Report of IsDMA MotiReport by President Ganz on Rough Conference, Tel Aviv.Honored guests - leaders of diamond-producing states and mining companies,
I would like to talk today about the manufacturer’s critical role in your strategic decision-making, both on the national and the corporate levels.
You may ask, what’s new about that? It is clear that the manufacturers are important, for without them, there are no polished diamonds to set in jewelry! But the aspect I would like to focus on here is the distribution policy of the diamond-producing states and rough companies operating in each of these countries.
However, before addressing the issue of distribution, I would like to contest a so-called truth – something everyone says: “There is no rough” – we are told, day in and day out. The headlines report gloomy forecasts about rough production, and we often read about the search for the next large mine. I want to refute this false claim. There is rough. There is no shortage of rough.
But even more than that – we also have plenty of polished. We have tremendous stockpiles of polished. The polished diamond manufacturers have accumulated stock in an unprecedented volume of some $14-17 billion. All their funds are invested in inventory. Even if every manufacturer in the world would stop cutting diamonds today, they could still supply polished for a full year.
And so – there is rough and there is polished. So what’s the problem?
The problem is that there are not enough buyers of polished. The problem is that there are too many manufacturers that purchase rough and manufacture polished even though they have no orders. All industries, worldwide, have moved to manufacturing by demand. All industries have learned that you mustn’t manufacture for stock. Stock is expensive. When you have a customer, you manufacture. No customer? Don’t manufacture. Only the diamond industry has failed to join this global trend.
Why do we do this? Why would a manufacturer make something without knowing there’s a buyer for the product? How did we get to this situation, where 60-70% of the rough that reaches factories has no potential buyer, yet we continue to run after rough and in doing so, cause its price to soar?
We can analyze the factors involved:1. We – the manufacturers ¬– are committed to our factories and our workers. For us, the factories are our life’s work, something we toiled hard to build up over many years. No one wants to close a factory. History shows that those who close never reopen. While we continue to provide our workers with a livelihood, we are also streamlining the work in the factories. We introduce modern, improved technology and increase production rates, but still continue to feed the same number of mouths. If today’s production is 30% more than that of the old factory – we need to supply our factories with more rough. And we do, by chasing after rough and paying unreasonable prices for it. Thus we perpetuate a worldwide situation of surplus labor and surplus manufacturing.
2. We – the manufacturers – are opening factories in diamond-producing states. We are doing so in order to enjoy direct supply of rough from the diamond-producing states and the companies committed to them. If the diamond-producing countries are now polishing $800 million of diamonds, we should be closing down factories around the world that polish that amount – $800 million. However, factories are not closing. We continue to manufacture in all locations. When we close a factory we do so with great heartbreak and only when we know there is no alternative. For as long as possible, we continue to chase after rough and cause its price to rise.
3. In order to increase our sales, we supply goods to stores on memo. The stores no longer limit the amount of goods they take on memo. In fact to the contrary – they increase it. The greater the volume of sales on memo, the greater the manufacturers’ need for stocks of polished. No store or chain promises to sell all the diamonds it takes on memo – nor even a part. And so we reach the incredible figures I cited earlier – we, the manufacturers, are sitting on a huge stockpile of polished and nevertheless we continue to seek rough and cause its price to rise.
4. The increase in polished sales in chains and stores is a mere illusion. True, in the last two years companies have reported an increase in the sale of some types of polished. However, at the same time, they have reported a decline in carat volume. In other words, in fact, less diamonds are being sold. And so, in fact, polished sales are declining. We manufacture carats and therefore, our sales are declining. In response, we want to increase sales. It is not the rough diamond producers who suffer from this situation. Nor is it the owners of chains or stores. Neither of them hold stocks of diamonds or finance them. The manufacturers are the only ones who maintain factories, pay workers and finance stock. They alone bear the consequences of the current situation. The rough traders do not owe money; their goods are sold in entirety on a regular basis to manufacturers. The diamond manufacturers have a large stock of polished goods. That is where their money is invested.
5. The diamond manufacturers are misleading themselves. They are mistaken when they apply the data at the year’s end to project sales for the coming year. The manufacturers are deluding themselves if they believe that if they turned over their inventory one and a half times this year the same will be true next year. When next year arrives and they discover that what actually increased was the store price of the diamonds, and not the carat volume sold, they again find themselves running after rough and causing its price to rise. The manufacturers have not grasped that you can’t win this war with the achievements of the last one. Every year has its own policy and rules.
Moreover, we – the manufacturers – attach too much importance to the issue of turnover. We need to stop holding on to this erroneous perception. What matters is not turnover, but profit. We need to concentrate on making a profit. The profit line is the row that matters in the corporate balance sheet, not the question of whether we turned over inventory once or one and a half times a year.
In light of the above, it is clear that we – the manufacturers – are financing a process whose beginning we may know, but whose end is a complete unknown. Every other enterprise in the world subtracts the costs of financing, manufacturing and raw materials from sales to get to the bottom line, their profit. According to this calculation, the company makes balanced decisions regarding further operations. We – the diamond manufacturers – are driven to operate against this economic logic, because we want to hold onto our factories on the one hand, and submit to the retailers’ dictates, on the other hand. Therefore, we – the diamond manufacturers – do not profit. If this situation continues, the price of rough will continue to run wild. The diamond producers will continue demanding excessive prices, and the store owners will continue to dictate our prices, terms and profit.
Now, you will certainly ask, why should the problems of diamond manufacturers interest us, the leaders of rough-producing states and mining companies. As far as we’re concerned, you’ll say, this is an ideal situation. We produce rough, sell it in tenders or auctions, fetch prices we never dreamed of in the past, and our profit leaves nothing to complain about.
A tender or auction may be an excellent way to get your foot into the market, or to sell special diamonds. However, this must not be a standard solution, as it hurts the manufacturers. And my aim is to explain to you that what hurts the manufacturers will also hurt the rough producers – countries that base their income, or a considerable portion of it, on rough diamonds, and the rough suppliers.
The rough diamond has no value on its own. Rough producer can’t do anything with their stones. There have been attempts to transform diamonds into a commodity, to treat the diamond like gold, copper, iron or coffee. These attempts have failed. Rough diamonds are not cash-equivalents like metals. The rough diamond can not be used like coffee beans. The rough diamond is worth money only after it has been polished.
I, the rough manufacturer, am the only one for whom rough diamonds have value. Only I, the manufacturer, know what I am holding and what can be done with it. For me to want the rough you produce, I must receive it on a regular basis, according to periodic, fixed sortings. Only under these conditions can I commit to chains and stores and adhere to a plan. Only thus can I guarantee that the rough you produce will be worth something to the customer in the store, and not only in the trade between us.
If you sell most of your production in tenders or auctions, you choose your customers by the price they are willing to pay.
Today, a customer is with you. What will you do tomorrow when prices decline? Who will be there? Who will be committed to you?
What is missing are the right hands to hold the rough and the polished. The right hands that can commit to buy and sell every month. There is room for all the others in the margins. But you can’t build an industry on margins.
You must understand that if the method of tenders and auctions prevails and manufacturing moves to service plants, everyone will be buying rough in tenders in August, to receive it in September, manufacture in October and sell in November, for the holiday season. And then what will happen in January, February, March, April, May, June and July?
Therefore I want to tell you – leaders of the diamond-producing states and heads of the rough suppliers: you – all of you who produce rough in large volume – must shift to a multi-annual sales program. If you don’t, you are liable to find yourselves in a situation where you are left with your rough. If the manufacturers and traders have no illusions – what will you do with the rough you produce?
It is the manufacturers who create the market. Therefore, rough producers need to think about the manufacturers and make business worthwhile for them. You need to understand that the good of the manufacturer is the good of the rough producer and the diamond-producing states.
All rough producers need to examine whom they are selling their rough to. They can not suffice with the question of price. They need to ask themselves whether the client they sell to has marketing channels? Will there be demand for this rough? What is the manufacturer’s plan? Is the relationship with the manufacturer a long-term one, or it is founded on the erroneous basis of “catch as catch can”?
Earlier I noted that the attempt to market diamonds as a commodity failed. Marketing the diamond as a luxury item is the only right thing to do, and all of us – rough producers, manufacturers and traders at all levels, to the very last hand – need to support this. I would like to stress this: the attempt to bring the diamond to the level of a highly desired luxury product is not only the interest of the chain or jewelry-store owner. Every rough producer should support the promotion of the diamond as a luxury product. Every rough producer should take part in the generic advertising of diamonds. This task must not be left in the hands of a single rough producer throughout the world.
I would like to suggest that you – the rough producers – add an important item to your agenda. I suggest that you decide to devote 3% of your sales turnover to advertising, just as De Beers does. Initially, the outlay will be great. However, in the long-run this investment will be repaid, as the awareness of diamonds increases in the consumer market.
The diamond is not a simple luxury product. It is not a bag – you buy it one week, and next year when it goes out of fashion, you buy another one. Women give bags that are out of fashion to their housekeepers. I have never heard of a woman who gave her diamond jewelry to a housekeeper. They pass on diamond jewelry to their daughters and granddaughters or set them in new jewelry. The diamond never wears out in their eyes. Therefore, the investment in marketing must be more sophisticated than that of other luxury items.
If you want to market the diamond as a luxury product, you must work responsibly. You must allow the manufacturers to profit, so that they can conduct successful business with stores and end users, and contribute to the cost of advertising.
You – leaders of the diamond-producing states and heads of the rough suppliers – must ensure that not only rough producers and traders profit, but that manufacturers, who invest their capital and take risks, profit as well.
This is the only way to ensure the future of diamonds.
That is my message to you today. I sincerely hope that it falls on attentive ears, that you understand that there must be life beyond your immediate profits. We are here not for a day or two, but for the long run. We are not building the industry for ourselves, and “après moi le deluge.” We are building it for our children and grandchildren. That is how it should be.
We are partners all the way and we want to be partners in the profit, as well.
Thank you.
Tel Aviv, Rough Conference
