MAN-MADE DIAMOND- A DISRUPTION

Global Strategy and the Business of Luxury

Submitted to
Professor Ashok Som

DECEMBER 6, 2018
VIMAL ANBALAGAN
B00753748
 Man-made Diamond – A disruption
"Lightbox will transform the lab-grown diamond sector by offering consumers a
lab-grown product they have told us they want but aren't getting: affordable
fashion jewelry that may not be forever, but is perfect for right now," - Bruce
Cleaver, De Beers CEO.

“We don’t see synthetic diamonds as a threat, but you cannot ignore it
completely.” - Stuart Brown, Finance Director, De Beers

Abstract

Man-made or lab created diamonds are made/grown in highly controlled Laboratory

environments. The exact conditions under which a natural diamond develops is replicated in
laboratory, hence man-made diamonds consist of carbon atoms arranged in the diamond crystal
structure. As they are grown in similar conditions as natural diamond, they possess the same
optical and chemical property.

This case talks about the impact on the diamond industry due to the introduction of Man-made
diamonds. A special focus is made on the top players in the diamond industry, how they are
responding to the disruption. The case also talks about the future of the industry.
 Introduction

De Beers, the world’s biggest diamond company, recently in its 130- year history it announced
that it would start selling synthetic diamonds. “Artificial diamonds” are being manufactured since
the 1950s but De Beers has avoided to enter into this segment.

Now the company believes that technology is advanced enough to produce large quantities of
“synthetic diamonds” with the quality of the best diamonds.

The diamond giant’s new strategy for small stones, paired with its entry into the synthetic
diamond market, is seen to be a disruption of the industry.

“A 1-carat synthetic sells for roughly $4,000, about half the price of a natural diamond. De Beers
new lab gems, to hit the market this month, will sell for around $800 a carat.”

The strategy is designed in order to undercut the rival lab-diamond makers, who having been
trying to disrupt the $80 billion gem industry.

The strategy is designed to compete with existing lab-diamond makers, who having been trying
to make inroads into the $80 billion diamond industry.

De Beers will target young millennials with its new diamond brand and tries to capture customers
that have been resistant to spend money on expensive jewelry. The company is confident that it
can capture both the top of the pyramid customers who buy expensive engagement rings and
bottom of the pyramid customers who wants less expensive environmentally friendly jewelry.

ALROSA group, introduced the first national commercial device for identification of synthetic
diamonds among natural diamonds in order to stop the illegal mixing for synthetic diamonds with
natural ones.

“One of the main competitive advantages of ALROSA Diamond Inspector is the use of three
optical detection methods, which give high assessment reliability. This know-how is protected by
an international patent and provides a lower price of devices compared to peers. The price of our
detector is USD 9.9 thousand, while foreign detectors of a similar class can cost up to USD 18-20
thousand,” says Vladimir Sklyaruk.
Are Diamonds “RARE”?

Diamonds have never been a rare stone since 1870s when large diamond mines where explored
in South Africa. As the investors of diamond industry didn’t wanted the industry to saturate for
obvious reasons set two objectives to counter it: one was to monopolize the diamond prices and
second was to stabilize the market.

To monopolize the prices the “British financiers” behind South African mining operations formed
De Beers Consolidated Mines, Ltd. They controlled the market by stockpiling diamonds and sold
them strategically. They formed a network of wholesalers all over the world.

In order to stabilize the diamond market, they needed to control both the supply and demand
for diamonds worldwide. In order to do so they hired an advertisement agency Philadelphia
called N.W. Ayer in 1938.

N.W. Ayer’s gameplay was to create a situation in which every man trying to get married is
obliged to buy a diamond ring for his partner. For this he needed to change the perception of
diamond from precious stone to essential part of marriage.

"The big ones sell the little ones," - Dorothy Dignam. N.W. Ayer hired publicists to write about
celebrity proposals with diamond rings and the size, type and price of their diamonds. There were
fashion designers who talked about diamond in radio shows. The idea was to make no direct sale
or promoting a brand but to build up emotions around the gem stone. They wanted to build-up
a story around diamond the people who gifted their partner with diamond rings were happy and
diamonds gave them self-satisfaction.

The agency’s campaign was tremendous success in the years between 1938 and 1941 diamonds
sales in USA grew by 55%. This campaign was successful in projecting that marriage without
diamonds is incomplete.

“A Diamond is forever”, these four words have appeared in all the advertisements of De Beers
since 1948. It was also named as the number 1 slogan of the century by “AdAge” in 1999. The
slogan was prefect for the company’s campaign as it projected that diamonds are eternal as a
relationship. (Exhibit 1)
"There was no direct sale to be made. There was no brand name to be impressed on the public
mind. There was simply an idea -- the eternal emotional value surrounding the diamond." – N.W.
Ayer

The Global Diamond Industry

The value chain of the diamond industry can be split into 3 broad categories Rough diamonds,
polished diamonds and final jewelry. The process starts with exploration of rough diamond
resources and then the mined, processed and sorted according to their sizes. These rough
diamonds are further sold to polished diamond producers. Polished diamond producers cut and
polish rough diamonds and are sold to people who make diamond jewelry. The complete process
is showed in exhibit 2.

The entry barrier in rough diamond industry is very high as the top 5 players control 70% of the
industry, this give immense bargaining power to the existing players in rough diamond mining
industry. In the polished diamond industry, the entry barrier is low and thus the bargaining power
of the existing players is low and there are more than 5000 players in this industry. In diamond
jewelry industry the entry barrier is medium and bargaining power of the existing players are
medium. The revenue of each industry is shown in exhibit 3. This exhibit shows that there is
increase in revenue in rough diamond industry from 2015 – 2016 as the sales dropped very low
in the previous years. In the remaining industry the sales revenue is almost constant.

The operating margin of rough diamond is around 27%-28% as the investment is very high. The
cutting and polishing industry has a margin of 1-2%, Jewelry manufacturing and sales range from
2-11%. The profitability in rough diamond and polishing industry have increased while jewelry
industry has remained constant. (Exhibit 4)

Rough diamond sales picked up in 2016 but it is expected to be lower in 2017 due various reasons.
In the years 2010-2015 the CAGR of De Beers have decreased by -4% and ALROSA has increased
by 1% but in 2015-2016 the YOY grew by 37% for De Beers and 28% for ALROSA. This change can
be attributed with the price drop and clearing previous inventory. (Exhibit 5)
Synthetic Vs Real

A “synthetic diamond”, which is also known as a “man-made diamond”, is created in laboratory

conditions. The diamond is a complete copy of a natural diamond as the same atmosphere and
procedures were recreated to make synthetic diamond, a synthetic diamond contains the same
“crystal lattice structure” as of a natural diamond. The only difference between the two is that
natural diamonds are actually more than Billions of years old.

The way in which a “synthetic diamond” is made isn’t significant as the that of a “natural
diamond”. Natural diamonds are mined around the world using different types of machinery and
equipment. Synthetic diamonds are man-made in a lab. Scientists place the Carbon elements
under high-pressure and high-temperature to form a diamond crystal. Another way to create a
synthetic diamond would be by chemical vapour deposition method. During this process, a
scientist will take a small fraction of a diamond crystal and grow it layer by layer in another
chamber.

In order to differentiate between a natural diamond from a synthetic diamond, you need to use
specialized equipment. The nature of inclusions in a natural diamond is different from the types
of inclusions found in a synthetic diamond. Not all inclusions are easily visible through the naked
eye or by using a microscope. The best way to find out if the diamond is natural or synthetic is to
ask the jeweler for a grading report. The Gemological Institute of America, will give a grading
certificate stating whether the diamond is real or synthetic.

When it comes to lab-grown diamonds most jewelers would be able to source the diamonds
direct from the laboratories. The process is same of that of natural diamond, the jeweler have to
find a laboratory which produces the required quality of the gem stone and need to procure and
use it in making jewelry.

Even though the origins of a synthetic diamond are different compared to the origins of a natural
diamond but the crystal structure is the same. Therefore, a lab-grown diamond still counts as a
real diamond; the physical properties and chemical composition of a synthetic diamond are the
same as a natural diamond. But keep in mind since an Earth mined diamond is nature’s form of
art, the one of a kind gem-stone still remains a woman’s best friend.

Challenges posed by Lab-grown Diamonds

The first challenge posed by the lab-grown diamonds to the natural diamonds I that the there are
some people who are mixing synthetic diamonds with natural stones especially in melee sizes.
This challenge is countered by the existing players by developing technology that provides
efficient, accurate and faster detection of lab-made diamonds.

The second challenge posed by it is that there is a growing interest in lab-grown diamonds from
midstream and retail sector. If the retail sector finds lab-grown diamonds to be more profitable
they might influence the consumers to shift to lab-grown diamonds. To counter this challenge
the natural diamond industry is trying to make “differentiation” by increasing investment in
generic marketing through Diamond Producers Association (DPA) with an investment of $57
million.

The third challenge posed by the lab-grown diamond producers is the marketing efforts that they
are taking up. They are trying to market synthetic diamond as an alternative to diamond jewelry.
They are also insisting on the fact that this diamond is environmentally friendly and the profits
made are not used to promote war or other illegal activities. There is a “disclosure” problem for
synthetic diamond producers as International Organization for Standardization issued a “new
standard” which defines the nomenclature that must be used while buying or selling natural and
synthetic diamonds. (Exhibit 6)

Conclusion

Presently the diamond industry faces three challenges: slowing long-term demand for diamonds,
further developments in the field of synthetic diamonds and the financial sustainability of the
midstream.

The ongoing disruption of the lab-grown diamond market and its potential to impact on the
market for natural diamonds continues to threaten the existing players of the industry. In past
markets for natural and synthetic gems such as rubies and emeralds for more than a century Co-
existed which suggests that markets for natural and synthetic diamonds can develop in parallel
without cannibalizing each other. The diamond industry is maintaining its focus on protecting its
supply chain from illegal infiltration by synthetic diamonds by developing more effective and
cheaper detection instruments.

The diamond industry is going to be disrupted due to the introduction of synthetic diamonds by
De Beers and other players. Although the price can not be higher than that of natural diamonds,
but “synthetic diamonds” are good substitute for diamonds. De Beers have found a way to play
in both the top and the bottom of the pyramid, by the present trends in the industry and attitude
of the millennials this approach can make an impact.
Exhibits:

Exhibit 1: Advertisement for “Diamonds are forever” campaign

Exhibit 2: Value chain of Diamond Business

Exhibit 3: Revenue across the diamond value chain

Exhibit 4: Profitability for different stages in diamond industry

Exhibit 5: Sales figures of different companies producing rough diamonds

Exhibit 6: Challenges posed by lab-grown diamonds and the steps taken to counter
References

Articles

• http://www.mining.com/de-beers-selling-diamonds-less-industry-isnt-happy/
• https://www.bloomberg.com/news/articles/2018-05-29/de-beers-is-said-to-make-u-
turn-by-selling-man-made-diamonds
• http://eng.alrosa.ru/alrosa-introduces-commercial-detector-for-polished-diamonds-
identification/
• https://blog.hubspot.com/marketing/diamond-de-beers-marketing-campaign
• http://www.capetowndiamondmuseum.org/blog/2018/06/real-diamonds-vs-synthetic-
diamonds/
•

Reports

• The global diamond industry 2017 – Bain & Company