Israel Diamond Institute Chairman and IsDMA President, Moti Ganz, and the Honorary President of the Israel Diamond Exchange and the WFDB Shmuel Schnitzer were appointed Honorary Advisors to the Diamond Administration of China (DAC).
Today, IDI Chairman Moti Ganz addressed the participants of the diamond conference currently taking place in Shanghai. Here follows the text of his speech:
Before I begin the main part of my speech, I would first like to thank the organizers of this important conference for the opportunity that you have granted me, as the Vice President of the International Diamond Manufacturers Association, to present my credo regarding the new world order in the world diamond industry.
I also want to take this opportunity to greet all of the participants at this conference who came from near and far to listen to what we have to say.
This new world order affects the entire world economy, including the diamond industry. The deeper our understanding, the better we will know where we stand and how to deal with this new reality.
All of the sectors of the diamond industry – rough production, manufacturing and marketing - are being shaped by the new world order. This clear order of things enables each of us to know what is being done where and how to ensure that we are at the right place at the right time.
In this new era, the manufacturing sector is divided into three categories:
Centers where manufacture is viable due to low labor costs;
Centers where manufacture is viable due to the ability to achieve maximum utilization and profitability (where labor is not a significant component of the overall cost);
Centers where manufacture is viable due to rough supply from local production (mainly in African diamond producing countries); This category also includes the veteran diamond center Russia, which in recent years has undergone extensive changes affected both by the European Commission's decision to terminate rough supply agreements between Alrosa and De Beers and the emergent policy to increase Russia's share as a manufacturing center.
Let us take a closer look at the manufacturing centers:
Centers where manufacture is viable due to low labor costs;
India – Before India became a modern diamond production center in 1967, rough diamonds worldwide were divided into gem diamonds (20%) and industrial diamonds (80%).
When synthetic diamonds took over the role of the industrial diamonds, De Beers discovered India. De Beers realized that a clearly-defined range of industrial diamonds could be classified as "near gems." As a result, large quantities of stones which were previously considered unfit for jewelry were redefined as gem-quality diamonds. Since that time the categorization of rough diamonds worldwide has been classified as follows: 20% - gem quality, 45% - near gem quality (also known as "Indian goods") and 35% - industrial diamonds.
India focuses mainly on the manufacture of sizes ranging between one point to 1-4 carat stones. One can sometimes find larger stones of 5 carats and up with varying processing qualities.
Thailand – Thailand became a diamond cutting center in the 1980's when De Beers sought a suitable location to manufacture goods. Thailand's high-quality cutting enabled it to replace Israel as the manufacturer of melees. When labor costs rose in that country the manufacture of high-quality small stones moved to China.
China – China, which is the second largest manufacturing center in the world, employs some 20,000 to 25,000 diamond polishers. The Chinese center processes diamonds worth about $1.5 billion annually. The expertise of the Chinese polisher focuses on all grades of cut of diamonds up to sixths and in sixths to 70 points on grades Fair to Excellent. The Chinese polisher is renowned for his or her meticulous work and close attention to detail, which enable the manufacture of extremely high-quality Triple Zeroes. The Chinese industry also specializes in other special cuts which require outstanding skill such as Hearts and Arrows. China, Thailand and Malaysia all manufacture small diamonds up to sixths in all grades of cut. These countries only manufacture diamonds below one carat.
Centers where it is viable to manufacture in order to attain maximum utilization and profitability, when labor does not constitute a significant component of the cost and comes to less than 5% of the total – Israel, Belgium and the United States.
Israel, Belgium and the United States focus on the manufacture of stones regarding which labor costs are not a consideration, even if they are very high. In these cases, the proximity of the manufacturing site to the stone's owner is crucial because the stone needs to be examined dozens of times during the process, which may take up to six months.
Israel, Belgium and the United States do not manufacture diamonds weighing less than 40 points due to high labor costs, but they do manufacture one to four carat stones. The difference between these centers lies in the processing quality. Israel still manufactures sixths to 40 points. Both Belgium and Israel manufacture 5 carats and up in various cut grades.
Centers where manufacture is viable due to rough supply from local production (mainly in African diamond producing countries);
In 1998, the Black Economic Empowerment policy was introduced in South Africa with the aim of developing affirmative action on behalf of the black population which had suffered from racial prejudice since the beginning of Apartheid in 1948. This policy ensured that black residents would gradually be incorporated into all branches of the economy, including the diamond industry, at all levels including ownership and management.
This policy, which advocates that the local population is entitled to derive maximum benefit from the country's natural resources, spread to other diamond-producing countries such as Botswana, Namibia, Angola and Congo. In the diamond industry this policy primarily impacted on the main supplier of rough – De Beers, which in the new millennium has undertaken to leave the diamonds that it produces in the supplier countries and provide employment to the local population, including jobs in local diamond manufacturing plants.
Russia produces stones of all sizes, from very small to large diamonds.
This new world order will undoubtedly prevail for years to come. Any changes will be minimal. Thus, for example, we may witness a shift of manufacturing centers to Korea and Vietnam, but this will have no significant impact on the present distribution of the manufacturing map. The list of active mines will also remain unchanged, at least for the next seven to eight years.
The new world order has far-reaching implications for the diamond manufacturing companies. In the past we would purchase a parcel, cut it and then seek buyers. But today, when we must finance the establishment of factories abroad and follow a multi-year plan, we must ensure our rough supply in advance while putting a mechanism for polished marketing and distribution in place. We must all adjust ourselves to this new world order because the diamond industry is the only industry today that continues to manufacture stock without knowing who will buy it.
The fact that the number of "hands" passing on the diamond from the production stage to the final sale in a shop has dropped from seven pairs to two or three has benefited store owners but not the manufacturers. The large number of middlemen served as a "shock absorber" in the event that prices dropped. The burden was shared by all of the middlemen along the pipeline. Today, the onus falls on the manufacturers. During the past 7 or 8 years we haven't really experienced this and many are unaware of what will happen if the bottom falls out of the market. But if we witness a 10% drop, this would mean surplus stock amounting to $1.5 billion.
Cutting centers worldwide offer various advantages: Dubai has a tax exemption for the next 50 years. In India, operations are subsidized. In Africa you are granted a sight which you undertake to polish within the country's boundaries. We, the manufacturers, have no choice but to spread out our businesses and claim as many stops along the pipeline as possible from mining to the retail shop.
I once recommended that diamantaires establish mixed groups made up of companies which specialize in manufacturing alongside companies that compete in marketing. This solution was not very popular due to the clannish nature of our companies, various suspicions and similar reasons. My proposal to form mergers with jewelry companies was also difficult to implement due to the competition with cutting centers that are government subsidized. The idea of cooperating with companies outside of the diamond industry – such as cosmetic companies – also did not take because there is no sector aside from the diamond industry that is willing to make do with a 3-5% profit. Such data barely appear in these companies' statistical deviations.
We, the manufacturers, continue to sell on consignment, which makes things difficult for any company striving to build a long-term plan. The uncertainty regarding the goods' ability to sell impedes the company's business plan.
The solution which appears to be emerging today is that of forming cooperation with jewelry retailers in building a recognized and branded line that will ensure the sale of the manufactured goods. The direct link with jewelry shops may offer the optimal solution for anyone who wants to remain in the industry without investing millions of dollars in stock and manufacturing. A company I know adopted this strategy. It contacted a designer who created a line. The companies' representatives went from store to store, trying to sell the line and guaranteeing to meet orders within 48 hours. At the same time the company continued with its regular manufacturing. The strategy worked and sales revenues grew. The overall profit margin increased.
The benefit was mutual. Both the manufacturer and the store gained; the latter because it prefers to work regularly with a supplier via daily communication. Today, when the store wishes to develop a new line or when it aspires to fill special orders, it only needs to turn to the supplier. Thus, a beneficial relationship for both sides was established. This is the direction that our future development must take.
The diminishing number of companies and the concentration in large firms has come to typify all of the world's industries, be it textile, toys or watches. We must learn how other industries have accomplished this and translate their achievements into diamond industry terms. We must make people understand that the situation that existed in the industry for decades, and which enabled us to manufacture and sell, no longer exists. The euphoria in which we have been enveloped since 1998 will soon burst. We must not allow ourselves to be found helpless when a crisis arises.
The new world order will persevere during the next few years so we must become accustomed to the fact that rough producers and jewelry shops will prefer ties with large diamond companies while tending to disregard the smaller ones. Nevertheless, small, independent companies will continue to seek firms that can offer them direct service. Thus, we can still anticipate that anyone who operates properly will be able to thrive financially
We cannot protect ourselves against losses caused by secondhand purchase of rough. We must perceive that it does not pay to continue purchasing rough just to stay in business, while undertaking commitments that we are not sure we can meet. I repeat the advice that I gave in the past – let us stay calm. We must not purchase rough at any price when it is not clear if the sale of polished will give us a return on our capital, let alone a profit.
All of the things that I have said are meant to stimulate rethinking and new planning, but there is no reason to give up. The diamond industry has a future to look forward to, and through proper reorganization based on a deeper understanding of the diamond profession, seeking out direct ties with the final link in the chain and forging long-term relationships with jewelry retailers, we can prevail and be equipped to face less fortunate times.
With your permission, I would like to say a few words about my business as a diamond manufacturer and as the owner of jewelry shops in China.
As you know, I have cutting factories not only in Israel, Botswana and India but also in China. Today I employ a staff of 1000 in 2 factories. I am also involved in the retail market and sell diamond jewelry in jewelry stores in China.
From my own personal experience, I want to tell you that the greatest advantage that I find in polishing diamonds in China, in addition to the considerable professionalism and productiveness of the Chinese polisher, is that it is not only an important manufacturing center but also an important consumer market second to none. China offers a special winning combination. This is a unique country where the manufacturing market is close to the consumer market.
I would like to take this opportunity to offer two pieces of advice to the leadership of the diamond industry in China and government entities:
Firstly - 90% of the stones that are being polished are in fact located in three centers – Guangdong (55%), Shandong (25%) and Shanghai (10%). I would like to suggest the possibility that additional customs stations for handling import and export be opened, so that the station in Shanghai will not be the only one. This will facilitate trading in diamonds and will enable this branch of the Chinese economy to flourish.
Secondly - To find a way to prioritize the local production of polished designated for the local market over the import of diamonds polished outside of the country, this will lead to the establishment of additional polishing factories in China as well as the building of jewelry manufacturing plants, which will in turn trigger meteoric development of the diamond and diamond jewelry retail market in China. This will not only bring many new jobs but also lead to an increase in the country's income.
