Ganz Aims to Relieve Diamond Manufacturers of Financial Burden
Antwerp: Ahead of the JCK Show in Las Vegas, International Diamond Manufacturers Association (IDMA) President Moti Ganz explained how diamond manufacturers in the major cutting centers can cope with the current financial crisis. Ganz tabled some of the ideas expressed below at an IDMA ad-hoc meeting in Antwerp in April.
How is the current crisis affecting your constituency, the diamond manufacturers?
Let's first look at the facts on the ground. During the first few months of 2009, demand for polished goods dropped between 35 and 40 percent compared to last year. And last year was not a great year either. But a 35-40 percent drop in business still means that we still did 60-65 percent business. True, that is much less business, but my point is we're still IN business. However, these numbers force us to find new ways to cope with this significant reduction in our diamond manufacturing and diamond business activities. I hope to come back to that later.
Of course, our Indian colleagues have been dealt the most severe blows. According to figures that have reached we regarding the world's largest diamond manufacturing center, during the past six months some 400,000 diamond industry workers have been laid off. Of course, these figures may not be altogether correct, as some manufacturers may have simply extended workers' leave after the Diwali festival, while others have shortened the work week. Still, this reduction in the work force constitutes a very serious set-back for the Indian diamond manufacturing base; indeed, an unprecedented one.
Also, in the other centers - China, Israel, Belgium and New York - we have seen significant declines as well, in rough purchasing, in manufacturing and as a result in sales. The figures are out there, we've all seen them. The question is what to do to counter this.
So what problems are diamond manufacturers facing?
Currently, most manufacturers are holding stocks and are trying to sell them, while reviewing their manufacturing capacities and capability. The question now is: how long can we hold out, without letting our workforce go?
After all, we all know that once we let a worker go - we do not know if he or she will return. Greener pastures beckon once a worker leaves the industry. At the same time, we all know how much we invest in training and honing the skills of cutters and polishers, by giving them the experience and knowledge to do the job we need them to do.
And then what will we do when business improves? While the crisis is still there, demand will return, perhaps not as fast as it dropped, but it will return, and I believe that will occur faster than in most other luxury products. When the rebound happens, we cannot be caught without a viable workforce in place!
Do you have the tools and means to ride out the storm?
How can we be sure that we will have enough goods available and the capacity to produce them on time when there is a resurgence in demand? The short answer is, by not falling back into the same old pattern of buying rough for cash, extending absolutely unreasonable and uneconomical credit terms to buyers, and by severely curtailing the possibilities for memo.
You have said on several occasions recently that the current economic crisis is an opportunity to change the "rules of financing in the diamond supply pipeline." Why?
We need to go back to the basics. What is, or should be, the genuine role of diamond manufacturers in the diamond supply pipeline? We buy rough, we produce the most beautiful and profitable stones we can, and we sell the polished. Sounds simple, but until now it has been far from that.
Therefore, to make it simple and economically viable again, we, the diamond manufacturers, need to try and disengage ourselves from the problems of the other players - the consumers, the retailers, and, yes, even the rough diamond producers - in the diamond and jewelry supply line. We must stop bidding up and buying rough diamonds at any price, and not let ourselves be fooled once again by speculation. In other words, we need to be wise - and change the rules of the game.
What were the rules and how did they - as you indicated - affect the manufacturers negatively?
Firstly, over time, diamond manufacturers in general have paid a heavy price due to the lack of responsibility of the jewelry retailers, in particular the retail chains in the United States. There, retail chains are in trouble because of their business models. On the one hand, they want to reduce their diamond buying, but on the other hand they have tied themselves into long term deals with leases on prime locations, in shopping malls and main street locations. In fact, they cannot get out of these long term commitments unless they declare bankruptcy and put themselves under the protection of Chapter 11. This means that nobody can touch them; that they can reorganize as they see fit.
Diamond manufacturers have also become dealers and distributors - we are among those who are defined as "unsecured clients" and we can only wait to see how many cents can be expected to be paid on the dollar. It has been our own doing - we've given them the goods, offered them long credit terms, often without any redeemable collateral.
As a result, we're losing money; we've put ourselves in a weak and disadvantageous position regarding the banks; we've nailed ourselves down in supply agreements and credit terms; and we have no tools to assess or even check what our retail clients are going to do.
What do you want to change?
We need to apply the conclusion of the painful lessons we learned. Rough diamond producers have a 'golden' rule: rough diamonds are sold in return for cash only. I suggest that the diamond manufacturers, and IDMA, the organization I head, take a hard look at that very successful business model and contemplate how we can do the same.
We're living in a new world. Maybe, just maybe, we need to decide that enough is enough? Existing models need to be broken, and it can be done if we act together and work in unison.
Why can't the retailers shoulder their own financing instead of us? Why can retailers memo [take diamonds on consignment] and then delay or worse not pay for what they buy? Why should the retailers not obtain their own financing from their own bank instead of from our banks?
This sounds like you're moving the buck downstream, out of 'your' way. The retailers are under enough pressure as it is. Is this the only solution?
Here is another idea. Maybe we should also look at the polished dealers for a solution - yes, those same polished dealers who so many in the diamond supply pipeline have written off and declared irrelevant. But maybe the polished dealer s should become the one who extends credit to the downstream market?
The model would be like this: manufacturers sell the goods to the polished dealers - for cash. The polished dealers, who are the closest to the market as they live and breathe the polished market, would provide credit to the retailers. Polished dealers know the market so well that they will only buy from us when they know that the goods bought are needed in the jewelry market and will move through the pipeline at an acceptable rate and pace. I have not invented this model - it already exists among the rough dealers and has been proven to work very well.
But one thing is crystal clear to us. We, the diamond manufacturers, simply cannot any longer bear the burden of the market, i.e. about 80 percent of the financing, of the credit that is extended in the diamond pipeline. You all know the situation; we buy the rough, pay cash, and move on to the manufacturing stage. Then, since we employ a significant labor force, we add to our own burden - i.e. create even more cost factors and risk - that are not only financial but also social.
And let's not forget that we carry responsibility for the livelihood of millions of people, many in low wage countries. That puts the issue of corporate social responsibility right into our laps.
Finally, three, four or even more months later, we come to the market with polished only to find that the price model on which we justified buying rough and obtaining credit has become irrelevant because prices have dropped. In the new world of finance, this simply cannot be sustained.
Back to basics, then? That will affect your profit, your reach into the market?
Correct - we need to go back and do what we know how to do best; manufacturing diamonds. Those of us who insist on also playing the role of dealer must realize the risk involved and should only sell if absolutely convinced that the goods will move through pipeline.
I know I am expressing an opinion that goes directly against the trend that has been pushed hard, including by the producers - that of vertical integration. Obviously, this model has not worked very well, and it needs to be reviewed. I think there is agreement across the board about that.
Once we take this route, the banks will begin treating us differently, more favorably, when they'll see that we have changed our business model. Of course, with that new model, they will lose some business, also some profit - 10-20 percent - but it is as a banker told me some time ago; "the problem is in the tail." In other words, the banker knows that you, the manufacturer, will ultimately pay his debts to the bank. But you, the manufacturer, on the other hand, never knows if the retailer will pay his debts to you!
So in a nutshell, where are you now in the current market situation?
This is the biggest crisis since the 1930s, triggered by what is now known as the implosion of the asset bubble [sub-prime) and the resulting global credit crunch. In all markets, business models and credit terms are changing - so will ours.
We will need to prove that we have a viable, sustainable business. We need a new diamond manufacturing business model.
We need to disengage ourselves from the financial risk that we have been carrying on behalf of the downstream (retailers) - and upstream (rough diamond producers) supply pipeline. It will be an uphill battle in times where the "vertical integrated" business model has been forced upon many of us.
We need to make our money in our core business - by doing what we know how to do best. And here is the million dollar question - will we take control of the industry's leadership. I think we can and we should. It is we who turn rough into polished diamonds. I have yet to see an engagement ring on the market set with a piece of rough. (some have tried).
We now have an opportunity to protect ourselves, our business, our work force, and we owe it to ourselves to do so. If anyone thinks that our organization has no relevance, let him think again. It is fine when everybody makes money, but it is difficult times like these we are under pressure to be worth our salt - or even better - our diamonds.
About IDMA:
The International Diamond Manufacturers Association (IDMA) was founded and convened for the first time in 1946 in Antwerp. It is committed to fostering and promoting the highest ideals of integrity and best practices throughout the diamond industry worldwide, as well as full compliance with all relevant national and international laws. Towards this end, the organization has developed and adopted a Code of Conduct which is binding on all members. IDMA also works to encourage fair and honorable practices and decent working conditions for those employed in the diamond industry; and to preserve, protect and promote the trust and confidence of consumers with respect to diamonds and diamond products. It encourages and supports social responsibility by the diamond industry worldwide. IDMA seeks to take a unified leadership role on all issues affecting the industry and convenes bi-annually, at the same time as the World Federation of Diamond Bourses (WFDB). The Congress includes a session of the general assemblies of both organizations, where joint resolutions are passed on current issues of concern. IDMA played an active role in establishing the Kimberly Process and is a co-founder of the World Diamond Council. IDMA has 12 national member associations representing virtually all diamond manufacturers worldwide. Visit the IDMA website at: www.idma.net.
How is the current crisis affecting your constituency, the diamond manufacturers?
Let's first look at the facts on the ground. During the first few months of 2009, demand for polished goods dropped between 35 and 40 percent compared to last year. And last year was not a great year either. But a 35-40 percent drop in business still means that we still did 60-65 percent business. True, that is much less business, but my point is we're still IN business. However, these numbers force us to find new ways to cope with this significant reduction in our diamond manufacturing and diamond business activities. I hope to come back to that later.
Of course, our Indian colleagues have been dealt the most severe blows. According to figures that have reached we regarding the world's largest diamond manufacturing center, during the past six months some 400,000 diamond industry workers have been laid off. Of course, these figures may not be altogether correct, as some manufacturers may have simply extended workers' leave after the Diwali festival, while others have shortened the work week. Still, this reduction in the work force constitutes a very serious set-back for the Indian diamond manufacturing base; indeed, an unprecedented one.
Also, in the other centers - China, Israel, Belgium and New York - we have seen significant declines as well, in rough purchasing, in manufacturing and as a result in sales. The figures are out there, we've all seen them. The question is what to do to counter this.
So what problems are diamond manufacturers facing?
Currently, most manufacturers are holding stocks and are trying to sell them, while reviewing their manufacturing capacities and capability. The question now is: how long can we hold out, without letting our workforce go?
After all, we all know that once we let a worker go - we do not know if he or she will return. Greener pastures beckon once a worker leaves the industry. At the same time, we all know how much we invest in training and honing the skills of cutters and polishers, by giving them the experience and knowledge to do the job we need them to do.
And then what will we do when business improves? While the crisis is still there, demand will return, perhaps not as fast as it dropped, but it will return, and I believe that will occur faster than in most other luxury products. When the rebound happens, we cannot be caught without a viable workforce in place!
Do you have the tools and means to ride out the storm?
How can we be sure that we will have enough goods available and the capacity to produce them on time when there is a resurgence in demand? The short answer is, by not falling back into the same old pattern of buying rough for cash, extending absolutely unreasonable and uneconomical credit terms to buyers, and by severely curtailing the possibilities for memo.
You have said on several occasions recently that the current economic crisis is an opportunity to change the "rules of financing in the diamond supply pipeline." Why?
We need to go back to the basics. What is, or should be, the genuine role of diamond manufacturers in the diamond supply pipeline? We buy rough, we produce the most beautiful and profitable stones we can, and we sell the polished. Sounds simple, but until now it has been far from that.
Therefore, to make it simple and economically viable again, we, the diamond manufacturers, need to try and disengage ourselves from the problems of the other players - the consumers, the retailers, and, yes, even the rough diamond producers - in the diamond and jewelry supply line. We must stop bidding up and buying rough diamonds at any price, and not let ourselves be fooled once again by speculation. In other words, we need to be wise - and change the rules of the game.
What were the rules and how did they - as you indicated - affect the manufacturers negatively?
Firstly, over time, diamond manufacturers in general have paid a heavy price due to the lack of responsibility of the jewelry retailers, in particular the retail chains in the United States. There, retail chains are in trouble because of their business models. On the one hand, they want to reduce their diamond buying, but on the other hand they have tied themselves into long term deals with leases on prime locations, in shopping malls and main street locations. In fact, they cannot get out of these long term commitments unless they declare bankruptcy and put themselves under the protection of Chapter 11. This means that nobody can touch them; that they can reorganize as they see fit.
Diamond manufacturers have also become dealers and distributors - we are among those who are defined as "unsecured clients" and we can only wait to see how many cents can be expected to be paid on the dollar. It has been our own doing - we've given them the goods, offered them long credit terms, often without any redeemable collateral.
As a result, we're losing money; we've put ourselves in a weak and disadvantageous position regarding the banks; we've nailed ourselves down in supply agreements and credit terms; and we have no tools to assess or even check what our retail clients are going to do.
What do you want to change?
We need to apply the conclusion of the painful lessons we learned. Rough diamond producers have a 'golden' rule: rough diamonds are sold in return for cash only. I suggest that the diamond manufacturers, and IDMA, the organization I head, take a hard look at that very successful business model and contemplate how we can do the same.
We're living in a new world. Maybe, just maybe, we need to decide that enough is enough? Existing models need to be broken, and it can be done if we act together and work in unison.
Why can't the retailers shoulder their own financing instead of us? Why can retailers memo [take diamonds on consignment] and then delay or worse not pay for what they buy? Why should the retailers not obtain their own financing from their own bank instead of from our banks?
This sounds like you're moving the buck downstream, out of 'your' way. The retailers are under enough pressure as it is. Is this the only solution?
Here is another idea. Maybe we should also look at the polished dealers for a solution - yes, those same polished dealers who so many in the diamond supply pipeline have written off and declared irrelevant. But maybe the polished dealer s should become the one who extends credit to the downstream market?
The model would be like this: manufacturers sell the goods to the polished dealers - for cash. The polished dealers, who are the closest to the market as they live and breathe the polished market, would provide credit to the retailers. Polished dealers know the market so well that they will only buy from us when they know that the goods bought are needed in the jewelry market and will move through the pipeline at an acceptable rate and pace. I have not invented this model - it already exists among the rough dealers and has been proven to work very well.
But one thing is crystal clear to us. We, the diamond manufacturers, simply cannot any longer bear the burden of the market, i.e. about 80 percent of the financing, of the credit that is extended in the diamond pipeline. You all know the situation; we buy the rough, pay cash, and move on to the manufacturing stage. Then, since we employ a significant labor force, we add to our own burden - i.e. create even more cost factors and risk - that are not only financial but also social.
And let's not forget that we carry responsibility for the livelihood of millions of people, many in low wage countries. That puts the issue of corporate social responsibility right into our laps.
Finally, three, four or even more months later, we come to the market with polished only to find that the price model on which we justified buying rough and obtaining credit has become irrelevant because prices have dropped. In the new world of finance, this simply cannot be sustained.
Back to basics, then? That will affect your profit, your reach into the market?
Correct - we need to go back and do what we know how to do best; manufacturing diamonds. Those of us who insist on also playing the role of dealer must realize the risk involved and should only sell if absolutely convinced that the goods will move through pipeline.
I know I am expressing an opinion that goes directly against the trend that has been pushed hard, including by the producers - that of vertical integration. Obviously, this model has not worked very well, and it needs to be reviewed. I think there is agreement across the board about that.
Once we take this route, the banks will begin treating us differently, more favorably, when they'll see that we have changed our business model. Of course, with that new model, they will lose some business, also some profit - 10-20 percent - but it is as a banker told me some time ago; "the problem is in the tail." In other words, the banker knows that you, the manufacturer, will ultimately pay his debts to the bank. But you, the manufacturer, on the other hand, never knows if the retailer will pay his debts to you!
So in a nutshell, where are you now in the current market situation?
This is the biggest crisis since the 1930s, triggered by what is now known as the implosion of the asset bubble [sub-prime) and the resulting global credit crunch. In all markets, business models and credit terms are changing - so will ours.
We will need to prove that we have a viable, sustainable business. We need a new diamond manufacturing business model.
We need to disengage ourselves from the financial risk that we have been carrying on behalf of the downstream (retailers) - and upstream (rough diamond producers) supply pipeline. It will be an uphill battle in times where the "vertical integrated" business model has been forced upon many of us.
We need to make our money in our core business - by doing what we know how to do best. And here is the million dollar question - will we take control of the industry's leadership. I think we can and we should. It is we who turn rough into polished diamonds. I have yet to see an engagement ring on the market set with a piece of rough. (some have tried).
We now have an opportunity to protect ourselves, our business, our work force, and we owe it to ourselves to do so. If anyone thinks that our organization has no relevance, let him think again. It is fine when everybody makes money, but it is difficult times like these we are under pressure to be worth our salt - or even better - our diamonds.
About IDMA:
The International Diamond Manufacturers Association (IDMA) was founded and convened for the first time in 1946 in Antwerp. It is committed to fostering and promoting the highest ideals of integrity and best practices throughout the diamond industry worldwide, as well as full compliance with all relevant national and international laws. Towards this end, the organization has developed and adopted a Code of Conduct which is binding on all members. IDMA also works to encourage fair and honorable practices and decent working conditions for those employed in the diamond industry; and to preserve, protect and promote the trust and confidence of consumers with respect to diamonds and diamond products. It encourages and supports social responsibility by the diamond industry worldwide. IDMA seeks to take a unified leadership role on all issues affecting the industry and convenes bi-annually, at the same time as the World Federation of Diamond Bourses (WFDB). The Congress includes a session of the general assemblies of both organizations, where joint resolutions are passed on current issues of concern. IDMA played an active role in establishing the Kimberly Process and is a co-founder of the World Diamond Council. IDMA has 12 national member associations representing virtually all diamond manufacturers worldwide. Visit the IDMA website at: www.idma.net.
