The diamond cutting and polishing industry presents a remarkable case in the field of family business in India. It provides an interesting landscape to view and investigate, as its distinguishing characteristics include unique features and approaches to management practised by the family firms that dominate the scene.
Indian industrial scene
The breadth of India's industrial canvas is truly impressive. Coexistence of primitive methods along with cutting edge technologies is its most striking feature. Besides, entrepreneurial fervour is widespread. The army of self-propelled entrepreneurs is growing at a breathtaking pace. Their endeavour is blessed by the availability of a technomanagerial pool but it is also beset with infrastructural hiccups.
Emerging environmental changes are influencing the industry's business behaviour. Business reforms initiated in the 1990s are finally yielding results. The developments are healthy and encouraging for the future and will enable Indian industry to emerge as a dominant world player. But a threat from China is real and perceptible.
The diamond industry
The diamond industry spans from the purchase of rough natural diamonds to trading the finished products, with cutting and polishing at its core. The industry acquired recognition and status in the 1960s. Since then it has grown multi-fold and today it is a major export industry with exports nearing US$8 billion.
The industry is 100% owned and managed by family firms of different sizes and types. About 7, 000 firms are registered with the Gem and Jewellery Export Promotion Council, of which roughly ten are publicly listed. What factors have contributed to this predominance of family firms and how does one account for their continued success?
Family firm dominance
The most obvious explanations for the prevalence of family firms in the diamond industry are their survival and growth instincts for which integrity and trustworthiness are important considerations. In the Indian context, the institution of the Hindu Undivided Family neatly fitted trustworthiness expectations. As family members already lived together, working together was a natural progression. Thus, the family structure translated to a business enterprise that met the survival need of diamond firms. Furthermore, the family demonstrated established hierarchical relationships and camaraderie. These factors played a vital role in the growth of the diamond industry.
Family firm sustenance
So, how has this model perpetuated? First and foremost, the industry is relatively young and a large number of firms are first generation, though several have first and second generations working together. Thus, the governance issues of sharing and succession have yet to become prominent. Some firms, where three generations are jointly running the business, have established workable and effective arrangements, devised through convention and understanding. Often, an informal governance structure has also ensured collective continuance.
Second, the diamond industry has experienced healthy growth from 1965 through 2000. At a business level, this growth was achieved through expansion of domestic activity and spatial expansion at international locations. The nature of the industry demanded family representation to achieve such growth. Thus, the induction of new family members became a pressing necessity. Some firms have restricted their expansion and forward integration plans as family manpower is not available.
Third, growth in the industry has contributed towards abating disputes emanating from performance evaluation and positional status. That is, in good times, wiser counsel prevails.
Fourth, most firms respect family hierarchy in business. Consensus oriented decision making under the guidance and supervision of the family head facilitates the business process. An accommodating stance promotes harmony and differences over business matters are resolved amicably, giving precedence to 'being together' and collective strength. Individual aspirations can be satisfied through specific task assignments – functional or geographical – that can be pursued with a remarkable degree of freedom and flexibility. Intervention by other family members takes an advisory shape but hierarchical discipline facilitates periodic monitoring and control. Guidelines are more a matter of convention than a written document.
The diamond industry possesses several distinctive features:
Youthfulness: As the diamond industry is relatively young, it does not suffer from the aging symptoms inflicting the older and matured brethren like jute, cotton textiles, sugar and engineering industries. This youthfulness is reflected in the vibrancy and agility that enables them to respond quickly and positively to environmental thrusts.
International integration: The industry is truly integrated with international markets. It sources 100% of its raw material (natural rough diamonds) requirement through imports and exports almost the entire volume of its finished output to overseas destinations. This international integration has enforced discipline, customer orientation and has equipped the diamond firms to compete in the international arena with confidence.
Global presence: The diamond industry is truly global. Witness the numbers reflecting an international presence of Indian diamond firms: 200 in Antwerp, 100 in New York, 50 in Hong kong, 25 in Israel, 20 in Thailand and 25 in Japan.
Human resource advantage and market development: The diamond industry is human resource intensive: approximately 1 million people are employed in the industry. The marvel of skilled workmanship is acting as a competitive driver. There are two dimensions to this characteristic:
- the unparalleled tenacity of Indian skilled labour to put in long hours for a routinely repetitive job; and
- backed by Indian entrepreneurs, these 'polishers' convert 'waste into wealth' – cutting and polishing residual rough diamonds into adornable 'stars' leading to phenomenal demand growth.
The Indian diamond firms' enduring patience and keenness to cultivate a successful industry has contributed enormously to market development for diamonds and diamond jewellery. Low raw material costs supported by economic processing charges led to a new and affordable pricing regime taking diamond jewellery well beyond the confines of the super rich.
Industry structure: The diamond industry structure reflects the usual evolutionary path. There are numerous firms, with about 90% being small and marginal units. According to one estimate, 250 firms/groups transact 90% of the business with only 450 to 500 firms being demonstratively active. The nature of the industry permits such fragmented operations. Low capital requirement (in terms of equipment and other infrastructure) and high human skill intensity are the deciding parameters.
Only a massive technological shift will enforce reorganisation to absorb overheads and benefit from scale advantages. Technological sophistication has arrived in certain processes and there are a few units emerging as models.
The present structure is likely to prevail until a competitive threat from China becomes a perceptible reality. When that occurs, the industry will need to reorient itself and reorganise. Survival instincts and past performance indicate that the industry will rise up to the challenge.
Supplier power: The industry receives its supply of natural rough diamonds from limited sources, Diamond Trading Corporation (DTC) being the leader commanding about 60% of Indian rough supplies. The DTC follows a proprietary scheme of 'managed supply' for rough diamonds to only approved 'Sight Holders' – approximately 130, of which 40 are from India. Interestingly, this arrangement has worked in favour of diamond firms.
DTC moderates supplies, based on their assessment of demand for polished diamonds. DTC has endeavoured to enforce discipline by providing guidelines through which they have been able to advise and direct the Sight Holders (and also others) towards improved management practices. This is a case of the raw material supplier working for long term growth and sustainability of diamond firms through dialogue, advice and periodic intervention.
Geographic clustering: For several reasons, Bombay (Mumbai) emerged as the Diamond Place, deriving advantages from being an international business hub with a well-developed financial infrastructure. The Diamond District of Bombay is always humming with intense commercial activity. The charm and sparkle here is amazing and almost all overseas diamond trading is conducted through the Bombay Gateway. Ferocious urbanisation has adversely affected Bombay's viability as a cutting and polishing centre, and now Bombay functions largely as a commercial centre.
This trading cluster in Bombay is supported by cutting and polishing clusters that emerged in India's Western State of Gujarat, particularly in the city of Surat. In the past, Surat harboured jewellery related occupations. But Surat's potential for growth made it a convenient destination to offload diamond cutting and polishing. Surat had the added advantages of proactive government facilitation, a conducive business environment and a geographical nearness to Bombay (250km). Today, more than 70% of polishing activity is concentrated in and around Surat city.
The trading-polishing combination in the diamond industry is operated by a large number of firms with dual presence in Bombay and Surat. This complementarity of industry and commerce has yielded a very strong relationship between the two sectors. Furthermore, dependable, low-cost support by home-grown courier agencies (angadias) enables the industry to remain competitive.
Ownership clustering: Ownership clustering is another interesting feature of the industry. The diamond industry overwhelmingly belongs to two segments of the Gujarati community: the Palanpuri Jains and the Kathiawari Patels; the Patels being the later entrants. This community clustering can be explained in terms of the overriding importance of trust and confidence in the diamond industry. Diamonds are precious and small volume items; the chances of unethical practices of stealing and replacing diamonds are high. Such behaviour can wipe out operating firms. This legitimate fear of fraudulent indulgence resulted in kinship-based business expansion, leading to predominance by the Palanpuri Jains in early stages.
It all began with inviting brothers, cousins and close relations to join the fast expanding business but resulted in extending beyond the immediate family. Persistent shortage of manpower induced them to attract and accommodate other relatives and acquaintances from the community, trust and dependability being the guiding criteria. With the passage of time, the strong community bonding resulted in an extension of the network beyond the town of Palanpur, embracing the Jain community of surrounding towns and villages. Over a period, they all flocked to Bombay. Today, Palanpuri Jain has become a brand with prestigious equity, nationally and internationally, and the Palanpuri Jain community commands around 65% of the diamond business.
The entry of the Kathiawari Patels is equally interesting. They have roots in farming. The Kathiawar region (now called Saurashtra) has a challenging climate, making it necessary for them to work hard in harsh and adverse conditions thus making their investment and human resource devotion a wasteful venture at times. Accepting lesser yields or even outright failure is a common business attitude for these farmers. As a result, many of them migrated to more stable pastures, such as diamond cutting and polishing. Their ability to work hard for extended hours and the ability to adapt easily made them successful in this sector.
Trading and polishing have much in tandem, leading to close business cooperation, mutual trust and respect between the Kathiawari Patels and the Palanpuri Jains. Their mental make-up was conducive to assimilation of seasonal and cyclical business fluctuations, a frequent occurrence in the diamond business. Their foray into diamond trading has taken them to Bombay and other international destinations. Today, this robust community commands about 30% of diamond business.
These clusters possess a sharp business acumen, native judgmental ability and mutually supportive business behaviour. Business failures therefore, have been few and far between.
The diamond industry is an interesting success story, especially from the family firm viewpoint. Future sustenance will require actions on several fronts to withstand environmental onslaughts, including a competitive threat from China. The important areas are:
Professionalisation: Professionalisation promises the potential to dramatically improve both the tangible bottom line and intangible governance quality. The induction of professionals will enable the owner-manager group to gradually vacate routine tasks so that they can focus on issues of strategic importance. There are some aspects of the business where acquired acumen and native intelligence may fail to deliver optimum performance. For example, employment of qualified and trained engineers can greatly enhance operational efficiency. Only dogged conviction and determination, with patience and faith in professional competence, can yield positive outcome. A half-hearted and apprehensive approach will only lead to business failure, demoralisation of professionals and a waste of resources.
Technological upgrading: Technological change will help in modernising the organisational outlook and will allow the firm to enhance competitiveness through better efficiency and higher productivity. Only performance-focused investment decisions, not 'demonstration effect-driven' moves, will yield the desired results.
Managerial competence: Success often breeds complacency. At times, it even hinders future progress. Diamond industry entrepreneurs are well equipped with financial wizardry, judgmental insights, negotiation skills and business acumen. Past success is a testimony. Yet, at least three areas provide opportunity for performance enhancement of owner-managers:
- leadership skill building for better human resource management including management of professionals;
- proactive approaches towards organisation building; and
- broadening of business perspectives to enable infusion of translatable ideas from other industries and/or countries.
Business diversification: Comfortable surpluses led many firms to seek diversification. Unsound principles and short-term orientation have resulted in huge losses and dead investments. A promising area for the diamond industry is forward integration into jewellery making and many have already entered the field. But the success rules in this new arena call for a reoriented mindset. To achieve sustainable success in new ventures, a dramatic shift in the business approach combined with the willingness and ability to sever the stumbling vestiges of current business practices are called for.
Corporate governance architecture: Experiences within the industry can provide guidelines for future corporate governance. Auditing the present governance practices is beneficial for preparing an appropriate model suiting the individual firm's aspirations. This initiative is likely to lead to Achaar Samhita(code of conduct) that can act as a reference point for managing the business-family interface – ensuring business growth with family harmony.
In summary, a combination of leadership skills, family upbringing and cultural norms have contributed to a healthy sustenance of the family firms that dominate the diamond industry. It is impossible to predict the future but the prevailing arrangements supported by the above-mentioned changes will decidedly enable these family firms to withstand any future challenges.