Finding a business model to smooth over rocky financing

Gem sellers need better financial aid to cope with return of the tough timesBy Hu Yongqi in KunmingAn entrepreneur in Yunnan province is trying to set up a new business model for the "typically unpredictable industry".mini storageYunnan Menggong Jade Co Ltd is looking for support from banks to set up a new system to evaluate raw stones and manufactured jade goods, and to provide loans to businesspeople in urgent need of cash.The system, which will be established in three years, should reduce the risk of rising costs for jade stones.Headquartered in Wanding, a border town in Dehong Dai and Jingpo autonomous prefecture, Menggong Jade has more than 400 stores around the country. Its president, Yang Ziwen, has accumulated assets worth 2.1 billion yuan ($343 million, 254 million euros) through 18 years of careful management.The jade industry has long been notorious for high taxation. The bidders have to pay 33 to 37 percent in tax to buy raw stones at the Myanmar Jade, Gem & Pearl Emporium, usually held in March every year in Nay Pyi Taw, the capital of Myanmar.When the buyers take the stones across the border into China, they have to pay another 33 percent tax to the Chinese customs authorities, says Zhang Bo, manager of the Kunming branch of Yunnan Menggong Jade.Before the jade items are sold to people in China, another duty of 17 percent on value added will be levied by the government. In other words, the stone or jade products will cost significantly more than the original price in Myanmar, not to mention sculpting and other costs. Therefore, jade businessmen must ensure a secure capital chain, or they might go bankrupt if one transaction fails to make enough profit.In 2009-10, more than 20 billion yuan swarmed into the Myanmar jade market for raw stones and substantially drove up manufacturing prices. A stone estimated to sell for 5 million yuan finally sold for 5.5 million yuan, because the speculators didn't care about the price. They needed to push it up to obtain their expected profits, says Zhang.Yang realized that most of the 5,000 jade factories and stores in Yunnan wouldn't want to cooperate to expand the industry. They prefer to operate by themselves."At the beginning, some retailers were really exhilarated by the rising prices, because they were selling goods they'd bought when they were much cheaper," Zhang says."However, when all the stored products sold out, they found that jade stones were no longer affordable. If they wanted to continue in the business, they had to borrow money from banks or pawn shops."Traditionally, jade and gems couldn't be pawned because they could be damaged easily. In addition, experts varied in their estimations of the value of jade pieces. Therefore, no one had the courage to take a jade item as security for a loan of thousands of yuan.Yang understands the significance of good finance for the jade business because he started trading in a shabby shop with 迷你倉,000 yuan borrowed from friends and relatives.Stone gambling, or speculating in gems, was a crazy business for many people in those circles. In 2002, Yang bid 800,000 yuan for a stone, but his heart was crushed when he made the first cut into it and saw that it was of poor quality.Yang, a "suburban man" with limited experience of the jade trade, insisted on making another cut. Finally, he was delighted to discover that he would be able to make a bracelet from the stone. That bracelet was valued at 58 million yuan and is now kept in a special collection box at his headquarters in Wanding."No one has tried to financially support other jade traders, but we are the first ones to have the courage to try to do it," Zhang says.He is confident the system will be set up within three years and that by then other businessmen will be happy to cooperate with Menggong Jade.The credibility of dealers might be another core topic for the new system because average people cannot evaluate jade. Zhang says his company promises to replace any items purchased in its stores."In many cases, jade will not be replaced or returned once the buyer steps out of the store. However, we believe in the quality of our products and have kept that promise," he says.Until 2006, a jade item sold for more than 10,000 yuan was considered expensive and many jade traders questioned Menggong's replacement policy because they thought it might cut their profit margins. However, the policy has been in use for 11 years and traders and buyers across the country are well aware of it.Recently, Yang has been busy negotiating with banks in Kunming, the capital of Yunnan. He said the discussions went smoothly."The jade industry booms in a rising economy and wanes before a slowdown," Yang says. "Therefore, few banks want to lend directly to jade traders because of the risks. Our advantages are our valuation system and the credit accumulated from years in the business. Therefore, we should be able to bridge the banks and other traders who need money."The new system will spread the risks and also generate profits for Menggong."For example, if a jade item is valued at 8 million yuan, we could keep it and lend 2 million yuan in cash to the owner at a certain interest rate," says Zhang. "Meanwhile, the owner could also set a floor price for the item and we would sell it at a higher charge, if possible. In this approach, the owner would have adequate funds to trade for new products and we could earn commission."Yunnan's jade traders could learn from their counterparts in Jieyang, in Guangdong province. Those traders collaborate to compete against provinces in a bigger business scene, says Yang."To end the situation where each jade trader works on his own, we need more finance to support the expansion of the industry in Yunnan. By this means, a strong and risk-resistant business can be fostered."Li Yingqing and Guo Anfeicontributed to the story.文件倉