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The Next Global Diamond Hub could be Virtual, and Chinese

15 september 2014

The industry is busy debating the destiny of old and new diamond hubs, but this geographic battle might become completely irrelevant in a few years’ time.

The number of goods traded globally via e-commerce, the practice of buying and selling on the internet, is growing at a rate of 16% per year. It is an astonishing result, considering that during the same period of time the total volume of international trade has shrunk as an effect of the global recession. As a consequence, market experts almost unanimously agree that the future of international trade is on the web.

So far the diamond industry has proved rather impermeable to those changes, but sooner or later it will have to take into account the possibility of migrating the bulk of its trading activities online. Indeed some retailers are already trying to do that, and what seems to be the seed of a new diamond-trading hub is developing on a virtual market. This virtual market is Chinese, and it is called Alibaba.

Alibaba is the largest business-to-business trading platform in the world. In 2012 its revenues matched those of eBay and Amazon combined, and its value is estimated at around US$150 billion. It is credited as one of the most strategic assets for the growing Chinese industry, as it has been representing for years the primary way for Chinese producers to advertise and sell their products abroad. This year, Alibaba will launch an initial public offering (IPO) on the New York Stock Exchange, which according to forecasts will easily break the US$12 billion record set by Facebook on its first day in May 2008.

The company name refers to a character of one of the popular “Arabian Nights” stories who, born and living in poverty, found an immense treasure. Its name is also a reminder of what this service  actually looks like: a modern version of a traditional Middle Eastern Bazaar, with Millions of goods for sale from multiple countries and producers.

Such an opportunity has not gone unnoticed to a number of diamond traders, who have been increasingly using Alibaba to advertise and sell their goods. Today, the “diamond” section of the website gathers 1,600 suppliers selling over 20,000 products. Not all of the products for sale are diamonds, though. Many of them are semi-precious stones (notably zircons and crystals), advertised in the diamond section of the website in an attempt to increase their visibility.

Nonetheless, the selection of diamonds is impressive. Most of the polished diamonds are of small size and sold in bulk, even though some larger stones are also for sale. They can be sorted by cut, colour and clarity. Rough diamonds are also for sale, which is extremely rare among online retailers. They are mostly from South Africa, the Russian Federation, Botswana, Angola and Zimbabwe and usually sold by Indian and Chinese companies. Some traders seem to be specialized in industrial quality diamonds, offering larger lots at a lower price. A sector that is already exploiting the opportunities of e-trading  at full steam is synthetics; producers of man-made diamonds have always found difficult to sell their products through traditional channels, and Alibaba offers them an unique opportunity to advertise their products side by side with naturals.

The result is that Alibaba managed to do, without particular effort, what diamond hubs aim to achieve through fierce competition: gathering hundreds of diamond enterprises operating at all levels, from rough to jewellery, under its roof. How did it do that?

An e-commerce hub offers a series of advantages over traditional, geographically-located, hubs. The first, and most appealing advantage is ease of access. Compared to a traditional market, the cost and time for joining a virtual one are minimal. All retailers are required to do is setting up an account and, preferably, undergoing a screening procedure to be registered as a certified seller. This is a big incentive for diamond traders to joining in, even when they are not entirely convinced about the prospects of e-commerce.

The second advantage is more connections. If a buyer wanted to purchase diamonds in Northern Europe, he would have to rely on those retailers based at the Antwerp hub; on the internet though, every buyer is connected with every seller at the global level. This would also allow buyers to have access to a larger selection of products, giving them a wider range of choice.

Additionally, e-commerce would allow buyers and sellers to control price levels to a higher degree than they do today, because the online service would act as a constantly updated price list, thus reflecting the real balance in supply and demand.

Another advantage of a virtual hub is that it helps reducing security costs. Today diamonds have to make several trips before reaching the final consumer. Each of those trips involves travel and stockpile-related security expenses. By keeping the transfer of diamonds to an absolute minimum, these costs would be consistently reduced.

Finally, as recently proved by another E-commerce giant, Amazon, online trade has the edge on tax and customs issues. The reason for that is that modern national fiscal systems are well equipped for taxing enterprises that operate on their territory, but have troubles controlling those making business on the web. By exploiting this legal vacuum, companies using online trading services can minimize fiscal exposure.

Due to the undeniable advantages given by e-commerce platforms like Alibaba, it is likely that even more diamond traders will try their services in the future. But by itself this is not a guarantee of success for online trading. Success can only be measured in terms of volume of trade, and as of today the number of diamonds traded through this mean is rather limited. This has not much to do with resistance to change in the diamond industry, but rather with the fact that e-commerce services  present a number of flaws that have been plaguing them since its beginnings and make them unfit to become a leading contributor to high-value markets such as the diamond one.

The first, and most notorious flaw, is the problem of frauds. Scams and illegal activities are a common problem in online trading, as it is hard for customers to exercise their rights when swindled through a virtual transaction. Alibaba in particular has developed a terrible reputation for its lack of pre-checks over its retailers. Typical examples of frauds involve the buyer not receiving the product he purchased, or receiving goods of lower quality than expected. Alibaba has been trying to address this problem by introducing a voluntary pre-check procedure for retailers and by setting a third-party escrow service similar to eBay’s PayPal. So far, though, this has not been sufficient to discourage fraudsters of all kind from committing illegal activities.

Another issue is that it is impossible for buyers to examine the products before purchasing them. The rule of thumb in e-commerce is that buyers are always entitled to a refund, provided that they return the goods at their own expenses. In the diamond industry, though, transfer of goods is particularly expensive due to security and insurance costs. The risk of facing extra expenses to ship diamonds back and forth could be a huge deterrent for potential customers. Fortunately the diamond industry has a solution to this problem already at hand. For years now, most polished diamonds have been accompanied by a gemological certificate, which guarantees for their quality and specs. With some improvements in anti-forgery regulations and methodology these certificate could well represent the basis for online diamond-trading. Concerning rough diamonds the matter is more complicated. At the present time there is no quality certification program accepted universally across the diamond industry, and it is not even clear whether such a program would be feasible and implementable.

Matteo Butera, Rough&Polished