7.14.00
Market Forces Are a Gem

7.13.00
Balance Sheet on Kosovo

7.13.00
Race Bating

7.13.00
Tired Feminist Claims

7.12.00
Talking Crazy

7.12.00
Liberal Second Thoughts

7.12.00
Don't Let Schools Off the Hook

7.11.00
Jane Austen & the First Gen Y

7.11.00
Hillary's Real Threat

7.10.00
Payback Time For Bill

7.10.00
Clintonian Dedication to Privacy

7.06.00
Gore's West Coast Dilemma

7.06.00
Au Courant!

7.05.00
Wait a Nano-Second…

7.05.00
A Bear in the Bullpen

7.05.00
Al's Way or the Highway?

7.03.00
A Battle Lost, A War Won?

7.03.00
Ignorance & American Liberty

7.03.00
The EPA’s Gas Problem

7.03.00
The British Are Groaning

7/14/00 2:20 p.m.
Market Forces Are a Gem
De Beers's "War Diamond" saga shows why.

By Jeremy Hildreth, senior economic analyst at American Skandia, Inc., & columnist for Money.net

hat a lovely set of diamonds!" someone once told Mae West, complimenting her exquisite jewelry. "You must have been good to get them." To which West replied: "Goodness had nothing to do with it."

A similar comment might perhaps be made about the De Beers company's seemingly altruistic announcement this week that it will no longer purchase so-called "conflict diamonds" — stones that originate in war-torn African nations like Sierra Leone, Angola, and the Democratic Republic of Congo, and whose sale finances the mayhem in those regions — and will take extreme measures to prevent other industry players from doing so as well. A little background on the immensely fascinating De Beers operation sets the context of this incredible story….

For more than seventy years, Johannesburg-based De Beers has proudly maintained superiority — an approximately 70% market share — in the $7 billion rough-cut-diamond industry. De Beers chairman Nicky Oppenheimer even reportedly remarked last year that the company likes to "think of itself as the world's best-known and longest-running monopoly."

Perhaps the largest factor in the success of the 112-year old firm has been its policy, implemented in 1929, of controlling the supply of diamonds by mining as many of them as possible itself and supplementing its inventory by buying up nearly every rough-cut diamond available on the open market. The other half of the De Beers equation has been creating demand for finished diamonds (produced by the 125 wholesalers who are allowed to purchase De Beers's diamonds at ten annual exclusive, closed-door "sightings") through massive ad campaigns, such as the creative, shadowy "A Diamond is Forever" TV commercials with the now famous custom-commissioned Karl Jenkins "Palladio" soundtrack (a.k.a. "the diamond music"). For the longest time, this strategy has worked, well, as advertised. As Sean Connery's James Bond characterizes the glittering rocks in the 1971 film Diamonds are Forever, they're "the hardest substance found in nature, they cut glass, suggest marriages, [and have] replaced the dog as the girl's best friend."

But now the diamond market is changing, and De Beers risks being replaced as the only game in town. For one, the "blood diamonds" situation threatens to attach to diamonds the kind of stigma that years of horrible PR created for fur coats. For De Beers, this is perhaps the worst possible scenario. Secondly, new mines in Canada and new ways of extracting diamonds from the ocean floor (and new ways of cheaply synthesizing man-made diamonds) are gradually bringing more diamonds to market than De Beers can afford to buy and stockpile. Consequently, De Beers is losing control over the global supply of diamonds (forecast to rise 28% by 2008), and with it, the ability to set prices.

De Beers is responding to the pressure. In 1999, it reduced its estimated $4 billion inventory by $859 million. This May, the company announced that it would no longer purchase all it could on the open market.

It is De Beers's new anti-"conflict diamond" campaign, however — which is by all evidence wholehearted and genuine — that is most significant. By taking great pains to keep "bad" diamonds off the market, De Beers secures the moral high ground and forces all industry participants to follow suit. In so doing, it manages simultaneously to suppress world diamond supply while boosting the demand for "legitimate" stones (which of course it is delighted to supply from its own mines and London stockpile). What's more, the company is being abetted in this by a brilliant free-media PR push, as sparkling headlines and feature stories lauding De Beers's labors have cropped up abundantly.

Another possible outcome of De Beers's campaign is that restrictions on its U.S. operations might be lessened or lifted. U.S. diamond sales, which account for some 50% of worldwide industry sales, have risen eight years consecutively and totaled $22 billion in 1998 (the last year for which figures are available). Yet De Beers has been considered a monopoly by the U.S. government and barred from operating directly in the States since WW II (its diamonds are legally sold here, but only through subsidiary channels). De Beers is hoping its latest efforts will impress U.S. officials and pave the way for a friendlier dialogue, and eventually, direct American operations.

In the final analysis, not only is the De Beers anti-bloodstone crusade an exceptionally deft marketing effort, it also appears to have the makings of an honest and effective humanitarian effort. It is a wonderful example of how market forces, including the threat of a boycott, can drive a gigantic multinational corporation — even a long-standing monopoly like De Beers — not only to alter its business operations in ways that may aid the consumer, but even to raise its ethical standards. Central planners, regulators, and followers of the Microsoft case take note: This could be the scintillating sign of things to come.

Columns / Current Issue / Goldberg File / Nota Bene
Washington Bulletin / Subscribe / Ad Info / Home