Proprietary Cuts: Their Own Brand of Trouble

RAPAPORT... Creating and launching a proprietary cut is difficult for almost anydiamantaire. The costs can be prohibitively high, even for larger companies. Inaddition, the weak prices of non-round goods mean there's no guarantee theventure will boost profits.Take the example of Pieter Bombeke (pictured), one of Antwerp'sbest-known cutters and a specialist in making innovative, non-generic shapes.Bombeke has created many shapes of his own, but until recently had onlypatented one: Solomon's Seal, which uses an optical effect to make the Star ofDavid appear on the stone. He has since begun registering another two creations:the Xiao Long - Chinese for "little dragon" - and the Dreamcatcher, which has aspiral-like appearance. It's a difficult business. Many bespoke cuts don't lendthemselves to large-scale production, and are therefore hard to make moneyfrom, Bombeke explains. "Both of the models I'm protecting now are easy to take intoproduction," he notes. "Lots of the new creations in diamonds, you need to be amaster to be able to cut them. The [Xiao Long and the Dreamcatcher] can be donein the same way you cut a brilliant - mass production without too much of aproblem, just with a small change in the equipment." Patent absurdityCutters such as Bombeke have many proprietary shapes undertheir belts, yet can't afford to protect and defend every design, explains AlexanderDayekh of Antwerp-based Dayekh Gems. It's a vicious cycle in a market wheredishonest competitors have been known to buy a tiny diamond with a particularcut, put it through a stone-scanning machine, and reverse-engineer larger, moreexpensive versions of that same branded cut. Even if the original craftsman haspatented the stone, impostors can simply change one facet and win any ensuingcourt case. "It means you're paying for protection but can't enforceit," Dayekh sums up. The imperative to protect intellectual property meansrelatively high legal fees in the initial stage. Those amounts rise sharply ifanother company contests the patent, or if the need arises to sue someone whohas stolen the design, especially if the culprit is in another country. That'son top of the cost of buying rough and marketing the product. Simulationtechnology lets artisans experiment with cuts, but they still have to do someof the work with real stones. "If you take a painter, his raw materials are a canvas or apiece of paper, and he can turn that into a masterpiece," says Dayekh, who haslaunched the Antwerp Diamond Guild to help people in this sector (see box)."But for us, our canvas is very expensive - it's a rough diamond. So just toexperiment, we have to invest a lot of money." Princess of salesMore established companies can at least handle the highstartup costs. New York-based Hasenfeld-Stein spent close to $70,000 obtaininga patent for its FirePrincess cut (then called FireMark), estimates companypresident Hertz Hasenfeld - and the process took three years due to severalchallenges to the application. The launch of the cut in 2008 was an attempt tocreate a more attractive version of the princess, which Hasenfeld says wasmainly a lower-end stone because cutters manufactured it to maximize yieldrather than for its beauty. The firm, a De Beers sightholder, later introducedanother cut, the FireCushion, at a much lower cost, as it received a patentuncontested in just three months. The FirePrincess and the FireCushion initially commanded a15% price premium over their generic counterparts, but required 15% extrarough, negating any direct profit. For the FirePrincess, both percentages arenow down to about 7% or 8% due to a market-wide improvement in the quality ofgeneric princesses. However, Hasenfeld sees the products as a success, sincethey have brought in committed repeat buyers."The difference is, [now] I have sworn clientele...insteadof every time I manufacture a stone having to go and peddle and find a clientfor it," he notes. "Every stone is not a new sales pitch." One of the largest costs is maintaining the right inventoryof the special cut, Hasenfeld adds. Retailers want to be able to buymerchandise on demand, but having too much stock is expensive. "You're constantly trying to project how many differentstones your clients are going to buy, and what they will be buying," he says."We try and use scientific tools, but it's a cost." Hard to pull offSmolensk Diamonds, a subsidiary of Russian manufacturerKristall Smolensk, has less happy memories of its escapades in branded cuts.The company had a group of experienced polishers in Russia who were working oncreating new cuts, but discontinued that operation about 10 years ago becauseit didn't bring in much business, recalls Raymond Cohen, Smolensk Diamonds'manager in Belgium. "It's good to have a new cut, but if you don't have somebodywho's interested in it, you don't make it," he says. The huge costs of producing and marketing new cuts meansthey can't get off the ground unless there's a solid client base willing to buythe goods repeatedly, Cohen explains. This was generally not the case forSmolensk. In addition, slicing up rough diamonds for a speculativepurpose, and for a relatively low volume of polished, made the projectdifficult, even for a large company like Smolensk. "If you need one kilo ofmeat, you're not going to buy the whole cow," Cohen says. Smolensk's one success was the Phoenix, which tookrectangular rough that had little other purpose, and used it to make a longer,cut-cornered version of the princess. It developed a selling arrangement with aUK jeweler, and continued making the Phoenix until two or three years ago. Even so, there were difficulties. The Phoenix didn't sellfor any premium, and Smolensk sometimes found itself a victim of its ownsuccess when demand outpaced supply. "We didn't know what to do with the rectangular [rough], sowe created a cut for that," Cohen recalls. "At the beginning, it's good,because you get rid of the rectangular shapes, but then when you need more, youhave a problem." Minority reportBusiness development can also be "disastrous" given themassive marketing costs and the low chances of turning the endeavor into acommercial success, Cohen warns. The May decision by the Gemological Institute of America(GIA) to place branded-cut names on its grading reports - as long as themanufacturer can produce the relevant patent documents - could help companiesin that regard. Hasenfeld-Stein, which is participating in the GIA's program,has inscribed the FireCushion brand on girdles and certificates before, "butnothing speaks as loud as the top line saying FireCushion or FirePrincess,"Hasenfeld notes. For retailers, "generics is pretty much a dying business,"he continues. "There's always someone selling cheaper - online, or thenext-door fellow. The more tools you give the jeweler, the easier it is forthem to sell that branded cut that separates him from someone else." Dayekh also anticipates benefits from the GIA's move, thoughhe notes that other laboratories, such as HRD Antwerp and the InternationalGemological Institute (IGI), have been recognizing proprietary cuts for awhile. "Imagine you're selling Nike shoes, and you want to provideyour customers with a certificate that says this is a Nike, but all you have isa report that says this is a sports shoe," Dayekh explains. "That's thedifference. We don't want to provide sports shoes anymore; we want to give themthe Nike."'Get rid of the lawyers'An Antwerp-based manufacturer aims to solve the many problems artists encounterwhen they try to create new diamond cuts. Alexander Dayekh of Dayekh Gems wants to open up patents sothat any trader with basic cutting skills can study how to make a protecteddesign. To do so, they must attend a course at the Antwerp Diamond Guild (ADG),Dayekh's new creation, where they will learn from the experienced polishers whoinvented the shapes in question. In the regular system, companies pay royalties and licensingfees to inventors to use their designs. That involves complicated calculationsbased on stones' values, and is too expensive due to legal fees, Dayekh argues."We want to get rid of that, get rid of the lawyers, thepatents," Dayekh says. Instead, cutters will take the knowledge they learn atthe ADG back to their factories, buy their own rough, and keep the profits forthemselves. The inventors make their money from the course fees and get apercentage of the price of the ADG's "SmART" certificates, which students canbuy to accompany the diamonds they end up making. The ADG will also help companies price their special cuts -a difficult task at present. The guild will measure stones' light performancewith the help of Wisconsin-based Gemex Systems, value the diamonds based onthat result, and state those facts on the SmART certificate. While cutters aren't obliged to get the certificate (whichwill cost about the same amount as other labs' grading reports), their diamondswill be difficult to price and have limited liquidity without it, Dayekhargues. Another problem at the moment is not knowing whether yourcut is actually new. "We know there are about 200-odd shapes round the world,"Dayekh notes. "It could very well be that whatever idea you come up with hasalready been made by somebody else, but there's no way for us to verify thisbefore the fact." To remedy the situation, he wants to create an open libraryof artistic cuts so craftsmen can easily find out what others have alreadymade. This could significantly help reduce costs for traders who experiment bycutting up expensive diamonds, and the contents could also provide inspirationfor artisans surfing the database.Image: Backes & StraussThis article was first published in the August issue of Rapaport Magazine.