Harvard Business School Case Study | De Beers Monopoly

Symbiosis Institute of Business Management, Bengaluru 1

Group 4Rhythm MalhotraRajat Verma Rohan DabasPramey zodeRahul BoseSai Charan

De Beers


History : De Beers and the Diamond Cartel


1866 : Accidental discovery of diamonds in South Africa

1869 : Around 10000 miners rushed to Cape Province to stake their claim

1872 : Five separate mines were established in Cape Province

1874 : Steam powered pumps arrived at Kimberly mine


Evolution of De Beers


Cecil Rhodes rented out steam powered water pumped to miners of the Kimberly mines.

Using it’s profits bought small

claims and formed the De

Beers Mining Company.

Bought all the other claim

holders and gained full

control over the production

“Diamond Syndicate” was created to keep the prices high

1874 1880

1890 1887


Causes for emergence of De Beers Monopoly


Control Over Production Only South Africa & Brazil were major

producers 95% of Production under De Beer

CoalitionDiamond Syndicate Single Producer & Single Distributer

Lack of CompetitionBought out all the other claim holders


Stockpiling

Bought excess Diamonds in the market Incurred losses for sake of long term stability

International AgreementsContracts with most Diamond producing

statesAbility to set prices & dictate terms in

world Diamond market

Regulation of Production and SupplyControlled Distribution Carats, Supply, Rate and Competition


1902: Diamond empire taken up by Ernst Oppenheimer

Oppenheimer entailed a monopoly of distribution as well as of supply

Ensure uniform prices across the industry and retail level

Concern about diamonds syndicate being independent, resolved to create a “New

Syndicate”

1929: Oppenheimer presided as Chairman of De Beers and the diamond corporation

Evolution of the Cartel


Cartel in Action


In mid 1950s, De Beers was no longer alone in the market

By 1960, South African diamonds accounted for only 19% of the total world gemstone production and by 1999, 11%

De beers urged other producers to sell their production to them

Realizing benefits, states signed contracts, but Prices were set by de beers

Countries agreed to accept low sales and Producer would reap traditional returns


Controlling diamond pipeline

Sent diamonds to london office

of CSO (Syndicates)

Held sights

Preferences of sightholders

were conveyed to company 5 weeks before

No cherry picking was permitted

This enabled De Beers to

regulate diamond market


Stockpiling

Whenever market weakened, De Beers would buy up excess stones

Whenever outside diamonds found their way to market, De Beers would buy them

Always ensured that supply-demand balance did not flatter


Reasons for loss of De Beers monopoly


1977: Trouble from Israel's soaring inflation who hoarded their diamonds and drove prices up

1981: Zaire threatened to destabilize the industrySoviets and Russians threatened periodically to withdraw from the De Beers

structure1992: double blow of Russian and Angolan defections, who leaked diamonds

onto the world marketThe stockpile continued to grow1997: Asian crisis swept through the far East


Diamond sales in Japan fell from 33% to 18% between 1997 and 1998Depressed De Beers sales and the share priceBrought a new wave of value investors from the united states who saw

opportunity for financial gain in the depressed share prices.Accountants started prying into De Beer’s financial management and

scrutinized the ever growing weight of the stock piles.March 1998, De beers and Anglo-American became two distinct firms.After isolation, it moved to the world market


Strategic ReviewOutside perspectiveNew investors criticized De Beers Its accounting methods could not be understood Heavily invested in Anglo-American Significant legal issues in US Followed traditional business modelStockpiling


StrengthsTremendous brand name – one of the world’s best recognizedBrilliant history of marketingSpent less than 1% on advertisingAdvertised diamonds on behalf of the entire industry




Millennial Campaign It was the first attempt to brand gems, to sell a “De Beers diamond”

rather that a regular diamondThe campaign occurred at a time of rapid changeThe campaign was centered in the US


Power of the brandInnovative branding strategyEmphasized the De Beers name in advertisementsEtched microscopic logo on to the stones De Beers was worth anywhere from $175m in rough stones up to

$1.25b at retail jewelry levelCreate a De Beers luxury store or a line of high end fashion

assessments De Beers “single channel marketing” brought social goals and

benefits to all involved


U.S. Anti-trust law


De Beers violated the fundamental underpinnings of capitalism as practiced in US

1890: The Sherman ActIt made illegal “Every contract, combination in the form of trust or

otherwise, or conspiracy, in restraint of trade or commerce”1914: Clayton ActIt broadened the definition of unacceptable behavior and prohibiting

any illegal behavior that might “substantially lessen competition or tend to create a monopoly in any line of commerce”


Despite the facts that De Beers retained no US presence and was completely run by South African nationals it was still subject to reach of the US law

The justice department had tried on several occasions to prosecute De Beers for violating US antitrust law

In 1945, investigation ordered against De BeersThe suit failed as maintaining a bank account did not constitute

sufficient “doing of business” to warrant jurisdiction1976: civil and criminal suit against the firm. It paid a small fine and

signed a consent agreeing to forego monopolistic practices


In 1984, Justice Department filed a suit against De Beers and GE, for price fixing in industry diamonds market

Spring of 1992, GE and De Beers raised their prices on industrial diamonds

The government argued that the exchange of price information between GE and De Beers was a part of conspiracy to fixed prices

But there was no evidence of collusion GE was acquitted De Beers never appeared in court to defend itselfDe Beers had simply come up with series of ingenious strategies for

remaining beyond the departments’ grasp


Blood diamond


Blood diamonds, also called conflict diamonds is a term used for a diamond mined in a war zone and sold to finance an insurgency, an invading army's war efforts, or a warlord 's activity.

Blood Diamond

Diamonds mined in Africa are prone to being traded

in exchange for arms which are used in civil

wars

Africa with its rich and varied mineral wealth is

also a target of ‘colonizing’ corporations.

These are backed up by governments of several

developed economies and plundering African politicians.

Since the atrocities of wars financed by illegal

diamond trade have been publicized the diamond

trade has become a heavily albeit imperfectly

regulated business.


• The diamonds are smuggled onto the international diamond trade and then sold as legitimate stones. The flow of conflict diamonds originated from West Africa in place like Sierra Leone, Angola, Democratic Republic of Congo, Liberia and Ivory Coast.


Diamonds that are mined are sold to middlemen

The money paid for the diamond ends up financing the war (buying guns and ammo, recruiting soldiers)

This war is waged for control over more diamonds

The money doesn't reach the local population who the warlord claim to represent. Instead the money lines the pockets of corrupt officials

This plundering of natural mineral wealth leaves the nation poor and bereft of benefits


The diamond and jewellery industry has been very aware of the conflict diamond problem for a number of years now.

The Diamond Council has been working to ensure that only legitimate diamonds, which are conflict free, come into the diamond industry.

With this in mind the Kimberley process was set up through the United Nations in the year 2000 when approximately 4% of the worlds trade involved conflict diamonds, now that figure is less than 1% and by working together.


Kimberley Process Certification

System

A System of Warranties to further assure

consumers of their diamonds

Once imported, a written statement must accompany

all invoices, guaranteeing that the diamonds being sold are from legitimate sources.

Under this system, every buyer and seller of polished diamonds

and jewellery containing diamonds must provide a assurance statement on all invoices.


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