Intl Trade Mgmt Business Plan

Canada’s Glitter Diamonds for Export

FITTskills Sample Business Plan

The sole purpose of this project is to provide a sample idea of a finished business plan for students as they prepare an International Business Plan for the FITTskills International Trade Management course. Use of any material or data contained within this project is strictly prohibited. This project is reproduced with the author’s express permission. All information contained within the document is considered confidential. Contents may be duplicated by FITT Educational Partners for learning purposes only. Duplication for any other reason is strictly forbidden.

FITT would like to thank the author, Leslie Lai, for allowing FITT to use this project as a sample.

Diamonds for Export FITTskills: International Trade Management

Table of Contents

1. Executive Summary ................................................................................................ 3 2. Corporate Profile and Nature of Business ............................................................... 4 - Company Background - Description of Business and Product - Core Competencies - Description of Product - Key Milestones - Background for Exporting 3. Management and Human Resources...................................................................... 9 - New Export Structure - Senior Management Roles and Background - External Expertise 4. Target Market and Environmental Scan ................................................................ 12 - Environmental Scan - Business Climate for Diamond Industry - Major Commercial Risks - Consumer Profile - LaiFan’s Ability to Meet Market Demands 5. Market Entry and Marketing Strategy .................................................................... 17 - SWOT Analysis - Market Entry - Product, Place, Price and Promotion Strategy - Criteria and Sourcing of Export Partner 6. Operations Overview and Supply Chain Management.......................................... 25 - Domestic versus Export Operational Structure - Key Changes as a Result of Exporting - Maintenance of Competitive Advantage 7. Financial Analysis and Risk Management ............................................................. 30 - Current Financial Standing - Export Cost Accounting - Profitability of Venture - Impact on Company’s Cash Flow - Payment Method - Risk Management Strategy 8. Conclusion ............................................................................................................ 35

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Diamonds for Export FITTskills: International Trade Management

Executive Summary Laifan Polishers Ltd., located in Toronto Canada is currently the third largest producer of diamonds by value in the world, Canada’s diamonds are gaining international recognition for their value and quality. LaiFan Polishers Ltd.’s core competencies lie in polishing and cutting high gem quality Canadian diamonds. Its high craftsmanship and specialty cuts translate into a product that is ready-made to meet China’s market demand for large carat, high value diamonds. The company has recorded seven years of steady domestic sales and feels it is now ready to expand to the Far East, to capture China’s growing demand for diamond jewellery. In this business plan, the company sought to measure the market opportunity and external threats against a specific set of criteria and company objectives to determine the feasibility of pursuing this plan. Results indicate: Market Potential: China offers a large pool of customers amounting to approximately 100 million people in the luxury goods consumer category. The country’s growing economic prosperity, large population and staggered growth, particularly in Shanghai, Beijing and Guangzhu, offers a sustainable and long-term category of customers for LaiFan’s premium priced diamonds. First year sales in the market expect to total over Can$350,0001, representing an 18% net profit for LaiFan Polishers Inc. Manageable Risk: Competitive threats and commercial risks can be overcome by LaiFan’s strengths in developing innovative cuts and designs. Its niche position is further enhanced with its access to a steady supply of Canadian diamonds, an increasingly important factor as world supply levels fail to keep up with demand. Currency exchange fluctuations and commercial risks can be mitigated through sound financial planning and the purchase of EDC’s export credit insurance. With a payback period of 10 months and return on investment of 18%, the proposed market entry strategy of partnering with a local diamond polisher in China is feasible within LaiFan’s current financial strengths. This partnership will enable Laifan to benefit from an established distribution network and local design interests

Product Fit: LaiFan’s product fits well with the Chinese consumer’s demand for glitzy, high quality diamonds that exude Western opulence. The product fit translates into fewer costs for product modification. Company branding to enhance LaiFan’s product image in the Chinese market will be achieved through the use of a local marketing consultant to execute a strategic long-term marketing plan for the company. Recommendations are thus for LaiFan to pursue moderate first steps in exporting to China. Action items and next steps stemming from this report include:

Presentation of the business plan to garner senior management support Incorporation of the company’s new exporting initiative into LaiFan’s corporate vision Securing a qualified Export Manager to spearhead the company’s export initiative Consulting with in-market experts, jewellery associations and Canadian Trade Officers in

China to research options for a compatible co-manufacturing partner in China.

1 All denominations used in this report reflect Canadian currency, unless otherwise noted. Currency

conversions performed on U.S. denominations based on Bank of Canada rate of 1.2428, posted on February 3, 2005. Currency conversions performed on Chinese Yuan denominations based on Bank of Canada rate of .1502 posted on February 3, 2005.

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Diamonds for Export FITTskills: International Trade Management

Introduction This business plan seeks to establish a process for bringing the company’s exporting vision to fruition. The report conducts a thorough analysis of the company’s operational and financial strengths and measures these assets against market opportunities and threats to determine feasibility of pursuing exports. This report concludes with recommendations and an action plan for the company’s next steps.

Corporate Profile and Nature of Business Company Background LaiFan Polishers Ltd. specializes in the cutting and polishing of Canadian diamonds. Based in Toronto, Canada, operations began in 1998 coinciding with the opening of Canada’s first diamond mine - EKATI Diamond Mine near Lac de Gras, Northwest Territories. LaiFan’s factory is housed in Etobicoke in a two level 21,000 square foot building. The company has eleven full- time and twelve contract staff and is presently divided into four divisions. It is headed by Mr. Jeffery Fan who has been in the diamond trading and polishing business for over 25 years. Style of Corporation LaiFan Polishers Ltd. is federally incorporated, subject to several benefits it would not receive in a sole proprietorship operation or provincial incorporation including the right to carry on business anywhere in Canada under its current name, limited liability for the owner and lower corporate tax rates (Industry Canada, 2004). Description of Business

Table 1: Value of World Diamond Production1 The Diamond Pipeline, 2003 Rough Diamond Production

Rough Purchased for Production (polishing)

Value of Polished Ex- production

Polished Diamond Content in Retail Sales

Retail Sales of Diamond Jewellery

$12.4 billion $13 billion $19.6 billion $21 billion $79.3 billion Source: Government of the Northwest Territories Resources, Department of Resources, Wildlife and Economic Development, 2004. The diamond pipeline represents the incremental increases in value as the rough stone moves through the supply chain to its final retail stage. LaiFan’s operations rest between stages 2 and 3 of the pipeline. With annual sales of approximately Can$1.5 million2, LaiFan is classified as a small to medium sized enterprise (Ontario Exports Inc.). LaiFan’s procurement activities reflect current standing agreements with the majority owners of Canada’s only two diamond mines: BHP Billiton Diamonds Inc. who owns a portion of EKATI Diamond Mine, and Rio Tinto plc of London England who owns a majority share of the Diavik Diamond mine. Both mines hold two sightholdings a year where their rough stones are sorted into predetermined valuations and sold to LaiFan. Purchase transactions are conducted in cash only and are nonnegotiable. 2 Source: The author’s description of the diamond manufacturing process in based on several sources:

Hardness 10; Conversation with Don Law-West, Indian and Northern Affairs Canada; “How Diamonds Work”, Kevin Bonsor; Russian Gemological Server”

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Diamonds for Export FITTskills: International Trade Management

LaiFan’s current business consists of sales to jewellery wholesalers, independent jewellers and to two of Canada’s largest jewellery retailers: Peoples Jewellers and Henry Birks & Sons Inc. Over 85% of the company’s diamonds are cut and polished to be set in ring and necklace jewellery with the remainder cut and polished for a variety of other jewellery including bracelets and watches. Core Competencies LaiFan’s core expertise is in processing rough diamond stones into cut and polished diamonds. Its manufacturing process consists of four main stages2:

1. Cleaving: The first stage of manufacturing whereby the rough stone is split into smaller, manageable components.

2. Sawing: Diamonds that cannot be cleaved and require finer treatment enter this stage. A laser or manual saw is applied to cut off odd irregularities and shape it for polishing.

3. Bruting: Workers at this stage begin to smooth the diamond’s surface and apply facets according to the predetermined end cut.

4. Polishing: The final stage where the diamond is polished to maximize its brilliance and fire.

Following these steps, the diamond is cleaned and sent to the independent gemological laboratory, Harold Weinstein in Toronto for independent grading of quality. A certificate is produced by the lab denoting the diamond’s features and LaiFan’s Canadian leaf logo is inscribed into the girdle of the diamond, with the company’s initials LF appearing below it.

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Diamonds for Export FITTskills: International Trade Management

Description of Product LaiFan produces four main diamond cuts3, representing traditional pieces in the diamond market. In addition, the company has developed a specialty cut, The MobiusTM, which was created and patented in 2000.

Princess: The most popular cut on the jewelry market, the Princess is a modified brilliant cut with 57 facets (21 crown facets (the top half of the diamond, above the middle girdle), 32 pavilion facets (the bottom half of the diamond, below the middle girdle), and four girdle facets). 30% of LaiFan’s diamonds are princess cut diamonds.

Oval: The oval is a brilliant cut with an elliptical girdle outline. The diamond features a circular section with triangular facets. 10% of LaiFan’s diamonds are of this cut.

Emerald: This is a square step cut with diagonally cut corners and two, three, or four rows of facets parallel to the girdle on the crown and pavilion. 10% of LaiFan’s diamonds are of this cut.

Pear: Variation of the brilliant cut with a pear-shaped girdle outline and 56 to 58 facets. 25% of LaiFan’s diamonds are of this cut.

And LaiFan’s special developed cut, The MobiusTM - an oval brilliant cut featuring a three twist mobius band lasered into the center of the diamond. 25% of LaiFan’s diamonds are of this cut.

Mobius band

Source: The Geometry Center

3 Source for diamond cut information: International Gemmological Association

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Diamonds for Export FITTskills: International Trade Management

Key Milestones Table 2 denotes the key milestones in LaiFan’s history:

Event 1998 1999 2000 2001 2002 2003 2004 Factory opens Negotiates $250,000 purchasing contract with BHP Billiton

Negotiates $100,000 purchasing contract with Rio Tinto

First sale outside of Ontario, in Vancouver, BC

First year of profit achieved Company automates production, purchasing $350,000 of laser technology, reduces production staff to 15 instead of 25

$400,000 purchasing contract signed with Peoples Jewellers, over 3 year term

$350,000 purchasing contract signed with Henry Birks & Sons, over 2 year term

Annual Sales $350,000 $700,000 $960,000 $850,000 $890,000 $1.2 million

$1.5 million

Background for Exporting 9/11 and subsequent weak consumer confidence levels softened sales across the diamond industry. However, a rebound in the industry since has posted strong sales and growth for LaiFan. The company’s stable domestic performance has now propelled it to consider expanding sales by exporting to a foreign market. Several conditions in the global economy have further fuelled this decision: Strong Global Demand - In 2003, world diamond retail jewellery sales increased by 6% over the previous year, totalling more than $79 billion (De Beers Annual Report, 2003). This demand is expected to grow even stronger as a result of a projected shortfall in the supply of rough diamonds. New Markets of Growth – There is a changing shift in the countries that are leading jewellery sales. While the United States currently accounts for around 50% of total world diamond retail sales, 2003 figures reflected double digit growth in Asia and Arabia markets (De Beers Annual Report, 2003).

Recognition of Canadian Diamonds – The high gem quality of Canadian diamonds is attracting international attention and Canada is now the third largest producer of diamonds, by value (Bruce Boyd, Natural Resources Canada). The international movement to prevent the entry of conflict diamonds4 in the diamond trade provides a further opportunity for the promotion of authentic, high quality diamonds such as those found in Canadian mines.

4 According to the United Nations, “Conflict diamonds are diamonds that originate from areas controlled

by forces or factions opposed to legitimate and internationally recognized governments, and are used to fund military action in opposition to those governments, or in contravention of the decisions of the Security Council.” (United Nations Department of Public Information, March 21, 2001).

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Diamonds for Export FITTskills: International Trade Management

Based on these factors, conditions seem conducive to the sales of LaiFan’s diamonds into new foreign markets. In a previous research report to select the appropriate first market for entry, LaiFan established three broad strategic objectives and criteria and compared market conditions in the target country against these criteria. It was concluded that China would serve as an excellent target market. This conclusion was supported by a number of findings:

Market Potential: The pool of approximately 200 million middle-class consumers in China is larger and growing faster than any other emerging market with buyers carrying the purchasing power to make luxury good purchases such as diamonds. Product Fit: Once ostracized by Deng Xiaoping’s government as symbols of Western ostentation and corruption, diamond jewellery is enjoying renewed popularity. The in-pouring of Hollywood movies, foreign multinational chains and American pop icons is fuelling consumer demand for Western products. To that end, LaiFan’s diamonds fit very well with the Chinese market’s desire for large, high gem-value diamonds from a foreign source. This translates into lower product modification costs for LaiFan and a strong ability to compete by offering a steady supply of the stones. Manageable Risk – As a criteria for pursuing the export opportunity, the target market must present risks that are manageable within the context of the company’s existing strengths and resources. Initial review of China’s commercial infrastructure and competitive environment revealed that LaiFan was in a position to overcome weak legal protection and obtain market position in the country. This report now moves to expand on these initial findings and assess the opportunities and threats in China against LaiFan’s operational and financial strength. Implications of this analysis are subsequently defined in the marketing and market entry sections. Similar to the criteria set out in the last research report, analysis of data in this report will be measured against the three criteria previously established and summarized again below: Market Potential: The new market must possess a sustainable and growing consumer

base. Manageable Risk: Overcoming risks and barriers in each market must be achievable within

the context of LaiFan’s existing strengths. Product Fit: LaiFan’s product should be compatible with consumer demand and

implications for product modification achievable within the realm of the company’s resources.

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Diamonds for Export FITTskills: International Trade Management

Management and Human Resources Figure 1: LaiFan’s Export Structure

Regional Sales Reps

Master Cutter Administrative Assistant

Shipping Clerk

Sales & Business Development Manager

Production Manager

Export Manager

Logistics Manager

Finance Manager

President

Sales & Business Development Production Logistics Finance

Cleavers Sawers Bruters Polishers R&D

Figure 1 proposes the ideal structure for LaiFan in its initial export stage. This structure differs from its current domestic setup with the introduction of an Export Manager who now plays a central role in coordinating the company’s export activities across all of its existing divisions. The ideal profile of the Export Manager thus includes a good mix between desired skills, background and experience. Table 3 summarizes the criteria LaiFan will place on candidates for this role.

Table 3: Hiring Criteria for Export Manager Skills Background & Experience Desirable Personality Traits Good analytical and problem

solving skills Detailed understanding of the

international trade environment, preferably of China and the Asia Pacific region

Experience managing budgets Negotiation skills Fluent in Mandarin Chinese Innovative and versatile

10 years or more experience in exporting and international trade, preferably in the Asia- Pacific region

Experience in the diamond industry, particularly in the diamond manufacturing sector

Experience developing market entry strategies

Open to cultural differences Team-oriented Comfortable with working non

conventional hours High self confidence Flexible and adaptable

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Diamonds for Export FITTskills: International Trade Management

At the senior management level, the head of each department will work closely with the new Export Manager to coordinate the additional sales, production, labelling and packaging activities in selling the diamonds overseas. The role of existing senior management is therefore extremely critical to the company’s transition to the new structure. The following presents brief bios of senior personnel with an emphasis on their roles in the new structure. President: Mr. Jeffery Fan Key responsibilities as pertains to international trade:

- oversees all operations and ensures smooth integration of the Export Manager role - leads negotiations and makes final decisions on market entry strategy - instils a renewed company vision that embraces LaiFan’s new exporting initiative

Background: Mr. Fan was born in Lan Tian, Xin Jiang province, the center of China’s jade industry and grew up as an apprentice in a jade factory. Pursuing an interest in diamonds, Mr. Fan trained in Israel and New York City in diamond polishing and cutting techniques. Upon immigrating to Canada, he ran his own jewellery store for fifteen years in downtown Toronto and enrolled in Aurora College’s twenty two week Canadian diamond polishing program. Sales and Business Development Director: Mr. Keynan Gujarit Key responsibilities as pertains to international trade:

- manages purchasing contracts with the EKATI and Diavik mines and will lead negotiations on increased purchase volumes for the Chinese market

- works closely with Export Manager to determine purchase volumes ahead of negotiations

- oversees work of three regional sales representatives and will incorporate international sales calls into their work portfolio

- participates in international diamond trade shows in China Background: Mr. Gujarit worked for India’s largest jewellery wholesaler as Sales Director in Mumbai and sold silver and gold jewellery to Canadian retailers. He moved to Canada in 1992 and joined LaiFan’s operations as the sales lead when it opened in 1998. Logistics Manager: Ms. Cathay Banton Key responsibilities as pertains to international trade:

- oversees materials management for packaging of diamond products - sets logistics schedule and oversees the packing and shipping of diamonds - works closely with Export Manager to determine shipping strategy

Background: Ms. Banton began her career in logistics as an Account Executive in a local courier company in Sydney, Australia. Prior to joining LaiFan Polishers, Ms. Banton worked as the Logistics Manager at Kuehne & Nagel’s Chicago office for seven years. Finance Manager: Ms. Shannon Lum Key responsibilities as pertains to international trade:

- manages all company budgeting, accounting and billing activities - works closely with senior management to determine financial activities to support the

increased purchase volume of diamonds for export - advises on credit terms to offer foreign buyers that will be most beneficial for LaiFan - determines LaiFan’s borrowing needs and initiates discussions with banks to borrow

funds

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Diamonds for Export FITTskills: International Trade Management

Background: Ms. Lum is a Certified General Accountant and has worked in the financial departments of various Hong Kong-based institutions prior to immigrating to Canada in 1993. Ms. Lum then operated her own independent accounting practice for five years upon moving to Canada. Ms. Lum studied and is fluent in Mandarin Chinese. Production Director: Mr. Torin Sandler Key responsibilities as pertains to international trade:

- sets production schedule and directs production staff - works with Master Cutter to establish cut styles - works closely with the Export Manager to determine production needs and schedules

additional production hours accordingly - manages routine maintenance and repair schedule of equipment - oversees materials management - oversees Research and Development Associates to innovate new diamond cuts

Background: Mr. Sandler was born and raised in Jerusalem, Israel and entered the diamond industry as an apprentice in his father’s diamond polishing factory. Upon his father’s retirement, Mr. Sandler took over the factory of one hundred staff and managed it for ten years before selling it. Mr. Fan had trained in Mr. Sandler’s factory when living in Israel and hired Mr. Sandler when he moved to Canada. Having reviewed LaiFan’s management structure, there are several inherent strengths that will support its new export initiative:

A diverse management team and workforce. Over 85% of LaiFan’s workforce comes from countries outside of Canada. This multicultural background harnesses greater acceptance of cultural differences and better ability for the company to overcome cultural and language barriers.

Experience in international trade: Many of LaiFan’s senior managers and staff have past

experience in exporting. Collectively, this background presents a pool of expertise to manage problems that may arise in the new market.

Despite these strengths, LaiFan does lack expertise and resources in several areas which it will need to offset by accessing outside expertise. Marketing: The company’s strength in polishing and cutting overshadows a weakness in marketing ability. LaiFan currently defaults to using its company brochures to promote its brand. With the industry’s charge towards heavy branding of company names, poor marketing could hinder the company’s competitive stance in the Chinese Mainland. LaiFan currently does not have the in-house resources nor the expertise to undertake a proactive marketing strategy. The development of such a strategy would thus be best led by an outside marketing consultant. The consultant would be hired to review LaiFan’s current marketing literature to determine language and messaging modifications required, and to develop a long-term marketing strategy for LaiFan in China.

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Diamonds for Export FITTskills: International Trade Management

International Lawyer: Advanced consultation with a lawyer well versed in international trade law and experienced in China practice is critical to identifying legal costs and risks. LaiFan will also need the lawyer to draw up the terms and conditions of its contracts with a foreign partner or buyer.

International Tax Consultant: Although LaiFan employs a financial officer, Ms. Lum is not experienced in China’s tax structure. Advanced consultation with an international tax consultant is therefore necessary to determine LaiFan’s tax obligations in China, and the implications this will have on its Export Costing, cash flow and market entry strategy. Freight Forwarders: The company will continue to use an external transporter for its diamonds, but will have increased reliance on major international shippers such as United Parcel Service of America, Inc. and DHL Express, two companies that are internationally reputed and well represented in the Chinese market. Both can advise on customs and documentation requirements in the Chinese market. Banking and Insurance: Increased purchasing requirements and new export initiatives translate into additional costs for LaiFan. Specific costs associated with the new venture will be discussed in greater detail in the Financial Analysis section, but do imply that the company will need to undertake additional borrowing activities. LaiFan’s Finance and Logistics Managers will lead the discussions with Export Development Canada (EDC) to establish export insurance protection, and with its current bank, Royal Bank of Canada, to obtain a higher line of credit and a short- term loan. Translators: Marketing literature for the Chinese market will need to be translated into Mandarin. Experienced translators will be required who can also assist the company in developing catchy slogans or branding messages. Target Market and Environmental Scan This section of the report strives to achieve several objectives:

Present a broad overview of economic and market conditions in China Discuss the business climate as specific to the diamond industry Identify risk factors the company will have to mitigate Zone in on the target market and target region of initial entry for LaiFan’s product

Environmental Scan Rapid evolutions in China’s political, economic and commercial infrastructure are creating a business climate increasingly favourable for the diamond industry. China is the world’s fourth largest country by size and the number two economy measured by purchasing-power parity (CIA – The World Factbook, China, 2004). The country is divided into twenty-two provinces, five autonomous regions, four municipalities and two special administrative regions and is home to 1.3 billion people (CIA – The World Factbook, China, 2004). China is a one party state, governed by the Communist Party led by Hu Jintao (Ambler and Witzel, 2004). Over the past twenty years, the country has gradually embraced market-oriented reforms and decentralized economic decision-making.

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Table 4: Key Economic Indicators Graph 1: GDP Growth

Economic Indicators China Gross National Income

- 2002 - 2003 - 2004

$1.6 trillion $1.9 trillion $2.1 trillion

Gross Domestic Product (purchasing power parity)

- 2002 - 2003 - 2004

$7.5 trillion $8.4 trillion $7.8 trillion

Inflation - 2003 - 2004 - 2005 (forecast)

1 2.5 3.2

Foreign Direct Investment - 2002 - 2003 - 2004

GDP (annual % growth, real)

6

6.5

7

7.5

8

8.5

9

19 98

19 99

20 00

20 01

20 02

20 03

20 04

20 05

(f ore

ca st)

Year

% China

Sources: The WorldBank Group; EDC Market Forecasts, 2004; International Monetary Fund, 2003; CIA – The World Factbook, 2002, 2003, 2004, 2005

$65.1 billion $71.3 billion $74.5 billion

Table 4 and Graph 1 provide a longitudinal profile of China’s economic performance and reveals several trends that support a positive investment climate: Stability – Despite nominal fluctuations, the country’s GNI and GDP levels are relatively stable, at times reporting an upward trend. Inflation rates also appear to be well managed and rest within a low-risk range (EDC Global Export Forecast, 2004). In a conversation with Phillip Wong, Ontario Exports Inc.’s International Marketing Consultant for the Asia-Pacific region, China’s increasing exports and diversified export portfolio mitigates the risks of over- dependence on one trade partner, decreasing its susceptibility to averse economic conditions in one market. Taking the United States market as an example, China only exports 22% of its products and services to the U.S. compared to Canada which exports 89% of its goods and services to the U.S. (CIA – The World Factbook, China, 2003, Ontario Exports Inc. - Trade Factsheets). Positive Growth – Steady increases in GNI and Foreign Direct Investment levels denote growing wealth and a favourable investment climate. China’s Ministry of Commerce reported a 7.6% increase in the number of new foreign-invested venture licenses in 2004, totalling 43,664 (CIA – The World Factbook, China, 2004).

These facts point to a nation with increasing prosperity and a growing pool of customers capable of affording luxury goods. The country’s stable economic and political climate also reveals a low risk environment for civil strife and sudden currency devaluations in the Chinese Yuan. Despite these facts, LaiFan still has to carefully monitor trends amidst industry analyst warnings of potential risks. In EDC’s presentation of its 2004 Global Export Forecast, Chief Economist Stephen Poloz warned of overheating in China’s economy in 2005 and 2006, a condition fuelled by soaring bank credit and rapid increases in money supply. Unexpected anomalies such as the region’s SARS epidemic in 2003 which cost Asian economies $16.5 billion to address further underscore the importance for foreign companies to buffer against such risks.

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Business Climate in Relation to Diamond Industry In 2000, China opened the Shanghai Diamond Exchange, a first step in its aggressive plans to build a strong domestic diamond industry. According to Martin Rappaport, in March 2004, diamond trading volumes increased 91% to $40.7 million, with diamond imports rising 48% to $12.2 million and the rough diamond trade soaring 270% to $3.71 million. Analysts predict the country will account for 10% of the world’s total sales of diamond products by 2010. These conditions have both positive and negative implications for LaiFan. Strategies for overcoming negative conditions will be discussed in greater detail in the Market Entry section of the report. Positive: Lower Costs – To develop a more competitive trading environment, China has progressively reduced its high import tax on raw and processed diamonds from 33% to 10% (People’s Daily Online, 2002). This reduction can amount to significant savings for LaiFan.

Higher International Standards – The Shanghai Exchange was inducted into the World Federation of Diamond Bourses in New York in May, 2004 (World Diamond Council, 2004). The rigorous guidelines imposed on China’s diamond activities as a result of entering the international community upholds a standard that will protect the credibility of diamonds in a market plagued with counterfeit brands and imitation jewellery. Negative: The downside to liberalization of the diamond trade is the influx of foreign competitors who are setting up polishing factories in Shanghai as well as in the Southern provinces of Guangdong and Shandong. These factories possess a competitive threat to LaiFan along several planes: Greater Product Mix – Foreign polishers from Belgium and Israel trade in higher gem quality diamonds with more sophisticated craftsmanship. The increased supply of such diamonds in the market dilutes LaiFan’s claim that its diamonds are unique in these qualities. Competitive Pricing – Local jewellery retailers are more inclined to purchase diamonds from polishing factories in China. Diamonds from these factories are cheaper due to their use of lower wage workers and exemption from taxes by re-exporting a portion of their product out of China. As a result, retailers have larger profit margins and can exact price penetration strategies to compete more aggressively in the market. Advanced Technology and Know-How – LaiFan’s competitive standing against local Chinese manufacturers has been its progressive use of technology to streamline its manufacturing costs and increase productivity. Its workforce is highly trained to operate laser machinery to effect more refined cuts. This ability will however, become increasingly challenged as Israeli and Belgium owners bring in advanced technology from their countries to automate their processes and transfer knowledge and skills to the local labourforce (Asia Times, November, 2002). Major Commercial Risks This section concludes with a discussion on China’s weak legal infrastructure as a risk for LaiFan’s operations.

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China’s rapid economic growth is outpacing reforms on foreign investment and its present legal framework is poorly equipped to govern more complicated business transactions (Ambler and Witzel, 2004). Regulations are frequently changed and inconsistently enforced with parts of commercial law often contradicting one other. This has several implications for LaiFan: Poor Legal Protection – A weak legal infrastructure complicates access to protection against unfair treatment from a foreign partner or buyer. Legal advice must thus be sought in advance of any negotiations with local buyers or sales agents. Guanxi is still extremely important and supersedes many written regulations and the tremendous discretion of government officials in exercising approval powers cannot be underestimated (Ambler and Witzel, 2004).

Resolution of Disputes – Litigation is not a popular option in China as there is a strong preference for the resolution of disputes through conciliation, to save face. Dispute resolution procedures need to be well defined in any export contracts with local businesses and a good translator is often needed should the dispute land in court. Poor Intellectual Property Protection – The Chinese market is notorious for constant breach of intellectual property rights. According to a Bloomberg report, half of the US$100 million in counterfeit goods seized by customs officials in 2002 were from China (Bloomberg, 2002). Such breaches pose a grave threat to LaiFan’s strategy on developing a well-branded Canadian image. Strategies to combat this situation include early registration of its patented cuts in the market, educating buyers on distinguishing between real and fake pieces and increasing innovation of patented cuts to make it difficult to replicate pieces. Consumer Profile 15% of China’s population is designated as middle class (Ambler and Witzel, 2004) which equals roughly 200 million people. According to China’s Chief Trade negotiator, this number is expected to rise to 400 million in 2010 (Yap, 2004). Jewellery has now become the third most frequent item purchased by disposable income and in a report by the International Herald Tribute, the average middle to upper-middle income consumer had an average of $8,500 yuan in disposable income in 2003, 36% more than in 1998. In the past four years, China’s retail sales growth has outpaced that of the United States, totalling $205 billion in 2003 (Yap, 2004). While wages across the country have been steadily increasing, regional disparities are salient when you compare the annual per capital disposable income of city residents – an average of $1,200 for city residents versus $395 for rural residents (China Statistical Yearbook, 2003). The majority of the wealth is concentrated in the eastern coastal cities of Shanghai and Beijing and in the Southern part of Guangdong province (Ambler and Witzel, 2004). China’s Middle Class Consumer LaiFan’s strategy to target the middle to upper middle income bracket of China’s population can be justified when one analyzes the size and buying power this subgroup represents. Several conclusions can be drawn about this:

• There is a large base of potential consumers for LaiFan’s product concentrated in the lower middle to upper middle class range.

• The target consumer can be further segmented to consist of the middle to upper middle class populations as they possess the buying power and disposal income to purchase luxury goods.

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Primary Markets: Shanghai, Beijing and Guangzhou China’s growing wealth is not equally distributed and to strive to sell across the entire country would be mismanagement of the company’s time and resources. The ailing conditions still present in the Western provinces become apparent when you consider in cities such as Xinjiang, Guizhou and Yunnan, the government has struggled to sustain adequate job growth for tens of millions of workers laid off from state-owned enterprises, migrants, and new entrants to the work force. Eighty to one hundred and twenty million surplus rural workers float adrift between villages and the cities, many surviving through part-time, low-paying jobs (CIA – The World Factbook, 2004). Leading the country’s charge in economic growth, Shanghai, Guangzhou and Beijing are three important markets for LaiFan to target first entry into. Of the three, Shanghai claims a heightened role in this development and should be greatly focused on in the company’s initial entry. With a population of 16 million, the city contributes one twelfth of China's total industrial output value, a quarter of its total exports and one eighth of the nation’s financial revenue (Shanghai Foreign Investment Service Center). China’s Jewellery Consumer Having established the target market group, this section now moves to better define the buying trends of LaiFan’s export customers. According to Ken Fong, Marketing Manager at the Hong Kong Trade Development Council, increased buying power, lower jewellery import tariffs and a standardization of China’s jewellery market have all led to new dynamics in jewellery buying trends. These include: Shift in Purchase Motivation - Jewellery was once purchased for investment purposes, often to hedge against inflation and rifts in the economy. Consumers now buy jewellery for their aesthetic value and personal pleasure rather than for long-term investment. Type of Jewellery Purchased - Gold jewellery, once the treasured favourite in the country, is now competing for buyer preference with platinum and diamond jewellery. An increasingly open market to jewellery imports further raises local awareness of other alternative pieces. Branding is increasingly important with the Chinese buyer, a fact reinforced by the growth of the luxury brand market (Benson and Whitcomb, 2003). International fashion houses such as Giorgio Armani and the Paris-based Cie Financiere Richemont, which owns Cartier, are expanding in China (Yap, 2004). The role of the younger consumer has also grown increasingly important, a group that is extremely fashion-conscious and influenced by Western trends (Ken Fong, HKTDC). The role of the female consumer cannot be underestimated as women in China increasingly make the purchasing decisions. Female employees total 330 million in the country, accounting for 46% of the total workforce, an increase of 0.3% from 1995 (All-China Women’s Federation, 2004). Women’s education levels are also rising. Over the last seven years, the number of female students completing adult higher education increased 37.6% (All-China Women’s Federation, 2004), denoting a population that is increasingly independent and influential.

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LaiFan’s Ability to Meet Market Demands Having better defined local market demands, several features of LaiFan’s diamonds differentiates it from its competition and makes the company well suited to meet current demand: A Canadian Source – There is much opportunity to actively export Canadian diamonds into the region. LaiFan’s product would be one of the first in China from a Canadian source, allowing LaiFan to claim it holds a unique position in the market. Sustainable Access to Supply – Diamond jewellery is in the beginning stages of the product life cycle in China. The predicted shortfall in supply in the near future will lead diamond traders to seek a reliable and sustained access to diamonds. Canada’s two operational mines are young and both have expected life spans of another twenty to twenty five years. There are two additional diamond mines expected to open by 2010 in the Northwest Territories. In contrast, some of the world’s largest diamond mines that supply the rough to factories in China have been in operation for greater than ten years and are reaching the end of their lifespan. For example, the Mir pipe in Russia, which has been in operation since the 1950s, recently surpassed its lifespan and was decommissioned (Natural Resources Canada, 2004). Research to find new deposits is a very lengthy and expensive process and this shortfall in supply will drive up demand for Canadian diamonds. Quality Diamonds Canadian diamonds are becoming internationally renowned for their high gem quality because of their origin in kimberlite pipes which trade for a larger value in the marketplace (Bruce Boyd, 2004). Innovation LaiFan’s automated technology is cutting edge in the industry and allows for greater and more precise cuts on traditional pieces such as the Princess Cut and the Round Brilliant. In a market where size and shine are the predominant buying criteria, a refined cut that can maximize the flare of a diamond would do extremely well in China. The increased productivity and finishing time to produce a polished diamond allows LaiFan to supply its product faster to a market that is largely being supplied by manual labour. LaiFan is also unique in that it houses an in-house research and development department. Though small, the two-person team presents an added advantage for the company to produce and patent unique cuts faster than other factories who concentrate on the processing aspect of polishing diamonds only. As diamond jewellery moves through the product life cycle, this allows LaiFan to introduce new and innovative cuts to the market, offering alternatives to traditional pieces the market may tire of. Market Entry & Marketing Strategy This section proposes that LaiFan’s market entry strategy take the form of a partnering arrangement with a local polishing plant in China. The merits and justification for this proposal will be presented within the context of a SWOT analysis on LaiFan Polishing and the benefits the company can expect to accrue through this partnership. SWOT Analysis Strengths Within its first seven years of existence, LaiFan has become a reputable leader for its ability to value-add to a raw commodity through the use of advanced technology. The company’s

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obsession with quality echoes throughout its operational structure, beginning from the procurement stage through to the delivery of its product to customers. Innovation occurs through LaiFan’s use of three state-of-the-art ROFIN RX3000 C02 laser machines to perform more refined and precise cleaves that result in better cut diamonds. Consequently, LaiFan’s diamonds command a much higher mark-up of 75%, compared to the industry average. LaiFan’s small research and development team further expedites new innovations by dedicating full-time commitment to researching new technologies and designs. It was the first to respond to market demand for a specialty cut, away from routine traditional pieces, and introduced the patented “Mobius” design. Weaknesses Three main internal weaknesses hinder LaiFan’s competitive strength in China:

- Financial resources. LaiFan is a small operation with limited resources to create a brand new export division. The strict purchasing schedule dictated by the diamond mines places an added strain on the company’s cash flow during specific times of the year. This reduces the company’s ability to invest aggressively in a new export initiative as well as reduces its capability to withstand significant losses should its export initiatives fail.

- Weak Marketing Ability. Already discussed in the Management and Human Resources

section of the report, LaiFan has neither the marketing budget, nor the in-house expertise to develop an extensive marketing strategy. In an industry where large competitors such as De Beers and Cartier launch multi-million dollar advertising campaigns, this weakness can significantly impede recognition of LaiFan’s product over competing brands.

- Inexperience. Although LaiFan’s workforce is extremely diverse, concerted efforts

across the company to pursue exporting activities is a new vision and presents a large learning curve for all involved. A more important aspect of the company’s inexperience is a lack of connections and distribution networks in the Chinese market. Not being able to access a strong distribution link into China could hamper the company’s entry strategy into the country and prevent it from performing effectively against aggressive competitors.

Opportunities Target opportunities were presented and justified in the preceding section and will be summarized again at a high-level in this section. Target Locations - Beijing, Shanghai and Guangzhou’s lead in the country’s wealth and middle- class boom make them the prime centers of target for LaiFan’s initial entry.

Product - The market’s crave for large gem quality pieces means a higher level of acceptance of LaiFan’s product requiring fewer modifications. Consumer Type - As the target market analysis demonstrated, there is a large and growing base of consumers for LaiFan’s product within the middle to upper middle class segments of the population. Selling to this pool of customers still allows LaiFan to price its diamonds to about a 65% mark-up.

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Threats External threats in China takes the form of domestic and foreign competition. At one level are jewellery products other than diamonds that compete with LaiFan for jewellery sales. At the other level are diamonds produced within China and from outside of China. Other Products as Competition - Despite the new attraction to diamonds, traditional pieces such as jade, platinum and gold are still very popular, especially with the older generation (Ken Fong, HKTDC). It is also important to note the growing prevalence and threat of fake diamond jewellery pieces. Cubic zirconia and synthetic moissanite jewellery exude similar brilliance and fire as genuine diamonds but retail for half the price. Improvements in technology will increasingly make these pieces more desirable to consumers who seek less expensive jewellery with the same flair of real diamonds. Domestic Diamond Producers - China Diamond Corporation is the country’s largest diamond producer and controls four mining properties in the country (AZoMM, 2004). Roughly more than 50% of the stones recovered from the company’s 701 Changma mine are gem quality stones. The country thus has access to a supply of polished and ready to set diamonds. Regional Competitors - China’s jewellery industry is heavily dominated by retailers from Hong Kong that carry strong branding through chain stores. Similar cultural background and preferential treatment of Hong Kong products as a result of the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) gives added advantage to Hong Kong players (Raymond Yuen, HKTDC).

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Market Entry Table 5 summarizes several feasible market entry options and their pros and cons for LaiFan Polishers. Table 5 – Market Entry Options

Market Entry

Option Advantage Disadvantage

Sales Agent Low Risk: Partnership can be terminated upon dissatisfactory performance.

Low Investment: Payment from LaiFan tied to commission from sales.

Established distribution network.

Local knowledge.

Additional costs: Increased staff wages as a result of increased activity.

Potential intellectual property infringement by agent. Chinese commercial law still underdeveloped and

often favour the local agent. Contractual disputes would be costly and time-consuming.

Less incentive to commit to LaiFan’s product if other clients have larger portfolios or offer larger commissions.

Manufacturing Plant in China

Cheaper labour costs. Most labour is manual labour and productivity is slower than automated process in Canada.

Major capital investment costs: A minimum of US$140,000 is required of registered capital with a minimum of 15% paid up within three months and the balance paid up within a year (Offshore.com, 2004)

Failure of operations in China represents major financial loss that may not be recovered by its domestic operations.

Cannot access tax breaks in special economic zones as company is not exporting goods out of China.

Co- manufacturing Partnership Agreement

Less investment than setting up a local manufacturing plant.

Access to local knowledge.

Due diligence in protecting intellectual property rights. Transfer of knowledge to local partner could enhance

its position as a future competitor.

Access to local distribution network.

The third option presented above is the most feasible in terms of LaiFan’s current financial and risk management abilities. Working with a local partner will facilitate LaiFan’s entry into China through:

Providing local experience and networks More efficient working process – the hours in China are longer than in Canada and

output can be greater with a larger workforce An economy of scale that the company may not otherwise have if it opened up its

own factory in China

The proposed co-manufacturing partnership will consist of LaiFan undertaking the initial three steps in the polishing chain: cleaving, sawing and bruting of the rough diamonds. At this point, the diamond will be cleaned and packaged by its logistics department, then sent to the local partner in Shanghai where it will complete the polishing and faceting of the diamonds according to LaiFan’s cut design, licensed for use to the partner. The diamonds will also undergo the final

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brillianteering stage in China and be inscripted with the traditional Canadian maple leaf emblem with the co-initials of LF and the partner company appearing beneath the logo. The partner will make an initial payment on LaiFan’s semi-processed diamonds on net 30 day credit terms. A further commission of 20% on the sales value of the polished diamonds will be forfeited to LaiFan once the diamonds are sold in the retail market. The commission will also be made on net 30 day terms. Upon finding an appropriate partner to undertake this relationship, LaiFan will enter into a one- year contract, with a purchase schedule set out for the year and licensing of its patented cuts to the partner to cover this one year period as well. Routine reviews of the partnership will be made by both parties with negotiations on the renewal of the partnership to be held on an annual basis.

This report now moves to support the merits of this strategy within the context of the company’s product, pricing, place and promotion strategy.

Product In the absence of a large marketing budget, the proposed partnership could act as a bridge to better connect LaiFan’s product to consumer demand:

Distribution Network: The partner would be expected to have an established network of buyers. Accessing this network would expedite LaiFan’s entry into China and save it time and costly research to tap into this network on its own. Local Knowledge: The local partner would be best suited to predict upcoming trends in the Chinese market and advise on minor modifications needed to LaiFan’s current product. There are also regional differences between local markets that only a business could pick up through extensive experience in a country. The local partner could thus help LaiFan fine- tune its product and market entry strategy to better match regional demands.

Price Two conditions about pricing in the diamond industry will govern the pricing strategy that LaiFan uses:

1) Widespread industry consensus that a shortfall of supply will keep diamond prices elevated well into 2010.

2) Limited range and flexibility for diamond traders at the polishing stage to set pricing

strategies. The greatest discretion and flexibility in pricing occurs at the retail stage, where mark-up can be made as high as 200%. This flexibility unfortunately does not exist at the polished and semi-polished stage as rough and polished diamonds are strictly priced according to the Rappaport Diamond Report (Don Law-West, Indian and Northern Affairs Canada). The report is an industry standard based on global supply and demand dynamics and reflects prices of small brilliants to stones of 5 carats, of colour D to M and from “pure” to “pique 3”.

Despite the rigid pricing structure, shortage of similar sized and graded diamonds in China means LaiFan’s diamonds would command a premium price in the market. Noting that the same carat diamond in China is not necessarily graded at the same standard, the higher price that Canadian diamonds command in this market thus resembles a market skimming strategy. This strategy supports the results discussed in the target market section of the report where LaiFan’s

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target market would have to preclude the lower end of the middle class category, who do not have the purchasing power to afford LaiFan’s pieces. The merits of the proposed partnership strategy become evident again at this stage of the analysis. A high premium price commanded by a product often requires similar messaging to justify the product’s cost. With the expertise and help of a local partner, LaiFan can refine its messaging to emphasize the diamond’s quality as support for its higher cost. This said, there are two areas in pricing which LaiFan does have control over when pricing its diamonds to its partner: the shipping terms used, and the currency payment will be made in. In Appendix A – Export Cost Accounting, LaiFan has calculated its pricing to its partner based on the Incoterm CIP Shanghai. This term is potentially the most reasonable one to negotiate between two parties who have no familiar history with one another. CIP also presents a balanced share of the risks and costs as LaiFan manages the responsibility for transportation to Shanghai and the partner oversees the entry of the product through local customs. As the Export Cost shows, using the CIP Incoterm, the $16,000 cost of transportation and insurance specific to the CIP term still makes the export venture feasible and profitable for LaiFan.

The sales price will be set in the foreign buyer’s currency – Chinese Yuan. This decision was made based on an assessment of environmental conditions including the foreign exchange rate, inflation, laws and regulations in China. The environmental scan reveals that China has a stable foreign exchange and inflation rate with low risk of currency devaluation. Quoting in Chinese Yuan will help the partner clear the goods through the Shanghai Diamond Exchange which operates in local currency and will make for more favourable negotiating terms between the two partners.

Place LaiFan’s shipping strategy is very dependent on its partner’s intimate knowledge of China’s customs and documentation procedure. In a telephone interview with Philip Yue, Operations Manager of Kuehne & Nagel, diamonds are considered high value products and as such, are very vulnerable to theft. Air transportation is the main mode of delivery used in the industry and once in-land, diamond traders use high security trucks to transport the diamonds to their final destination. Under the CIP Incoterm, the risk passes from LaiFan to the importer when the cargo is handed to the first carrier (FITTskills International Trade Logistics). However, responsibility for the costs stay with LaiFan until the goods actually arrive in Shanghai. The term offers a good risk management opportunity for LaiFan because it does not have to worry about finding a local customs broker to clear the goods. LaiFan’s responsibilities before the goods leave Canada then are that it must prepare all the certification for the diamonds and complete other export paperwork. Certification includes a report from a gemmological lab and a Kimberely Certificate, to prove that the diamonds are from a non-conflict source. Documentation includes a B13A, three copies of a commercial invoice, the shipper’s waybill and evidence of insurance. As the Canadian government does not restrict the export of diamonds, no Export Permit is required to clear the goods (Canada Customs and Revenue Agency). There are also no restrictions of the importation of diamonds into China. According to Samira D’Costa, FedEx

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Sales representative, these documents do not need to be translated for accompanying the goods into China. Transit points for LaiFan will thus be two areas. LaiFan will have UPS pick up the shipment from its factory in Toronto. Its diamonds will land at Pudong International Airport in Shanghai and be transported by Brinks armoured car to the Shanghai Diamond Exchange where they will clear customs. Clearance of the goods in China will be managed by LaiFan’s partner who will need to hire a local customs broker. According to the HKTDC, documentation requirements are handled by the Chinese importer and include the bill of lading, invoice, shipping list, sales contract, an import quota certificate for general commodities, import license, inspection certificate issued by the State Administration for Import and Export Commodity Inspection (SACI) or its local bureau, insurance policy, and customs declaration form (Raymond Yuen, HKTDC). The packaging of the diamonds will need to be enhanced due to the extra travel time they are subjected to. To prevent the shape of the diamonds changing through contact with other materials during transportation, they will be wrapped very tightly in heavy duty parcel paper. There will also be a paperweight placed in the parcel paper before it is folded to prevent the diamonds from “jumping” in shipment. The parcels are lined with double layers of soft cotton fabric liners, instead of the regular single layers. As with domestic shipments, the diamonds will be placed in aluminum parcel boxes, but packed more compactly to prevent shifting or movement. Promotion Strategy Diamond conglomerates such as De Beers, Tiffany’s and Cartier, are spearheading the industry’s move towards massive branding of their names on jewellery. This phenomenon will compound the importance for all diamond participants in the supply chain to step up efforts to brand their product. With this in mind then, there are several avenues for which LaiFan can promote its diamonds – some specific to its short-term strategy and some specific to its long term strategy. LaiFan’s first line of customers in China is the jewellery retailer – the company’s first point of sale after their partner polishes the diamond pieces. The company’s marketing brochure will thus be its key piece of marketing literature to build awareness within the retailing market. Extra prints of its promotional brochures will be supplied to retailers for display at their jewellery counters or jewellery stores. The market’s affinity for Western products means images in the brochure should depict a Western culture theme, showing a Caucasian model in a North American wedding bearing a Canadian ring. Symbols of good fortune should also be utilized in the material such as the colour red or the number eight, both symbols of auspicion to the Chinese. Heavy government control in China means extra caution must be exercised when establishing product messaging. Messaging should not have any political overtures but instead, emphasize the following qualities:

• The size of the Canadian diamond. • The authenticity of the Canadian diamond. In a country ridden with counterfeit products,

being able to provide retailers and consumers with a government-backed certification provides reassurance to the buyer of genuine quality.

• North American source of the diamonds. • Prestige of owning a Canadian diamond.

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On a long-term basis, this marketing outreach will extend to utilize channels that would reach the target diamond consumer. The high cost of television and radio advertisements and the lower control of targeting the message to a specific audience makes them less appealing channels for LaiFan to pursue. Instead, print advertising in fashion magazines presents a more feasible medium for LaiFan to promote in, ensuring the company of better reaching its target audience. The influx of Western magazines such as Esquire, Cosmopolitan and Vogue all present highly circulated mediums for LaiFan to advertise in. Additionally, glossy fashion and lifestyle magazines such as iLook and Rayli have become prime marketing tools for jewellery retailers to market to the young and affluent woman. To offset its weakness in marketing, LaiFan will rely heavily on its local partner to assist with two components of its marketing plan:

- Initial review of LaiFan’s marketing materials and advisement on how to adapt its products to better suit the market’s tastes. The first modification of the marketing piece that the company will undertake is translation of the piece into Mandarin Chinese. Here, the local partner would be of benefit in suggesting credible translators. The partner could also take initial looks at the marketing materials and advise what modifications are required to the colours, messaging and imagery used.

- The second benefit the partner would bring to the relationship consists of advising on the

long-term marketing strategy for LaiFan. It is LaiFan’s intention to secure the expertise of a local marketing consultant who will develop and implement a long-term marketing strategy for the company. The co-manufacturing partner would be of value in identifying a reputable marketing consultant, advising LaiFan of acceptable and current market rates for consulting fees and evaluating the feasibility and merits of the consultant’s marketing results. Using a consultant will be less expensive for LaiFan in the long run (i.e. consulting with the marketing expert at 40 hours at $40 per hour, the industry norm, will cost LaiFan approximately $1,600 versus hiring an additional in-house marketing staff at $24,000 a year.)

Criteria As this section shows, the partner plays a very important role in the success of LaiFan’s entry into China. Extra attention should thus be paid to sourcing a reputable company with the experience and expertise of polishing high valued diamonds. Specific criteria will be used when selecting the partner. Ideal qualities in the partner include:

Foreign owned factories that source high value, gem quality diamonds similar in size and grade to Canadian diamonds

The use of advanced technology such as laser equipment in the factory Established in China for longer than five years Financial stability and a history of timely payment to suppliers Timely and satisfactory delivery of product to customers

Target partners will be Israeli or Belgium owned companies who have been established in China for greater than five years. These foreign owned firms often source higher gem quality diamonds, similar to the size and grade of Canadian diamonds and use advanced technology to effect the polishing. Locating such a partner would give LaiFan greater assurance that it can uphold its quality standards in the Chinese market and that it can continue to market “quality” in its messaging.

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How to Source Partner A number of avenues can be used to locate the foreign manufacturer and these include:

Canadian Consulate Officers in Guangzhou, Shanghai and Beijing. Trade officers are very attuned to local conditions and can recommend local polishing factories that meet LaiFan’s criteria as well as advise on companies that may not possess a good fit with the company.

Hong Kong Trade Development Council – Consultants in HKTDC are divided into

sectors of expertise and the diamond and jewellery industry in China is very heavily researched by the organization. HKTDC also has strong representation in Canada with an office in Toronto where LaiFan could speak to one of their consultants.

Local trade shows – Shanghai held the country’s first ever diamond fair in 2004 and the

success of the show will guarantee future trade shows for this industry. These are an excellent venue for LaiFan’s President to meet face-to-face with manufacturers, to learn about current trends in the diamond industry in China, and to meet with government level decision makers.

International diamond associations are another great source to access because they are

tapped into China’s development in the jewellery market and are well acquainted with local contacts in the regions. It is important for LaiFan to speak with individuals at the World Diamond Council, the International Gemological Association and the International Diamond Association to review China’s progress in this industry from an external and less biased viewpoint.

Operations Overview and Supply Chain Management LaiFan’s operational setup has been critical to maintaining its competitive advantage against competitors. The company has improved its operational processes in several ways:

Integrating technology into its manufacturing process. In 2001, LaiFan purchased three laser machines and two CAD design programs to automate its production process. The transition resulted in a 25% reduction in production staff required to manually produce the diamonds and a 37% reduction in time to manufacture a finished piece.

Since its inception, LaiFan’s President has instilled a commitment to quality in the

company, not just in the final polished piece, but throughout the company’s entire operational structure. In 1999, LaiFan was ISO 9001:2000 certified and has established regulatory standards across all its departments

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Graph 2 – Operational Structure: Domestic Versus Exports

Operational Structure: Domestic Operational Structure: Exports

Customer orders

Logistics team: - determine packing and labeling

needs for the week and ensure materials on hand

- coordinate shipping times

Financial Manager & Admin Assistant: - invoice customer upon release of

diamonds - track payment and follow up with

payment reminder - update financial reports to reflect sales

Production team: - schedule cleaving,

bruting, sawing and polishing

- R&D consistently evaluates new technologies for company according to that week’s orders

Sales team coordinates

Sales team solicit sales

President & Business Development Director purchase diamonds from mines based on previous years’ sales

President & Business Development Director purchase diamonds from mines for export

Export Manager: Manages contract with China partnerProduction Team:

- schedule cleaving, bruting, sawing of diamonds to be polished by overseas partner

- R&D evaluates new technologies to give company competitive edge in Chinato that week’s

Logistics Team: - orders additional

packaging supplies - preparesB13,

commercial invoice, consular invoice,

Sales Team:

Financial Manager & Admin Assistant: - obtain export credit insurance - obtain BDC loan to cover diamond

purchase - invoice partner - track payment and follow up with

payment reminder - update financial reports to reflect

sales

- ensures enough brochures available

In the export structure above, each of the four existing departments will expand to incorporate exporting components to their current operational processes. A central difference between the domestic and export structure is that while in the former, the sales team plays the central role in coordinating activities with the four departments, the Export Manager now takes on the coordination role. The Export Manager manages the partner contract, establishes the sales volume with the partner and sets the purchasing schedule for the year. The contract will stipulate the number of diamonds the partner will procure throughout the year and the dates of delivery to Shanghai. The Export Manager will work with the lawyer to solidify the terms into a contract and oversee the licensing of the cut designs to the partner. Having established the buying schedule, the Export Manager then works with the four department teams in the following manner: Production Team – The Export Manager communicates the purchasing schedule with the production team. The Production Director then establishes the schedule to process the rough diamonds for export. The two R&D team members will evaluate new technologies and cuts to introduce into the Chinese market. Sales Team – Prepares extra marketing materials and brochures to accompany the diamonds. The Sales and Business Development Director attends international diamond and jewellery trade shows in China with the Export Manager to establish contacts and find alternative sales leads in the country. The Export Manager will communicate any modifications required to the marketing pieces to the sales team who will implement the changes.

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Logistics Team – The Logistics Manager ensures all staff is trained on preparing export documents. The Manager secures the appropriate insurance coverage and procures an adequate amount of supplies and materials used for the shipments. The Manager also establishes the packaging and shipping schedule to ensure timely delivery. Financial Manager – The Export Manager consults with the Financial Manager on the extra purchase volume the company can sustain and works with the manager to establish cash flow projections. The Financial Manager is responsible for securing export credit insurance and extra borrowing to cover the increased purchases from the diamond mines. Constant communication is critical between the Finance and Export Manager to ensure payment is received from the foreign partner and to monitor the company’s cash flow for future purchases.

To better understand the labour required and materials used in producing the diamonds for export, what follows is a detailed description of the production processes the rough stone goes through before being delivered for export to China.

Analysis The rough stone is first analyzed by the Master Cutter to determine the best cut for the diamond. The best cut is determined to be the one that will show off the diamond’s four Cs in the most optimal way. Equipment used in this assessment stage include diamond testers, a scale to measure the initial and subsequent weight of the stone, a microscope and a gran diamond colorimeter to assess the colour variations in the diamond.

Following this analysis, the Master Cutter places the rough stone under a camera. The camera reproduces the picture of the stone on a computer and an image of the diamond comes up on the screen with lines drawn into it, suggesting the optimum cut for this particular rock. The analysis involves tracking all possible angles and proportions and determining the regions most promising for cutting. The Master Cutter can then program the selected cut into the laser equipment.

Before actual work is done on the diamonds, LaiFan’s diamonds undergo extra steps to authenticate their origin and guarantee of value from the Canadian mines up north. These steps follow the voluntary guidelines set out by the Canadian Diamond Code of Conduct where a unique Diamond Production Number is assigned to each stone and the number is registered with the Canadian Diamond Code Committee.

Lasering Lasering is most used during the cleaving, sawing and bruting stages of manufacturing. After the preset cut is programmed into the computer, the diamond is centered on an X-Y axis on a platform. As the computer-controlled laser passes over the first time and cuts the diamond at high temperature, it breaks the carbon bonds and leaves behind the graphite residue, which is “burnt” or vaporized on the return pass. The gemologist is able to watch his progress on the computer screen. Cleaving The Master Cutter explains the cut pattern to the two cleavers where one will operate the laser beam to create the kerf incision in the diamond while the other will perform the manual split of the stone. Basic equipment is utilized at this stage and includes quick-drying cement, a wooden cleavers’ workbench, the laser machine and a steel blade to make the blow to the stone.

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Sawing This stage has been greatly automated over the past several years as the laser saw has now become the predominant tool. The stones are fixed on a circular saw in individual supports, then subjected to a sensor which detects heat and vibrations. Several stones can be simultaneously placed on the saw as the laser beam slices through the stones. The Sawer cleans the stones by putting them into Pyrex pots filled with sulfuric acid before they proceed to the bruting stage. Bruting During this stage, the diamond is placed in a lathe, and another diamond in the lathe is rubbed against it to create the rough finish of the girdle, the outside rim of the diamond at the point of largest diameter. Equipment utilized at this stage include one automated bruting machine which consists of a laser beam controlled by a desktop computer and a manual bruting machine made of cast iron, mounted on an individual work table with a ¼ HP motor. The manual machine is also supported by a bruting stroboscope which allows the bruter to monitor the progress on the video screen and a heating block. Polishing Polishing5 puts a number of faces (called facets) on the stone. To give the diamond its finished look, it is placed onto the arm above a rotating polishing wheel. The wheel is coated with diamond powder that smoothes the diamond as it is pressed against the wheel. LaiFan operates five rotating polishing wheels set on wooden polishing benches and employs six polishers specialized in different streams of polishing. These specialists include:

- 2 crossworkers specialized in round or fancy cuts - 2 eight cut workers, divided into specialists of the crown and specialists of the cutlet side - 1 brillianteerer – specialized in round or fancy cuts and the company’s “Mobius” brand

There are various other equipment and tools to support the polishing process including diamond powder, mesh pads, diamond drill packs and diamond polishing syringes. With greater wear and tear due to the new export production activities, the equipment will need to be maintained with parts replaced on a regular basis. Following these four stages, LaiFan sends the diamond to the Harold Weinstein laboratory in Toronto to grade the diamond’s cut and quality. After grading, the diamond is inscribed with the LaiFan trademark symbol. Upon return of the diamonds from the gemological institute, they are sent to the logistics department to prepare for packaging and shipment. The diamonds are steam cleaned once again, then sorted by their gem grading and packaged in 5 ½ x 3 ¼ sized parcel paper. Diamond Information Fact Papers are taped onto the parcel papers to identify the stone’s weight, color, clarity and measurements and allows the producer to pinpoint inclusions and pavilion diagrams. Following this, the diamonds are placed in 3 x 4 velvet pouches closed with a drawstring and finally placed in aluminum parcel boxes. The respective mine’s certification and report from the gemological institute are both placed in the box. The logistics team then completes the waybill and contacts UPS to pick up the day’s shipments. An invoice to the buyer is enclosed with the package. This sale is logged with a copy of the invoice kept by the Finance Manager who manages all billing records. 5 Descriptions of the diamond polishing process is based on the Hardness 10 book by Eddy Vleeschdrager and on

discussions with Don Law-West of Indian and Northern Affairs Canada.

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Key Changes as a Result of Exporting The new partnership agreement allows LaiFan to focus on its core competencies while not incurring the added costs of polishing a finished diamond. With the new partnership arrangement, LaiFan will be responsible for cleaving, sawing and bruting the diamonds and will take on added overhead costs associated with greater hours put in by the production team. With the company’s recent adoption of new technology, its production processes have been largely streamlined where equipment is not being used to maximum capacity. LaiFan’s manufacturing facility thus has enough room to take on the extra capacity of processing the diamonds for export, and will not require a new capital budget for additional equipment. It should be noted however, that as LaiFan becomes more experienced in the export market and begins to aggressively expand into China, additional equipment will eventually be purchased to support a full functioning export department. In fiscal years 2009 and 2010, this assumption is reflected in the purchase of one additional polishing and sawing machine, and one laser machine, totalling $375,000. All three purchases have been factored into the company’s operational budget and cash flow projections, with the corresponding borrowing method denoted. Additional support materials have also been budgeted for and these include extra diamond powder, diamond mesh pads, diamond drill packs and diamond polishing syringes, additional parcel papers, velvet bags and aluminum boxes to store the diamonds. In addition, more frequent maintenance of the machinery will be needed. Maintenance of Competitive Advantage LaiFan’s production process will help it establish a competitive advantage in the Chinese market. For one, its core competency of manufacturing very high gem-quality diamonds allows it to offer a premium product in the Chinese market, supporting the higher price it will charge for its diamonds overseas. LaiFan also leads in the use of cutting-edge technology, supported by an in-house R&D team. Its proximity to New York City, a world cutting center in quality diamonds means it has access to new technology on the market faster. This has important implications for LaiFan as it allows the company to keep ahead of the competition by constantly reinventing its products and offering new product lines as markets mature in Beijing, Shanghai and Guangzhou. A third competitive factor that LaiFan has is access to a highly skilled workforce. A multitude of schools across Canada now offer diamond polishing programs and a number of international diamond governing agencies have representation in Canada. The high craftsmanship in the company through a strong domestic training infrastructure again means LaiFan can offer higher valued diamonds to the Chinese market. What this all translates into is that LaiFan can deliver to its customers in China something that local competitors cannot – a larger, higher gem quality stone complemented by a refined cut. The company’s advanced technological processes also enable it to better respond to market demand and change, leading the introduction of new products into the product life cycle.

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Financial Analysis and Risk Management The proposed market entry strategy and entire export initiative can only be pursued if LaiFan’s financial structure can support its plan. This section thus performs several analyses to validate the strategy. Analyses include:

- Export Cost Accounting – This section of Appendix A presents the export costs associated with two market entry scenarios. Comparison of both scenarios allows LaiFan to measure the direct impact each strategy will have on the firm’s profitability. Recommendations to pursue the co-manufacturing strategy are supported by the data presented.

- Performance Ratios – The export venture’s Return on Investment (ROI) and Payback Period are calculated to determine when LaiFan’s initial investment in the project will be recovered and if the ROI meets industry and the company’s standards.

- Five Year Cash Flow Forecast – The forecast, included as part of Appendix A, integrates the costs associated with the export strategy, into the company’s domestic operations. The effect of the partnering venture on the company’s cash flow is reflected in these reports and areas where there are cash shortages are isolated and addressed.

This section concludes with a discussion of the financial risks of the export venture and strategies for LaiFan to mitigate such risks.

Current Financial Standing The three year income statements and balance sheets in Appendix A provide a snapshot of LaiFan’s financial performance prior to the undertaking of any exports. The sales revenue in the Income Statements are consistent in showing the company’s increasing growth in the domestic market. Over a three year period, this corresponds to a 71% increase in gross sales. Despite this, the financial statements also reveal that profit levels are not large enough to support an immediate aggressive pursuit of exporting. To rapidly pursue large export sales, LaiFan would have to dramatically increase its purchase volume of rough diamonds and also spend a minimum of $400,000 on new equipment. Both the financial statements and cash flow analysis show that the company does not have the deep cash pockets to follow this route. More appropriate actions would instead involve the company moderately adapting a proactive export structure, processing diamonds for export within the existing capacity levels of its present machinery. As export sales and cash levels increase, the company will be in a better position to undertake larger export contracts. Export Cost Accounting To validate the proposed co-manufacturing partnership entry strategy, export costs were performed on this option and the second option of selling to a sales agent.

Scenarios A and B in the Export Cost section details direct costs associated with the export activities and measures such costs against the sales forecast expected in the first year of operations. The costs are based on a projected value of $200,000 in rough diamonds that would be purchased in the first year of export and are totalled to reflect expenses accrued over a year’s processing activity. In producing this Cost Accounting analysis, a decision on the allocation of export overhead was made. Overhead such as utilities, long-distance calls, equipment maintenance and building and property taxes have been proportionally applied to the costs associated with the export project. In terms of wagers, only those associated with the extra hours of the production team was factored into the export costs. The cost of hiring an

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Export Manager would still be incurred if the company chose not to export that year, so was not included in the export analysis.

Reviewing the summary costs in Scenarios A and B, it becomes readily apparent that two large costs associated with Scenario A render this option highly unfeasible:

Additional Equipment: The fast wear and tear of polishing machines means extra wheels would need to be purchased to polish the extra volume for export. This represents an additional cost of $200,000, requiring capital and cash LaiFan does not have to make the purchases.

Additional Labour: Additional work volume calls for additional polishing wages. The higher wages that Polishers command makes up 82% of the total wages associated with processing the export diamonds, contributing to an additional $100,000 the company cannot afford.

Totalling these and other costs up totals to an aggregate cost of $634,120, an amount that is almost twice the projected sales revenue, and an unsustainable activity for LaiFan to pursue.

Net profit posted for Scenario Two lends greater credibility to the co-manufacturing partnership. Ironically, the second scenario draws in greater revenues than the first scenario, in large part due to the negotiated 20% commission LaiFan will receive on the polished diamonds.

Performing the ROI and Payback Period calculations on Option Two, the payback period for when LaiFan will generate sufficient profits to recover the initial investment is about 10 months (300,700/356,000) with the return on investment at 18%, above the industry average of 15% (ROI = $356,000-$300,700/$300,700). Results of both calculations are acceptable to LaiFan’s criteria and support the recommendation to pursue the export partnership.

Profitability of Venture The Operational Budgets in Appendix A present a short and long term snapshot of forecasted sales and expenses over the next five years. Fiscal 2006’s operational budget expands on the Export Cost Accounting sheet to measure expenses and expected sales revenue on an accrual basis – as earned by LaiFan, versus when the cash is actually received.

Sales revenues will be achieved through two means in China: through selling of the semi- processed diamonds to its partner manufacturer in Shanghai and through a negotiated commission of 20% on the sale of the polished diamonds. The five year operational budgets demonstrate corresponding increases in expenses and sales revenue. As the first two years demonstrate, there will not be a great amount of profitability as LaiFan moderately engages in exporting. Sales forecasts expect a steady increase in revenue over the next several years to reflect the industry’s optimism on the role of emerging markets in creating strong, sustained demand and low supply levels to keep with customer demands. In year four, the increase in expenses reflects the company’s purchase of extra machinery to match its aggressive pursuit of markets beyond Shanghai, Beijing and Guangzhou. The higher expense level is correspondingly matched by an increase in sales, reflecting the company’s sales in secondary markets. Revenue in the operational budget and cash flow forecast also reflect the trends discussed in the marketing section of this plan where the highest volumes will be made during the shoulder months of the calendar year, around Chinese New Year, Valentine’s Day and Christmas.

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Impact on Company’s Cash Flow A final important assessment that LaiFan must undertake is the impact of the export project on the company’s overall cash flow. The past several sections isolate the costs of the export venture but the cash flow analysis seeks to integrate the export costs into the overall financial picture. The most immediate impact on cash flow will occur in the following areas:

- Greater cash shortfall to purchase the rough diamonds destined for China - Funds required to buy diamond powder and equipment accessories to support increased

cleaving, bruting and sawing activities - Greater cash shortages to pay for additional hours of workers - Higher interest costs incurred due to additional funds borrowed to finance cash

purchases - Increased costs associated with extra packaging and freight expenses

Two unique features of the diamond industry carry significant implications for LaiFan’s cash buoyancy. First, buying transactions can only be carried out during two very strict periods of time. Second, rough diamond transactions are only conducted in cash. Such increased cash requirements are expectantly reflected in LaiFan’s cash flow forecasts for the five year period into 2010 where the large surplus built from the seven months leading up to the first purchase in August is accessed to effect the first buy. The tight four month window between August and the next sightholding is however, not enough to allow LaiFan to build up its reserves again. In each year, borrowing from external financers is needed to provide the cash for the December purchases. In the first three years forecasted, the transactions show that LaiFan will still be able to largely access its one source of financing – the negotiated Line of Credit to support its December purchases. This line of credit is used towards year end and will be negotiated up from a maximum of $100,000 to $200,000 to support the new export initiative. While it is heavily used in the latter part of the year, it is also regularly paid down when the company receives its payments in the new year. The cash flow denotes that each year however, a short-term loan will need to be secured. In year four, this will increasingly be accessed as LaiFan pursues more aggressive strategies to expand its export venture.

The cash flow and sales forecast are inextricably linked but ultimately are also susceptible to unexpected conditions in the marketplace. These risks could throw the company’s cash flow off balance and affect its ability to conduct its export and domestic business. Such risks include:

- Large amounts of uncollected debt and delayed accounts payables: LaiFan offers open account credit terms to familiar customers in Canada and its bad debt is usually less than 1% of its total revenue. In China however, LaiFan will be offering 30 day credit terms, lengthening the delay in receipt of money. If the banks or the buyer reject LaiFan’s paperwork and does not pay within the 30 days, the company’s cash projection could be thrown off track, affecting subsequent operations throughout the year.

- Unexpected changes in global diamond market. Sudden events such as 9/11 and SARS could cause immediate and unpredicted slowdown in LaiFan’s sales, again potentially straining the company’s operations.

- Civil unrest, government expropriation, nonconvertible currency and severe devaluation of the Yuan could result in significant losses for LaiFan.

These risks and others will be discussed in greater detail in the section to follow with strategies to mitigate their effects presented.

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Payment Method As LaiFan’s relationship with the export partner is new and unfamiliar, it needs to implement a payment plan that will offer a fair length of time for the partner to remit payment but will not excessively prolong LaiFan’s accounts receivables. Open account is too risky in this case and cash in advance would be difficult to demand with a first-time buyer that is unfamiliar with LaiFan. The recommended payment schedule would thus be 30 day credit terms for payment on the semi-processed diamonds sold to the partner and an additional 30 day credit term for payment of the commission after the semi-processed diamonds are polished and sold. Payment will be effected by a Confirmed Letter of Credit (L/C), specifying 30 days after sight. To initiate the letter of credit process, LaiFan will approach Royal Bank of Canada, its current business bank that provides the line of credit, and request that RBC issue a Letter of Credit in favour of the exporter. In the L/C, LaiFan will need to confirm the expiry date or last day it can present the documents to receive payment, latest shipping date and the presentation days or number of days from shipment in which the documents must be presented. To obtain payment from the importer, LaiFan needs to present the following documents to RBC:

- a term bill of exchange signed by LaiFan and the partner that specifies the sum of money to be paid on an indicated date

- copies of the commercial invoice, packing list and insurance certificate from Prudential Assurance

- waybill from United Parcel Service

LaiFan’s Financial Manager, Ms. Lum, will be negotiating the L/C instrument with RBC, be responsible for monitoring the receipt of payment from the partner and will implement a follow up schedule on the collection of accounts receivables from the partner. Risk Management Strategy Exporting to China through the co-manufacturing arrangement, LaiFan is exposed to a number of risks. Commercial and Currency risks are the most prevalent with potential large impacts on LaiFan’s operations. Such risks include: Commercial Risk: Getting Paid – Shipment delays, incomplete documentation and buyer insolvency are all events that could prevent LaiFan from receiving payment in accordance with the contractual terms of the sale. At minimum, a delay in payment would throw LaiFan’s cash flow off-balance. This is less serious if the payment is late by one or two months during the March to July period when LaiFan’s cash level is most buoyant. As operations near the tight cash months of August and December however, bad debt and uncollected accounts could seriously impact the company’s ability to make the purchases it needs to fulfill existing contracts. Borrowing amounts subsequently grow larger, translating into higher interest rate expenses and relationships with domestic buyers can become strained if LaiFan is unable to obtain the financing to fulfill its contractual obligations. Should its goods be unreasonably rejected by the buyer or the contract contravened by the partner, LaiFan may be inclined to pursue legal action. Such a course will both be time consuming and expensive for the company, with a high profile litigation possibly casting a negative shadow on LaiFan’s reputation. Currency Risk: LaiFan pays for the rough diamonds in Canadian funds, but quotes to its partner, and is paid in Chinese Renminbi (Yuan). The consequences of transaction exposure appear if the Chinese Yuan devalues against the Canadian dollar after the sales agreement has been

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made, before the transaction is completed. Direct impact is again felt at the operational level where losses due to the conversion of Yuan into the Canadian dollar impacts LaiFan’s profitability. At worst, such losses could build up to an export venture that is unprofitable and unsustainable. Intellectual Property Infringement: A major risk from LaiFan’s first-time partnership with a local polishing factory is the possibility the partner would steal its patented cuts. Should the partner terminate the partnership and use LaiFan’s cuts on its own, it would be difficult for LaiFan to compete with its well-established network in the country. LaiFan’s market position would thus be seriously challenged, making it difficult to be “first on the market” with its innovative pieces. Others in the market could also carry out IP infringement. For example, LaiFan’s “Mobius” cut diamonds could be subject to wide-spread reproduction by other jewellery producers who fashion their cubic zirconia pieces after the same design but for a lower cost. Mitigation of Risks Many options are available to reduce LaiFan’s exposure to such risks but the most meritous are those that best meet LaiFan’s criteria and support the company’s objectives. A review of such criteria and objectives are:

- Supports LaiFan’s determination to pursue the co-manufacturing market entry strategy - Risk mitigation strategies should be proactive rather than reactive - Strategies that require lower outlays of cash would be preferred over those that need

higher expenditures The most important action step that underscores all risk mitigation strategies is effective research and planning in advance of signing any contracts and making any commitments in the new market. Specific options such as the following can then be pursued:

1) Purchase Export Development Canada’s Export Credit Insurance. This product provides coverage against both commercial and political risks (FITTskills International Trade Finance). Purchasing this insurance provides LaiFan up to 90% coverage on loss sustained from foreign buyer insolvency, default, refusal to accept or take delivery of the goods and unwarranted termination of contract. This insurance also aligns with LaiFan’s objectives to pursue a partnership arrangement and premiums paid would certainly be less than potential losses sustained from commercial risk.

Reducing commercial risk can be proactively done during the research stage to follow this report. While evaluating potential partners, a key step would include reviewing each prospect’s payment history and financial strength. This can be done through research on the Canadian trade commissioner service, consultation with trade officers stationed in Beijing, Shanghai and Guangzhou, speaking to experts at international diamond councils and accessing financial reports from Dun & Bradstreet on the prospect companies, if available.

2) There are several proactive actions LaiFan can take to protect against currency

exchange risk. The lowest cost method can be implemented in the negotiation phase with the partner whereby LaiFan and the partner can insert a price clause into the contract. Both partners in the negotiation phase can determine a price band whereby the price can be adjusted should the exchange rate fluctuate beyond this price range during the course of the transaction.

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In addition, LaiFan can use a money market hedge to protect against unfavourable movements in the exchange rate. With this technique, LaiFan would immediately borrow from a Chinese bank, an amount in Canadian dollars, equal to the sales value of the diamonds it sold to its partner. Once the partner pays within the 30 – 60 day period, LaiFan would repay the amount borrowed back to the bank. This technique is more favourable than purchasing a forward or futures contract because of the higher cost associated with the latter two options.

3) Constant innovation. Patent infringement is a common occurrence in the Chinese

market and is not well addressed by the Chinese government. Registering for an international patent on its designs and cuts and stipulating the conditions of the partner’s use of the designs are two ways LaiFan can reduce copycat reproductions. A third involves utilizing its research and development team to constantly create new innovations. New designs can be produced that are difficult to replicate on the Chinese Mainland and existing designs can be reinvented to incorporate new technologically refined cuts.

Finally, LaiFan can use its marketing literature as a means to educate its buyers and the end consumer. In its brochures, it can detail how a buyer can differentiate between a real and fake diamond and reinforce the importance of a Canadian certificate of authenticity in supporting a true LaiFan piece.

Conclusion The purpose of this business plan was to evaluate the feasibility of LaiFan’s export ventures to China against the company’s criteria and objectives, and to set a “blueprint” for pursuing this opportunity. This section summarizes the findings along these three objectives and provides a recommendation on next steps. Market Opportunity: In selecting a target market, LaiFan required that the market not only be large enough to provide a profitable pool of customers, but also that it be sustainable, to support the company’s long term growth in the country. The target market analysis and market entry sections zoned in on this market and found that the three cities of Beijing, Shanghai and Guangzhou meet this criteria. Of note:

- China has an existing and growing market of 100 million luxury goods buyers, with the purchasing power to buy higher end diamonds.

- Renewed Long-Term Opportunities: The economic disparities between China’s rural

West and its cosmopolitan Eastern coast carves out long-term opportunity in terms of the country’s primary, secondary and tertiary markets. Staggered economic growth across the country allows LaiFan to benefit from renewed evolutions of its product life cycle across many regions in one country.

- Peripheral Opportunities: China offers future access to other prospective markets in the

region. Developed economies such as Hong Kong, Taiwan, Singapore and Malaysia along with emerging markets such as Thailand, Vietnam and the Philippines together present a regional power of over 50 million people.

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Manageable Risks: The report demonstrated several competitive threats in the market that would challenge LaiFan’s success. Results suggested that LaiFan was able to mitigate the risks through four primary channels:

- focusing on its core competencies to produce a quality product - utilizing its highly skilled and multicultural workforce to combat cultural barriers and

export problems - accessing external experts in areas it did not have the in-house expertise or resources to

address - partnering with a local polishing factory to access reduced production costs, an existing

distribution network and local knowledge The proposed market entry strategy of partnering with a local manufacturer provides LaiFan with an advantage of overcoming language and competitive barriers in China. The selected partner would be equipped to polish higher gem quality diamonds and allows LaiFan to enter the Chinese market on a market skimming pricing strategy. Its distribution network would fasttrack LaiFan into a market that is ripe for foreign luxury brand products. Moreover, the partner’s local knowledge can assist LaiFan with the proper adaptation of its marketing materials to build awareness and branding of its name in the market. This benefit is supported by a sound commercial and economic infrastructure in China which houses a stable investment environment, lessening the chance of disruptions to LaiFan’s operations due to uncontrollable external circumstances.

Product Fit: LaiFan’s export plans time very well with a market that is in the beginning stages of the diamond product life cycle, demanding very similar features to what LaiFan’s product offers: real diamonds over fake, high-tech produced pieces; high gem-quality diamonds driven by carat size and foreign diamonds that epitomize the very essence of Western opulence. The natural fit of Canadian diamonds with this demand means fewer modifications are required to the pieces, translating into fewer costs. LaiFan can thus compete in the new market concentrating on its core competencies of processing gem quality diamonds, rather than undertake added time and costs to implement new operational processes to extensively modify its cuts and designs.

Feasibility of the Export Venture Beyond the three criteria, an assessment of LaiFan’s financial capacity was very important to determine the feasibility of the export idea. Review of the company’s financial reports and cash flow projections support plans that it moderately adopt an export structure and conservatively pursue export sales through its foreign partner in its first three years. The Return on Investment ratio and Payback Period calculations show that a realistic first export activity consists of a maximum purchase of $200,000 worth of rough diamonds to process and sell to China in the first year. An initial purchase beyond that level would greatly strain LaiFan’s cash buoyancy and affect its ability to recover should it suffer unexpected losses in the new market. Recommendation and Action Plan This report now needs to be presented to senior management to garner their support. A new export venture requires the full commitment of the entire company, with staff feeling their contributions are valued in the various stages of the export plan. Appendix B presents a critical

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path summarizing the actions that should be undertaken in 2005, to prepare for the company’s first exports in 2006. Upon approval from senior officials, LaiFan should begin to incorporate the export structure. The Export Manager position will need to be filled. Senior manager and departmental meetings need to begin incorporating the export venture into their domestic operations. Research should also begin to find a suitable local partner. Discussions can be held with trade officers in the Shanghai, Beijing and Guangzhou Canadian Consulate offices, representatives of the Canada China Business Council, The Canadian Jewellers Association and the Hong Kong Trade Development Council on their recommendations for prospective partners. The President and Sales and Business Development Director will need to plan a visit to China in 2005 to meet with prospective partners and experience market conditions firsthand. Benefits of a personal visit include:

- The ability to access current market intelligence not readily available in Canada. Contacts in the Canadian Consulate offices in Beijing, Shanghai and Guangzhou, the Canadian Chamber of Commerce in China, the Canada China Business Council, the Chinese government’s department of trade – MOFTEC, all have extensive networks in China with information that is not necessarily up to date on the internet or in Canadian networks.

- LaiFan representatives can visit the market to see in person competitor activities – what

types of marketing/advertising are they using; what are their distribution channels; where are they located; how are they making contact with their customers? This information can be compared to the analyses presented in the company’s research and business plan and revisions made based on new information collected.

- Participation in jewellery trade shows – The success of China’s first ever diamond trade

exposition in 2004 means opportunities to partake in future jewellery trade shows grows. Attendance in trade shows will help LaiFan establish connections with suppliers, buyers and potential business partners, gain market intelligence and again witness the competitors that are currently operating in, or planning to enter into the Chinese market.

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