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India
Dec 1, 2000 9:38 AM
By Martin Rapaport
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By Martin Rapaport
The sights and sounds of India fascinate the senses. The hustle and bustle of Mumbai has the intensity of New York or Hong Kong, but yet something is different. There is a subtle, yet very forceful, business energy. It’s hard to tell exactly where this energy is coming from. It appears that large segments of India’s one billion population have reached a critical mass of human resource development. They are beginning to interact with the new globalized international economy to bring about an unprecedented era of prosperity. Maybe it’s the millions of computer programmers or even the super high-tech diamond cutting factories with thousands and sometimes tens of thousands of workers. One gets the sense that change and development in India is reaching a critical mass, that it is an economic volcano just waiting to erupt.
Needless to say, because of its huge population everything about India is big including its diamond industry. Some 600,000 to 650,000 people work in a diamond industry that directly and indirectly supports one million people. In fiscal 2000 the country imported 134 million carats of rough and exported 33 million carats of polished diamonds — almost all small stones — hundreds of million individually cut diamonds.
India’s numbers look good with $6.6 billion of polished sales and $4.8 billion of rough purchases yielding an added value of $1.8 billion in foreign currency earnings. That is a 38 percent gross profit margin which is less than the 50 percent of last year, but still much better than any other diamond center can even dream about. The diamond business is extremely important to India. Diamonds not only account for 17.6 percent of India’s exports they are also India’s number one export item.
The Secret
The secret of India’s great success is its ability to make big bucks from small stones. Lots of folks don’t understand India. They think that India produces cheap diamonds because they use very inexpensive labor that is incapable of producing finely cut stones. But that is not true. Indian diamond cutters are highly skilled at cutting very inexpensive rough in a way that optimizes polished yield and value. While some people think that cutting expertise is based on how good a quality of cut a worker can produce, in fact, real cutting skill is based on the ability to work difficult, hard-to-cut rough and produce the best possible polished from this rough. Furthermore, India has a wide range of technically proficient diamond cutters capable of producing almost any type of diamond from inexpensive melee at $80 per carat to D-IF AGS 0’s at $15,000 a carat.
India’s great strength is reflected in its ability to cut low-end inexpensive near-industrial grade rough diamonds and turn them into highly marketable low price point polished diamonds for the mass-market retailers. Some 40 percent of the worlds rough diamond output is graded as near-gem. Actually these diamonds are near-industrial. They are off shape, low quality, highly included and often extremely difficult and time consuming to process. India takes in rough that no other cutting center can deal with.
The fact is that India produces inexpensive cheap diamonds because they are the most profitable market niche in the diamond industry. With rough coming in (fiscal 2000) at an average $36 per carat and polished going out at $201 per carat with a yield of 24.77 percent, India can make much more money on the cheap, small stones than it can with the "better" stones cut by other cutting centers. India is powerful and profitable because they are the only ones capable of efficiently processing the small cheap rough. They realize that the secret to the diamond business is not necessarily producing perfect "cookie cutter" diamonds, but rather optimizing rough and producing diamonds that meet the price point requirements of buyers. The real diamond business is not about making perfect diamonds; it is about making money.
Expansion
Given India’s trade advantage in small inexpensive goods, it naturally seeks to expand into larger better quality stones. India has become a dominant force in polished diamonds under a half carat, especially in fancy shapes and lower to medium cut grades. Some cutting centers like Israel and Belgium have moved over to larger sizes while others like Thailand and China have specialized in finer cut stones.
India’s expansion efforts are most often felt in the rough markets as Indian firms bid for better quality larger rough. The problem for India is that prices for this rough are high in relation to the resultant polished because other cutting centers work on much smaller profit margins. Furthermore, the benefit of low labor costs are marginalized as they are a lesser component of expensive goods. Some Indian firms specialize in fine cut, large, better-quality stones and the trend is likely to continue as demand from a rapidly expanding domestic market increases, but there is no reason to believe that India maintains an inherent competitive trade advantage over other cutting centers that produce larger, better quality stones.
In summary, we can expect India to push the envelope and increase competition with other cutting centers, especially when they have strong cash flow and want to experiment with better rough. However, over the long term India can only dominate other centers if they have inherent trade or skill advantages, which is not yet the case for larger expensive diamonds. Furthermore, Indian diamond manufacturers are more likely to crowd into the high-profit margin business of cutting of cheap goods rather than competing with other centers for low-margin diamond manufacturing.
Jewelry Manufacturing
The real opportunity for the expansion of India’s trade is jewelry manufacturing. Since 1994 when government restrictions on gold imports were lifted, jewelry sales grew from $286 million to $1.087 billion. Overall sales for fiscal 2000 increased by 29 percent and sales to the U.S. market surged 55 percent to $600 million. We expect India’s total jewelry sales to skyrocket and reach $3 billion by 2003.
India’s opportunity is obvious since the manufacturing of inexpensive jewelry is labor cost sensitive and almost all the inexpensive diamonds that go into such jewelry are cut in India. For some U.S. retailers, the cost of setting a diamond into jewelry may be higher than the cost of the small diamonds themselves. It simply doesn’t pay to manufacture inexpensive jewelry in the U.S. And where better to do it than in India? Furthermore, retailers are not interested in buying inexpensive diamonds; they want ready-to-go jewelry that can be popped into a showcase and sold.
While the opportunity is great, so is the challenge. We must recognize that diamonds and jewelry are separate product categories. A diamond merchant does not a jeweler make. In other words, just because you know how to cut diamonds does not mean that you know anything about how to make, merchandise and market jewelry.
Jewelry sales are complicated by the fact that jewelry needs to be designed — not just manufactured, and countries have very different design/merchandising requirements. Furthermore, almost all jewelry is unique and requires very specific customer targeted marketing efforts. You can’t just manufacture a bunch of jewelry and sell it in a bourse the way you can with diamonds. Finally, jewelry sales often require extensive financing and marketing agreements with large retailers that require long credit terms and memo programs.
So far India’s successful sales to the U.S. have been based on contract orders from large retailers and wholesalers that specify exactly what they need and provide their own quality control. As the market develops, more Indian firms will learn the U.S. market and significantly expand their marketing activities. Ultimately, the real challenge for the Indian market will not just be to figure out how to make better jewelry, but more importantly, how to market jewelry.
The focus on Indian jewelry manufacturing fits well with De Beers new marketing strategy. De Beers wants diamond manufacturers to sell diamonds into targeted marketing channels that reach retailers. Jewelry marketing programs are a very good way to reach retailers and assure that the diamonds being produced have a targeted market.
The Domestic Market
Another channel of strong growth opportunity is India’s own rapidly expanding domestic market. India is a giant consumer market just waiting to wake up. For many years India’s greatest problem was the sheer size of its population. Too many people with too few resources. In the new information and high-tech era we are discovering that the ultimate resource is people, not products. Educated people, i.e., human resources, have become the most valuable part of the new world economy. What was once considered India’s greatest liability will one day become India’s greatest resource.
With hundreds of thousands of computer programmers and a million or more on the way, India is already the world's largest and lowest cost provider of programming services. It won’t be long before the export added value from intellectual based services such as programs exceeds the $1.836 billion added value from diamonds. While it may take a few years, it is only a matter of time before India becomes a primary world class consumer market for diamond jewelry.
The Future
India will continue to own the market for inexpensive small diamonds. India’s expansion into larger and better quality goods will continue, but India will not dominate or take significant market share from other cutting centers unless the type of goods provide a trade advantage based on relatively low labor costs or complicated rough processing. India will benefit from an expanding domestic market which will encourage a broader range of diamond manufacturing.
India’s greatest opportunity for growth lies in the expansion and development of its jewelry manufacturing sector. India will develop better jewelry manufacturing, merchandising and quality control skills to accomplish this. The greatest challenge confronting India is the need to develop diamond and diamond jewelry marketing skills and programs. Such marketing activities are a prerequisite for the realization of India’s potential as the world’s primary jewelry manufacturing center for inexpensive jewelry. It is hoped that the development of more sophisticated marketing programs will help firms improve diamond production planning and reduce their reliance on risky extensive credit terms as a primary selling motivator.
India is a country that presents unlimited opportunities for the diamond industry. The world market for inexpensive diamond jewelry will grow in the years ahead and India will dominate this market. India will also become a primary consumer market for diamonds and jewelry. The challenge for the international diamond industry is to find ways to work with India and integrate its development in the world market. In the years ahead, as the world economy develops and as third world countries become consumer nations, the diamond industry will find that India is not so much a competitor for market share as a developer of new international markets for diamonds.
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Tags:
Belgium, China, De Beers, Economy, Government, Hong Kong, India, Israel, Jewelry, Manufacturing, Production, Sights
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