Given the extraordinary role of India as both a global diamond cutting center as well as a global diamond jewelry manufacturing powerhouse, it’s important to keep a watchful eye on events there that could impact the American jewelry retailing environment. Recently, my friends there say the situation can best be described by one word: Chaos.
As I write this in early July, the chaotic environment in India has resulted in two massive bankruptcies in just the past four days, totaling 191 million dollars. And now it seems reasonable to suggest that in the near future, new bankruptcies are likely to occur that may approach 900 million dollars. Imagine the impact on the overall supply chain when a billion dollars of equity simply vanishes from the Indian diamond industry. This extraordinary level of economic turmoil is likely to have an effect on us here in the States, since it will inevitably lead to changes in the short-term supply of both loose diamonds as well as finished diamond jewelry, so this month, let’s take a closer look at what’s been happening there.
It’s important to recognize that for at least the past two years, the diamond cutting community has been unable to make a reasonable profit. In response, many of the families owning these firms have siphoned equity out of their companies, instead investing in alternate ways (especially real estate) of turning a profit, and leaving their banks to fund day to day activities. The plan, of course, was to make money elsewhere until the diamond manufacturing business became profitable again, at which point, they would recapitalize their core businesses. Unfortunately, a larger Indian banking crisis has ensued, which in turn has forced a liquidity crisis, to the extent that now, the real estate investments can’t be sold without their owners experiencing massive losses.
As demand for polished diamonds has softened, putting even more pressure on the diamond ecosystem, many cutters have simply chosen not to offer their new production for sale at lower prices. Worse yet, overall production has been reduced by an astonishing 50 percent! So when demand does firm up as we approach the period when jewelry must be produced to support retailers in the fourth quarter, delivery timetables will get stretched, and some orders may simply not get filled. Even worse, the new much lower levels of production will be increased very slowly, so upward pressure on prices will probably be inevitable, at a time when we here in America certainly don’t need an increase in retail diamond jewelry prices.
All of the issues in India have now produced what one friend calls a “Trust Deficit.” Diamond sellers have historically been able to hold receivables safe in the knowledge that the people they were selling to were well capitalized, and had profitable business possessing underlying fundamentals that would allow them to pay what they owe. But now, it’s become very difficult to tell if the person – or company – you’re selling to actually has the capacity to pay. This incapacity to trust has led to an overall state of fear in which transactions that would normally have occurred in the past are now not occurring. No flow of goods, no revenues, no cash flow – in short, a massive reduction in economic activity.
The silver lining in this cloud may be that since the majors are so incredibly reliant on India, they may disproportionately get caught short, and I’m guessing there won’t be quite as much memo available to them this year, either. That won’t hurt a bit for those of us on the independent side of the supply chain, will it?
The whole scenario in India is getting out of control, and any kind of global economic hiccup will make matters worse. Please recognize that any destabilization in a key part of the supply chain will be felt by ALL parts of the supply chain. And even if your suppliers aren’t manufacturing in India, you’re still likely to be affected. And this potential supply problem in India is happening simultaneously with a general reduction in Chinese jewelry manufacturing output, as many of China’s largest producers have shrunk their manufacturing bases, which will only serve to make matters worse.
Of course, your more sophisticated suppliers are acutely aware of what’s going on globally, and the best of the group have probably taken precautionary steps to ensure adequate supply. But there’s an interesting annual shift in the psychology of many independent jewelers where they go from being afraid that they won’t be able to pay their bills, to being afraid that they won’t have enough goods on the shelf to make their Christmas sales numbers. As that shift occurs this year during the next several months, you’ll have no problem placing your orders. Unfortunately, this time around, you may have an unexpected problem getting them filled, because many suppliers on the independent side of the supply chain may have failed to take proper precautions, or lacked the financial resources to do so, and will be caught short.
So, what to do about this mess? Your best bet is to go ahead and place your orders with your key suppliers now, rather than later. Don’t leave things to chance. You’ve been operating in a buyer’s market for years, where getting the right diamond jewelry has been as easy as making a phone call to your favorite supplier. But this Fall, things may be a little different. So place your orders now, and let other folks who aren’t aware of what’s going on bear the brunt of India’s chaos.
Class dismissed!
By the way, I’ll be delivering a Seminar on the “Top Ten Jewelry Trends for this Christmas Season” Saturday morning, August 8, at the SJTA Show in Atlanta. If you’re planning on attending the Show, I look forward to seeing you!
George Prout is Vice President of Sales and Marketing for Gems One Corporation, and can be reached via e-mail at info@gemsone.com , or at Gems One’s New York office at 800-436-7787.
