IIHE-UNIVERSITY OF WALES

Analysis on Export Oriented Jewellery Market

BMG 207- International Business
Bhanuka Gunatilleke, Prabath Ariyapala, Ashen Kumarasena, Husnun Nazeeyl & Kavindu Hapuarachchi

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Contents
01. International Jewellery market ............................................................................................. 3 01.1 Top Importers and Exporters .............................................................................................. 4 01.2 Current State of the Industry ............................................................................................... 5 01.2.1 Industry size ..................................................................................................................... 5 01.2.2 Sourcing ........................................................................................................................... 6 01.2.3 Synthetic Diamonds ......................................................................................................... 7 01.2.4 Fabrication ....................................................................................................................... 8 01.2.5 Retailing ........................................................................................................................... 9 01.3 Special Characteristics and Trade Terms in the Global Jewellery Industry ..................... 10 01.3.1 Special Characteristics ............................................................................................... 10 01.3.2 Trade Terms ............................................................................................................... 12 02. Domestic Jewellery Industry ................................................................................................ 14 02.1 Sri Lankan economy and the Jewellery Industry .............................................................. 14 02.1.1 Sri Lankan Economy.................................................................................................. 14 02.1.2 Jewellery industry ...................................................................................................... 17 02.2 Current State of the Industry ............................................................................................. 18 02.3 Special Characteristics and Trade Terms .......................................................................... 19 02.3.1 Special Characteristics ............................................................................................... 19 02.3.2 Trade Terms ............................................................................................................... 20 03. Barriers or Constrains in the Jewellery Industry .............................................................. 21 04. New Market Strategy ............................................................................................................ 24 04.1 Growth prospects in the international market ................................................................... 24 04.2 Modes of entry& the possible mode ................................................................................. 32 04.3 International Business Strategy......................................................................................... 36

05. Recommendations ................................................................................................................. 37 06. Conclusion ............................................................................................................................. 38 07.References ............................................................................................................................... 39 08.Bibliography ........................................................................................................................... 42

01. International Jewellery market Jewellery is a product that is brought together with the combination of earths rarest and expensive materials. When considering the international jewellery market, it is impossible to find all the materials to be found within the boundaries of one country. Since, the materials gems, diamonds, gold, silver, platinum have their own market leading suppliers and consumers (countries). The main producers of gold are China, Australia, United States, Russia, South Africa, Canada, Ghana and Uzbekistan while the top consumers of gold are India, China, United States, Germany, Turkey, Thailand, Switzerland, Saudi Arabia and Russia. When considering the precious metal Platinum, the main producers are South Africa and Russia while United States and China have become the largest consumers. Peru, Mexico, Russia, China and Chile have become the main producers in silver while United States, India, Thailand and Germany have become the main consumers of silver. Given below is a list of the current top importers, exporters and the producers in the jewellery industry.

01.1 Top Importers and Exporters

Figure 1: Top Importers and Exporters (Adapted From: Business Vibe)

Out of the above countries, United States of America has been claimed as the largest jewellery market in the world among the other big players in the industry. Half of the United States jewellery market is being driven by diamond jewellery. Regional wise, Asia Pacific is dominating the jewellery market as a result of the big players in the industry such as India and China. India and China are also the current largest in processing and manufacturing jewellery. The international jewellery market is now growing with the increase of the disposable incomes and the changing lifestyles of the global population. According to Global Gems and Jewellery Market Forecast and Opportunities, 2018, the industry is yet to experience a strong growth in the coming years. The jewellery market has been steadily growing in the recent past despite the slowdown due to the recession back in 2008.

01.2 Current State of the Industry 01.2.1 Industry size

As of 2012 the global jewellery industry is worth around $275 billion of which 87% was fine jewellery. The fine jewellery sector has grown 46% - the highest growth rate ever, during the past five years despite the economic recession in 2008 (Young, 2013). The key stages in the fine jewellery value chain include mining, refining of precious stone and metal, fabrication of jewellery and retailing. More than 75% of the fine jewellery are made of diamond and gold, based on value. Platinum is increasingly becoming popular, along with palladium more recently due to its price convenience. Silver and other metal only make up a small amount in the global jewellery market.

Figure 2: Jewellery Value Chain (Adapted from KPMG, 2006)

As the figure above describes, global jewellery industry consists of three key value addition stages. i.e. Sourcing of precious stones and metal, Jewellery fabrication and jewellery retailing. And as the term precious asserts, only a handful of countries are blessed with the sourcing stage of the value chain. And the rest of the world is left to deal with fabrication and retailing functions.

01.2.2 Sourcing
Gold and diamond together dominate more than 75% of the global jewellery sales values (See Figure 3). Despite being produced over 25 countries around the world, majority of the diamond supply come from 7 countries (Botswana, Russia, Angola, South Africa, Canada, Australia, and Dem. Rep. of Congo). Similarly, more than half of the gold mining also comes from 7 countries (South Africa, USA, Australia, China, Russia, Peru and Indonesia) and the rest is produced by nearly 60 countries around the world. Unlike diamonds, gold is acquired through sales from central banks and also recycled from old jewelleries.
Figure 4: Jewellery type by sales value - 2009 (Adapted from Bernstein Research, 2011) Gold & Diamonds Other 77% 23%

% Based on Sales Value

Figure 3: Diamond Pits around the World (KPMG, 2006)

01.2.3 Synthetic Diamonds

Synthetic or lab grown diamonds are made artificially and mostly used for industrial purposes. If cut and polished, it is practically impossible to differentiate from natural diamonds without the help of sophisticated equipment. As such around 2% of synthetic diamond is used in jewellery fabrication at present (Zimnisky, 2013). However, in September 2013 Scio, lab-grown diamond manufacturer has announced its plans to mass produce diamonds in China, as large as 1million carats per year (Heebner, 2013).

Figure 5: World Gold Mining 2005 (KPMG, 2006)

Figure 6: World Gold Supply - 2005 (KPMG, 2006)

The move is a major concern for the jewellery industry as there is high possibility for most of the synthetics produced to end up in the jewellery industry without mentioning the origins. Even the CEO of Scio Michael McMohan confirmed that even though the company will be looking for customers will good reputation, they cannot make sure their clientele would mark the diamonds as lab-grown (Heebner, 2013).

01.2.4 Fabrication
Plain metal jewellery and gem-studded jewellery are the two broad variations in the fine jewellery sector. Traditionally Italy, USA, Thailand, China/Hong Kong have been the leading players in fabrication of fine jewellery. However India and Turkey have become significant in fabrication; India has even overtaken Italy to become the worlds leading gold jewellery exporter (Young, 2012). The key rationale for the shift is identified as the global recession along with the price fluctuations of precious metal forcing fabricators to look for cheap labour. India, China and USA, the current leading fabricators in the world also have other advantages, such as having a large domestic market, skilled labour etc (Refer Figure 7).

Figure 7: Leading Global Fabricators - Comparative Analysis (Adapted from KPMG, 2006)

The rising prices of precious metal have resulted in jewellery fabricators looking for alternatives for gold, platinum and silver. The best alternative found is the Palladium, which is becoming increasingly popular around the world mainly due to its price convenience. Furthermore, the boundary between fine jewellery and costume jewellery is increasingly becoming blurry. Dauriz (2013) argues, some fine jewelry is available at bargain prices: Tchibo in Germany sells gold diamond rings starting at 99. On the flip side, brands such as Lanvin and Roberto Cavalli sell fashion jewelry for thousands of euros.

01.2.5 Retailing
Historically the USA has been the biggest retail market for jewellery, however regional wise it is the Asian region being the biggest market with China and India accounting for than half of the market. By 2015, it is expected that China will account for 20% of worlds luxury sales (Young, 2012). In the traditional landscape of the jewellery retail sector, there was no room for branding. However in recent years there is a strong shift in that stance, with branded jewellery growing significantly on the global stage (See Figure 8). And by 2020 branded jewellery is expected to be around 30 40% of the total jewellery retail sales (Dauriz, 2013)

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13

19

19

20 30- 40

90

87

81

81

80 60- 70

2003

2005

2007 Unbranded

2009 Branded

2011

2020E

Figure 8:% of Branded and Unbranded Jewellery (Adapted from Dauriz, 2013)

01.3 Special Characteristics and Trade Terms in the Global Jewellery Industry
01.3.1 Special Characteristics Characteristics of the business differ from one industry to another and the jewellery industry is not an exemption. There are few characteristics which are very unique to the industry and some which are unique to regions and markets. Controlled Supply The sourcing of the top two minerals, i.e. gold and diamonds, used in the production of jewellery is largely carried out by only 7 countries per each mineral (Refer 01.2.2). Hence they naturally possess the power to control the supply to the market thereby artificially manipulating the price according to their convenience. As a consequence the global jewellery industry is heavily affected by high price fluctuations in raw materials over the years. Carat Differences Gold and diamond jewellery together accounted for more than 75% of the global jewellery sales (Refer 01.2.2). As such it is vital to consider the variations in customer preferences with regards to gold jewellery between regions. The most critical variation is the difference in the carats value i.e. the amount of gold used in the alloys. While 22 24 carat, which consists more than 90% of gold the jewellery is preferred in Asian region it is not considered suitable in Europe and USA as it is deemed as not strong enough to wear. As such people is those region prefer to wear 9 18 carat jewellery which are much stronger, but less pure. Illegal Activities The industry has been subject to allegations of illegal activities, such as money laundering, illegal trade and human exploitation, time and time again. The diamonds have fuelled civil wars in Africa which is famously known as Conflict Diamonds or Blood Diamonds i.e. diamonds mined in Africa, primarily in Sierra Leone, Liberia, Angola, and the Democratic Republic of Congo, which is used to purchase arms and drugs to fuel domestic conflicts. Diamonds are widely used as tool to grow wealth without being noticed by the taxmen around the world as well for money laundering, due to the very nature of the product, which is highly fungible and a highly concentrated form of wealth given its high value.

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Human exploitation is quite common in gold and diamond mines, especially in Africa. Human rights violations such as slave like employment, unsafe working condition are the common allegations associated with gold and diamond mining operations. Additionally, the environmental hazards due to irresponsible mining are also talked much in the recent years.

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01.3.2 Trade Terms In order to comply with or to mitigate (negative) special characteristics, the global jewellery industry engages in trade terms which are identified below. Hallmarking This is the process of confirming the purity of the jewellery i.e. carat value, often by an assay office, for the convenient of the consumer. Hallmark helps consumers in different regions to pick the jewellery of their preferred carat value (Refer 01.3.1) with confidence. Although hallmarking is largely common in leading jewellery market such as USA, China and Europe, it is largely limited in India which is a significant market in the world, with large number of the consumers not knowing the exact carat value of the jewellery they buy (KPMG, 2006) KPCS - The Kimberley Process Certification Scheme Established in 2003 between the governments of diamond producing countries, trader countries and diamond industry players with backing of the United Nations, the KPCS process is designed to prevent the Blood Diamonds entering the global jewellery market. KPCS prevents blood diamonds by placing strict obligations such as forgery proof documentations, transportation in temper proof containers and government approvals so that the end consumer is aware of the origins of the diamonds. Even though the scheme has not eliminated blood diamonds from the market, it has played a vital role in increasing the transparency of the industry (KPMG, 2006). Ethical mining The alarming rate of irresponsible mining (Refer 01.3.1) has resulted in ethical mining practices recently. No Dirty Gold campaign is one such initiative in which not only the social groups got together but also large retailers and global brands collaboratively thrive to ensure responsible mining. The initiative looks forward to reduce the environmental impacts ensure healthy and safe working condition for workmen reduce negative impact on communities such as, forced displacement, child labour, public health, prostitution etc (KPMG, 2006)

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Even though the initiative is still in its infancy stage, it has the potential to become a key trade term in the near future as human rights and sustainability are two key dimensions of modern trade. In some industries such as the garments industry, ethics and sustainability are already and integral part, without which most of the brands will struggle to attract customers.

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02. Domestic Jewellery Industry

02.1 Sri Lankan economy and the Jewellery Industry 02.1.1 Sri Lankan Economy Sri Lankan economy experiences a steady and strong movement during the last few years. In 2012 the economic growth recorded as 6.4% and in 2012 government expected a growth of 7% (CBSL Annual Report, 2013). Agricultural sector showed a vast improvement in the last year strengthening the food supply. As a result, rice and maize generated a surplus and the surplus was exported. In line with agriculture, dairy and poultry showed a similar improvement. Tourism industry recorded its peak arrivals during the last year reaching 1.5 million foreign and 3.5 million domestic tourists. Foreign earnings from tourism were around US$ 1.5 billion in 2013. The other related industries like handicraft industry were also groomed as a result. Construction industry now contributes around 10% of the GDP with a growth of 17% compared to 2012. Total value of the GDP was more than Rs. 3 billion at the end of 2012. Export industries showed a little growth in the last year due to fluctuations in the global markets. However, apparel industry showed a growth of 6% in the last year and is expected to create export earnings of US$ 4000 million in 2014. Total expected export earnings will be US$10000 million while foreign employment contributes 70% to the total earnings (Budget speech 2014, 2013). External sector development was reflected in the BOP with a positive figure of Rs. 72,638 million in 2012. However there was a trade deficit and FDIs contributed to gain a positive balance in BOP (CBSL Annual Report, 2013). Sri Lanka was able to widen its export market to China, India, Australia, UAE, Saudi Arabia, Russia, Qatar, Brazil and many African nations, in addition to the European and American markets. Export target is US$ 20 billion in 2020 (Budget speech 2014, 2013). Development of infrastructure laid the foundation for this improvement. The other supporting infrastructure such as roads, highways, electricity, water, communication and education were also played a big role in this scenario.

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E.g.:MattalaRajapaksa International Airport

(Source: www.slatca.lk) MagamRuhunupuraMahindaRajapaksa Port

(www.commons.wikimedia.org)

Colombo South Port

(www.discover-srilanka.blogspot.com)

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Manufacturing and SME sector boomed with the low interest rates during the last year. Sunrise industries unlocked their potential after eradicating the 30 years hatred war with LTTE on 18th May 2009. President MahindaRajapaksa was the key person in the success of the Sri Lankan economy. He brought his policies through MahindaChinthana and MahindaChinthana-Vision for the future. Economic stability and growth have given an insight to the potential investors and Foreign Direct Investments would rise as a result. Sri Lanka is moving towards US$ 100 billion economy expecting per capita income of US$ 4000 by 2016. MahindaChintana-Vision for the Future

(www.priu.gov.lk)

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02.1.2 Jewellery industry Jewellery industry is an old industry which now generates much more revenue from exports. It was back then started in small scale, manufacturing shine jewellery, diamond jewellery and jewellery with standardized gemstones. Industrialization was started in Sri Lanka in early 80s with the open trade policy prevailed at that time. From there onwards this industry became more prominent and powerful. About 25000 workers are employed in this sector which includes nearly 15000 craftsmen who independently work and around 2500 workers employ under companies who are in the industry. Rest of 7500 are specialized in the manufacture of silver jewellery (Weralupe, 2013). Trade policies prevailed in those days were not harmonised and hence the growth of this industry was at low rate. With the implementation of new trade policies, the jewellery industry was turned in to a highly value added industry and there onwards the industry showed a steady growth. This industry receives much more incentives compared to other industries mainly because of the liberalization of export and import policies. Three basic segments could be identified in the jewellery industry. They are; Domestic Tourist Export Domestic industry shows a reduction in growth while tourism and export has a growing trend over the past years. Most of the domestic firms are operating in small scale having only few employees. Majority of these firms were started in late seventies as a result of the open economy (Fazil, 2014). Most of the firms in jewellery industry lacks a formal structure and the sometimes the sales staff is higher than the technical staff. Lack of research, lack of consultancy and exposure to information could be the main reasons for the declining in the domestic industry. However National gem and jewellery authority has taken many steps to promote jewellery industry in Sri Lanka namely, removing all taxes, JEWELS exhibition in Sri Lanka, take part in foreign jewellery exhibitions, trade agreements with other countries and consultancy programmes.

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02.2 Current State of the Industry If we consider the current situation of the industry, 30% of Owners of businesses interviewed were of the vision that the industry is growing, while 32% confirmed that the industry is static, and the rest of the 38% thought that the sector is declining. However the gold jewellery sector is reducing in the current scenario as the price of gold is increasing day by day and making gold jewellery less attractive to the consumers. The current trend is that people tend to go for white gold and also for jewellery with gems attached. However middle class people tend to go towards silver rather than gold. The price of 22 carat gold is roughly around 45000 rupees, which was earlier going at a rate of around 30000 about 2-3 years ago. The main export sector products will be the jewellery with fancy gems. The market price for jewellery is determined through Reutter prices of the foreign markets. In Sri Lanka the main jewellery shops have the upper hand where people go for normal shops only to buy at a cheaper rate. And the main jewellery shops tend to be an entry barrier to the jewellery industry as well. Currently the revenue gained through exports of jewellery lays around 19 million USD.

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02.3 Special Characteristics and Trade Terms 02.3.1 Special Characteristics Geographical diversity In Sri Lanka most of the large jewellery shops are located in the Colombo district, hence this industry has a less geographical diversity, and also if we take gems it is also mainly in Rathnapura district. That reflects that there is less geographical diversity. Flexibility Flexibility of the industry is low. As if the trend changes from gold to silver, they cannot change overnight. As jewellery is a skill related industry. Therefore it takes time for the craftsmen to get hold of the trends, and also cost wise they are not flexible. For gold jewellery the labour cost may be high, but they cant charge the same amount for silver jewellery. Competition The competitions from the large players towards the new comers and also towards the small scale players are very high. As the large scale players already have established there customer base the new players cannot attract them and also it is really hard to match the same quality as skilled craftsmen may not exist. Chain reaction In the jewellery industry the customer base for a certain business is achieved through past transactions. If a person buys products and if he is satisfied then it will lead to repeated purchases and also his relatives, friends will also buy from the same provider. Use for religious Activities This industry has a special characteristic to other industries where the products are used for religious work.

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02.3.2 Trade Terms In the jewellery industry there are no specific trade terms, however the quality of the product must be to a certain extent approved by the authorities, the number of carat should be to the exact specifics. As the industry is mostly based on customer requirements, having trade terms may not be very much effective. However when it comes to export trade certain gems is restricted of exporting. Prices, trading values wholly depend on the customers requirements. Hence less trade terms are there.

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03. Barriers or Constrains in the Jewellery Industry

Start-up costs The start-up cost for a jewellery manufacturer will be so high that they will need higher amount of capital to put up manufacturing plants and other resources. And if it is a retailer they will need to put up a high end jewellery shop to attract customers, therefore they will incur a lot of costs to put up these shops. Therefore a retailer to enter into the industry he must have a high capital or some other funding. This could be a main constrain for them.

Specified licenses and certifications To put up a jewellery manufacturing plant or a jewellery shop you will have to take specific license from the authorities. And also to prove that you make high quality jewellery you will need to get specific certifications. Getting these license and certifications are really a hard and long procedure. Therefore this could be a barrier to people who are interested in the industry. However currently in Sri-Lanka they have reduce all this procedures to an easy way where the local manufacturers will be motivated to enter into the market.

Distribution Challenges It will be a barrier to find distribution channels for the local manufacturers to distribute their products locally and internationally.

Inventory costs and outsourcing Inventory cost is one of the main barriers that a new retailer will face when entering into the jewellery industry. It will cost millions of dollars to even stock the shelves in the opening day of the shop or the store depending on the size. To overcome this situation, retailers could outsource their inventory to jewellery suppliers. But then again it could be difficult to secure business because the suppliers who have contracts under high volume with the current retailers will not consider supplying to another retailer.

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Existing players in the market (overcoming entrenched brands) Most of the jewellery retailers compete in the industry almost on quality and creating a framework on consumer emotional experience and consumer psychology. Eg:- most people in the world buy jewellery on special occasions such as weddings, anniversaries, Special Birthdays etc. Therefore existing brands in the industry have learned to create close and deep relationships with their loyal customers (Creating strong bonds with them on their special occasions). This consumer psychology is difficult to break into (sometimes two three generations from the same family will buy from the exact retailer). Therefore it is really hard for a new retailer to build customer loyalty in the industry and it will be a reason for them to not being competitive in the market. And also existing brands will use brand loyalty or emotional experience when marketing their products. This will have a great negative impact on new retailers because it will show that their products are low from quality.

Has to facilitate investment and risk of losses Jewellery retailers will have to face the same infrastructure requirements as other retailers, including shelving, display cases, back-room warehouse storage and point-of-sale systems. However, advanced security systems will be required to protect their high valued inventory depending on the scale of the shop. The amount of security required of a retail jewellery store can incur the largest expense when putting up the shop (cost of cameras, safes and electronic monitoring for doors and windows). Even if they have an advanced security system risk of loss from theft can be high. Therefore it will be a barrier/constrain or demotivate a new retailer to enter into the jewellery industry.

Insurance policies Jewellery shop owners will have to insure their shops because of the above reason. Therefore they will have to pay high insurance cost because the value of a shop could be really high. Therefore it will be another reason for them to not to enter to the industry. (The Barriers to Entry in the Retail Jewellery Industry)

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Highly skilled employees If a person or an organisation is entering into a jewellery manufacturing company they will need to produce high end well-designed jewellery, therefore you will need to recruit highly qualified jewellery designers. This will be a major issue because most of the qualified designers (in Sri-Lanka) have left the country to work in Europe or America because they are well paid in those countries. And also to train the employees who are directly involved in making the jewellery you will need to train them for at least two to three years with a professional maker. This could be a time waste procedure and a costly procedure for the company. So these reasons could be a barrier to enter into the industry. (The Jewellery Sector)

Demographic differences In different countries they have different types of rules and regulations. Therefore manufacturers will need to manufacture jewellery specifically for that country or the market. For an example,

a. The EU adopted a measure prohibiting using nickel as a mixture over 0.05 %. In the EU, manufacturers and importers of jewellery that contain nickel are under the control of the law concerning nickel in jewellery, and the general law regarding product safety. b. A measure in the USA prohibits the import of irradiated gemstones, unless having license from the Nuclear Regulatory Commission and providing proper disclosure to the consumer. c. The law of Saudi Arabia states that imported fine jewellery must have a Certificate of Conformity to guarantee that those product standards are in accordance with the Saudi Arabian Standard Organization. (The Study of Problems and Trends of Non-Tariff Barriers affecting the Gem and Jewellery Industry) Likewise manufacturers will need to consider rules/policies or regulations to every country that they are willing to export. Otherwise there product will get rejected.

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04. New Market Strategy

04.1 Growth prospects in the international market When considering the Sri Lankan jewellery industry, the growth prospects have been gradually increasing despite the negative impacts of the global economic recession. When referring to the data obtained from the Exports Development Board (EDB), it can be seen that throughout the time period of 2000 to 2013, Sri Lankan jewellery manufacturers have been exporting to a total of 100 countries. Out of them, fourteen countries have been consistent/ regular buyers of Sri Lankan jewellery. Given below are the regular buyer countries listed in their current ranking order. Switzerland United States Hong Kong Germany United Arab Emirates Japan United Kingdom Australia Malaysia Maldives Singapore Canada Thailand South Africa

Cumulatively, these countries are responsible for more than 95 percent of the exports in the Sri Lankan jewellery industry each year. When considering the growth prospects in these countries, it has increased in a steadily other than for an exception. Given below is a graphical display of the total revenue over the years.

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Total Revenue
50,000,000 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total Revenue
Figure 9: Total Revenue of the Jewellery Industry over the Years (2000-2013)

When conducting the analysis, the following countries were considered. Switzerland United States Germany

Figure 10: Revenue from the Top Three Countries

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The reason to select these countries were the reason that, in the selected time period for the analysis (2000-2013), cumulatively these three countries have been responsible for fifty percent (i.e. USD169, 364,621) of the total revenue of the industry.

Revenue by percentage
0% 12% 16% 50% germany Switzerland USA 0% Other 22%

Figure 11: Total Revenue Vs. The Revenue of the Top Three Countries (I)

Figure 12: Total Revenue Vs. The Revenue of the Top Three Countries (II)

After selecting the three countries, a regression analysis was done to select which country has the highest payoff when compared to the revenue. To do the regression analysis, fourteen years of revenue data was used. The revenues of the selected countries were held as independent 26

variables while the total revenue over the years was held as the dependent variable. Given below are the formula generated from the final results of the regression analysis. Revenue = 7676816.523+0.823 total value of the exports to Switzerland + 1.310 total value of exports to USA According to the formula, The constant- this means that during the time period of 2000-2013, in the absence of all independent variables in the formula, still, there will be a revenue of 7676816.523 USD to the jewellery industry. Total value of the exports to Switzerland- for every dollar increased in jewellery exports to Switzerland, the total revenue will increase by 0.823 US dollars. Total value of exports to USA- for every dollar increased in jewellery exports to USA, the total revenue will increase by 1.310US dollars. Depending on the above test results, we recommend selecting United States of America to start export the products of our client. But when considering the interview we had with the representative of the jewellery industry in the Exports Development Board, it was said that the potential market for the Sri Lankan jewellery was the European countries and the Chinese and the Japanese markets. As for this report, we have decided to proceed with the results approved by the statistical data. The economy of United States History In the pre-colonial stage, America was an agricultural economy. The economic growth of the country started to occur with the population growth from the births and immigration started to increase. The American economy experienced a tremendous growth with the writing of the United States constitution in 1787. The open market concept allowed the free flow of goods and ideas into the market which was the major boost of the American economy. In 1848, the discovery of gold in California caused in drawing in thousands of people in to the country as 27

well as shifting the countrys balance of the economic attention. Over the years the American economy has passed through many famous issues such as the civil war in 1860s, World War I and World War II. Despite the negative impacts, the country has managed to keep up its growth over the years, keeping up to the standards as the largest economy in the world (www.randomhistory.com). But when considering the recent past, back in 2008, America was struck hard by the Global Economic Recession which set them back with massive damages to its economy. The country is still on the process of recovering from the damages caused by the recession in 2008. Current state The American economy managed to exit from the recession in the last quarter of 2009, but since then, the economy has experienced a slow growth overall. The current growth rate is around two percent (2%) and is expected to decrease more this year (economix.blogs.nytimes.com). America is still holding the position as the largest economy in the world but still the economy is at a unstable stage. This situation is reflected in the GDP of the country where as the growth percentage of the 3rd quarter in 2013 was 4.1 percent (from second quarter to the third) and the growth percentage for the 4th quarter has been 3.2 percent (from third quarter to fourth quarter) (www.bea.gov,2013). The personal income also shows a slow growth in the third quarter (0.2 percent) where as there have not been a growth in the fourth quarter. The BOP of the country is at a staggering negative value, yet, the deficit is gradually reducing. The deficit has reduced 1.8 billion USD from 96.6 billion USD in the second quarter to 94.8 billion USD in the third quarter in 2013 (www.bea.gov, 2013). When considering the foreign direct investments in the country, United States has a huge difference between the foreign investments made in US against the investments made by US in foreign countries. Even though there was a reduction in foreign investments due to the recession, the investments have increased drastically ever since. Currently, the foreign owned assets in the country are closing up to 26,000 billion USD while the Foreign assets owned by the US remains at a worth of around 22,000 billion USD creating a difference of around 4,000 billion USD (www.bea.gov, 2013). 28

Macroeconomic policies Monetary policy The Federal Reserve System is in charge of the United States monetary policy. They use three key instruments (merriam-webster, 2012). Open Market Operations Discount rates Reserve requirements

The basic target have been set to keep the inflation rates at 2 percent (2%) and 3 percent (3%). Fiscal policy The United States fiscal policy has always tended to spend more than the money that comes in. it consists of high taxes and social contributions with high public spending. It also has maintained high borrowings in order to bail out from the recession situation from 2008.The fiscal policy of United States is claimed to be a failure in adapting to the current situation of its economy. Jewellery Industry of United States When considering the current market for jewellery industry in America, the current trend shows that the growth rate have further decreased after rising by 10 percent in 2011 and 6 percent in 2012. The US jewellery industry came back into track in 2011 after suffering major cut downs from the recession. Currently, it is a 33 billion dollar industry with an annual growth of -0.3 percent (from 2008 to 2013 due to the recession) and provides business space to 67,622 businesses and employment to 172,889 employees. Currently the US jewellery market is fragmented that none of the firms have the control over the market. The largest market share of sales is currently 6 percent and it is by Sterling Jewelers. This company owns the first and the third largest jewellery brands in the Unites States (Kay Jewelers and Jared the Galleria). The small players in the industry are still having a hard time being unable to match the competition from the big players in the industry

(www.euromonitor.com).

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As for the future prospects, it is forecasted that the industry will have a full recovery in another four years (by 2018). The consumer confidence index is projected to increase and return to normal by the next four years. The profits are also expected to grow parallel over the years. currently retail giants such as Walmart, have tapped into the market buying expensive jewellery items such as engagement rings which would be sold in their supermarkets, thus, the demand for the traditional high-level customer service will also remain un-harmed and also increased over the years since it is a trade mark to the industry. The employment and the wages are expected to grow over the same time period (www.prweb.com). Analysis of the current US jewellery market is given in the appendix. Product analysis Even though the jewellery market of the US is still at a recovering phase, there is much potential sh23own in the growth prospect shown for small scale suppliers such as Sri Lanka. Sri Lanka also felt the impact as the US jewellery market was crashing due to the recession back in 2008, but currently the industry is recovering at a rapid pace, showing signs of growth in the US jewellery market. A data analysis was done from the statistics retrieved from the customs statistics department. This analysis was done using five product categories which has had a constant demand over the time period of 10 years. The purpose was to give an insight about the fluctuation of demands of these five types of exports to US over the years. The types of products used in the analysis are; Diamonds, whether or not worked Precious stones (other than diamonds) and semi-precious stones Synthetic or reconstructed precious or semi-precious stones Articles of jewellery Imitation jewellery

All of these products have resulted in revenue in millions to the Sir Lankan economy over the years. Given below is a summary of the revenues earned by each product over the years. A critical analysis of the five product types are given in the appendix.

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Revenue earned over the years (product base)

5,000,000,000 4,500,000,000 4,000,000,000 3,500,000,000 3,000,000,000 2,500,000,000 2,000,000,000 1,500,000,000 1,000,000,000 500,000,000 0 Diamonds, whether or not worked Precious stones (other than diamonds) and semi-precious stones Synthetic or reconstructed precious or semi-precious stones Articles of jewellery

Revenue in LKR

Figure 13: Revenue Generated By the Five Different Products

As for the results of the critical analysis, was clearly displayed that despite the major blows from the economic recession, the demand for the Jewellery have been relatively stable over the considered time period for the analysis (2003-2013). Furthermore the market for the jewellery exports from Sri Lanka has been in a feasible range of revenue for a SME market leader.

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04.2 Modes of entry& the possible mode Modes of entry explain the best ways of entering the international market for a domestic company. It is not easy to select the mode of entry since each of them has many advantages as well as root faults. Entry strategy should be developed so 32as to suit the product. The main concepts in choosing the best mode will be the degree of control and the amount of risk. Its a challenge for a SME to select the best mode of entry. There are several modes of entry to international markets. Key modes are explained below. Exporting

Exporting is one of the most fundamental modes of entry which has the lowest risk among all. This comprises the sale of goods and services to another country. There are two methods of exporting. They are direct exporting and indirect exporting. Direct exporting means the one to one export trade done between the local producers with the importer. Indirect exporting includes the sale of goods to another country through a third party. Licensing

Licensing is the method of allowing the foreign country business to use the property of the local company. The property in this case is the intellectual/intangible property. Some examples would be Patent, Copy rights & Trade mark rights. Licensee has to pay the licensor with the loyalty fee and he has to bear the burden of manufacturing and marketing costs. Licensing will give a higher return on investment than the cost of the investment. Joint Ventures

Joint venture is a business formed by joining two companies. Both companies form a managerial team and share the joint venture control. Sharing knowledge and experience will benefit both companies but on the other hand there may be issues in privacy and strategies in both companies. Examples of some best known joint ventures are Sony-Ericsson & Hero-Honda.

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Franchising

Franchising is also another method of allowing the franchisee to use the intellectual property of the franchisor. Franchisor will provide the guidelines and knowledge to conduct the business. Franchises exist most of the time in food and beverage industries. Unlike in licensing, franchises allow the franchisee to alter the product in to some degree to suit the culture prevailed in that particular country. Subsidiary

Local company can form a fully owned subsidiary company in another company and do the operation. Lot of cost should be incurred and the parent company will have to start everything from the bottom unlike in franchising. Foreign Direct Investment

Investing directly in another country is called Foreign Direct Investment. Lot of capital is required in order to do FDI. The best mode of FDI will be the acquisition of a company from another country. Piggyback

This is a kind of tactic used by companies to promote the products. Two different companies exchange their products and sell in the home country. A high degree of trust is required and considerable degree of control is also required in order to conduct the business comfortably.

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Possible mode For a SME business in the jewellery industry, the most suitable method of entering to the international market will be exporting. Exporting requires a less capital requirement and contains a minimal risk compared to other modes of entry. In a country like USA, there is a possibility of doing one to one direct exporting rather than exporting via a third party. Eastern world most of the time prefers the indirect exporting since the transactions are relationship based. Buyers can easily be found through the trade fairs and through internet. Direct exporting will enable the company to gain the cash quickly with the help of a bank guarantee. Hence financial risk will be at a minimum rate. SME businesses should focus on the existence than expansion of the business because they will gain the capability of entering new markets only if they become stable in the market. Advantages of exporting Company will be able to sell the goods to a market which they never served before. Sales can be raised and sales can be maximized. This will be a major solution for the increase of domestic competition. Exporting will benefit in achieving the growth prospects. Doing business at foreign lands will enhance the knowledge about different types of market and thus future mistakes can be avoided and risks can be mitigated. This will be a good solution for the sale of excess production than worrying.

Disadvantages of exporting Financial costs that need to be incurred are very much higher and it is unbearable for a small or sunrise firm. Risk is high and there is a chance of having huge losses however there are options available to mitigate the risk Eg:- Obtaining a letter of credit or a bank guarantee from the importers bank 34

Information about the foreign market will be unreliable and the sources available to find information are less.

Legal procedures and documentation work may be a burden for the exporter. Meeting the objectives of the agencies thatare in line with exporting (I.e. Sri Lanka Customs, Ministry of Industry and Commerce) will be time consuming.

Limitations in other modes of entry Licensing will be impossible since there will not be any intellectual property gained by the SME business and also to do that, the company must be well established and reputed. So a rising SME company wont be able to do that. Joint Ventures are formed between two well established and capable firms but in this case SME sector business wont have that kind of capacity since they are new to the industry. Franchising could have been possible if the product is related to food and beverage industries. Jewellery products cannot be franchised in such a way and doing franchising not an easy task. It requires a good brand name with a good capital requirement which is hard for a SME business. Forming a subsidiary and Foreign Direct Investment requires a lot of capital where the rising companies in the SME sector cannot bear. With the depreciation of rupee value, money going out of the country will be an unbearable loss. Piggyback method could be used if the companies have a good faith and trust. Trust comes with the past experience. SME companies wont be able to carry out the piggyback strategy since they are new to the industry and the local company will have to sell the foreign product in the home country. With these limitations, SME exporter cannot select these modes of entry and therefore they will have to stick to exporting.

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04.3 International Business Strategy Strategy focuses on the action plan that an organization should work on. The strategy that is focusing will depend on many things such as the type of the organization, types of products, markets serving and even the types of customers. In order to develop an international business strategy, there must be a clearly identified market/country. The country analysis which was carried out should be used to analyse the factors affecting the business in the international context. Country analysis gives a clear idea about the environment. Cross cultural assessment has gained the attention throughout the past decades. Theories were created on how to carry out the assessment in a manner that it can be used as a standardized approach. Research and analysis which was carried out will help to suggest a best mode of assessment. However there wont be any necessity of doing an assessment on cross culture since the mode of entering to USA is exporting. The assessment will be very much useful for the modes of entries like subsidiary and foreign direct investment. It is important to know about the culture, societal classes and trends in USA in order to develop the market intelligence. Market intelligence provides an overall picture of the market and it will be useful in deciding the future strategies on the modes of entry or widening the reach. Risk assessment will be a result of the environment and market analysis. Ascertaining the risk will always give a motivational effect on what the business do. By knowing the risk, the organization can get to know about it and steps can be taken to mitigate the risk. Hence risk assessment is a vital function that should be carried out in order to develop a good strategy. There may be a risk of delaying the payments since the relationship is new. Options available to mitigate the risk are handling transactions through money terms rather than credit terms, obtaining a bank guarantee etc. There is a best time to do anything even in the personal life. So do the organizations. Organization should wait till the right time comes which is the best opportunity. Knowing the general environmental factors like economic factors will give clues in choosing the right time. For an example, in order to export jewellery to USA this is the best time since the rupee value is depreciated.

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05. Recommendations
To improve the jewellery industry the country needs to bring down high tech machinery to manufacture high quality jewellery. Therefore to bring that machinery the manufacturers will need to pay high amount of taxes for the government. Therefore the government should give tax incentives to improve this industry There should be a separate department under the Gem and Jewellery authority to deal with jewellery industry in Sri-Lanka. Because currently the Gem and Jewellery Authority of SriLanka concentrates mostly on Gems. Therefore improving jewellery industry has declined. If a separate department is there, then they could concentrate on improving the jewellery industry. Government should emphasize on collecting more international data on jewellery industry and publishing it to the public so that exporters and potential exporters have an idea of which markets to enter. Therefore the exports on jewellery industry could be improved. Branding our jewellery products so that it will gain more recognition and popularity in the international market. E.g. similar thing is currently done for the Blue sapphire gem in Sri-Lanka. Providing training and development programs to current and potential employees so that they could improve their skills and manufacture high quality jewellery products. For the government should get down expertise from other countries and train them collaborating with technical colleges island wide.

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06. Conclusion
This report includes a complete analysis on jewellery industry in Sri Lanka. After conducting a thorough analysis about the domestic jewellery market, a complete and critical analysis was carried out about the international jewellery market. As we are supposed to develop a international business strategy for a SME firm, we did a regression analysis and found the best market. The best market was identified as USA since it showed a steady growth with fewer fluctuations throughout the last decade. A country analysis was done using the techniques of SWOT, PEST and porters five forces. After carrying out the country analysis, modes of entry were evaluated and possible mode of entry was decided as exporting. Then the reasons for rejecting the other modes were also explained. Finally the recommendations were given to develop the export industry for jewellery market in Sri Lanka.

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07.References
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