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GE / LKI Support — Disclosure and Detection

Sep 30, 1999 11:23 AM   By Martin Rapaport
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Interview with Leon Tempelsman by Martin Rapaport

Martin Rapaport (MR): How important are Pegasus Overseas Limited (POL) diamonds to the trade?

Leon Tempelsman (LT): The issue of technology as it applies to the diamond industry, is an important issue that people should focus on. Not only as it relates to manufacturing technology, but more importantly as it relates to marketing technology. Specifically, distribution technology, the internet, or other forms of communication which are changing the way business is done at the end of this century. As far as the small part of the business that we are involved in — POL application technology — the amount of attention that has been drawn to it is somewhat overblown given the size of the business relative to the total diamond market. The global wholesale diamond market is forecast this year to be approximately $11 billion of polished. If we hit our sales target, POL will be less than one half of one percent of that market. So in material terms, I don’t think it’s a lot. In terms of what it represents — the application of new technology — people are paying attention, as they should, and as they do in all businesses at the end of the twentieth century.

MR: How many stones — in carats and in value are actually being sold by POL?

LT: We’re looking at annual sales of approximately $30 million. In unit count, it will probably be somewhere in the two to three thousand stone range.

MR: How many of the two to three thousand stones are carat or larger sizes?

LT: A small number. My guess is that it will be far less than half. We are talking about a small number of units, which is important in terms of the marketing approach. There is an element of a “limited edition” in the production of the product that is suitable for POL.

MR: So you’re saying, it would be about 1,000 to 1,500 stones of a carat or larger being sold?

LT: Yes, Something of that order.

MR: What are your sales expectations for next year?

LT: Based on what we understand now, I do not think we have the capability to double in an economic fashion. Our forecast looking into the year 2000, is to sell approximately $50 million.

MR: What prices are POL stones getting in relation to similar quality non-POL stones?

LT: We’re just launching the first stages introduction of the product and I’m pleased to say that so far, the pricing has been roughly comparable to the price of diamonds that have not gone through the process. Obviously, as the marketing unfolds, and as we provide more marketing support to the product, perhaps offset by a desire to move somewhat more of the material, we may have a different balance. We think our early indications are rather positive. Part of our strategy is to provide a beautiful product in desirable categories, at good value, to a select number of customers.

MR: We’ve been getting information that POL stones are selling at about 10 to 15 percent less than comparable stones. Is that correct?

LT: The discount is in fact less than that. The stones are predominantly fancy shapes. The element of subjectivity in fancy shapes is probably greater than in rounds. One would hope the buyers perception is that they’re getting a very good value. We feel that we’re achieving a very good price. Hopefully that’s a good combination.

MR: Are these stones cut in any special way? Are they very well cut fancies or average fancies?

LT: Since the stones are predominately better color fancies, we’ve chosen to make

a better-cut product.

MR: Without giving away trade secrets, why are the stones predominately fancies? Why not rounds?

LT: It’s a function of economics. All diamond manufacturing ultimately is driven by the economics of the rough. From our standpoint we believe that we are able to obtain better value from raw material by making fancy shapes. Again, as you know in traditional diamond manufacturing, in principle, any fancy shape stone can be turned into a round stone. It’s only a function of yield. The same financial discipline applies in the way we go about our decision making process. Our objective is to maximize value.

MR: How will you market the POL stones?

LT: We want to have a very select distribution for this product. We’re not talking about selling hundreds of thousands of units. We’re talking about a small number of units of a high quality product, which lends itself to distribution through select retailers around the globe. We’re spending a fair amount of time focusing on the types of retail distribution, and in some instances wholesale distribution, that is capable of handling a high quality product and merchandising it in the appropriate fashion.

MR: Do you plan on any special marketing with GE?

LT: We’re still in the early days of this because we’ve only begun marketing, and merchandising the product. We are planning to build on the concept of selective distribution and to add in the essential features of what will ultimately be a branded product. That means, we will be providing the full range of required support including sales training, in-store promotional material, cooperative advertising and public relations events. In addition, as you know, the stones are being certified by the GIA. We’re working very diligently with professionals at GE to design a full package to complement the quality of the product. GE will also be addressing some of the trade’s concerns as they will be issuing a warranty for the product.

MR: What kind of product warranty will they issue?

LT: The warranty would say the stones are all natural and the process is irreversible. These seem to be the two biggest concerns of the trade and they will be addressed head on.

MR: Will the warranty also relate to whether or not the process is detectable?

LT: We’ve taken a very, very aggressive position on disclosure, and all of our stones are absolutely detectable because we are inscribing GE POL on the girdle of the stones. We are in favor of the development of detection. We’re certainly in favor of disclosure. I think, it’s somewhat of a non-issue. The warranty is related to the branding of the product.

MR: Other than the warranty, what role will GE play in the marketing of these diamonds?

LT: We hope to have the full weight of GE’s promotional, marketing and public relations expertise behind the launch of this product. One of GE’s greatest company resources is the talent and the experience of the individuals within the firm. I think we can draw upon their vast experience and knowledge in helping us shape our marketing plans. We have a lot to learn and a lot to gain. GE will play a constructive role in developing our public relations material and the events that are geared towards the product introduction. We’re looking to draw upon their resources and intelligence in order to ensure that the product is introduced in a commercially successful way.

MR: Your point is that all these stones are absolutely disclosed. You’re for disclosure and you’re not opposed to disclosure?

LT: We’re concentrating on doing all that we can to ensure full disclosure throughout the distribution pipeline. We are also working very closely with GIA to help them in their independent, scientific research.

MR: GE filed a letter with the Federal Trade Commission that says that the decision requiring disclosure should be put off. What’s the basis for the letter?

LT: GE is saying is that they are in favor of disclosure, but from a legal standpoint, insufficient notice was given on this specific issue to formulate an appropriate position. In addition, GE feels that since they’ve only been merchandising the stones for two months, there’s insufficient information to draw a legal basis for the conclusions as of yet. Furthermore, there are also broader issues for the trade as a whole. In a rush to judgement, the trade may find that inadvertently other types of broadly used manufacturing processes, such as acid or pressure boiling and laser sawing, may suddenly need to be disclosed as well. I am not sure that this is what is intended. Greater thought is required, I don’t think there is enough data for any decisions right now. As far as we are concerned, we are in favor of disclosure. That’s one of the reasons we’re quite relaxed, but I just don’t think there is enough information to draw any conclusions yet.

MR: Are you making sure your clients are in fact disclosing?

LT: We do all that we can to encourage clients to disclose — moreso now that we have discovered that there were one or two exceptions along the way who chose to try and polish off the inscription either to gain advantage, or just simply test whether GIA was able to recognize these stones. Our position is that because these stones have undergone this process, it should be disclosed. Going forward, we will try not to sell to those who we learn are polishing the inscription off. Furthermore, the warranty mentioned earlier will be rendered null and void if anyone has tampered with the inscription. We’re also planning to sell in greater and greater frequency directly to retailers which will make it somewhat easier for us to monitor disclosure. We’re not in the business of policing but we will be in direct discussion with those who are selling this product directly across the retail counter. We will do additional training to ensure that the product is appropriately disclosed.

MR: GIA came out with a report about the first 858 stones that they graded. GIA points to some unique factors that they have seen in POL stones. It appears that some of these stones are detectable by GIA. Are some POL stones detectable?

LT: Our position is that all POL stones are detectable, because of the laser inscription. I think the issue on these first 858 stones, which basically represent the preliminary development work on the product well over a year ago, include samples that were work in progress. Some of the indicators that GIA picked up were related to these research and development samples and are not present in the later work as a result of improvements in the process. We coordinated a major effort to work with GIA, regarding the issue of detection and that is why we gave them all these stones. We are encouraging them to do all that they can to develop an appropriate method, if possible, for detection. We are doing all that we can to show them all of the work — both the good and the bad that was done in the past. Nevertheless, even in these samples the characteristics observed by the GIA can be found in unprocessed stones as well. GE does not believe there are any concrete definitive markers of the process present in the POL stones.

MR: With regard to shape, size, color and clarity, were the GIA stones a representative sample of the kind of stones that you’ll be processing? GIA noticed that a lot of the stones are high clarity and that they’re mostly G color and better. Is that representative, of the kind of stone that you’ll continue to process?

LT: I think it’s fairly representative. Of course, the purpose of the process is to take something and add value. That’s what we do. Obviously, the value added when you’re ending with a better clarity and a better color stone is considerably greater than when you’re ending with a low color imperfect stone. Logic would indicate that you would want to work in the better range. So I think that it is fairly representative in terms of the general product distribution.

MR: Are only type 2A stones treatable, or are there are a lot of other stones that are treatable besides 2A?

LT: As GIA and we have indicated, the process applies to stones beyond the 2A family. In the early samples that were submitted to the GIA, the super-majority were type 2As. We expect that a significant portion of POL stones going forward will be type 2A, which are in fact rarer, and purer than the other groupings of diamonds. While you will see both 2A and non-2A processed stones, we will be seeing more 2A’s than others. Our objective is to process as many stones as we can cost effectively include in the POL marketing plan. Depending on availability of raw material, technology and marketing, we will focus on producing the best quality and best type of stone for the market.

MR: De Beers’ Gary Ralfe says that the CSO has been holding back rough suitable for this type of process. Is this making it difficult for you to find supplies of rough?

LT: I believe his comment was that they had been withholding this type of material for well over 20 years. Since our work began in this area less than two years ago and withholding was already taking place, we haven’t seen any significant change in availability.

MR: Is GE researching the availability to process a broader range of diamonds?

LT: From day one they have been researching many different aspects of applying new technology to the diamonds. Certainly, GE is looking at other types of diamonds and thus far has been able to process them. It is logical for GE to continue their research and they are doing so.

MR: Do you think that in the next year or two GE will be able to broaden the scope of what they’re treating?

LT: I do not expect a significant broadening in the range of products that can be cost effectively processed in the near future.

MR: Do you think they will broaden the range within the next couple of years?

LT: Yes.

MR: Who is actually processing these diamonds?

LT: GE applies the process and POL cuts the stones.

MR: Is anyone else treating diamonds like this, or doing this kind of process?

LT: We have no conclusive proof that anyone else is applying this process. We’ve heard many rumors over the years that people have been applying technology in various forms to improve the color of diamonds but we’ve never seen concrete evidence to that effect. Since this could be linked to the fact that we believe the stones are indistinguishable, I obviously can’t speak with certainty that no one else is applying the process.

MR: How significant is the improvement of brilliance and brightness?

LT: From the simplest lay perspective when you compare the “before product” to the “after product,” there is a significant improvement in each one of those characteristics.

MR: Are the GE stones hazy?

LT: The only thing that we can attribute this to is, as GIA noted, there is some internal graining in some of the stones. This is particularly true in some of the earlier stones that were part of the experimental work that was done.

MR: So you think the haziness may only be in the earlier stones and that it won’t carry forward as we go into the future?

LT: From what we see of the product that we are selling as it exists today, from what our experts are telling us and from the feedback from the market in terms of the product that we’re making available for sale, I certainly wouldn’t say that that is a common complaint that we’re hearing. By and large, people are saying the GE POL stones are simply beautiful.

MR: Are you ever going to treat rough and sell it?

LT: We process rough diamonds for POL to cut. Our position is to not sell rough into the marketplace, because there would be no effective means of ensuring full and adequate disclosure which we feel is important. Therefore, we voluntarily chose not to sell rough diamonds.

MR: Will you forever laser GE POL on these stones, or is it a temporary measure?

LT: We plan to sell all of the stones polished, with GE POL laser inscribed on the stone.

MR: If you change the laser inscription or rough sales policy will you give the trade notice?

LT: Yes, By all means.

MR: Can the GE process also intensify color? Take a cape stone and turn it into a fancy color?

LT: There are all kinds of profitable opportunities which may emerge from new GE technology. For the time being, our primary focus is on marketing the POL colorless and near colorless stones.

MR: Will you would let the trade know if you’re moving into the fancy color area?

LT: Yes, by all means, yes.

MR: Do you think the industry reacted responsibly to the introduction of the POL stones?

LT: I’m not surprised by the industry’s reaction and concern because we are part of the industry. When we first learned about the new GE technology and became involved, we too shared the industry’s concern. We are a significant stakeholder in this industry and therefore very much care for its health and well being. It’s natural for people to be nervous, and concerned about change or — I might add — anything that might have a bearing on the underlying value of the product. Having said that, I think it’s always important to put things in the proper perspective. At this point, the industry has heard of the change and they have digested the information. Responsible firms have come to terms with the fact that this is a specialty “limited edition” product within a specific niche in the marketplace. I think that that is very much a part of what a product introduction is all about.

In the diamond business you tend to get a knee-jerk reaction which is followed by — okay there it is, it’s a fact of life, lets move on. It’s hard when you’re on the cutting edge of the introduction of a new technology or a new marketing program, and you feel that you’re doing the right thing, at a considerable financial cost. It’s hard sometimes to accept that people are not necessarily as appreciative as you think they should be of your good work and effort. But that’s life. One has to move on. I think that both GE and POL have behaved responsibly and I think they have taken the interest of the industry to heart and frankly, put their money where their mouth is. What I mean is that GE and LKI have taken a position which affects their narrow commercial interests in order to ensure that the introduction of the product is handled in a responsible fashion. We are quite proud of that.

MR: How do you think the industry should respond to POL in the future?

LT: I think the product has to stand on its own merits. There will be those who will look at it and say this is a beautiful product that is available to a select group of retailers and they might want to be part of those who provide this product offering to the consumer. There will be those people either because they consider themselves to be above the product, or because they consider themselves to be below the product, who would say that this is not a product they wish to handle. I think that everybody has to come to their own conclusions as far as where they fit into the distribution of this product. That’s a personal decision. Some will say yes and some will say no. I think this is all part of the normal life cycle of a product introduction and people will come to terms with it.

MR: Do the POL stones have the potential to destabilize prices for high quality colorless diamonds?

LT: It is my point of view that this will not occur because we have a small group of stones that are specifically identified with a permanent marking that sets them in a unique product class. The marketplace has to react over time. I just do not believe that this product has the capacity to influence the global supply and demand of better quality diamonds. It’s just not big enough. The opening of a new diamond mine has a far more profound effect on the global supply than this product could have.

MR: What kind of retailers would you like to sell this product?

LT: We’re looking for quality oriented retailers that understand the technical aspects of premium diamonds. Retailers who appreciate the difference in the color, cut, and clarity of a fine diamond. We’re looking for retailers who understand that the jewelry and diamond business are part of the global business community that will be affected by technological change, rather than those that wish change would go away, or not occur. We are looking for customers with an open mind that sense a real business opportunity in a changing world.

MR: Will these stones be sold predominately in the United States, or all over the world?

LT: While they will be sold all over the world, the U.S. accounts for a high percentage of global consumption. You have to assume that a very, very substantial portion of stones will be sold in the United States.

MR: Are you planning to create a jewelry line ?

LT: We are looking at the advantages of providing a semi-finished product if not the full finished product. There seems to be a good market for layouts and matched pairs. POL will immediately sell stones to address both of these market needs. There are shortages of well made better color, fancy — shaped diamonds especially matched pairs. Providing a beautiful product in that specific product niche is a good business opportunity.
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Tags: De Beers, GIA, Jewelry, Manufacturing, Polishing, Production, United States
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