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The State of New York
Sep 5, 1997 12:22 PM
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by Karen Nestlebaum
In Jacob Zupnick's compact office on 47th Street, three conversations
are going on at once -- two on the phone and one with a broker who
sits across the metal desk bargaining with Zupnick's son-in-law. All
three conversations are at full volume, all three are in Yiddish, and
all three are about fine quality, top-of-the-line, large and gorgeous
diamonds.
Zupnick deals in top stones. It's just him and his two sons-in-law,
scouring the diamond district on behalf of an elite clientele located
largely in the Middle East. The clients trust Zupnick to spend their
money, and he throws 110 percent of his considerable energy into
getting them the diamonds they desire at the best price he can find.
In another diamond office, the Goldberg family discusses the diamond
business with lunch guests, who are elegantly served in the company's
expansive in-house dining room. William Goldberg, head of the family,
the company, and certainly among the heads of the New York industry,
sits at the head of the table. It's a midday family meal -- a
tradition as rare in America as the perfectly crafted, firey diamonds
Goldberg manufactures in this same office suite. The table is
populated by Deborah, one of two daughters working in the company, as
well as son Saul and a son-in-law Barry Berg. Daughter Eve is out of
town. Goldberg's wife, Lilly, anchors the other end of the table and
occasionally contributes her own view of the business she's spent
decades building with her husband.
On the next block heading east, Basant Johari mans the sparely
furnished office that is the New York headquarters for Dow Gems, an
affiliate of the Bombay-based Dauji & Co., manufacturers of Indian
diamonds. While his operation may have somewhat shallower roots in
American soil, about 70 percent of the diamonds adorning Americans
come from businesses like Johari's and the other 200 or so Indian
merchants who, over the past 20 years, have become an integral part of
the American market.
Diverse as these New York scenarios may be, they are connected by one
strong, common bond. Frustration. In each type of business, there
have been changes over the past decade that have insinuated an
uncomfortable level of frustration into a business that has never been
easy, but has at least historically been lucrative for those who knew
what they were doing. Now, as the industry closes out the 20th
century, it is characterized by difficulties that are largely out of
the diamond industry's control.
For the broker/middle-man, the enemy is consolidation. To be sure,
there's still plenty of business for dealers like Zupnick, who acts as
an agent for out-of-town or foreign clients. Someone who knows
diamonds and people, has an excellent name and the loyalty of his
clients is still an invaluable resource to a diamond buyer. But
loyalty is a fast-disappearing attribute, and certificates, price
lists, internet trading and other modern embellishments are clearly
eroding this niche.
For the manufacturer, the crisis is brewing over the rough supply
situation. Over the past decade, as other cutting centers have begun
"moving up" into larger goods, New York, which always occupied the
summit, has had nowhere to go. It has lost the smaller end of what was
once New York goods, and can't get enough of the larger stones to make
a normal market. Furthermore, De Beers' Central Selling Organization
has been religiously raising rough prices whenever polished has
firmed, instantly gobbling up profit margins wherever they appear.
For the dealer in mass-market merchandise, the threat looms in the
market's insatiable demand for longer and longer credit terms. An
Indian firm nowadays is expected to carry customers for up to six
months -- double the length of normal terms only a few years ago. And
even then, payment can be come in bits and pieces. This creates cash-
flow disaster for the capital-intensive business of cutting small
diamonds.
But despite all these gathering storm clouds, the New York industry
by-and-large keeps its vision set on the sun behind the clouds. That
"sun" is the essential value of diamonds, the durable, growing,
seemingly eternal desirability of this brilliant jewel. As long as
people want jewelry, selling diamonds will ultimately remain a viable
business. That's the basis for the optimism that peeks out from behind
the gloom and insures members of the industry that the diamond
industry will thrive.
What's New York Got?
It hasn't got the largest cutting industry by any means. The
entire complement of active cutters here -- an estimated 500, most of
whom work as contractors -- are a tiny fraction of the labor force of
India. Nor does New York, despite its location at the doorway of the
world's largest diamond consumer market, have the highest turnover.
Antwerp and Israel are busier trading centers. One dealer proposed
that, if De Beers' Central Selling Organization took New York's sight
and divvied it up among the other centers, the world might never know
the difference.
So, in a world where niche is everything, what niche justifies
New York's star on the diamond map? Those who cut diamonds in New
York, or deal in the diamond cut here, have one unanimous answer to
that question. It's the make. There may be only 500 cutters, but each
is a craftsman and each stone is handled with individual loving care.
Goldberg talks about his cutters working in the small factory
down the hall. An observer can see them assiduously tending to their
diamonds, lifting the dop every few minutes to check the progress,
make small adjustments, peer through a loupe into the emerging
brilliance of the interior."Our cutters think about their work.
They'll come to me and say, 'I think you made a mistake with this
stone.' They understand how to maximize the beauty of a diamond."
In fine diamonds, asthetics and the bottom line should go hand-
in-hand. You can't make more money in the long run by cheating the
muses and producing a clunkier, duller stone that's heavier. "The
quality make is the secret of New York," says Goldberg. "Make is
value. Make is liquidity."
At Kwiat, another old-line New York firm, Sheldon Kwiat presides
over a vertically integrated company that brings diamonds from rough
to retail display case. And he is also a believer in a fine make, both
because it means a better looking diamond, and because it is an
increasingly important marketing tool.
"There is a growing awareness of make and quality on the consumer
level," says Kwiat. "This is partly because of the growth of gem labs,
particularly the GIA. It's a trend that has been a help to New York,
because it has the best cut of any major cutting center."
Jeff Fischer, who grew up in the industry and is now the second-
generation head of Fischer & Son, says New York's placement as cutters
of the good stuff has secured it a growing market during the past
decade. "We are the center that cuts the better rough that requires
individual attention and craftsmanship," he says. "I don't think
anyone will improve upon the job New York is doing."
Tired of Roughing It
There's only one problem with New York's niche. There's not
enough rough to support it. Theories abound as to why De Beers seems
to be starving this loyal, politically stable, financially secure
goose that lays the golden eggs. Clearly, one reason is that there are
a lot of other geese clucking for better rough.
"Goods will go where they can be cut most efficiently," says Eli
Izhakoff, president of the World Federation of Diamond Bourses and
former president of the Diamond Dealers Club. "For 80 percent of the
rough, the cost of cutting has to be the top priority. That other 20
percent, the rough that requires special expertise...we get most of
it, but it has to be distributed to to other centers too. It's the
'candy' and everyone wants their share."
The candy has become more and more narrowly defined over the
years, adding to the problem. Jeff Fischer identifies the critical
point now at rough that finishes into diamonds of one to three carats.
Well-made polished stones in those sizes are a struggle to come by.
From De Beers, the rough is inadequate, and on the open market, it's
expensive.
Yet, the strong demand and firm prices in those goods are not
lapping over the boundaries into other, neighboring categories.
"Selling the in-demand categories requires almost no effort if you
have the goods," says Fischer. "It's almost just taking orders over
the phone. But the less in-demand stuff -- the very cheap end, the
off-make -- you have to struggle to sell."
One manufacturer, who preferred to speak off the record, pins
some of the blame for the current situation on the New York market
itself. He says the manufacturers here narrowed their own niche by
retreating to higher ground when they saw Israel inching its way up
toward the lower end of what had traditionally been New York goods.
Israel, in turn, was trying to protect itself from India's gradual
infiltration into Israel's territory.
"Everyone was nipping at the next guys heels," says the
manufacturer. "But we should have fought to keep our ground, because
once it's lost, you're not likely to get it back."
Long-Term Folly?
Goldberg believes that, in sending what would be ideal New York
material to other cutting centers, De Beers is committing an error
that will reveal itself in the long run. Even if India takes $50
million sights compared to New York's estimated $15 to $20 million,
even if De Beers wants to offer some reward to the entrepreneurs who
take its most difficult, labor-intensive production, even if New York
is more demanding and selective, even if, even if....New York should
get the rough it cuts best, because the stunning stones it produces
out of that rough are what make diamonds precious.
"If we make beautiful jewelry, we are whetting the customer's
appetite for more. We are developing conoisseurship," says Goldberg.
"It can't be immediately proven, but I believe that if people buy
certain products that serve them well, they will want to buy more. If
De Beers sells its best rough to the Indian market, where it won't be
cut to the highest standards, in the long run, they're missing the
point."
The oft-stated reason other cutting centers are eager for the
larger rough is that it is allegedly more profitable than the lower
quality goods that go into a pressure-cooker mass market. But Kwiat
questions that premise, seeing profit as an elusive goal for the
entire market from top to bottom.
"There's a fallacy in this line of thinking," says Kwiat. "There
is very little profit in cutting diamonds -- not enough that giving
the goods to another cutting center would compensate them for the less
desireable goods they cut.."
On the other hand, however, taking the goods out of New York's
factories does
immeasurable harm to the industry here. "To maintain a vital cutting
industry, you need a consistent flow of rough," says Kwiat. "Customers
have their standards, and we need to know what we are going to be able
to get. Buying on the open market doesn't provide that consistency of
assortment."
A Paradox or Two
Oddly, De Beers' advertising thrust, especially in the U.S., is
on larger, better stones of exactly the type it is making New York
fabricate out of staw. And the argument that India deserves some of
the cream after surviving on the dregs also has a hole, since even
with its far smaller intake of rough, New York markets a third of the
world's diamonds by value.
David Abraham, a diamond dealer and co-chairman of the Diamond
Dealers Club's business development committee, points out another
reason De Beers' rough allocation policies might be short-sighted. "I
think they're making a critical mistake, because New York has always
been a stable market for them," he says. "I've travelled a alot
throughout the Far East, and the places where they're putting their
emphasis, on Thailand, China, the Phillipines -- these are great
places, but they're not stable. The U.S. has always been good for
them."
Not only polticially, but business-wise also, New York has been a
loyal, reliable customer. Says one manufacturer: "We've been proven to
be the most stable, financially secure market in the world. There's
never been wild speculation here as there has been in other centers."
Making Money
While New York might be an ideal place to make diamonds, it has
ceased for many diamond traders to be an ideal place to make money.
Profit margins have slimmed to the point that many say they have
trouble justifying their investment. The question is, if rough costs
X, labor costs Y and overhead costs Z, why can't a cutter base his
price on this mathematical reality?
One reason, voiced by most of those interviewed, is the
"commoditization" of diamonds. Certificates and price lists seem to
many to form a deadly duo that has given profits a knock-out punch.
Jacob Zupnick, whose livelihood depends on the market's need for
people who know diamonds, says that gradually, buyers are becoming
"more interested in looking at the paper than the diamond."
Kwiat says the effect has been to rob the wholesaler, and to some
extent, the retailer, of the market value of his expertise. "It used
to be that someone was entitled to a certain amount of profit because
he had an expertise that people needed. But with certificates and
price lists, that expertise is required less by the market."
With commoditization has come the ability of buyers to bid down
the price. Just like a shopper looking for, for instance, a 1997 Jeep
Cherokee might go from dealer to dealer seeking lower and lower price
quotes, a buyer in the market for a two-carat G-VS1 can do the same.
At least he thinks he can. Zupnick and most any other experienced
diamond dealer would argue that doing so would be a big mistake,
because two stones with the same grades, even if they are both
considered well-made stones, can have a different look. One will
"speak" to the customer, and one won't, and there's no way to tell
without looking at the stone.
Bolstering the effect of shopping by paper is the nationwide love
affair with discount. Shoppers have become devoted to the idea of
never paying full price for anything, and this mind-set prevails up
and down the distribution chain. Even in hard-to-find diamonds, buyers
want to feel they're getting a bargain. Fischer says he's had
customers call him for a stone they've been looking for for awhile,
and pass on it when the price was two or three percent above what they
felt they should have to pay.
Manufacturers facing this kind of market are forced to exist on a
razor-sharp edge. "If it costs me five percent more to manufacture an
item, especially one that's not unique, I can't pass that on," says
Fischer. "I have to sell within certain limits."
Of course, the price of rough is the other prominent factor in
the profit equation, and the fact that De Beers' profits keep rising
while the industry grasps at a few percentage points is not lost on
diamond manufacturers. On one hand, the true De Beers' loyalist will
laud every price increase as a move to strengthen the market and
maintain the truism that "diamonds never go down." On the other hand,
people would like to be making some money.
Eli Haas, president of the Diamond Dealers Club, sees the current
situation as a change in the relationship between De Beers and its
clients. "There used to be an unwritten agreement that in exchange for
the industry's loyalty, De Beers would take care of the industry
overall. It wasn't expected to worry about each individual firm, but
it was expected to maintain a climate in which diamond businesses
could prosper. The CSO was the gatekeeper of the industry. But now, it
seems they don't take that role as seriously."
Eli Izhakoff notes that profitability has been a long-term and
world-wide problem. "It used to be that, even if people lost a little
on some sights, they would make it back on others. It would all work
out in the bottom line," he says. "But today, the problem is
continuous, and it's a problem for all the cutting centers. It's
becoming hard to justify the investment."
Roads to Riches
Because profits are so narrow, a manufacturer who wants to
maintain his firm's revenues has to sell, sell, sell. But diamonds --
especially the type sold by New York cutters -- are not a mass market
product. They aren't sold by the carton, the gross, or even the dozen.
They're sold one by one, like art or luxury yachts. Diamond dealers
know their diamonds personally -- this one has an especially nice cut,
that one is particularly bright, another has just a small flaw below
the girdle, and so forth. No matter how many stones pass through a
diamond firm each day, a dealer still delights in showing a visitor a
particularly beautiful one. He still takes time to roll it back and
forth in the light, watching it sparkle and scintillate.
So, with volume a limited proposition, diamond dealers and
cutters must find other ways to survive the profit squeeze.
Essentially, that means putting back some of the added value lost
through commoditization. And there are various routes that are being
successfully pursued toward that end. Mounting the stones is one.
Expanding outlets is another. Finding a unique brand or product niche
-- a specialty cut, for instance -- has also succeeded for some firms.
An increased level of customer service is essential.
"Any of these methods will work," says Fischer, "if it's done
with good business sense. The important thing is to not continue
putting effort into a direction that doesn't produce profit."
At Kwiat, a line of diamond jewelry gives adds value to the
company's diamonds. "We provide a service to our customers," says
Kwiat. "We give them all sorts of support. If they need a piece
repaired, we have the expertise to take care of it. We offer our
customer the availability of our diamond inventory. With overnight
delivery, they can have a stone to show a customer the very next day.
This is something no other cutting center can offer the American
retailer."
Goldberg sees mounted diamonds as more than just a
diversification. He sees them as the potential salvation of the New
York market. "What we need now is a Harry Winston-type person," he
says. "We need someone who can reach the media and create the glamor
that makes people want to own diamonds."
Exquisite designs using the best diamonds will draw the luxury
dollars into the diamond market, Goldberg maintains. And the time is
ripe, he says, for the right designer to take the stage. "Even the
fear of wearing diamonds is being lessened by the drop in crime," he
says. "But we need the goods to do it. I recently needed a two-and-a-
quarter-carat emerald cut to finish a piece, and I couldn't find
it...You can't sell from an empty pushcart."
Finding new markets is the other major survival strategy diamond
firms are using to adapt to the new realities. Goldberg says his firm
is constantly seeking new outlets around the world. And other dealers
agree: He who limits his sights to 47th Street these days is probably
looking at early retirement.
"You can't rest on your laurels," says Eli Izhakoff. "You have to
look at your options. Make a strategic partnership, become innovative,
see where you can earn money. Time is on the side of those who act
today. You have to go out and look for the business. You can't wait in
the club for business to come to you. Thirty years ago, you could buy
at one table and sell at another. But those days are gone."
Will the Cutting Wheels Keep Humming?
Nobody doubts that New York is undergoing some kind of transition
as a cutting center, and nobody can predict exactly how the current
batch of challenges will work out. However, those in the diamond
market believe that New York's viability as a cutting center is
essential not only for those who make their living in that sector, but
for those who trade polished diamonds, for America's retail trade, and
for De Beers, which relies on America to consume the vast majority of
the world's diamonds.
"For the American jewelry market to maintain a healthy market in
diamonds, it's important for New York to have a cutting center," says
Kwiat. "We respond to the demands of our customers. We give jewelry
stores immediate access to diamonds. Having an American cutting
industry gives retailers a resource they couldn't get overseas."
Nonetheless, Kwiat sees an erosion of cutting in New York, and
fears that a loss of critical mass could allow the industry to
"whither and go away." If that happens, he says, it could be
impossible to get it started again. There would be too few diamond
cutters to train new ones, and eventually, it would become a lost art
in New York.
Haas believes that maintaining an active cutting industry is a
vital factor in keeping New York as a major trading center. With no
goods produced here, he says, many buyers would travel overseas to
shop at the primary sources. The fact that one can sometimes get a
better deal even on Israeli or Indian goods in New York would not be
enough to retain the trading center status. New York would become like
Japan or Hong Kong, primarily a distribution point.
Izhakoff sees New York's position as evolving, but secure. "It
will always be a big trading center, because it's the gateway to the
world's largest consumer market," he says.
"Firms from all over the world have their offices here. The majority
of goods being sold are going through firms here in New York."
In fact, cutting in New York has not fallen off during the past
decade, says Fischer. Over a 20- to 25-year period, there has been a
slide. But in the past decade, he sees a restablization that is only
being shaken by the lack of rough. "I think we can preserve the niche
we've developed," says Fischer. "I don't think any other cutting
center has improved on the job New York has done."
Tradition
If the tradition of diamond cutting is an essential feature of
New York, the traditions of diamond trading are no less important.
Ask Bill Goldberg, what the strength of the New York diamond market
is, and the answer is ready on the tip of his tongue: ethics.
"New York lives by the ethical standards of the Torah," he says.
"It's a stronger factor here than in any other market. People honor
their commitments."
While other centers, particularly Antwerp and Israel, are
anchored in the same tradition, Goldberg sees these markets as more
dog-eat-dog, probably due a more acutely developed survivor instinct.
"We in New York are solid, established firms. We've never been
threatened with the wars and problems that have effected other
markets," Goldberg explains. He ticks off a number of firms in which
second and third generations are now active: "This is the aristocracy
of the industry," he says. "And when I look at the next generation, I
see educated, high-quality individuals who are definitely carrying on
this ethical tradition."
This, to Goldberg, is the New York industry's most valuable
resource. And, unlike rough, there's still plenty of it.
India in New York
One irony of the American diamond market is that an estimated 70
percent of the stones sold to American consumers comes not from New
York's small, specialized factories, but from the mammoth output of
the Indian diamond industry. About 25 years ago, Indian firms started
to establish sales offices in New York in order to reach further down
the pipeline to their clientele. Now, there are about 200 diamond and
colored stone firms operating here, with market dynamics unique to
their mass-market sector of the industry.
Basant Johari heads the Indian Diamond and Colorstone Association, and
operates Dow Gems, associated with the Bombay diamond cutting firm
Dauji & Co. He sells both jewelry and loose stones, which primarily go
to New York jewelry manufacturers.
Johari's organization has been trying to gain recognition for Indian
diamonds in the U.S. Despite their dominance, he says, many buyers had
a negative image of their quality and were in fact unaware that the
parcels they bought in Antwerp, Israel or New York were cut in Bombay.
But, he says, the public relations effort has born fruit, and now
Indian diamonds are recognized as an asset to the New York market.
"Indian diamonds add to the variety of goods available in New York,"
Johari says. "This helps to build up the trading center."
The Indian market doesn't deal with the rough shortages and high rough
prices that afflict New York manufacturers, but it does deal with its
own set of problems. The mass market is fiercely competitive and
price-sensitive. Arun Kothari of Alma Diamonds, the U.S. affiliate of
Suraj Diamonds in Bombay, jokes that he "can't count the number of
gray hairs" he's earned keeping the customers satisfied.
"There was a time when we used to sell a series of goods A to Z to a
customer like Fabrikant," he says. "Now everyone is cherry-picking.
It's a whole different operation."
The competition comes mainly from new Indian firms entering the market
-- the "young Turks," as Kothari characterizes them. They're
energetic, aggressive, and willing to go yet another extra mile. The
latest trend, he says, is providing manufacturers with bagged
assortments suited to their needs. If a ring requires ten 5-pointers,
five 10-pointers and a 15-pointer, that's what will be in each bag.
Obviously the labor involved in such a service is enormous, so it's
done in India, where the labor costs are low. Does a manufacturer have
to provide such a tailor-made assortment? "If Idon't do it, my cousin
will," says Kothari.
Another challenge is cash flow. "It's hard to ease money out of
customers," says Kothari. "It can take six or seven months to get
paid. People expect it."
Indian firms are beginning to wiggle out of the smallest goods/lowest
quality categories by producing some larger stones, mainly fifths,
quarters, thirds and half-carats, up to four-grainers. They are moving
up in quality, too. "We're going very strongly into H and I colors,
and VS, SI clarities," Kothari says.
This is all part of the Indian industry's continued integration into
the New York marketplace, says Johari. "We've been involved with the
DISC (Diamond Industry Steering Committee) to promote New York as the
main diamond center in the world. There's a whole range of goods
available here, and I believe this market will continue to grow."
A Tough Deal
Diamond manufacturers in New York are beset with the problems of
industry -- raw materials, labor costs, equipment, marketing. But for
most of 47th Street, those problems are nothing compared to the
continual consolidation of the business, the squeezing out of the
middle-man, which is what most diamond dealers are.
Jacob Zupnick, a member of the Diamond Dealers Club's board of
directors and a 30-year veteran of 47th Street, says manufacturers are
reaching further down the line, stopping just short of the private
customer.
Arnold Gross, who co-chairs the DDC's business development
committee, sees the dearth of supplies in the pipeline as an
aggravating factor. "If there would be more goods available, middlemen
would be needed to direct them to the customers. But with so little
around, the goods go straight to the retailers."
Zupnick agrees. "The shortage of rough makes it harder for
everyone. There's less trading, less business."
But another major factor, arguably more important, is the growing
availablility of internet trading, based on certificate grades.
"Internet companies will kill the market even more," says Zupnick.
"Even though it's not the right way to buy a diamond, it will
eventually make brokers extinct."
To Zupnick, who deals in the finest quality stones for an elite,
foreign clientele, the idea of buying a diamond based on paper is an
affront. "As professinal diamond dealers, we know the difference
between a paper and a diamond. There are some gorgeous diamonds that
don't look good on paper, so they won't sell." However, he
acknowledges that certificates have served the purpose of quality
assurance for buyers parting with large sums of money for what is
essentially, to the layperson, a blind item.
Can anything be done to restore the broker's role? Zupnick
believes that a stronger, more active market would help. He suggests
that the Diamond Dealers Club appoint five permanent board members
"like the permanent members of the U.N. Security Council" --
individuals from top New York firms who would give the New York
industry some extra clout in dealing with De Beers and the world-wide
market. "Then maybe we could get more rough, more activity," he says.
"We need a united front and De Beers' strong backing."
Meanwhile, brokers like Zupnick rely on their expertise, their
contacts and their knowledge of diamonds to provide their services to
clients who want an edge on the New York diamond market. "If you have
a good name, you have the loyalty of your customers," says Zupnick.
"They come back to me because they know I do my best for them."
Perhaps the best evidence of Zupnick's belief in the viability
of diamond trading is the presence of his two sons-in-law in his firm.
"There's still room for people who want to work hard, and who have a
good head for business."
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Tags:
China, Consumers, De Beers, GIA, Harry Winston, Hong Kong, India, Israel, Japan, Jewelry, Labs, Production, Sights
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