Too Good to Be True?

Don Kogen leaned over the bag of rubies spilling onto his desk, his eyes wide with excitement. Kogen was talking about his business, Nuntiya Care Stone Co., Chanthaburi, Thailand, which owns theThaigem.com Web site.

He talked about the wide selection of colored gems—with heavily discounted prices—available on his e-commerce site. He explained the labor-intensive technology behind it, the threat he thinks it poses to the traditional gem-trading establishment, and the future of gem trading as he sees it. Three Thai women working at desks in his office ignored his animated monologue.

More than $100,000 in sales poured through his company that day. Meanwhile, outside in the dusty streets of Chanthaburi, hundreds of thousands of dollars’ worth of stones were traded the way they have been for centuries: by groups of men sitting at rickety tables. Kogen wants to turn this situation inside out. As a result, Thaigem.com is causing a minor ruckus in the colored gemstone trading world.

After 15 minutes with the 35-year-old Kogen, it’s apparent that he is someone who knows how to make money. Nuntiya, a small gem wholesale company two years ago, today boasts an online inventory on Thaigem.com of more than 500,000 stones. Chief operations officer Gavin Linsell says it ships 200 packages a day, containing more than 1,000 items. While 98% of the world’s colored gem trading is done off line, Thaigem claims to own 92% of the 2% that’s done online. Company executives say the firm sells $1.5 million worth of merchandise a month, and its goal is to sell more than $2 million a month by the end of 2001.

Midas touch. Nuntiya has implemented several successful business plans, any one of which could be the foundation for a business. A regional cable television channel airs Thaigem trading content, which is repeated on the Thaigem Web site, allowing buyers to post a product request to be filled by local gem dealers. Twenty-three Nuntiya-owned computer component stores in Thailand sell individual parts and build systems for Thai consumers and businesses. Kogen’s programming staff builds e-commerce-ready Web sites for gem dealers and retailers. A separate section on Thaigem.com sells Thai collectibles such as Buddhas, silks, opium pipes and weights, statuettes, and antiques. Thaigem offers custom jewelry, designed from either a faxed sketch or from one of 10,000 online designs, for $19.99 more than the cost of materials. It promises to deliver the finished piece within five days of payment. Kogen franchises his inventory to select online entrepreneurs worldwide. Thaigem even runs a profitable Internet café in Chanthaburi, complete with a computer school for local children.

Kogen is a respected businessman in Chanthaburi, the kind of person who gets whatever table he wants in a restaurant. (I watched the staff at a nightclub clear patrons from a table in the middle of the room to make way for Kogen and his retinue.) In this small, southern Thai province of 40,000 people, Thaigem employs more than 250 Thai workers who wear nice clothes and seem to live comfortable, middle-class lifestyles—an enviable condition in a relatively poor country. Thaigem’s employee turnover rate is low. Loyalty is palpable in the firm’s two-story headquarters. Kogen says he has already made at least five people very rich through his company, and he’s not finished yet.

“I’m going to make more people millionaires in this city,” he says. “The next generation in Chanthaburi will be millionaires.” Not bad for a Houston boy who came to Thailand 11 years ago with a backpack and $2,500.

The flip side. But not everybody is thrilled with Kogen’s success story. Another 15 minutes into our interview, and the reason becomes apparent. “It’s time to make this market efficient, and that’s what I want to do,” says Kogen. His right-hand man and marketing colonel, Linsell, says that Thaigem aims to correct differences between wholesale and retail prices and “the artificially fixed prices that have become entrenched within the industry’s market channels.”

He cites sapphire prices as an example: “We have seen sapphires of similar size, quality, and origin sell in Chanthaburi for $150 a carat, and [we] find nearly the exact same stone selling on another Web site for $1,500. It is obvious that some people are getting very rich in the trade, and it isn’t the miners at the source or the cutters here in Thailand.”

Linsell says the company views the Internet as a tool to fix the current pricing situation “as those middlemen who do not add value are removed from the distribution process.”

On the Thaigem.com site you can find a 2-ct. blue sapphire for $90. But critics of Thaigem—and even some of its regular customers—say the stones aren’t top-quality.

“We have purchased a few nicer stones in the past,” says P.C. Peck, general manager for Eastern Pacific Gems of San Diego. “We have been mostly disappointed. Most have been returned.”

Steve Moriarty, owner of Moriarty’s Gem Artin Crown Point, Ind., makes a similar point: “I travel the world, including Thailand, and while most of our gems are not in the same price category as Thaigem’s, it is my choice not to deal in gems for price only. I want the gem that stands out among the millions of gems, not the gem that millions of people can own.”

Moriarty’s point is less a criticism of Thaigem than it is an explanation of the company’s current market. Most of Thaigem’s online inventory consists of stones priced at less than $30 per carat, and there is a lot of money to be made in that segment. Kogen says Thaigem does sell more expensive stones, but his overriding philosophy is summed up by this statement: “Kmart wins, man. I will meet any price. If you are getting it supplied, I can beat the price.”

Linsell says 80% of the company’s income and 20% of its customers come from the wholesale sector. A significant percentage of Thaigem’s wholesale and consumer buyers are hobbyists. Thaigem is widely believed to be eBay’s largest seller in any product category. (eBay would not confirm this.) These facts point to a market outside the upscale jewelry sector. Linsell bristled at the notion.

“We find it hard to believe that an unbiased manufacturer could classify our merchandise as second-tier or would be uninterested in holding such merchandise,” says Linsell. “With 1 million items online, we stock a huge range to cover the diverse needs of all manner of global buyers, from the inexpensive to top of the line. Looking at our online inventory at any given time, you may or may not come across many of our higher-end items, simply because they sell so quickly.”

War of words. Here are some of the company’s descriptions of its stones: “Fabulous Gorgeous Blue Sapphire,” “Super Uncommon Ruby,” “Top Quality Supreme Blue Purple Tanzanite.” While this kind of marketing was restricted in the diamond trade decades ago, it’s still legal for colored stones. Critics of Thaigem say it cheapens the industry; Linsell says the critics scream because they can’t compete.

Critics also complain about Thaigem’s graphics. No one would speak on the record for fear of a lawsuit, but several people asserted that Thaigem uses the same image for more than one listing, that the images are touched up to enhance color or clarity, and that stones are backlit to lighten them.

Linsell strongly denied most of these assertions. A visit to Thaigem’s photo lab was inconclusive. The light boxes in which the stones are photographed are standard equipment. Photoshop, an image manipulation software program, was in use at several stations, but whether it’s ever used to change the gemstone images rather than just to crop and clean up backgrounds is debatable. And Linsell admits that a given digital image is sometimes used twice “when the digital image is identical to the gemstone in question.”

“Our intent here is never to deceive or to fraudulently present merchandise, but rather to ensure that we can keep pace with public demand and an ever-changing massive inventory in a manner that maintains our world-famous price points,” says Linsell.

Even some of Thaigem’s customers don’t trust its images, yet they don’t consider that a problem. They trust Thaigem based on past experience. Neena Washington, a retailer in the United Kingdom, says, “Images are actually little use because you can’t see the flaws in a stone from the picture. You can only assess its true value when you have it in your hands.” Yet she says Thaigem is her primary supplier of finished jewelry, and she hopes to buy larger stones from the company in the future. The setup is not unlike that of any customer who buys stones from a traditional overseas gem dealer, sight unseen.

However, one recent Thaigem customer is displeased enough with his transaction to threaten legal action and ask the Federal Trade Commission to investigate Thaigem’s business practices. David Sherman is the owner of Treasures of the Earth, a company that owns the primary Paraíba tourmaline mine in Brazil. He saw Paraíba tourmaline, a rare, neon-bright tourmaline that frequently sells for as much as $10,000 a carat, on sale for very low prices—Thaigem sells these stones for about $60 per carat—on eBay. He discovered that Thaigem was the seller and made arrangements to fly to Chanthaburi.

Sherman examined the stones and bought $72,000 worth in late February. They were a dull green—the color of some Paraíba tourmaline before it’s heated. He heat-treated the stones when he returned to Brazil, and they didn’t change color. An analysis by the European Gemological Laboratory in New York found that they were green tourmaline, lacking the copper content to give them the bright colors characteristic of Paraíba. They were worth about $35 a carat, according to a Brazilian gem dealer on New York’s 47th Street.

Sherman asked Thaigem for his money back. The company said a refund would take six months but later told Sherman his money would be returned, in exchange for the stones, in three months. Sherman approached eBay and demanded that it banish Thaigem from the site, which it refused to do. Thaigem altered its online description of its stones to read “Paraíba color” tourmaline.

If the stones had been Paraíba tourmaline, Sherman would have made a killing. Sherman claimed he wanted to remove the cheap Paraíba from eBay only “to protect the market.” Linsell says the stones were bought from “a Brazilian national” in Chanthaburi. To complicate matters further, a mine in the Paraíba region of Brazil recently produced tourmaline that did not respond to heating. It is tourmaline from Paraíba, but it does not contain a high level of copper. Is this what Thaigem bought and passed on?

Caveat emptor. Enough ambiguities surround Thaigem to reinforce the old adage, “let the buyer beware,” yet there are enough satisfied customers to temper this view. Typical is Don Bell, co-owner of Native Sun, a custom jewelry design house and stone broker Bargain Gems in Tyrone, N.M.

“Thaigem is my major source for colored gems,” says Bell. “I buy all sizes and prices, some [stones for] over $600. Overall, they have treated me well, and as far as [price] goes, I would hate to have to compete with them on the wholesale level.”

Dr. Pete Warren, a senior partner in BargainGems of Anthony, N.M., says Thaigem supplies his company with 60% of its colored stones and saves him a lot of money on airfare. “Because of Thaigem, I have canceled my last two trips to Asia, saving over $8,000 in costs by buying from them and a few other minor suppliers I know in Asia,” he says.

Warren says he returns about 20% of the stones he gets from Thaigem, but that doesn’t faze him. He says he’s pleased with the “great value for good to great stones. The price is usually the lowest price for the quality available anywhere. I have dealt with them for almost a year at the $2,000-plus level per month, and a few months of much higher levels; they have been a pleasure to deal with.”

Thaigem’s customer service was lauded by a number of its customers. It’s an aspect of the company’s success formula that is even perversely evident in Sherman’s transaction. After offering to refund Sherman’s money in six months, Thaigem reacted to his anger by cutting that time frame in half and then urged a public forum on the difficulty of identifying Paraíba tourmaline, all of which shows a willingness to accommodate customers. Thaigem’s two-day window for returns was deemed insufficient by almost every customer I spoke with, but nearly all were aware that if they kept a stone longer and then talked to Thaigem about returning it, the company was flexible.

Thailand’s cheap labor allows Kogen to build Web sites, craft jewelry, and provide highly attentive customer service at a far lower cost than a Western company could. That, plus Kogen’s access to colored gemstones in one of the world’s biggest cutting and polishing centers, equals a recipe for fat profits. Does the Thaigem CEO worry about someone setting up shop next door and giving him a run for his money on the World Wide Web? “It would probably come down to a price war, and my competitor would find going up against Thaigem would be very foolish,” says Kogen. “I’ll kick their ass.”