Ramat Gan, the city at the heart of the Israeli diamond industry, has lost its sparkle. In the 1980s and 1990s, Israel was the world’s major producer of polished diamonds, successfully leveraging low labor costs and traditional diamond-cutting knowledge. Today, the hum of the polishing wheels is mostly silent. The bulk of the business has moved away — to India, China, Russia, Vietnam and Africa.

“There has been a globalization of the production process,” says Udi Sheintal, managing director of the Israel Diamond Manufacturers Association. “Today, the diamond dictates where it is going to be polished.” Sheintal notes that manufacturers produce the stones where it makes most business sense, and this depends on the size and quality of the raw material. “The production of polished diamonds has moved eastward, mostly to India,” says Steven Benson, founder of Market Direct Business Communication, a media consulting company working with the diamond and jewelry industry.

Traditionally, the diamond polishing industry has followed the trail of low labor costs. New York was a major diamond manufacturing center once. Lower wage bills in Europe brought the industry to Belgium, then to Israel and now to India and China.

Origins of the Industry

Israel’s polishing industry was set up in the late 1930s, when Jewish diamantaires, who emigrated from Belgium with their polishing wheels, set up an industry in what was then Palestine under the British mandate. In his book From Mine to Mistress, industry analyst Chaim Even-Zohar writes that in 1939 there were only four diamond cutting plants in Palestine with a total of 197 workers. These polishers were joined in the 1940s by diamantaires from Belgium and Holland who fled the German occupation. By 1942, the industry had expanded to encompass 33 diamond factories employing 3,750 workers.

The number of local employees rose significantly over the years, as local production boomed. At its peak, in the 1980s and 1990s, the Israeli diamond manufacturing industry employed between 25,000 and 35,000 expert workers in the cities of Ramat Gan, Netanya and Bnei Brak. Today, however, the workforce totals no more than 500 to 1,000 — and not all of them work full time, according to Martin Rapaport, an industry expert and founder of the Rapaport Diamond Report, a baseline for the pricing of wholesale polished diamonds.

In particular, fierce competition from India, with its significantly lower labor costs and its fast and easy adaptation to new technology, has gobbled up a significant chunk of the Israeli business, and totally taken over the production of the smaller, brilliant cut diamonds (known in the trade as Melee diamonds), considered the bread and butter of the diamond industry.

According to data from the Israel Diamond Manufacturers Association, in 2001 diamonds produced in Israel represented some 60% of the country’s total exports of polished diamonds. By 2005, local production had fallen to around 41% of total polished exports, declining even further to just 27.5% in 2010. Israel became a trading, rather than a manufacturing hub, so that net polished imports (that is imports of diamonds manufactured elsewhere and imported into Israel, deducting exports) rose from US$1.8 billion in 2001 to US$4.2 billion in 2010. By then, they comprised over 72% of net exports. The bottom line is stated simply by Udi Sheintal: “Israel is losing its production base.”

India Gets the Crown

With nearly one million employees in its diamond manufacturing sector and the latest technology, India is today the world’s largest manufacturing center for cut and polished diamonds, contributing 60% of the world’s supply in terms of value and 85% in terms of volume. Eleven out of every 12 diamonds set in jewelry worldwide are processed in India, according to India’s Gem & Jewellery Export Promotion Council (GJEPC).

India exported cut and polished diamonds worth US$18.24 billion in the year ending March 31, 2010, according to GJEPC data. For calendar year 2010, polished exports totaled US$23.3 billion while rough imports totaled US$11.3 billion, Rapaport’s data show, reflecting the strong recovery of the diamond industry from the global recession.

The availability of low-cost labor is one of the main factors behind India’s success. “India spends US$10 per carat on the polishing and cutting of diamonds, against China’s US$17 and South Africa’s US$40 to US$60,” explains Vasant Mehta, past chairman of the GJEPC. The vast resources of manpower combined with “the skill of the Indian artisan” and the “relentless efforts of Indian entrepreneurs who took on the daunting task of setting up this industry” are additional contributors to India’s success, he says.

Two other key elements are the entrepreneurial spirit in the Gujarati community in India — which explains the concentration of the industry in Surat, in Gujarat; and the support of the financial system in India, particularly during the recent financial crisis. This support allowed manufacturers to maintain production and survive during that difficult period, according to Purushothaman Ambramoli, chief executive officer of the State Bank of India’s branch in Ramat Gan. The bank opened a fully licensed branch in Israel in June 2007.

Present in All Segments

Although India pioneered the cutting of small diamonds, today its craftsmen are equally skilled at cutting all shapes and sizes of stones, and even at faceting colored diamonds. “India is the only center which offers a truly mind-boggling variety of gems and plain, diamond-studded and colored-stone-studded jewelry suited for every need of every market in the world. None of the other major producing countries offers buyers such a complete range of choices,” says Mehta.

Much of India’s success could not have happened without advanced technology, which has replaced the need for human intervention in deciding how best to cut the rough stones and thereby extract the most value from every diamond. Today’s machinery, much of it developed in Israel, automatically maps out the best cuts.

“India is becoming a center of implementation of technology,” says Elliot Tannenbaum, a principal at Leo Schachter Diamonds, an Israeli firm that outsources its diamond production to a plant in Surat. “India’s labor source is not only low cost but also flexible and easily adapts to new technology.” The latest advances invariably find their way to Surat, Tannenbaum adds.

Israel’s Sarin Technologies, established in 1988, is a worldwide leader in the development and manufacture of advanced planning, evaluation and measurement systems for diamond and gemstone production. The company started selling its machines to India in 1993 and in January-September 2010 sold US$29.1 million worth of machinery to India — up 240% over the corresponding period in 2009. India contributed 80% of the company’s revenue in that nine-month period. “The Indian diamond cutters are early adopters. They are willing to learn and evaluate new technologies, to find out if the machine can do it better than them,” says Akiva Caspi, vice president for marketing and business development at Sarin.

India is striving to further lower manufacturing costs by securing direct sources of rough diamonds by striking deals with mining companies. In 2010, Russia’s state-owned diamond giant Alrosa signed a three-year agreement with India’s Rosy Blue, Diamond India and Ratilal Becharlal & Sons to supply rough diamonds for a total of US$490 million. The deal secures a direct source of supply for local diamond companies which until then had to import rough diamonds from centers such as Belgium and Israel, adding to their costs. A direct source of roughs is expected to lead to cost savings of at least 3% to 4% for the Indian manufacturing companies. The country is also repositioning itself as a major diamond trading center. On October 18, 2010, it unveiled the Bharat Diamond Bourse (BDB) in Mumbai, the biggest diamond trading center in the world.

If You Can’t Beat Them, Join Them

Rather than remain hapless in the face of their rapidly shrinking local manufacturing industry, Israeli entrepreneurs have started setting up manufacturing activities around the world: in India, China, Africa, Russia and Vietnam. “Israelis tend to be pioneers everywhere,” says Shmuel Mordechai, diamond controller at the Israeli ministry of Industry, trade & labor. “When they saw the industry moving away from here, they took the industry there.”

Israelis are doing this by setting up plants abroad, whether by working with local partners or subcontracting to local manufacturers. They have also reorganized logistically, sending experts to train personnel abroad and relocating Israeli manufacturing managers to their new plants. “If once people were reluctant to move production out, today this has evolved: The system of production has changed,” says consultant Benson.

The new paradigm is exemplified by Leo Schachter Diamonds, which employed around 300 workers in Israel in the early 2000s. Today it employs less than 100 and produces just 30% of its output in Israel. Instead, 40% of the company’s goods are manufactured in India: since 2003, they have had an exclusive agreement with a subcontractor in Surat, who employs 400 people and cuts a whole range of stones. An additional 30% of Schachter’s roughs are processed in Botswana, where it established a factory in 1997.

Schachter has also set up a jewelry manufacturing operation in India and has an office for the sorting and trade of diamonds, as well as an area for back-office operations. Israel however remains the nerve center, as all the roughs (except those received in Botswana) are processed via Ramat Gan.

Other companies, like Masingita, a sister company of Moshe Namdar & Co, have set up manufacturing plants in China and South Africa. “We produce 30% in Israel, another 40% in China and 30% in South Africa,” says Yael Namdar, a director of the company.

Masingita still cuts the more expensive stones in Israel. “You have expertise in Israel which you don’t necessarily have in China and South Africa,” Namdar says. Until the late 1990s Moshe Namdar & Co used to employ 50 to 60 diamond polishers in Israel, but today it only uses local subcontractors. Masingita chose not to set up its factory in India because “you can’t beat the Indians on their home ground. That is too challenging.” However, for a couple of years the company had a manufacturing partnership with an Indian manufacturer for one specific project.

The Power of Technology

Technology plays a key part in the relocation of the Israeli industry. “Today, a person can sit in Israel and can control the production process from here,” says Benson. Namdar elaborates on this theme. “We have an integrated computer system through which we are able to control the manufacturing process very accurately,” she notes. The company’s manufacturing activities in China and South Africa are connected and closely monitored from Israel. “We can see a specific stone and how much its weight was in rough, what was planned and how much yield it gave,” she says, adding that the manufacturing and stock management software used by the company was developed in Israel.

Still others have gone elsewhere. Shlomo Bichachi Diamonds set up a manufacturing plant in Thailand nearly eight years ago and still owns a plant in Israel with around 50 cutters. The Israeli plant develops special cuts for the watch industry and high-end jewelry. “We continue manufacturing the expensive stones here in Israel because we have more control. We also wanted to hold on to our team which has been with us since the beginning,” says Shlomo Bichachi. The company has relocated three production managers to the plant in Thailand, where it employs 300 people and produces 80% of its output.

The loss of the manufacturing industry could also be a blessing in disguise for Israel, some say. The fact that Israeli diamantaires did not have to carry the weight of a large workforce helped the sector stay afloat during the credit crunch of 2008 and 2009, says Udi Sheintal.

And manufacturing is not such a profitable business anyway, adds Martin Rapaport. “Israel may have lost the business but it has lost a losing business,” he notes, indicating that higher prices of rough diamonds in 2010, which rose approximately 21% during the year, had further eroded profitability.

A Bumpy Road Ahead

Israel is thus adapting and will have to continue to adapt to the changing dynamics of the industry. “Israel is going to adapt in a lot of different ways, and Israelis respond well to a rapidly evolving environment. Once Israel was known for its oranges, then its diamonds, now high-tech. Israel will go with the flow, which is very healthy,” Rapaport says. He believes Israelis should continue to focus on manufacturing and developing their up-market brands and high-end products in the country. “There is a growing trend towards specialized brands and specialized diamonds, and that is the opportunity for Israel.”

Another opportunity is the huge diamond and jewelry consumer markets developing in India and China. A KPMG-GJEPC analysis shows that in 2015 China is forecast to have a 13% share of the worldwide market for jewelry consumption, second after the U.S. with a 26% share and followed by India with a 12% share. “There is a rise in demand for polished jewelry in India. This is a significant new market for us,” says Tannenbaum of Leo Schachter Diamonds.

Diamantaires continue to see a strong diamond sector in Israel, even if diminished somewhat, with an emphasis on diamond trading and branding rather than production. As a diamond trading center, Israel can offer buyers a wide variety of polished stones from Russia, China, India and Israel. “We have a good spectrum. Israel will definitely continue to be a trading center. Our company will always be in Israel. The industry here won’t die,” says Tannenbaum.

Yael Namdar shares this view. “A lot of people are concerned because the Indians are very aggressive…. There is still going to be a strong industry [in Israel] in the future. The volume will be smaller, but the management and knowhow are here,” she says. “The industry is made up of family businesses and the younger generations are adapting to modern times; they know about marketing and new products. And that is not going to go away.”

India is set to continue its growth as a manufacturing center. According to the KPMG analysis, India will have a 49.3% share of the world diamond roughs for processing in value terms in 2015, with 21.3% going to China, 7.1% to Russia, 5.5% to South Africa, 4.7% to Israel and 1.4% to the US.

But India also faces stiff challenges. These include a looming shortage of skilled manpower and the threat from China, where manpower costs are lower and which is developing as a polishing center. There is also the growth of polishing in diamond-producing nations. “India is … finding it hard to find the labor it needs,” Tannenbaum points out. “Salaries in other industries are rising faster than in the diamond industry and they are having a hard time employing a new generation of diamond polishers. If this labor problem continues, China could be a real threat to India.”

“China may emerge as a viable rival — if not in the near term, then certainly in the longer term,” adds Mehta of GJEPC. In addition, he notes a growing preference for polishing diamonds in countries where the diamonds are mined. “There has been increased political pressure by producing nations in Africa to gain further economic benefits from diamond production through job creation in the cutting and polishing industry,” he says.

In this rapidly changing environment, it is clear that there are opportunities and obstacles ahead for both countries. And the key to success will be the ability of the players in this industry to adapt and evolve. Says Rapaport: “It is a global market. The real message is one of change.”