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Is a Diamond (cartel) Forever?

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

Diamond Industry
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 The Diamond Industry can be separated into two

distinct category:
 One

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

Both market values are different

Gem-grade Industry
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 Large trade in gem-grade diamonds 

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

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

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

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

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

Interesting Facts:

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

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

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

Industrial-grade Diamonds
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 Industrial diamonds are valued mostly for their

hardness and thermal conductivity.
 570,000,000 carats (110,000 kg) of synthetic

diamond is produced annually for industrial use.
 In addition to mined diamonds, synthetic diamonds

are used for industrial applications.

Major Diamond Mining Companies
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 BHP Billiton

 De Beers
 Rockwell Diamonds  Petra Diamonds

 Anglo American
 Alrosa

Mine in Russia

The Birth of THE Diamond Cartel
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 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”

The De Beers Business Model
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 Mine rough diamonds -- classify and deliver to

Central Selling Organization(CSO), in London –
 There only about 100 chosen sightholders could buy

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

stones entered the market and at what price

3 stages of development
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Output percentage in global diamond

Challenges at the end of the 20th century
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 Adapting to the changing industry structure : monopolies no longer

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

operating in its largest market, the United States. (paid 295million)
 De Beers no longer holds a monopoly of diamonds. They have begun to

develop itself as the leader in the diamond business

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

How did the Diamond Cartel run for more than a 100 years?
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 The diamond industry has an extraordinarily high

concentration

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

relationships among participants of the cartel.
long term Profits.

 Clear Strategy: Expand Demand, Limit Supply and Maximize

 Diamonds are forever Campaign to prevent emergence of a

market for second hand diamonds.

 High Flexibility to Adapt to new Challenges

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

Firm Capabilities (Resource Based View)
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Industry based view using Porters 5 Forces

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

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

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

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

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

Institution Based View
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 Friendly relationships with most governments of

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

However De Beers lost its monopoly and the cartel is much weaker
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 How does De Beers continue to be an industry

leader? Lets look at their SWOT….

De Beer’s Current SWOT
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• What are the opportunities for De Beers? • What are the threats? • What kinds of strengths and weakness does De

Beers have when dealing with these challenges?

Strengths
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 Previous owner of the longest running diamond cartel in

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

 The friendly social relationship with most governments

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

make decisions from their own position

Weakness
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 The strategy of “Expand demand, limit supply” is not

sustainable because De Beers no longer holds sold control of the industry.
 Rise of new competitors such as Broken Hill

Proprietary, Rio Tinto Diamonds, Le Leviev Diamonds and Alrossa Diamonds
 Threat of man made diamonds

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

to the U.S. government in anti trust fines.
 New rising economies such as China and India  Reputation as largest diamond supplier market in

the world

Threats
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 The structure of whole diamond industry is changing

with the rise of new suppliers and new competitors

 Too much pressures for CSR (Corporate social

responsibility)

 The threat of the diamond losing its value if man

made diamonds gain popularity.

 The threat of depleting quantities of diamonds

Who is one of De Beer’s biggest rivals?
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Lev Leviev

De Beers vs. Leviev
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 Lev Leviev started as a sight

holder (buyer) of De Beers diamonds

 In the 1990s Leviev challenged

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

De Beer’s diamond monopoly

 Leviev became the first

vertically integrated diamond company

What is the future of the De Beer Leviev rivalry?
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De Beer’s strong points
• Controls 40 % of the diamond industry. • Partnered with LV in order to create retail brand • Startegy to become the leading diamong retailer. • Spends $150 mill on ads/yr • Stores in Asia, Europe, the Middle East and Russia

Leviev’s Strong Points
• First vertically integrated

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

Let’s look at the rivalry through the 3 lenses
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 Resource :

De Beers has more experience and more capital than Leveiv

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

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

Winner : De Beer

The Future of the Diamond Industry
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 There is an increase in demand due to new markets such

as China, Japan, India, and the Gulf countries

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

control of their resources

 Man made diamonds pose a major threat. Companies

like Gemesis offer ecological conflict free affordable diamonds

FIN

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