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Labs
Feb 15, 1999 10:41 AM
By Martin Rapaport
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Diamond grading laboratories are probably the best thing that ever happened to the diamond business. To be fair, we must say that not everybody agrees with the above statement. Some people think that labs are the worst thing that ever happened to the diamond trade. While lots of folks love to hate grading reports, or “certs” as they are commonly referred to in the trade, everybody needs them and uses them.
From the trade’s perspective it is easy to understand the inherent conflict of interest regarding the use of grading reports. After all, labs are blabs; they tell everybody, particularly customers, too much about the diamond they are buying.
In the “good” old days, diamonds were a blind item. Color and clarity descriptions were the nonstandardized subjective representations of the seller. You could pretty much say anything when selling a diamond and get away with it. After all, who could prove you were wrong?
While the “loose” interpretation of diamond quality descriptions provided great profits to unscrupulous sellers who misrepresented diamonds, it penalized honest retailers that did not misrepresent their stones. Consumers who had no way of independently verifying the true quality of a diamond, tended to go with the jeweler that did the best job romancing the diamond. Often this turned out to be the jeweler that lied the best.
The need for a level playing field was the primary motivating factor behind the establishment of diamond grading standards and laboratories. Shigley and others who established the AGS and the GIA in the 1930’s were idealists in the sense that they sought to create a different type of diamond marketplace. A marketplace where honesty was more important than selling skills, where establishing and maintaining consumer confidence was more important than making a fast buck.
Standards
The first step towards creating a fair diamond market was the establishment of uniform standards and terminology. Terms like “blue-white” and “clean” were so abused that the U.S. Federal Trade Commission (FTC) outlawed them, and a new diamond language had to be developed. For the first time the terminology used to describe the color of diamonds was based on specific color samples. Standard procedures and equipment was used for clarity grading.
It is impossible to overestimate the great contribution made by those who pioneered the establishment of diamond standards. Their standards became the foundation upon which our industry stands. Things that we take for granted today, such as the ability of one diamantaire to communicate color and clarity to another diamantaire simply did not exist in the “good” old days. Before the establishment of uniform standards, the diamond industry was a literal tower of babel. There was no way for people to communicate effectively. We had no common language.
The development of standards brought about the establishment of the GIA. Now that terminology and standards existed, someone had to be responsible for them. Initially, the role of the laboratory was not to make lots of money issuing grading reports. That developed later. The primary role of the GIA was to be the keeper and enforcer of the new standards.
In the new market, dishonest traders could not destroy the new terminology or standard because the GIA guarded it. A seller could not call a low color stone a D, because a third-party independent nonprofit GIA lab stood ready to grade the stone as it really was (more or less). The idea that there was someone with authority available to “call the stone the way they saw it” introduced a quasi-regulatory environment into what had been the wild west of diamond trading.
The synergy between lab and standards was greatly enhanced by the issuing of grading reports. Grading reports not only provided funding for education and research; they became the primary communicators of diamond standards. Every diamond with a grading report became a color and clarity sample. The proliferation of graded diamonds promoted consistent communal standards in the trade. After awhile, everyone understood color and clarity because they had seen it in so many diamonds with grading reports.
Over time, the role of the lab expanded. Labs became much more than mere official standard bearers. Since labs are live, ever-changing environments they began to give life to the standards. Diamond grading standards and grading reports did not remain fixed in time; instead they developed and evolved with the world around them. The role of the lab was to further the development of standards; to create new and better standards, and in some instances, to modify existing standards so that they met the needs of a growing and evolving marketplace.
It is extremely unlikely that Shipley and company ever imagined that the role of laboratories and grading reports would ever evolve the way it has. According to Richard Liddicott, chairman of GIA, the reason the GIA settled on D as the highest color was because they wanted something that would not be promoted at the consumer level. The diamond grading system was originally designed to be for the trade only.
Beyond Control
Undoubtedly, the use of third-party grading reports as the ultimate marketing and merchandising vehicle for fine quality diamonds has developed far beyond the intent or even control of the laboratories. Following the rapid adoption of “certs” in the 1970s, there was no turning back. Demand and supply of grading reports are now market driven. There is intense competition not only among those that buy and sell certs, but also between those that print them. If the GIA is too expensive or slow to adopt cut standards, no problem, the IGI or EGL is there to grab the market share of smaller stones and the AGS lab is ready to grade cut. Grading reports have developed a life of their own. How, when, and where certs develop is beyond anyone’s control.
Given the economics of diamond grading laboratories, it is extremely likely that we have reached, or are rapidly approaching, the point where labs no longer control the certs but rather the certs control the labs. In a competitive market labs must produce grading reports that meet the demand of their clients. If they don’t take care of their customers someone else will.
Of course this does not mean that the GIA or any other lab can or should prostitute themselves by lowering standards, or creating inaccurate grading reports. Customers should never set the standards of the lab. What we are saying is that the GIA, or any other lab, must provide all the honest information they can so that their grading reports fully meet the needs of their ultimate users.
If a lab tries to hold back information that another lab provides in an accurate manner, then the lab holding back information will lose market share. In a competitive environment, you must do the best job you can; you don’t have any choice in the matter. Over the medium term, a lab can’t control how much good information it wishes to give to the trade or the consumer. What really happens is that demand for grading report information controls the type of grading report information given. The lab must then react and find a way to provide this information. Over the long term, grading labs cannot protect the industry by controlling the type or extent of information they include on diamond grading reports. Ultimately, the labs will be forced to tell all.
The Cut Story
The cut story is a good example of how the interaction between new technology and market demand impacts laboratories. Our story starts with the development of the Sarin machine, a video/computer system that efficiently records the external measurements of a diamond. While the device has made it much easier for labs to process diamonds, it has also made it possible for the trade to monitor various cut parameters and even manufacture diamonds to very specific cut tolerances. Overall, the machine has significantly increased the trade’s awareness of cut parameters and its ability to factor in these characteristics when trading and pricing diamonds.
The net effect on the trade has been that price differentials for excellent versus medium versus poorly cut stones have increased significantly over the past few years. The supply side of the diamond equation is saying that the quality of cut now matters more than ever before. And to prove it, buyers are paying significantly more for very fine-cut stones.
On the demand side of the equation we have an information-driven consumer economy. Historically, consumers simply wanted to be sure they were getting a “nice” diamond. Third-party color and clarity information gave them increased confidence and supported the tremendous growth in grading reports. These days, consumers want to know more about the diamonds they are buying. Significantly, the market is telling us that consumers are willing to pay more if they can be shown that the cut of the diamond is superior.
Cut Paradox
The trade’s view on the matter is complicated by what we shall call the cut paradox. On the one hand, the trade wants, and even needs, to make more money for very fine-cut stones. On the other hand, if they educate consumers too much about cut, how will they ever sell the stones that are not cut so well?
Naturally, the labs are caught in the middle of the paradox. If they don’t put a cut grade on the report, it makes it much harder to sell consumers fine-cut stones at premium prices. On the other hand, if they put a cut grade on the grading report, consumers will offer lower prices for less well cut stones.
While GIA has done an exemplary job researching cut, its grading report basically ignores the issue. It provides incomplete cut information to the trade (i.e. no pavilion data) and ignores consumer demand for an overall cut grade. Frankly, it’s painful to find consumers convinced that the only thing that matters is table size and then watch them pay premium prices for off-make GIA stones with 56 percent tables. But then again, how can the consumer tell the stone is not good when looking at the GIA report? There is no cut grade. Not surprisingly, the GIA’s hole has been filled by the AGS. In fact, if you want to get the full cut premium for a stone, you have to get an AGS report which has a cut grade.
The GIA is conducting highly important research on cut. Initial results indicate that “ideal” stones are not necessarily ideal. Other combinations of table percent, crown and pavilion angles provide equal brilliance. Since the GIA is not yet sure what the optimal cut of a diamond should be, some in the trade believe that there is ample justification for the GIA not to put a cut grade on their grading reports. After all, the GIA does not yet know the parameters of the “best” cut diamond.
While we congratulate the GIA for its fantastic work and encourage everyone in the trade to support GIA research, we must unequivocally state that those that believe this research justifies the lack of a GIA cut grade misunderstand the implications of the research.
Defining the best possible cut diamond has absolutely nothing to do with the consumers’ need to know if the diamond they are buying has a poor cut or good cut. Perhaps the GIA doesn’t know which parameters define the best cut, but so what? Does this mean that they do not know the parameters for bad cuts?
Pray tell, how many consumers will be burned buying off-make GIA graded diamonds while GIA research is off to find the holy grail? By all means the research division must do their work — but so should the lab.
The real issue here, is not the GIA/trade/cut paradox, but rather, how should labs react to new information? Do labs have a responsibility to provide more and better information to consumers? Perhaps the role of the lab is to just maintain existing standards and not create new ones? Do labs need to balance the interests of the trade with the interests of the consumer? Which way should they lean? Whom exactly do labs represent? The trade, the industry, the consumer, themselves?
These issues will become increasingly more important as new technologies drive innovations of grading technology. In the years ahead we can expect an exponential growth in the level of detailed information laboratories are able to generate about diamonds. Furthermore, the trend towards increased consumer interest and awareness of diamond quality will continue unabated. Consumers will demand more and better information about the diamonds they buy. The convergence of new technology and increased consumer demand for information will create unprecedented demands on grading services. The labs will have to establish policies that reflect their unique nature and commitment.
As outlined above, the views of this writer are clear. Nonprofit laboratories have a moral obligation to represent the interests of the consumer who is the ultimate user of the grading report. In situations where there is a conflict between the interests of the trade and the interests of the consumer, the lab must side with the consumer who relies fully on the lab for expertise. While change and development are sure to unsettle some in the trade, the primary focus of the grading laboratory must be to provide long-term stability through the maintenance of consumer confidence in the diamond product.
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Tags:
Consumers, Economy, GIA, IGI, Laboratories, Labs
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