The big money in cheap rock
Published by Forbes on 1987-08-10
IN SEVEN YEARS 43-year-old Tushar Kothari has built himself a highly profitable business selling $ 25 million worth of cut diamonds a year -- and growing. With some of the profits Kothari entered the travel agency business. He's also a principal investor in the latest and swankest reincarnation of Manhattan's legendary El Morocco nightclub.
Not bad for a kid whose forefathers came from the parched and dusty western Indian town of Palanpur, founded in 746 A.D., 350 miles from Bombay. Tushar Kothari is a Jain, a member of an ascetic, nonviolent vegetarian sect of some 4 million. Many Jains are so opposed to killing in any form that they refuse to swat flies. In India the more orthodox wear white gauze masks so they will not inhale and kill bacteria.
Various communities in India have traditionally pursued carefully defined occupations. The Punjabis are considered excellent farmers. The Gujaratis are traders and merchants, and the Tamils bureaucrats and administrators. The Marwaris are known as industrialists and money-lenders.
The Jains had always served as accountants and administrators to the ruling nawabs of Palanpur. From there it was a fairly easy step in the modern era to become experts in money management. Ever alert to moneymaking opportunities, some of the Palanpur Jains discovered diamond cutting and trading almost a century ago.
And then they discovered the wonders of the rich U.S. market. Today the Palanpur Jains are a powerhouse in the $ 2.6-billion-a-year uncut diamond trade. They got there by being the first to realize that the traditional people in the industry (Hasidic Jews, mostly) had overlooked the beginnings of an entirely new market for diamonds in the U.S. -- the slowly growing demand for small, tightly cut and therefore relatively low-priced stones. The diamond cutters of Israel and Belgium were fixated on big stones, such as the 109-carat Kohinoor, the smaller Hope at 45.5 carats and the Cullinan, weighing in at 3,106 carats uncut.
But the Jains understood that middle-class America wanted glitter, too, and that even in very expensive jewelry the industry was making room for smaller diamonds. Their timing was exquisite, and their perseverance was inspiring. Their product now sparkles in bracelets and earrings, nearly all priced under $ 1,000, in the showcases of Zale's, Gordon's, Kay and the rest of this country's mass market jewelry retailers.
Kothari and his fellow Jains, with dogged persistence, wiped away India's reputation in this country for grinding out poor-quality gems by insisting that their cutters improve their skills and equipment. They have also overcome the prejudice of the Israelis and Hasidic Jews who dominate Manhattan's jewelry district, by providing their high-quality goods at low prices the competition rarely tries to match. Most Israeli and Belgian cutters still sneer at the thought of carving up stones under 10 points, one-tenth of a carat in size. The Indians are not so blindly stubborn. Eighty percent of their stones are 10 points or smaller. It doesn't hurt that labor costs are low in India.
Diamond prices these days have stabilized at about $ 13,000 for the finest 1-carat diamond in the interdealer market. A 1-carat, flawless, round, brilliant cut diamond might fetch as much as $ 16,500 today, but prices escalate geometrically as the size of the stone increases. So a top-quality 10-carat stone, about the size of a dime, might fetch up to $ 550,000 wholesale. Conversely, uncut diamond prices decrease dramatically as the size of the stone drops. Which means that the Indians are in a part of the market where they can sell cut diamonds at relatively low prices and still make handsome profits.
Indian diamond traders, like their counterparts everywhere else, buy their rough, uncut diamonds in London at auctions held ten times a year by the De Beers Central Selling Organization, which markets 85% of the world's supply of rough diamonds. De Beers maintains its stranglehold in part because of its own production in South Africa and other African nations, such as Botswana and Namibia, and also because De Beers remains the principal selling agent for Soviet and Australian diamonds. (The Soviets go along with the De Beers company mostly because of its reputation for sustaining the most lucrative world prices for rough stones and also because of its unequaled global distribution network.)
Worldwide sales of rough diamonds rose 40% last year, to $ 2.56 billion, or about twice the $ 1.26 billion in sales for 1982. That made 1986 the best year since 1980, when volume totaled $ 2.72 billion. This year the industry estimates that sales of uncut diamonds will grow beyond $ 3.1 billion.
Tushar Kothari and his fellow Jains are expected to revel in at least $ 1 billion of that. "We have set the standards for the small-diamond industry," says Kothari's compatriot Pravin Mehta, who owns Occidental Gems in New York City. "We created the market here." True enough, and it is lucrative, indeed. The U.S., after all, accounts for more than half the world's retail trade in small, polished diamonds. Sales are still growing some 20% a year, and the Jains cut more than 43% of these diamonds.
It is a market that did not really exist even 15 years ago. "When we started out in America, we had nothing to lose," says Mehta, who was among the earliest Indians to begin diamond trading in the U.S. "Small diamonds were the hardest to cut, and the demand then was for the larger stones that the Israelis and Belgians had specialized in. We knew even back then that there would be great growth in the American mass market -- that, as affluence among the masses increased, people would be looking for affordable diamonds, not just stones from Tiffany's and Cartier's and Harry Winston's.
"We simply weren't liked," Mehta recalls. Arun Bhansali, owner of Eurogem and among the first Indian diamond traders to set up shop in the U.S., back in 1966, remembers the prejudice he found among the Jewish wholesalers he was trying to cultivate. "Since the Indian government loudly supported the Palestinian cause, this aroused a lot of emotions in the Jewish community here," Bhansali says. "Initially, few Jews liked to do business with me. But the fact that I had a good, cheap product to sell, the fact that I delivered on time -- this made the difference."
And the Jains kept at it, kept knocking on doors, kept rejiggering their approach to the U.S. market. At the same time, that mass market was being born. American jewelry manufacturers were also beginning to use smaller stones, in so-called channel and pave settings, nestling the tiny stones one next to the other to create a continuous diamond surface for their inexpensive rings, bracelets, earrings and tie bars.
"Then we decided to go directly to the manufacturers, too," says Bhansali. The Jains, in those early years, were the only ones with an abundant, cheap supply of the smaller stones. They invested in modern machinery for their cutters back in India, so the quality of much of their product improved. And, ah, those prices.
Even today their per-carat price ranges from $ 50 to $ 1,000, depending on clarity, color and cut -- not as expensive as the top of the line, but also not as good quality. (Kothari claims the average price of an Indian-cut diamond is $ 200 a carat; the figure for an Israeli stone is $ 460.)
"Today, if you mixed Belgian- and Israel-cut stones with some Indian stones, you wouldn't be able to tell the difference," says Lloyd Jaffe, chairman of the American Diamond Industry Association. Adds Jeff de Lange of Haber-Worth Enterprises, who buys diamonds from India and markets them in the form of jewelry here: "When these Indians first started doing business in New York, I thought, 'They're never going to make it here.' But they developed their market with ready inventory and prompt, trustworthy service. And I'm impressed."
The result? India has become the world's biggest exporter of small polished diamonds, edging out Israel in carats shipped each year -- and fast closing in on dollar value of diamonds exported to the U.S. and other markets, such as Japan, Italy, West Germany and Hong Kong. Last year, for example, India's exports rose to 6.7 million carats, from 5.1 million in 1985. The U.S. continues to be India's single biggest market: In 1986 the U.S. imported 2.9 million carats of polished diamonds under a half-carat from India. The value of these stones was $ 629 million. The comparable figure for Israel was 1.6 million carats, with a value of $ 542 million.
The Jains' instincts for the potential of mass market diamond jewelry were obviously right on. In 1982 there were 14.7 million pieces of diamond jewelry sold in the U.S., worth some $ 5.7 billion. By 1986 Americans were buying 18.3 million pieces, worth nearly $ 10 billion. The main action is in rings, with 55% of the sales. Necklaces, bracelets and earrings make up most of the rest.
America's love affair with low-cost diamonds certainly does not seem to be waning. And so far the Indians' competitors are hardly threatening. The Israelis have been out of it because of their higher labor costs, though some of the smaller manufacturers in Tel Aviv have been trying to edge in. And, of course, the Third World is beginning to covet some of this action. Manufacturers in Thailand, China, Malaysia, South Korea and Hong Kong are jumping into the act. But labor costs in most of these countries are considerably higher, and they will not easily catch the Jains of Palanpur.
Senior Writer and Global-Affairs Columnist