Are diamonds forever?

The change of Israel's industry from manufacturing into a global trade center may save its int'l niche.

By LEAH GRANOF
February 1, 2007 09:03
diamond ring 88

diamond ring 88. (photo credit: )

On a woman's finger, a diamond is all razzle-dazzle and shine. Before reaching its showcase potential, however, that diamond has traveled over numerous continents and quietly changed hands many times, in all likelihood passing through one of the world's largest diamond trading centers: a multiplex structure in the heart of Ramat Gan. From the outside, Israel's Diamond Exchange, affectionately known as the bourse, is the opposite of glitz and glitter. Its nondescript, behemoth construction barely hints at the level of activity burgeoning behind its almost airtight security. Comprised of four buildings connected through inside passageways, the bourse can boast 80,000 square meters, 1,000 offices, six bank branches, its own customs bureau and on-site controller, 35 elevators, two post offices, one synagogue, one study hall, two central trading halls and three independent restaurants. In short, the bourse is its own miniature city. And that's the way its members, who operate with clam-like secrecy, like it. "It is all done to give diamantaires the freedom to move around," explains exchange managing director Yair Cohen. Freedom of movement, however, is relative. The 15,000 people who pass through the bourse each day receive colored levels of security clearance based upon their needs, and entrance into one building hardly grants one access to the trading floor or even to the next building. For the uninitiated visitor, gaining entrance includes more stringencies than the average airport trip. It is a given that less palpable security measures are at play. "Let's just say that besides the bathroom, you will be seen all over the place," explained Avi Paz, president of the Diamond Exchange. There is good reason for such lockdown security, as nearly $20 billion worth of diamonds are traded inside the bourse's walls each year. The only complex of its kind among the world's 26 other bourses, crime is unheard of inside. The same cannot always be said for other major trading centers, like Manhattan's renowned diamond district whose diamond shops are interwoven into the city's streets leaving diamond brokers vulnerable to petty theft and more serious heists. Diamond broker Avi Elias, who has worked as a buyer for American customers both in New York's diamond district and the Ramat Gan center, explains that Israel's general culture of security creates a much more serious atmosphere inside the bourse than in other places. "It makes for the safest way to do business without a doubt," he says. It is clear that the diamond industry is a dominant power in the country's global trade and a significant force in its economy. Yet in the past two decades, the worldwide diamond industry has undergone numerous shifts in its dynamics that have forced Israel to reposition and redefine its strengths to stay competitive. FIGURATIVELY SPEAKING, securing entrance into bourse membership is even more exclusive than gaining physical access to the buildings. Technically, the bourse is a private corporation whose 2,700 members own shares in the company. Even though the bourse's physical operations are a model of sophistication and modernity, its members' business acumen is still one from a previous generation, based on family ties and close connections. The only way for a new member to gain access to the bourse is for a current member to bring him in and two other members to guarantee his financial credentials - a risk most often only undertaken by family members. As a result, the market is controlled, by some estimates, by a few hundred families with more than few dozen establishing themselves as industry leaders. Many insiders dismiss the notion that the family composition of the market intentionally creates a privileged entity. Rather, they explain that with such large amounts of money at stake on a daily basis, the most important criterion in diamond trading is the ability for one person to trust another. "People must know you and trust you. People know how to trust someone who is the son of somebody else," explains Shmuel Mordechai, the on-site diamond controller for the Ministry of Industry, Trade and Labor. Even disputes are settled through an internal arbitration system, and members hardly ever turn to outside courts or lawyers, a rarity in today's court-centered environment given the scope of the business deals involved in diamond trading. "The $20 billion of transactions are made with handshakes and saying mazal uvracha," describes Paz, the third generation in his family to enter into the diamond business. One's good name in the business is everything and those who violate internal rules will feel the sting. Not only will a delinquent member be banned from trading, he will quickly be blacklisted among all the other bourses, explains Paz who also serves as vice president for the World Federation of Diamond Bourses. The WFDB sets trading policies for and provides a legal framework for its 26 diamond exchange members. THE FAMILY nature of the diamond business parallels traditional Jewish involvement in gem trading dating back to the Middle Ages, when Jews were prevented from owning land, the most common source of income. To earn their living, Jews set up shop in the jewelry trade. In the face of historical European anti-Semitism, diamond dealing proved a particularly wise choice for many families. "They needed something that they could take with them and run whenever there was a pogrom," Paz says. Indeed the first diamond polishers and cutters in pre-state Palestine got their start after riots against Jews in Russia in the early 20th century, and the cataclysmic 1903 Kishinev pogrom prompted the 1905 Zionist Congress to seek relief for the Jewish orphans whose parents had been murdered. In response, Jews from Belgium and Holland offered to teach the orphaned children how to manufacture diamonds in Palestine. In 1937 the first polishing plant was established in Petah Tikva, and by 1948 there were 30 factories in the country employing close to 800 people. At the time, the salaries paid to diamond workers were among the highest in the state. Ten years after independence, there were 134 diamond polishing and cutting factories in the country. In parallel with these developments, the origins of the modern Diamond Exchange began in the living room of the late R. Akiva Weiss, whose house was on the corner of Tel Aviv's Herzl and Ahad Ha'am streets. There, a small group of diamond and jewelry merchants decided to establish the Eretz Yisrael Diamond Club in the late 1930s. Within a year, the club outgrew Weiss' living room and moved into a small two-room office on Allenby Street. By 1940 "the first diamond exchange in the Middle East" had been established. Simultaneously, additional commercial activity began to develop in various forms, most notably the group of diamantaires that would gather regularly at the Zuckerman cafe on Allenby Street and later found the Society for Developing the Diamond Profession in Eretz Yisrael. Ultimately the various groups merged, and in 1968 the Shimshon building of the current diamond exchange was inaugurated, eventually growing into today's giant Ramat Gan complex. Last year, Israel exported a combined $9.3 billion worth of polished and rough diamonds, comprising more than 20 percent of its total exports. The US is the largest market, with more than 60 percent of diamond exports going there. In comparison, Israel exports only 18 percent of its diamonds to Europe. IN ITS HEYDAY in the 1950s and 1960s, Israel reigned supreme as the global leader in diamond manufacturing. Within the last 15 years, laborers in India and China (often trained by Israelis) began offering cutting and polishing services at far lower costs than Israel's manufacturers. As a result, only 3,500 manufacturers are currently employed in the country, according to the Israel Diamond Manufacturing Association. Nevertheless, Israel maintains its strength in the cutting and polishing of large diamonds, in which the cost of labor is a negligible percentage of the diamond's final price, as opposed to smaller diamonds, in which manufacturers strive to keep labor costs from driving up the overall price. Even with the introduction of new software that can aid in the process, diamond cutting is still an art, and much of a diamond's final value derives from the strength of its cut. In particular, the cutting of large diamonds requires high-level proficiency that is still found only among Israel's multi-generational cutters. "Fewer people are working in manufacturing in Israel, but they have far more expertise," Mordechai explains. The value added in cutting large diamonds is so much greater than in the cutting of small diamonds that even though the volume of diamond manufacturing completed outside Israel far supersedes that within the country, more than 45 percent of global profits earned from manufacturing are still accrued here. Even more significant is Israel's role as a global trade center. "In the last 10 or 20 years, we reduced the number of people working in manufacturing and jumped to be the trade center of the world," Mordechai says. It is in this area that historical tight-knit personal connections show their critical strength. Israel's diamond traders have the ability to make connections all over the world that Asia's budding diamond manufacturers cannot come close to matching. As Mordechai explains, "The Jews and the Israelis still know how to find diamonds at better prices than the Indians and the Chinese." Insiders see the development of global partnerships as a key component to future success. The transformation of Israel's industry into a global trade center has already panned out for buyers like Elias, who has delivered diamonds to his customers at lower prices from Israel than he did in New York. "People perceive that access to certain merchandise is going to be the greatest in the States, but at what price?" he asks. "The better, smarter diamond buyers buy direct from Israel because Israel is a way station for all goods." IF ANYBODY understands the need to keep up with global trends it is Shmuel Schnitzer, whose family has long been considered a pillar of the Diamond Exchange. Schnitzer's father and family patriarch Moshe arrived in Mandatory Palestine in the mid-1930s, sent by his parents at the age of 13 in search of a more promising future than his native Romania could offer. During the struggle for independence, Moshe fought with the Irgun. As a result of this, he remained life-long friends with former prime ministers Menachem Begin and Yitzhak Shamir. Although he studied philosophy and history, Moshe became a diamond cutter by choice and was one of the visionaries who met in the Tel Aviv coffee shops during the early days of the bourse's development. He went on to become a giant in the industry, credited with lifetime commitment to developing the Diamond Exchange complex. He served as the president of the exchange for more than two decades and was president of the WFDB for two terms. In honor of his contributions to the industry, the Israel Diamond Exchange was renamed Kiryat Moshe Schnitzer and he was awarded the Israel Prize in 2004. Now Shmuel runs the family business with his brother-in-law, even though at 86, Moshe still comes to work most days. Shmuel, who took time out of the business to earn a law degree from Hebrew University, served as the exchange's president before Paz assumed the role. Inside the Schnitzer family offices, there is a bustle of nonstop activity rarely seen on the trading floors today, exemplifying the recent trend for business to be conducted in the more intimate setting of the office, rather than at the long rows of wooden tables that characterize the trading floors. Notwithstanding the stringent security throughout the complex, getting into the offices involves the same type of security that foreign embassies often employ. Entry involves a set of double doors in which one door must lock securely behind the visitor before the next door will open. Even as owners of a factory and one of the largest exporters at $70 million a year, Shmuel Schnitzer is worried about the future. "I don't see a big future for small or medium companies," he says, categorizing his own company as medium-sized. "I think we have to at least double our activity in the coming years, because if you don't work on a certain volume it doesn't pay." Schnitzer plans to increase volume by seeking out new markets, particularly in China, which he notes can offer up the opportunity of at least 300 million new customers. "In the last 50 years, there was no tradition of buying diamonds in China, but all of a sudden, they discovered diamond jewelry," he explains. His emphasis on volume derives from the plunging global profitability of the 1990s that sent the industry into crisis. The main cause was the shrinking price margin between the prices of rough diamonds and polished diamonds. Despite popular misconception, diamonds are neither particularly scarce nor inherently valuable. Even though diamonds are bought and sold for huge amounts of money, profits are derived from the price at which a dealer can sell a polished diamond over the price he paid for it rough. Sometimes that margin is less than 1 percent, forcing dealers to conduct large volumes of business. Experts concur that there are numerous causes for the decline in price margin, but part of the reason is the loosening control over prices in the rough diamond market. Until recently, the market was tightly controlled by DeBeers, which at one time managed more than 80 percent of rough diamonds. Today, the company's share has dropped below 50 percent. The demise of DeBeers' power was in small part due to the ingenious activities of another Israeli billionaire, Lev Leviev. Born in Russia, he made his fortune in diamonds after immigrating to Israel and devising a way to bypass the DeBeers cartel through manufacturing operations in Russia. Today, Leviev is one of the only people to have complete vertical control over the diamond production business, owning the entire process from the mines to retail. THE ULTIMATE profitability of a diamond, however, rests on the ability of the industry to build a reputation around it that creates demand in the consumer market. "The diamond is a symbol of purity and love," Paz emphasizes. That illusion of the diamond was in large part established by DeBeers, whose 1948 "A diamond is forever" slogan became one of the most successful advertising campaigns in history and was named the best slogan of the 20th century by Advertising Age magazine. In the post 9/11 world, however, it is becoming harder for the diamond sector to maintain that illusion when many governments are demanding that all industries become more transparent as they seek to eradicate any possible avenues that could be used by terrorists to launder money. The diamond industry, in particular, has been affected by the implementation of the Kimberly Process which tracks the export of rough diamonds to prevent stones from conflict regions from entering into the retail sector. "Until five or 10 years ago, there was a lot of secrecy in the industry for purposes of protection," Paz says. "For many reasons our business practices are becoming more open to everyone. I believe it is a good thing because if for any reason the image of the diamond is spoiled, then it would spoil our business." Regardless of falling profit margins, the data show that the bourse's next generation is still vying for a place in the elite exchange. Schnitzer's children have already made names for themselves in the bourse, though they don't work directly with the family business. The bourse's immediate future as a world diamond leader is strong, but for Schnitzer the joy in working in the industry comes from the diamonds themselves. "I have seen millions of diamonds in my life and I still love coming here. I love looking at diamonds because each diamond is a world of its own." n


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