Something is happening in Ramat Gan. The Israel Diamond Exchange, that bastion of rectitude and solidity, is no longer so quiet, no longer so solid. Its dirty laundry is hanging out for all to see, possibly even hiding the billboard ("Diamonds - Israel's No. 1 Export Sector) that drivers stuck in traffic had been reading for years.
Diamond merchants. What have we known about them up till now? The image is full of foreigners - dark-suited Belgians, Russians or Bukharans, travelling in Mercedes with a white handkerchief discretely located in a breast pocket and a gold watch ornamenting their wrists. Their expressions are frozen, and even while carrying millions - everything done with a handshake and not a piece of paper to be seen - there is not even a flicker of an eyelid. All in all, very secret men.
Top secret? No so much anymore. The fact that diamond merchants' financial difficulties are reaching the newspapers is merely a symptom of a new wind blowing through the corridors of the Diamond Exchange. Men who had once been world champions in censoring business information and keeping their lips sealed are now opening their mouths. For the first time, industry leaders are having to cope with dealers who are not afraid to say what they think, who insist on getting answers and explanations, and even dare to wash their dirty laundry in public.
And when they wash it, they use a lot of soap and water. In fact, the waves from the events of last March at the Basel 2000 World Watch, Clock and Jewelry Show have yet to ebb. What happened was that the Israel Diamond Institute, a body that will be talked about in the future, rented a stand at the Show and even prepared giant production intended to present Israel's diamond industry to the exhibition goers.
However, as part of his presentation, Israel Diamond Manufacturers Association (IsDMA) president Yigal Hausmann included a private venture which is being partnered by Moshe Schnitzer, a diamond institution in himself. Schnitzer was president of the Diamond Exchange for 25 years, then established the Institute, which he now chairs. His son Shmuel is the current president of the Diamond Exchange.
Things erupted upon their arrival back in Israel. Furious diamond merchants sent letters to daddy Schnitzer and Hausmann, others appealed to Israel Diamond Institute director general Efraim Raviv, while others simply seethed with anger amongst themselves. The word in the Exchange was, "Schnitzer and Hausmann allow themselves to do whatever they want. They are acting as if the Exchange is their private fiefdom." Such a storm would be a trivial matter in any other sector, but in this secretive one, it was revolutionary, one of the first occasions that diamond dealers actually demanded explanations and answers.
The Diamond Institute had no alternative. An investigative committee was appointed and its conclusions were unambiguous. The activities of Schnitzer and Hausmann at the Jewelry Show were not innocent and were against rules and regulations. The committee recommended transferring the decision to the Institute's board of directors and a general meeting.
And who are members of the board of directors? Correct: Schnitzer senior and Hausmann. During the meeting, some participants diverted the debate into an attack on the report's writers. Ultimately, the board of directed voted confidence in the elder Schnitzer and Hausmann. The dealers refused to keep quiet about this either, and the issue was raised before Ministry of Industry and Trade legal advisor, who confirmed the conclusions. These were, improper administration, inadequate supervisory mechanisms, and a sector helpless against the senior managers controlling it.
The affair did not end here. On one hand, not a few dealers think that Hausmann should resign. Why aren't they demanding it? Simply because they are afraid of the titans' vengeance. On the other hand, Hausmann himself, who thinks that the whole affair has been "cynically inflated and exploited in order to attack us," has submitted a libel suit against Uri Schwartz, a senior diamond merchant and scion of the Schwartz family that owns the sector's fifth largest firm. Hausmann's $1.5 million libel suit has been transferred to the Diamond Exchange Court.
Hausmann says, "I sued in order to make it clear that all these things are lies. After I submitted the suit, the sector calmed down. People began to keep their mouths shut, and to speak carefully. We live in a relatively closed sector, and it is quite easy to slander someone. People slandered others knowing that nothing would happen to them. I have been in this building for 24 years, and this is the first time I am suing or have been sued." Schwartz was not available for comment.
A new spirit and a PR office
The De Beers syndicate recently launched its slogan "Diamonds Are Forever" that is supposed to accompany the next millennium, if not for eternity. However, the diamond industry in general, and Israel's in particular, however conservative it may be, is not frozen in time.
In order to recover from the crisis of the last few years, the Israeli diamond industry had to undergo major changes. The bottom line is success, at least as measured in money. The sector's exports in 1999 amounted to $4.5 billion - an all time record.
The best example of the new spirit is the Diamond Exchange's new president, Shmuel Schnitzer. Immediately upon his election, he hired a public relations firm. He likes to meet with journalists, including foreign ones, and provides them with information and tours through the Exchange's corridors.
Luxury Instead of Luck
The Israel Diamond Exchange was founded in 1936 by several families of European diamond merchants who immigrated to the country. Most came from the low countries, who had started out as polishers in their fathers' firms, and moved to Palestine where they established branches of their families' businesses.
In its early years, the Exchange was located in the old Herzliya Gymnasium, the then "hot-spot" of Tel Aviv. The founder's generation knew each other very well, and a handshake accompanied by "mazal u'bracha" (luck and blessings) was enough to seal a large-scale deal.
In the 1960s, the Exchange moved to its current site in Ramat Gan. What is today a complex of high-tech towers was then a single building, one of Israel's first skyscrapers. During these years, Israel began to make its mark as a leader in the global polished diamond industry, and the second generation merchants, mostly Israeli-born, began to participate in their fathers' thriving businesses. "Diamond merchant" became a byword for a desirable financial aristocracy.
Almost all of them worked, ate and entertained in the same places, and even intermarried. Not a few marital relationships became business coalitions. The same small tribe of yesteryear remains dominant today. According to IsDMA director general Zvi Shur, the 50 largest firms on the Exchange control 50% of the entire market.
The third generation has recently begun to enter the business, and most of the changes in the industry is due to them. Unlike their parents, they did not join the Exchange immediately after release from military service. They traveled the world, studied at university, and only after going through the experiences available to the young upper class Israeli, did they settle down in Ramat Gan.
The dichotomy between the men who did business and the "diamond wives" who job was to sparkle quietly at affairs, is also beginning to evaporate. Among the new generation, one is seeing women entering the sector for the first time. "We are beginning to see them as brokers in particular," says Shur. "Most of them are daughters of well-known families in the Exchange. It is still very hard for strangers to get in."
Polishers are closing down, but the Exchange survives
When it became clear to Israeli diamond merchants during the 1980s that it was uneconomical to compete with polishers of small diamond from India, the industry faced a genuine crisis. While there were over 15,000 diamond polishers in Israel 15 years ago, today there are only 3,000. Most polishers have closed down, the labor force declined and families lost their living. Those who survived moved into production or commerce and many began to make diamond jewelry.
The Exchange successfully survived these events, but learned a lesson. The market is unstable, the future is uncertain and it would be a good idea to spread the risk and invest in other sectors. Many families began to invest in real estate, and recently in high-tech and start-ups, whose risk level is the total negation of the industry's conservative past, as well as in other fields.
For example, Hannah Gertler, the daughter of Moshe Schnitzer and Shmuel's sister, acquired a percentage in the Sharon regional radio station and works there in a managerial post. Her father has served as a director of Bank Leumi. Hausmann is also an importer of televisions. The Steinmetz brothers are making hay in the US capital market with the investments in Ampal American Israel Corporation.
Another lesson was learned along with the recovery. The industry had better become competitive, and would have to become more efficient to do so. The first result was the cutting out of the middleman. Many producers stopped using the services of brokers, and began to market their goods themselves. As a result, members of the Israeli Exchange began to go out to the world, to develop connections.
Consequently, the number of participants at trade shows has doubled in recent years and many opened offices in the world's diamond centers. Marketing has also been professionalized, and now every self-respecting diamond merchant retains professional marketers, not necessarily from within the industry. Moreover, advertising in trade journals, once considered superfluous and even forbidden, is now essential.
How diamonds are realized on the Internet
The first two generations of diamond merchants were used to working the old-fashioned way, with wads of dollars in exchange for bags of diamonds. The new generation has brought new ways of payment to the industry: credit. According to Udi Sheintal, this requires the banking system - which finances the credit - to increase the industry's credit line from $1.1 billion annually to $1.5 billion. Paradoxically, larger debt means great business in the industry. By the way, collateral covering this debt is not at all bad, in the form of diamonds or real estate.
One of the examples of the change in industry's professional Weltanschauung is the meteoric rise of Ubexdiam. This young diamond company was founded only seven years ago and has already won the Outstanding Exporter award. What astonished veteran Exchange members is the fact that Ubexdiam's two owners were not originally diamond merchants, nor the sons of diamond merchants. In 1999, Ubexdiam was the 11th largest company in the industry, with exports worth $51 million, a 50% increase over the previous year. Ubexdiam's owners had a clear marketing orientation and were among the first in the industry to go online.
Internet? For diamonds? As if all the previous shocks were not enough, now the Internet threatens to change the way things were. But not so fast: many diamond merchants still believe that in order to buy stones, one must actually see them, touch them, look at them through a jeweler's glass, and most important of all, to really feel them. After all, the industry is built on a massive amount of sensuality and instincts.
Almost a decade ago, Schnitzer the elder fired one of his salesmen, who insisted that diamonds should be marketed through the Internet. Today, Schnitzer is a partner in an Internet venture DiamondView with Hausmann and other investors. So what do we do with the jeweler's glass? The company developed a kind of microscope called "gemscope" upon which you can place the diamond you wish to trade. The gemscope is equipped with an electro-optic hardware system that gives a three dimensional scan of the stone and can identify its specifics: size, faults, color and clarity. In this way, rather than the buyer sitting opposite the seller, and especially in front of the stone itself, he sits before a computer screen, and, click!, checks a stone's quality and decides whether or not to buy it.
Another veteran group of diamond merchants founded an e-commerce site for diamonds in order to prevent fraud. Two more Internet sites are about to be set up in the coming weeks: Waldman (WDC) will launch a website called "My Diamond Source" which will be one of the first companies to allow its customers to enter its full reservoir online. Ubexdiam will establish a site called "CyberDiam" as a virtual retail store.
Despite this optimistic and fascinating picture, and despite the fact that there is already electronic trading in diamonds, worth several million dollars, many in the industry are still skeptical. New York broker Martin Rapaport said that only 1.5% of all diamond trading today is carried out online.
They have an arrangement with the Income Tax Commission
Diamond merchants do not pay taxes like ordinary men. For over 30 years, at the end of each year, Income Tax Commission and industry representatives meet to determine tax rates for that year. It is hard to discover details regarding the nature of the arrangement with the industry which takes so much trouble to maintain confidentiality regarding its tax arrangements.
It has become clear that these talks consider a variety of parameters, such as the number of members included in the arrangement, turnover for the year and the industry's general situation. Most diamond merchants pay a tax rate of 36-38% on 1% of their turnover.
Diamond Exchange members are offered the opportunity to choose whether or not to join the comprehensive arrangement. Those who join are not required to open their books, and senior industry officials have admitted that the number of raids or income tax audits carried out by the Income Tax Commission can be counted on the fingers of one hand. Diamond merchants who decide to pay taxes independently have to open their books before the tax authorities, in effect reporting just like any ordinary business. The decision to choose one or another of the payment methods is usually based on the merchant's situation for that year: the arrangement with the Income Tax Commission does not permit diamond merchants to offset losses, depreciation or VAT reimbursements.
Industry associated believe that this arrangement is open to corruption. One source said that the diamond merchants can exploit the arrangement for black or gray market purposes. Other actually want to emphasize the arrangement's utility for tax collection: there are only two Income Tax inspectors for all 2,300 Exchange members. Hausmann believes that the arrangement will continue. "If the arrangement were not good for the State, it would not continue with it," he said.
The industry is expected to undergo another shock in two years time. Minister of Justice Yossi Beilin decided that in 2001, all emergency regulations and orders will be cancelled, one of which is the diamond inspection order that defines the state-industry relationship and the supervisory activities carried out by the Supervisor of Diamonds. The Ministries of Industry and Trade and Justice are now formulating a new law.
According to Supervisor of Diamonds Sheintal, many customs will have to change. Today, for example, the Supervisor issues licenses for diamond deals, and he can refuse to issue a license, by operation of law, to a person who fails to meet the criteria. The law therefore is in conflict with the Basic Law: Freedom of Enterprise, which was enacted many years later. Diamond merchants - you have been warned.
Just don't let what happened to fur happen to diamonds
Last year, the world's diamond industry encountered a new issue: "conflict diamonds." These are diamonds whose source are mines located in "zones of conflict" in Africa, and used by rebel organizations to finance their wars, particularly to buy weapons.
The British organization Global Witness began a massive media campaign, which others joined, and succeeded in arousing the awareness of governments, the US Congress and the UN Security Council. The activists goal was to create a situation whereby the free market would refuse to buy diamonds from war zones.
Officially, diamond merchants joined the campaign, mainly for fear that bad public relations for diamonds could create a disaster similar to what befell the fur industry, which has since disappeared. Behind the scenes, according to a senior industry source in Israel, diamond merchants think that the whole idea is utter rubbish. "Thanks to the propaganda regarding the matter, diamond merchants joined the hullabaloo so as not to appear bad. The truth is that every beginning diamond merchant knows that it is difficult to identify a diamond's source. There is no way to determine whether a diamond came from an area under the control of rebels or the legitimate government, sometimes we are talking about two banks of the same river." As for the intention to create documentation standards, to identify every stone, from mining to consumer jewelry. The same source states, "It is impossible to prove anything regarding a polished diamond, only rough stones."
The Israeli Diamond Exchange decided a few weeks ago that an Israeli diamond merchant who can proved to have sold a conflict diamond would lose his membership in the Exchange. The decision was adopted with the same warrior spirit by the IsDMA and by the Supervisor of Diamonds Sheintal. It is said that UK Foreign Minister Robin Cook welcomed Israel's initiative to be the first diamond exchange to condemn merchants who trade in conflict diamonds. The same source says, "This was mainly a diplomatic decision. No-one has any way of proving the claim."
De Beers demands total commitment
Only this month, the De Beers diamond syndicate published its marketing strategy that requires total commitment from its members, from the mining stage, through distribution, ad campaigns, marketing efficiencies and up to the final buyer of a polished diamond for jewelry. The industry says that this is a desperate attempt by the syndicate to protect its market share, which has declined from 90% to 65% in recent years, as a result of the entry of independent suppliers of rough diamonds. One of these independent suppliers is Lev Leviev, who supplies rough diamonds form mines in Russia and Angola.
The Israel Diamond Exchange has retained a balanced position in the global rough diamond arena: on one hand, it has made certain to retain De Beers' trust, while opening relatively relationships, at the industry level, with other suppliers of rough diamonds in the world, to complement supplies from De Beers, on the other. Recently, the diamond industry even organized an International Rough Diamonds Conference, which was attended by all the world's large mine owners. The atmosphere at the Tel Aviv Hilton was that of a small-scale revolution. While there was no challenge to De Beers, the start of new path could definitely be seen. Now, in the wake of De Beers' new strategy, time will tell whether the industry will embark on the new path or return to the old ways.
Published by Israel's Business Arena on 30 July 2000