The New York Times ran an interesting article by Keith Bradsher today called “Suddenly Sparkling” (available only with registration). It’s about the rapidly growing diamond polishing industry in China, which currently represents 6 percent of the world-wide value add in diamond polishing.
It’s fascinating on a number of levels. It is another example of China’s ability to compete on skill, rather than simply wage rate advantages. As the article reports,
“With a potent mix of experience, cheap labor, advanced technology and strict quality controls, they are challenging the industry leaders . . . China took over much of the international costume jewelry business in the late 1980’s and 1990’s. . . . diamond businesses in China have rapidly moved beyond . . . the polishing of the smallest, poorest-quality diamonds. . . . workers in China ae moving to bigger and bigger diamonds.”
China in this case is competing with highly experienced masters of the craft in Antwerp, Belgiumand Tel Aviv that specialize in handling diamonds of a carat or more. But China is also competing with India, a country with a million diamond workers and an 80% share of the diamond polishing industry. While China has a distinct labor cost advantage relative to Antwerp and Tel Aviv – compare labor costs for cutting and polishing diamonds at $17 a carat in China with $100 a carat in Israel and $150 a carat in Belgium– it actually competes at a substantial labor cost disadvantage relative to India, where workers are paid $10 a carat. Yet India is on the defensive and expects to lose share. Antwerp, which still specializes in polishing larger diamonds, also expects to lose share to China.
The story is also interesting because the diamond polishing industry in China has concentrated in Panyu in Guangzhou province, about 80 miles from Hong Kong. Much of the competitive strength of China comes from highly specialized local business ecosystems like Panyu, where businesses in particular niches tend to concentrate. In this case, Panyu is reproducing the history of cities like Antwerp, Tel Aviv and New York’s diamond district, where specialized expertise and trust-based personal networks developed. No doubt this gathering of highly specialized businesses helps to explain the rapid capability building reported in the New York Times. Apparently, one of the big reasons Panyu emerged as a center for diamond polishing is because in the late 1990’s local officials chose not to enforce strict laws of the Chinese government restricting transactions in diamonds.
Finally, there is an interesting personal dimension of who is behind the highly entrepreneurial diamond polishing businesses emerging in Panyu. In many cases, they are Belgian and Indian. In this case, China appears to be able to attract talent from other specialized ecosystems to be able to bootstrap its growth in this industry. One of the Indian entrepreneurs in Panyu, Vijay Nahata, is quoted as predicting that, in the highly competitive diamond polishing industry, “China is going to be the leader of the world in two years.”
Accelerated capability building, specialized local business ecosystems and competition for talent – these are all key themes in The Only Sustainable Edge. We didn’t think to look at the diamond industry but even here these dynamics are playing out with a vengeance.