Lawrence Ma: Chairman of the Diamond Federation of Hong Kong
By Martin Rapaport
Martin Rapaport recently interviewed Lawrence Ma, Chairman of the Diamond Federation of Hong Kong and Executive Director of Lee Heng Diamond Co. Ltd. The interview took place on September 24, 2001 during the Hong Kong Jewelry Show.
Martin Rapaport: How has the Hong Kong market been developing this year? Has the attack on the U.S. impacted the market?
Lawrence Ma: Towards the end of August, things seemed to be on the right track. We felt stronger demand and prices were quite strong for goods that were scarce. However, just before the holidays, we heard about 10 per carat selling very cheaply in Belgium at much lower prices than what we were selling in Hong Kong. And during the summer in Hong Kong we heard that some bankers went to De Beers to tell them that they didn’t feel comfortable with the situation. June was a very difficult month for Hong Kong. We had 26 days of rain, three typhoons. The retail market and economy were quite bad in June and July. But I think August was turning better.
During the first week of September we did quite well. But then, unfortunately what happened September 11, was really too much of a shock for the market. For a week or ten days in Hong Kong the higher priced items almost stopped. I think it was because people feared that we were probably slipping into a real recession.
The Hong Kong jewelry show was not as bad as expected. Far East and Chinese buyers have come. In general it is still too early to tell how people will react. I’m sure the buyers came to adjust their inventory, where they see holes they will want to replenish, but definitely not aggressively. The organizer of the fair told me that there are 1,700 exhibitors. Only 22 or 23 didn’t show up. I can understand that since the exhibitors already paid for the show, they would want to come to make contacts and sell. On the other hand, of the buyers that usually visit, maybe 30 to 40 percent did not come. So it’s not good.
I really don’t know about the inventory situation. We have a cutting factory in Thailand. I know that in a factory the goods keep rolling out, but people are just holding on to the inventory. I think that one month from now we will probably see the real picture because now it is still too early to tell.
MR: I understand that Hong Kong is selling rather well to Chinese from the People’s Republic of China. Are these sales compensating for lower sales to the U.S.?
LM: The American market in Hong Kong is mainly for jewelry exports. It’s a totally different market compared to the Hong Kong relationship with China, which is much broader and includes diamonds as well as jewelry. I think that the Chinese market is okay although there has been trouble with the tax issue during the last nine months. The Chinese government is really cracking down on people who are evading taxes and tax invoices. Not only in the jewelry business but also in garment, cosmetics, computer and other businesses. A lot of goods are definitely imported into China but you don’t see the official record of importing. So once the government starts looking, Chinese firms must have records for sales tax, VAT and the custom duty. If people cannot come up with this documentation, somebody will be fined or even jailed. The jewelry and diamond industry has been troubled with this.
On the other hand, I must comment that the Chinese consumer market for diamond jewelry is increasing because their economy is growing at the rate of 7 to 8 percent per annum. While the base level of diamond demand is very small, the growth rate is healthy — possibly 20 to 30 percent per year.
MR: How large is the retail Chinese diamond market?
LM: Unofficial estimates might be about $800 million at retail and $350 million at the wholesale level.
MR: Will Far East diamond demand channeled through Hong Kong be able to compensate for decreasing U.S. demand for diamonds?
LM: I don’t think so. Obviously there is a problem with overproduction. In general the Far East market is rather quiet. Taiwan is very bad and has problems politically, structurally and economically. Japan is very quiet and Thailand also has problems with tax issues. The Philippines and Indonesia have shown signs of recovery in the last one to two months. I think the stability in the political scene in these countries has helped people buy bigger size diamonds. While China is growing rapidly, its base is not big enough to compensate for lower American demand and the type of goods the Chinese buy is quite different.
MR: What types of goods are selling in China and the Far East?
LM: In general, Far East demand is for H/I/J colors in better VS clarities.
MR: Has the demand for these goods improved over the past few months?
LM: Yes, I would tend to think so. Customers like to buy I/J/K colors. Customers would like to buy I colors because a lot of jewelry is set in white gold; however your price list has put a very big difference between I and J colors so customers settle on J colors. This has put a lot of pressure on J colors. K colors are a little too dark so the make is essential. We have taught our clients to buy a better make stone so that with a spreader stone the yellow color will not be so visible. The Hong Kong market does not use very much SI clarity in the lower colors.
On the other hand, in the last five to eight years, South East Asia and Taiwan has used a lot of F/G color SIs because they appreciate the better color.
MR: And how are the 30, 40, 50 pointers?
LM: Rather weak for the time being. In general, Hong Kong local consumption is okay for small goods like (-8.5) 2 to 5 pointers and other small stones set in jewelry. The half-carat and other pointers are in between sizes.
In general, when we look back at basic consumer demand in Hong Kong, the lower income group hasn’t suffered very much as long as they still have their jobs. So even if 8 percent of the people have lost their jobs, you still have the 92 percent who never lost their job and for them life is better today. This is because things are cheaper. So for the same amount of salary, you’re getting better value.
On the other hand, the very wealthy will buy D/E/F, VVS big stones. The wealthy also did relatively well in the last two years. They have always had money; it’s only a question of whether they are in the mood to buy. The worst sector is the middle income class who have mortgages. Whatever property you bought in Hong Kong within the last 12 years is worth less today.
Five years back, in 1996, many customers had a lot of paper profit on their property. Although they had a mortgage of $300,000, their property was worth $600,000. Now it’s only worth $250,000. So the drop in real estate has hurt the mood. The middle class and the middle range of goods they buy are the problem areas.
In terms of jewelry, the top end is doing relatively okay and the lower end is doing not bad. But the jewelry selling between in the mid ranges ($1,000 to $20,000) is in trouble. I think that it’s the same in Thailand and Taiwan.
MR: How has the September 11 attack affected the market?
LM: Any normal human being who is uncertain will lay low. I think people will be very cautious with their consumer spending — especially luxury items like diamonds and jewelry. I have a friend whose daughter is getting married. She picked out a 5.98 F VVSI for her daughter’s birthday. Even though I know that she has the money to spend, she called the other day and said her husband isn’t in the mood — so instead maybe she would buy a 4.50-carat. So even people with deep pockets have these feelings. That really scares you a little bit. It’s the mood — when you spend you need the two “Ms” — one is the money and other is the mood. If you miss one it’s going to be difficult.
I have heard from friends that are exporting jewelry to America that orders were cancelled. They are also afraid to give credit and concerned that if their U.S. customers can’t sell the jewelry, they will return the goods and they will be faced with a critical problem. It’s unfortunate.
In general, the Hong Kong banks are very cautious about lending money
to the Hong Kong diamond and jew-elry industry, so we don’t borrow very much. But I don’t know about other diamond centers and this is worrying us.
MR: While the banks in Hong Kong don’t lend very much, Hong Kong is still the place of the wealthy diamond dealers. How is liquidity in Hong Kong?
LM: My banking friends are telling me that there is lots of money in the Hong Kong banks but people don’t know what to do with it. They are afraid to buy shares because they are coming down. They are afraid to buy property. So the banks are loaded with money —they don’t know who to lend to. Those to whom they would like to lend don’t need the money.
So coming back to our industry, most of the people in Hong Kong are financially stable and inventory levels are not very high considering we are a consumer market and buyers go for very specific things. So even if firms have overbought, they overbought for only one of two months of inventory. We are not a manufacturing center where you keep loading on goods and you don’t sell. Our only concern is people who extend credit to America or Southeast Asia where the credit flow is not smooth and there might be some credit problems.
MR: What advice do you have for firms in the cutting centers that might have too much inventory? Should they ease up on their production?
LM: I am sure that each will adjust their production according to their own sales. In Hong Kong, we had many different ups and downs since I’ve been in the business. From 1950 until 1995 I think the world seemed to have good antibiotics against bad economic situations — reduction of interest rates and injection of money. So every cycle we had three or four good years and two years coming down. The overall cycle has been good since the new low was higher than the previous low and the high was higher. So it was okay.
The last difficult 11 years in Japan seem to prove that the virus has become too strong. Another worrisome part is that in Thailand for example, even in previous recessions or slow downs, people had money in the bank. Their interest income supported them but now interest rates are only 2.5 percent a year. Before, people would joke and say if you had a half-million U.S. dollars you could retire — because 5 to 8 percent per annum was a lot of money. But not anymore. So people are hesitant to spend. I don’t have very good advice for the general market. If you want to sell, you have to be competitive. But watch out for credit.
The problem with Hong Kong is not with financing, but with very high expenses. Operational costs in Hong Kong are quite high and people are geared to a certain level of turnover and profit margins. If turnover slows down, then the margin automatically comes down as you push to sell more. So profitability could be badly hurt. In the next six months, it’s definitely going to be much more difficult.
MR: What about prices?
LM: Even before the summer holiday, the cutting centers had pressure from banks on borrowing. I sincerely hope that there will not be pressure like there was in 1981 and 1982 when the banks started forcing people to sell. That would be quite disastrous.
MR: I understand that Shanghai has opened a new bourse.
LM: Yes. It was open almost a year ago. There was not much activity because the related diamond taxes were so high that few people traded through the exchange. But two things happened. One is the Chinese tax authority investigations have made a lot of companies want to pay their tax so that they can go on with business. Presently there is a rather big cushion of profit margin between the wholesaler/manufacturer and the retail level, so people are more inclined to pay tax now and in the future.
Two, the taxes on diamonds will be significantly reduced. The import duty on polished diamonds, presently 9 percent, will be eliminated as will the duty on rough diamonds. Also, the consumption tax of 10 percent that used to be paid by the importers will now be moved to the consumer level. To facilitate the government in collecting the 17 percent VAT tax on diamonds, the only place VAT taxes will be administered and invoiced will be at the government tax office at the diamond exchange.
So the diamond exchange will serve to unify the legitimate diamond activity in China. It will help greatly that the trade will only have to pay the 17 percent VAT. In terms of jewelry made in China, firms can import the raw materials, diamond and platinum together and this will encourage development of trading through the proper channels.
MR: So we are seeing an opportunity for the legitimization of the diamond and jewelry business in China. Does this represent opportunities to diamond dealers around the world?
LM: I think so. People will compete on equal footing. While the 17 percent VAT might still discourage some people from legitimate channels, the new system is very good and people should now learn to play by the rules. As we say, “You can’t eat an elephant in one bite,” so I think things will progress. I was told by some Chinese associates that they will willingly pay the 17 percent and have their business really legitimate.
MR: Should foreign companies consider joining the Shanghai bourse?
LM: Whomever is interested in the Chinese market should. To be a member you must apply for membership and when your membership is approved you will have to establish a local company — a Chinese company — if you want to import to, or trade in China. The government will recognize the legal entity of the local company and then you have to apply for an import and export license.
In the long run it depends on the foreign firms’ position. I don’t know if it will pay for the New Yorkers to join for the time being because I don’t know how many big stones are being sold in China. But for the jewelry manufacturers it might be a very good idea. I think many foreign firms inquire about setting up polishing factories in China or contracting with China to cut diamonds or manufacture jewelry. If you are a member, your goods can be shipped to the Shanghai Exchange, VAT paid and then the diamonds can be sold in the Chinese market.
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