India’s Diamond Industry: Back from the Dead

After enduring years of oversupplies, falling prices, and eroding confidence, India’s big diamond industry is counting on 1999 to bring a reversal of fortune. Key Indian manufacturers are serving notice on memo-dependent American buyers that the days of pushing out diamonds on long-term loan may be coming to an end.

“Prices for most types of polished have stabilized, even rising in some areas, and there’s no longer the big supply excesses we once had, so there’s no longer the intense pressure to move goods. We now have a choice to walk away from some deals,” warns Latit Adani of M. Suresh Diamonds, Mumbai (formerly Bombay), a De Beers Diamond Trading Company sightholder and diamond jewelry manufacturer.

Memo isn’t dead, of course, and neither are long payment terms—six-month or even eight-month terms are not uncommon. Many of the companies that Indian firms are eager to do business with—large national chains, mass merchandisers, and jewelry manufacturers such as Fabrikant—require memo terms and extended credit. Indian manufacturers claim they’re dealing with the situation by getting tougher where possible and by offering price incentives for faster payments. With prices and profits up early this year, there’s enough “wiggle room” in diamond prices to offer such price breaks.

De Beers claims much of the credit for India’s revival. Managing director Gary Ralfe notes that De Beers helped take more than $1 billion worth of excess diamond stocks out of circulation last year, and Indian dealers concede that much of those stocks came from their safes. Strong U.S. diamond jewelry sales (up 9% last year to nearly $23 billion) also helped, and some better-quality “Asian” small goods are slowly starting to move again, but the big story in India is that the De Beers-enforced market starvation diet of 1997-’98 succeeded.

Lessons learned. Indian diamond manufacturers say they’ve taken the lessons of the past five years to heart. They are adjusting their production to what’s in demand rather than gearing it to the amount of rough available. “Manufacturers have become very flexible in the past year,” says Champak Mehta of C. Mahendra Imports, a Surat-based “grass-roots” manufacturer. “In the past year, everyone had it in mind to clear out their [excess] stocks, and they stopped making anything they can’t sell quickly.”

Before the oversupply crisis hit, Indian manufacturers accepted virtually any rough they could get their hands on, just to sustain production in their huge factories. But last year they stopped taking better-quality makeables that polished out to small “Asian-type” goods, which were no longer selling. “It was a big change for Indian manufacturers to hold back taking rough,” Mehta says.

The key to prosperity, Indian diamond executives agree, is flexibility to meet changing market demands. Last year they moved downmarket to take advantage of their traditional strength, cheaper small goods for American mass merchandisers. And when demand for tapered baguettes nose-dived early last year (because of overproduction, the Asian crisis, and changing tastes), some factories quickly converted to princess cuts to feed the growing demand in the United States for invisibly set diamond jewelry.

Retooling helped keep large plants in Ahmedabad and Surat moving. “We were up more than 50% last year because the market for cheaper goods was so strong,” explains an Ahmedabad factory manager. “We never had a problem getting supplies,” he adds. (De Beers cut rough sales by 28% last year, but its allocations of cheaper goods actually increased.)

The strategy paid off as American mass merchandisers reported stronger-than-expected sales of diamond jewelry at Christmas, which resulted in fewer returns of unsold goods. The banks, along with the rest of the industry, breathed a collective sigh of relief.

Indian diamond manufacturers—even those in outlying areas far removed from the fashion centers of the United States, Europe, and Japan—vow to keep closer tabs on demand trends to avoid accumulating stocks of unsaleable goods.

Indian manufacturers also are moving aggressively on the marketing front. Argyle’s Indo Argyle Diamond Council has helped a number of jewelry manufacturers reach U.S. retailers with saleable products, but many manufacturers have opened New York offices. These refugees from the Asian downturn have prospered through assertive selling, connections with Indian wholesalers around the country, and having hot-selling goods in a rising market. One manufacturer reports that American mass merchandisers virtually devoured small diamonds from India. Kmart alone bought more than 200,000 carats worth of 3- to 5-pointers last year, says one Mumbai dealer, who notes that Wal-Mart probably consumed even more.

To avoid the cutthroat price competition that drives down profits, finished jewelry manufacturers are exploring innovative technology and styling. Prabir Chatterjee, who manages M. Suresh’s Mumbai jewelry manufacturing operations, says innovations such as automated setting and casting diamond jewelry in place have allowed his company to offer distinctive-looking diamond jewelry at the $199 price point demanded by mass merchants.

Meanwhile, jewelry designers have been finding jobs in Mumbai’s manufacturing shops, which can adapt expensive European ideas to popularly priced jewelry. “Many companies are now training jewelry designers instead of relying on clients [retailers or mass merchandisers] to submit designs,” says Jayesh Sanghavi, who manages Sanghavi Imports’ manufacturing operations.

Filtering down. Rajiv Bhandari, who heads De Beers’ operations in India, says he believes the crises have taught the industry the value of remaining flexible and controlling costs to stay competitive. He’s confident that those lessons will filter down to the mainstream of India’s industry, not just stay with the technologically advanced elite.

That elite is growing rapidly, because the market outside the cheapest diamonds is demanding a better make but isn’t yet willing to pay extra for it. India’s technicians say they’re up to the challenge.

To increase yield and accuracy and reduce pilfering of rough by workers, many companies have added new equipment, including computerized rough-modeling and inventory-control systems. They have improved working conditions and increased productivity in their Ahmedabad and Surat plants; the same number of workers can produce more than double the number of diamonds of a year or two ago.

Parag Shah, a partner in K. Girdhalal, says many of the old, inefficient cottage-industry polishing shops in Surat have given way to large factories with vastly improved working conditions and equipment. His Surat plant has installed computerized systems throughout and added a new form of “spindleless” cutting wheel that uses direct drive instead of a drive belt. This allows faster work and truer make, because pressure on the wheel doesn’t slow it down.

In addition, more companies are relocating their smallest, lowest-quality production to Ahmedabad, where labor is cheaper than in Surat or Mumbai. Much of the cheapest Argyle goods — rough costing $1 to $7 per carat — is processed there.

Not out of the woods. The problems of India’s diamond industry have abated, but they haven’t disappeared. Competition is fierce even in normal times, and companies that do large volumes of business one year can find themselves in the doldrums the next. Many depend on a few key accounts, usually American mass merchandisers or large jewelry manufacturers. Companies with large diamond and jewelry manufacturing facilities to maintain find it difficult to downsize if they lose some of those key accounts.

India’s diamond industry employs more than 750,000 workers and last fiscal year accounted for diamond exports of $4.49 billion and diamond jewelry exports of $839.48 million. But few of the dozen or so giants that built that industry through the 1970s and 1980s remain in the top 10 or even top 20 leaders in sales volume. And many big second-generation companies that came on strong earlier this decade have faded. Some failed to invest in new technology to upgrade productivity and quality. Others couldn’t handle the price wars waged by large American buyers who often play one firm against the other. In addition, India’s diamond companies have yet to create a more congenial atmosphere for foreign buyers traveling there.

For more than 20 years, the trade has tried to establish a diamond complex and bourse to replace the decrepit Prasad and Panchratna buildings in central Mumbai, where visitors can wait up to 30 minutes for an elevator. The latest effort is a $150 million complex near the airport. But the project ran out of funds and is only half-finished. Some diamond dealers estimate it will take another $100 million to complete it.

A ‘Collective Nervous Breakdown’

India’s problems over the past five years derived from an insatiable desire for rough—just about any kind. The trouble began in 1994 when the Russians began selling “technicals” (industrial diamonds that often are cuttable as small gems) outside its agreement with the Diamond Trading Company. Most of it wound up in Indian hands. Companies that could obtain goods from the source or get their pick of the better-selling goods prospered. (One quiet section of Surat—home to the new, posh factories and offices of some of these firms—is called “Russian Street.”)

But other firms, motivated by underpricing, took in rough for which there were no immediate customers. These goods accumulated as the Russians continued to sell more rough at increasingly lower prices. Prices of some types of rough and polished—particularly the smaller, cheaper goods—tumbled more than 20%. In June 1995, for the first time ever, the DTC announced it was decreasing prices of some of those goods.

Exactly a year later, Australia’s Argyle mine, the single largest source of cheaper rough, announced it was splitting from De Beers. The announcement touched off a crisis in confidence that sent prices falling even faster. Large sight allocations of those goods didn’t help matters, because many Indian manufacturers believed the two mining companies would lock themselves into a price war with the Indians caught in the middle. De Beers executives termed the situation in India a “collective nervous breakdown.”

Declining prices, accumulating stocks of rough and polished, and anxious banks forced India’s diamond companies to sell goods quickly to maintain cash flow and to unload polished before prices plunged even further. “Everybody lost confidence then—even better qualities started going down, not just Argyle goods,” says Govindbhai Kakadia, a partner in Sheetal Diamonds who manages its Surat operation. “Polished, selling for $100 in 1994, was bringing $65 last year. Eighty-dollar polished was getting $55. We’ve only now started seeing some firming.”

Just as the industry’s nerves began to calm, the Asian market began its slide, catching much of the trade off guard. Many Indian companies had been selling half or more of their production to Japan, Hong Kong, and other Asian countries, and they quickly found themselves without customers for much of their output.

The banks stuck with the industry through the crisis, says one top Indian executive. “They still had faith in the industry as a whole, but they were very worried about how companies would cope with their loss of business in Asia and the aftermath of the Lorenzi crisis.”

The Lorenzi default in Israel occurred because Lorenzi was pushing memo goods aggressively into an oversaturated American market and eventually found itself with huge numbers of diamonds in clients’ safes and showcases and no cash coming in. The Lorenzi crisis was a wake-up call for the trade worldwide.

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