Polishing The Diamond Business

Scandals expose flaws in an old industry. But change is slow

Every day, in a third-class carriage of the express train that rolls between Bombay and Ahmedabad, plainly dressed couriers carry precious cargo: diamonds. Rough gems are imported to Bombay from dealers in London, Antwerp, Tel Aviv, and New York, taken by these couriers to cutting and polishing centers in Gujarat state, and then carried back to Bombay to be reexported to the world. This system, based on trust, secrecy, and skilled low-cost labor, has been working for half a century with barely a mishap. It has helped make India the world's premier center for diamond cutting and polishing. Nine out of every 10 stones sold in the world pass through India, making diamonds that country's largest export, at $6.6 billion a year.

But recent scandals have rocked the industry and exposed flaws in the old ways of doing business. In June, a courier absconded with an estimated $10 million worth of diamonds and cash. Then, two diamond traders in Bombay used clients' money to speculate on stocks and lost it. Shamed, they committed suicide. This came on top of alleged misappropriation of funds, two years ago, by the developers of a modern, $250 million diamond bourse in Bombay, who abandoned the monument to India's modern industry. As a result, diamond merchants are in shock, and some are realizing they must professionalize or risk losing out in the growing, $12 billion global diamond business. "All these years, we have built up the industry in an unprofessional manner," says Vasant Mehta of diamond traders V. Rameshchandra & Co. in Bombay. "But now we need to organize to stay competitive."

Indeed, change has come slowly to an industry dominated by family control and entrenched ways. Diamond merchants--mostly religious Palanpuri Jains, a small community from Gujarat--have long trusted their wares only to family members and a few outsiders. Bombay-based Karp Impex, for example, which won an award for exporting $100 million worth of diamonds last year, is run by the brothers and cousins of one clan. And although these clans operate multimillion-dollar enterprises, most members have only a high school education.

These dynasties are starting to recognize the need for change. If they modernize, the resulting profits could be enormous. De Beers, the longtime monopolist, is finding its cartel usurped by Canada, Russia, and Australia, which want to go directly to diamond-cutting centers without using a middleman--a move that could raise India's current 55% share of the world diamond industry. India is also moving into larger stones, currently the preserve of Belgium and Israel.

Thus Raj Kishore Karur, head of the Indian diamond desk at ABN-Amro Bank, which handles a quarter of the world's diamond trades, expects "50% of Israel's diamond [cutting] to move to India over the next three years." To handle it, India is importing more sophisticated machines and cutting lasers. According to the Gem & Jewellery Export Promotion Council, the country's 1 million diamond cutters now handle up to 40 stones a day, twice that of a decade ago, at a cost of less than $1 each.

CYBERDESIGN. Companies also are taking steps toward more professional management. Kunal Mehta, a partner in Diatrends, a Bombay-based diamond cutter and jewelry maker started by his grandfather, began signing up trained managers this year when relatives had difficulty understanding such terms as production planning and quality control. He has doubled his workforce to 120, hired an engineer to run the factory, and replaced his wife and cousins as jewelry designers with a professional who uses a computer rather than sketches.

In July, after years of lobbying, India became a member of the World Federation of Diamond Bourses, which sets industry policy. That will allow Indian merchants to trade on the federation's 22 diamond exchanges worldwide, vastly expanding their markets.

India hopes to have its most visible sign of progress, the diamond trading bourse in Bombay, completed three years from now. The exchange will be the world's largest, bringing under one roof India's 2,500 trading firms, banks, airlines, customs offices--even courier services. Not the absconding kind, of course.