1

Is a Diamond (cartel) Forever?

AndreaGroup 4

Andrea GonzalezAnwar Syed

Maryam RehamYao PuQin Lu

2

3

Diamond Industry

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

4

Gem-grade Industry

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

5Interesting 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.

6

Industrial-grade Diamonds

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.

7

Major Diamond Mining Companies

BHP BillitonDe BeersRockwell DiamondsPetra DiamondsAnglo American Alrosa

Mine in Russia

8

The Birth of THE Diamond Cartel

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 diamond’s 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”

9

The De Beers Business Model

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

10

3 stages of development

Output percentage in global diamond

11

Challenges at the end of the 20th century

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.

12

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

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.

Clear Strategy: Expand Demand, Limit Supply and Maximize long term Profits.

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 ?

14

Firm Capabilities (Resource Based View)

Threat of Substitutes • No substitutes for natural

diamonds• Social Issues/ Status• Cultural history

Bargaining Power of Suppliers(low)• Controls output• Owns distribution

Channels• Alliances• Relationships with

Foreign Governments

• Cash on Delivery

Threat of New Entry(low)• High Cost of

Entry • Cornered the

Market• Strong Brand

Image• Existing Mining

and political relationships

• Owns Output Distribution Channels

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

Existing Rivalry • Strong Brand Image• Trust already built with

customers and partners• Historical holdings• Expertise• Control of output• Distributions Channels

Industry based view using Porters 5 Forces

15

16

Institution Based View

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.

17

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

How does De Beers continue to be an industry leader? Lets look at their 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?

De Beer’s Current SWOT

19

Strengths

Previous owner of the longest running diamond cartel in the world (more than 100 years). They have expertise.

The friendly social relationship with most governments and big industry of diamond-producing countries .

Resources and capital to compete against competitors

Due to reduction of sight holder it has more freedom to make decisions from their own position

20

Weakness

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

21

Opportunities

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

22

Threats

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

23

Lev Leviev

Who is one of De Beer’s biggest rivals?

24

De Beers vs. Leviev

Lev Leviev started as a sight holder (buyer) of De Beers diamonds

In the 1990s Leviev challenged De Beer’s diamond monopoly

Leviev became the first vertically integrated diamond company

"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."

25

What is the future of the De Beer Leviev rivalry?

• First vertically integrated diamond dealer.

• Own mines in Angora, Alaska, Australia, Russia, Africa

• Stores in New York, London, Dubai, and Singaopre

• 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

Leviev’s Strong Points De Beer’s strong points

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.

Let’s look at the rivalry through the 3 lenses

Winner : De Beer

27

The Future of the Diamond Industry

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

FIN28