A glittering prize

PUBLISHED : Thursday, 05 July, 2007, 12:00am
UPDATED : Thursday, 05 July, 2007, 12:00am

When Belgium's Crown Prince Philippe and his wife, Princess Mathilde, flew

into Hong Kong last month, they spearheaded a well-heeled trade mission representing more than 260 government bodies and private-sector companies from the small European nation.

Within hours of arriving at Chek Lap Kok, Princess Mathilde paid a visit to the Chow Sang Sang jewellery store in Canton Road. The following day, the royal couple were at the Jewellery and Watch Fair where they headed straight to Marc Brauner, the Belgian chief executive of the International Gemological Institute. The two events spelled out the focus of the royal couple's visit: diamonds.

Mr Brauner's recent appointment by royal warrant as diamond adviser to the Belgian Foreign Ministry reflects the importance of the industry in Belgium. Globally, the diamond industry produces about US$13 billion in rough stones and more than US$62 billion in diamond jewellery. Of this, Belgium's diamond exports were worth US$9.5 billion last year, accounting for 8 per cent of the nation's GDP.

While almost a third of the diamonds go to the US, the second largest buyer is Hong Kong, which bought more than Euro1 billion (HK$10 billion) worth of diamonds from Belgium last year.

The Hong Kong market for Belgian diamonds is big, and growing. 'More than 50 per cent of our exports to Hong Kong are diamonds,' said Patrick Nijs, Belgianconsul-general in Hong Kong. The value of imports is up more than 17 per cent on last year, due to diamond price rises and the local penchant for diamonds of the highest quality and cut.

That excellence of cut has long been the pride of Belgian diamond traders. But now there are signs that the labour-intensive and highly lucrative cutting and polishing business is moving to Asia and, increasingly, to the mainland.

For 500 years, the centre of the world's diamond industry has been Antwerp, a lively, medieval city. The narrow, dark streets that surround the central railway station are full of tiny shops with glittering window displays piled high with gold jewellery and diamonds. There are an estimated 1,200 diamond shops and four diamond exchanges crowded into a small area.

For centuries, the business has been largely the domain of Jewish merchants, often refugees from pogroms in other parts of Europe, who were attracted by the portability and quick profits to be made from diamonds. They became astute traders and mastered the art of cutting and polishing the rough stones.

It's a business with its own culture and traditions. 'The industry is entirely based on trust,' said Mr Brauner, a former cutter and now head of the Hong Kong branch of a company that issues about one-third of all diamond certificates globally. 'Deals are still done with mazal, a Hebrew word meaning 'deal done and good luck'. People don't necessarily sign a contract. There is word of honour and trust involved. In Antwerp, you grow up with this. When I was doing my homework, my father was cleaving diamonds.'

Now precision manufacturing has begun moving away from the small workshops of Antwerp to Asia. According to the Hong Kong Trade Development Council, the mainland is the world's second-largest cutting, polishing and production base, after India, exporting more than US$800 million worth of processed diamonds annually.

'The labour costs only a fraction of what it is in the west,' said Mickey Weinstock, an Antwerp-based diamond manufacturer who opened a cutting and polishing factory in Panyu , Guangdong province, three years ago in partnership with Chow Sang Sang, to whom he had been selling diamonds for years.

Diamond cutters have worked in Guangdong for 20 years but their numbers have grown rapidly in the past decade. Mr Weinstock estimates there are about 60,000 diamond cutters in the province today, and that about 20 of the 100 or so diamond-cutting factories there are foreign-owned. Many of the remaining outfits are run by Belgians, according to Mr Brauner.

Mr Weinstock's 190 workers in Guangdong were trained by his master diamond cutter from Belgium and the machinery imported from home. His Belgian factory, meanwhile, employs just 12 cutters who handle the larger stones. The quality of work done on the mainland is the equal of Antwerp, he said. 'Today, you can't see the difference [between the workmanship in his Belgian and Chinese factories]. We have now in my factory in China people who could teach in Belgium.'

But in an industry based on prestige, he said that branding was crucial and all the stones returned to Belgium for quality control and certification.

'We are still a Belgian factory,' he said. 'It's still a Belgian product even if a part of the manufacturing process is done in China. Even if the stone is physically cut in China, it still remains the Antwerp cut, the Belgian diamond and Belgium is the No1 diamond manufacturer in the world.'

A KPMG report last year on the global gems and jewellery market predicted the mainland diamond processing industry was set to blossom, 'with China emerging as a strong player with 21.3 per cent share of [global] diamond processing'. The value added by cutting and polishing would also increase, it said, from 29.3 per cent in 2005 to 34.1 per cent in 2015.

That Mr Weinstock stresses the importance of Belgium in the trade is evidence perhaps of the concern of Belgian diamantaires as they expand operations into the mainland. They have received support from the Belgian government through a double taxation agreement with Hong Kong. Belgium has also been actively courting foreign companies with major tax incentives, a liaison office to facilitate setting up business there and high-profile, overseas missions such as that by the crown prince and princess.

Mr Weinstock has also been active. He knows things are about to change, and is planning ahead for a time when the Chinese manufacture and design for themselves. When that time comes, the plan is to use Antwerp as their export hub.

The typical journey of a Belgian diamond from the mine to the window of a Hong Kong or mainland retailer is dizzying. Mr Brauner said selection of the rough De Beers stones took place in London involving a small group of select companies known as sight holders. The British capital is the headquarters of the De Beers' Diamond Trading Company, which brings about 45 per cent of all rough diamonds to the market.

The stones then travel to Antwerp, before being shipped to the mainland for manufacturing, back to Antwerp for certification, back to the Hong Kong regional office, to the mainland again for mounting, then to Hong Kong as a finished product. Distribution to shops across China is the final step.

The problem of diamonds coming from war zones and often sold clandestinely was highlighted by the recent film Blood Diamond, but both Mr Brauner and Mr Weinstock insist that the issue is resolved by the Kimberley Certification process.

'We tackled this problem and we solved it,' said Mr Weinstock. 'The diamond community itself understood what it had to do. Diamonds have to have a passport in order to be shipped from one place to another. Today, it's probably easier to travel with no passport as a person than as a diamond.'

To help support the Belgian-Chinese trade, Mr Weinstock last month opened the Belgium Diamond Club of China in Guangzhou , of which he is chairman. He said variable standards in diamond production across the mainland had the potential to damage the credibility of the whole industry.

'You can't sell diamonds unless you have the consumer's trust,' he said. 'In order to solve a problem that hasn't occurred yet, we want to bring all the diamond industry in China to the same standards.'

The club aims to help Belgian diamond traders penetrate the Chinese market, a process he found riddled with difficulties, and also help Chinese manufacturers gain access to world markets. 'But we want them to do that via Belgium. Very soon, the Chinese are going to realise, why should they manufacture for foreign companies and not make instead their own design jewellery? We are building our guanxi [connections]. The Chinese have a long memory. If we help them today, they will remember us tomorrow.'

Mr Brauner said there were hurdles for manufacturers to overcome before they reached that point. 'One day, when the complex tax regime in China - of taxation and import and export - is a little bit more transparent and accessible, possibly those manufacturers in China will polish their diamonds and sell them [directly],' he said.

There are signs the mainland is already bypassing Hong Kong's role as a hub. Mr Brauner's own figures show that in the first five months of this year, diamond exports from Belgium to the mainland rose by almost 58 per cent. In July 2006, in a move seen as aimed at promoting the industry and ending diamond smuggling, the mainland cut VAT for uncut diamonds entering the country through the Shanghai Diamond Exchange from 17 per cent to zero, and from 17 to 4 per cent for polished diamonds.

Mr Brauner said the increase in trade was a temporary market reaction to the tax deduction and would balance out. Hong Kong's position as the key diamond hub in Asia was safe because of its superior logistics, security and tax system.

'Even if merchants have offices in Shanghai, their Hong Kong office is used for the export part,' he said. 'Hong Kong is useful because of logistics. Hong Kong maintains its position, no doubt about it.'