Diamond industry at crossroads, Tempelsman says

The diamond industry is at a “crossroads,” with some form of correction “inevitable,” Lazare Kaplan chairman Maurice Tempelsman warned Tuesday in his closing speech at the GIA Symposium in San Diego.
 
Tempelsman noted that “for well on seven decades the diamond industry sat secure on the bedrock of measured supply” but “those old familiar foundations are gone, and they are gone forever.”
 
He said that when De Beers changed its business model to the demand-centered “Supplier of Choice,” it benefited from “good luck”—at a time when the world’s bankers were pumping liquidity into the system. “That rising tide concealed the new dangers and difficulties that would have to be addressed by all when, inevitably, the high waters of liquidity began receding,” he said.
 
Now interest rates are rising, as are gas prices, which impacts consumer spending. In addition, banks are now demanding greater transparency from companies—”and not all companies are geared or set to thrive in the spotlight,” he said. This new transparency can lead to “increased systemic costs” and make banks increasingly fickle in extending credit.

These new burdens come at a time when manufacturer margins are as slim as ever.
 
“Does all this portend the worst?” he asked. “Not in my view, though some correction does seem inevitable.”
 
“At the end of the day, our present industry course is not sustainable,” he said. “There is simply not enough margin capturable downstream to support the new investment that I agree must be made in this segment of the pipeline—investment in stimulating consumer demand, investment in technology and markets, and investment in the systems and practices to cater for greater transparency and outside scrutiny. Nor is there enough margin to offset the structurally enhanced risk we face now that the old traditional industry foundations of price stability underwritten by a simple dominant player are no more. So if we do not self correct, I very much fear that a correction will be imposed upon us.”
 
Tempelsman said that while he strongly rejected the view that Supplier of Choice is the cause of all the industry’s problems, he did see it as a “process—rather than a final destination.” He seemed to be urging De Beers to turn “Supplier of Choice” into a true “franchise” arrangement, where De Beers works closer with its customers and provides them with a solid base.
 
“A true franchise entails more security and support for those on the downstream end of the pipeline than is now provided under SOC or any other operative model in the diamond industry,” he said.
 
In the most surprising part of his speech, Tempelsman closed by discussing LKI’s current lawsuit against GIA—which apparently grew out of LKI’s lawsuit against manufacturer of inscription technology PhotoScribe.
 
“Put bluntly, intellectual property is a growing issue for our industry,” he said. “We owe it our shareholders, our employees and our partners … to protect by all means what we believe is rightfully and lawfully ours. We regret that this has brought us to litigation with the GIA … and we hope and trust that at the end of the day not only justice but also common sense will be served.”
 
GIA board chairman Helene Fortunoff later echoed those words when she appeared after Tempelsman. Still, his remarks on the lawsuit surprised the audience, most of whom seemed unaware that GIA and Lazare Kaplan were in litigation.
 
He also made a quick reference to what he called GIA’s “troubles”—the scandal in its lab that led to four graders being fired.
 
“The best way to deal with these problems when they arise is as directly, as forcefully, and … as openly as possible,” he said. “I think we can only applaud the leadership of GIA, starting with its chairman Ralph Destino.”