemstone cutting factory in Shantou, China. In 1998, they also opened a 50,000 square foot factory in Shenzhen. By 2003 they had consolidated the operations into a 100,000 square foot highly modern facility in Shenzen. From there, they cut coloured gemstones, design and manufacture jewellery, and conduct all their trading and corporate affairs.

Their major wholesale markets include the USA, Europe and Japan, with 70 per cent of their sales in the USA. They sell to many major companies, including QVC, Ben Bridge, Sterling, Helzberg Diamonds, Macy’s, Walmart, JC Penney, Signet and Rhein Studios. Their lines include sterling silver, various carat gold alloys, a variety of coloured gemstones, diamonds and cultured pearls, as well as synthetic and imitation gemstones.

ENZO RETAIL DIVISION

The first Enzo retail store opened in Shanghai in December 2004. Today, Enzo has around 250 stores throughout Greater China, including mainland China, Hong Kong and Macau. Enzo has two divisions:  the Enzo chain of retail stores and Enzo Ouro, a new retail concept that serves super-VIP clients with high-end jewellery by appointment. The first Enzo Ouro store opened in Beijing in 2014. Prices for Enzo Ouro jewellery range from US$12,500 (£7,500) into the millions.

While known for loose coloured gemstones and coloured gemstone jewellery, Enzo also has diamond lines that target the important wedding market in China, which sees over 13 million marriages annually. Enzo breaks its diamond line into three price-point ranges, with different diamond qualities in each. The highest is Enzo 88, then Snowy and then Cape. Enzo 88 has D to H colour, Snowy has G to J colour, and Cape has K to M colour. The Cape line has the largest market share of diamond jewellery for Enzo.

LORENZO MANUFACTURING AND WHOLESALE

GIA visited LJ International’s corporate headquarters in Shenzhen to observe their manufacturing process. Lorenzo cuts over 100 types of coloured gemstones in their facility. In the warehouse, rough is kept in 25-kilo bags, with more-expensive varieties like tourmaline stored in a walk-in vault. Lorenzo primarily cuts coloured gemstones other than ruby, sapphire and emerald, preferring to buy those stones already cut for use in their finished jewellery.

Lorenzo sources its rough from mines that the company has interests in, from other mines and from the open market. All rough goes first to their office in Hong Kong and is housed in their massive warehouse. Shenzhen is a free-trade zone, so having the factory there allows the rough coming through Hong Kong to be declared to Chinese Customs with stone type, weights and values listed, then enter China through Shenzhen and come directly to the Lorenzo factory with no taxes or duties placed on it.

Lorenzo has an agreement with customs declaring the typical expected amount of weight loss after cutting. The new weights are listed for loose or jewellery-set finished stones, which are exported back to their Hong Kong office for global distribution.

This allows Lorenzo and other companies to smoothly import rough gemstones into China, cut them, set them into jewellery and export them to the global market without paying import and export duties. Rough is brought in by the gram and kilo while cut stones are exported by carat weight and number of pieces. For gemstones destined for domestic retail sale in Enzo stores, the company must pay duties that depend on stone type and whether they’re rough or cut.

Lorenzo has more than 100 types of stones in their inventory room, broken down into three categories by value: Platinum, Gold and Silver. The Silver level includes agates and other less-expensive aggregate materials; Gold contains facet-grade material like amethyst, citrine, garnet and blue topaz; and Platinum contains more-expensive facet-grade material like tourmaline (including copper-bearing), imperial topaz, pink topaz, kunzite and morganite. 

Their sorting department uses rough masterstones to grade colour. They have six colour classifications for each type of gemstone. For example, the six colour grades for citrine range from CS (citrine super excellent) and CE (citrine excellent), down to C1, C2, C3 and C4. The rough’s final grade is based on colour, shape, thickness and clarity. At this point and after each manufacturing stage—sawing, preforming and faceting—the rough is also given a weight yield projection. If the weights after each stage are less than the projection, they review that manufacturing stage.

The sawing, also called slicing, stations are set up so that the sawing wheel is enclosed, with a viewing screen and an opening for the worker’s hands. This set-up, along with a face mask, vacuum tubes drawing gemstone dust away and water applied to the rough, minimises the worker’s exposure to the dust resulting from the sawing process.

After sawing, the preform stage uses a grinding wheel to shape the stone. The preform set-up is also designed to minimise workers’ exposure to gemstone dust. Workers wear masks, and a vacuum tube draws dust away at each grinding station.

The set-up at the faceting stations uses two lapidaries: one for cutting and the other for polishing. While this system is not unique, the custom-built lapidary machines from Korea were set up in an arrangement designed for left-handed workers. The reason for this is the competitive nature of hiring skilled cutters in Shenzhen. Cutters are often hired away from one manufacturer to another. However, almost all two-lap cutting systems are designed for right-handed workers. By having left-handed machines, Lorenzo minimises the hiring away of its cutters.

Lorenzo cuts all its copper-bearing tourmaline in a separate section that encompasses all stages: rough sorting, sawing, preforming and faceting. This confinement to one area makes it possible to secure the expensive material.

THE FINISHED PRODUCT

Our tour through LJ International’s multi-story Shenzhen headquarters took us into their jewellery design and manufacturing facilities. Their designs start out as hand renderings that are scanned and cleaned up with Microsoft Paint before moving on to the CAD/CAM division. The digital design file is sent to a Fast Prototyping Machine that creates the first wax model in a laser printing process that takes six hours. The wax form is then cast in silver to make a master model. Lorenzo reports that they have approximately 120,000 metal master models on hand.

Lorenzo’s mass-production areas start with stone sorting, quality control and stone matching for jewellery. Their diamond melee sorters move at an amazing speed, louping a stone about once every second. Coloured stones are matched to master sets so customers can confidently order additional material in the future and know they will receive the same consistent qualities.

The production process involves selecting the mould needed from the company’s rubber mould library and then moving through wax injection, removing the wax from the rubber mould, preparing the wax for casting, casting the piece, preparing the jewellery for stone setting, setting the stones, the final polish and final quality control. Some casting is done with stones like diamond, sapphire and ruby already set in the wax.

CONCLUSION

Our visit to Shenzhen, with stops at the Shuibei International Jewelry Trade Center, The Royalland Jewelry Club, Batar Jewellery, Xingguangda Jewellery and LJ International, provided us with an important overview of the modern, bustling city’s dynamic jewellery industry. Because of the vertically integrated nature of its businesses, we also gained important information about the general structure of the Chinese gem and jewellery industry.