Earlier this year, I started Diamond Dialogues, a series meant to take a wider look at our industry and the forces that shape it.
This latest installment stems from an excellent and thought-provoking presentation given last week by Erik Jens, the head of diamond and jewelry clients for ABN Amro, the largest bank in the industry. It is excerpted and reprinted here with his permission.
Here, Jens discusses other industries’ methods of coping with profitability woes, why bankers are wary of the diamond business, and how science fiction is becoming a reality.
The current state of the industry. We are seeing a perfect storm in the diamond industry, created by a drop in demand from China, reduced polished prices, higher than desired inventory levels, and low or no margins on rough trading and manufacturing.
Many stakeholders complain about the mining sector keeping prices high. But compare the diamond sector to the oil sector. Some U.S. companies, for example, have a cost between $50 and $60 a barrel, while the current oil price is around $45. Do you think those companies will call OPEC to ask them to raise prices like diamantaires are now asking Alrosa and De Beers to lower rough prices?
What do these oil companies do? They adjust their tactics and their strategy. They implement efficiency gains, cost cutting, product enhancement, and look at different productions, like solar or other renewables.
The same could go for the diamond industry. It could also use yield enhancement, generic marketing, innovation in product, and manufacturing efficiencies. Manufacturers could also think about shared service centers, capacity cutting, or using recycled diamonds and even man-made diamonds.
The midstream of our sector is in a trap, a prisoner’s dilemma. Manufacturers do not control rough prices. At the same time the market demand sets the polished diamond prices, so producers have less influence on profitability. For many the drop in rough prices will be translated in lower prices for polished from the market. Lowering rough prices provides only temporary relief for the manufacturers.
The industry would not exist without the midstream. Their role is crucial. But that doesn’t mean that business models can’t change. They should change. They must change.
Banking. We should not underestimate the perception of risk that regulators see in the diamond sector. It jeopardizes the sector’s bankability in certain countries. Look, for example, at the debate with the U.S. State Department. Or look at the recent Financial Action Task Force report on money laundering in the diamond industry. Look at the nongovernmental organizations, the United Nations, or the Organisation for Economic Co-operation and Development. Or recent developments in India, where the Reserve Bank of India is concerned about the high level of nonperforming assets.
Transparency and asset-backed lending is not only being forced on banks by both regulations and capital requirements, but also have been embraced by us at ABN Amro. Banking has become more expensive; costs are higher. The diamond and jewelry sector is vulnerable to all these factors, given its high risk perception.
These facts have clearly jeopardized finance options for the industry, especially as banking now risks disruption. All four leading banks in the world are among the world’s 10 least-loved brands. Seventy-three percent of customers would be more excited about an offering of a new provider in financial services like Google or Apple, rather than a conventional bank.
Industry bank finance will evolve. It will be available only to modern, sustainable companies with strong balance sheets, transparent operations, and, above all, good strategies. Those who can’t meet the bar, or don’t want to meet the bar, will be left behind. The finance burden will also fall on mining companies and retailers.
Disruption. We need to look for disruptive trends, which demonetize and democratize parts of the established economy.
Uber, for instance, has the largest car fleet in the world without owning one car. Airbnb has the largest number of hotel rooms in the world without owning one hotel. The turnover of Amazon.com exceeds that of the world’s largest retailer, Wal-Mart. Think of self-driving cars. Car companies look at this as putting a computer in a car like BMW, Mercedes, or Audi. Google and Tesla look at this as putting wheels on a computer. Which way do you want to bet?
3-D printing will have the same effect on physical things as the Internet had on digital things. There are more than 300 materials available to print in. A 3-D printer was $18,000. It’s now $400. For jewelry, this will mean the ultimate freedom of design! Printing is possible now at less than 1 micron. You have a factory in a box.
Take man-made diamonds. The industry is turning its back rather than embracing and capturing the opportunity. They will attract a different target group: the fashion consumer. Think of Swarovski, now a $5 billion business that once no one believed in. Same for cultivated pearls, which is now a far bigger business than natural pearls. As a result of technological development and enhancement, the price of a man-made diamond will halve every two years as they double in size.
So I wonder, what will be the demonetizing, democratizing. and dematerializing trends in our industry? I don’t know. What I know is that we are still in a phase of disruptive change in our industry.
The future of our industry. One should think about a re-branding of our sector into a luxury consumer goods sector.
With all the looking inward, we should never forget the consumer. The consumer is why we can be in this business. When we talk about gemstones, will the millennial generation keep on buying? Demand has dropped in the European Union for many years now. Will that follow in the United States? Will India and China grow enough to compensate?
What can our industry learn from Apple Store, which has the highest gross per square foot in the world? What are they doing right? They want you to touch the product. They put it in every display at an off angle so you have to pick it up to see and touch it. That creates desire. Estée Lauder did the same thing in its stores.
Online will not be the only way to sell going forward. But retail will be about desire and experience and emotional connection. Champagne is just white sparkling wine but is connected with celebration and exclusivity.
Diamonds and gemstones are connected with love and scarcity. But how long can we keep that up? How can we capture new exponential and sustainable growth? We have to make sure the next generation sees diamonds, jewelry, gemstones as attractive as the iPhone.
By 2020, most Standard & Poor’s 500 companies will be companies we haven’t heard of yet.
In the 2030s, predicts Singularity University professor Ray Kurzweil, “we are going to send nano-robots into the brain (via capillaries) that will provide full immersion virtual reality from within the nervous system and will connect our neocortex to the cloud. Just like how we can wirelessly expand the power of our smartphones 10,000-fold in the cloud today, we’ll be able to expand our neocortex in the cloud.”
Directly plugging your brain into the Internet? Upgrading your intelligence and memory capacity by orders of magnitude? It sounds like science fiction. Yet 2030 is only 15 years away.
The speed of adaptation and innovation in our industry needs to be promoted. It’s all about having an operational and innovative mindset and about assuming that anything is possible.
Past Diamond Dialogues:@jckmagazine
Follow JCK on Twitter: @jckmagazine
Follow JCK on Facebook: @jckmagazine