Global Markets for Diamonds – Part 11

• 2.3.8 Conduct or Behavior of Firms

2.3.8 Conduct or Behavior of Firms

It is crucial to contextualize the behaviors of the market players with the overall structure of the global diamond industry. According to Maduekwe (n.d.), the competitive structure of the global diamond industry is inherently a combination of an oligopoly and a consolidated industry. Being an industry which derives its product value mainly from its costumer perception, the feasibility for the players in the industry to behave in a competitive manner is questionable.

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1. De Beers - with all its controversial cases and lawsuits, this diamond company can be very well identified as collusive. It is both a diamond producer and supplier. With a major control of the whole industry in the past (about 90 percent), De Beers now controls only 40 percent yet remain a strong competitor in the global diamond industry. (Maduekwe, n.d.) It was slapped with a diamonds antitrust class action seeking to end its alleged 60-year conspiracy to control the price of rough diamonds in the U.S. by a group of companies (Diamond Class Action Settlement, 2011).

The litigation highlighted various cases like Hopkins v. De Beers Centenary A.G., et al., which started in 2004 and Sullivan v. DB Investments and earlier similar cases that began in 2001. The alleged De Beer cartel is said to have monopolized the marketing assortment of diamonds. While De Beers and its intermediate companies produced almost 50 percent of the world's rough diamonds, only one fourth went outside its own distribution channels. De Beers controlled about three-quarters of all the diamond production through DTC.

De Beers also set the prices of rough diamonds and it only catered to its selected buyers or "sight holders". These sight holders supplied the other segments of the diamond value chain such as the cutting, polishing, retailing, etc. Finished gem stones were sold to wholesalers, designers and retailers in the major jewelry markets such as the U.S., Japan, European Union, India, and China. Diamond mark-up occurs throughout the value enhancement process. Ariovich (1985) estimated the mark up percentages as follows: mine sales (67%), dealers of rough diamonds (20%), cutting sector (100%), wholesale dealers (15%) and retail (100%).

De Beers has played a profitable role in the value enhancement process and it has a significant influence in the industry. De Beers' supply control was through its single distribution channel, the DTC, which marketed three-quarters of rough diamonds worldwide. Hence, it controlled prices and aggregated the proportions of rough diamonds which selected buyers had to purchase or reject as a package.

During high production and low demands, De Beers had a stock pile of diamonds which it sold during improved demand conditions (when prices went up). Its cartel effectively handled market changes i.e. increasing the supply of low grade diamonds as a penalty to Zaire's defection, compromising with ALROSA, the largest Russian producer of high quality diamonds, and establishing The Kimberley Protocol (identification of diamonds) to steer from "blood diamonds," etc. (Spar, 2006).

De Beers' legendary expensive advertisements, which were estimated to be worth $200 million annually, were also alleged of exploiting the human psyche in the strings of romance and the myth of scarcity. De Beers intended to create a consumer need such that they will be willing to pay high prices for their diamond jewelry. It often placed stories and photographs in magazines and newspapers of celebrities with diamonds symbolizing love. It also used fashion designers to discuss diamond trends through radios. It even hired famous artists like Picasso and Dali to paint pictures for its advertisements in order to convey the notion that diamonds are extraordinary (Lee, et. al., n.d.). De Beers' strategy is called market-driving, where it drives the customer and reforms the markets to its own intentions and needs. This is different with the type of advertisements and marketing that only cater to satisfy the needs of the customers (Harris & Cai, 2003).

In 2000, the company tried to alter its collusive strategies through various measures like delisting from the Johannesburg Stock Exchange, reorganizing its market distribution system from CSO to DTC, among others. De Beers also shifted to a non-category marketing in 2003 through its Supplier of Choice Program. It continued to promote the stability and exclusivity of the diamonds to the public but with special focus on its own brand “Forevermark”. With these different strategies, De Beers came out strong as a key industry leader by solidifying its brand equity and taking up some cost saving measures.

2. ALROSA - this is also a collusive firm because it has allowed itself to be monopolized by De Beers for a long period of time. De Beers & ALROSA, which are actual stiff competitors in both upstream and downstream segments of the value chain, engaged in an exclusive dealing whereby ALROSA will sell all its rough diamonds exports to De Beers. ALROSA is also state owned and has ready public funds in case it needs more capital for its operations. Being state owned, it also uses its profits for other state related requirements. Most subsidies are extended by the government so that the company could prevent the lowering of its market position. (Todaro & Smith, 2009) In this case, ALROSA is subsidized in order to encourage the sale of its diamond exports. It also benefits from taking an advantage of constant government support.

According to Semenovykh (2011), when the demand for diamonds fell in 2009 due to the global crisis, Gokhran bought 41 percent of the company's diamonds. This enabled ALROSA to maintain its production volumes. During this same time, the company also received financing (through loans) from VTB, Bank of Moscow and Alfa Bank. These loans were used to finance ALROSA's short-term debt. Subsidies can also be considered as a way of protecting ALROSA from the other rivals in the global diamond industry. The financial assistance by way of subsidy is very anti-competitive since other industry players incurred bank interests in order to sustain their diamond operations. These are evident characteristics of a collusive firm.

3. Aber - is a rather large competitor of De Beers because it has a large ownership in Canada's mines. It is a collusive firm rather than a competitive one. This is because of its set deals with retailers such as Tiffany's and Harry Winston. Its long term partnership with Tiffany is also anti-competitive. Being a part owner of Harry Winston Diamond Corporation, it also exclusively retails its diamonds through this global diamond jewelry chain (Lee, et. al., n.d.).

The company's strategic investment in brand building is also a reflection of its collusive behavior, more or less, because it brings its advertising campaigns to a marketing strategy similar to de Beers' "market driving." The technology is uses to monitor actual market prices in polished stones in order to devise its rough stone sales strategies and to find ways to secure the best prices for diamonds from Diavik may also be anti-competitive.

4. Leviev - is a competitive firm. As one of its competitive moves, it focused on the areas which De Beers did not dominate. In short, it tried to find its own niches or markets. For instance, it made contracts with African governments, thereby integrating African interest in "more than just producing rough diamonds." (Barmecha, 2007) The company also encouraged forward integration in operations within the African territories as shown in its system of processing and manufacturing of polished diamonds. Also, the company offers greater value to buyers by providing flexible terms in their rough diamond purchases. Leviev also does not dictate the diamond assortments which its buyers must buy .

The company utilizes its own "levitation strategy" wherein it integrates the general interests of the African government through the promotions of investment within Africa. It also tries to remain competitive by way of vertical integration. It forms a strategic partnership with ALROSA in diamond cutting. It tries to lead in the way of diamond industry upgrading as it intends to single handedly manage its diamond exploration, mining, cutting, polishing, designing, and retailing. By having a fully integrated supply system, it has a very competitive position in the global diamond market.

5. Rio Tinto - is a competitive firm. In fact, this company broke up the diamond cartel several years ago when it refused to sell its diamonds through De Beers. (Banks, 2012) Generally, Rio Tinto has a significant position in the diamond industry. It is the world's biggest producers of natural colored diamonds. It is focused on its rough diamonds from mining, sales and marketing. Rio Tinto also has a niche in diamond cutting and in polishing the extraordinary pink diamonds found in its Argyle diamond mine located in Australia (Rio Tinto Website, 2012). Rio Tinto produces diamonds exclusively for the fine jewelry market. It abides by its business ethics and integrity principles. By its transparent diamond business operations, it is evident that the company is competitive, not collusive.
6. BHP Billiton - is a competitive firm. It did not copy the monopolistic selling of De Beers. It allows for actual market forces to take its place, giving their diamonds to those buyers who will present the greatest value to their company. In 2008, it assigned its rough diamonds to a simple auction system, whereby the highest bidders get its Ekati diamonds at the most competitive market prices (Cramton, Dinkin & Wilson, 2010). The diversified company holds spot auction ten times a year in order to establish the prices for each of its nineteen (19) deals of rough diamonds grouped according to size, color and quality. It also holds term auction, which allows auctioneers to participate in the long term time frame. BHP Billiton also holds special auctions thrice a year to set prices of large stones.

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Its pricing and selling schemes are very competitive and have proven itself highly successful in allocating the company's diamond outputs even in the face of economic crisis. It is important to mention at this point that the remarks on Rio Tinto and BHP Billiton's behaviors (being competitive or collusive) mainly pertain to their diamond business operations. Both companies are accused of collusion in the mineral sector, specifically in its iron ore production (Hao, 2010).

These two companies control 70% of the said market. By their joint ventures, these two players attempt to attain equal production cost in iron ore production. With full knowledge of each other's production cost, the two companies will find it easier to reach tacit agreement over the final price of the product. They have highly similar operations in various respects - cost base, distance to key customers, quality of deposits and scale.