De Beers: are strategic resources forever?

Company History Take some wood form prehistoric trees, subject it to intense volcanic heat and pressure under the surface of the earth for thousands of years, and the result is the formation of crystals called diamonds which, when cut and polished, are among the most valuable and sought after of gemstones and the hardest known material that exists in nature the word diamond derives from the ancient Greek adamas meaning invincible. Of the 26,000 kg of diamonds mined annually around the world, roughly half come from central and Southern Africa, with other important sources being Canada, Australia, and, increasingly, Russia. Until the late nineteenth century, total global output was only a few pounds in weight each year. However, in the 1870s, large deposits were found in southern Africa near the Orange River. A diamond rush followed as speculators and entrepreneurs stampeded to open mines as quickly as possible, and the supply of the stones increased rapidly. Since then, one company whose name is synonymous with diamonds has dominated the world trade in them: De Beers, Based in Johannesburg, South Africa, the firm was founded in 1888 by British businessman Cecil John Rhodes, after whom the African state formerly called Rhodesia, now Zimbabwe, was also named. Originally a cotton farmer, Rhodes and his partner, Charles Dunell Rudd, bought a farm on which diamonds had been found from two Afrikaner brothers, Nicholas and Dierderik Arnoldus de Beer, for 6,300. The first two mines which formed the foundation of the companys fortunes were dug on this site. Although no longer owned by the brothers, one kept the de Beers name, the other was known as the Big Hole or Premier Mine. Subsequently, Rhodes and Rudd began buying out or investing in many of the other rival mines in the region, until within a few years De Beers was a major force in diamond production in Africa. In one transaction, a competitors mining interests were reportedly bought with the handing over of a cheque for 5,338,650, then the largest cheque every written. The diamond industry and the De Beers company have played a significant role in South Africas economy every since. Rhodes himself was also an active politician and legislator. As well as contributing to the founding of the state of Rhodesia, he was a member of the Cape Parliament and in 1890 became prime minister of the Cape Colony, as that part of southern Africa was then known.

The diamond Supply Chain There are two main types of diamonds: those of high grade, gemstone quality that will eventually become expensive jewelry, and lower grade stones that are used for industrial purposes such as in drilling and cutting tools. Diamonds can also be made synthetically, although the quality of these has traditionally made them suitable only for industrial use. Unlike gold and other precious commodities, gemstone diamonds are not sold and traded on world markets but marketed and distributed through a system of controlled channels. Gem quality stones go through various stages of production, processing and distribution between being mined from the ground and appearing in the windows of up-market jewelry stores, and De Beers has interests to a greater or lesser extent in several of them.
De Beers Final exam case

Diamonds are rare. There are few locations around the world where they occur naturally, and the diamond mining industry, particularly in Africa, is highly concentrated in terms of ownership and control by a small group of major players, of which De Beers is a leading member. The company owns or has a stake in almost all diamond mining operations in Africa and its mining interests produce around 60 per cent of the worlds output. In the mining and first stages of processing, ore is extracted from the ground and crushed to reveal raw stones of different sizes. A large proportion of the rough diamonds produced globally are then sold to and marketed through the Diamond Trading Company or DTC, a De Beers subsidiary, which has branches around the world and marketed through the Diamond Trading Company or DTC, a De Beers subsidiary, which has branches around the world and handles stones from mines owned by both De Beers and other producers. The share of the world rough diamond trade that is handled by the DTC has been estimated at around 70-80 per cent. DTC sorts rough diamonds into different categories by weight and density. It then releases these for sale in controlled amounts of bulk lots to a limited number of specially chosen and authorized distributors called sightholders several times a year. In 2006, DTCs turnover was reported to be approximately US $ 5.7 bn. After being bought by sightholders, the stones are sent to be cut and polished. This transforms raw stones, which are naturally dull in color, into the glittering gemstones that consumers prize so highly. The final value of a diamond can be significantly affected by the skill with which it is cut and finished, and the cutting process relies on a set of highly specialized skills that are concentrated in only a few locations around the world, traditionally Antwerp, Amsterdam, Johannesburg, New York, and Tel Aviv. More recently however, newer cutting centers offering the same quality of work but at lower cost have appeared in India, China, and Thailand. Distribution after cutting and polishing is also limited and controlled. Cut stones are marketed through 26 registered diamond exchanges or bourses, where wholesalers buy small lots which will either be incorporated into manufactured jewelry or sold on to final consumers through retailers. Finished diamonds and jewelry are usually sold through up-market stores, and De Beers also has a presence in retailing. In 2001, it formed a joint venture with LVMH, a French luxury goods company, to open a number of De Beers branded stores in upscale locations in major cities including London, Paris Tokyo, Dubai, and Beverly Hills.

Diamonds are Forever Although diamonds are rare and De Beers exerts a strong degree of control over their production and distribution, it is still necessary to position them in consumers minds as objects of desire. Historically, diamonds have always competed for jewelry buyers affections with other types of gemstones. In 1938, however, when the world was in recession and, despite De Beerss efforts, diamond prices had fallen, the company appointed US advertising agency N W Ayer to try and revive its fortunes and those of the diamond industry. As Europe was moving towards war, attention was focused on the US. The goal was to change the image of diamonds from being unattainable trinkets and investments available only to the very rich, to being aspirational and more affordable purchases for those at the more affluent end of the mass market.
De Beers Final exam case

Ayer defined the target market for diamonds as some 70 million people, 15 years of age or over whose opinion we seek to influence in support of our objectives. The advertising and publicity campaign, which was supported by extensive market research, was spectacularly successful and the slogan that an Ayer copywriter created, A Diamond is Forever, became synonymous with the company, and is still used today. Ayers campaign focused on making De Beers indelibly associated with diamonds, but some later advertisements did not even feature the companys name, simply the slogan, the aim being to make the diamond a brand in itself. Successive campaigns used a skilful blend of advertising and public relations to position diamonds as being not only unique and superior to other stones, but also precious works of art signifying eternity and romance, and therefore the first choice of gemstone for wedding and engagement rings. As well as being an inseparable part of courtship and marriage, diamonds were also promoted as symbols of prestige and status that, as gifts, could commemorate lifes great occasions. The idea that diamonds were for a lifetime and forever also deterred customers from reselling them, discouraging the growth of a second hand market. Spectacular stones were also donated to and worn by Hollywood stars and celebrities including Queen Elizabeth of England. By 1941, sales in the US had increased by a reported 55 percent. Further successful moves into international markets were made in the 1960s, particularly into Brazil, Germany and Japan, where large numbers of young Japanese, for whom diamonds held no traditional significance, were persuaded that they were an indispensable part of modern courtship and marriage rituals. For De Beers, Japan became, from virtually nothing, a US $ 1 billion a year market, exceeding the firms most optimistic expectations.

New Challenges in the Diamond Trade De Beers has long played a dominant role in the world diamond trade, especially through its large share of upstream mining operations and the control that DTC exerts over the distribution on stones. In response to concerns that its strong position was anticompetitive, there has historically been longterm restriction imposed on the company by American trade authorities which meant that it could not deal directly with companies in the US but only through intermediaries. In 1994, the company was also charged by the US Justice Department with violations of antitrust (competition) laws for conspiring to fix prices of industrial diamonds. However, after pleading guilty and agreeing to pay a US $ 10 million fine in 2004, these trade restrictions were lifted and De Beers was again allowed to trade directly with the US after many years. De Beers has also faced regulatory forces in Europe. To stop what were seen as anti-competitive practices which restricted the flow of rough diamonds onto the market, the European Commission ordered De Beers to stop buying stones from a rival Russian producer, Alrosa, in a settlement which allows the firm to make commitments to cease what the Commission describes as abusive practices or face a fine of 10 percent of global turnover. Similarly, before its retail joint venture with LVMH was allowed to launch, the European Commission carried out an investigation into whether this move into retailing was anticompetitive. Eventually, it was decided that the joint venture could go ahead. There have also been criticisms of the detrimental effects to the environment of diamond mining and the poor conditions experienced by workers in some parts of the diamond mining industry. De Beers and other industry members have responded by emphasizing its attempts to adopt an ethical
De Beers Final exam case

approach to production and the benefits to some African economies and communities that come from the diamond trade. The diamond business is changing as new sources of diamonds have been discovered in different parts of the world. As well as exploring for new sources in Africa, De Beers has developed a joint venture mining operation in Canada, but other supplies originating outside the companys ownership and control from both Canada and a newly liberalized Russia, have appeared on world markets. As a result, company chairman Nicky Openheimer announced in 2003 that De Beers was certainly moving away from being the ultimate controller of the diamond business. As they improve in quality with advances in technology, synthesized or cultured diamonds, which have the same composition as real stones but are produced in a laboratory, may also encroach more into the markets for traditional gems. It is now possible to produce synthetic diamonds which are flawless and increasingly difficult to tell apart from those that are mined from the ground, but which are considerably cheaper. Producers of synthesized stones also claim that their production process is more environmentally friendly and ethical.

De Beers Final exam case