Rapaport Magazine

The Competitive Edge

India carries on with its diamond manufacturing legacy.

By Zainab Morbiwala

Venus Jewels

India’s love affair with diamonds dates back 5,000 years to the discovery of Koh-i-Noor diamonds. In fact, historians say that diamonds were first recognized and mined in India. The country has capitalized on its skilled work force and advanced technology to become a major hub for diamond cutting and polishing and it likes to boast that 11 of every 12 diamonds produced in the world come from India.
   Last, but not least, the country is home to one of the most aggressive, effective and creative national umbrella organizations, anywhere, promoting its domestic gems and jewelry industry, the government-subsidized Gem and Jewellery Export Promotion Council (GJEPC). India’s diamond manufacturing sector continues to develop its expertise, invest in technology and expand its product range, making India the preferred destination for cut and polished diamonds and also positioning the industry as one of the country’s highest-dollar-volume export sectors. 
   GJEPC’s summary of provisional figures for the export of gems and jewelry during April to May 2013 reported that the export of cut and polished diamonds from India for this period was $3,612.58 million as compared to $2,578.27 million during April to May 2012. This amounts to a year-to-year rise of 40.12 percent. In terms of net exports of rough diamonds, there was an increase of 5.16 percent for the period of April to May 2013 from the comparable period in 2012. These numbers confirm India’s continuing growth in its position as the leading global center for cut and polished diamonds. 

Manufacturing Capabilities
   “In India, we have a perfect blend of modern appropriate technology and skilled artisans,” explains Kalpesh Vaghani, partner, Kapu Gems. “Earlier, India was only known for manufacturing small goods but in the past five years, we have arrived on the global scene with our strong expertise in manufacturing large-sized diamonds of 1 carat plus. With modern technology and most of the companies establishing a strong ecommerce marketing presence, we have developed a superb system where our manufacturing is directly linked with market demand. So in a way, we have a market-led manufacturing system, where we are constantly producing goods that are already in demand. This results in lean inventories. Also, with our expertise in making all kinds of shapes, we can have an optimum utilization of rough.”
   Rajesh Shah from Venus Jewels agrees with Vaghani’s view that India has moved from being a leader in small diamonds to the manufacturing of bigger stones of higher quality and value. He attributes this to an emphasis on innovation and adoption of new technology. “With increasing technological updates and improving technical know-how, a large number of manufacturers are now producing diamonds from VS to I clarities, F through H color, in both round and fancy shapes,” says Shah. “Bigger companies with a solid expertise produce higher-end diamonds with FL, IF and VVS clarities with D through F color and in sizes varying from 1 carat to 20 carats.”

The Relationship with the U.S.
   Trade in any market depends on product quality and a transparent business model. India’s relationship with the U.S. is no different, although that relationship has been transformed in recent years. Where past attention by Indian manufacturers was almost exclusively focused on the U.S. as India’s biggest customer, today many Indian companies are working hard to establish strong relationships with countries from the Middle East and Europe.
   “The U.S. is still the major consumption market, but now stiff competition is seen from the Eastern world,” says Vaghani. “In the past, our sales to the U.S. were around 50 percent to 60 percent of our total, but now it is around 30 percent, whereas sales to countries from the Far East have increased. Still, volume-wise, if we want to keep our hold on the global market, the U.S. continues to have great potential. ” For Venus Jewels, Shah says, “the U.S. market continues to be our biggest importer, contributing around 40 percent of our total direct sales.”
   Navin Sadarangani, director of NYUZ, a retail sales consultancy to jewelry companies, says, “Every Indian manufacturer, distributor or wholesaler from any of the Export Processing Zones (EPZs) in the country first looks at the American market to begin his export business. It is like the charted route for exports because of the American market’s larger interest and greater experience in prevailing market prices, interest rates and credit benefits. However, with the slump in the global markets in the past five years, the preference for making America the obvious first choice for exporting has diminished. Many companies thinking strategically in terms of marketing and product development are looking at European markets, Japan and even the Middle East. Some have even looked closer to home at the domestic markets as a significantly better long-term option.”
   Still, the U.S. wields considerable market influence in establishing trade policies. “The U.S. is a market that has very understanding customers,” says Venus Jewels’ Shah. “They know how to communicate with their suppliers and make an effort to understand their needs and they have a very open mind to accept suggestions.”
   Shah cites the example of credit policies. “A decade back, U.S. customers would ask suppliers for credit on purchases that were of a very speculative nature. But after Indian suppliers explained the disadvantages, which U.S. buyers positively accepted, today 90 percent of our U.S. clients are buying in cash terms,” explains Shah. “In addition, because they are assured and confident of the availability of desired stock from us, they do not stock on speculation anymore. In the end, this creates a win–win situation where our payments are not blocked and they do not have to deploy their capital in stocking inventory.” 

Venus Jewels factory

Relying on the Web
Shah feels that the U.S. customers are more brand conscious compared to any other customer in the world. They are also tech-savvy, which makes it imperative for the Indian players to offer them services that can facilitate a faster interaction and transaction. Talking specifically about Venus Jewels’ website activity, Shah says, “The appetite of the U.S. wholesaler is huge. With a daily upload of around 200 fresh diamonds on our website, buyers are confident of continuous supply of newer goods.”
   At Kapu Gems, Vaghani says the company has “developed a highly advanced website where each and every detail of the stones is explained. Along with the high quality of diamond images and access to certificates on the website, we have created tremendous confidence in our customers in the U.S. We have made them understand that instead of taking the time to travel to India, they can stay in their country and concentrate on their own business activities and leave the diamond procurement in our hands. By providing highly advanced, user-friendly websites with high-powered digital images of diamonds and modern mobile applications, we have built strong U.S. customer confidence in and acceptance of our diamonds.”

Rough Matters
There is concern among Indian manufacturers on rough diamond sourcing, which they feel needs to become more organized and systematic. “Still we feel there are many players who get involved in speculation and that results in an artificial price hike of rough prices, which creates a mismatch with the polished prices,” says Vaghani. “Sourcing should be done in such a way that the mining companies identify the appropriate key manufacturers and give them the rough diamonds, rather than routing them through rough dealers.”
   As for rough diamond sourcing, Shah says, “As far as supply is concerned, though the African continent still continues to be a major source of rough diamonds, diamond deposits in other parts of the world such as Canada, Russia, etc., have given manufacturers additional choices for sourcing rough diamonds. No significant new rough diamond deposits have been discovered in the last decade or more. Some new sources are seen as unethical, while other potential deposits lie in extremely inhospitable geographies. Also, there are, of course, smaller mining companies supplying rough, but they cannot be expected to supply in large volumes.”
   Only with sufficient rough can Indian factories continue to maintain the levels of production that enable them to dominate the world market. No one is more aware of that than India itself. In recent months, the industry has searched far and wide to locate new sources of rough and negotiate contracts to stake its claim to those supplies.

Rupee Roller Coaster
In the midst of all the other concerns about economic recovery and rough supplies, in July, India’s diamond industry got hit with a wildly gyrating currency system. The rupee has always had a reputation as a somewhat volatile currency but it took a real roller-coaster ride in July, eventually falling to an all-time low of 61.21 rupees to the U.S. dollar. For most industry manufacturers, their exports are tied to the dollar so the impact of a sliding rupee is limited.  “In a declining rupee scenario, the company benefits because we are a net exporter,” says Nalini Rajan, director of finance for Tara Jewels Ltd., explaining that the company’s exports are based on dollar prices.
   For Venus Jewels, around 85 percent of their revenue comes from their dollar-denominated exports. Shah explains that “As far as the market is concerned, during a decline in rupee, the imports become costlier as compared to returns generated by the exports. So companies concentrate more on their exports. But naturally, to replenish the sold inventory, they will have to import the raw materials, which would be at the declined rupee rate, making their imports costlier and, in turn, the final production even more costly. So this creates a volatile and uncertain situation in the market where the manufacturers are not sure whether to hold or to sell goods. This hesitancy to take a stand creates a slowdown in the market as a whole. To revive the market, the government often intervenes with such measures as cash inflow and tax reductions. But these measures in turn increase inflation. And the circle goes on.”
   While exports are cushioned by their tie to the dollar, manufacturing expenses — and even credit costs — in such a market are greatly impacted by the declining rupee. In addition, consumer confidence declines and the stage is set for inflationary pricing throughout the economy.“As a result, our operating profits are subject to exchange-rate fluctuation risk,” says Shah. “Based on economic law, depreciation in rupee would have a favorable bottom-line impact, while an appreciation in the Indian rupee would affect our profitability adversely. When the dollars are converted into rupees, at an appreciated rupee rate, the net sales value will be on a lower side, resulting in lower operating profits.” Most manufacturers, including  Venus, engage in various forms of hedging as protection against volatile fluctuations of the rupee.
   “The declining rupee is not always good news for exporters,” says Abhishek Haritwal from Haritsons. “A declining rupee creates pricing issues with buyers who have presence in both India and the U.S. The very price-sensitive customer wants to take advantage of the falling rupee and thereby renegotiate and also the weak rupee has a tendency of quick recovery, thereby giving speculation jolts to exporters who play on currencies.”

Overall Outlook
The financial year 2012-13 ended on a positive note with imports of rough diamonds confirming the strength of cutting, polishing and other manufacturing activities in India by increasing 12.65 percent. The year also witnessed a significant drop of 61.45 percent in the import of cut and polished diamonds, indicating a huge cut in India’s foreign exchange spending, thereby reducing the country’s current account deficit (CAD). Total gem and jewelry exports for the year 2012-13 were $39.033 billion.Commenting on the outlook for 2013-14, Vipul Shah, chairman of the GJEPC, says, “The outlook for the current fiscal year of 2013-14 looks positive, with an estimated growth of 12 percent to 15 percent in total gems and jewelry exports.”
   Overall, the country appears confident that it will be able to retain and expand its diamond customer base going forward. It just needs to continue to manage — and control  — the triple market threats of recovery, rough and the rupee.

Article from the Rapaport Magazine - August 2013. To subscribe click here.

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