As I write this, I’m sitting in seat 15A on a Thai Airways 787 Dreamliner bound for Bangkok from Mumbai. The flight left at the ungodly scheduled time of 2:40 AM, clearly demonstrating that Asian culture has a totally different view of the impact of sleep deprivation on mood and performance. Oh well, at least my phone isn’t ringing at altitude, and I have a chance to tell you about my trip to Surat, possibly the most interesting trip I’ve ever taken.
My journey began six days ago, with a flight to Mumbai in order to spend several days with two factories in SEEPZ, the Special Enterprise zone where jewelry that’s shipped directly out of India receives a favorable tax status. Several colleagues and I then took the 4-hour drive to Surat, to visit the largest Lab Grown Diamond (LGD) Laboratory in the world.
With a metro population exceeding 8 million people, Surat is the second largest city in Gujarat province, and is forecast to experience the highest population growth of any city in the world during the next decade. Ninety percent of the world’s diamonds are processed here, making this the diamond polishing capital of the world.
The Surat trip allowed me to also visit the world’s largest office building (yes, bigger than the Pentagon!), which will provide a new home to 4500 diamond trading offices. The Surat Diamond Bourse building is unbelievably massive, triggering a memory of the building at Cape Kennedy where the huge Saturn 5 rockets that transported astronauts to the moon were assembled. There is no question that once this place gets up and running, it’s going to be the epicenter of the global diamond market.
As you might imagine, the recent extraordinary growth in global LGD sales has sent shock waves through the community here. Diamond people at the highest levels tend to be pretty conservative, and there’s been resistance not just to LGD as a product, but to the whole notion of the potentially tectonic shift in consumer preference regarding LGD vs mined diamonds.
Remember, these folks are global experts in the diamond business, and they did not see Lab coming, and I think they are now mystified as well as horrified by how LGD may impact their long-standing dominance in the diamond world. The scenario reminds me of a similar case of “Expert Error Syndrome” that occurred in the computer business over 40 years ago.
At the time, the undisputed king of computational devices was IBM, as they produced the extraordinary mainframes and semi-conductors that dominated the computing landscape in the ‘60s and ‘70s. In a classic case of confirmation bias, they viewed the initial personal computing machines produced by companies like Apple as “toys” that appealed only to a select bunch of geeky nerds, possessing very limited real-world applications.
But then in 1977, a new upgraded version called the Apple 2 was released, and Apple began selling it to a broader audience. And then a year later, a Harvard MBA student named Dan Bricklin and Bob Frankston, a skilled software programmer, began working on a piece of software that was to revolutionize the world of finance and accounting.
They created the first spreadsheet, called Visicalc, which instantly provided the accounting capacity to replace 20 man-hours of weekly work with just 15 minutes of data manipulation. Visicalc, running on the Apple 2 Personal Computer, completely changed the computational game, and represented a massive threat to IBM’s dominance.
IBM responded by launching its first Personal Computer, developed in record time, with an expectation that they would sell 400,000 “PCs” over the lifetime of the product. Of course, their expectations were ridiculously low, as they actually sold nearly that many in just the first 12 months.
They had failed to recognize the revolution that was taking place around them, as an entire ecosystem of PC manufacturers like Compaq, Dell, and HP entered the space and invented an entirely new consumption paradigm. The Personal Computer became one of the biggest hits in the history of consumer products, spawning a revolution that continues to this day.
IBM’s senior management blew it by failing to properly recognize the incipient consumer demand for Personal Computers, but their focus as a company was already shifting from hardware to technology services, so in retrospect it’s unclear that they would have been able to fend off the huge competition that was to come from the upstart hardware manufacturers.
But in this context, what should we make of the large diamond entities who have chosen only to dabble in LGD, rather than aggressively staking out sufficient productive capacity to create defensible levels of future market share?
I suspect that they have made an error of great strategic significance, basing this evaluation on the fact that just as IBM failed to react properly to the incipient demand for Personal Computers, allowing multiple players to gain a foothold in what is now a trillion-dollar business, similarly the huge diamond companies who could have ramped up LGD production in a massive way have instead chosen to play a game of wait and see, allowing aggressive new players to leapfrog them, both in capacity as well as technological proficiency. Because while the old guard companies were moving in slow motion, things have been happening at light speed in Surat that will redefine the Lab Grown space, as I saw with my own eyes during the past several days.
What I saw in Surat was mind blowing. As I visited a series of new Laboratory complexes that have sprung up in just the past six months, I saw not hundreds, but thousands of machines being built and installed, creating an ultimate annual production capacity that will be measured in millions of carats.
One of my colleagues calculated that in just one afternoon, while inspecting this massive new diamond growing initiative, we walked over 4 miles reviewing the new equipment, as we traversed the nearly 2 million square feet of space that will ultimately be taken up when the installations have been completed by year’s end. And the space for yet another 2,000 machines has already been allocated for 2024.
There are two fundamental forces at play here. One is the undeniable fact that in LGD, scale matters, and players who can ramp up productive capacity at exponential rates will ultimately possess an enormous competitive advantage over their competitors who can’t. Second, just as new technologies that allowed for the production of personal computers and cell phones created entirely new consumer product categories with trillion-dollar revenue streams, it’s my strongly held view that the diamond business is no longer a zero-sum game, in which increasing LGD demand will serve only to cannibalize mined diamond sales. Entirely new ways for using diamonds in consumer-centric applications will provide an opportunity to lift the current level of global diamond sales, estimated at about 85 billion dollars, to heretofore unimaginable heights, perhaps even exceeding 250 billion dollars, as consumers gravitate towards diamond jewelry at the expense of other luxury verticals. All of this will create a new, incredibly robust, sustainable diamond business that will ultimately be seen as the beginning of a new, extraordinarily profitable age in the jewelry business.
It’s going to be a wild ride. Just make sure you’re on the right horse.