Argyle Bets on U.S.

Argyle Diamonds, the Australian mining giant, is beefing up promotion of Indian-manufactured diamond jewelry in the U.S. to bolster demand for its smaller diamonds and to help the Indian diamond industry recover from its depression The American retailer will be a key player in Argyle’s new independence from De Beers’ Central Selling Organisation, say top Argyle officials.

The company is adding more muscle to its Indo Argyle Diamond Council marketing programs to help participating jewelry manufacturers increase their sales in the U.S. The council comprises 21 Indian jewelry manufacturers who are heavy buyers of small diamonds, including Argyle material. These Indian clients are the linchpin of Argyle’s business strategy following its break from the CSO in June.

Most visibly, Argyle will funnel most of its budget into expanding the traveling mini-trade shows it holds to bring retailers together with the Indo Argyle manufacturers.

Two “exclusive viewing shows” are planned this year, says Martin Hurwitz, manager of Market Vision, which runs the Indo Argyle program in the U.S. In March, a show touring Los Angeles, New York, Dallas and Atlanta will be targeted at mass merchandisers, large chains and wholesalers. An August tour will visit smaller chains and independents in seven cities.

Hurwitz says members of the council have learned the ropes of the U.S. market and can meet all the quality and service standards it requires. The time has come now, he says, to concentrate on building sales volume.

The Indo Argyle manufacturers, all of whom are clustered in the SEEPZ free-trade zone outside of Mumbai (formerly Bombay), expected total sales of $75 million to $80 million in 1996, up considerably from $45 million the year before and up from $30 million in the IADC’s inaugural year of 1994.

The majority of Indian manufacturers in the IADC produce what they call “studded” jewelry – pieces containing clusters of small diamonds, though these pieces are not necessarily in the lowest price ranges. This helps to consume large amounts of Argyle’s diamonds in each style line.

Mike Mitchell, Argyle’s sales manager for rough diamonds, believes the IADC program and the rising demand for mass-market jewelry in the U.S. and Asia ultimately will vindicate Argyle’s controversial decision to leave the De Beers network.

Jewelry manufacturers in India now take only 8% or less of their country’s total diamond production, but most believe they are still at the beginning of a long growth phase that will see their industry grow as large as Thailand’s.

“Look at the figures,” says Suken Mehta, manager of B.V. Jewels, the jewelry manufacturing arm of the large Vijaykumar diamond group. “Finished jewelry exports are only 0.5% of India’s polished diamond exports of $5 billion, so the potential is huge.”

India’s diamond jewelry manufacturers say they have two prime competitive assets: the backing of large, well-capitalized diamond companies and the market connections these companies provide. Most of India’s 50 or so “serious” jewelry manufacturers have been in the market fewer than seven years and have seen sales skyrocket from zero to $30 million or more already. “There’s no turning back,” says Navin Mehta of Inter Jewel, which exported $12 million last year and is looking to double that by next year. “We have the resources, the skills and the will to compete in any market.’’

In addition, Indian manufacturers say they have the IADC to provide entree to the U.S. market through trade shows, advertising and promotional assistance. “The IADC is a tremendous help,” says Mehta. “The advice they’ve given us has helped us move into the U.S. market five to 10 years ahead of what it would normally take to do so.”

Caught in the middle: While India’s jewelry manufacturers offer Argyle its best long-term growth potential, they’ve been caught in the middle of the political fallout resulting from Argyle’s break from the CSO. And this could affect prices paid in the U.S. for diamonds and diamond jewelry.

Mitchell acknowledges the break “couldn’t have happened at a worse time for some parts of the trade.” The market for small diamonds, Argyle’s mainstay, is in oversupply now – especially the tiny goods that polish out below 2 points – but he stresses that demand for jewelry containing those goods is strong and growing worldwide.

“Around the year 2000, demand for smalls will likely begin exceeding supplies,” says Mitchell. “Supplies are growing about 2% each year, while demand has been growing at least twice that rate.” Russian technical stocks (small, low-quality goods) have been diminishing as well and will be less of a competitive factor in the future, he says.

Because the vast majority of Argyle’s 35-million-carat annual production is small, lower-quality material, the company has cast its fate with India’s diamond industry, which grew huge manufacturing such goods. “In the U.S., new channels of market are opening up all the time with TV shopping, Internet marketing and the like. Most of this will be the type of jewelry suitable for our goods.”

Most of this bullish, upbeat message was delivered at a seminar Argyle hosted recently in Mumbai for the Indian trade. The Indians’ mood has been anything but cheery since Argyle parted company with De Beers.

India’s huge diamond industry faced increasing problems of oversupply and liquidity even before the break became official. This was thanks, in large part, to the flow of illicit Russian rough into the country. Prices of rough smaller than 11 points and in darker colors declined 10% to 15% in 1995 and remained soft through spring 1996. However, the industry and its bankers all believed De Beers would master the supply situation in India once the Russian sellers were reined in.

The Argyle split with De Beers undermined those hopes, caused an immediate drop of 10% or more in the price of these goods and created what De Beers director George Burne calls a “collective nervous breakdown” within the Indian trade. Argyle officials believe De Beers helped to bring about this breakdown by allocating more diamonds than expected to Indian manufacturers in the spring. De Beers warned that a rival source would bring inevitable competition for price and market share, further destabilizing the market for small diamonds.

Argyle says its conservative sales and pricing policy has helped to calm the worst of the fears and that confidence is on the rebound. And Mitchell says Argyle is meeting the financial goals it set before splitting from the CSO. Argyle’s aim was to recoup the CSO’s 10% markup on all of its diamonds, including the expensive pinks, and some of the 15% it was losing from the CSO’s decision to buy fewer diamonds from its suppliers after a flood of illicit diamonds from Angola and Russia increased the supply on the market.

He freely acknowledges the value of most Argyle goods (70% or more) fell by 20% or more in 1996. But he says the better qualities, while comprising only a fifth of production, bring in about 80% of the company’s annual revenue. And prices of these goods have been stable or higher, he says. As a result, Argyle is getting the better deal it was hoping to get by leaving the CSO.

Mitchell declines to offer specifics because he wants to avoid provoking a reaction from the CSO. “If we say we are doing very well, they might be tempted to hit back,” he says. “If we say we are doing badly, the CSO may be encouraged to knock us harder, so we don’t want to get into specifics.”

Court of opinion: Analysts believe the CSO is restrained from overt action against Argyle now by the world court of opinion. Many diamond observers say the CSO will try to deny Argyle its hoped-for additional revenue by simply supplying the market with just enough small goods to maintain subtle downward pressure on prices. This will reverse its usual strategy of slightly underselling the market to keep prices rising.

The goal, they say, would be to make it economically unsound for Argyle to spend $150 million needed to redevelop the mine underground to extend its life beyond 2003. Argyle’s parent companies, RTZ-CRA and Ashton Mining, will decide early this year whether to go ahead with the redevelopment.

Mitchell is confident Argyle will get the green light to go underground and disagrees with analysts that De Beers can undermine Argyle’s future by pressuring only the smaller, cheaper goods.

He says the bulk of production by value hasn’t declined in price and that demand for Argyle rough has been strong. “Our customers have been loyal, active buyers; there’s been a lot more demand from Israel than we’d expected,” says Mitchell. He also says this loyalty has cost some Indian dealers a few sleepless nights. “Some of our customers, who are also CSO clients, have told us CSO executives have had ‘very firm’ talks with them about their dealings with us,” he says. “What’s more, the CSO named two large, regular buyers of our goods to its sightholder list in the weeks before we went market-direct.”

The CSO denies pressuring any of its clients and remains mum on its plans for dealing with Argyle, beyond saying it would “continue to supply our [Indian] clients if they have the appetite for goods,” says Burne of De Beers.

Sacrifice the industry: Some Indian sightholders worry that the CSO may “sacrifice” the Mumbai trade in order to drive out Argyle. However, Burne stresses the CSO will not push oversupply of rough on its clients to make a point to its rival.

“We have already cut back our supplies to India,” says Burne, and that has helped to relieve the situation somewhat. Some Indian dealers and Argyle say the CSO’s cutbacks came after the huge allocations last spring, followed by an attempted rough embargo by some of the country’s largest dealers. “The embargo was not successful,” says one large sightholder who doesn’t want to be identified. “But I think we made our point to the CSO and Argyle that we would not be sacrificed for their power struggle.”

Indian diamond manufacturers acknowledge things have calmed somewhat, but they believe it’s an uneasy peace. “It’s a two-tiered market in which the CSO controls supplies and prices for larger rough, while smaller goods float with the market.” says the sightholder.

“The core of our industry – the 50 or 60 largest companies – are solid even if they aren’t making any profits right now, so if profits return, our business will regain health fairly quickly,” he says.

But the sightholder accuses the CSO of engaging in “box politics” with its Indian clients. “The CSO doesn’t have to lower prices, but it can change the assortments to give us more goods, which we can still cut profitably,” he says. “As it is now, the CSO is pitting one client against the other with these [profitable] goods. They tell us we can reject our sight boxes if we wish, but the sightholders who do so find that the profitable goods are withdrawn from them at the next sight.”

The CSO says Russia and Argyle have created the two-tiered market, that it can do nothing about. The Indian trade is skeptical over these pleas of helplessness. The feeling that the CSO is still more interested in producer politics than its clients’ interests runs strong through Mumbai’s Opera House diamond district. “They tell us all the time the cheaper goods are out of their hands,” says another sightholder. “But Argyle is only 6% of the CSO’s total sales and about 18% of India’s supplies, so I don’t see what the CSO’s problem is. If they can control the Angolans with their hundreds of millions of dollars worth of production, they can control the cheaper-goods market.’

Long roots: While Argyle and the CSO have accused each other of causing the crisis in India, many key Indian manufacturers agree their problems began long before the break. “The break with Argyle was only the catalyst,” says Shreyas Doshi of Shrenuj & Co., a sightholder and jewelry manufacturer. “Many of these problems have been brewing for a while.”

Much of the illicit rough that poured out of Russia in the past two years were “technical goods” (industrials suitable for polishing) bound for Indian manufacturers. Indians bought these goods even if there was no immediate demand, because they were generally priced below comparable CSO rough. As a result, stock levels in Mumbai reached record levels with no customers in sight.

The view was that the Russian situation was temporary and that the CSO would right things once it reached an accord with them. On the other hand, the break with Argyle is viewed as permanent, making it impossible for the CSO to put things right on its own. To make matters worse, supplies of Russian rough continued to stream into Mumbai even after De Beers signed its “understanding” with the Russians at the end of February.

Nilan Parikh of Mahendra Brothers, a sightholder that also manufacturers finished jewelry for the U.S. and Asian markets, says these alternate rough sources make it very difficult to gauge stock levels flowing into the country.

“The CSO, Argyle and the Russians are all selling rough in their own way, so it’s become very difficult to determine just how many diamonds are being produced here,” he says. It will at least six to eight months to work through current excess stock, assuming the CSO, Russia and Argyle do not embark on a price or market share war.

Even the complex supply and demand issues are not the whole story in India. Profits in the country’s diamond industry have suffered a terrible beating in recent years – worse than in Israel or New York City, they say, because most outside income has been cut off thanks to economic liberalization.

In the past, Indian manufacturers made lots of money on what they call “manipulations” – profiting from currency exchange fluctuations, buying and selling export licenses and other fiscal maneuvers. Today, the rupee is relatively stable and trading freely against the U.S. dollar. Imports have become much more liberal, reducing the need for costly licenses so there’s little money to be made in these areas anymore. “Even the stock market has been losing us money,” complains one diamond manufacturer.

Banks have taken a dim view of the situation and cut credit lines as much as 35%, says R.V. Karoor of ABN Amro’s Mumbai branch. The resulting cash crunch – combined with the supply glut – have ended what Karoor looks back on as the easy days. “Too many companies have overextended credit or overstocked on goods that have depreciated 20% to 30% in value,” he says. “We have seen 20 to 30 bankruptcies of small and medium-sized companies and we may see more. However, the big companies and those smaller ones that have a forward-looking, progressive attitude in upgrading their factories and work force will survive.”

In addition, Doshi sees some encouraging news amid the gloom: sales are up 3% to 5% this year. Demand for small diamonds appears to be strengthening in most important consumer markets worldwide.

Indeed, Argyle views this development as its ace in the hole. At Argyle’s seminar in Mumbai in October, Managing Director Gordon Gilchrist told the audience Argyle is a “responsible partner that won’t dump its production to raise funds.”

He said the long-term outlook for the Indian industry “remains good, particularly for smaller diamonds.”