SMEDA Gold Jewelry Manufacturing & Retail Shop

Pre-Feasibility Study

GGOOLLDD JJEEWWEELLRRYY MMAANNUUFFAACCTTUURRIINNGG &&RREETTAAIILL SSHHOOPP

Small and Medium Enterprise Development AuthorityGovernment of Pakistan

www.smeda.org.pk

HEAD OFFICE

Waheed Trade Complex, 1st Floor , 36-Commercial Zone, Phase III, Sector XX, Khayaban-e-Iqbal, DHA LahoreTel: (042) 111-111-456, Fax: (042) 5896619, 5899756

[email protected]

REGIONAL OFFICE PUNJAB

REGIONAL OFFICE SINDH

REGIONAL OFFICE NWFP

REGIONAL OFFICE BALOCHISTAN

6th & 8th Floor LDA Plaza, Egerton Road, Lahore.Tel: (042) 111-111-456Fax: (042) [email protected]

5TH Floor, BahriaComplex II, M.T. Khan Road,

Karachi.Tel: (021) 111-111-456

Fax: (021) [email protected]

Ground FloorState Life Building

The Mall, Peshawar.Tel: (091) 9213046-47


Bungalow No. 15-AChaman Housing Scheme

Airport Road, Quetta.Tel: (081) 831623, 831702


January, 2006

Gold Jewelry Manufacturing & Retail Shop

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1 PURPOSE OF THE DOCUMENT............................................................................................... 3

2 CRUCIAL FACTORS & STEPS IN DECISION MAKING FOR INVESTMENT..................... 4

2.1 SWOT ANALYSIS ................................................................................................................... 42.2 ENTREPRENEURIAL FIT ........................................................................................................... 62.3 BUSINESS MODEL: IN-HOUSE MANUFACTURING VS. OUTSOURCED MANUFACTURING............... 7

3 PROJECT PROFILE.................................................................................................................... 7

3.1 OPPORTUNITY RATIONALE ...................................................................................................... 73.2 PROJECT BRIEF ....................................................................................................................... 83.3 MARKET ENTRY TIMING ......................................................................................................... 83.4 PROPOSED BUSINESS LEGAL STATUS ....................................................................................... 83.5 PROJECT CAPACITY AND RATIONALE....................................................................................... 83.6 PROJECT INVESTMENT........................................................................................................... 113.7 PROPOSED PRODUCT MIX...................................................................................................... 12

3.7.1 Product Mix - Workshop Operations ............................................................................... 123.7.2 Preferred karatage........................................................................................................... 123.7.3 Item Wise Stock Composition ........................................................................................... 12

3.8 PROPOSED LOCATION............................................................................................................ 143.8.1 Location for Workshop Unit............................................................................................. 143.8.2 Location for Retail Unit ................................................................................................... 14

3.9 KEY SUCCESS FACTORS/PRACTICAL TIPS FOR SUCCESS.......................................................... 153.9.1 Key Success Factors for Workshop Unit ........................................................................... 153.9.2 Key Success Factors for Retail Unit ................................................................................. 15

3.10 STRATEGIC RECOMMENDATIONS ........................................................................................... 153.10.1 Marketing ................................................................................................................... 153.10.2 Ratio of Order to From-Counter Purchase................................................................... 153.10.3 Nature of Stock Keeping .............................................................................................. 153.10.4 Pricing Policies: ......................................................................................................... 163.10.5 Mode of Payment ........................................................................................................ 16

3.11 PRODUCT RANGE IN TERMS OF DESIGNS, ITEMS AND QUALITY............................................... 16

4 SECTOR & INDUSTRY ANALYSIS......................................................................................... 16

4.1 INDUSTRY STRUCTURE.......................................................................................................... 164.1.1 Average Workshop........................................................................................................... 17

4.2 EXPORT MARKET.................................................................................................................. 184.2.1 Major International Market Players................................................................................. 184.2.2 Pakistan’s Jewelry Export................................................................................................ 194.2.3 Export Regulations and Procedures ................................................................................. 20

4.3 LEGAL ISSUES REGARDING INDUSTRY ................................................................................... 244.3.1 Taxation .......................................................................................................................... 24

4.4 MARKET POTENTIAL ............................................................................................................. 244.4.1 Customer Loyalty............................................................................................................. 244.4.2 Trends ............................................................................................................................. 24

4.5 TARGET CUSTOMERS ............................................................................................................ 24

5 PRODUCTION PROCESS......................................................................................................... 26

5.1 PRODUCTION PROCESS FLOW ................................................................................................ 265.1.1 Contracting out an order.................................................................................................. 275.1.2 Jewelry Designing ........................................................................................................... 275.1.3 Gold Refining and Mixing ................................................................................................ 275.1.4 Converting Gold Ingots into Gold Sheets and Wires ......................................................... 275.1.5 Transfer of Design / Pattern Making ................................................................................ 285.1.6 Engraving........................................................................................................................ 28

Gold Jewelry Manufacturing & Retail Shop

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5.1.7 Finishing ......................................................................................................................... 295.1.8 Polishing and Buffing ...................................................................................................... 295.1.9 Beading and Stone Studding............................................................................................. 295.1.10 Gold Recovery............................................................................................................. 30

5.2 CASTING PROCESS AND MACHINERY REQUIREMENT .............................................................. 305.2.1 Supply of Machineries...................................................................................................... 30

5.3 JEWELRY ITEM MANUFACTURING TIME ................................................................................. 315.4 RAW MATERIAL.................................................................................................................... 315.5 MISCELLANEOUS EXPENSE.................................................................................................... 325.6 INITIAL INVESTMENT IN GOLD JEWELRY STOCK..................................................................... 335.7 MACHINERY REQUIREMENT .................................................................................................. 335.8 FURNITURE & FIXTURES ....................................................................................................... 34

6 LAND & BUILDING REQUIREMENT .................................................................................... 35

6.1 LAND REQUIREMENT ............................................................................................................ 356.1.1 Rent................................................................................................................................. 35

6.2 UTILITIES REQUIREMENT ...................................................................................................... 36

7 HUMAN RESOURCE REQUIREMENT................................................................................... 37

8 FINANCIAL ANALYSIS............................................................................................................ 38

8.1 PROJECTED INCOME STATEMENT........................................................................................... 388.2 PROJECTED CASHFLOW STATEMENT ...................................................................................... 398.3 PROJECTED BALANCE SHEET ................................................................................................. 40

9 KEY ASSUMPTIONS................................................................................................................. 41

9.1 ASSUMPTIONS RELATED TO THE SCOPE OF OPERATIONS......................................................... 419.2 INCOME RELATED ASSUMPTIONS........................................................................................... 419.3 EXPENSE RELATED ASSUMPTIONS ......................................................................................... 43

Pre-feasibility Study Gold Jewelry Manufacturing & Retail Shop

PREF-87/Jan, 2006/ Rev 1

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DISCLAIMER

The purpose and scope of this information memorandum is to introduce the subject

matter and provide a general idea and information on the said area. All the material

included in this document is based on data/information gathered from various sources and

is based on certain assumptions. Although, due care and diligence has been taken to

compile this document, the contained information may vary due to any change in any of

the concerned factors, and the actual results may differ substantially from the presented

information. SMEDA does not assume any liability for any financial or other loss

resulting from this memorandum in consequence of undertaking this activity. The

prospective user of this memorandum is encouraged to carry out additional diligence and

gather any information he/she feels necessary for making an informed decision.

For more information on services offered by SMEDA, please contact our website: www.smeda.org.pk

DOCUMENT CONTROL

Document No. PREF-87

Prepared by SMEDA-Punjab

Issue Date Jan 2006

Issued by Library Officer



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11 PPUURRPPOOSSEE OOFF TTHHEE DDOOCCUUMMEENNTT

The objective of the pre-feasibility study is primarily to facilitate potential entrepreneurs in project identification for investment. The project pre-feasibility may form the basis of an important investment decision and in order to serve this objective, the document/study covers various aspects of project concept development, start-up, production, marketing, finance and business management. The document also provides sectoral information, brief on government policies and international scenario, which have some bearing on the project itself.

The purpose of this document is to facilitate potential investors in gold jewelry manufacturing and retail enterprise by providing them a macro as well as a micro view of gold jewelry business with the hope that such information as provided herein will aid the potential investors in crucial investment decisions.

The need to come up with pre-feasibility reports for undocumented or minimally documented sectors like jewelry manufacturing and retailing sector attains greater imminence as the research that precedes such reports reveal certain thumbs of rules; best practices developed by existing enterprises by trial and error, and certain industrial norms that become a guiding source regarding various aspects of business set-up and it’s successful management.

This particular pre-feasibility is regarding “Gold Jewelry Retail Enterprise”, which comes under a broader “Gem and Jewelry Sector”.

22 CCRRUUCCIIAALL FFAACCTTOORRSS && SSTTEEPPSS IINN DDEECCIISSIIOONN MMAAKKIINNGG FFOORR IINNVVEESSTTMMEENNTT

Below are some factors and variables that have a great bearing on setting up jewelry manufacturing and retailing enterprise:

22..11 SSWWOOTT AAnnaallyyssiiss

Before stepping into any venture, one has to analyze the strengths, weaknesses, opportunities and threats (SWOT). An industrial / sectoral SWOT analysis is given below. A prospective entrepreneur would have to conduct a micro-level SWOT analysis on the basis of the intended city / town / village for his business.



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SWOT AnalysisStrengths

1. Stock of skilled craftsmen;2. Low manufacturing cost;3. Low capital investment in

machinery;4. Price inelasticity of demand for

gold jewelry implying the relative ease with which an entrepreneur may pass on increase in costs to the customer.

5. Easy exit since gold stock can be resold easily (though capital gains / loss possible due to change in gold price);

6. Premium mark-up is accepted in general by customers if they perceive that the jewelry item they are purchasing is unique or has a designer’s value. Thus there is greater opportunity for an entrepreneur to charge higher mark-up on exclusively positioned jewelry line.

Weakness1. Weak sharing of information and best

practices within the industry. Trade secrets tend to be kept within family;

2. Demand for exclusivity prevails over demand for standardized items. Thus the degree of mechanization of the jewelry manufacturing process tends to be low;

3. Maintaining exclusivity of designs is difficult due to absence of copyright laws within the industry. Investment in exclusive designers is thus risky.

4. Highly skilled craftsmen are concentrated in few clusters, mainly in Karachi and Lahore;

5. Practice of hallmarking products for export is low, thus non-hallmarked items are less reliable abroad than competitive but hallmarked jewelry.

Opportunities1. Increasing population thus

expanding potential domestic market;

2. Gold price is perceived to be outmatching inflation thus purchase of gold jewelry is more readily justified in terms of future security.

3. Increasing demand for 22k gold jewelry abroad amongst South Asian expatriates;

4. Increasing demand of 18k jewelry within Pakistan provides opportunity for jewelers to increase their stock size and range with lesser investment in gold.

5. Increasing participation of females in work-force, thus greater purchasing power of women to

Threats1. Improving trade relations with India

may lead to import of competitive jewelry items into Pakistani Market;

2. Competition from Far-East Asian countries is already somewhat visible;

3. Proper designing matching the market taste is crucial to sales, if designing does not match the market demand, the entrepreneur may be stuck with slow conversion of stock to sales.

4. Frequent turnover of key craftsmen risks loss of quality and exclusivity;



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purchase jewelry items;6. Increasing trend and inclination in

the market to pay premium for exclusive designs / brands has a created a niche market for products bearing higher profit margin.

22..22 EEnnttrreepprreenneeuurriiaall FFiitt

The prospective investor will need to assess an entrepreneurial fit in the sector in light of the sectoral SWOT analysis. Table 2-1 below gives an example of crucial traits contributing to entrepreneurial fit in the jewelry sector, and course of action to be taken in case the crucial trait is present, and also if it’s lacking.

TTaabbllee 22--11:: EEnnttrreepprreenneeuurriiaall FFiitt

ENTERPRENURIAL FIT

CRUCIAL TRAITS

Importance If Positive Action Needed if Negative

Family Background

Source of process knowledge;

Prevents costly managerial mistakes more probable in trial and error based decision making;

Better knowledge/ guidance of the market in terms of trends, suppliers, craftsmen..etc.

Entrepreneurial advantage;

Lower risk than if any industrial background is lacking.

Intensive industrial and sectoral study in terms of processes, modes of quality control, workers' management practices; Preferred technology; Preferred suppliers..Etc.

Process Know How

Effective quality control;

Feasibility assessment of selecting production technology

Entrepreneurial advantage;

Effective quality check; Less risk in management

and ownership of retail / manufacturing unit.

Acquire process know how; Delegate Quality Control

function to employee or partner who has the process / production know how

Flair for designing / Ability to

gauge trends

Unique selling proposition;

Premium pricing Customer Loyalty

Entrepreneur is able to determine the stock of jewelry items in terms of designs and variety.

Prospective customer's feedback on preferred / not so preferred styles;

Advice of established jewelers catering to similar target market;

Hire graduates from designing / arts' institutions;

Greater investment in jewelry catalogues.



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22..33 BBuussiinneessss MMooddeell:: IInn--HHoouussee MMaannuuffaaccttuurriinngg vvss.. OOuuttssoouurrcceedd MMaannuuffaaccttuurriinngg

The entrepreneur - assuming sufficient financial resources - then needs to decide on his business model in terms of having his workshop in-house, or outsource jewelry production. The following table gives advantages and disadvantages of the two options.

TTaabbllee 22--22:: PPrrooss aanndd CCoonnss ooff IInn--HHoouussee vvss.. OOuuttssoouurrcceedd MMaannuuffaaccttuurriinngg

Pros and Cons of In-House vs. Outsourced Manufacturing

In-House Outsourced

PROS CONS PROS CONS

Greater control on quality

Greater total set-up cost Lower set-up costLess convenient in terms of quality control

Greater chance of securing design exclusivity

Greater investment risk lower investment riskDifficult to keep designs from being copied by competitors

Optimal order processing

Greater labor cost in order to prevent craftsmen's turnover

feasible for small scale jewelers

Lesser control over order completion time

Better process control when production under one roof

Cases of design leakages and craftsmen refusing to work exclusively for one jeweler commonly reported

Possible to rationalize on total labor cost for small/ medium size business

Not feasible for small scale jewelry business

Greater range of choice in terms of craftsmen to be used

33 PPRROOJJEECCTT PPRROOFFIILLEE

33..11 OOppppoorrttuunniittyy RRaattiioonnaallee

A lack of passion for gold jewelry in Pakistan, and even amongst the Pakistani expatriates, is hard to imagine. It is a cultural idiosyncrasy within the South Asian Region. Gold jewelry is perceived not only as a decorative item but a symbol of status. This perception pervades all classes.

Another reason for the vitality of the gold jewelry market is that all domestic jewelry products are priced by weight, which results in the fact that people perceive gold jewelry as a means of security net for the future because gold alone has an internationally agreed price (although there is no regulated appraisal system for selling second-hand jewelry, more often people get much less money than they have paid when they try to return the jewelry).

On the supply side, gold jewelry manufacturing is labor intensive. The skill of most of the craftsmen is passed on from generation to generation or through a process of intense apprenticeship. Gold jewelry manufacturing units tend to specialize in terms of process,



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thus they all tend to form a cluster of independent units that utilize each other’s service to complete a jewelry item. This makes it easier for a new entrant to identify craftsmen in terms of skill, reliability and quality.

In case the entrepreneur wishes to set-up an integrated business (retail and manufacturing), most of the machinery used is now locally made (largely in Gujranwala) and is considered almost at par with the Italian machines for the same purpose. Hence, initial capital investment in machinery is less and does not pose a great barrier to entry into enterprise of gold jewelry manufacturing and retailing.

33..22 PPrroojjeecctt BBrriieeff

The subject enterprise of this pre-feasibility study is an integrated business gold jewelry manufacturing and retailing business. The manufacturing unit known as the workshop is a self sufficient unit that out sources only the following processes: gold refining and mixing, mechanized chain and bangle making.

With required rate of return for the project being 21%, the project is – with conservative assumptions – is expected to have a net present value (NPV) of Rs. 17,979,862/- and a modified internal rate of return (Modified IRR) of 34.50%. The discounted payback period is about 3.6 years.

Project OutcomesNet Present Value 17,979,862 Modified IRR 34.50%Discounted Payback (years) 3.6

33..33 MMaarrkkeett EEnnttrryy TTiimmiinngg

The gold jewelry retailing sector faces a seasonality factor that becomes apparent in the sales. Sales tend to peak during the wedding season. Wedding seasons fall in winters (October - February); and in summers (June – August).

As far as the importance of timing of setting up a gold-jewelry business is concerned, it’s preferable that the business be set up to coincide with either of the wedding seasons.

This would not only help the initial cash flows but also render any promotional tactic (even if it may be just an attractive façade of the shop or a w ell designed jewelry) more effective by having greater number of prospective gold jewelry buyers in the market.

33..44 PPrrooppoosseedd BBuussiinneessss LLeeggaall SSttaattuuss

Since majority of Gold Jewelry business are family owned, most of these enterprises hold the status of registered partnerships. The other option mostly taken up is that sole-proprietorship. The latter two options are preferred over the option of incorporation mainly due to requirement, in the case of incorporation, of periodic disclosure of financial information.

33..55 PPrroojjeecctt CCaappaacciittyy aanndd RRaattiioonnaallee

The capacity of the workshop is defined as the volume of output the workshop is can produce when working to full capacity at a given period of time. In this case, the capacity of the workshop is defined as the amount of gold jewelry in terms of grams (weight) that



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the workshop can produce in a year when working at its full capacity. The research, based on interviews with gold jewelry making craftsmen suggests that on average, a skilled craftsman can produce gold jewelry worth 575 grams of gold in a month or 6900 grams (600 tolas) worth of jewelry in a year. Since majority of gold jewelry is handmade and only small portion, if any, of the jewelry involves casting process, number of gold jewelry manufacturing craftsmen is the key variable determining the capacity of the workshop.

The capacity of the retail unit in gold jewelry industry, on the other hand, is described in terms units of gold invested in stock of jewelry prepared by a jeweler at any one time. Table 3-1 shows how a manufacturing unit and gold jewelry retail enterprise is described in terms of capacity and scale.

TTaabbllee 33--11:: CCaappaacciittyy DDeessccrriippttiioonn

Capacity Description Capacity Description for Workshop Unit

SCALE Number of Craftsmen

Output / year (grams) Output / year (tolas)

Small 3 - 5 20,700 – 34,500 1,800 – 3,000Medium 6 - 10 41,400 – 69,000 3600 - 6000Large 11 or more 75,900 - more 6,600 - more

Capacity Description for Retail UnitSCALE Stock Level (Grams) Stock Level (Tolas)

Small 1150 - 2300 100 - 200Medium 2300 - 8050 200 - 700Large 8050 or more 700 or more

This pre-feasibility report suggests that to enter the gold jewelry manufacturing and retail industry with an integrated business of manufacturing and retailing, the new entrant should enter with at least a medium scaled workshop and also a medium scaled retail unit. The medium sized workshop and retail business is the minimum feasible scale for integrated unit since the larger number of overheads (as compared to if manufacturing and retail were separate independent businesses) require a minimum level of sales for the overhead costs to be met. This minimum level of sales is met with operations at medium scale. Medium scaled workshop can provide jewelry items for its own retail units where generating greater profit margins. Furthermore, in order to keep working capital required, especially in terms of investment in gold jewelry stock, the manufacturing unit can offer its services to other gold jewelry retailers who outsource manufacturing of gold jewelry items. Starting at a larger scale would expose the entrepreneur to greater risk while starting too small, with given fixed and administrative costs, can push the break even period for the project too far ahead. For example, with the given cost parameters described as assumptions, starting with workshop of 4 craftsmen and retail unit with a stock of 2300 grams of gold can push the discounted payback period to more than 10 years.



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The financial model given at the end of this report assumes initial capacity of workshop to be manufacturing of gold jewelry worth 69,000 Gms / year (6000 tolas / year) and retail outlet with initial capacity in terms of gold jewelry stock at any one time to be 5175 grams of gold (450 tolas) worth of jewelry.

The model as depicted in Table 3-2 shows that the workshop will initiate its operations at 60% of its capacity in year 1, and the level of operations will increase as manufacturing unit receives more orders from its own retail unit and from other gold jewelry retailers. It is estimated that the manufacturing unit will be able to operate at 90% of its initial capacity by year 8.

The model also assumes that in initially, in year one, the proportion of workshop output sold be self and that manufactured for others will be 60 % and 40% respectively. This implies that in its initial year the modeled enterprise will rely on orders from another jewelers due to limited capacity of the self owned retail unit to absorb the workshop capacity and also as a risk managing strategy since the greater the proportion of workshop output is to be sold be self owned retail unit greater the investment in stock required of the entrepreneur, thus greater level of investment tied up in stocks. The ratio of workshop output sold is self owned retail against that manufactured for other jewelers increases as the self-owned retail unit marks its place in the market and gathers its greater market knowledge that will ensure greater sales and thus greater capacity to absorb the output of the workshop. Hence by year 10, the model assumes that the business reaches equilibrium in terms of product mix whereby 85% of the workshop’s output is sold by self and 15% is manufactured for other jewelers. This accelerating ratio is based on the assumption that the marginal return on investment on selling gold jewelry by self is greater than that on gold jewelry manufactured for others till the 85:15 of product mix.

TTaabbllee 33--22:: CCaappaacciittyy aanndd OOppeerraattiioonnss PPaarraammeetteerrss

Capacity and Operations Parameters

Annual manufacturing Capacity = 69,000 grams

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Level of Operations (ratio of capacity) of Workshop

0.6 0.65 0.7 0.75 0.8 0.85 0.85 0.9 0.9 0.9

Level of workshop Operations (volume of gold) grams

41,400 44,850 48,300 51,750 55,200 58,650 58,650 62,100 62,100 62,100

Stock Level of Gold Jewelry Items to be Maintained by Retail Unit at Any Given Time

5175 5399 6261 6469 6133 6924 6924 7331 7331 7331



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Ratio of workshop output sold by self-owned retail unit

0.6 0.65 0.7 0.75 0.8 0.85 0.85 0.85 0.85 0.85

Ratio of workshop output manufactured for other gold jewelry retailers

0.4 0.35 0.3 0.25 0.2 0.15 0.15 0.15 0.15 0.15

33..66 PPrroojjeecctt IInnvveessttmmeenntt

Table 3-3 below gives an estimate of the initial investment required to set up a workshop with annual capacity to manufacture gold jewelry items worth 69000 grams and gold jewelry retail unit operating initially with stock level of 5,175 grams (450 tolas).

TTaabbllee 33--33:: IInniittiiaall IInnvveessttmmeenntt

Description Amount (in Rs.)Shop Lease Down PaymentRetail Shop 200,000Work Shop 72,000Total Lease Payment 272,000Furniture and FixturesRetail 197,000Work Shop 50,308Total Furniture & Fixture 247,308MachineryWire Making Machine 25,000Plate making machine 25,000Wax Casting Machine 315,500Polishing Machine and Accessories 14,000Tools for craftsmen 40,000Tools for gem studders 8,000Scales 6,600Total Machinery & Equipment 434,100Raw Material + Jewelry StockInitial Gold Jewelry Stock 6,073,380Nitric Acid 8,000Wax 6,000Total Raw Material 6,087,380Fee 10,000Licenses 10,000Pre-Operating Cost (personnel cost) 80,000



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Minimum Cash Reserve 329,878Total Investment 7,470,666

33..77 PPrrooppoosseedd PPrroodduucctt MMiixx

33..77..11 PPrroodduucctt MMiixx -- WWoorrkksshhoopp OOppeerraattiioonnss

The workshop operations will be based on orders from other gold jewelry retailers who outsource gold jewelry manufacturing and on gold jewelry items sold directly through self-owned retail unit of the model. Table 2.5.2 explained earlier shows how total workshop operations are expected to be distributed between output made on order for other jewelry retailers and output sold directly through self-owned retail unit.

The following subsections refer to product mix of the gold jewelry retail unit.

33..77..22 PPrreeffeerrrreedd kkaarraattaaggee

Pakistanis and Indians abroad and at home prefer 22-karat jewelry. The West and Far East prefers jewelry of 18 – 14 karat gold. Because Pakistanis consider gold jewelry an asset, a trend towards preferring low karat jewelry by the mainstream local market is unlikely in the foreseeable future.

However, a niche for 18 karat jewelry has emerged. This niche constitutes largely of working women belonging to age group 25 years - 40 years.

The business model in this report assumes traditional / mainstream customers who prefer 22 karat gold jewelry as the target market.

33..77..33 IItteemm WWiissee SSttoocckk CCoommppoossiittiioonn

Based on the interviews of established jewelers, we were able to establish “rule of thumb” for stock composition of total amount of gold invested in stock of jewelry available for display.

We were also able to establish an average amount of gold per item type and average number of units stocked per item type. Table 3-4 below shows average gold content in grams per jewelry item.

TTaabbllee 33--44:: AAvveerraaggee GGoolldd CCoonntteenntt

AVERAGE GOLD CONTENT (Grams) PER ITEM

Gold Content (grams) - RangeItem80% of items of

same category sold20% of items of

same category sold

Average Gold Content / Item

Earrings 3.5 7 4.2Rings 3 7.5 3.912 Bangles' Set 43 34 41.2Bracelets 10.25 24.75 13.15

Chains 15 7 13.4Necklaces 34.5 37 35



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Pendants 3.25 4 3.4

Teeka 4.375 3 4.1Bridal Set 57.5 115 69Jhoomer 11.5 17.25 12.65

Calculation of average gold content for earrings (as an illustration) is calculated thus: 3.5 grams * 0.8 + 7 grams * 0.2 = 4.2 grams

Table: 3-4 is to be read as, for example, of the total units of earrings kept as stock for sale, 80% weigh around 3.5 gms, while 20% of earrings kept in stock weigh about 7 grams.

Given the average weight of gold (gms) per jewelry item and the information regarding average item wise stock composition of jewelers participating in this research, Table: 3-5 below gives an idea as to how, percentage wise, total gold available for jewelry stock may be distributed among various jewelry items.

Further more this distribution is translated into number of units per jewelry for initial stock level of gold jewelry items worth 4600 grams (400 tolas).

It is of note that smaller items have higher sales turn-over than larger jewelry items. Thus, though small items like earrings, rings and pendants utilize together only 16 % of total gold available for stock, unit wise they constitute 61% of total units prepared as stock.

TTaabbllee 33--55:: WWeeiigghhtt wwiissee ddiissttrriibbuuttiioonn ooff ggoolldd mmeettaall

WEIGHT WISE DISTRIBUTON OF GOLD METAL STOCK AMONG JEWELRY ITEMS

Item Item-wise Distribution of Gold Stock (%)

Units per Item Type given 4600 gms (400 tolas) of Gold

Earrings 4% 40 unitsRings 9% 108 unitsBangles' Design (four bangles per design)

14% 16 units

Bracelets 7% 24 unitsChains 3% 10 unitsNecklaces 43% 56 unitsPendants 3% 42 unitsTeeka 0% 2 unitBridal Set 17% 12 unitsJhoomer 0% 0 unitsTOTAL 100% 310 units

It is important to note that as such jewelers in Pakistan do not compose their stock on the basis of any hard and fast rule. The stock size and its composition are improved as the retailer gains experience of the market itself.



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33..88 PPrrooppoosseedd LLooccaattiioonn

33..88..11 LLooccaattiioonn ffoorr WWoorrkksshhoopp UUnniitt

The ideal location for workshop would be within a jewelry cluster often referred to as sirafa bazaar in main urban cities. The advantages of locating the workshop are many and some of them relate to the fact the cluster is almost self suffieicient in terms of supply of raw material, small tools and equipment, ancillary services such as machine repair, and also in terms of gold jewelry making processes that may need to be outsourced. More important are the advantages in terms of networks and links developed with suppliers, gold jewelry retailers who may be potential customers, and with potential craftsmen who may be recruited when required.

The downturn of locating the gold jewelry manufacturing workshop that integrates many processes that are usually outsourced (eg. Polishing and buffing, casting) is that the space required for the model workshop will be far greater than the average workshop found in sirafa bazaar. Sirafa bazaars are often located in the oldest part of the city. Finding rentable space is hard and if available, space in terms of complete room is often small. This implies that the workshop may have to be set up in two different rooms / tiers.

Also, the rents and rates of space in a jewelry cluster is almost double that of space for workshop outside the cluster. The difference becomes greater the further one goes from the cluster. For example, space 22 by 88 square feet may be let at Rs.6000/month if located within the cluster but may cost Rs.3000/month in old part of the city but far from the cluster.

33..88..22 LLooccaattiioonn ffoorr RReettaaiill UUnniitt

An ideal location for setting up a jewelry shop would be in main market or shopping center where more females tend to shop frequently. Ideally that location should not only have a wide range of shops in terms of clothes, shoes etc but also have a cluster of competing jewelry shops.

The latter characteristic is important for jewelry buyers tend to shop around for designs and variety before making a purchase, and because it is convenient for a prospective buyer to window shop amongst clustered shops, they are less likely to enter a recently set-up, and not so renowned shop located in isolation.

It’s noted that even shops of established reputation ultimately shift to main market areas to boost their sales.

In short, factors important in considering the location of the shop would be:

Accessibility Security Area frequented by female shoppers Cluster of competing jewelers



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33..99 KKeeyy SSuucccceessss FFaaccttoorrss//PPrraaccttiiccaall TTiippss ffoorr SSuucccceessss

33..99..11 KKeeyy SSuucccceessss FFaaccttoorrss ffoorr WWoorrkksshhoopp UUnniitt

The key success factors in gold jewelry manufacturing business are: Quality of craftsmanship Managing turnover of key craftsmen; Establishing a reputation of reliability (in terms of honest and timely processing of

orders) and quality; Networking to attract and ensure sufficient orders to cover overhead costs; Networking to identify suppliers and service providers who are reliable and provide

adequate quality. Housing as many processes in-house so as to provide as many services under one roof. Location

33..99..22 KKeeyy SSuucccceessss FFaaccttoorrss ffoorr RReettaaiill UUnniitt

The key success factor in gold jewelry retail business is the turnover which in turn depends on: Quality Design Variety and product range displayed under one roof. Location

33..1100 SSttrraatteeggiicc RReeccoommmmeennddaattiioonnss

33..1100..11 MMaarrkkeettiinngg

Marketing and promotional schemes are financially feasible only if you have sufficient capital / stock in terms of finished product that you are able to satisfy a customer’s need. Hence, unless one has a sufficiently wide range of jewelry items to cater to a prospective buyer attracted by marketing scheme, the attraction of that customer to your shop may not translate into sales but into higher average selling cost.

33..1100..22 RRaattiioo ooff OOrrddeerr ttoo FFrroomm--CCoouunntteerr PPuurrcchhaassee

In the wedding season, purchases on order outnumber those from the displayed stock and vice versa on other occasions.

33..1100..33 NNaattuurree ooff SSttoocckk KKeeeeppiinngg

Increase the average stock size to hedge against gold price increase if the trend in of rising gold price is expected to continue for some time.

Some stock is kept of gold and those stones, precious and semi precious gems the type of which have been used in displayed jewelry items to cater to the possibility that a customer may want to purchase a displayed item with some alterations. Stock in term of duplicates of displayed jewelry item is not kept.



16

33..1100..44 PPrriicciinngg PPoolliicciieess::

Increased competition has reduced jewelers’ control in terms of price determination of smaller, and relatively non-exclusive jewelry items. One is, however, able to charge a premium on exclusivity and uniqueness of the design.

Price of gold jewelry item is extremely sensitive to price of gold. Furthermore since gold jewelry has a high income elasticity of demand, the jeweler is not free to pass all of theincrease in cost of raw material to the customer but has to absorb some of it himself.

If a customer has ordered an item, then the rate of gold that a customer will pay is established when the order is given by the customer and is largely the current market rate at that time.

33..1100..55 MMooddee ooff PPaayymmeenntt

Advance: Advance is normally taken when the jewelry item being sold is to be made on order. There is no fixed percentage of the order’s cost demanded since our business depends on relationship building and we keep a customer’s ability to pay advance at a given moment under consideration.On the Spot Payment: On the spot purchases of displayed items are paid for at the time of the purchase.Credit: Credit sales are neither an industry norm, nor encouraged by the jewelers. In the rural areas, however, payment if not purchase coincides with the harvesting of crops.

33..1111 PPrroodduucctt RRaannggee iinn TTeerrmmss ooff DDeessiiggnnss,, IItteemmss aanndd QQuuaalliittyy

The type of jewelry items in term of design and quality depends on the clientele of the jeweler. The type of clientele, in its turn depends on the location of the shop.

The choice of target customers may be gauged by the general trend as seen via the jewelry items sold by other jewelers in the same or similar area and by trial and error. However, the jeweler’s vision and his understanding of the market trend have a great bearing on the range and variety of jewelry items displayed in his shop.

44 SSEECCTTOORR && IINNDDUUSSTTRRYY AANNAALLYYSSIISS

44..11 IInndduussttrryy SSttrruuccttuurree

Pakistan’s jewellery sector is basically retail driven due to a huge local market. Karachi and Lahore are the main hubs for jewellery manufacturing. Dubai is the main exporter of bullion to Pakistan. The dominant reason for the purchase of jewellery in Pakistan is marriage, as gold is perceived as a form of savings and it is accumulated for this purpose over several years. However, with increasing awareness and education, along with other emerging investment opportunities, jewellery is now gaining preference as more of a fashion symbol.

The range of jewellery items produced by the jeweller is very wide. The popular items of Pakistan’s jewellery are Teeka, Pendants, Bazuband, Jhoomer, Bangles, Nose Pin, Kara, Earrings, Ring, Balian, Pazeb and Necklace.



17

Jewellery industry is highly fragmented, with very few players having complete in-house production facilities. Most of the players outsource manufacturing process to small vendors. The trade consists of small companies (generally up to 15 workers) with freelance craftsmen. The workforce works in the traditional manner sitting on the floor at low benches rather than seated at conventional workbenches, which are more comfortable and productive. The tools and technology employed are mostly basic. The use of high-tech machinery is missing throughout the value chain.

Each of the major cities of Pakistan has a “Sarafa Bazaar”, consisting of hundreds of small showrooms, bullion dealers and casting shops. Major cities and their markets are:

KARACHI Zaibunisa Street (Saddar), Tariq Road & HyderyLAHORE Gulberg, the Mall Road, Suha BazaarRAWALPINDI/ISLAMABAD Muree Road, Mareer Chowk, & Jinnah Super

Market

The industry structure is very fragmented and one with high degree of operational / functional specialization. For a polisher of gold jewelry will not do anything but polish. Thus a polisher can be an independent unit in manufacturing process and may cater to multiple jewelers. Complete jewelry manufacturing and integrated retailing units are rare in the industry.

The market’s preference leans towards exclusive designs. Thus jewelry manufacturing is very labour intensive, and unlike in the West, degree of mechanization and production of standardized items except in case of generic gold chains and perhaps bangles is very low. Hence, every process of jewelry making requires high level of expertise and skill – so mush so that jewelry manufacturing is closer to being a form of art. It is an art in the sense that when it comes to making of hand made jewelry, each process has more than one way of doing it, and the quality of work depends on the skill of an individual worker/ craftsman.

Because jewelry manufacturing is spread over number of specialized units in terms of process, jewelry making industry tends to be clustered or geographically concentrated. These clusters of workshops are found in Lahore, Karachi, and Rawalpindi in what are called the Sirafa Bazaars.

Large and renowned jewelers tend to have their workshops preferably in Karachi or in Lahore due to exceptional skill level developed there over time. In order to supervise the quality of workmanship and design of their jewelry item, jewelers not located in the main jewelry manufacturing cities but having their workshops there then have a representative or an agent in the city where their jewelry is being manufactured.

44..11..11 AAvveerraaggee WWoorrkksshhoopp

An average gold jewelry manufacturing workshop tends to be a 10 by 20 square feet covered area that is located within or near a jewelry manufacturing cluster if the workshop depends on outsourcing some of the processes as gem setting or polishing. Workshops visited in the jewelry manufacturing clusters (Sirafa Bazaars) were further specialized in terms of bangle manufacturers alone; makers of plain jewelry only; makers



18

of studded jewelry only, making gold balls to be sold to other workshops ..Etc. A completely self-sufficient workshop is seldom found in the industry.

Average number of workers in a typical gold jewelry manufacturing workshop found within a cluster like Sirafa Bazars is 5 to 6 craftsmen. These craftsmen tend to be generally the “pattern makers”, or those craftsmen who transfer the design on to the gold. Few workshops have a “polisher” and a “finisher”, and even fewer have a “stone setter” in the same workshop. Within the workshop, however, workers tend to be specialists in terms of their functions. For example, a workshop will have one worker who specializes in copying designs from catalogues; another, a maker of studded jewelry; another, a maker of plain jewelry, or a worker who only makes bangles Etc.

The average number of hours worked are 9 hours a day, six days a week. Workers are often part of a local union.

The recruitment of craftsmen is based on references and personal recommendations. According to some jewelers the turnover rate of workers recruited on the basis of personal recommendation / reference tends to be low since the workers recruited in this manner would not like to loose the confidence of their referees.

The remuneration of the craftsmen is a combination of base salary and performance (in terms of units made and / or quality of work).

44..22 EExxppoorrtt MMaarrkkeett

44..22..11 MMaajjoorr IInntteerrnnaattiioonnaall MMaarrkkeett PPllaayyeerrss

Global trade for Gems and Jewellery has shown a positive growth trend showing increasing demand for these valuable fashion articles in international market. For Jewellery the total trade expanded from US$21.0 billion in 1999 to US$27.9 billion in 2003. Whereas for Gemstones trade expanded from US$44.7 billion in 1999 to US$56.5billion in 2003. Following are the figures in terms of million US Dollars for top ten Gems and Jewellery exporting countries:

TTaabbllee 44--11:: JJeewweelllleerryy EExxppoorrttss ((UUSS$$ MMiilllliioonn))

1999 2000 2001 2002 2003

Italy 4,979 5,317 4,864 4,857 4,537

Hong Kong 1,716 2,132 2,081 2,442 2,854

USA 1,938 2,180 2,596 2,718 2,768

India 865 1,019 1,208 1,443 2,175

Switzerland 1,283 1,346 1,537 1,970 2,056

United Kingdom 1,260 1,043 1,480 1,605 1,948

China 1,994 1,791 1,498 1,660 1,761

Thailand - 901 890 1,062 1,202

Germany 788 795 805 816 1,035

France 680 842 1,013 966 1,018

Italy21%

Hong Kong13%

USA13%

India10%

Switzerland

10%

United Kingdom

9%

France5%

Germany5%

Thailand6%

China8%



19

Source: UNSTAT1

TTaabbllee 44--22:: JJeewweelllleerryy IImmppoorrttss ((UUSS$$ MMiilllliioonn))

1999 2000 2001 2002 2003

USA 5,772 6,553 6,359 7,221 7,615

United Kingdom 1,713 1,627 1,988 2,320 2,843

Hong Kong 1,070 1,261 1,236 1,435 2,023

Switzerland 1,054 1,183 1,174 1,393 1,323

France 723 829 948 950 1,074

Germany 887 861 792 844 928

Singapore 582 552 529 - 604

Italy 307 374 408 434 550

Canada 283 404 388 386 432

Thailand - 44 78 101 158Source: UNSTAT2

44..22..22 PPaakkiissttaann’’ss JJeewweellrryy EExxppoorrtt

The export of jewelry constituted only about 1.3% of the total exports made by Pakistan. The export of jewelry had been around Rs.807 million (US$ 1,366,000) over the period of July 2004 to March 2005. This was in effect a decrease of 16% over jewelry exports reported over the period July 2003 – March 2004, while the total exports showed an increase of 18% over the period considered above.3

Pakistan’s export of jewelry targets mainly the South Asian expatriates in Dubai, USA and UK. Several factors contributing to an insignificant share of world jewelry export contributed by Pakistan is that firstly, the industry is still fragmented and not well documented. Secondly, the designs produced by the jewelers are very traditional and are made in 22 carat. No hall marking or branding system exists. The larger export market, on the other hand demands 18, 14 and 8 carat jewellery with new and lightweight designs. The giftware market is negligible.

Pakistan’s Export Promotion Bureau has identified Pakistan’s jewelry industry as a sector with major potential. To support this sector, a gold assaying / hall marking facility is being established in the proposed Dazzle Park in Karachi. The necessary ground work is complete and funding has been lined up from the Export Development Fund.

Following tables contains information on Pakistan’s export performance in the Jewellery Sector for the last 5 years.

TTaabbllee 44--33:: JJeewweelllleerryy EExxppoorrttss ooff PPaakkiissttaann ((UUSS$$))

1‘ 897’ SITC Code Revision 3

2 ‘ 897’ SITC Code Revision 3

3 “STATEMENT SHOWING EXPORTS OF SELECTED COMMODITIES DURING THE MONTH OF MARCH, 2005” Ministry of Commerce, Pakistan.

Singapore3%

Italy3% Cananda

2%Thailand

1%Germany

5%

USA44%

United Kingdom

16%

Switzerland8%

Hong Kong12%

France6%



20

TTaabbllee 44--44:: FFiivvee YYeeaarrss’’ CCuummuullaattiivvee EExxppoorrtt FFiigguurreess wwiitthh MMaajjoorr TTrraaddee PPaarrttnneerrss((UUSS$$))

Country AmountUtd. Arab Emirates 50,003,601USA 34,405,920United Kingdom 18,467,423Canada 2,543,479Singapore 825,053Other partners 3,790,529Total 110,036,005

Source: Source: UNSTAT4

Most of the jewellery exported from Pakistan is purchased by Pakistani expatriates. There is a need to improve our understanding of international designs and trends to increase our customer base beyond our traditional cliental.

44..22..33 EExxppoorrtt RReegguullaattiioonnss aanndd PPrroocceedduurreess

The export of precious and semi-precious stones and gold jewelry is governed as per special procedure notified vide S.R.O. 266(I)/ 2001, dated 7-5-2001.5

3.2.1.1 General Rules:(1) Export of gold jewellery shall be allowed by air, parcel post, courier service and by

sea, as accompanied or unaccompanied baggage.(2) Export of gold jewellery shall be against advance payment, irrevocable letter of credit

firm order or contract, delivery or payment or delivery on acceptance (DP/DA), or consignment sale, as well as on self-consignment basis through authorized representative.

(3) In addition to registration under the Registration (Importers and Exporters) Order, 1993, exporters of jewellery and gemstones shall also be registered with the Export Promotion Bureau as exporters for jewellery and gemstones on application in the form as set out in Annexure A of S.R.O. 266(I)/ 2001, dated 7-5-2001.

4 ‘ 897’ SITC Code Revision 3

5 Reference : Export Promotion Bureau. (www.epb.gov.pk). Section 3.2.1 is abstracted from S.R.O. 266(I)/ 2001, dated 7-5-2001.

Years Amount2003 24,429,0842002 30,145,1362001 19,419,2262000 23,800,1441999 12,242,415Total 110,036,005



21

(4) Exporters of jewellery and gemstones shall be required to be members of one of the recognize Associations such as the All Pakistan Gem Merchants and Jewelrs Association, Karachi, or the All Pakistan

(5) Commercial Exporters of Rough and Unpolished Precious and Semi Precious Stones Association, Peshawar. or any other Association for jewellery and gemstones recognized by the Ministry of Commerce under the Trade Organizations Ordinance, 1961 (XLV of 1961)

(6) Exporters of jewellery and gems stones shall maintain a Jewellery Pass Book duly authenticated by the Export Promotion Bureau and all export and import transactions, as well as import entitlements and actual imports, shall be entered in the Jewellery Pass Book and authenticated by the Export Promotion Bureau.

3.2.1.2. Export procedure:-1. Export of gold jewellery shall be made according to the usual Form E procedure

of the State Bank of Pakistan.2. The sale proceeds of gold jewellery and gemstones exported under any provision

of this notification shall be repatriated either wholly in foreign exchange through normal banking channels or partly in the form of gold up to one hundred per cent weight of gold content of jewellery exported including wastage, and gemstones, and partly in foreign exchange for value addition.

3. Export of gold Jewellery and gemstones and import of gold and gemstones shall be provided preferred handling by the Customs authorities for clearance of related goods, and, in the weighment of gold, variation of one per cent shall be allowed.

4. The exporter or his authorized representative shall produce the parcels or boxes containing gold jewellery or gemstones along with export documents to the Customs authorities for weighment and examination under strict security and privacy.

5. The Customs authorities shall verify the weight of gold as per exporter's declaration, and shall assess the minimum value addition norms as specified in this notification.

6. The export documents shall clearly indicate the type of gold jewellery, whether plain or studded or embedded, and purity and karatage of gold used in making the gold jewellery.

7. For gold jewellery studded or embedded with gemstones, the value of gemstones shall be shown separately in the export documents including Form E, clearly indicating therein the kind, value and weight of gemstones of each article.

3.2.1.3. Entrustment scheme:- The Entrustment Scheme provides for export of gold jewellery and articles against import of gold supplied as partial advance payment, by the foreign buyer, to the extent of the quantity of gold to be used including wastage, in the manufacture of the items to be exported.

3.2.1.4 Export of gold jewellery and gemstones on self consignment basis:-In case of export of gold jewellery and gemstones taken out by authorized representative of an exporter on self-consignment basis, the following procedure shall be followed, namely:

i) The exporter shall submit to the Export Promotion Bureau, an application in the form as set out in Annexure E. in duplicate for export approval and import authorization and



22

such application shall be checked and verified by the Export Promotion Bureau and entries shall be made in the Jewellery Pass Book;

(ii) The import authorization shall be valid for one hundred and twenty (120) days from the date of departure of the exporter's representative for bringing back gold and gemstones o_ export proceeds and any unsold gold jewellery or gemstones;

(iii) The Jewellery Pass Book, duly authenticated by the Export Promotion Bureau, shall be produced by the exporter's incoming representative to the Customs authorities on, arrival for clearance or release of gold, gemstones and any unsold gold jewellery and gemstones

(iv) The sale proceeds shall be realized, within one hundred and twenty days from the date of export in foreign exchange through normal banking channels or partly in the form of gold content of the jewellery exported including wastage and gemstones;

(v) The unsold jewellery or gemstones shall be deposited with the Customs authorities and shall be cleared against relevant entries in Jewellery Pass Book, and a bill of entry shall be filed for such import of unsold jewellery or gemstones;

(vi) Import entitlement for gold and gemstones, as well as other imported inputs, shall be entered in the Jewellery Pass Book; and

(vii) Bill of entry for gold and gemstones imported in lieu of foreign exchange and for unsold jewellery or gemstones shall be produced to the bank, through which consignment was exported, within a period of one hundred and twenty days from the date of export.

3.2.1.5. Import of gold and gemstone against export of jewellery (1) In case of exports of gold jewellery made from locally procured gold and gemstones. where sale proceeds are realized wholly in foreign exchange, the exporter shall be entitled to replenishment of gold at one hundred per cent of gold content of jewellery exported including wastage and gemstones actually used in the jewellery exported and the exporter shall be entitled to claim import entitlement for the replenishment within one hundred and eighty days from the date of realization of export proceeds.

3.2.1.6. Import entitlement:- Import of raw materials used in the production of gold jewellery and gemstones shall be allowed to the exporters as replenishment according to the following parameters, and such imports shall be freely transferable, namely:

a. Gold: Equal to the gold content of gold jewellery actually exported, including wastage.

b. Gemstones: Up to seventy per cent of the f.o.b. value of gemstones used in embedded or studded gold jewellery or loose gemstones actually exported.

c. Other raw materials and equipment: Import of the following raw materials and equipment shall be allowed up to seventy per cent of value addition i.e., the f.o.b. export value of gold jewellery and gemstones actually exported, less value of gold



23

content including wastage and value of gemstones, up to maximum percentages where indicated namely:

i. Jewellery casting power.ii. Moulding rubber.

iii. Injection wax.iv. Rhodium plating solution concentrate.v. Bright and chrome lacquering solution.

vi. Alloys of silver copper and zinc for mixing the twenty four carats gold.vii. Mounts and findii1g of gold, silver and platinum jewellery.

viii. Steel balls and pins (different sizes) used for polishing.ix. Jewellery casting machines and accessories. Diamond cutting tools (different

sizes).

3.2.1.7. Import duties and taxes:-

(1) Import of gold and gemstones under all schemes shall be exempt from normal import tariffs. The import of other raw materials, tools, machinery and equipment as' provided in section 3.2.1.5 and 3.2.1.6 shall be- allowed free of customs duties and without payment of advance Income Tax in terms of the Notifications Nos. S.R.O. 592(1)/97, dated the 7th August, 1997, and S.R.O. 490(1)/2001, dated the 17th July, 2000, retrospectively.

(2) In case an exporter uses duty-paid raw materials procured .from the market, duty drawback shall be admissible according to the standard duty drawback system in force. Refund of sales tax, if paid on any raw material inputs, shall be allowed according to the Sales Tax Refund Rules made under Notification No. S.RO 417(1)/2000, dated the 20th June, 2000.

3.2.1.8 Advance import of gold:- Exporters .may also apply, in the form as set out in Annexure, E, for advance authorization of import of gold and gemstones, before export of jewellery, as per letter of credit or firm export order or contract, subject to deposit, with their bank of cash margin equal to one per cent of the value of gold and gemstones and in this case the procedures under the Entrustment Scheme in shall apply.

3.2.1.9 Sale of jewelry to foreign buyers and overseas Pakistanis: -Foreign national and overseas Pakistanis shall be allowed to take out personally gold jewellery or gemstones up to the limit of US Dollars ten thousand, against foreign currency encashment certificate, with itemized purchase receipts(s) and, if the value exceeds US Dollars ten thousand, the normal export procedure shall be followed.

3.2.1.10 Display or sale In international fairs and exhibitions: Exporters shall be allowed to take out gold jewellery and gemstones, for display and sale in international fairs and exhibitions, either as accompanied baggage or through parcel post or courier service, according to the procedures of entrustment scheme and subject to the following conditions namely: (a) Items not sold abroad shall be re-imported within forty-five days of the close of the exhibition;(b) the gold content of items sold in such exhibitions may be imported as replenishment within sixty days after the close of the exhibition; and (c) exporters may take out as personal baggage gold jewellery and gemstones as samples up



24

to a value of US Dollars one hundred thousand, for export promotion tours and temporary display abroad, Such gold jewellery and gemstones shall be brought back within forty-five days from the date of departure.

44..33 LLeeggaall IIssssuueess RReeggaarrddiinngg IInndduussttrryy

44..33..11 TTaaxxaattiioonn

The gold jewelry manufacturer / retailer is exempt from paying sales and income tax as long as the year’s profit before tax is less than Rs.5,000,000/- Once the profit moves beyond the threshold of Rs.5,000,000/- the gold jewelry manufacturer / retailer is liable to pay 15% sales tax and 0.75% income tax on the year’s profit before tax.

44..44 MMaarrkkeett PPootteennttiiaall

The consensus amongst the jewelers spoken to is that the demand driven growth is definitely positive and potential of annual growth can be between 15% to 20% given an adequate stock size, regardless of the state of the economy as experienced over past five years.

44..44..11 CCuussttoommeerr LLooyyaallttyy

Customer loyalty in urban areas and cities is less than in rural areas. Urban customers tend to shop around for an item before making a purchase. The loyalties of these customers have to be retained via good designs, long product range and relationship building.

44..44..22 TTrreennddss

The main driver of demand for jewelry tends to be weddings whereby shopping for jewelry to be given in dowry starts years back and goes on till few days before the event. Larger, prominent and gem studded jewelry, thus, constitutes the traditional demand. However, with increasing rate of females working and earning a salary for themselves; and greater exposure to outside culture through magazines and TV the demand for smaller and contemporary western designs is emerging in the main urban cities. The rural and semi rural areas tend to present a more traditional demand.

44..55 TTaarrggeett CCuussttoommeerrss

The gold jewelry manufacturing and retail enterprise will have two broad sets of target market. Given the proportion of workshop output sold by self, the main set of target market are the consumers (purchasers) of gold jewelry. The other set of target market are those gold jewelry retailers who outsource the manufacturing of gold jewelry. These jewelers are potential source of “orders” for the workshop.

The first set of target market – consumer market – can be sub-defined in terms of how theenterprise decides to position its gold jewelry items. Tapping an exclusive niche that falls under “Designer Jewelry” may require lower initial investment in terms of stock per gross margin. However, that position strategy would have additional demands of offering exclusive and appealing designs and range to the target market.



25

The positioning strategy, that is, whether the prospective jeweler (retailer /manufacturer) decides to cater to a local niche or mainstream market; or to the export market has crucial bearing on gamut of decisions ranging from site and décor of the showroom to production process / feasibility of mechanization of process.

The following table depicts how the choice of target market affects some of the decision variables.

TTaabbllee 44--55:: IImmpplliiccaattiioonnss ooff VVaarriioouuss PPoossiittiioonniinngg SSttrraatteeggiieess

Implications of Various Positioning Strategies6

Target Market

Price Promotion Product Distribution

NICHE MARKET / DESIGNER

Designer's Premium for exclusivity

Exhibitions; Fashion

Shows; Fashion

Magazine shoots / Ads

22 karat - 18 karat; Exclusive designs; Low duplicity; Labor Intensive

processes

Location in the main market is not crucial;

Décor of showroom must support the brand image

LOCAL MAINSTREAM MARKET

Competitive pricing;

Lesser profit margin than in designer products.

Word of mouth; Window

displays; If justified by

capacity, fashion magazine advertisement near seasonal peaks.

22 - 21 karat items; High stock to sales ratio;

Larger range of jewelry items available for display;

Variety of smaller (high turn over items)

High importance of central location in a busy shopping centre, or in a cluster of jewelry shops

EXPORT MARKET (Expatriates from the Sub-Continent)

Competitive in the foreign market

Exhibitions 21 karat; Studded jewelry

preferred; Both Asian and

contemporary designs; Smaller / lighter jewelry

Importing agents; Own agent abroad; Exhibitions

EXPORT MARKET (Non-Expatriates)

Competitive in the foreign market

Trade promotion

18- 14 karats; Contemporary designs; Smaller / lighter jewelry;

Mechanization feasible for mass distribution

Importing agents; Own agent abroad; Exhibitions

6 Note: This model is based on catering to the local mainstream market. The various target markets mentioned above, however are not mutually exclusive. For example a gold jewelry manufacturing and retailing enterprise may have mainstream local market for volume of sales as the primary target market but can have separate product lines for exclusive / niche and export market for greater profit margin as secondary target market



26

55 PPRROODDUUCCTTIIOONN PPRROOCCEESSSS

55..11 PPrroodduuccttiioonn PPrroocceessss FFllooww

Figure 4.2.0 below shows the production process flow from contracting an order and completing an order. The production process depicted in Figure 4.2.0 is described in detail later.

4.2.1 Contract Order

4.2.4 Converting gold ingots into plates and wires

4.2.6 Engraving

4.2.3 Gold Refining and Mixing

4.2.2 Jewelry Designing

4.2.5 Pattern Making

4.2.7 Finishing

4.2.9 Beading and Gem Studding

4.2.8 Polishing and Buffing

4.2.10 Gold Recovery



27

55..11..11 CCoonnttrraaccttiinngg oouutt aann oorrddeerr

There are two main ways a jeweler contracts out an order. Firstly, if a jeweler has his / her own basic workshop, then he/she assigns the task of manufacturing a particular jewelry item to the workshop supervisor / lead craftsman in the workshop. The person to whom the task is assigned in effect becomes the project manager for the manufacturing of the assigned jewelry item.

The other route is that the jeweler himself takes the order through different manufacturing process located in independent specialized units like Gold Mixing Unit; independent designing and crafting unit, the polishing unit, and the stone / gem setting Etc.

The latter route is more costly and time consuming, however the jeweler can apply greater quality control and be more satisfied with the end result.

55..11..22 JJeewweellrryy DDeessiiggnniinngg

The design of the jewelry offered is crucial to a cash flow favorable stock-turnover. There are several sources of jewelry designs: Copy of designs from jewelry magazines and catalogues; Hiring of professional jewelry designers with a related educational and professional

background; Jewelry design may be provided by the client himself / herself; Jewelry designing by the jeweler himself / herself.

Once the jewelry design is provided to the craftsman / pattern maker, the latter makes a sketch of the design and shows it to the jeweler / entrepreneur for approval. This process till the approval may take about 2 days.

55..11..33 GGoolldd RReeffiinniinngg aanndd MMiixxiinngg

The jeweler commissioning the manufacture of a gold jewelry first purchases gold in form of ingots amount more than what that item would take. For example for a 1 tola (11.5 gram) gold item, the jeweler would purchase 1.5 tolas of gold) from gold wholesalers in sirafa bazaars.

Next, the gold is mixed to get the desired karatage. The mixed gold is molded into small bars and given to the craftsman who manufactures the order.

If the jewelry design requires setting of gems / stones, they too will have to be bought. The quality of the stones can be checked by the Gem Corporation.

55..11..44 CCoonnvveerrttiinngg GGoolldd IInnggoottss iinnttoo GGoolldd SShheeeettss aanndd WWiirreess

In accordance with the design requirements, the craftsman converts the gold ingots into gold sheets and wires with thickness required by the design. The gold sheets and rods are made from a machine locally called sheet and wire making machine (Patra or Ari ki Machine). This machine compresses the gold fed into it in one end to produce sheets / wires according to the setting from the other end.



28

55..11..55 TTrraannssffeerr ooff DDeessiiggnn // PPaatttteerrnn MMaakkiinngg

There are two main ways a craftsman may transfer the design into a jewelry item: Direct transfer of design on Patra (flat gold sheet) by the “Engraver” locally referred

to as “Ari ka Kaam Karrney Wala”; Casting.

The direct transfer of design is a more popular method. The disadvantage of direct transfer of design on gold sheet is that one requires more gold than is required to make an item. The excess gold at the end of the process is then melted and re-used in other items. However, the jewelry item itself requires less gold through the direct method than it requires if casting method is used. Jewelry made via casting is heavier for it requires more gold. Same design made via casting, taking 30g of gold may be prepared by hand using 20g of gold.

Casting method is used for repeated designs. Casting designs are those that are used currently either as piece in a jewelry item or a jewelry item itself.

Cast process follows thus: First, a model referred to as a “dye” is prepared on an iron sheet. The model is then used to prepare rubber casts / moulds. These models are used in a “casting plate” (Casting Machine) to make the gold jewelry. Wax casting is used for Kundan and very light jewelry, like Dhaka or Bangal’s jewelry. Kundan making skills are concentrated in Lahore, Multan, Bahawalpur, Sargodha and Karachi.

The Casting method is time saving. A casting plate has a capacity of 50 tolas. Unless casting work of 50 tolas is not lined up, the machine will not (or cannot) operate. Because casting method is not popularly used, casting work is not sufficient at any given time to operate the machine.

Hence, workshops having their own casting shop set specific days of a week for casting. For example, a workshop may set two days in a week for operating the casting machine, and the craftsman may have to wait for these days for his work-in-process to proceed.

This is one reason why the casting process is often outsourced by workshops to independent casting units in the jewelry cluster. These independent units run their casting plates every day; hence the casting process does not prove to be a bottleneck for a craftsman.

On getting the casted design, the craftsman gives a finishing to the casted pieces.

Locally manufactured casting machine and it’s accessories would cost about Rs.315,500/-, whereas imported machines German or Italian.

55..11..66 EEnnggrraavviinngg

Most jewelry design often requires engraving whereby intricate patterns are etched onto the gold base. Basic engraving may be done at the workshop. However, engraving is a specialized task, and sophisticated engraving may need to be outsourced to an independent engraver in the market.

Engraving mainly requires basic chip forming tools such as miniature chisels made of hardened steel. In proper engraving a sharpened tool is set against the metal at a specific



29

angle and pressure applied both own-ward and forward. The tool buries itself into the sheet, forms a chip, and pushes that curl of metal ahead of it as it cuts.

55..11..77 FFiinniisshhiinngg

Once the design has been transferred, engraved and design pieces soldiered to form one item, the craftsman gives the piece a finish technically called “deburring” before the item is sent for polishing. Deburring is the removal of all sharp edges, air bubbles and burrs on a piece.

55..11..88 PPoolliisshhiinngg aanndd BBuuffffiinngg

Polishing is the use of abrasives to get general surface finish improvement. Buffing is the step to get a smooth, bright, high luster final finish. There are many different polishing and buffing compounds. An often-used breakdown of compounds is:

Cutting Compounds: These include the brown Tripoli and bobbing compound Intermediate Compounds: These include Gray Tripoli, Graystar, white diamond, and

crocus. Platinum Tripoli and yellow bobbing compound. Polishing Compounds: Some polishing compounds are red rouge, yellow rouge, white

rouge, black rouge, green rouge. Super Finish Compounds: Blue rouge, Blue magic, Fabuluster, and Zam.

The Polishing and Buffing process is performed on buffing wheels. There are buffing wheels to go with different types of compounds being used. There are cotton wheels, chamois wheels, bristle brush wheels and more. Cotton buffing wheels are the most common, felt wheels are also popular as are the brushes. Chamois wheels are great for final buffing, but they are also fairly expensive.

Polishing may take one to three days depending on the item being polished and buffed.

The polisher is paid in kind that is considered as wastage by the jeweler. A polisher sets his rate in terms of 500mg on 11.5g (1 tola) of gold. This means that if a polisher is given 13g of gold to polish, and after polishing the weight of gold goes down to 12.5 g, then 500mg was his compensation. If the weight lessens by more than the set rate, the gold-jeweler will write the excess amount payable by the polisher and will be adjusted at the end of a month when the polisher will melt his gold and pay off the excess to the jeweler.

55..11..99 BBeeaaddiinngg aanndd SSttoonnee SSttuuddddiinngg

Beading and gem studding process occurs after the finishing, polishing and buffing of the main gold base of the jewelry item.

Beading is the stringing of gem beads on to the main gold jewelry item. There is often a “beader” in every workshop whose job is only to put on the beads on to the gold jewelry.Gem studding is fixing of gem stones on to the jewelry. While some workshops may have their own gem studder, most of the workshops outsource the gem / stone studding to an independent stone setter. Stone setting may take two to three days.



30

55..11..1100 GGoolldd RReeccoovveerryy

On completing the gold jewelry item /s the craftsman must return to the jewler who had given the order the same amount of gold in terms of jewelry and scrap net of a fixed rate of wastage. For example, if the jeweler had given the craftsman 30g of gold (24k) for a necklace requiring 15 grams of gold, then the craftsman has to return gold in terms of 15 grams constituting the necklace and 13.2 grams in scrap gold after netting wastage at 6% (1.8 grams of gold).

55..22 CCaassttiinngg PPrroocceessss aanndd MMaacchhiinneerryy RReeqquuiirreemmeenntt

If a new design is to be casted, the first step to casting is making a model of the design by hand either with gold, silver or iron. The model is then used to make a rubber mold known as “dye”. For this process, rubber that comes in rolls and is known as Casting Rubber is heated, using a Dye Press Machine, under pressure and flows around the prototype making a mold. When cool it is then is cut apart leaving a cavity in the rubber in the shape of the original piece. Wax Injector machines are used to inject molten wax is into the rubber mold creating a wax copy of the original. The wax model is attached to a rubber base with a heating pen like device known as Waxer with a number of others into a tree like form in the process known as “sprueing”.

The wax tree is then surrounded by a metal cylinder called a flask which fits onto the rubber base. This cylinder is then filled with plaster which has been mixed under vacuum in a vacuum machine to draw out the air it contains. The plaster encases the wax pieces and then hardens. The base is removed and the assembly is placed in a Gas Furnace. The flasks with the plaster encased waxes are heated overnight to 1350 degrees which burns away the wax leaving cavities in the plaster in the shape of the original pieces.

Gold is melted in a flask like attachment on a casting machine. The flasks of plaster thatare ready from the Gas Furnace are put on the Cast Machine that is turned on. The caste machine, using system of pressure makes the molten gold travel into the plaster mold while at the same time removes trapped air and gases.

When the process is done, the plaster is broken off and the tree is then put under a motorized pressure machine that wahes away any remaining plaster. The gold tree is then dipped into nitric acid and heated with a blow torch to get the gold colour on the gold caste pieces. The caste pieces are then cut away from the base and are sanded and filed to remove traces of the spruce, mold lines and any imperfections. The pieces are oxidized if required and undergo a multiple step tumbling process using different grit media to achieve the final desired finish.

55..22..11 SSuuppppllyy ooff MMaacchhiinneerriieess

As mentioned above, most of the gold manufacturing machinery is made in Pakistan. Gujranwala is the hub where most of the locally made gold manufacturing machinery is manufactured. The suppliers are concentrated in Sadar bazaar of Gujranwala. Simple machines like motorisd polishing and buffing machines can be bought from any sarafa or old city bazaar of main urban centres.

Earlier, casting machines had to import from either Italy or German. The main suppliers through which the imported casting machines were bought are located in Karachi. Some



31

of the suppliers of imprted casting machines have now started manufacturing (with some imported parts) the casting machines and equipment themselves.7

55..33 JJeewweellrryy IItteemm MMaannuuffaaccttuurriinngg TTiimmee

Table 5-1 below gives an average time for a medium sized workshop to produce the respective jewelry items.

TTaabbllee 55--11:: JJeewweellrryy IItteemm MMaannuuffaaccttuurriinngg TTiimmee

Item TimeRing 1-2 daysBangle 1 weekEarring 2-3 days Chain 3 daysNecklace 1 weekTeeka 1 dayJhoomer 3 daysNose pin 1 dayPendant 2 daysBaazoband 5 daysBridal set 1 month

The time taken on completion of a small order is not far less than time taken for a bridal set because of the way craftsmen schedules the work on order. Craftsmen prefer to work on larger items since for almost a similar amount of concentration the craftsmen’s earning on a large item is far greater than his earning on a smaller item.

55..44 RRaaww MMaatteerriiaall

Table 5-2 below lists the main raw material needs and the purpose for their use. The monthly requirement assessment for each raw material is based on the workshop operations at 41400 grams / year. The raw material assessment below suggests the proportion of raw material cost to grams of output in terms of gold jewelry is Rs.6.4 / gram.

7 One such supplier is “Ayub Brothers Engineering Works and Alay Casting Equipment”. Phone# 021-2254747, Address: LR9/14, Amil Street, Wahab Road, Ghazi Nagar, Karachi 3.



32

TTaabbllee 55--22:: RRaaww MMaatteerriiaall RReeqquuiirreedd

Raw Material Needs for Workshop output of 41400 grams in Year 1Raw Material Purpose Total Monthly CostCasting Rubber For making casting dyes

for new designs7000

Whip Mix Jewelry Investment Powder (Plaster)

Required in the process of casting

10,000

Wax Required in the process of casting

2000

Nitric Acid For bringing out the color of gold after casting process and during polishing

2000

Surf / Detergent Required during polishing and buffing process

200

Coloring Chemicals Required to change color of gold jewelry item after finishing process

1000

Table 5-3 below shows how proportion of raw material cost to output over the period of 10 years change and the respective expected annual raw material cost. The change in proportion of the of raw material cost to output is based on the planned level of production of the workshop and on 5% annual increase in raw material cost.

TTaabbllee 55--33:: YYeeaarrllyy RRaaww MMaatteerriiaall CCoossttExpense Variables

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Proportion of Raw material Cost to Output (Rs / gram)

6.40 6.72 7.06 7.41 7.78 8.17 8.58 9.01 9.46 9.93

yearly raw material cost (Rs)

264,960 301,392 340,805 383,405 429,414 479,065 503,018 559,238 587,200 616,560

55..55 MMiisscceellllaanneeoouuss EExxppeennssee

Miscellaneous office expense includes: Stationary expense: Printing (receipt vouchers, business cards..Etc), writing material

(pens, pencils, ink pads...etc); Tea and entertainment expense for favored customers and employees; Commuting expense (visits to workshops, suppliers…etc). Other non-recurring expenses.



33

55..66 IInniittiiaall IInnvveessttmmeenntt iinn GGoolldd JJeewweellrryy SSttoocckk

The retail unit of the integrated modeled enterprise will begin operations with initial stock level of 5175 grams of 22k gold. Given the parameters below, the initial investment in gold jewelry stock required is Rs. 6,073,380/-

TTaabbllee 55--44:: PPaarraammeetteerrss ffoorr IInniittiiaall IInnvveessttmmeenntt iinn GGoolldd JJeewweellrryy SSttoocckk

Parameters Year 0Initial Gold Stock (Grams) 5175

Gold Price (Rs) / Gm 905

Ratio of other material to value of gold used (Rs) 0.06

Direct Labour (Rs) / Gm with annual increase of 10% 160

Wastage Ratio to value of Gold Content 0.06

55..77 MMaacchhiinneerryy RReeqquuiirreemmeenntt

A basic gold manufacturing workshop can be set up quite inexpensively. Cutting (separating materials), soldered construction and finishing are the three main things that jewelers do. However the more processes included within the workshop, the greater the level of investment. The model subject to this study includes the following processes and the tools, equipment and machines required are in accordance.The workshop of this model has the capacity to perform all processes. The only process it out sources is gold refining and mixing. Processes performed in the workshop are:1. Gold refining and Mixing2. Handcrafting of jewelry by engravers and craftsmen3. Polishing4. Finishing5. Gem / stone Beading6. Gem Studding7. CastingFor this purpose the tools, equipment and machinery requirements are as follows:

TTaabbllee 55--55:: DDeettaaiillss ooff MMaacchhiinneerryy && EEqquuiippmmeenntt

Machines, tools and equipment

No. of Units

Price / unit (Rs)

Total Cost (Rs) Place of Origin /Manufacturing

Wire Making Machine and accessories

1 25000 25,000 Gujranwala, Lahore

Plate Making Machine and accessories

1 25,000 25,000 Gujranwala, Lahore

Wax Casting Machine & Equipment

1 315,500 315,500 Karachi

Polishing Machine and Accessories

2 7,000 14,000 Gujranwala

Tool set for craftsmen 5 8,000 40,000 Gujranwala



34

Tools for gem studders 2 4,000 8,000 GujranwalaManual scale 1 600 600 Gujranwala,

Lahore, local market

Digital scale 1 6,000 6,000 Chinese / Italian

Most of the above mentioned tools and machines are manufactured locally. Gujranwala specializes not only in gold jewelry making tools, equipment and machinery, but also in terms of furnishings (like special safes) required by gold jewelry retail outlet. However, some machines like gold plate making and wire making machines are also manufactured in Faisalabad and Lahore.

There are clusters of Gold jewelry related tools and machine manufacturing and are located in “Sadar bazaar” in each of the three main cities mentioned above.

The general practice amongst the jewelry manufacturers is to use locally made tools and machinery. Machines generally imported are chain making, bangle making and casting machines. The main origin of imported machines is primarily Italy or Germany. Till recently, casting machines had to be imported as electricity based casting machines were not being manufactured in Pakistan. Casting machines are now being manufactured in Karachi at a small scale. Interviews with users with locally manufactured casting machines have expressed their satisfaction with the latter. Because the enterprise subject to this model deals primarily with hand crafted jewelry and casted jewelry component or whole items constitute only small portion of total output, the model enterprise invests in locally manufactured casting machine and equipment.

Table 5-6 below shows the casting equipment and machinery required and respective cost.

TTaabbllee 55--66:: CCaassttiinngg EEqquuiippmmeenntt aanndd MMaacchhiinnee

Casting Machines and Tools Units Rate / Unit (Rs) Total Cost (Rs)Die Press 1 13,000 13,000Wax injectors 2 8,000 16,000Waxer 1 500 500Vacuum Machine 1 18,000 18,000Automatic Gas Furnace 1 25,000 25,000Caste Machine 1 230,000 230,000Pressure Machine 1 18,000 18,000Blow Torch 1 3,000 3000Total 315,500

55..88 FFuurrnniittuurree && FFiixxttuurreess

Furnishing and fittings (including 2 heaters) required for a workshop (22 by 88 square feet) is estimated to cost around Rs.50,000/- (Rs.50,308/- to be exact based on current prices). The workshop requires very basic furnishing and fittings.



35

A simple furnishing of an 11 by 44 square feet jewelry shop can cost about Rs.197,000/-(Rupees One hundred and ninety seven thousand) on average, including an air conditioning unit and a heater. The fancier the fittings and the furniture, higher the cost.

Table 5-7 below shows the break-up of the cost for furniture and fixture for both the retail and the workshop unit.

TTaabbllee 55--77:: FFuurrnniittuurree aanndd FFiixxttuurree

Cost Items Units Unit Cost Total CostRetail UnitFurniture (counters, chairs, wall mirrors, lighting, installed safes)

1 15,000 125,000

Cash Register 15,000Digital Weighing Machine 1 2,000 7,000Hand tools (magnifying glass, gem inspection glass, ring size gauge .etc)

1 set 5,000 5,000

Split Unit / AC 1 30,000Heater 1 15,000Total Cost on Furniture and Fixture - Retail Unit 197,000Manufacturing UnitJute / date leaves floor matting 1452 4 5,808work benches 11 2500 27,500Safe 1 7,000 7,000Heater 2 5000 10,000Total Cost on Furniture and Fixture - Workshop Unit 50,308Total Furniture and Fixture Cost 247,308

Mostly Gold jewelry retailers contract for fixtures like lockers and showcases anddecided upon after consultation with and recommendation of other jewelers who have had experience in acquiring those items. The whole industry runs on the basis of trust and word-of-mouth reputation. Jewelers tend not to recruit un-vouched for suppliers or workers. However, Gujranwala specializes in specialized lockers for gold jewelry retail shops.

66 LLAANNDD && BBUUIILLDDIINNGG RREEQQUUIIRREEMMEENNTT

66..11 LLaanndd RReeqquuiirreemmeenntt

66..11..11 RReenntt

Rent varies with space and location. For workshop, the location may be within a jewelry a cluster or outside it. The rents and rates within the jewelry cluster tend to be higher. For example, a workshop space 22 by 88 square feet within the jewelry cluster would seek rent of Rs.6000/- per month whereas the same nature of space further to the jewelry



36

cluster may seek only Rs.3000/- per month. This model assumes a workshop space of 22 by 88 square feet located within the jewelry cluster. Hence the monthly rent for the first year is Rs.6000/- per month with annual increase of 5%.

The rent for the gold jewelry retail shop 11 by 44 square feet, located in a central shopping centre of a major urban city, is estimated to be around Rs.17,000/- month and is estimated to increase at 5% annually.

The rent for both the workshop and retail shop is often pre-paid in terms of lease.

66..22 UUttiilliittiieess RReeqquuiirreemmeenntt

A medium sized 324 square feet sized retail shop that is open six days a week for about 10 hours / day, tends to incur electricity bill worth about Rs.84,000/. This amounts to a monthly average of Rs.7000/- after considering the fact that electricity bill tends to be higher in summers and lower in winters. Yearly gas bill averages to Rs.12,000/-, amounting to Rs.1000/- per month.

Currently established gold jewelry manufacturing workshops concludes that of utilities, electricity and gas costs amounts to, on average Rs.5000/ month and Rs. 2000/ month on average (use of casting machinery and equipment and wire and plate making machine tends to high use of electricity and gas. The main electricity usage in the workshop will be in terms of lighting and operation of machines such as wire and plate making, polishing and most significantly, the casting machine. The gas expense will be on heating in winters and use of gas furnace in the casting process.Both the workshop and the retail shop will have at least one telephone line. The average monthly bill for each line is expected to be Rs.1000/-.

Table 6-1 below shows the break-up of utility costs for year one. The cost of utilities is expected to rise by 5% annually.

TTaabbllee 66--11:: UUttiilliittiieess

Utility Type Estimated Monthly Bill for Year 1

Estimated Annual Bill for Year 1

Retail UnitElectricity 7000 84,000Gas 1000 12,000Telephone 1000 12,000Total Utilities Cost - Retail Unit 108,000Manufacturing UnitElectricity 5000 60000

Gas 2000 24000Telephone 1000 12000Total Utilities Cost - Manufacturing Unit 96,000Total Utilities for Year 1 204,000



37

77 HHUUMMAANN RREESSOOUURRCCEE RREEQQUUIIRREEMMEENNTT

The model enterprise recruits two types of employees in terms of the latter’s remunerations: salary based and performance based. Table 7-1 shows the remuneration scheme for the employees employed in both the retail and manufacturing units. The monthly salary cost of the retail unit is Rs.45,000/- while the monthly salary cost of the planned workshop is Rs.13,000.

Within this scheme, all the employees in the retail unit are employed on the basis of fixed monthly salary. However, the workshop employs three different sets of employees. The chief craftsman is a also the workshop manager. He is paid a combination of monthly salary and wage based on quantity of output produced. Other craftsmen are employed, as is the practice in the industry, on performance based wage whereby they are paid on the basis of Rs./grams of gold jewelry produced. The polisher is paid in terms of wastage (grams of wastage / tola) and machine operators are paid on basis of fixed salary. According to this scheme, the monthly fixed salary.

The annual salary fixed salary cost for the first year is Rs.696,000/- and this amount increases with 10% annual increase in fixed salaries.

TTaabbllee 77--11:: HHuummaann RReessoouurrccee RReeqquuiirreedd aanndd RReemmuunneerraattiioonn PPllaann

Designation / Responsibility Number employed Monthly Remuneration / person

Retail UnitShop Manager 1 25,000Sales Assistant 2 6,000Errand Boy 1 2,000Guards 2 3000Manufacturing UnitChief craftsman 1 5000 + Performance related

wage @ Rs.90/gram Craftsmen 9 @ Rs.90/gram Beader 2 performance related wage @

36/gram on averageStudder 4 performance related wage @

60 / gram on averagePolisher 2 WastageCasting Machine operator 2 4000



38

88 FFIINNAANNCCIIAALL AANNAALLYYSSIISS

88..11 PPrroojjeecctteedd IInnccoommee SSttaatteemmeennttPR O JEC TED IN C O M E STA TEM EN T Y ear 1 Y ear 2 Y ear 3 Y ear 4 Y ear 5 Y ear 6 Y ear 7 Y ear 8 Y ear 9 Y ear 10

Revenue from sale o f Jewelry Stock 34,982,669 42 ,005,823 49,888,218 58 ,702,109 68,529,026 79,461,074 81 ,707,106 89,062,984 91 ,800,400 94 ,743,701Revenue from m anufacturing for other jewelers2,898,000 3 ,021,769 3,068,258 3 ,013,467 2,828,641 2,479,481 2 ,727,429 3,176,652 3 ,494,318 3 ,843,749 Total Income 37,880,669 45 ,027,592 52,956,475 61 ,715,577 71,357,667 81,940,554 84 ,434,535 92,239,637 95 ,294,718 98 ,587,450

Cost o f G oods Sold directlyO pening B alance 6,073,380 6 ,482,380 7,698,799 8 ,153,071 7,931,600 9,196,884 9 ,456,841 10,308,216 10 ,625,046 10 ,965,706Purchases 29,561,224 36 ,221,272 42,027,786 48 ,696,954 58,372,805 66,477,519 68 ,940,630 74,535,984 76 ,840,993 78 ,953,084Closing Balance 6,482,380 7 ,698,799 8,153,071 7 ,931,600 9,196,884 9,456,841 10 ,308,216 10,625,046 10 ,965,706 10 ,965,706Cost o f m anufactureing gold jewlery for o ther jewlers 2,649,600 2 ,762,760 2,805,264 2 ,755,170 2,586,186 2,266,954 2 ,493,649 2,904,368 3 ,194,805 3 ,514,285 T otal Cost o f G oods / services Sold 31,801,824 37 ,767,613 44,378,779 51 ,673,594 59,693,708 68,484,515 70 ,582,904 77,123,521 79 ,695,138 82 ,467,369G ross Pro fit 6,078,845 7 ,259,979 8,577,696 10 ,041,982 11,663,959 13,456,039 13 ,851,631 15,116,115 15 ,599,580 16 ,120,081

G eneral Adm inistration & Selling E xpense U tilities 204,000 214,200 224,910 236,156 247,963 260,361 273,380 287,048 301,401 316,471 Raw m aterial 264,960 301,392 340,805 383,405 429,414 479,065 503,018 559,238 587,200 616,560 Personnel E xpense 696,000 765,600 842,160 926,376 1,019,014 1,120,915 1 ,233,006 1,356,307 1 ,491,938 1 ,641,132 Shop Lease / Rental Expense 272,000 285,600 299,880 314,874 330,618 347,149 364,506 382,731 401,868 421,961 O ffice Expense (Stationary Etc.) 36,000 37,800 39,690 41,675 43,758 45,946 48,243 50,656 53,188 55,848 Professional E xpense (Legal, Audit..) 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 A ssociation's M embership Fee 12,000 13,200 14,520 15,972 17,569 19,326 21,259 23,385 25,723 28,295 D epreciation Expense 68,141 68,141 68,141 68,141 68,141 68,141 68,141 68,141 68,141 68,141 A mortization o f Pre-O perating Cost 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 20,000 Total C ost o f Sales 1,593,101 1 ,725,933 1,870,106 2 ,026,598 2,196,477 2,380,903 2 ,551,553 2,767,506 2 ,969,459 3 ,188,408 O perating Income 4,485,744 5 ,534,046 6,707,591 8 ,015,384 9,467,482 11,075,136 11 ,300,077 12,348,609 12 ,630,121 12 ,931,673

Interest on Short Term Loan - - - - - - - - - - Interest E xpense on Long T erm D ebt 447,400 376,975 298,099 209,757 110,815 - - - - - Earning Before Tax 4,038,344 5 ,157,072 6,409,492 7 ,805,626 9,356,667 11,075,136 11 ,300,077 12,348,609 12 ,630,121 12 ,931,673

T axable Earning for the Y ear 4,038,344 5 ,157,072 6,409,492 7 ,805,626 9,356,667 11,075,136 11 ,300,077 12,348,609 12 ,630,121 12 ,931,673T ax 636,039 812,239 1,009,495 1 ,229,386 1,473,675 1,744,334 1 ,779,762 1,944,906 1 ,989,244 2 ,036,739 N ET PR O FIT / (LO SS) A FTER TA X 3,402,305 4 ,344,833 5,399,997 6 ,576,240 7,882,992 9,330,802 9 ,520,315 10,403,703 10 ,640,877 10 ,894,935

B alance Brought Forward - 3 ,402,305 7,747,138 13 ,147,135 19,723,375 27,606,367 36 ,937,169 46,457,484 56 ,861,188 67 ,502,065T otal P rofit Availab le fo r Approp riation 3,402,305 4 ,344,833 5,399,997 6 ,576,240 7,882,992 9,330,802 9 ,520,315 10,403,703 10 ,640,877 10 ,894,935D ividend - - - - - - - - - - Earnings used for Cash in H and for N ext Y earA ddition to retained earning 3,402,305 4 ,344,833 5,399,997 6 ,576,240 7,882,992 9,330,802 9 ,520,315 10,403,703 10 ,640,877 10 ,894,935Cumualtive retained earnings 3,402,305 7 ,747,138 13,147,135 19 ,723,375 27,606,367 36,937,169 46 ,457,484 56,861,188 67 ,502,065 78 ,396,999



39

88..22 PPrroojjeecctteedd CCaasshhffllooww SSttaatteemmeenntt

PROJECTED CASHFLOW STATEMENTYear 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Net Income 0 3,402,305 4,344,833 5,399,997 6,576,240 7,882,992 9,330,802 9,520,315 10,403,703 10,640,877 10,894,935 Depreciation and Amortization 0 88,141 88,141 88,141 88,141 88,141 88,141 88,141 88,141 88,141 88,141 (Increase) Decrease Current additional Gold Jewelry (6,073,380) (409,000) (1,216,419) (454,272) 221,471 (1,265,283) (259,957) (851,375) (316,831) (340,660) 0 (Increase) Decrease in Prepaid annual shop lease

(272,000) (27,200) (29,920) (32,912) (36,203) (39,824) (43,806) (48,186) (53,005) (58,306) (64,136)

Pre-Operational Costs (100,000)Increase (Decrease) Current Short Term Loan 0 0 0 0 0 0 0 0 0 0 0 Cash Flow from Operations (6,445,380) 3,054,246 3,186,635 5,000,954 6,849,648 6,666,026 9,115,180 8,708,895 10,122,008 10,330,052 10,918,939

Initial Investment Expenditure 0 0 0 0 0 0 0 0 0 0 Furniture and Fixtures (247,308)Machinery + Equipment (434,100)Cash Provided (Used) from Investments

(681,408)

Proceeds from Borrowings 3,728,333 0 0 0 0 0 0 0 0 0 0 Payments of Principal of Long Term Loan

0 (586,876) (657,301) (736,177) (824,518) (923,461) 0 0 0 0 0

Payments of Principal of short term loan

0 0 0 0 0 0 0 0 0 0

Issue Stock / Exercise Options 3,728,333 0 0 0 0 0 0 0 0 0 0 Cash Provided (Used) from Financing

7,456,666 (586,876) (657,301) (736,177) (824,518) (923,461) 0 0 0 0 0

Increase (Decrease) to Cash 329,878 2,467,370 2,529,334 4,264,777 6,025,130 5,742,565 9,115,180 8,708,895 10,122,008 10,330,052 10,918,939 Beginning Cash Balance 0 329,878 2,797,248 5,326,581 9,591,358 15,616,488 21,359,054 30,474,234 39,183,128 49,305,137 59,635,189 Ending Cash Balance 329,878 2,797,248 5,326,581 9,591,358 15,616,488 21,359,054 30,474,234 39,183,128 49,305,137 59,635,189 70,554,128



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88..33 PPrroojjeecctteedd BBaallaannccee SShheeeettPROJECTED BALANCE SHEETYear 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

AssetsCurrent AssetsCash & Near Cash Assets 329,878 2,797,248 5,326,581 9,591,358 15,616,488 21,359,054 30,474,234 39,183,128 49,305,137 59,635,189 70,554,128 Cash & Near Cash Assets 329,878 2,797,248 5,326,581 9,591,358 15,616,488 21,359,054 30,474,234 39,183,128 49,305,137 59,635,189 70,554,128 Closing Gold Jewelry Inventory 6,073,380 6,482,380 7,698,799 8,153,071 7,931,600 9,196,884 9,456,841 10,308,216 10,625,046 10,965,706 10,965,706 Pre-Paid Annual Shop Lease 272,000 299,200 329,120 362,032 398,235 438,059 481,865 530,051 583,056 641,362 705,498 Total Current Assets 6,675,258 9,578,828 13,354,500 18,106,461 23,946,324 30,993,996 40,412,939 50,021,395 60,513,239 71,242,257 82,225,332

Fixed AssetsFurniture & Fixture 247,308 247,308 247,308 247,308 247,308 247,308 247,308 247,308 247,308 247,308 247,308 Machine and Equipment 434,100 434,100 434,100 434,100 434,100 434,100 434,100 434,100 434,100 434,100 434,100 Less: Depreciation To Date - (68,141) (136,282) (204,422) (272,563) (340,704) (408,845) (476,986) (545,126) (613,267) (681,408) Total Net Fixed Assets 681,408 613,267 545,126 476,986 408,845 340,704 272,563 204,422 136,282 68,141 -

Pre Operation Costs 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 Less Amortization to date - (10,000) (20,000) (30,000) (40,000) (50,000) (60,000) (70,000) (80,000) (90,000) (100,000) Net Intangible assets 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 -

Total Assets 7,456,666 10,282,095 13,979,627 18,653,447 24,415,169 31,384,700 40,725,502 50,255,817 60,669,521 71,320,398 82,225,332

Liabilities & Shareholders' EquityCurrent LiabilitiesShort Term Loan - - - Current Long Term Debt - 586,876 657,301 736,177 824,518 923,461 - - - - - Total Current Liabilities - 586,876 657,301 736,177 824,518 923,461 - - - - -

Long Term Liabilities Long Term Debt 3,728,333 3,141,457 2,484,156 1,747,979 923,461 0 - - - - - Total Long Term Liabilities 3,728,333 3,141,457 2,484,156 1,747,979 923,461 0 - - - - -

Shareholders' EquityPaid-Up Capital 3,728,333 3,728,333 3,728,333 3,728,333 3,728,333 3,728,333 3,728,333 3,728,333 3,728,333 3,728,333 3,728,333 Retained Earnings - 2,825,429 7,109,837 12,440,958 18,938,857 26,732,907 36,997,169 46,527,484 56,941,188 67,592,065 78,496,999 Total Equity 3,728,333 6,553,762 10,838,170 16,169,291 22,667,190 30,461,240 40,725,502 50,255,817 60,669,521 71,320,398 82,225,332 TOTAL CAPITAL & LIABILITIES7,456,666 10,282,095 13,979,627 18,653,447 24,415,169 31,384,700 40,725,502 50,255,817 60,669,521 71,320,398 82,225,332



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99 KKEEYY AASSSSUUMMPPTTIIOONNSS

99..11 AAssssuummppttiioonnss RReellaatteedd ttoo tthhee SSccooppee ooff OOppeerraattiioonnss

Aspect AssumptionScope Gold Jewelry Retailing and ManufacturingIn-House Operations Retailing and ManufacturingOutsourced Function Gold refining and mixingScale Medium Legal Status Sole proprietorship

99..22 IInnccoommee RReellaatteedd AAssssuummppttiioonnss

Variables AssumptionsTotal Annual Capacity of the Workshop

The total annual capacity of the workshop estimated (69,000 grams) is based on the assumption that when working at full capacity, a craftsman can manufacture gold jewelry worth 575 grams / month.

Level of Operations (ratio of capacity)

It is assumed that the workshop will begin operating at level of 60% of its capacity in year 1, 65% in year 2, 70% in year 3, 75% in year 4, 80% in year 5, 85% in year 6 and year 7, and 90% in year 8, year 9 and year 10.

Sales to Stock Ratio The sales to stock ratio increases with time as the enterprise gets established in terms of popularity and the stock composition is more in tune to the taste of the market. It is assumed that in year one 40% of stock at any time sells over a given period. This percentage rises to 45% in year 2 and year 3, 50% in year 4 and 60% in year 6. Because gold jewelry is relatively slow moving item 60% sales to stock ratio is an average sale to stock ratio of well established gold jewelry retailers. This ratio is assumed to be maintained till year 10.

The sale to stock ratio also determines in this model the stock replacement. In order to maintain one’s stock level, the entrepreneur will have to replace the stock sold. Hence if 40% of stock is sold at any time, the entrepreneur must “purchase” 20% of the gold jewelry stock so that the opening balance of the gold jewelry stock and the closing balance remains the same.

Stock Level of Gold Jewelry Items to be Maintained by Retail Unit at Any Given Time

It as assumed that the initial capacity of the retail unit in terms of stock level will be based upon the ratio of total workshop output sold through the self owned retail shop and on the stock turnover rate assumed for each



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respective year. Thus in year 1, 60% of workshop output is sold be self, furthermore 40% of any stock level in year 1 will be sold at any given time within the year. Thus stock level for retail outlet is 5175 grams worth items.

Ratio of workshop output sold by self-owned retail unit

60% of total workshop output is sold be self owned retail in year 1. The percentage increases in year 2 to 65%, in year 3 to 70%, 75% in year 4, 80% in year 5 and from year 6 to year 10, it remains constant at 85%.

Ratio of workshop output manufactured for other gold jewelry retailers

The ratio of workshop output manufactured for other jewelry retailers is inversely related to ratio of workshop output sold by self-owned retail unit

Change in gold price The average annual change in gold price is estimated to be 1.13%. This is based on the 10 year (1994 – 2004) trend in gold price change as reported by World Gold Council.

Gold Price (Rs) / Gm Gold price in Pakistan at the time of this report was Rs.905 / gram for 24 k gold.

Ratio of other material to value of gold used (Rs)

It is assumed that the value of gems, beads and other metals used in gold jewelry item is about 60% of total value of gold used in gold jewelry items produced over a year’s period.

Direct labour cost (Rs) / Gm excluding polishing cost with annual increase of 10%

The direct labour in terms of Rs / grams is calculated on the basis of the wage rate of craftsman, beader and studder and on the proportion of jewelry (in terms of grams) that require the labour of the latter three. The wage rate of the craftsman is based on the type of jewelry item and the weight of the jewelry item. The estimates in this analysis are based on what the craftsman, beader and studder earn on average per gram. In a medium sized workshop, craftsmen on average would earn Rs.90 / gram. A beader would earn Rs. 60 per average item he works on, but it is assumed that about 60% of total workshop items would require beading, an average rate of Rs.36 / gram is assumed for a beader. Similarly, given an average item wise rate of Rs.100 / gem studding and 60% of total out requiring studding, the average wage rate for studder will be Rs.60 / gram. These rates are subject to 10% increase per annum.

Wastage Ratio to value of Gold Content

The wastage of gold is assumed to be 6% and constitutes remuneration of polisher as well.

Retailer's Margin The retailer’s margin is assumed to be 20%



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Manufacturer's Margin Rs. / gram on goods made for other jewelers on order

The model assumes that on average the entrepreneur will charge a margin of Rs.15 per gram from other jewelry retailers outsourcing production to the workshop. This margin will increase at the rate of 10% annually due to corresponding increase in wage and production cost rates.

99..33 EExxppeennssee RReellaatteedd AAssssuummppttiioonnss

Expense Variables Annual rate of increase (ratio)

Utilities (Rs) / year Utilities increase at the annual rate of 5% Personnel Expense (net of performance related wages)

Fixed salaries increase annually by 10%

Office Expense Annual increase in office expense is 5% Jeweler Association Membership Fee @ Rs.1000 / year for Year 1

The annual member ship fee to jewelers’ association increases by 10%

Debt to Capital Ratio The long term debt to capital ratio during the start up is 50:50

Annual Shop Lease The annual shop lease increases by 5% Annual lease for workshop The annual shop lease increases by 5% Rate of Raw Material Cost to Workshop Output (Rs / Gram) assuming annual increase in raw material of 5%

In year one the ratio (Rs / gram) of raw material cost to total workshop output is Rs 6.4 / gram, and it increases with 5% annual increase in cost of raw material.

yearly raw material cost The yearly raw material cost is based on total workshop operations (output) and on rate of raw material cost to workshop output.

Depreciation Straight line over 10 years

Annual Interest Rate (Long Term) 12%

Rate of Tax on Operating income 15% sales tax and 0.75% income tax if year’s operating income is above Rs.5,000,000 (five million)

SMEDA Gold Jewelry Manufacturing & Retail Shop

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