FROM NEW TAXES TO BANKING REGULATIONS: ADJUSTING THE DIAMOND INDUSTRY TO CHANGING TRENDS
As 2016 draws to an end, it is clear that the world we live in is changing. The business environment in which we operate is undergoing a process of transformation, and this calls for meaningful change in the way we conduct our business. As such, I think it is important to understand what the changes are, what lessons we can learn from them, and how we can reach logical (and not emotional) conclusions concerning the diamond trade.
Last week, the Belgian government formerly enacted a new taxation scheme for the diamond industry, the so-called carat tax. The new tax system is a turnover tax that simplifies and brings clarity to the local diamond sector. The law was passed after much lobbying by Antwerp’s diamond traders, which demonstrated that the old system resulted in the flight of business and finance from the country to other centers, damaging generations of local know-how. They helped the government understand that for the industry to not only survive, but to truly succeed, a deep and meaningful change was needed. Now that the government has moved to aid the diamond center, local traders have a responsibility to justify the trust placed in them by acting within the parameters of the Carat Tax, developing Antwerp’s diamond industry, and remaining in the city.
The Carat Tax is a call for renewed activity, within sensible boundaries, with a forward-looking approach. It is an excellent example of how the diamond industry can work with government, battle negative trends, and catalyze positive change that elevates all of us. The lesson for us all is that if we gain the trust of government by acting responsibly, we can strengthen our position, and thrive. This can and should be adopted by all diamond centers, and the diamond industry as a whole.
The banking standards set forth by Basel III have now been fully implemented. The regulations placed on banks by Basel III had an impact on the diamond industry. The requirement that banks have a more robust asset-to-borrowing ratio has in turn forced borrowing companies to abide by that model, which should decrease the level of leverage among diamond companies.
However, there are still heavily leveraged companies among us and that is causing harm to us all. I have written many times about how heavy bank financing became a leading driver in our business and how that is causing harm to the diamond industry at large. We are faced with companies that are often far more leveraged than is healthy, and the magnitude of the problem is such that it impacts the entire pipeline. Many business failures in the diamond industry over the past couple of years were exacerbated by this phenomenon. The main driver for buying a raw material such as rough diamonds is to manufacture a product for profit. But that might not be the case for those who buy, trade, manufacture and sell only in the context of satisfying the heavy demands created by bank financing. I must once again ask: where do we head from here if some players are pricing their goods to simply generate a cash flow? This is an issue that Basel III addressed only to some extent. More can be done to ensure a healthier borrowing scenario that helps businesses grow, but does not enslave us to meeting monthly payments at the expense of meaningful business development.
There are more banking changes on the horizon. The Joint Declaration for AEOI – an international agreement that would require countries to collect data on the banking activity of foreign companies and nationals, and then create a system of automatically sharing data on these bank accounts between countries – will bring greater transparency. Before these changes are enacted, businesses in all industries, including in the diamond industry, have a de-facto grace period. We must ensure that our business activities are above board, and that they service our long-term needs.
Making business sense
There are a number of issues that have arisen outside of the banking and taxation realm. About a decade ago, the diamond industry established polishing facilities in a number of diamond-producing southern African countries, at the request of local governments. Those governments wanted to get more out of their natural resources, and drive additional income from the added jobs, the consumption of local services, and the additional tax collection potential of having polishing facilities in their country. What we learned in the past year is that there are some changes we cannot force. There is a reason why diamond polishing was centered in Amsterdam, why it migrated first to Antwerp, then to Israel, and afterwards to India. In simple terms, it made economic sense.
If a country decides to develop a local industry, it has to provide the necessary foundation for such an economic activity to develop and flourish. The large number of factory closures over a period of years proves that the economic basis is not there. I support the desire of these countries to develop their economies, including in the diamond industry. However, for that to happen, the economic logic cannot be limited to a country’s own beneficiation. A project has to be economically viable for all stakeholders. In this case, it is the diamond industry that made the commendable effort, and it is the responsibility of the diamond-producing countries to adjust and adapt.
An example of this can be found in Israel. Once the biggest diamond polishing center and the world’s largest diamond exporter by value, today Israel is trailing both India and China in these areas. The Israeli sector learned and adapted. Today it is the most important supplier of diamond industry technologies. The technologically-advanced country is continuing to look for ways to grow and improve, and I salute it for these efforts. There are ongoing negotiations with the government on a number of laws, and the diamond center is also looking inwards to find ways to develop. It is trying to adapt to a changing world, and it will be interesting to see how this plays out.
Most recently, we have seen a move in India against black money. Prime Minister Narendra Modi understood that a parallel economy run on black money is destructive, and decided to battle it. Although the move was not directed against the diamond or jewelry industries, it had an immediate and profound impact on them. Small-and-medium-size manufacturers in Surat are finding it difficult to operate. At first, small jewelry retailers saw a surge in business, when many rushed to buy gold with the cancelled notes, but that initial surge ended. Today, many companies and individuals are without much work, trying to adapt to the new reality of an economy where working with banks and reporting business activity to the authorities are necessities. This is a welcome and much-needed change. Now, it is important to ensure that the part of the industry that operated fully or partially outside the organized sector segment evolves to be included in the organized sector, so all are playing on a level playing field.
On another front, there is growing consumer demand, mostly in the US and Europe, that companies meet responsible standards, and minimize the impact of their activities on the environment. This demand is only expected to grow in the coming years. The larger diamond mining companies are already addressing this, and a number of industry organizations, such as Responsible Jewellery Council are providing tools and measurements to meet the required standards.
The burden is now on diamond manufacturers, jewelry makers, wholesalers and retailers to take the necessary steps to act in an ethical and environmentally sensible way, not only because the consumer is demanding it, but be because it is important to us. I’m happy to see that many companies have already adopted the mindset that this is important, and can only hope that the entire diamond industry aligns itself to it.
In practically all aspects of our business, we are faced with the need to evolve, adapt, change and learn. There are heavy issues on the table for us to address, and those that won’t do so may find that doing business the way we used to won’t work anymore. Therefore, we must change with the times, accept the new rules, learn the new realities, and act upon them. Doing so is crucial if we want to grow and flourish!
By: Ehud Laniado