Business and Life

Israel Glitters with Its Diamonds

The Israeli Diamond industry has designated India as a strategic target for 2008. Diamonds account for about 70 per cent of the bilateral trade between Israel and India and the volume has been growing rapidly in the recent past.

The Israel Diamond Exchange is the official name of the organisation in Tel Aviv that organises, conducts and manages the industry to the benefit of its members. The building looms large in the Ramat Gan area of the city, and appears disproportionately large in the tourist maps of the city.

But I was hard pressed to explain my destination to my taxi driver. After trying to say the name with different accents, I pulled out the map and pointed it to him. ‘Ah, Borsa,’ he exclaimed. Everybody knows the borsa, or the bourse, where diamonds are traded.

Interesting anomaly.

But diamonds in Israel is itself an interesting anomaly. Early economic theories stressed the need for natural resources on which to base a country’s economic development till countries such as Singapore proved that what you needed was a vision, and hard work to make development happen. Israel is like that. Without diamond mines and without a major market to consume the product, Israel is still a major player in the global diamond industry.

Israel is said to account for roughly half of the rough and polished diamonds traded in the world, and has built this position based on its creativity and technological competence in polishing and designing equipment that is used in the industry.

The Diamond Exchange is a comprehensive centre; a complex of four interconnected buildings with what is reportedly the world’s largest trading floor, offices for the traders, banks, post office, restaurants, a synagogue, and day care facilities for children. You do not need to leave the place! Such a centre, in any place, needs to have high security, and in Israel, which is not at peace with all its neighbours and faces violent attacks, the need for security has the place tightly sewed up. I had to provide my passport particulars a day ahead in order to be cleared to enter the building.

The security also seems appropriate for a business that has, at higher levels, been shrouded in secrecy, and is an industry that seems to deviate from all the accepted theories of business and management. The official face of DeBeers, the private company that controls the industry, is just innocuously called the Central Selling Organisation (CSO), not wanting to attract attention. Hmm. An organisation that does not want publicity!

Crafted by CSO

The diamond industry is carefully managed by the CSO, which has about 50 per cent of the world’s share of the market. Much like the central planners of the former Soviet Union, it sets the prices at which it will sell its rough diamonds to ‘sight holders’ who are its approved buyers. You take it or decline; there is no negotiation. Even Russia, now a major diamond producer, prefers to let DeBeers take the lead in setting prices, for the company has mastered the art of managing both demand and supply to keep price high. Interestingly enough, in the case of luxury goods such as diamonds, nobody is interested in the prices crashing! It is obvious that the supplier wants high prices, but so does the buyer, for it represents her/his status and luxury.

That same spirit of secrecy and security pervades other aspects of the operations of the diamond exchange. In any other exchange, you will see listings of opening and closing prices and volume of trades in a day. Not here. The Exchange does not keep records of the volume of business conducted on the trading floor. You are not going to see flashing signs listing the going price.

You will see two individuals seated across a small desk, negotiating a price for a small piece of stone wrapped in paper. A trader, who has just made a few millions in profit, will probably shuffle across the floor claiming to his friends that business is bad, so as not to attract attention! A person transporting diamonds is not likely to advertise that fact too for obvious reasons.

SBI in fray

The Israeli Diamond industry has designated India as a strategic target for 2008, signalling that there is going to be increased cooperation between the two countries. The trend has been building for a while. Diamonds account for about 70 per cent of the bilateral trade between Israel and India and the volume has been growing rapidly in the recent past.

If the diamond business is growing, the banks cannot be far behind. And that is where the State Bank of India (SBI) has entered the fray. The bank has been in the diamond business for about 30 years and already operates in other diamond centres such as Antwerp, Hong Kong, Johannesburg, New York and Mumbai.

Ms V. Sasikala, my gracious host during my visit to the Diamond Exchange, is the CEO of SBI’s operations in Tel Aviv and was sent there to get the operations started. She has successfully managed to find a strategic perch for the bank by locating it physically in the bourse in such a manner that the bank can be accessed from the rear by its diamond clients and thus have all the security protection they need At the same time, the bank can be accessed from the front by ‘market’ (or non-diamond) customers without being hassled by the need for security clearances.

‘Cutting-edge’ technology

There are about 35 Indians in the diamond business in the bourse and they have been operating there long before diplomatic relations were established between the two countries in 1992. One of them, Nimish Modi, who has been operating in Israel for about 30 years, briefed me on the changes he has seen in the business.

One has been the inroads that machines and technology have made, gradually taking over skills that were previously in the domain of human expertise. Israel’s traditional role in the diamond business came from its diamond cutting expertise which, for cost reasons, has now largely shifted to other countries, such as India.

Mr Modi explained that the two fields in which Israel has competence now is in its network of trading and marketing, and in its technological competence in developing many of the machines that have an important role in the industry.

One of the machines in the bourse’s technical centre demonstrated how much of the skill had now been transferred to the machine.

With the rough diamond placed in a compartment, a laser scans it, analyses the data, and provides a report that gives the colour, carat and other characteristics. It then displays what could be the most efficient cut and is also prepared to mark it on the stone as a guide for the cutter. While the standard mass merchandising diamonds go to China, the more creative cuts are done in India.

Ms Sasikala took about nine months since landing in Tel Aviv to start the branch, which began operations in 2007 and was also the first foreign bank in the bourse. Often one thinks of starting operations in a new country as challenging due to the need to understand the environment, which includes the regulations, the local business culture, finding the office space and people, and so on.

But there is another side to it, namely, the need to effectively convey to one’s head office how some of the standard operating procedures and rules will not work in the new environment and secure the necessary permissions to design a new structure and culture. So, a pioneering manager has to manage both ends of the operation while at the same time, setting the right precedents.

Opening up opportunities

The diamonds sector makes up about 90 per cent of SBI’s business there now, but Ms Sasikala sees enough opportunities in other sectors of Israel’s economy that do business with India such as telecommunications, plastics, chemicals, and pharmaceuticals, to drop the diamonds’ share of her business to about 50 per cent in the near future. Not a small achievement.

Here is an interesting example of the kinds of opportunities that have shown up on her door. Since religious strictures prevent orthodox Jews from receiving interest from other Jews, they shun Jewish banks and are looking at SBI with great interest!

Israel is thriving and it will be wonderful if it can share some of that prosperity with its poorer cousins, the Palestinians. SBI can even play a role here with India having good relations with both sides of the disputed territories. SBI’s expertise in lending to small businesses, weaker sections, and priority sectors is applicable in the West Bank. Maybe we will see an office there too very soon.

http://www.israelidiamond.co.il/English/index.aspx

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