Freakonomics is the title of a best seller by “rogue economist” Steven D. Levitt who explores the hidden side of everything. Looking beyond conventional wisdom, he searches for linkages behind cause and effect. For example, 10 years ago, politicians and bureaucrats embraced as truth the unanimous claim by American researchers that the rate of teen homicides would more than double in the following years. President Bill Clinton was quoted in 1995 as saying, “We know we’ve got about six years to turn this juvenile crime scene around or our country is going to be living in chaos.” And then all of a sudden, instead of going up and up, juvenile crime began to continuously fall. It was entirely unanticipated, especially by the experts who had predicted the exact opposite. Professor Levitt looked at the profile of the juvenile delinquents of the 1990s and concluded that many of them were from single mothers, broken homes, or unfavorable economic backgrounds.            

            So why the drop in crime rate from 1995 and onward? Levitt relates it to the Supreme Court decision Roe vs. Wade, which legalized abortion. Suddenly, millions of kids that would have little hope for a decent life simply weren’t born – so they couldn’t become criminals.

            That is why the juvenile crime rate went down, argues Levitt. Is that the sole explanation? I wouldn’t know. Does it make sense? Yes, it sounds logical, plausible, and even fascinating. Furthermore, it prompts one to think “outside of the box.”

            Back to diamonds: Looking at the polished diamond imports in the United States, imports from Israel went up by only 7.3 percent, which is well below the general rise of imports (12.1 percent) in the period as compared to the same time span last year.

            Indeed, the Indian market share in the United States is suddenly jumping far more than any other time in recent history – and in a very short period. Its market-share gain comes fully at the expense of Belgium and Israel.

Increase Driven by Better Goods
            “Ah, Americans are importing large amounts of junk,” one might say, but, no, that is not the case. Looking at polished imports of diamonds above half a carat, imports of these larger goods from India are up 24 percent in the first four months of this year. That is an enormous amount and statistically incredibly significant. In the same period, imports from Belgium in this category declined by 1.1 percent, and from Israel, they rose by merely 8.5 percent, which is well below the 10.7 percent average rise in imports of larger goods. As Israel, Belgium, and India together represent well over 90 percent of all polished imports, other supply countries are marginal in analyzing trends.

            So going back to the “rogue economist” looking for the hidden cause of everything, we have a number of thoughts on the sudden Indian increase. Just like in the earlier example when a U.S. Supreme Court ruling changed the situation in the field, on January 1 of this year, something changed in the American market: FinCEN’s Anti-Money Laundering Jewelry Rule came into effect.

            Since that date, U.S. jewelry retailers have enjoyed an exemption of the AML/CFT compliance rules when purchasing from domestic parties. Unexpectedly, they discovered that Indian suppliers are “domestic” from an AML/CFT perspective.

            Why? Because traditionally, the Indian distribution system is different: Indians have 3000 Indian offices around the world of which 1250 are in the United States. This domestic presence gives them a solid advantage and it makes it easier for retailers to purchase the required polished from them. Looking for “the hidden side of everything,” this goes a long way in explaining the steep hike in the sales of better goods by Indian diamantaires (and reducing the market share of both Belgium and Israel in their traditional product categories).

            There is an almost ironic incongruity here. Belgium has a very strict anti-money laundering compliance regime in the diamond business; Israel is about to finalize its diamond industry compliance system, while, in contrast, India has general but no specific diamond jewelry compliance rules. As it now seems, the absence of rules does not impair the nation’s ability to operate on the American market because of its distribution systems. They are there. They always have been. It surely represents a fortunate “unintended consequence.”

Skillfully Playing the Supplier-of-Choice Game
            Of course, this isn’t the sole reason for the rise in market share. There is no magic. The Indian diamond industry can’t sell goods that it doesn’t have. And in recent years, it has been getting more and more of the larger goods. Actually, the Indian diamond industry has proven to be far more skillful in understanding the Supplier-of-Choice “game” than their colleagues in other centers.

            When the first two-year supply contract was concluded between De Beers and Sightholders, hardly any Indian companies were taken off the list. The DTC indicated that this was because of the (then) ample availability of Indian goods and that Indian Sightholder reductions would wait for the second contract.

            Under the terms of the Supplier-of-Choice, all Sightholders can apply for all goods. The Indian Sightholders were very astute and started to apply also for the better goods, which until then had not been allocated to them. They knew full well that the so-called Indian articles would end up in India one way or the other. The reverse did not take place; we didn’t see Belgian, Israeli or American Sightholders massively applying for Indian goods. So the ability of the Indian diamond companies to make significant inroads in the market share of Belgium and Israel is, to a large extent, also a result of their ability to gain a larger part of the Sight allocations of the better goods. We estimate that the bulk of the increase of DTC sales in recent years went to the Indian diamond industry, which received goods it previously didn’t process or sell. The opening of the Diavik mine also boosted the supply of better goods as Rio Tinto graciously rewarded its loyal clients of the traditional Argyle goods.

            So when looking to the American statistics of the first four months of this year, we see a happy coalescence of two unrelated events, which very much play into the Indians’ hands. On the one hand, the massive presence of offices in the United States gives them a competitive advantage over the other foreign cutting centers in their access to retailers, while the astute way they have played Supplier- of-Choice accelerated their expansion of market share in better goods.

            This may all partly seem like Freakonomics – though there is definitely a cause and effect relationship, but they are undoubtedly parts of a larger puzzle. So the Indian diamond industry enjoys an early Indian summer in the United States – a sunny and warm environment for its exports, leaving its competitors just sweating. This explains at least one telephone conversation I overheard this week between an Israeli in Tel Aviv and the principal of a prominent Indian diamond office in Antwerp, “Please tell us how we can become Indian!” That elusive formula will be discussed in a future article….

            Have a nice weekend.