A New Cut On An Old Monopoly THE COMPANY THAT HAS RULED DIAMONDS FOR A CENTURY WANTS TO POLISH ITS IMAGE...AND DOMINATE AS NEVER BEFORE.
(FORTUNE Magazine) – If you wandered through Trafalgar Square on the morning of Sept. 27, past the weathered stone columns of St Martin-in-the-Fields, you might have been surprised to see a group of bearded, black-hatted Orthodox Jews standing outside the venerable Anglican parish church. Though their religious beliefs prevented them from entering, they had traveled to London from the diamond districts of New York, Antwerp, and Tel Aviv to pay tribute to Harry Oppenheimer--the former chairman of De Beers and architect of a diamond empire stretching from the southern tip of Africa to the frozen Siberian tundra.
Inside, the Reverend Nick Holtam conducted a memorial service for Oppenheimer, who had died a few weeks earlier at the age of 91. As the strains of Bach wafted through St Martin, luminaries of British society and the diamond world crowded into the wooden pews. Margaret Thatcher sat gravely in one pew. Nearby was Maurice Templesman, chairman of diamond firm Lazare Kaplan and longtime companion of Jacqueline Kennedy Onassis.
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When everyone was seated, the royal family of the diamond world, the Oppenheimers, entered and moved solemnly down the center aisle. There was Harry's widow, Bridget, who had flown in from the family estate in South Africa; Harry's cousin Anthony Oppenheimer, the rotund, rumpled De Beers director; Anthony's daughter Sophie, escorted by her husband, De Beers' consumer-marketing chief, Stephen Lussier; and Harry's son Nicky, who in 1998 succeeded his father as chairman of De Beers.
After the prayers had been intoned and the psalms sung, Nicky Oppenheimer ascended the pulpit. Carefully echoing the themes prepared by De Beers for the world's obituary pages, he spoke of his father's many "facets": his business acumen, his philanthropy, his antiapartheid activism, and his lifelong interest in African artifacts. Then, looking at the De Beers executives seated as a group in front of him, Nicky read his father's epitaph: "May he rest in peace, and may his successors be worthy."
Those in attendance must have experienced a powerful sense of deja vu. Only two months earlier many of them had heard Oppenheimer deliver another epitaph--this one for De Beers itself. In what he called "one of the most significant developments the diamond industry has seen since the 1930s," when his grandfather Ernest first took control of De Beers, Oppenheimer declared that the company was relinquishing its 112-year monopoly over the world's diamond supply. The old De Beers, referred to in the industry as "the Syndicate" for its seeming omnipotence and impenetrable facade, was dead. Now, at St Martin, the aged monopolist was being laid to rest beside the grave of his beloved monopoly.
In their place the company unveiled the new De Beers, its younger face represented by the leadership of Nicky Oppenheimer and managing director Gary Ralfe, its monopolistic approach supplanted by a strategy called Supplier of Choice. Instead of trying to control the world supply, De Beers would now focus on adding value--through marketing and branding initiatives--to the diamonds already under its dominion.
The only way to understand the magnitude of this shift is to grasp the degree of the company's dominance. For most of the 20th century, De Beers sold 85% to 90% of the diamonds mined worldwide. With this leverage, it could artificially keep diamond prices stable by matching its supply to world demand. Rockefeller's Standard Oil and Gates' Microsoft may have briefly approached this kind of dominance, but the length and extent of De Beers' supremacy is unprecedented.
Why would a company voluntarily abandon the hegemony it had held for more than 100 years? This is the question I set out to answer over three months of reporting this winter. I traveled through the company's mining operations in Africa; toured the diamond-laden sorting rooms of its sales and marketing hub in London; and interviewed more than a dozen senior De Beers executives and innumerable other players in the secretive diamond business. And gradually I realized that I needed to ask an altogether different question: Was De Beers really changing at all? Or had it crafted a tale designed to seduce and appease worried antitrust regulators in the U.S. and Europe--a tale that concealed the fact that the company's new initiative might make it as dominant in the future as it ever was?
My suspicions were confirmed by an announcement on Feb. 1, a shock that caught the industry by surprise: Anglo American PLC, the South African mining giant that is also controlled by the Oppenheimers, was in talks to buy De Beers. This represented De Beers' third epitaph in just a few months. Like the others, it raised more questions than it answered.
A CENTURY OF POWER
Pictured in the pages of De Beers' company publications, Nicky Oppenheimer projects an air of casual confidence. In one photograph he is piloting his helicopter above a herd of wild eland on one of the company's South African game reserves. In another he stands with Queen Elizabeth at Ascot, the fabled English horseracing venue. A third shows the 55-year-old decked out in cricket whites, a blue cap perched roguishly on his head, a bat tucked confidently under his arm. These are portraits of a modern Renaissance man--a billionaire business leader as adept in the cockpit and on the ball field as in the boardroom, a 20th-century monopolist ready to guide his inherited dynasty into the 21st.
In person, though, Oppenheimer is withdrawn and ill at ease. Dressed in a shabby gray-pinstripe suit, a pair of garish red-and-brown socks peeking out beneath his pant cuffs, the king of the diamond world displays none of the glamour associated with his company's product. His receding hair, unkempt gray-and-white beard, and retiring demeanor are more reminiscent of a college biology professor than a captain of industry.
We are standing in Oppenheimer's office, on the fifth floor of 17 Charterhouse Street, a modern, six-story stone-and-glass edifice on a quiet London cul-de-sac. This building, one next door, and another across the street make up De Beers' London headquarters. The innocuous facade is deceiving. Hidden among the bricks are cameras that cover every inch of space, powerful enough to record the color of a man's eyes. It is a building De Beers' executives describe as "the most secure in Europe." With good reason: Its vaults house up to $5 billion of uncut diamonds.
Two blocks west is the city's historic diamond district, Hatton Garden, once home to the diamond world's most powerful merchants. In 1888, after Cecil Rhodes had successfully consolidated South Africa's diamond mines into the company that would become De Beers, he formed a cartel with the ten largest of these merchants. Each was guaranteed a certain percentage of the diamonds pouring out of De Beers' mines. In return they provided Rhodes with data about the market so he could ensure a steady, controlled supply. In the years since--though De Beers has refined its system for disseminating diamonds, and its original partners in the cartel have been replaced by 125 of the world's most powerful manufacturers--the principle underlying their relationship has remained the same: to match the supply of diamonds at one end of the pipeline with the demand on the other.
De Beers controls its supply chain in a manner unlike that of any other industry. The company's London-based marketing arm, the Central Selling Organization (CSO), purchases the production of 13 mines owned or co-owned by De Beers in South Africa, Botswana, Namibia, and Tanzania. In 1999 this amounted to more than 44% of the world's annual output. What's more, the CSO bought $120 million of diamonds from Canada's Ekati mine and another $1.5 billion or so from Russia, which together made up an additional 25% of the world's $6.8 billion annual diamond production.
All of these diamonds are shipped to the CSO, where they are combined, separated into 14,000 categories, and divided by the company's 500 sorters into lots called "boxes." Every five weeks De Beers holds what it calls a "sight" and distributes the boxes to its 125 partners, known as "sightholders." De Beers sets the price of its boxes in advance and determines the quality and quantity each sightholder receives. Price and quantity are nonnegotiable. The sightholders take the rough diamonds back to their factories; cut and polish them into sparkling gems; and then sell them to their wholesale and retail customers throughout the world. (For more on the diamond-cutting process, see "Inside the Diamond Factory.")
Until 1998, Charterhouse Street also housed the London operations of De Beers' sister company, Anglo American PLC. Anglo is one of the world's largest mining companies. Its stock trades on the London Stock Exchange, and the company carries a market capitalization of $27 billion (vs. De Beers' $15 billion). Anglo was founded in 1917 by Nicky's grandfather Ernest Oppenheimer. When Ernest took control of De Beers' board in 1929, he initiated a cross-holding arrangement that has since grown immensely complicated. Currently De Beers owns 37% of Anglo's stock, while Anglo holds 33% of De Beers--a setup stock analysts say distorts the earnings of both companies. The Oppenheimer family controls a large percentage of each company's shares. So even if a buyout goes through, with Anglo American CEO Anthony Trahar as nominal chief of the company, the Oppenheimer family will retain a controlling influence--especially over the diamond business.
During the apartheid era, the convoluted structure between them enabled both companies to deal, through their web of subsidiaries, with countries that refused to do business with South Africa. Apartheid's demise made such obfuscation unnecessary, as De Beers executives were anxious to tell me last winter. They assured me that they had separated from Anglo American; after all, hadn't they transferred Anglo's operations out of Charterhouse Street? "With that separation," Nicky told me then, "we joined the real world, without Big Brother protecting us. The diamond business has always been secretive. De Beers lived in that environment where you didn't want to be open. You wanted to do business without regard to the outside world," he continued, his mouth forming a bemused smile. "Funnily enough, when you do change and become more open, the sky doesn't fall in." If I wanted more proof of openness, they pointed out that they had gone outside the company for help on the Supplier of Choice strategy--that instead of doing the historical thing, and keeping all discussions in-family, they had relied on the consulting firm Bain & Co. for advice.
Apparently, transparency didn't quite suit the Oppenheimers. If the Anglo buyout goes through, De Beers will likely get less transparent, not more. As Justin Pearson-Taylor, an analyst with Johannesburg brokerage Standard Equities told the New York Times, "Pressure on increasing its level of disclosure to the market dissipates. So we may never know what the returns on the diamond business actually are."
Welcome to the new, "open" world of diamonds.
THE "NEW" DE BEERS
Whoever ultimately controls the company, the man responsible for guiding De Beers on a day-to-day basis is Gary Ralfe, the company's managing director since 1998. "If De Beers were a ship," says communications director Andrew Lamont, "Nicky would be the captain on the bridge and Gary would be down below with his hands on the wheel." Ralfe is a tall, rail-thin 56-year-old whose round, flat face is dominated by bushy, demonic eyebrows. Like Nicky, Ralfe was born in South Africa and educated in England, and has been with the firm his entire career.
One morning last October I met with Ralfe to talk about Supplier of Choice and De Beers' seemingly radical shift. We sat in the glass-enclosed courtyard of Ralfe's opulent Johannesburg home, our conversation competing ever so slightly with the gurgling of an adjacent fountain. On the other side of the glass an African man tended to the garden, his silhouette framed by a brilliant array of foliage and a cloudless blue sky.
Ralfe began by talking about the emergence, in the 1990s, of a number of "seminal milestones" that undermined the company's monopoly. The first was the 1991 collapse of the Soviet Union, the world's second-largest producer, by value, of diamonds. In 1958 the Soviets discovered rich deposits in Siberia. They built Aikhal, a city encased in translucent plastic, to recover the diamonds from a landscape where temperatures sometimes drop to minus 80 degrees. When word of the discovery reached the West, De Beers' shares plummeted 30%. Recognizing the precariousness of his company's position, Harry Oppenheimer persuaded the antiapartheid, anticapitalist Soviet regime to sell its entire production to the CSO, thereby preserving De Beers' single marketing channel. But the disintegration of communism made it difficult for De Beers to protect this agreement. While De Beers and Russia have had a series of contracts since, an increasing percentage of Russian diamonds are now sold outside the CSO.
In 1996 the cartel was shaken further when Australia's Argyle diamond mine became the first major producer to terminate its contract with De Beers. Argyle produces more diamonds, by volume, than any other mine in the world. While most are of poor quality, De Beers found a use for them with the growing popularity of inexpensive jewelry. So Argyle's decision to market its own diamonds--to De Beers' sightholders and others--hurt the company at the low end of its market.
As Argyle slipped from De Beers' grasp, a new diamond superpower was emerging: Canada. The discovery in the 1990s of several rich diamond deposits in the Northwest Territories--Ekati, Diavik, and Winspear--was the third milestone to erode De Beers' monopoly. Though the company was able to secure 35% of the production of Ekati, and last August launched a successful takeover of Winspear, Ralfe says it does not hold the overwhelming position in Canada that it would have insisted on in the past.
The sudden emergence of all these producers meant that De Beers, in an effort to keep prices high, was forced both to hold back a large portion of its diamonds and to purchase much of the excess supply of its new competitors--often at inflated prices. The company's market share fell from 85% to 65%, and its stockpile soared from $2.5 billion to $5 billion--tying up cash reserves and antagonizing investors, who battered its stock. (De Beers' share price on Dec. 31, 1989, was $17; on Dec. 31, 1998, when the company initiated its strategic review, its shares closed at $12.)
"As a public company, our first duty is to our shareholders," said Ralfe. "This seems to have been lost in the great imperial quest for control. The way we did business, which revolved around the central concept of controlling supply in the market, was simply not viable in this more competitive environment."
Not to mention an environment in which antitrust regulators were becoming ever more active. The U.S. Department of Justice has been investigating De Beers for years and still has an outstanding indictment against the company from a 1994 price-fixing case. As a result, De Beers can't deal directly with its largest market, and its directors won't even enter the U.S. for fear of arrest. (It seems unlikely that an Anglo American purchase would resolve any of De Beers' antitrust woes.)
Though De Beers has largely managed to sidestep this issue by having its American customers travel to London, it isn't as easy for the company to avoid trustbusters from the European Union. EU antitrust commissioner Mario Monti, the man who dismantled the proposed Sprint/MCI WorldCom merger, applied last fall for the power--along the lines of that granted by the U.S.'s Sherman Antitrust Act--to break up dominant companies by forcing them to shed assets. And since several former sightholders have complained to him about De Beers' monopolistic practices, there is widespread speculation that the company may well be a future target of his.
No wonder, then, that De Beers is spinning Supplier of Choice as a strategy designed for a new environment. "We don't have to go rushing about the world trying to buy every diamond," said Ralfe. "What is the point of us buying diamonds close to or over our selling prices? It's silly." He continued, "I'm perfectly happy to market 60%. What I want to do is differentiate the portion that does come to us and create value on those goods...in order to sell them first, more advantageously, and at better prices."
How exactly does Ralfe plan to go about "creating" value with Supplier of Choice? The answer, in a word, is branding. In the past few years the diamond industry has failed to generate the earnings growth and profit margins enjoyed by other luxury-goods purveyors. Ralfe blames a lack of strong brands, which he said has led to the commoditization of diamonds. "I don't want diamonds to be discounted," he said. "I abhor it. What is tantalizing is that at the luxury end--the famous blue box of Tiffany's--there are brands getting the margins and markups enjoyed in the luxury-goods business as a whole. We want to see stores pushing the preciousness of diamonds rather than treating them as a commodity you can discount."
With Supplier of Choice, De Beers unveiled two branding initiatives. The first, called the Forevermark, is a hallmark, like the INTEL INSIDE symbol, guaranteeing the integrity of De Beers' diamonds. The second is the De Beers name itself. On Jan. 16 the company announced it had formed a new company, in partnership with French conglomerate LVMH Moet Hennessy Louis Vuitton, to develop a retail strategy for the De Beers brand. The Forevermark has replaced the name "De Beers" on the company's famous "A diamond is forever" advertising campaign, leaving the De Beers brand free to be exploited by the new entity.
As it seeks to leverage those brands, De Beers is taking more interest in managing its diamond pipeline--the network of sightholders, wholesalers, and retailers that disseminates its diamonds. "Our relationship with our sightholders has been very arm's-length," says Gareth Penny, De Beers' 38-year-old director of sales and marketing. "We haven't ever really found a need to know what they do with the diamonds we sell them. Now we are trying to make sure that the diamonds we sell are put into the strongest, most effective hands."
In order to make that happen, De Beers asked its sightholders to fill out a questionnaire providing the Diamond Trading Co. (the DTC is the bland new name for the more sinister-sounding Central Selling Organization) with data--assets, cash flow, and other intimate financial details--about their companies. They formalized their partnership with a written contract, previously unheard of in this handshake-driven business. Most important, they amended the criteria for being a sightholder. De Beers historically chose sightholders for their financial strength and manufacturing skills. Now it also looks for marketing savvy.
Penny cites a recent partnership between its sightholder the Pluczenik Group and the Munich fashion house Escada as an example of what Supplier of Choice can accomplish. Last year the Pluczeniks approached Escada to design a line of diamond jewelry under the Escada name. The Pluczeniks agreed to supply the diamonds, subsidize Escada's advertising costs, and educate the company's sales force. Escada launched the line last October at gala events in its New York and Paris boutiques, and will test it in seven locations worldwide.
For their efforts, sightholders get more than just guaranteed supply. They are entitled to use De Beers' Forevermark--and all the research, marketing savvy, and consumer confidence it represents. In its former role as market custodian, De Beers let everyone in the industry benefit from its advertising campaigns, which last year cost the company $150 million. In addition, De Beers maintains a consumer-marketing department--at an annual cost of $5 million--that tracks everything from buying habits and patterns to the number of engagements worldwide. As producers defected from the DTC, De Beers tired of giving them a free ride with its generic advertising. Now all that marketing data is just for De Beers' customers. "We want people to say, 'While I can get diamonds from people other than De Beers, the package De Beers gives me is so valuable, I get a better return from them,'" says Nicky Oppenheimer.
De Beers' plan seems a brilliant response to the changing conditions of the diamond business. Faced with the increasingly intractable logistical and financial realities of controlling the fate of every diamond, De Beers has set in motion a formula for making the diamonds under its control more valuable--simply because they have the company's imprimatur.
THE POWER PLAY
Carved out of the southwest coast of Africa, where the mouth of the Orange River meets the waters of the Atlantic, is a rectangular strip of desert known as the Sperrgebiet: the forbidden territory. It is an inhospitable place, encompassing 10,000 sun-bleached square miles of sand. Thanks to an accident of geology millions of years ago in which masses of rough diamonds were transported from South Africa by the Orange River and deposited within its borders, the Sperrgebiet has become one of the most protected stretches of real estate in the world. There are only two ways in and out: a single two-lane highway and a small, dusty airstrip. Diamonds have been pulled from the riverbed here since 1908, when the country was a German protectorate known as South West Africa. De Beers has controlled the area since 1920; in 1994, after the country gained its independence as Namibia, De Beers formed the Namdeb Diamond Corp., a fifty-fifty partnership with the new government.
On a sweltering morning last October I found myself in an eight-seater Sikorsky Seahawk helicopter as it lifted off the runway of Namdeb's airport and climbed 1,000 feet above the desert. The helicopter flew over a solitary patch of green: Oranjemund, the town adjacent to the Namibian diamond mines. Then it headed out over the Atlantic.
I was encased in a tight-fitting wet suit and a yellow life preserver (a safety video had informed me that the helicopter would float if it crashed). A red speck emerged in the distance, then gradually materialized into the Debmar Atlantic--a diamond-mining and -processing plant in the guise of a large ship.
The Seahawk landed on the ship's helipad. Feeling a bit like Sean Connery in Diamonds Are Forever, I sprinted away from the helicopter's spinning blades, peeled off my wet suit, and descended a steep ladder into the bowels of the ship. For the next two hours, I was given a tour of one of the technological marvels of the diamond world: deep-sea mining.
As the once fertile beaches along the Namibian coast dry up, De Beers is placing its bets on the Debmar Atlantic and seven sister ships. Last year the company's marine division recovered more than 570,000 carats of high-quality diamonds from the waters off the Namibian coast. The process is remarkable. Special drill bits, 23 feet in diameter, burrow into the ocean floor, releasing a mix of diamond and ore that is sucked through 300 feet of tubing to the surface, where machines separate the diamonds from the surrounding material and pack them, like chunky soup, into aluminum cans. For security reasons, no human comes into contact with the diamonds until the cans have been sealed. Operating 24 hours a day, 365 days a year, the ships cover 1.2 square miles of ocean annually. No patch is left untouched.
De Beers had invited me to Namibia, along with the diamond editors of four American jewelry trade magazines, as part of a tour of the company's operations in Namibia, Botswana, South Africa, and the war-torn jungles of Angola. Over 14 days, 16 flights, and countless meetings with senior De Beers personnel, we were subjected to an endless sales pitch about Supplier of Choice and the new De Beers.
When it launched Supplier of Choice last July with a PR barrage, the once media-shy company got exactly the reception it wanted: "After a 60-year effort to hoard every diamond on Earth, De Beers decides to open the market," reported Time. DE BEERS TO ABANDON MONOPOLY, AIM AT NEW ROLE IN DIAMONDS, pronounced the Wall Street Journal. DE BEERS HALTS ITS HOARDING OF DIAMONDS, declared the New York Times.
My trip to Africa was meant to be the clincher, a demonstration of the new, transparent De Beers. But as I witnessed first-hand the company's sprawling empire, heard about its many expansion plans, and experienced its unrelenting focus on secrecy and control, I came to a different conclusion. As it implements its new strategy, De Beers is hardly abandoning the tactics that have defined its corporate culture for more than a century.
Prior to my James Bond-like adventure on the Debmar Atlantic, the sheer magnitude of De Beers' African operations had already overwhelmed me. At Orapa, a Grand Canyonesque pit in northern Botswana, Caterpillar trucks with 20-foot-high wheels and beds that carry nearly ten million tons of diamondiferous ore a year seemed more like Tonka toys, their tonnage dwarfed by the scale of the world's second-largest diamond mine. At Namdeb, I had watched giant bucket-wheels the size of Ferris wheels scoop out 65 feet of sand to expose diamond-encrusted bedrock so that miners in sand-covered overalls could vacuum the diamonds off the rocks.
The company's expansion plans are equally outsized. A proposed $300 million extension will double the capacity of the Premier mine, located just an hour from Johannesburg. A sparkling, largely automated recovery plant being built at Orapa will double that mine's output of nearly $1 billion per year. And De Beers is aggressively pursuing diamond properties around the globe. Last July, precisely at the moment it was proclaiming an end to its monopoly, De Beers launched two hostile takeover bids. The first, a $205 million offer for Winspear, a mine in Canada's Northwest Territories, was approved last August. The second, a $389 million bid for Australia's Ashton Mining--and its Argyle mine--was held up by the European Union's antitrust commission, so Ashton accepted a lower offer from a competitor.
De Beers was even making forays into Angola, albeit carefully. For more than 25 years Angola has been locked in a brutal, debilitating civil war. Begun as a struggle against the Portuguese occupation, the war has most recently been fought over the country's vast natural resources, chiefly oil and diamonds. Angola mines between $600 million and $800 million of diamonds each year, making it the fourth-largest producer, by value, in the world. One-fifth of that production comes from the country's only mine, Catoca. The rest is scattered in alluvial (surface) deposits.
The old De Beers prospected for underground deposits in Angola. And in its effort to control the world's diamond supply, it also bought lots of alluvial diamonds--both from the Angolan government and from areas controlled by rebels.
By 1998, De Beers' Angolan adventure threatened to become a PR nightmare. The nongovernmental organization Global Witness publicized the atrocities that rebel forces in Angola and other African countries were committing to gain access to their countries' diamonds. The phrase "conflict diamonds" entered the lexicon; the United Nations passed resolutions calling for a boycott; and U.S. Congressman Tony Hall sponsored a bill that called for an embargo against diamonds not certified by the governments of Sierra Leone and Angola. Fearful of a consumer backlash, De Beers closed its buying offices in Angola and the Democratic Republic of Congo (DRC).
Moments after De Beers shut its doors, Angola awarded the marketing rights for the country's diamonds to Ascorp, a state partnership with Lev Leviev, a Russian/Israeli diamond manufacturer and former De Beers sightholder. As a result Leviev now controls one of the largest sources of diamonds outside De Beers.
Despite its new, supposedly open mindset, De Beers is hardly comfortable ceding control over such an important producer of diamonds. So it is maintaining a presence in Angola, though a low-key one. Its representatives continue to negotiate with the government, it has just recently finished construction on a 12-story sorting house in downtown Luanda, and it still spends about $8 million a year prospecting in the Angolan jungles.
In the meantime the company is happily reaping the PR benefits of being able to call itself a "conflict-free" supplier. Diamonds that carry its new Forevermark are guaranteed to be conflict-free, and the company says that any sightholder caught handling conflict diamonds would be excommunicated. And last August, De Beers and other industry leaders formed the World Diamond Council, whose mandate is to eradicate conflict diamonds from the rest of the world's supply.
While the company seems to be winning this particular PR battle, its uneasy effort to tiptoe through the Angolan minefield exemplifies the problem De Beers faces as it simultaneously tries to open up and to wield the monopolistic powers of the old De Beers. Throughout my trip to Africa, I was confronted with evidence of this schism. Even as the company openly exhibited its expansion plans and granted access to its mining operations, it displayed the secrecy and stifling control for which the old De Beers was famous. Every minute of every day was rigidly scheduled. There was little room to escape, to veer from the confines of De Beers' yellow-brick road and seek the company behind the curtain.
But we didn't need to veer too far. Signs of the old De Beers were everywhere: At an orphans' village in Gaborone, Botswana, where De Beers had taken us to illustrate the company's commitment to social causes, even though the village's leader admitted, reluctantly, that Debswana, the partnership between De Beers and the government, contributed only $14,000 (about 2% of the annual budget)...In a seedy bar in Oranjemund, where one of Namdeb's miners complained, "The security for the diamonds is 110%; the security for us is not so good." Everything about the place, he said, can be summed up by the food, which "looks great on the outside but tastes like shit." The only thing left to do here, he said, staring at the label on his beer, "is to empty the bottle"...And even in the posh confines of the De Beers guesthouse. On our last night at Namdeb, I asked Alan Ashworth, the mine's manager, why we hadn't been able to see the "recovery area"--the part of the mine where the final separation between diamonds and ore takes place. "It's a question of security," he replied. Earlier that day at the mine, even though none of our group had come within a hundred yards of a diamond, we had all been X-rayed. (Employees are X-rayed every two weeks; Namdeb was in the process of implementing a low-dosage machine called Scannex that will allow it to X-ray all of its employees daily.) "How do we know that one of you wasn't recruited by some international crime syndicate?" Ashworth asked, his pale, mustachioed face reddening with anger. True, Namdeb is an alluvial mine that experiences a higher level of theft than De Beers' other operations. Still, Ashworth's response seemed paranoid. After all, for every 270 tons of sand they move, Namdeb's miners recover less than a handful of diamonds. Many miners work their entire careers without once seeing a diamond.
A GREAT BRAND IS FOREVER
A century of history, and a lifetime of hubris, is difficult to change. Transforming its corporate culture from that of a ponderous colonial-era monopoly may in fact be De Beers' greatest challenge as it implements Supplier of Choice. "There are very few companies...you may struggle to find even one, that has been the leader of its industry for its entire history," says Gareth Penny, his jaw clenching with pride. "We want to build on the best of the past and make sure we maintain that position."
For Supplier of Choice to succeed, De Beers will need to become a lithe, brand-savvy enterprise in an industry with little success at building brands. Indeed, while the top 15 perfume brands dominate 80% of their industry, the top 15 jewelry brands have less than 15% market share.
Yet diamonds can be branded successfully, as a Bostonian by the name of Glenn Rothman has proved over the past few years. Rothman is a diamond wholesaler who in the past also hawked leather goods. Four years ago he decided to start selling a branded diamond (he buys his raw stones from De Beers sightholders and others) under a name one might think better suited for a romance novel--Hearts on Fire. Rather than follow the long-held customs of his fellow diamond wholesalers, Rothman chose to emulate consumer-marketing pioneers like Nike. He spends 8% of gross revenue on public relations and marketing, well above the industry average of 1%; and he supports his brand with significant educational initiatives, including a two-day, $500,000 training extravaganza he calls Hearts on Fire University. The result: A brand that didn't exist in 1995 now does $40 million in sales each year--making it a phenomenal success in this industry.
"All the retailers in all the malls carried the same product," says Rothman. "They had no way to give the consumer some sense of difference or exclusivity. The only way I could make any kind of profit was by creating a powerful consumer brand."
Hearts on Fire provides differentiation through its cut. Polished to a mathematical formula known in the trade as an ideal cut, Rothman's diamonds, when viewed under a special scope, exhibit perfect symmetrical patterns. From the top, you see a ring of eight hearts; from the bottom, eight corresponding arrow-shaped bursts of fire. Thus, he says, consumer fears about quality are removed--and the retailer can charge enough to earn a decent profit.
This is the kind of thinking De Beers will have to bring to its own branding efforts. Through Supplier of Choice, the company will reward sightholders that build strong brands, whether by teaming up with established labels--as the Pluczeniks did with Escada--or by creating their own versions of Hearts on Fire. Those in the industry interpret this as a sign that De Beers will eventually pare down its sightholders to the most powerful manufacturers with the most successful retail clientele. "There will be winners and losers," says Adam Nagel of W. Nagel, brokers who represent sightholders in their interactions with De Beers. "Some clients are more vulnerable; some have stronger cases than others. But proposing and implementing are two very different things."
Already De Beers has instituted co-op initiatives with its sightholders that will reimburse them for a portion of the money they spend on their customers' advertising and marketing efforts. "By giving away these kinds of percentages, all of the best customers in the world will end up in the hands of the strongest sightholders," says Rothman, who himself has been approached by several sightholders to sell them his brand.
The picture Rothman paints is a compelling one. De Beers will place its diamonds with the most profitable, marketing-savvy sightholders, which in turn will sell them to the most profitable, marketing-savvy retailers. The cartel of the many will be transformed into an equally powerful cartel of the few.
Whether or not the advertising blitz that is sure to follow in the next year actually results in the establishment of brawny new brands, De Beers will be the ultimate beneficiary. The more ad money spent, the more diamonds people buy. And when people buy diamonds, De Beers profits. It is the reason the company spends $150 million a year to advertise cut diamonds--a product it doesn't even sell...yet. When De Beers announced its partnership with LVMH, it once again exhibited its desire to have things both ways. On the one hand, it wants to maintain, and expand through Supplier of Choice, its core business of mining and marketing rough diamonds. On the other, it wants to leverage the powerful consumer brand it has built for diamond jewelry by selling De Beers-branded diamonds and opening De Beers boutiques--a move that will put the company in direct competition with its sightholders' retail customers. De Beers has tried to downplay this conflict by emphasizing that the new company will be independent from De Beers and will have to purchase its diamonds like any other retailer--and not directly from De Beers. Sightholders are far from convinced. "Until now, the industry viewed De Beers sightholders as a step below God," says one, who prefers to remain nameless. "I'm concerned that the way my customers feel about my association with De Beers will change."
Of course, for the plan to fully succeed, De Beers will need to allay the fears of antitrust regulators in the U.S. and abroad. The company will not dominate the supply of rough diamonds as it once did. But its plan to transform itself may well give it even greater leverage over the strongest manufacturers, wholesalers, and retailers, the ones the company needs as it seeks ever higher margins for diamonds. Whether this new De Beers would be as disturbing to regulators as the old is an open question. Clearly, De Beers executives are nervous about the answer. When the subject comes up, their confident manner abates and their eyes look away. "Where we have moved to as a company is a very compelling situation, and we hope that they recognize that," says Gareth Penny, echoing the phrases of his colleagues. "You don't turn history around in a matter of months. But I think they know our door is open."
By Nicholas Stein
February 19, 2001
(FORTUNE Magazine) – If you wandered through Trafalgar Square on the morning of Sept. 27, past the weathered stone columns of St Martin-in-the-Fields, you might have been surprised to see a group of bearded, black-hatted Orthodox Jews standing outside the venerable Anglican parish church. Though their religious beliefs prevented them from entering, they had traveled to London from the diamond districts of New York, Antwerp, and Tel Aviv to pay tribute to Harry Oppenheimer--the former chairman of De Beers and architect of a diamond empire stretching from the southern tip of Africa to the frozen Siberian tundra.
Inside, the Reverend Nick Holtam conducted a memorial service for Oppenheimer, who had died a few weeks earlier at the age of 91. As the strains of Bach wafted through St Martin, luminaries of British society and the diamond world crowded into the wooden pews. Margaret Thatcher sat gravely in one pew. Nearby was Maurice Templesman, chairman of diamond firm Lazare Kaplan and longtime companion of Jacqueline Kennedy Onassis.
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When everyone was seated, the royal family of the diamond world, the Oppenheimers, entered and moved solemnly down the center aisle. There was Harry's widow, Bridget, who had flown in from the family estate in South Africa; Harry's cousin Anthony Oppenheimer, the rotund, rumpled De Beers director; Anthony's daughter Sophie, escorted by her husband, De Beers' consumer-marketing chief, Stephen Lussier; and Harry's son Nicky, who in 1998 succeeded his father as chairman of De Beers.
After the prayers had been intoned and the psalms sung, Nicky Oppenheimer ascended the pulpit. Carefully echoing the themes prepared by De Beers for the world's obituary pages, he spoke of his father's many "facets": his business acumen, his philanthropy, his antiapartheid activism, and his lifelong interest in African artifacts. Then, looking at the De Beers executives seated as a group in front of him, Nicky read his father's epitaph: "May he rest in peace, and may his successors be worthy."
Those in attendance must have experienced a powerful sense of deja vu. Only two months earlier many of them had heard Oppenheimer deliver another epitaph--this one for De Beers itself. In what he called "one of the most significant developments the diamond industry has seen since the 1930s," when his grandfather Ernest first took control of De Beers, Oppenheimer declared that the company was relinquishing its 112-year monopoly over the world's diamond supply. The old De Beers, referred to in the industry as "the Syndicate" for its seeming omnipotence and impenetrable facade, was dead. Now, at St Martin, the aged monopolist was being laid to rest beside the grave of his beloved monopoly.
In their place the company unveiled the new De Beers, its younger face represented by the leadership of Nicky Oppenheimer and managing director Gary Ralfe, its monopolistic approach supplanted by a strategy called Supplier of Choice. Instead of trying to control the world supply, De Beers would now focus on adding value--through marketing and branding initiatives--to the diamonds already under its dominion.
The only way to understand the magnitude of this shift is to grasp the degree of the company's dominance. For most of the 20th century, De Beers sold 85% to 90% of the diamonds mined worldwide. With this leverage, it could artificially keep diamond prices stable by matching its supply to world demand. Rockefeller's Standard Oil and Gates' Microsoft may have briefly approached this kind of dominance, but the length and extent of De Beers' supremacy is unprecedented.
Why would a company voluntarily abandon the hegemony it had held for more than 100 years? This is the question I set out to answer over three months of reporting this winter. I traveled through the company's mining operations in Africa; toured the diamond-laden sorting rooms of its sales and marketing hub in London; and interviewed more than a dozen senior De Beers executives and innumerable other players in the secretive diamond business. And gradually I realized that I needed to ask an altogether different question: Was De Beers really changing at all? Or had it crafted a tale designed to seduce and appease worried antitrust regulators in the U.S. and Europe--a tale that concealed the fact that the company's new initiative might make it as dominant in the future as it ever was?
My suspicions were confirmed by an announcement on Feb. 1, a shock that caught the industry by surprise: Anglo American PLC, the South African mining giant that is also controlled by the Oppenheimers, was in talks to buy De Beers. This represented De Beers' third epitaph in just a few months. Like the others, it raised more questions than it answered.
A CENTURY OF POWER
Pictured in the pages of De Beers' company publications, Nicky Oppenheimer projects an air of casual confidence. In one photograph he is piloting his helicopter above a herd of wild eland on one of the company's South African game reserves. In another he stands with Queen Elizabeth at Ascot, the fabled English horseracing venue. A third shows the 55-year-old decked out in cricket whites, a blue cap perched roguishly on his head, a bat tucked confidently under his arm. These are portraits of a modern Renaissance man--a billionaire business leader as adept in the cockpit and on the ball field as in the boardroom, a 20th-century monopolist ready to guide his inherited dynasty into the 21st.
In person, though, Oppenheimer is withdrawn and ill at ease. Dressed in a shabby gray-pinstripe suit, a pair of garish red-and-brown socks peeking out beneath his pant cuffs, the king of the diamond world displays none of the glamour associated with his company's product. His receding hair, unkempt gray-and-white beard, and retiring demeanor are more reminiscent of a college biology professor than a captain of industry.
We are standing in Oppenheimer's office, on the fifth floor of 17 Charterhouse Street, a modern, six-story stone-and-glass edifice on a quiet London cul-de-sac. This building, one next door, and another across the street make up De Beers' London headquarters. The innocuous facade is deceiving. Hidden among the bricks are cameras that cover every inch of space, powerful enough to record the color of a man's eyes. It is a building De Beers' executives describe as "the most secure in Europe." With good reason: Its vaults house up to $5 billion of uncut diamonds.
Two blocks west is the city's historic diamond district, Hatton Garden, once home to the diamond world's most powerful merchants. In 1888, after Cecil Rhodes had successfully consolidated South Africa's diamond mines into the company that would become De Beers, he formed a cartel with the ten largest of these merchants. Each was guaranteed a certain percentage of the diamonds pouring out of De Beers' mines. In return they provided Rhodes with data about the market so he could ensure a steady, controlled supply. In the years since--though De Beers has refined its system for disseminating diamonds, and its original partners in the cartel have been replaced by 125 of the world's most powerful manufacturers--the principle underlying their relationship has remained the same: to match the supply of diamonds at one end of the pipeline with the demand on the other.
De Beers controls its supply chain in a manner unlike that of any other industry. The company's London-based marketing arm, the Central Selling Organization (CSO), purchases the production of 13 mines owned or co-owned by De Beers in South Africa, Botswana, Namibia, and Tanzania. In 1999 this amounted to more than 44% of the world's annual output. What's more, the CSO bought $120 million of diamonds from Canada's Ekati mine and another $1.5 billion or so from Russia, which together made up an additional 25% of the world's $6.8 billion annual diamond production.
All of these diamonds are shipped to the CSO, where they are combined, separated into 14,000 categories, and divided by the company's 500 sorters into lots called "boxes." Every five weeks De Beers holds what it calls a "sight" and distributes the boxes to its 125 partners, known as "sightholders." De Beers sets the price of its boxes in advance and determines the quality and quantity each sightholder receives. Price and quantity are nonnegotiable. The sightholders take the rough diamonds back to their factories; cut and polish them into sparkling gems; and then sell them to their wholesale and retail customers throughout the world. (For more on the diamond-cutting process, see "Inside the Diamond Factory.")
Until 1998, Charterhouse Street also housed the London operations of De Beers' sister company, Anglo American PLC. Anglo is one of the world's largest mining companies. Its stock trades on the London Stock Exchange, and the company carries a market capitalization of $27 billion (vs. De Beers' $15 billion). Anglo was founded in 1917 by Nicky's grandfather Ernest Oppenheimer. When Ernest took control of De Beers' board in 1929, he initiated a cross-holding arrangement that has since grown immensely complicated. Currently De Beers owns 37% of Anglo's stock, while Anglo holds 33% of De Beers--a setup stock analysts say distorts the earnings of both companies. The Oppenheimer family controls a large percentage of each company's shares. So even if a buyout goes through, with Anglo American CEO Anthony Trahar as nominal chief of the company, the Oppenheimer family will retain a controlling influence--especially over the diamond business.
During the apartheid era, the convoluted structure between them enabled both companies to deal, through their web of subsidiaries, with countries that refused to do business with South Africa. Apartheid's demise made such obfuscation unnecessary, as De Beers executives were anxious to tell me last winter. They assured me that they had separated from Anglo American; after all, hadn't they transferred Anglo's operations out of Charterhouse Street? "With that separation," Nicky told me then, "we joined the real world, without Big Brother protecting us. The diamond business has always been secretive. De Beers lived in that environment where you didn't want to be open. You wanted to do business without regard to the outside world," he continued, his mouth forming a bemused smile. "Funnily enough, when you do change and become more open, the sky doesn't fall in." If I wanted more proof of openness, they pointed out that they had gone outside the company for help on the Supplier of Choice strategy--that instead of doing the historical thing, and keeping all discussions in-family, they had relied on the consulting firm Bain & Co. for advice.
Apparently, transparency didn't quite suit the Oppenheimers. If the Anglo buyout goes through, De Beers will likely get less transparent, not more. As Justin Pearson-Taylor, an analyst with Johannesburg brokerage Standard Equities told the New York Times, "Pressure on increasing its level of disclosure to the market dissipates. So we may never know what the returns on the diamond business actually are."
Welcome to the new, "open" world of diamonds.
THE "NEW" DE BEERS
Whoever ultimately controls the company, the man responsible for guiding De Beers on a day-to-day basis is Gary Ralfe, the company's managing director since 1998. "If De Beers were a ship," says communications director Andrew Lamont, "Nicky would be the captain on the bridge and Gary would be down below with his hands on the wheel." Ralfe is a tall, rail-thin 56-year-old whose round, flat face is dominated by bushy, demonic eyebrows. Like Nicky, Ralfe was born in South Africa and educated in England, and has been with the firm his entire career.
One morning last October I met with Ralfe to talk about Supplier of Choice and De Beers' seemingly radical shift. We sat in the glass-enclosed courtyard of Ralfe's opulent Johannesburg home, our conversation competing ever so slightly with the gurgling of an adjacent fountain. On the other side of the glass an African man tended to the garden, his silhouette framed by a brilliant array of foliage and a cloudless blue sky.
Ralfe began by talking about the emergence, in the 1990s, of a number of "seminal milestones" that undermined the company's monopoly. The first was the 1991 collapse of the Soviet Union, the world's second-largest producer, by value, of diamonds. In 1958 the Soviets discovered rich deposits in Siberia. They built Aikhal, a city encased in translucent plastic, to recover the diamonds from a landscape where temperatures sometimes drop to minus 80 degrees. When word of the discovery reached the West, De Beers' shares plummeted 30%. Recognizing the precariousness of his company's position, Harry Oppenheimer persuaded the antiapartheid, anticapitalist Soviet regime to sell its entire production to the CSO, thereby preserving De Beers' single marketing channel. But the disintegration of communism made it difficult for De Beers to protect this agreement. While De Beers and Russia have had a series of contracts since, an increasing percentage of Russian diamonds are now sold outside the CSO.
In 1996 the cartel was shaken further when Australia's Argyle diamond mine became the first major producer to terminate its contract with De Beers. Argyle produces more diamonds, by volume, than any other mine in the world. While most are of poor quality, De Beers found a use for them with the growing popularity of inexpensive jewelry. So Argyle's decision to market its own diamonds--to De Beers' sightholders and others--hurt the company at the low end of its market.
As Argyle slipped from De Beers' grasp, a new diamond superpower was emerging: Canada. The discovery in the 1990s of several rich diamond deposits in the Northwest Territories--Ekati, Diavik, and Winspear--was the third milestone to erode De Beers' monopoly. Though the company was able to secure 35% of the production of Ekati, and last August launched a successful takeover of Winspear, Ralfe says it does not hold the overwhelming position in Canada that it would have insisted on in the past.
The sudden emergence of all these producers meant that De Beers, in an effort to keep prices high, was forced both to hold back a large portion of its diamonds and to purchase much of the excess supply of its new competitors--often at inflated prices. The company's market share fell from 85% to 65%, and its stockpile soared from $2.5 billion to $5 billion--tying up cash reserves and antagonizing investors, who battered its stock. (De Beers' share price on Dec. 31, 1989, was $17; on Dec. 31, 1998, when the company initiated its strategic review, its shares closed at $12.)
"As a public company, our first duty is to our shareholders," said Ralfe. "This seems to have been lost in the great imperial quest for control. The way we did business, which revolved around the central concept of controlling supply in the market, was simply not viable in this more competitive environment."
Not to mention an environment in which antitrust regulators were becoming ever more active. The U.S. Department of Justice has been investigating De Beers for years and still has an outstanding indictment against the company from a 1994 price-fixing case. As a result, De Beers can't deal directly with its largest market, and its directors won't even enter the U.S. for fear of arrest. (It seems unlikely that an Anglo American purchase would resolve any of De Beers' antitrust woes.)
Though De Beers has largely managed to sidestep this issue by having its American customers travel to London, it isn't as easy for the company to avoid trustbusters from the European Union. EU antitrust commissioner Mario Monti, the man who dismantled the proposed Sprint/MCI WorldCom merger, applied last fall for the power--along the lines of that granted by the U.S.'s Sherman Antitrust Act--to break up dominant companies by forcing them to shed assets. And since several former sightholders have complained to him about De Beers' monopolistic practices, there is widespread speculation that the company may well be a future target of his.
No wonder, then, that De Beers is spinning Supplier of Choice as a strategy designed for a new environment. "We don't have to go rushing about the world trying to buy every diamond," said Ralfe. "What is the point of us buying diamonds close to or over our selling prices? It's silly." He continued, "I'm perfectly happy to market 60%. What I want to do is differentiate the portion that does come to us and create value on those goods...in order to sell them first, more advantageously, and at better prices."
How exactly does Ralfe plan to go about "creating" value with Supplier of Choice? The answer, in a word, is branding. In the past few years the diamond industry has failed to generate the earnings growth and profit margins enjoyed by other luxury-goods purveyors. Ralfe blames a lack of strong brands, which he said has led to the commoditization of diamonds. "I don't want diamonds to be discounted," he said. "I abhor it. What is tantalizing is that at the luxury end--the famous blue box of Tiffany's--there are brands getting the margins and markups enjoyed in the luxury-goods business as a whole. We want to see stores pushing the preciousness of diamonds rather than treating them as a commodity you can discount."
With Supplier of Choice, De Beers unveiled two branding initiatives. The first, called the Forevermark, is a hallmark, like the INTEL INSIDE symbol, guaranteeing the integrity of De Beers' diamonds. The second is the De Beers name itself. On Jan. 16 the company announced it had formed a new company, in partnership with French conglomerate LVMH Moet Hennessy Louis Vuitton, to develop a retail strategy for the De Beers brand. The Forevermark has replaced the name "De Beers" on the company's famous "A diamond is forever" advertising campaign, leaving the De Beers brand free to be exploited by the new entity.
As it seeks to leverage those brands, De Beers is taking more interest in managing its diamond pipeline--the network of sightholders, wholesalers, and retailers that disseminates its diamonds. "Our relationship with our sightholders has been very arm's-length," says Gareth Penny, De Beers' 38-year-old director of sales and marketing. "We haven't ever really found a need to know what they do with the diamonds we sell them. Now we are trying to make sure that the diamonds we sell are put into the strongest, most effective hands."
In order to make that happen, De Beers asked its sightholders to fill out a questionnaire providing the Diamond Trading Co. (the DTC is the bland new name for the more sinister-sounding Central Selling Organization) with data--assets, cash flow, and other intimate financial details--about their companies. They formalized their partnership with a written contract, previously unheard of in this handshake-driven business. Most important, they amended the criteria for being a sightholder. De Beers historically chose sightholders for their financial strength and manufacturing skills. Now it also looks for marketing savvy.
Penny cites a recent partnership between its sightholder the Pluczenik Group and the Munich fashion house Escada as an example of what Supplier of Choice can accomplish. Last year the Pluczeniks approached Escada to design a line of diamond jewelry under the Escada name. The Pluczeniks agreed to supply the diamonds, subsidize Escada's advertising costs, and educate the company's sales force. Escada launched the line last October at gala events in its New York and Paris boutiques, and will test it in seven locations worldwide.
For their efforts, sightholders get more than just guaranteed supply. They are entitled to use De Beers' Forevermark--and all the research, marketing savvy, and consumer confidence it represents. In its former role as market custodian, De Beers let everyone in the industry benefit from its advertising campaigns, which last year cost the company $150 million. In addition, De Beers maintains a consumer-marketing department--at an annual cost of $5 million--that tracks everything from buying habits and patterns to the number of engagements worldwide. As producers defected from the DTC, De Beers tired of giving them a free ride with its generic advertising. Now all that marketing data is just for De Beers' customers. "We want people to say, 'While I can get diamonds from people other than De Beers, the package De Beers gives me is so valuable, I get a better return from them,'" says Nicky Oppenheimer.
De Beers' plan seems a brilliant response to the changing conditions of the diamond business. Faced with the increasingly intractable logistical and financial realities of controlling the fate of every diamond, De Beers has set in motion a formula for making the diamonds under its control more valuable--simply because they have the company's imprimatur.
THE POWER PLAY
Carved out of the southwest coast of Africa, where the mouth of the Orange River meets the waters of the Atlantic, is a rectangular strip of desert known as the Sperrgebiet: the forbidden territory. It is an inhospitable place, encompassing 10,000 sun-bleached square miles of sand. Thanks to an accident of geology millions of years ago in which masses of rough diamonds were transported from South Africa by the Orange River and deposited within its borders, the Sperrgebiet has become one of the most protected stretches of real estate in the world. There are only two ways in and out: a single two-lane highway and a small, dusty airstrip. Diamonds have been pulled from the riverbed here since 1908, when the country was a German protectorate known as South West Africa. De Beers has controlled the area since 1920; in 1994, after the country gained its independence as Namibia, De Beers formed the Namdeb Diamond Corp., a fifty-fifty partnership with the new government.
On a sweltering morning last October I found myself in an eight-seater Sikorsky Seahawk helicopter as it lifted off the runway of Namdeb's airport and climbed 1,000 feet above the desert. The helicopter flew over a solitary patch of green: Oranjemund, the town adjacent to the Namibian diamond mines. Then it headed out over the Atlantic.
I was encased in a tight-fitting wet suit and a yellow life preserver (a safety video had informed me that the helicopter would float if it crashed). A red speck emerged in the distance, then gradually materialized into the Debmar Atlantic--a diamond-mining and -processing plant in the guise of a large ship.
The Seahawk landed on the ship's helipad. Feeling a bit like Sean Connery in Diamonds Are Forever, I sprinted away from the helicopter's spinning blades, peeled off my wet suit, and descended a steep ladder into the bowels of the ship. For the next two hours, I was given a tour of one of the technological marvels of the diamond world: deep-sea mining.
As the once fertile beaches along the Namibian coast dry up, De Beers is placing its bets on the Debmar Atlantic and seven sister ships. Last year the company's marine division recovered more than 570,000 carats of high-quality diamonds from the waters off the Namibian coast. The process is remarkable. Special drill bits, 23 feet in diameter, burrow into the ocean floor, releasing a mix of diamond and ore that is sucked through 300 feet of tubing to the surface, where machines separate the diamonds from the surrounding material and pack them, like chunky soup, into aluminum cans. For security reasons, no human comes into contact with the diamonds until the cans have been sealed. Operating 24 hours a day, 365 days a year, the ships cover 1.2 square miles of ocean annually. No patch is left untouched.
De Beers had invited me to Namibia, along with the diamond editors of four American jewelry trade magazines, as part of a tour of the company's operations in Namibia, Botswana, South Africa, and the war-torn jungles of Angola. Over 14 days, 16 flights, and countless meetings with senior De Beers personnel, we were subjected to an endless sales pitch about Supplier of Choice and the new De Beers.
When it launched Supplier of Choice last July with a PR barrage, the once media-shy company got exactly the reception it wanted: "After a 60-year effort to hoard every diamond on Earth, De Beers decides to open the market," reported Time. DE BEERS TO ABANDON MONOPOLY, AIM AT NEW ROLE IN DIAMONDS, pronounced the Wall Street Journal. DE BEERS HALTS ITS HOARDING OF DIAMONDS, declared the New York Times.
My trip to Africa was meant to be the clincher, a demonstration of the new, transparent De Beers. But as I witnessed first-hand the company's sprawling empire, heard about its many expansion plans, and experienced its unrelenting focus on secrecy and control, I came to a different conclusion. As it implements its new strategy, De Beers is hardly abandoning the tactics that have defined its corporate culture for more than a century.
Prior to my James Bond-like adventure on the Debmar Atlantic, the sheer magnitude of De Beers' African operations had already overwhelmed me. At Orapa, a Grand Canyonesque pit in northern Botswana, Caterpillar trucks with 20-foot-high wheels and beds that carry nearly ten million tons of diamondiferous ore a year seemed more like Tonka toys, their tonnage dwarfed by the scale of the world's second-largest diamond mine. At Namdeb, I had watched giant bucket-wheels the size of Ferris wheels scoop out 65 feet of sand to expose diamond-encrusted bedrock so that miners in sand-covered overalls could vacuum the diamonds off the rocks.
The company's expansion plans are equally outsized. A proposed $300 million extension will double the capacity of the Premier mine, located just an hour from Johannesburg. A sparkling, largely automated recovery plant being built at Orapa will double that mine's output of nearly $1 billion per year. And De Beers is aggressively pursuing diamond properties around the globe. Last July, precisely at the moment it was proclaiming an end to its monopoly, De Beers launched two hostile takeover bids. The first, a $205 million offer for Winspear, a mine in Canada's Northwest Territories, was approved last August. The second, a $389 million bid for Australia's Ashton Mining--and its Argyle mine--was held up by the European Union's antitrust commission, so Ashton accepted a lower offer from a competitor.
De Beers was even making forays into Angola, albeit carefully. For more than 25 years Angola has been locked in a brutal, debilitating civil war. Begun as a struggle against the Portuguese occupation, the war has most recently been fought over the country's vast natural resources, chiefly oil and diamonds. Angola mines between $600 million and $800 million of diamonds each year, making it the fourth-largest producer, by value, in the world. One-fifth of that production comes from the country's only mine, Catoca. The rest is scattered in alluvial (surface) deposits.
The old De Beers prospected for underground deposits in Angola. And in its effort to control the world's diamond supply, it also bought lots of alluvial diamonds--both from the Angolan government and from areas controlled by rebels.
By 1998, De Beers' Angolan adventure threatened to become a PR nightmare. The nongovernmental organization Global Witness publicized the atrocities that rebel forces in Angola and other African countries were committing to gain access to their countries' diamonds. The phrase "conflict diamonds" entered the lexicon; the United Nations passed resolutions calling for a boycott; and U.S. Congressman Tony Hall sponsored a bill that called for an embargo against diamonds not certified by the governments of Sierra Leone and Angola. Fearful of a consumer backlash, De Beers closed its buying offices in Angola and the Democratic Republic of Congo (DRC).
Moments after De Beers shut its doors, Angola awarded the marketing rights for the country's diamonds to Ascorp, a state partnership with Lev Leviev, a Russian/Israeli diamond manufacturer and former De Beers sightholder. As a result Leviev now controls one of the largest sources of diamonds outside De Beers.
Despite its new, supposedly open mindset, De Beers is hardly comfortable ceding control over such an important producer of diamonds. So it is maintaining a presence in Angola, though a low-key one. Its representatives continue to negotiate with the government, it has just recently finished construction on a 12-story sorting house in downtown Luanda, and it still spends about $8 million a year prospecting in the Angolan jungles.
In the meantime the company is happily reaping the PR benefits of being able to call itself a "conflict-free" supplier. Diamonds that carry its new Forevermark are guaranteed to be conflict-free, and the company says that any sightholder caught handling conflict diamonds would be excommunicated. And last August, De Beers and other industry leaders formed the World Diamond Council, whose mandate is to eradicate conflict diamonds from the rest of the world's supply.
While the company seems to be winning this particular PR battle, its uneasy effort to tiptoe through the Angolan minefield exemplifies the problem De Beers faces as it simultaneously tries to open up and to wield the monopolistic powers of the old De Beers. Throughout my trip to Africa, I was confronted with evidence of this schism. Even as the company openly exhibited its expansion plans and granted access to its mining operations, it displayed the secrecy and stifling control for which the old De Beers was famous. Every minute of every day was rigidly scheduled. There was little room to escape, to veer from the confines of De Beers' yellow-brick road and seek the company behind the curtain.
But we didn't need to veer too far. Signs of the old De Beers were everywhere: At an orphans' village in Gaborone, Botswana, where De Beers had taken us to illustrate the company's commitment to social causes, even though the village's leader admitted, reluctantly, that Debswana, the partnership between De Beers and the government, contributed only $14,000 (about 2% of the annual budget)...In a seedy bar in Oranjemund, where one of Namdeb's miners complained, "The security for the diamonds is 110%; the security for us is not so good." Everything about the place, he said, can be summed up by the food, which "looks great on the outside but tastes like shit." The only thing left to do here, he said, staring at the label on his beer, "is to empty the bottle"...And even in the posh confines of the De Beers guesthouse. On our last night at Namdeb, I asked Alan Ashworth, the mine's manager, why we hadn't been able to see the "recovery area"--the part of the mine where the final separation between diamonds and ore takes place. "It's a question of security," he replied. Earlier that day at the mine, even though none of our group had come within a hundred yards of a diamond, we had all been X-rayed. (Employees are X-rayed every two weeks; Namdeb was in the process of implementing a low-dosage machine called Scannex that will allow it to X-ray all of its employees daily.) "How do we know that one of you wasn't recruited by some international crime syndicate?" Ashworth asked, his pale, mustachioed face reddening with anger. True, Namdeb is an alluvial mine that experiences a higher level of theft than De Beers' other operations. Still, Ashworth's response seemed paranoid. After all, for every 270 tons of sand they move, Namdeb's miners recover less than a handful of diamonds. Many miners work their entire careers without once seeing a diamond.
A GREAT BRAND IS FOREVER
A century of history, and a lifetime of hubris, is difficult to change. Transforming its corporate culture from that of a ponderous colonial-era monopoly may in fact be De Beers' greatest challenge as it implements Supplier of Choice. "There are very few companies...you may struggle to find even one, that has been the leader of its industry for its entire history," says Gareth Penny, his jaw clenching with pride. "We want to build on the best of the past and make sure we maintain that position."
For Supplier of Choice to succeed, De Beers will need to become a lithe, brand-savvy enterprise in an industry with little success at building brands. Indeed, while the top 15 perfume brands dominate 80% of their industry, the top 15 jewelry brands have less than 15% market share.
Yet diamonds can be branded successfully, as a Bostonian by the name of Glenn Rothman has proved over the past few years. Rothman is a diamond wholesaler who in the past also hawked leather goods. Four years ago he decided to start selling a branded diamond (he buys his raw stones from De Beers sightholders and others) under a name one might think better suited for a romance novel--Hearts on Fire. Rather than follow the long-held customs of his fellow diamond wholesalers, Rothman chose to emulate consumer-marketing pioneers like Nike. He spends 8% of gross revenue on public relations and marketing, well above the industry average of 1%; and he supports his brand with significant educational initiatives, including a two-day, $500,000 training extravaganza he calls Hearts on Fire University. The result: A brand that didn't exist in 1995 now does $40 million in sales each year--making it a phenomenal success in this industry.
"All the retailers in all the malls carried the same product," says Rothman. "They had no way to give the consumer some sense of difference or exclusivity. The only way I could make any kind of profit was by creating a powerful consumer brand."
Hearts on Fire provides differentiation through its cut. Polished to a mathematical formula known in the trade as an ideal cut, Rothman's diamonds, when viewed under a special scope, exhibit perfect symmetrical patterns. From the top, you see a ring of eight hearts; from the bottom, eight corresponding arrow-shaped bursts of fire. Thus, he says, consumer fears about quality are removed--and the retailer can charge enough to earn a decent profit.
This is the kind of thinking De Beers will have to bring to its own branding efforts. Through Supplier of Choice, the company will reward sightholders that build strong brands, whether by teaming up with established labels--as the Pluczeniks did with Escada--or by creating their own versions of Hearts on Fire. Those in the industry interpret this as a sign that De Beers will eventually pare down its sightholders to the most powerful manufacturers with the most successful retail clientele. "There will be winners and losers," says Adam Nagel of W. Nagel, brokers who represent sightholders in their interactions with De Beers. "Some clients are more vulnerable; some have stronger cases than others. But proposing and implementing are two very different things."
Already De Beers has instituted co-op initiatives with its sightholders that will reimburse them for a portion of the money they spend on their customers' advertising and marketing efforts. "By giving away these kinds of percentages, all of the best customers in the world will end up in the hands of the strongest sightholders," says Rothman, who himself has been approached by several sightholders to sell them his brand.
The picture Rothman paints is a compelling one. De Beers will place its diamonds with the most profitable, marketing-savvy sightholders, which in turn will sell them to the most profitable, marketing-savvy retailers. The cartel of the many will be transformed into an equally powerful cartel of the few.
Whether or not the advertising blitz that is sure to follow in the next year actually results in the establishment of brawny new brands, De Beers will be the ultimate beneficiary. The more ad money spent, the more diamonds people buy. And when people buy diamonds, De Beers profits. It is the reason the company spends $150 million a year to advertise cut diamonds--a product it doesn't even sell...yet. When De Beers announced its partnership with LVMH, it once again exhibited its desire to have things both ways. On the one hand, it wants to maintain, and expand through Supplier of Choice, its core business of mining and marketing rough diamonds. On the other, it wants to leverage the powerful consumer brand it has built for diamond jewelry by selling De Beers-branded diamonds and opening De Beers boutiques--a move that will put the company in direct competition with its sightholders' retail customers. De Beers has tried to downplay this conflict by emphasizing that the new company will be independent from De Beers and will have to purchase its diamonds like any other retailer--and not directly from De Beers. Sightholders are far from convinced. "Until now, the industry viewed De Beers sightholders as a step below God," says one, who prefers to remain nameless. "I'm concerned that the way my customers feel about my association with De Beers will change."
Of course, for the plan to fully succeed, De Beers will need to allay the fears of antitrust regulators in the U.S. and abroad. The company will not dominate the supply of rough diamonds as it once did. But its plan to transform itself may well give it even greater leverage over the strongest manufacturers, wholesalers, and retailers, the ones the company needs as it seeks ever higher margins for diamonds. Whether this new De Beers would be as disturbing to regulators as the old is an open question. Clearly, De Beers executives are nervous about the answer. When the subject comes up, their confident manner abates and their eyes look away. "Where we have moved to as a company is a very compelling situation, and we hope that they recognize that," says Gareth Penny, echoing the phrases of his colleagues. "You don't turn history around in a matter of months. But I think they know our door is open."
By Nicholas Stein
February 19, 2001
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