Recessions spare no one in the business world. The real question is how companies build their resilience amid economic downturns.

The secret, according to a McKinsey & Company report, is moving ahead and making tough decisions fast.

Published last year in an article titled “Improving your company's business resilience,” the study examined how companies flourish amid difficulties, particularly during the 2008 global financial crisis. The analysis focused on a group of approximately 1,100 publicly traded companies, across a wide range of industries and geographies, with revenues exceeding US$1 billion.

“We found some noteworthy characteristics in how 'resilients' weathered the storms: How they prepared for them, how they acted during tougher periods and how they came out of them,” noted McKinsey.

While the world is far from another financial meltdown, the year 2019 proved boldly challenging for many industries.

The jewellery and gemstone sector, for instance, bore the brunt of uncertainties caused by the US-China trade dispute and anti-government protests in Hong Kong.

Hong Kong government data showed a 42.9 percent drop in jewellery sales in October as violent social incidents disrupted consumption sentiment and tourist arrivals.

China also saw a 4.5 percent descent in October jewellery sales, representing four straight months of declining demand.

Other sector-specific challenges likewise abound – lacklustre rough diamond sales and oversupply of polished goods; and monetary regulations in China that hinder seamless trading of coloured gemstones.

There are, however, silver linings: Rough demand started to pick up towards end-2019, the strengthening of the US market and low interest rates. On top of this, most gem and jewellery industry players have been preparing contingency measures amid macroeconomic uncertainties.

“Sometimes, knowing the danger helps mitigate risks. When you are cautious, you have time to adjust and prepare for challenges. This fuels business resilience,” remarked Lawrence Ma, president of the Diamond Federation of Hong Kong, China Ltd (DFHK).

Upbeat outlook

Encouraging trends have emerged in the last few months of 2019, which could signal a healthier year for the diamond trade, said Ernie Blom, president of the World Federation of Diamond Bourses (WFDB).

Blom cited slight gains in rough demand following a slump in sales throughout much of 2019 as the trade grappled with a surplus in polished diamonds. Manufacturers reduced their purchases in the second half, so the jewellery sector can absorb polished goods already in the pipeline.

Traders are expected to replenish their rough and polished inventories ahead of Chinese New Year and Valentine's Day celebrations, on top of a regular restocking that happens in the first quarter.

The US market will also play a crucial role in how the industry will fare in 2020, with the US November elections seen to boost spending and further lift the economy.

“We are likely to see increasing prosperity in the US – the world's most important market, accounting for about 50 percent of jewellery sales,” stated Blom. “With stock markets and house prices soaring, and unemployment at all-time lows, diamond jewellery sales are poised to rise in the US.”

DFHK's Ma is also “quite positive” about business prospects this year. Despite 2019 being a difficult year, global interest rates remained low, which aided subdued economic growth and helped stabilise asset prices. Businesses are similarly setting up safety measures and reducing supplies.

Most manufacturers who adjusted their inventories according to existing demand will probably keep those at low levels until the market recovers. “They can buy more if prices fall. If demand drops, they’d be happy to have a leaner inventory,” continued Ma.

Apart from the US providing much-needed impetus to the sector, emerging markets like China and India could also bolster demand once their economies start to pick up. Millennials and the Generation Z meanwhile are potential sources of growth for jewellery retailers, he added.

Financing and lab-grown diamonds

Some issues in the diamond trade will likely remain on industry leaders' agenda in 2020, including financing difficulties and synthetic diamonds.

According to Blom, bank lending to the diamond sector is expected to dip below US$11 billion in the next couple of years from US$16 billion in 2013 owing to liquidity issues in the trade, so the rise of alternative financing solutions, which offer access to capital, is a welcome development.

The year 2020 will also see higher production of lab-grown diamonds, which account for 2 percent to 4 percent of global supply, amid growing demand, especially from millennials. Synthetic diamond prices will however sink further as output rises.

The trade also faces the perennial threat of undisclosed mixing of synthetic diamonds with natural stones as well as more sophisticated lab-grown diamond treatments. These issues will carry on in 2020, noted Blom, but modern diamond detection devices are continuously being developed in response to this threat.

Colourful prospects

The coloured gemstone business also slowed down in 2019, with China, a major coloured gem market, exhibiting weaker demand.

Clement Sabbagh, president of the International Colored Gemstone Association (ICA), said among the biggest hurdles were monetary regulations for Chinese nationals entering Hong Kong at trade fairs. This was further exacerbated by social incidents in the city that destabilised business sentiment. The sector also suffered setbacks in Europe due to Brexit.

Demand for higher-quality goods however remains sturdy while the US market's continued recovery, thanks to a strong US dollar and a buoyant stock market, has restored confidence in the sector.

The top-performing gems of 2019 were red, cobalt-blue and grey spinels; aquamarines, opals and Paraiba tourmalines. Pastel green, yellow, pink and blue sapphires likewise fared well along with tanzanites in lighter hues. Emeralds are constantly on buyers' shopping lists while Mozambique rubies continue to gain traction in the trade.

These gems are expected to perform strongly in 2020. China, India and Southeast Asia will likely drive growth in the gem and jewellery sector, followed by the Middle East and the US.

The gemstone industry will continue to promote responsible sourcing, transparency, education and harmonised grading standards, practices and nomenclature to bolster consumer confidence.

“Geopolitical tension, disruptive technologies and a change in consumer mindset can impact the trade in the short term,” said Sabbagh. “If we can educate the end-consumer on the rarity of coloured gems; provide them with a certain degree of harmonisation in colour and clarity descriptions; transparency and a compelling story, there is a lot of growth potential.”

Stable demand

A dent in Chinese buyers' purchasing power as a result of macroeconomic downturns affected demand for pearls in 2019 but decent-quality products are still selling, according to Yoshihiro Shimizu, chairman of the Japan Pearl Exporters Association (JPEA). Hong Kong protests further impaired sales.

Buyers now gravitate towards white South Sea pearls and better-quality Tahitian pearls, which are short in supply. Demand for these will remain stable or even higher in 2020, noted Shimizu.

The average price per momme of Tahitian pearls reached US$23 in 2018, down from about US$28 five years ago. The current price is too low for farmers to survive, revealed Shimizu, adding that quality control suffers under a tight price point.

“It's cheaper to produce smaller sizes. Good-quality Tahitian pearls are less visible in the market, even at major auctions like Rikitea,” he added.

White South Sea pearls from Australia now sell at auction for about US$110 per momme while Indonesian pearls of commercial quality fetch US$45 to US$50 per momme.

Price-conscious buyers mostly go for commercial-range loose pearls of 9mm to 11mm in diameter owing to scarcity of nicer-quality items. Prices are stable, thanks to keen demand from serious buyers.

Despite a weaker purchasing power, the Chinese are still restocking albeit at a slower pace, noted Shimizu. This trend is expected to continue unless the Hong Kong situation is resolved, he added.

Promising market

Jewellery retailers are also banking on China for growth given that Hong Kong and Macau markets will likely remain challenging in the near term, according to Kent Wong, managing director of Chow Tai Fook Jewellery Group Ltd.

Chow Tai Fook reported a 20.8 percent year-on-year decline in profits in the six months ending September 30, 2019 largely due to high gold prices, and the impact of the US-China trade war and the public incidents in Hong Kong.

Despite subdued sales, Wong said some pent-up demand for gold products for wedding and Chinese New Year celebrations is expected to boost business in the holiday season. China also presents brilliant prospects.

“Chow Tai Fook's strategy to penetrate lower-tier and county-level cities in China will keep the group's growth momentum,” he continued, adding that these areas are driving China's consumption growth, thanks to rising disposable income.

Demand for luxury goods in these cities is expected to further intensify this year, he added.

Chow Tai Fook opened 333 points of sale during the first half of fiscal year 2020. From this figure, around 55 percent were in Tier III, IV and other cities in China.

“We believe the jewellery industry will get together to overcome challenges ahead and strive for sustainable development,” stated Wong. “Being resilient means responding to evolving customer needs. With a more sophisticated and fragmented consumer demand, jewellers need to make the buying experience evermore relevant to potential customers.”