Is a Diamond (cartel) Forever?

Andrea Group 4
Andrea Gonzalez Anwar Syed Maryam Reham Yao Pu Qin Lu

Diamond Industry
3

The Diamond Industry can be separated into two

distinct category:
One

dealing in Gem-grade diamonds. Another for Industrial-grade diamonds.

Both market values are different

Gem-grade Industry
4

Large trade in gem-grade diamonds

Substantial mark-up in the retail sale of gem diamonds.

There is a well-established market for sale and resale of

polished diamonds (e.g. pawn broking, auctions, second-hand jewelry stores, diamantaires etc.)
The production and distribution of diamonds is largely

consolidated in the hands of a few key players, and concentrated in traditional diamond trading centers

Antwerp is the de facto "world diamond capital". Processes 80% of all rough diamonds, 50% of all cut diamonds and more than 50% of all rough. This makes

Interesting Facts:

According to the Rio Tinto Group, in 2011 the diamonds produced and

released to the market were valued at US$12 billion as rough diamonds, US$18 billion after being cut and polished, US$ 35 billion in wholesale diamond jewelry, and US$57 billion in retail sales. Today 80 % of the world diamonds are sold in New York city
92% of the world's diamonds were cut and polished in Surat, India. Other important centers of diamond cutting and trading are the

Antwerp Belgium, London, New York City, Tel Aviv, and Amsterdam.

Industrial-grade Diamonds
6

Industrial diamonds are valued mostly for their

hardness and thermal conductivity.

570,000,000 carats (110,000 kg) of synthetic

diamond is produced annually for industrial use.

In addition to mined diamonds, synthetic diamonds

are used for industrial applications.

Major Diamond Mining Companies

7

BHP Billiton

De Beers
Rockwell Diamonds Petra Diamonds

Anglo American
Alrosa

Mine in Russia

The Birth of THE Diamond Cartel

8

Cecil Rhodes, an English tycoon, founded De Beers in

1875 Historically diamonds were expensive because they were rare. But with the discovery of mines in South Africa there was a threat to diamonds rareness Rhodes responded by buying all the diamond mines in South Africa and creating a diamond syndicate in which all sellers would buy only from him. Kept supply low and prices high.

A single-channel market

The De Beers Business Model

9

Mine rough diamonds -- classify and deliver to

Central Selling Organization(CSO), in London

There only about 100 chosen sightholders could buy

and further distribute diamonds. De Beers set the price and quantity there was no bargaining
De Beers controled exactly what and how many

stones entered the market and at what price

3 stages of development
10
Output percentage in global diamond

Challenges at the end of the 20th century

11

Adapting to the changing industry structure : monopolies no longer

accepted
Dealing with pressures for corporate social responsibility Overcoming formal institutional barriers preventing it from directly

operating in its largest market, the United States. (paid 295million)

De Beers no longer holds a monopoly of diamonds. They have begun to

develop itself as the leader in the diamond business

They partnered with Moet Hennessey Louis Vuitton to create a diamond brand and worldwide stores.

How did the Diamond Cartel run for more than a 100 years?
12

The diamond industry has an extraordinarily high

concentration

De beers had control of price Long term viability facilitated by the friendly social

relationships among participants of the cartel.

long term Profits.

Clear Strategy: Expand Demand, Limit Supply and Maximize

Diamonds are forever Campaign to prevent emergence of a

market for second hand diamonds.

High Flexibility to Adapt to new Challenges

13

Drawing on industry, resource, and institutional based views, explain why De Beers has been phenomenally successful ?

Firm Capabilities (Resource Based View)

14

Industry based view using Porters 5 Forces

Bargaining Power of Customers (low) Only provider No substitutes Customs/Traditions War Quality of Product

15

Threat of New Entry (low) High Cost of Entry Cornered the Market Strong Brand Image Existing Mining and political relationships Owns Output Distribution Channels

Existing Rivalry Strong Brand Image Trust already built with customers and partners Historical holdings Expertise Control of output Distributions Channels

Bargaining Power of Suppliers (low) Controls output Owns distribution Channels Alliances Relationships with Foreign Governments Cash on Delivery

Threat of Substitutes No substitutes for natural diamonds Social Issues/ Status Cultural history

Institution Based View

16

Friendly relationships with most governments of

diamonds producing countries. Joint production arrangements with host country governments in Botswana, Angola and the democratic Republic of Congo. Problem of beneficiation in most African countries . The Only major institutional problem was faced by the US and European government.

However De Beers lost its monopoly and the cartel is much weaker
17

How does De Beers continue to be an industry

leader? Lets look at their SWOT.

De Beers Current SWOT

18

What are the opportunities for De Beers? What are the threats? What kinds of strengths and weakness does De

Beers have when dealing with these challenges?

Strengths
19

Previous owner of the longest running diamond cartel in

the world (more than 100 years). They have expertise. and big industry of diamond-producing countries .

The friendly social relationship with most governments

Resources and capital to compete against competitors Due to reduction of sight holder it has more freedom to

make decisions from their own position

Weakness
20

The strategy of Expand demand, limit supply is not

sustainable because De Beers no longer holds sold control of the industry.

Rise of new competitors such as Broken Hill

Proprietary, Rio Tinto Diamonds, Le Leviev Diamonds and Alrossa Diamonds

Threat of man made diamonds

Opportunities
21

Opening of the U.S. market after paying 295 million

to the U.S. government in anti trust fines.

New rising economies such as China and India Reputation as largest diamond supplier market in

the world

Threats
22

The structure of whole diamond industry is changing

with the rise of new suppliers and new competitors

Too much pressures for CSR (Corporate social

responsibility)

The threat of the diamond losing its value if man

made diamonds gain popularity.

The threat of depleting quantities of diamonds

Who is one of De Beers biggest rivals?

23

Lev Leviev

De Beers vs. Leviev

24

Lev Leviev started as a sight

holder (buyer) of De Beers diamonds

In the 1990s Leviev challenged

"I grew up in the Soviet Union. I knew what it was to be afraid. I can remember being beaten by the bullies at school, and I said to myself I would never be afraid of anybody again."

De Beers diamond monopoly

Leviev became the first

vertically integrated diamond company

What is the future of the De Beer Leviev rivalry?

25

De Beers strong points

Controls 40 % of the diamond industry. Partnered with LV in order to create retail brand Startegy to become the leading diamong retailer. Spends $150 mill on ads/yr Stores in Asia, Europe, the Middle East and Russia

Levievs Strong Points

First vertically integrated

diamond dealer. Own mines in Angora, Alaska, Australia, Russia, Africa Stores in New York, London, Dubai, and Singaopre

Lets look at the rivalry through the 3 lenses

26

Resource :

De Beers has more experience and more capital than Leveiv

Institutional :
De Beers signed European and American anti-trust regulations. Leveiv on the other hand has many friends in high places

Industrial :
De Beers controls 40% of the industry. Levein continues to expand his diamond mines and partnerships.

Winner : De Beer

The Future of the Diamond Industry

27

There is an increase in demand due to new markets such

as China, Japan, India, and the Gulf countries

Despite increase in demand, supply is not unlimited Diamond supplying countries demand more and more

control of their resources

Man made diamonds pose a major threat. Companies

like Gemesis offer ecological conflict free affordable diamonds

FIN

28