Beyond Survival

Israel's diamond industry offers an outstanding example of how to flourish in the face of potentially devastating change. Jewelers who worry about surviving in a volatile marketplace would do well to note how the Israelis keep their industry growing.

By historical standards, the diamond industry in Israel should be in decline. Polished diamonds account for almost one-fifth of the country's exports, but no diamond mines lie within its borders. Periodic outbreaks of terrorist activity deter visitors for months afterward, and its labor force is neither endless nor cheap. The number of Israeli sightholders has declined since De Beers instituted its Supplier of Choice program, and rumor has it that it will lose even more when the latest list is released this month. Meanwhile, India, China, and, recently, Africa have taken away much of its cutting and polishing business.

Yet the diamond complex in the Tel Aviv suburb of Ramat Gan is one of the most vibrant and busy places in the world. In addition to diamond trading floors and offices, the complex has almost everything a businessperson needs, including customs offices, post offices, shipping companies, local and international banks, restaurants, shops, houses of worship, and a hospital.

The Israeli diamond industry has thrived by reinventing itself. Recognizing that Israel couldn't compete with India and China as a general cutting center, business leaders repositioned Tel Aviv as a major trading center. Diamonds as a percentage of Israel's total exports (in millions of U.S. dollars) have dipped—from 20.2 percent in 2000 to 18.4 percent now—but that's because other exports have grown.

“The industry here is changing along with global changes,” says Eli Avidar, managing director of the Israel Diamond Institute, an umbrella organization encompassing all aspects of the industry there. “There's less rough, there are changes in rough distribution, and changing systems such as Supplier of Choice. We had to become more focused and aggressive and active in areas we weren't previously active in.”

Especially since the advent of African beneficiation, less rough is coming to the diamond complex in Ramat Gan, Avidar says, and those packages don't come without effort. So the Israeli industry is engaging in talks with governments in Africa to create a foundation for doing business together. The industry also is active in Asia; IDI has opened a Hong Kong office and is focusing on China as a strategic market.

“For years, America was No. 1—and Israel saw itself almost as the 51st state,” quips Shmuel Schnitzer, principal of the diamond firm M. Schnitzer and Co., and a former president of the World Federation of Diamond Bourses. “Israel still has a very strong affinity for the United States, but we can't ignore changes in dynamics. China and India as consumer markets have huge potential.”

There is still cutting and polishing in Israel, but it's specialized and focused on high-end, better goods. And the Israelis themselves own factories in India and China and outsource smaller goods there. “Our production here is mainly about very large stones, where we have to get more of the stone. Two to 3 percent [more of the stone kept] is a big difference,” says Avidar. “A key factor in production now is the salary of the worker, and we're seeing some [general] production coming back. Workers from India, China, and the Ukraine are growing more professional and cost more. There's less of a difference.”

The critical point, he says, is that the rough still passes through Israel, where it's marked for cutting (a highly specialized skill), then sent to India or China for cutting. It returns to be sorted, counted, and exported.

Leo Schachter Diamonds embodies the new paradigm. It owns factories in India, China, and Botswana. Rough comes into its Ramat Gan headquarters, gets sent to its various factories—including ones still in Israel—and completed stones come back to headquarters to be shipped worldwide.

Avi Paz, president of the Israel Diamond Exchange, says more change in the diamond business occurred in the last 10 years than in more than 100 years before that. “My father never had marketing. I'm in business for 36 years, and for 30 of them, I never had marketing. If I wanted to make an ad, I called Rapaport or Israel Diamonds magazine and said 'Put in an ad.' Now I know years ahead where I want to advertise, what shows I want to do, etc.”

The most notable change is the loosening of the control De Beers once had over the market. “We've gone from one godfather—the Diamond Trading Company—taking care of the market and making all the decisions. Now it doesn't, and people are trying to find their place in the new order of business,” says Paz, who admits to some concern about the declining number of Israeli sightholders.

“I do worry because of the strength of the DTC, but companies can go to other suppliers: Alrosa, the Canadians, etc. Israel has sights with other suppliers, and companies realize they have to diversify. The shortage of better rough is a [bigger] problem.”

Shmuel Schnitzer concurs. At press time, the latest DTC sightholder list had not been released, but rumors suggested more Israelis would be dropped. Schnitzer takes a pragmatic view. “If you'd have asked me five years ago, I'd have been very uncomfortable, but not today. Israel probably will lose sightholders. All centers will lose. There's a shortage of rough. We'll suffer like the other centers.”

Schnitzer estimates the DTC still controls 40 percent to 45 percent of rough. “We have to focus on the 55 percent they don't control. Israelis are very aggressive. We look everywhere for rough.”

Schnitzer also thinks the shortage of rough—and resulting price increases—aren't necessarily a bad thing. “Diamonds will be more expensive, but in my opinion, good diamonds are too cheap compared to other commodities.”

Outsourcing is part of the new paradigm. Paz estimates only about 35 percent of the goods going through Israel are manufactured there, but he's pragmatic about it. “When you look at Nike shoes, 99 percent of people believe it's an American shoe. Nike is made in China, but to most people, it's an American shoe.”

Not all companies have embraced outsourcing. Lili Diamonds, for one, manufactures only in Israel. Itzhak Siman-Tov, one of its principals, stands on giving diamond-cutting work to Israelis. The company's finished jewelry is outsourced to the Far East, but only, he says, because Israel lacks top-quality finished-jewelry manufacturing. He also wishes Israel had more diamond manufacturing. “Other [diamond] companies go to India, but even if we make a little less, we owe it to Israel. We owe it to the people who helped us 30 years ago. [There are] people still in our factory for 30 years. Not everything is money in business.”

Lili started from nothing, Siman-Tov says, and built its business step-by-step, becoming a sightholder 12 years ago. The firm also practices differentiation. It doesn't cut rounds, only specialty cuts such as the Lili diamond (a flower-shape stone with four “petals”), Crisscut, Orchidea, and Crisscut Cushion. “We don't want to compete with everybody,” Siman-Tov says.

Israel remains a leader in developing and improving cutting and polishing technology and has many diamond patents, notes Siman-Tov. Lili alone has seven or eight, he says, with four more pending.

High technology in general has been a boon for the Israeli economy, though the semiconductor industry saw many successful firms move to the United States. Not so with diamonds, says Avidar. Headquarters will remain in Israel, even if firms have offices elsewhere.

The Israel Diamond Technology Center opened in 1967 to develop better ways to perform each step of the diamond-manufacturing process. Moshe Kelman, its director, cites some of the devices that were developed in Israel: bruting machines, Sarin machines (which use computer scanning and modeling to determine the best cut for a piece of rough), robots that can polish multiple stones at a time, and laser cutting machines.

After the bruting machine was invented, hand bruting all but disappeared within five years, says Kelman, though it's still common in India. Labor is cheap and plentiful in India, so there's no haste to mechanize, he notes, but in Israel one person monitors the work of 10 to 20 machines. Automation, he says, is the only way to compete with India and China. The machines are typically used only for stones up to 1.00 ct., and only on rounds. Stones weighing 3.00 cts. or more usually are still done by hand, he says.

“Unfortunately, very few people are joining the industry today,” Kelman adds. “The work went out of Israel. There used to be 20,000 polishers; today there are one-tenth of that.”

No technology has done as much to revolutionize the diamond-cutting industry worldwide as the laser—another Israeli first—which came out of the country's Weitzman Institute. There are two kinds of laser drilling, explains Kelman: One removes dark black inclusions from diamonds (allowing more to be used for gems); the other shapes and forms the stone. The revival of briolette cuts and the use of drilled diamond beads, for example, occurred because of laser technology.

Israel has always had a learning-centered culture, and the nonprofit IDT emphasizes education and training as well as research. It offers a variety of manufacturing courses in subjects such as using Sarin technology, bruting, polishing, optics, and surface finishes. Courses are offered every month, most lasting approximately two days, and students pay nominal fees.

The industry is focusing on other new vocational services as well, says Avidar. It's creating sets of academic programs, such as its one-year diamond business executive program at Shenkar University, designed for heads of companies and other high-ranking executives, to teach them how to conduct business in a global environment. Since IDI has identified China as a strategic market, there's a course in the language and culture of that country. Other programs are geared to people in small and medium-size companies.

“The business environment is changing,” Avidar says. “It's becoming more global, more transparent. [People in it are] exposed to greater economic dynamics than before.”

Even the Israel Diamond Exchange offers classes for new members, including a six-month program on how to sell, how to abide by club rules and policies, even how to dress appropriately for the floor. Within the club are teachers of technology and gemology—one from Sarin, one from OGI, and one from the Gemological Institute of America.

To build unity in a notoriously fractious industry, Avidar is shifting the focus away from IDI and promoting the Israeli diamond industry as a brand in itself. “We have a stronger identity as an industry, and it empowers all organizations within it,” he says. The branding initiative launched in 2006 with a major advertising campaign, and the World Diamond Council meeting in May 2007 was organized by the Israeli diamond industry, not IDI. The ad campaign, launched with the tagline “All you can ask for in one,” will become more focused in 2008, he says.

A major initiative for IDI, and the industry, is its business-to-business Web site. Under the direction of content manager Tali Ayalon-Metzer, the site includes news and search engines in English, Hebrew, and Chinese (most Indians speak English and use that version, says Ayalon-Metzer); a photo gallery; information about companies, cuts, and brands; import and export data; free screen-saver downloads; and online forums for people to find jobs, employees, stones, information, links to diamantaires' individual sites, IDI TV (video of events in Israel), and mini-sites for Israeli pavilions at major trade shows.

“We are like a cat—we land on our feet,” says Avi Paz. “We will find a way of getting what we need. Look at the Israel Diamond Exchange—we're blessed by hundreds of young people who want to join the business. The old generation is moving out, but the new generation is moving in. It's quite expensive to join, but they join.

“All the trade centers need each other. Globalization is a bigger and bigger part of the business, and it's useless to fight against it. As people travel more, the world is smaller and smaller. Look at the Kimberley meeting, CIBJO, the World Federation of Diamond Bourses, and you see all working together. Each used to have its own Congress, now it all works together. People want to buy diamonds that are pure, clean, and without blood. We have to work together.”