june- global value chain analysis gold jewellery

DECEMBER 2012

IDS Institute of Development Studies

University of Guyana

Turkeyen Campus

Guyana

Working Paper

GGlloobbaall VVaalluuee CChhaaiinnss AAnnaallyyssiiss ooff tthhee GGoolldd JJeewweelllleerryy

IInndduussttrryy:: UUppggrraaddiinngg TTrraajjeeccttoorriieess ffoorr GGuuyyaannaa

June 2013

Dianna DaSilva-Glasgow

DaSilva-Glasgow, Dianna

Global Value Chain Analysis of the Gold Jewellery Industry: Upgrading Trajectories for Guyana

by

Dianna DaSilva- Glasgow*

*Dianna DaSilva-Glasgow is a Researcher 2 at the Institute of Development Studies

and a Lecturer in the Department of Economics, Faculty of Social Sciences, University

of Guyana

IDS/UG 50th

Anniversary Working Paper Series- Working Paper 6/12

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Published by the Institute of Development Studies,

University of Guyana,

Turkeyen, Georgetown,

Guyana, South America

www.idsguyana.org

June 2013

ISSN 1019- 1305

This paper should be cited as: DaSilva-Glasgow, Dianna (2013). Global Value Chain Analysis of the Gold Jewellery Industry: Upgrading Trajectories for Guyana. Institute of Development Studies, University of Guyana Special Series Working Paper # 6/12 to commemorate the 50th Anniversary of the University of Guyana.

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CONTENTS PAGE

SECTION 1: INTRODUCTION 1 SECTION 2: METHODOLOGY 3 SECTION 3: INPUT-OUTPUT STRUCTURE OF THE GLOBAL VALUE CHAIN FOR GOLD JEWELRY

5

SECTION 4: KEY MARKET TRENDS IN THE GLOBAL GOLD JEWELLERY INDUSTRY

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SECTION 5: INDUSTRIAL ORGANIZATION AND GLOBAL GOVERNANCE STRUCTURE OF THE GOLD JEWELRY INDUSTRY

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SECTION 6: GUYANAS CURRENT PARTICIPATION IN THE GLOBAL GOLD JEWELRY VALUE CHAIN

41

SECTION 7: INSTITUTIONAL FRAMEWORK FOR GOVERNANCE OF THE LOCAL VALUE CHAIN

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SECTION 8: UPGRADING IN THE GLOBAL VALUE CHAIN 61 SECTION 9: RECOMMENDED UPGRADING STRATEGIES AND ASSOCIATED POLICY MECHANISMS

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SECTION 10: CONCLUSION 69 SECTION 11: KEY INFORMATION SOURCES 70 SECTION 12: APPENDIX (SWOT analysis of the Guyanese gold jewellery industry)

75

LIST OF TABLES Table 1: World Supply of Gold by Source: 2011-2012 Table 2: Gold Production by Country: 2012 Table 3: Gold Jewellery Consumption by Country: 2009-2012) Table 4: Governance Structures in Global Value Chains Table 5: Top 10 Gold Producing Companies Globally Table 6: Leading Jewellery Companies Globally Based on Retail Value in 2011, USD Billion Table 7: Leading Luxury Jewelry Designers and Stores Globally


Table 8: Leading Players in the Distribution of Gold Jewellery, by Category Table 9: Recent Investments by Leading Jewellery Companies, affecting the Governance of the Value Chain Table 10: Top 10 Exports from Guyana, 2010 Table 11: Export Markets for Gold Jewellery, 2008-2011 Table 12: Main Players in the Gold Jewellery Manufacturing Sector In Guyana Table 13: Key Stakeholders in the Gold Jewellery Industry in Guyana Table 14: Activity Status by Gender: 1992/93 and 1999 Table 15: Guyana, Ease of Doing Business Rank by Criteria Table 16: Guyana, Burden of Compliance with Taxes and Mandatory Contributions Table 17: Summary of General Enabling Factors for Industry Development Table 18: Summary of Industry Specific Factors Table 19: Upgrading Opportunities for Guyana in the Gold Jewelry Value Chain

LIST OF FIGURES Figure 1: Input-Output Structure of the Gold Jewellery Value Chain Figure 2: Trends in Exports of Gold Jewelry, 2000-2010 Figure 3: Top 20 Exporters of gold jewelry, 2011 Figure 4: Trends in Imports of Gold Jewellery, 2000- 2010 Figure 5: Top 20 Importers of Gold, 2010 Figure 6: Governance Structures in the Gold Jewellery Value Chain Figure 7: Guyanas Participation in the Gold Jewellery Value Chain Figure 8: Domestic Exports (US$Mn), 1990-2011 Figure 9: Domestic Exports (US$Mn), 1990-2011 Figure 10: Guyanas Value chain for Gold Jewellery Manufacturing Figure 11: Growth Rate of Real GDP, Guyana: 2000-2012 Figure 12: Guyana, Ease of Doing Business Rank, 2012 Figure 13: Output of Gold: 2000-2011 Figure 14: Recommended Upgrading Strategies for Guyana

LIST OF APPENDICES

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Appendix 1- SWOT Analysis of the Guyanese Gold Jewellery Industry

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SECTION 1: INTRODUCTION

This paper undertakes a study of the global value chain for gold jewellery.

The value chain describes the full range of activities that firms and workers perform to bring a product from its conception to end use and beyond. This includes activities such as design, production, marketing, distribution and support to the final consumer. The activities that comprise a value chain can be contained within a single firm or divided among different firms (globalvaluechains.org, 2011).

The global value chain framework (GVC) is used to understand the structure and capture the dynamics involved in the global gold jewellery value chain. The study is done with the overarching objective of understanding how small to medium sized enterprises (SMEs) in Guyana can competitively improve their presence and insertion into the global market for gold jewellery.

The importance of undertaking such an analysis for Guyana for the gold jewellery industry is predicated on the fact that gold has become the leading export commodity for Guyana contributing in excess of 50% of export earnings. However, little value adding to raw or refined gold takes place domestically. Further, in the local value chain there is a notable dominance of SMEs at every stage, from gold mining to jewellery fabrication.

The study employs the step-by-step approach developed by the Duke Universitys Center for Globalization, Governance and Competitiveness that encapsulates the following steps: Input/output structure, geographic scope, governance and industrial organization, institutional framework and upgrading trajectories.

The specific questions that the study seeks to answer mirrors these steps to a large extent and include:

1. What is the structure of the global value chain for gold jewellery 2. What are the most notable market trends for gold jewellery


3. How is the value chain governed? 4. Where does Guyana fit in the Global Value Chain for Gold Jewellery 5. What is the structure and institutional framework for management of the Guyanas

value chain? 6. What are the prospects of Guyana improving its participation in the gold jewellery

value chain? 7. What policy mechanisms are necessary to realize improved participation of Guyana

in the gold jewellery value chain?

The paper has twelve sections that are focused on answering the key research questions. Section 2 describes the methodological approach of the paper; section 3 identified and describes the input-output structure of the global value chain for gold Jewellery; section 4 examines key market trends in the global gold jewellery industry; section 5 gives an overview of industrial organization and global governance structure of the gold Jewellery industry; section 6 examines those aspects of the global chain where Guyana currently participates; section 7 looks at the local value chain; the key stakeholders having an impact on the gold industry and the key enabling conditions generally and more specific to the industry that may affect the development of the industry; section 8 examines the prospects for SMEs in Guyana to upgrade their participation in the global value chain; section 9 recommended upgrading strategies that are feasible for SMEs to follow and the associated policy mechanisms that are necessary to realize these strategies; section 10 gives a brief conclusion; section 11 gives the key information sources consulted for the study and section 12 (appendix) gives the SWOT analysis of the Guyanese gold jewellery industry that was used to inform previous sections of the paper.

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SECTION 2: METHODOLOGY

This paper follows the Global Value Chain methodology as developed by the Duke University, Centre for Globalization, Governance and Competitiveness. There are four dimensions associated with this methodology. These include:

1. Input-output structure- that describes the process involved in bringing the raw material to a finished good and the nature of the interactions among firms involved in this process.

2. Geographical scope- focused on understanding the global dispersion of the main entities that play a part in the transformation of the raw material into the finished product. The geographical scope also focuses on identifying key market trends in the industry in order to be able to identify market opportunities. Key standards within the industry are also examined in order to be able to infer obstacles to expanded trade.

3. Governance structure- that identifies the major players in the chain and explains how the chain is coordinated and controlled. This is informed by an assessment of the strategy of the lead firms.

4. Institutional context- that identifies the key stakeholders and their level of importance and influence over the industry. The focus is specifically on institutional support for SMEs which are recognized to be dominant in the Guyanese market. At this stage, an assessment is also done of the general and industry-specific factors in Guyana that can either support or hinder further growth and development of the industry. These are categorized as strong, weak and average.

5. Upgrading1 that shows how players can shift between different stages of the chain with the aim of improving their economic welfare. This step is informed by a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis of the local industry. It also draws on the assessment of the enabling factors done in the previous section.

1 See Gereffi (1999) and Humphrey and Schmidt (2002)


Primarily secondary data is used for the study. Data used includes trade information, firm and industry level data on employment, revenues, business locations; institutional data; general macroeconomic and social data. Since the study relied mainly on secondary data it was necessary to consult various sources such as the Annual reports of leading firms in the industry, international organizations such as the World Bank, Global industry associations such as the World Gold Council, International news publications such as the Economist, industry news magazines such as Jewelrista and the National Jeweller; and statistical databases such as the United Nations Commodity Trade Statistics Database and Datamonitor.

In order to assess trends in trade of gold Jewellery, Jewellery is taken to mean item 89731 (articles of jewellery and parts thereof of precious metals) of revision 3 of the standard industrial classification system. Data is obtained from the UNCOMTRADE database.

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SECTION 3: INPUT-OUTPUT STRUCTURE OF THE GLOBAL VALUE CHAIN FOR GOLD JEWELLERY

Figure 1 shows the input-output structure of the global value chain for gold jewellery. Based on the figure the Gold Jewellery value chain in simple stages encompasses research, gold mining; gold refining and trading, Jewellery fabrication and design, distribution and gold recycling.


Gold Mining

Mining Equipment

and Supplies

Jewelry

Fabrication

Marketing and

Distribution

- Branded Boutique

Chains

- Authorized Retailers

- Department Stores

- Discount Merchandisers

- Mom and Pop shops

- Non-store Retailers

- Wholesale Distributors

Geo-physical Research:

- Mineral Exploration/ Gold Prospecting

- Resource Evaluation

- Reserve Definition

Gold

recycling

Gold Extraction Jewelry Tools

Jewelry Design

Gold Refining

Refining Equipment

Chemicals

Chemicals

Gold Trading:

State-Owned

Enterprises

Private Companies

Research

Exploration Equipment

and Supplies

Market Research

Chemicals

(paste,enamel,

rhodium liquid,

acid)

Research and Development

Figure 1: Input-Output Structure of the Gold Jewellery Value Chain

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Description of the global value chain for gold jewellery

Research Stage: Research is one of the first activities firms undertake before getting involved in gold mining. There are two types of research that firms undertake, geophysical and market research. The combined focus of both types of research is the extraction and commercial exploitation of gold resources.

The specific focus of geophysical research is to determine if deposits of gold exist in commercially viable quantities. The main activities involved in this type of research are mineral exploration or prospecting, resource evaluation and reserve definition. Mineral prospecting is a simplified form of mineral exploration and in effect, involves a search for commercially viable deposits of ores. Prospecting and mineral exploration are similar activities and often the terms are used interchangeably. However, mineral exploration is a more organized and scale-intensive exercise. Prospecting/exploration can involve both large and small firms; however, the use of the term prospecting often characterizes more small-scale exploration. In some countries people work independently as prospectors, some illegally. In some countries, such as the USA, gold prospecting (and mining) is also done for recreational purposes. For instance, the Gold Prospectors Association of America (GPAA) has mining claims across the country that members can work for a yearly fee.

Market research is done to determine if discovered resources will be worth mining based on commodity prices and demand trends. Small deposits will not be mined by large firms as the economic returns will be small and the risks are great.2 Research also focuses on assessing the risks involved in mining the resources; these include political risks, particularly of foreign firms in developed countries, social and environmental risks, market risks such as changes in land tenure and resistance from locals. Such research is usually outsourced to consultancy firms.

2 http://en.wikipedia.org/wiki/Gold_prospecting


Gold Mining Stage: The main activities at the gold mining stage are mineral exploration, gold prospecting and mineral extraction.

Gold exploration may involve both large and small firms. However, the size of the deposits that could be unearthed is an important determinant of the size of firms that would be involved in extraction. In fact, there is a direct relationship between the size of firms involved in exploration and the size of deposits they are able to mine. Larger firms require larger deposits in order to have an internal rate of return. It may be precisely because of the risks involved in large scale mining that approximately one-quarter of world output of gold is estimated to originate from artisanal or small-scale mining.

Once resources have been discovered a determination is then made of whether the deposits exist in commercially viable quantities. This is particularly the purpose of resource evaluation, in addition to assessing the grade of the deposit. This is followed by reserve definition where the objective is to undertake a feasibility study, based on statistical and technical assessments, to determine if the ore deposit could be converted into an ore reserve with economic potential. At this stage the skills of geologists, geo-chemists, and mining engineers are required.

Once resources have been discovered in commercially viable quantities, extraction of the resource is undertaken. Gold extraction involves the use of the chemical mercury (Sodium Cyanide). Mercury is used primarily to extract small gold particles. Mercury- use involves numerous health and environmental implications such as damage to the human brain and fish stocks. Consequently, its use is regulated in many countries. Globally, the World Health Organization has set exposure limits. Further, 140 countries have come together to create the Minamata Convention through the United Nations Environment Programme to prevent emissions of mercury. Signing of this agreement will commence in October 2013.

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Apart, from mercury use, the existence of other elements in gold ore, such as cadmium, lead, zinc, copper, arsenic and selenium, is also cause for concern. More so since, thirty tonnes of used ore are dumped as waste for producing one finger ring of gold. 3

Refining Stage: Raw gold extracted is refined before to increase its purity. A process called gold parting, for instance, involves the removal of silver from gold. This is done using chlorination using the Miller process and electrolysis using the Wohlwill process. The Wohlwill process results in higher purity, but is more complex and is only applied in small-scale operations. Other methods of assaying and purifying smaller amounts of gold include inquartation as well as cupellation, or refining methods based on the dissolution of gold in aqua regia.

In some countries, gold refining is done by state-owned enterprises. Refining could also be done by independent refining companies. For instance, Johnson Matthey Plc is a company operating in the US and Europe that undertakes gold refining and the manufacture of gold bars. The company has operations in 30 counties around the world and employs around 9,000 people. Large companies usually enter into fixed long term purchasing arrangements with vendors for polished gemstone and precious metals for the supply of refined metals.

The majority of the gold produced annually is used for Jewellery, about 50% to be more precise. Other uses of gold include investments (40%) and industry (10%) (for example, electronics, medicine, food and drink). As a means of investment, gold is used by central governments to hold foreign exchange reserves as well as for coinage. In 2010, the central banks of nations held a total of 28,398 metric tons of gold. For the US, Germany and Italy gold accounts for over 70% of foreign exchange reserves. The demand for gold for both Jewellery and investments is related to an important chemical property of gold, that is, its resistance to corrosion, which means that it is long-lasting.

Jewellery Design Stage: Jewellery design entails the creation of design concepts through detailed technical drawings by a Jewellery designer, a professional trained in

3 http://en.wikipedia.org/wiki/Gold_prospecting


the architectural and functional knowledge of fabrication techniques, composition, wearability and market trends. In most instances, Jewellery could be designed and fabricated by the same entity.

The options for designing jewellery are: (1) Employed goldsmiths and gemologists; (2) Independent designers; and (3) Customers.

Jewellery stores can design jewellery in-house through certified gemologists employed with the company or goldsmiths trained through the apprenticeship system, which is the practice of small Jewellers. Jewellery design could also be outsourced to independent jewelers. Customer designing is also facilitated by some stores where customers work with store designers to create their own one-of-kind piece. According to the National Jeweler (2008), in the US, stores that offer custom designing may also some also offer other services such as free insurance appraisals, personalized after-sale service (like free cleaning and maintenance work).

Jewellery Fabrication Stage: Jewellery fabrication is the first transformation of gold bullion into a semi-finished or finished product (World Gold Council 2012). Pure gold is often not used to make Jewellery because of its softness. It is usually alloyed with base metals. Copper is the most common base metal used. Other metals used include aluminum, iron, nickel, zinc, silver or paladium. The word carat however, is used to refer to the amount of gold a Jewellery item consists of.

An important activity in fabrication is component sourcing. Component here refers to diamonds and other gemstones that may be used with gold jewellery. For watchmaking, components that are often sourced from other companies include bands and dials.

Given that Jewellery fabrication is a skill-intensive exercise the tools used are important and varied and include; drills, lathes and moulds. These are tools used for Jewellery classified as handmade. Other tools may also be used but these must be guided by the human hand in order for the Jewellery made to be classified as handmade. Machine made Jewellery makes use of punch presses, CNC machinery and casting. Jewellery fabrication takes place in-house for most jewellery makers.

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For large luxury-type jewellers, some degree of outsourcing of the fabrication process is done. For instance, Tiffany & Co. purchases finished jewellery from about 60 independent manufacturers (Tiffany & Co., 2012). Such arrangements are not-based on long-term supply arrangements and are based on terms such as product quality requirements and vendor social responsibility. Branded Jewellers may also have other companies produce and distribute jewellery using their brand. Further, large global suppliers of jewellery tend to have subsidiary manufacturing operations in several countries. For instance, Tiffany & Co. has manufacturing facilities4 in Belgium, South Africa, Mauritius, Botswana, Namibia and Vietnam (Tiffany & Co., 2012).

The move by companies to outsourcing of components and parts reflects a broader paradigm shift in the manufacturing sector to lower production costs and improve productivity. In the jewellery sector, other reasons proffered include: access to a variety of jewellery-making skills, product quality, the cost of capital investment and support for alternative capacity (Tiffany & Co., 2012).

Distribution Stage: There are several options to distribute fabricated Jewellery. These include Branded Boutique Chains (National and International), Authorized Retailers of Established Brands, Non-Brand Jewellery shops (family-owned or Mom and Pop Shops), Department Stores, Discount Merchandisers, Whole-sale Distributors and Non-store Retailers.

Branded boutiques, authorized retailers of established brands and non-brand Jewellery shops are all Jewellery stores specifically or largely, involved in the retail distribution of Jewellery and in some instances silverware and timepieces. Such stores do not sell costume Jewellery or antiques. However they may offer repair services and engraving in combination with the sale of new Jewellery (Jewelrista 2011).

The various distribution channels are discussed in turn below:

1. Branded Boutiques: Branded boutique chains are Jewellery stores with subsidiary stores in several locations, either within a country (national) or in

4 The first three facilities are leased.


several countries (internationally) all operating under the same brand name. Branded boutiques reflect a vertically integrated process where Jewellery are designed, fabricated and distributed under one brand but different collections are produced. These tend to be high-cost items operating in the luxury end of the market. Branded boutique chains may also sell other accessory items such as handbags, and sunglasses under the same brand, however, Jewellery represents their most significant activity. Examples include Harry Winston in the USA and Van Cleef and Arpels in Italy. These companies may not manufacture for themselves all, the jewellery items distributed. Some companies have arrangements where the manufacturing and distribution stages are outsourced. For instance, Tiffany & Co. in 2007 entered into a 20-year license and distribution agreement with the Swatch Group for the manufacture and distribution of watches under the Tiffany & Co. brand.

2. Authorized Retailers: The difference between branded boutique chains and authorized retailers lies in the intellectual property rights of Jewellery items distributed. Authorized retailers may not fabricate jewellery. However, they may be licensed by branded Jewellers to distribute jewellery items produced by the brand owners but under their own company name. They may also provide maintenance services on behalf of the brand owners. For instance, Piaget, a Swiss company has several authorized retailers in the US and Canada (see Box 1) that retail Piaget Jewellery.

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3. Non-brand Jewellery Shops: These refer mainly to small family Jewellers, mom and pop stores whose key strengths in the jewellery market are that (1) all jewellery items are meticulously hand-crafted;5 and (2) they offer a range of pricing options that are within the reach of the pockets of middle to low income earners. These are popular in Italy and India. In India, 96% of the total players in the industry are small family-owned businesses. There are over 2.5 million Jewellery shops in India; 450,000 goldsmiths and 100,000 gold jewelers. 6 These mom and pop shops do not offer branded Jewellery and may sell only jewellery unlike the high-end section of the market that tends to also sell other forms of accessories. In India the craftsmen involved in this segment tend to be illiterate and rely on the apprenticeship system to learn their trade7. According to the National Jeweler magazine, non-brand Jewellery shops account for 79% of Jewellery-only retailers in the US.

5 http://www.economist.com/node/21554538

6 http://www.newdevtprojects.com/ilo/iloPdf/jewellerymarket.pdf 7 http://www.economist.com/node/21554538

Box 1: Authorized Retailers for Piaget in the USA and Canada

- New York: Simpson Jewelers, Carat N Carat, London Jewellers, T&R, Cosmos, Cellini, Tourneau Time Machine

- Arizona: Ed Marshall - California: Beverly Hills, Los Angeles (2 Locations), Miliptas, Rowland Heights, San

Franciso (2 locations), San Gabriel, Santa Clara - Washington: Diplomatic Duty Free Shop - Atlanta: Neiman Marcus - Massachusetts: Royal Jewelers - Las Vegas: Roman Time Jewelers - Florida: Fort Lauderdale (2 locations) - Hawaii: Honolulu - Illinois: Chicago, Oakbrook Terrace - New Jersey: Cosmos - Pennslyvania: Ardmore - Texas: Fortworth, Houston, Midland, San Antonia - Virgina: McLean

Authorized Retailers in Canada: Richmond, Toronto, Vancouver (2 locations), Montreal


4. Department Stores: Department stores are generally involved in the retail distribution of clothing and accessories, including Jewellery. Department stores may also sell costume Jewellery. Examples of department stores in India include: Debenhams, Lifestyle Stores, Pantaloon Retail (India) Limited, Reliance Trends, Shoppers Stop and Star Bazaar.

5. Discount Merchandisers: Discount merchandisers sell jewellery on the basis of a medium to low-price strategy. Such retailers are global-trotters seeking out low cost options for securing jewellery. Examples of discount merchandisers in the US include: Wal-Mart, Kmart, Target and Costco, which are among the top 20 Jewellery retailers in the US. According to the National Jeweller (2007) Wal-Mart, in 2007 was the nation's number one Jewellery retailer with estimated Jewellery and watch sales of $2.8 billion. India is gaining prominence as an international destination for sourcing jewellery with companies such as Wal-Mart and JC Penny procuring jewellery from India8.

6. Wholesale Distributors: Wholesale distributors act as intermediaries between Jewellers and retailers. This is not a very large distribution outlet in the gold jewellery market but an important one nonetheless. It is an outlet, jewellers operating in the middle to low-end side of the market may rely on. For instance, LouLouBijoux in the US is the exclusive wholesale distributor in the US and Canada, of the Brin DAmour collection of jewellery produced by French designer Sandra Doquin.9 Italian company Buccellati also operates a wholesale outlet for its jewellery and watches.

8 http://www.newdevtprojects.com/ilo/iloPdf/jewellerymarket.pdf

9 http://www.louloubijoux.com/pages/about-us

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7. Non-store retailers: Non-store retail avenues include mail-order catalogs, direct response marketers, Business-to-Business sales10, direct sales, television11 and internet sales. Non-store retailers and discount merchandisers represent a paradigm shift away from traditional means of distributing Jewellery. Non-store retailing is the second largest retail distribution channel in the US, accounting for 11% of total industry sales and displaying rapid growth (Jewelrista 2011). According to Jewelrista (2011), one in six engagement rings is purchased online in the US. Mail-orders sales are facilitated through advertising on television programmes and in magazines.

Many brand retailers also offer online sales through their various subsidiaries around the world. For instance, Tiffany & Co. operates e-commerce websites in 13 countries. Sales through this channel accounts for 6% of worldwide net sales for the company.

It is important to underscore that firms may also invest in research and development to inform the design of jewellery items and the selection of distribution outlets.

Gold Recycling Stage: Gold recycling entails not only the recycling of gold Jewellery but all products produced by gold. Recycled gold constitutes a source of supply of gold (as depicted by the broken arrows in the figure). Globally, apart from mine production, recycling accounts for around a third of all current supply of gold (World Gold Council 2012).

10

This is where Business sales executives sell items to Business clients specifically developed for the market for purposes such as gift giving, employee service and achievement recognition awards, customer incentives etc. Business clients have the privilege of purchasing at discount prices. 11

According to Jewelrista, this avenue has been growing because it responds to self-purchasing women. Together television retailers QVC and HSN generate $1.4 billion in Jewellery sales, as.


SECTION 4: KEY MARKET TRENDS IN THE GLOBAL GOLD JEWELLERY INDUSTRY

Supply and Demand for Raw Gold Gold is the primary input into gold Jewellery. 50% of gold produced in the world is used for Jewellery fabrication. The source of gold is both new mine production as we all recycled gold. Central banks can also contribute to the supply of gold by selling some of their reserves.12 Table 1 shows the source of gold supply for 2011 and 2012. Mine production accounted for 63% of gold supply and grew by 2% between 2011 and 2012.

Table 1: World Supply of Gold by Source: 2011-2012

Total Gold Supply in the World (Tonnes)

Source of Supply 2011 2012 % change Mine Production 2835.6 2847.7 Net Producer hedging 11.3 -20.0 Total mine supply 2846.9 2827.7 2 Recycled gold 1668.5 1625.6 -5 Total 4515.4 4453.3

Source: World Gold Council, 2013

It is important to note, that because gold is a natural resource, large scale commercial extraction is geographically concentrated at the country level as it is dependent on endowment of the resource. The principal countries that produce gold in the world are: South Africa, the United States, China, Australia, Russia and Peru. Based on table 2, in 2012 China was the main producer with a total of 370 tonnes kilograms of gold. China emerged as the number one producer of gold globally in 2007 (with 276,000 tonnes). Previously, South Africa had been the largest producer of gold since 1905. In 1970 79% (1,480 tonnes) of world supply of gold came from South Africa. 50% of all the gold ever produced in the world came from South Africa and that amounts to 165,000 tonnes as

12

It is worth noting that after 18 years as net sellers, collectively central banks are now effectively net buyers, causing not only a significant decrease in supply but a corresponding, simultaneous increase in demand (See http://www.numbersleuth.org/worlds-gold/)

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at 2009.13 In fact, the Witwatersrand basin in South Africa is believed to be the largest gold mining region on earth.

Table 2: Gold Production by Country: 2012 Rank Country/Region Gold production

(tonnes) World 2,700

1 China 370 2 Australia 250 3 United States 230 4 Russia 205 5 South Africa 170 6 Peru 165 7 Canada 102 8 Indonesia 95 9 Uzbekistan 90 10 Ghana 89 11 Mexico 87

Rest of the world 847 Source: U.S. Geological Survey

In addition to Jewellery, gold is also used for investment and industry (40% and 10%, respectively) (World Gold Council 2012). Owing to the global recession and economic downturns in several countries, the demand for gold for Jewellery fell between 2010 and 2012 from 2,017 tonnes to 1,908 tonnes. Concomitant with this however, was an increase in the value of jewellery sales from 79.4 US$bn to 102.4 US$bn (World Gold Council 2012). This reflects increasing prices for gold. Poor economic conditions globally consequent to weakening US dollar, the European Debt Crisis and unrest in North Africa and the Middle East were the main driving factors behind the increase in demand for gold as a form of investment and the resultant increase in price.

KEY EXPORT TRENDS FOR GOLD JEWELLERY

In order to assess trends in trade of gold Jewellery, Jewellery is taken to mean item 89731 (articles of jewellery and parts thereof of precious metals) of revision 3 of the

13

http://www.numbersleuth.org/worlds-gold/


standard industrial classification system. Data is obtained from the UNCOMTRADE database.

Figure 2: Trends in Exports of Gold Jewellery, 2000-2010

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Figure 3: Top 20 Exporters of gold Jewellery, 2011

Several trends are observable from the figures:

Firstly, export data was assessed for three years for figure 2; 2000, 2005 and 2010. In 2010 the top five exporters of gold Jewellery were India, USA, Italy14, Switzerland and China.

14

The major destinations for gold from Italy are: The US, China and Switzerland. In 2012, China became the second by largest export destination for Italian Jewellery with an increse in exports by 52.7%.


Secondly, is the shift in position of India and the USA to first and second place in 2010. In 2011 (figure 3), the value of exports of gold Jewellery from India almost doubled from US$7,834 Mn to US$14,382 Mn allowing India to become the number one exporter of gold jewellery. Both the USA and India have been able to overtake Italy which was previously the leading exporter of gold Jewellery. Italys decline is related to several factors (Brough 2012):

1. High cost base of Italian jewelers due mainly to high salaries and small scales of operation. Italy produces both mass-produced and crafted gold jewellery. The country faces increasing competition from low cost competitors such as China, Hong Kong that relies on improved design skills, access to the latest technology and cheap labour (Brough 2012).

2. Duty-free access of competing countries in export markets. For instance, India has duty-fee access to the US market for exports up to a certain volume. India also faces low duties in the EU market. According to Brough (2012) Italian exporters also face barriers in the markets of the BRIC countries.

3. High price of gold which is higher than historical levels. Gold is currently being traded at US$1669 oz.

4. Economic recession in Italy15 (Brough 2012) 5. Unorganized market in Italy16, which is made up mainly of small fragmented

family owned businesses.

Thirdly is the growth in the value of exports of China from US$1,511 Mn in 2000 to US$4,776 Mn in 2010. In 2011, China became the second largest exporter of gold Jewellery, overtaking the US, with a value of US$10,079. This seems to support a KPMG study that predicts that by 2015, the market shares of China and India would

15

As a result of the economic recession, sales of gold Jewellery in Italy fell by 9% in value terms in 2012 according to the World Gold Council, while volume declined by 15% compared to 2011. During Italy's economic downturn, India-based Gitanjali purchased a number of Italian luxury jewellery brands. Subsequently, the world's largest diamond and jewellery manufacturer-retailers opened a store in Dalian, China, for the Italian brands Stefan Hafner and Nouvelle Bague. 16

http://www.ibtimes.co.uk/articles/401180/20121103/gold-world-council-damiani-italy-india.htm

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have risen to 13% from the 2007 level of 8-9% while the US share will drop to 25% from 30.8% in 2007 (World Gold Council 2012).

Fourthly, most of the leading exporters are developed countries which means that even though the manufacuting capacity of developing countries suchas China is expanding, manufacturing still remains dominated by developed countries.

KEY IMPORT TRENDS FOR GOLD JEWELLERY

Figure 4: Trends in Imports of Gold Jewellery, 2000- 2010


Figure 5: Top 20 Importers of Gold, 2010

From the figures the following key trends are observable:

Firstly, The composition of the top five importers of Jewellery for 2000, 2005 and 2010 remained the same; the United Kingdom, China, Hong Kong, United Arab Emirates, USA and Switzerland.

Secondly, Switzerland and China, Hong Kong are among the fastest growing import markets for gold Jewellery. In 2010, Switzerland became the largest import market but shifted to second place behind China in 2011.

Thirdly, the main importers are developed countries which reflects the nature of this commodity, a luxury commodity for which consumption will increase as income increases as there is a high income elasticity of demand.

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KEY TRENDS IN JEWELLERY CONSUMPTION

Jewellery consumption is equal to fabrication plus/minus jewellery imports/exports plus/minus stocking/de-stocking by distributors and manufacturer

(World Gold Council 2012) There are two trends worth noting where gold Jewellery consumption is concerned:

The first is that the largest consumer markets for gold Jewellery are: India, China and the USA.

The three markets together accounted for 63% (1302.3 Metric tonnes) of total consumption of gold Jewellery in 2012. India consumed 745.7 metric tonnes of gold Jewellery in 2010; China 428 metric tonnes and the US 129 metric tonnes according to the World Gold Council (See table 3). Between 2009 and 2010, consumption of gold Jewellery increased by 69% most of this gold comes from India. The stock of gold held by India represents some 11% of the global stock and is worth more than $950 billion17

The gold Jewellery industry in the US is a $30 bn industry employing about 169,281 persons (IBIS 2012). The vibrancy of the gold market in the US is linked to the perception of gold as one of the must-have gift items. According to the World Gold Council18the US market is domianted by gifting with over 50% of the total value of gold jewellery at retail created by pieces over $1,000. Neverthelss, gold jewellery only accounts for 10% of total Jewellery stores sales. Diamonds are in the lead with 45% and colored gemstone Jewellery (rubied, sapphires, emeralds, etc.) with 8%. While the US remains one of the largest consumer markets, growth has been negative since 2007 (IBIS 2012). Between 2009 and 2010, the decline in consumption was 14% (see table 3). Undoubtedly, this is linked to the economic recession that the country is currently engulfed in. Since Jewellery is a luxury good dependent on consumers disposable income, during periods of recession sales will fall as consumer spending declines.

17

All the Worlds Gold http://www.numbersleuth.org/worlds-gold/ 18

http://www.gold.org/jewellery/markets/us/


Table 3: Gold Jewellery Consumption by Country: 2009-2012) Gold Jewellery consumption by country (in metric tonnes)

Country 2009 2010 % change 2011

India 442.37 745.70 69 618.3 Greater China 376.96 428.00 14 549.6 United States 150.28 128.61 -14 115.5 Turkey 75.16 74.07 -1 70.1 Saudi Arabia 77.75 72.95 -6 51.7 Russia 60.12 67.50 12 76.7 United Arab Emirates 67.60 63.37 -6 50.1 Egypt 56.68 53.43 -6 33.8 Indonesia 41.00 32.75 -20 30.2 United Kingdom 31.75 27.35 -14 22.6 Italy 27.6 Other Persian Gulf Countries

24.10 21.97 -10 19

Japan 21.85 18.50 -15 16.6 South Korea 18.83 15.87 -16 12.5 Vietnam 15.08 14.36 -5 13 Thailand 7.33 6.28 -14 3.6 Total 1508.70 1805.60 20 1711 Other Countries 251.6 254.0 1 261.1

World Total 1760.3 2059.6 17 1972.1 Source: SOURCE: World Gold Council Gold Demand Trends Report, Full Year 2010, World Gold Council 2013 http://www.forexyard.com/en/news/Gold-jewellery-consumption-by-country-2011-02-28T130619Z-FACTBOX http://www.gold.org/investment/research/regular_reports/gold_demand_trends/ http://www.numbersleuth.org/worlds-gold/

The second is that growth in consumption is taking place mainly in the East- India and China are the fastest growing markets in the world

Countries in the East accounted for approximately 70% of the worlds gold jewellery in 2010 (see table 3 above). India and China are at the forefront of this growth. However, Indias consumption in 2010 was almost double that of China. Growth in the Indian market is likely to be sustained as accoridng to a study by the World Gold Council 75% of Indian women say they are constantly searching for new designs. Jewellery sales in the Indian market are estimated to reach US$37 billion in 2015 (World Gold Council 2011).

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The World Gold Counil (2010) highlights one fundamental difference between the chinese market and other markets and that is that Chinese consumers prefer higher levels of purity. More than 80% of gold jewellery in China is made from 24 pure carat gold.

There are several driving forces behind the growth of the Indian and Chinese markets. these include:

1. The symbolism of gold. Gold is considered a symbol of power, strength and love. Gold is the number one choice of wedding jewlery. Over 50% of gold Jewellery bought in India are bought for weddings. According to the World Gold Council19 (2013) over 75% of all urban Chinese women own more one significant piece of gold Jewellery partially because of the use of gold Jewellery in the wedding ceremony.

2. Expanding economic growth. Both China and India are among the fastest growing economies in the world. According to the Economist (2012), it is also a tradition in India to launder undeclared income by converting it to gold which could also contribute to the high demand for gold in India.

3. Culture. Gold Jewellery is an important aspect of Indian culture and mythology. Gold Jewellery is passed on from one generation to another and is a popular wedding gift given to daughters. According to the world Gold Council20 during the festival of Dhanteras, the most auspicious day in the calendar just before Diwali, there is a usually surge in sales of gold Jewellery.

4. Consumer perception. In addition to culture, consumer perception is an important driving force for the increased demand of gold in both India and China. The World Gold Council reports that Chinese women have indicated that wearing gold makes them feel good.21 Both India and China have in recent times, been targeted for branded Jewellery. According to Brough (2012) with declining sales domestically some Italian jewelers are looking towards markets in emerging economies, such as

19

http://www.gold.org/jewellery/markets/india/ 20

Ibid 21

http://www.gold.org/jewellery/markets/china/


Chinese and Russia, to boost sales. For instance, Italian Jeweller Damiani has opened eight boutiques in China with plans to open another five.

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SECTION 5: INDUSTRIAL ORGANIZATION AND GLOBAL GOVERNANCE STRUCTURE OF THE GOLD JEWELLERY INDUSTRY

Governance within the context of value chains is defined by Gereffi (1994, p.97) (in Gereffi and Stark 2011) as authority and power relationships that determine how financial, material and human resources are allocated and flow within a chain. Value chains can be classified either as producer-driven or consumer-driven to reflect where the balance of power lies. There are five types of governance structures; markets, modular, relational, captive and hierarchy (Gereffi and Fernandez-Stark 2011). These governance structures are influenced by the inter-play of three variables: (1) the complexity of the information between actors in the chain; (2) how the information for production can be codified; (3) and the level of supplier competence (Frederick & Gereffi, 2009; Gereffi et al. 2005) (in Gereffi 2007).

The impact of these variables on the determination of governance structures within a value chain are depicted in table 4.

Table 4: Governance Structures in Global Value Chains

Governance Types Market Modular Relational Captive Hierarchy Complexity of Transactions Low High High High High

Ability to codify transactions High High Low High Low

Competence of the Supplier base High High High Low Low

Degree of coordination and power asymmetry Low High Adapted from: Gereffi 2007

The Gold jewellery chain could be classified as a producer-driven chain given the fact that most of the operations of jewellery manufactures are vertically integrated from the design stage to the distribution segments of the chain. This means that jewellery companies exert greater control over the design and price of jewellery than do consumers. They also play a dominant role in the distribution of fabricated jewellery and the control of the chain generally. With respect to governance, several structures are


evident at various stages of the gold Jewellery value chain. This supports work by Dolan and Humphrey (2004) and Gereffit, Lee et al. (2009) (see Gereffi and Fernandez-Stark 2011) that GVCs are characterized by multiple an interacting governance structures. Figure 6 captures the various governance structures evident in the gold jewellery chain with explanations on the choice of structure at each stage.

Market Hierarchical

Relational

Gold Mining

Design

Distribution Gold Refining & Trading Research Fabrication

Figure 6: Governance Structures in the Gold Jewellery Value Chain

Research, gold mining and gold refining are governed by the market

This is because the information involved in transactions at these stages is simple. Further, transactions are driven by price, with minimal scope for firms to dominate how transactions occur. This is clearly evident when the nature of gold production and trading is assessed. Table 5 shows the dominant gold producing firms globally. In 2012, Canadian Barrick gold was the leading producer of gold, with operations in seven countries. Producers of gold do not require input from purchasing companies in order for production to occur. Producers and refiners of gold also have no impact over the price at which gold is traded as the price is fixed. The fixed price is then used as a

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benchmark price for the sale of refined gold. The system used to fix prices is called the London Fix22 and occurs twice daily (at 10 am and 3 pm)23. Fixed prices are reported in US dollars, Sterling and Euros and per troy ounce. The London fixing emerged way back in 1919 when the Bank of England signed an agreement with seven South African mining houses to have their gold refined in London and sold through N.M. Rothschild at an agreed price. Presently, several other options exist for the trading of gold and the setting of the price of gold, though the London Fix is still the benchmark used. Gold is traded on several stock exchanges both in physical form and through derivatives, through what are known as exchange-traded funds (ETFs) such as SPDR Gold Shares, Gold Bullion Securities(London), Gold Bullion Securities (Australia), NewGold Debentures, iShares Comes Gold Trust, ZKB Gold ETF, GoldIST, ETF Securtiies Physical Gold etc (World Gold Council 2012). In 2011, about 2,100 metric tons of gold appeared in exchange-traded funds (ETFs), 1,240 metric tons of which were in SPDR Gold Shares (World Gold Council 2013).

In ability of producers and traders to influence directly the price at which gold is traded means that purchasers of gold can easily switch from one supplier to another.

22

The banks currently involved in the fix are Bank of Nova Scotia- Scotia Mocatta, Barclays Bank, Deutsche Bank, HSBC Bank US and Societe Generale. 23

Previously the price was fixed only at 10am however; in 1968 N.M. Rothschild introduced the 3pm fix to coincide with the opening of the US market. This latter fix is considered the more important of the two.


Table 5: Top 10 Gold Producing Companies Globally

Rank Name Base Operations Globally 2012 rev (bil.USD)

2012 Profit (mil.USD)

2012 cap bil USD

2011 FY production

tonnes

Reserves Moz

Total Resource

Moz

Cash Cost 2011 year

US$ total/oz 1 Barrick Gold Canada Peru, Chile, Argentina,

Australia, Dominican Republic, USA, Canada

14.3 (2011) 4,500 49.0 Feb.10

217.7 138.5 226.92 460

2 Goldcorp Canada 5.4 1,900 39.0 Feb.7 71.29 46.3 60.1

Feb'11

81.59 534

3 Newmont Mining

United States

States, Australia, Peru, Indonesia, Ghana, Canada, New Zealand and Mexico

10.4 400 29.09 Mar.02

145-150 2011 est

85.0 142.67 591

4 Newcrest mining

Australia Australia, Ivory Coast, Indonesia, Papau New Guinea

4.4 1000 26.0 Feb.14

71.44 (2011 NC 49.95

77.0 205.45 Newcrest

119.2

$692

5 Anglogold Ashanti

South Africa

U.S., Tanzania, South Africa, Namibia, Mali, Guinea, Ghana, Brazil, Australia and Argentina

5.9 1300 16.7 Feb.28

122.75 74.9 264.30 728

6 Yamana Gold Canada Canada, Brazil, Argentina, Chile, Mexico and Colombia

2.2 500 13.0 Feb.27

25.98 19.4 46.35 463

7 Kinross Gold Canada Canada, Brazil, Chile, Ecuador, Russia and the U.S

3.9 (2100) 11.5 Jan.20

74.0 (2011)

59.17 92.06

596

8 Gold Fields South Africa

South Africa, Ghana, Australia and Peru

5.2 900 11.26 Jan.21

98.80 78.9 270.28 795

9 Eldorado Gold Canada 1.1 300 13.0 Feb.27

18.69 18.67 20.2 405

10 Polyus Gold Russia Russia, Republic of Kazakhstan, Romania and Kyrgyzstan

1.7 300 10.59 39.7-42.5 2011 est

74.1 211.92 617

Source: http://goldinvestingnews.com/investing-in-gold/top-10-gold-producers, http://en.wikipedia.org/wiki/Largest_gold_companies

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Jewellery design by independent or contracted designers is

relational governance.

The options for designing jewellery are: (1) Employed goldsmiths and gemologists; (2) Independent designers; and (3) Customers.

Jewellery design through the use of independent or contracted designers is relational. This is because Jewellery design involves the use of skills and technologies not easily learned but that requires time and training to acquire. Jewellery designs are usually done by certified gemologists or goldsmiths trained through the apprenticeship system, which is the practice of small jewelers. Large companies may also outsource the design of jewellery to independent jewelers as companies seek out exceptional designers upon whom new collections could be developed. For this reason, Jewellery companies tend to offer differential products or unique pieces based on quality (caratage), brand, signature collections, combination with other precious metals and gems. However, given the nature of the Jewellery market there may be interactions between designers and Jewellery companies and companies may also seek to take into consideration customer feedback regarding designs and caratage and further, requests for custom-made pieces. Therefore, there must be a level of trust between designers and companies. Particularly, since relational linkages take time to build. Jewellery companies often use licensing arrangements to secure Jewellery designers and as a way of solidifying linkages. These arrangements are usually long-term for branded boutiques that sell based on brand. For instance, since 1974, Tiffany and Co. has been the sole licensee for the intellectual property rights necessary to make and sell Jewellery and other products designed by Elsa Peretti and bearing her trademarks. Given the features of this market, especially the high-end, luxury aspect, the costs and difficulties required to switch to a new partners tend to be high. Some companies build entire collections on the designs of a few designers.


Jewellery design, fabrication and distribution done by firms with

vertically integrated operations is hierarchical governance.

The majority of the firms operating in the gold jewellery industry have vertically integrated operations that extend from design to distribution. This is true of both large and small firms alike.

Table 6 shows the leading jewellery companies globally based on retail value; ehile table 7 shows examples of some of the leading jewellery companies operating in the high-end segment of the global jewellery market. Vertical integration is an expressly stated production strategy of several of the leading jewellery companies such as Bulgari and Tiffany & Co. For example, the Italian company, Bulgari, which is one of the leading jewellery companies globally, has a production strategy that is based on vertical integration of the entire production process, from research and development to the finished product.

Jewellery pieces are designed and fabricated in-house through goldsmiths and gemologists, with some companies allowing for customer input. This coordination over the design and fabrication of jewellery occurs because firms derive their competitive edge on their ability to come up with unique designs and high quality pieces that sets them apart. This means that designs cannot be easily codified but jewelers must rely on select designers who can deliver the combinations of quality and style that companies require.

Vertical integration is also used as a strategy to improve scale and the competitiveness of companies globally. For instance, in 2002, as part of a strategy to become one of the leading watch makers in the world, Bulgari acquired, Italian jewellery manufacturer Crova. In 2005, the company bought Swiss watch making companies Cadrans Design, a producer of dials for high-end watches, and Prestige D'Or, a leader in the production of steel and precious metal watchstraps24. In 2009, the company realized the results of

24

http://en.bulgari.com/about/about_bulgari.jsp?cat=cat00105#homeAB.jsp?cat=cat00105

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its efforts as it was able to produce and assemble in-house the Bulgari BVL 465 Caliber. Table 9 shows other examples of recent investments by leading jewelers companies, which includes mergers and acquisitions and joint venture arrangements. These are more dominant at the manufacturing stage and also encompass use of brand names. These reflect attempts by firms to consolidate their operations in a bid to increase their share of the global market. However, these investments would also lead to further concentration and dominance of firms in the value chain.

Jewelers can also exert some degree of control downstream over the production of diamonds. Gold jewellery is often produced in combination with other metals and gemstones such as diamonds. Jewelers such as Bulgari, use the Kimberley process international certification scheme to select suppliers of diamonds. Most of these suppliers are members of the World Diamond Council, which encourages implementation of the Kimberley Process. All suppliers of diamonds must produce a five year warranty stating that they do not sell conflict diamonds before they can secure buyers. 25.

Following internationally-set standard is another way of companies gaining a competitive edge in the global jewellery value chain. Some of the leading jewelers are members of the Responsible Jewellery Council (RJC). The RJC is a not-for-profit organization that focuses on the quality and human, social and environmental ethics of the diamond, goldsmithing and platinoids value chain26. Bulgari is a RJC member. Richemont, the group company under which Van Cleefs and Arpels and Cartier falls, is also a member of the RJC.

There are also ISO relevant standards that producers must comply with in their operations. Examples include: ISO 8653:1986 (Jewellery-Ring-sizes-Definition, measurement and designation); ISO/AWI 9202 (Jewellery-Fineness of precious metal alloys); and ISO 10713:1992 (Jewellery-Gold alloy coatings).

25

http://en.bulgari.com/about/about_bulgari.jsp?cat=cat00105#homeAB.jsp?cat=cat00105 26

http://www.responsiblejewellery.com/


Jewelers also control the distribution of their jewellery through self-operated boutiques chains nationally and internationally to maintain their brand. For instance, Tiffany & Co. has 275 stores globally. Table 8 shows leading players in the various distribution channels for gold jewellery. In India, the major national chains include Tata Group and Gitanjali Gems Ltd. In China leading national Chains include the Pranda Group but China is also home to international chains such as Piaget, Harry Winston, Graff and Tiffany & Co. In the US leading national chains include Zale Corporation and Kay Jewellers; international chains include Tiffany & Co. and Piaget.

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Table 6: Leading Jewellery Companies Globally Based on Retail Value in 2011, USD Billion Company Headquarters Retail

value Number of Stores

1. Chow Tai Fook Jewellery Group Ltd. China 4.6 1000 2. Compagnie Financire Richemont Switzerland 4.5 3. Tiffany & Co. United States 3.9 275 4. Signet Jewelers Ltd. United Kingdom 3.4 1443 5. Shanghai Lao Feng Xiang Co. Ltd. China 3.3 6. Shanghai Yuyuan Tourist Mart Co. Ltd. China 2.7 7. Zale Corp. United States 1.8 1778 8. Pandora A/S Denmark 1.7 9. LVMH Mot Hennessy Louis Vuitton SA France 1.5 3204 10. Swarovski AG Austria 1.3 1218 11. Gitanjali Group India 2.0 4164 Source: Euromonitor International http://www.jckonline.com/2012/12/31/around-world-in-Jewellery-sales


Table 7: Leading Luxury Jewellery Designers and Stores Globally

Companies Country of Origin

Number of Locations

Globally

Number of

Stores

Number of Employees

Examples of Collections

1. Buccellati Italy US, Canada, France, Paris, Italy, United Kingdom, Russia, Japan, Australia

Crepe De Chine, Magnolia, Macri, Classica, Etoilee, Ondine, Signatura

2. Tiffany & Co

USA Canada, Mexico, Brazil, USA, Japan, China, Korea, Taiwan, Australia, Singapore, Macau and Malaysia, United Kingdom, Germany, Italy, France, Spain, Switzerland, Austria, Belgium, the Czech Republic, Ireland, Netherlands, the United Arab Emirates

275 9,900 Woven Collection, Keys Collection

3. Piaget Switzerland Switzerland USA, Canada, Japan, China 25,000 (group)

Gouverneur Dragon

and Phoenix www.piaget.com 4. Cartier27 France Switzerland, France, Germany, Italy and Spain, China/Hong

Kong, Japan, USA, Canada 300 Sortilges, Cartier, Naturellement

collection Trinity Collection 5. Chopard Switzerland Switzerland, Japan, USA, Singapore 120 1,750 Quartz, L.U.C, Casmir, La Vie en

Rose, Pushkin, Copacabana, and Chopardissimo

6. Bulgari28 Itlay US, France, Switzerland, Japan, Qatar, Australia, Singapore, South Korea

295 3,815 BVLGARI

http://jewelrista.com/blog/2011/08/03/the-world%E2%80%99s-top-10-Jewellery-designers/, http://www.buccellati.com/en/start.html, http://www.parkviewgreen.com/eng/shop/watches-Jewellery/chopard/, http://investinginafrica.net/wp-content/uploads/2012/10/Richemont-2012-Annual-Report.pdf

27Cartier is a Maison of Richemont group of companies 28

Production sites in Italy and Switzerland, 41 companies

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Table 8: Leading Players in the Distribution of Gold Jewellery, by Category

Distribution Categories Major Players

US India China Italy Branded Boutique chain Retailers

Independent (Authorized) Retailers

Cosmos

National Chains Zale Corp. and Kay Jewelers, Finlay Jewelers

Tata Group (Tanishq and Gold Plus brands), Gitanji Gems Ltd. (Gili brand), Reliance Industries, Shree Ganesh Jewellery House Limited

Pranda Group, 3D- Gold Jewellery Holdings ltd., Luk Fook Jewellery, and Shanghai Lao Feng Xiang

International Chains

Signet Jewellers

Tiffany & Co.Piaget

Damas Jewellery, Swarovski Piaget, Harry Winston, Graff, Tiffany & Co.,

Bulgari, Buccellati

Discount Merchandisers

Wal-Mart, K-Mart, Target, Sans Club, Costco

Big Bazaar, Reliance, Ambanis, K Rahejas, Bharti AirTel,

Department Stores

Boscovs, Federated, JC Penny, Sears Roebuck, Macys

Debenhams, Lifestyle Stores, Pantaloon Retail (India) Limited, Reliance Trends, Shoppers' Stop, Star Bazaar

Mainland; Dashang Group, Isetan and Mitsukoshi Department Stores

Hong Kong; Harvey Nichols, Lane Crawford, Seibu Department Stores, Daimaru, Takashimay, Parco

Coin, LaRinascente

Non-Store Retailers

Online shopping Bidz.com, Blue Nile, eBay, Amazon, Ice.com, Overstock.com, JewelleryTelevision.com www.zales.com, , www.pagoda.com and www.peoplesjewellers.com. www.tiffany.com

totaram.com, meenajewelers.com, aumkaarfashions.com, amritasingh.com

ctfeshop.com.

TV home stations

QVC, ShopNBC, Shop-At-Home,

STAR CJ Alive, HomeShop 18 QVC/CNR QVC, for you, HSE24


ACNTV, Jewellery television ,Americas Auction network, Home Shopping Network, Liquidation channel (Jewellery channel)

Others Mail-order, armed forces retailers, pawn shops

Travel catalogues

Source: Various

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Table 9: Recent Investments by Leading Jewellery Companies, affecting the Governance of the Value Chain

Nature of Investment Company Name Stage of the

Value Chain Mergers and Acquisitions Joint Ventures

A.J Jewellery29 Distribution Merger with Italian Jewellery institution Gitanjali Group British jewellery distribution company Alfred Terry Gitanjali Gems Ltd Joint Venture

with Damas (50-50), 2003

Gitanjali Group Manufacturing Italian jewellers, Stefan Hafner, Porrati and Nouvelle Bague

Chinese jewellery maker Grown Aim

Bulgari Manufacturing 2005, Swiss watchmaking companies: Cadrans Design (dials for high-end watches), and Prestige dOr, (metal and precious metals watchstraps).

In 2000 high-end watchmaking brands Daniel Roth and Grald Genta (high-end watchmaking brands).

Crova in 2004

Bulgari Design (Brand) in August 2008, bought 60 per cent of its commercial and brand-related operations.

Gitanjali Group Design (Brand) 'Nakshatra', the premium brand of jewellery promoted by Diamond Trading Company (DTC)

Bulgari Manufacturing (Component)

2005; Italian leather-goods company Pacini, renaming it Bulgari Accessories

2007; Swiss watchmaking companies Finger, (cases for high-end complicated watches); and Leschot, (watchmaking machinery)

Richemont Manufacturing (Component)

component manufacturing facilities of Geneva-based Roger Dubuis in 2007

Polo Ralph Lauren The collection of luxury watches

Tiffany & Co. Manufacturing and Distribution

Incorporation of Swiss company by the Swatch Group for the design, engineering, manufacturing, marketing, distribution and service of TIFFANY & CO. brand watches.30

Signet Signet acquired Ultra Stores, Inc. (Ultra) on October 29, 2012 Source: Company Websites

29

http://www.ajjew.com/newsite/en/node/15 30

Under the agreement, Tiffany and its affiliated companies may only purchase Tiffany & Co. brand watches from the Swatch Group.


Distribution of gold jewellery reflects a mixture of relational and

hierarchical governance

Leading jewelers operating in the high-end segment of the market use several channels to distribute jewellery produced. Some of these channels reflect the relational governance structure, such as the use of authorized retailers. Authorized retailers are independent suppliers in that they are operating under their own duly constituted company, however, companies whose jewellery they are retailing can exert some degree of control through the authorization process. To become authorized, retailers must demonstrate the ability to supply the product in an environment that the brand owner supports. Bulgari for instance, in selecting its retailers for watch distribution requires that the retailer must be able to offer impeccable customer service.

There is mutual dependence under this arrangement as independent suppliers make profits from becoming authorized retailers while jewellery companies enjoy the benefit of increased marketing of their products. Retailers are also selected to allow brands to be ideally positioned in strategic markets. Especially since the competitive landscape is characterized by fragmentation (in the US for instance, the largest 50 companies generate about 40% of revenue) and demand that is driven more by quality and design than price. Therefore, effective marketing (visibility of the product) becomes important.

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SECTION 6: GUYANAS CURRENT PARTICIPATION IN THE GLOBAL GOLD JEWELLERY VALUE CHAIN

The figure 7 identifies where Guyana is present in the global value chain. These are at the mining, refining and fabrication stages. However, the countrys presence is more significant at the mining stage. Gold mining is an important economic activity in Guyana as the country possesses rich deposits of gold and other mineral resources such as, diamonds, manganese and rare earth elements (Thomas 2011).

Gold Mining Jewelry

Fabrication

Marketing and

Distribution

Gold

Recycling

Jewelry Design

Gold Refining Research

Figure 7: Guyanas Participation in the Gold Jewellery Value Chain

In recent years there has been a gold rush owing to favourable prices globally gold (Thomas 2011). This has seen gold mining, in particular, increasing significantly. For instance, between 2008 and 2010 the value of gold output expanded by 23%. Concurrently, exports of gold have expanded so much so that gold is now the number 1 exported commodity from Guyana. Figure 8 reveals a spike in the value of gold exports starting from 2005.


Figure 8: Domestic Exports (US$ Mn), 1990-2011 The gold industry in Guyana has somewhat of an enclave structure with small artisanal gold miners alongside large scale foreign investors, however, small scale mining dominates. The rush for gold has seen an expansion in both industries. Figure 9, shows that between 2005 and 2010, the small and medium scale sector expanded from 49.6% to 76.6%. The number of mining licenses given out to large scale miners increased by 50% in 2011. In 2011, two new large scale mining companies were added to the industry, E.T.K incorporated and Guyana Goldfields Inc. Guyana Goldfields estimates that one of its mining areas has the potential for about 6.88 million ounces of gold (measured and inferred) (Thomas 2011).

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Figure 9: Domestic Exports (US$Mn), 1990-2011 Comparatively, gold jewellery fabrication and design is economically smaller than gold mining. The export of gold jewellery is also significantly lower in value when compared to exports of raw gold. This reflects a significant manufacturing void in the economic structure of the country as most of the countrys exports are primary products. This is reflected in table 10 which shows the top 10 merchandise exports from Guyana in 2010 based on data obtained from Datamonitor. Whereas in 2010 the value of gold exports was US$ 440 Mn exports of gold jewellery was only US$3.9 Mn.

Table 10: Top 10 Exports from Guyana, 2010

Top 10 Exports from Guyana, 2010 Rank HS4 Name Value Percent

1 7108 Gold $440,822,299 38.38% 2 1006 Rice $183,665,932 15.99% 3 2606 Aluminium ores $149,061,412 12.98% 4 1701 Raw sugar, cane $102,120,914 8.89% 5 306 Crustaceans $35,149,291 3.06% 6 2208 Alcoholic preps for beverages $26,700,964 2.32% 7 4407 Wood sawn or chipped of a thickness exceeding 6

mm $25,753,010 2.24%

8 7102 Diamonds $12,577,128 1.09% 9 1703 Molasses $11,178,033 0.97% 10 4409 Wood continuously shaped along any of its edges $10,206,224 0.89% 11 303 Frozen fish, excluding fillets $9,858,230 0.86%


12 304 Fish fillet or meat $9,254,788 0.81% 13 305 Fish flours, meals & pellets for human consumption $9,088,934 0.79% 14 4403 Wood in the rough $8,660,944 0.75% 15 7204 Ferrous waste and scrap $7,980,233 0.69% 16 302 Fish, excluding fillets $7,614,697 0.66% 17 4404 Hoopwood; split poles; piles, pickets and stakes of

wood $7,258,403 0.63%

18 4412 Plywood, veneered panels and similar laminated wood

$5,905,814 0.51%

19 4406 Railway cross-ties of wood $4,351,725 0.38% 20 7113 Jewellery of precious metal $3,927,925 0.34%

Source: Datamonitor

Guyanas main export markets for gold jewellery are in the Asia, North America, Europe and the CARICOM. In 2011, the top ranking markets for exports from Guyana were the United Aram Emirates , Surinae and the Bahamas.

Table 11: Export Markets for Gold Jewellery, 2008-2011

Destinations for Exports of Gold Jewellery* (2008-2011) US$ Mn

Partner 2008 2009 2010 2011

Suriname 106 - - $23,379 Barbados 87 - - - USA - 7,683 25 - Trinidad and Tobago

- 221 98 -

Canada - 7 5,894 - United Arab Emirates

- - 3,027,270 2,703,386

Belgium - - 894,761 - Bahamas - - 19,555 World 193 7,910 3,928,047 $2,746,320 Notes: *89731 SITC Rev 3- Jewellery of precious metals

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SECTION 7: INSTITUTIONAL FRAMEWORK FOR GOVERNANCE OF THE LOCAL VALUE CHAIN

The institutional framework focuses on the local conditions and policies impacting the value chain (Gereffi and Fernandez-Stark 2011). These conditions can act either as catalysts or barriers to the effective upgrading of a countrys participation in the global value chain. The institutional framework in this aspect of the paper will focus on; a stakeholder analysis and identification of the key factors impacting the growth and development of gold jewellery industry in Guyana. However, this must be preceded by an examination of the local value chain.

.


GUYANAS VALUE CHAIN FOR GOLD JEWELLERY

Gold Mining Gold Board

(Government-

Owned)

Gold Dealers

& Traders

Jewelry

Fabrication

Jewelry Design

Distribution

Channeks

Jewelry

chain

retailers

Jewelry

Specialist

stores

Non-store/non-

licensed traders

Laboratory

preparatory Services

Jewelry Design

tools (moulds,

casting etc)

Pawn

shops

Informal

Buyers

Figure 10- Guyanas Value chain for Gold Jewellery Manufacturing

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The following observations are noteworthy regarding the value chain for gold jewellery in Guyana:

When the number of firms in the value chain are assessed, there is a disproportionately large amount of mining companies compared to jewelers which points to the fact that there is insufficient manufacturing of the primary resource extracted. The main operators in the mining industry are: Omai Gold Mines Limited, Correia Mining Company ltd, Forage Orbit Inc and Major Miners Inc. (See table 12 for main players in the industry).

Gold refining and trading takes place through a semi-autonomous government agency. All raw Gold extracted in the mining industry must be declared to the Guyana Gold Board. The Guyana Gold Board is the sole entity authorized to buy and sell raw Gold in Guyana (at the London fix). Specifically, its functions are:

1. To carry on the business of trading in gold 2. To secure at all times an adequate supply of gold and to ensure its

equitable distribution at fair prices 3. To purchase all gold produced in Guyana 4. To sell all gold in Guyana and to sell gold out of Guyana 5. To engage in other related commercial or industrial activities...

There also exists an informal (unlicensed) sector that undertakes gold trading. The difference between Goldsmiths and jewelers in the local context is principally

that Goldsmiths are metalworkers who tend to work only with gold whereas jewelers are a little higher in the value chain and craft Jewellery from both gold and other gem stones. Many jewelers work with Goldsmiths. All goldsmiths and jewelers must be licensed to operate. The main goldsmiths and jewelers in the industry include: Kings Jewellery World which dominates the industry, L. Seepersaud Maraj and Sons, Gaskin and Jackson Jewelers, Topaz and Steves Jewellery.


Many of the jewelers in Guyana rely on a system called casting for the design of Jewellery, which is essentially crafted by hand. Casting requires the use of moulds which are tools used to pre-design Jewellery. There are two sources of moulds. Locally, some jewelers make their own moulds containing original designs. Moulds are initially made from silver (which has to be imported) and then are reproduced using rubber and wax. However, the alternative is to import moulds manufactured in countries such as China, which apparently is the preferred option among jewelers. Other Jewellery design tools are also imported mainly from the United States. Most of the jewelers self-import the tools required for Jewellery manufacturing. However, there is one jeweler (Scotts Jewellery tools and variety stores) that is also involved in the importation and distribution of Jewellery tools. This jeweler works with goldsmiths on a contractural basis for the design and fabrication of Jewellery. However, all tools and equipment are supplied by them.

There are essentially two levels on which Jewellery is distributed. Firstly, jewelers also operate Jewellery stores and retail Jewellery as their own exquisite designs. Secondly, some jewelers have chain stores or several stores around the country and supply their various branches with Jewellery. Most of the jewelers sell only to local customers and benefit from repeat customers to build their clientele base. There are also sales to tourists which is essentially the primary means of getting indigenous Guyanese designs exposed to the international market. The other two channels depicted in the framework represent channels of purchasing jewellery from consumers.

Table 12: Main Players in the Gold Jewellery Manufacturing Sector In Guyana Main Players In The Gold Jewellery Manufacturing Segment In

Guyana

Position in the value chain

Company name

Gold Mining Guyana Goldfields Omai Gold Mines Limited. Correia Mining Company Limited Forage Orbit Incorporated Guyana Goldfields Inc Major Miners inc.

Gold Dealers/Traders SKS Mineral Trading Pure Diamond Inc. Steves Jewellery

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Goldsmiths/Jewellers King's Jewellery World L. Seepersaud Maraj and Sons Gaskin and Jackson Jewelers Topaz Steves Jewellery Royal Jewel House

Jewellery Design Tools R. Seeram's Jewellery Support Services Energy Agency

Wartsila Operations Guyana Inc. Guyana Energy Agency

STAKEHOLDER ANALYSIS

Table 13 summarizes the key stakeholders having an impact on the performance of firms in the local gold jewellery industry. These encompass governmental ministries, semi-autonomous agencies, private entities and industry associations.

All governmental organizations play an important role in the industry and have power and influence to shape how the development of the industry unfolds as they shape the environment under which firms must operate. These organizations address issues related to the environment, compliance with labour regulations, small businesses, energy, trade, tax, investment and standards.

Industry associations such as the private sector commission, the Guyana Manufacturers and Services Association and the Georgetown Chamber of Commerce are important to the development of the gold industry in Guyana as they perform general functions that would benefit all manufacturers such as policy advocacy and training. While these organizations are important their level of power and influence over the industry is restricted by the limited participation of gold jewellery firms in these organizations. Only three jewellery manufacturers are members of the Guyana Manufacturers and Services Association.

At the gold mining stage, the organizations involved in the regulatory management of the industry are not only highly important to the industry but can exert significant power and influence over the development of the sector through their impact of the supply of raw gold. The Guyana Geology and Mines Commission for instance is an important regulatory agency in the mining industry. All mining equipment must be registered and licensed by the company to operate. Additionally, Gold refining is done by the state-


owned, Guyana Gold Board. This is also the only government-directed agency responsible for the buying and selling of raw gold in Guyana. This company has an impact over the purity of gold

Table 13: Key Stakeholders in the Gold Jewellery Industry in Guyana Stakeholder Description Key Interest Level of

Importance in the

industry

Power & Influence

over sector development

Small Business Unit Enabling Environment

Promoting the development of small businesses

Medium Medium

Ministry of Natural Resources and the Environment

Natural Resource Management

Sustainable management of the natural resources of Guyana

Medium Medium

Ministry of Foreign Trade Foreign Trade Securing trade concessions High High Ministry of Labour Labour

Regulations Enforcement of compliance with ILO Core labour regulations.

High High

Environmental Protection Agency

Environmental Regulations

Enforcing compliance with environmental regulations

High High

Guyana Energy Agency Energy Regulating the generation, supply and use of energy in Guyana

High High

Guyana Power &Light Energy Regulating the generation, supply and use of energy in Guyana

High Medium

Guyana Revenue Authority

Tax Authorities Compliance with tax, trade and border laws

High High

Guyana Office for Investment

Business Development

Trade and Investment facilitation High High

National Bureau of Standards

Standardization Enforce compliance with quality Standards

High High

Guyana Manufacturers & Services Association

Industry Associations

Supporting manufacturers through technical assistance, policy advocacy

High Medium

Georgetown Chamber of Commerce & Industry


Promoting and protecting the interests of members by fostering ethical practices in commerce and trade a

Medium Low

Private Sector Commission


Advocating for the development of the private sector

Medium Medium

Commercial Banks Financing Providing a range of financial instruments

High High

Guyana Gold Board Regulatory Purchase and refining of raw gold High High Guyana Gold and Diamond Miners Association

Industry Association

To promote the interests of miners High High

Guyana Geology and Mines Commission

Regulatory Regulating the exploration and mining of mineral products in Guyana.

High High

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FACTORS AFFECTING INDSUTRY DEVELOPMENT

A. GENERAL FACTORS

Economic conditions:

Though, Guyana has not reached a level of political stability equivalent to what obtains in its sister CARICOM countries, economically Guyana has made significant strides towards economic stability. Under the World Bank criteria, Guyana is now classified as a lower middle-income country. Consequent to increasing growth rates, macroeconomic performance has improved. Figure 11 captures growth rates for Guyana from 2000 to 2012. Growth in Guyana has increased marginally over the years. Negative growth rates were experienced in 2000, 2003 and 2005 (year of the big flood). For 2006, 2007 and 2011 growth rates were above 5%.

Figure 11- Growth Rate of Real GDP, Guyana: 2000-2012

However, in spite of positive growth rates over the last couple of years, Guyanas macro performance still requires further improvement in order to support business development. On the global competitiveness index Guyana has a rank of 109 for macroeconomic conditions with a score of 4.02. This is less than its overall score, which


is 114. Poverty though it has reduced is still somewhere around 38% based on the latest estimates by the Bureau of Statistics.

Labour market size:

The size of the labour market in Guyana is conducive to expanding the gold jewellery industry locally and improving Guyanas participation in the global gold jewellery value chain. The countrys working age population (persons 15- 65 years who are capable of being engaged in productive activities) is approximately 60% of the total population and has marginally increased since 1980 in response to total population trends. The labour force participation rate (ratio of the labour force to the working age population) however, remains low, falling from around 60% in 1992 to about 54% in 2008. Labour force is defined as the number of persons of working age who are gainfully employed or are seeking to become gainfully employed. This indicates that a significant proportion of the countrys working age population (40%) is economically inactive (see table 14). The most recent estimate of the unemployment rate in Guyana places it at 11%.

In addition, the country has a high migration rate among persons who have received tertiary education. The latest estimate by the World Bank suggests that 86% of the countrys university graduates migrate to developed countries. This high level of migration is related to the poor capacity of the country to absorb all the graduates that are produced. Therefore labour is available to work with reasonable skills set. Undoubtedly, industry specific training would be required as this is currently lacking.

Table 14: Activity Status by Gender: 1992/93 and 1999 Activity Status by Gender Activity Status All Guyana Male Female 1992/93 1999 1992/93 1999 1992/93 1999 Labour Force Participation Rate 60 57 81 76 39 39 Inactive 40 43 19 24 61 61 Working (% of Labour Force) 88 91 92 94 82 86 Unemployed (% of Labour Force) 12 9 8 6 18 14 Source: Guyana Survey of Living Conditions, 1999

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Social Conditions

Social conditions in Guyana have improved in tandem with improved economic performance. For instance, there are has been significant reductions in the male and female labour force participation rates, From 81% and 39% respectively in 1993 to about 81% and 61%, respectively in 2010.

Additionally, Guyana has a literacy rate of 98% for femal