DTC

We Need a Soul

Isaac Mostovicz writes...

After more than 4 years of manning the US State Department conflict diamond desk, Brad Brooks-Robin stepped down and was interviewed by JCK magazine. Apart from appreciating the very honest answers Brooks-Robin gave, I was left with some questions that I could not find answers to.

 

Kimberley Process Certification Scheme, established ten years ago, is a structure set up to ensure that diamonds sold internationally do not finance wars or other conflicts. Countries subscribing to the Kimberley Process must put in place regulations requiring diamond dealers to buy diamonds only from known sources. Brooks-Robin considers the scheme to be effective, but believes it does not cover all aspects. Its lack of comprehensiveness was the reason the NGO Global Witness decided to leave the Kimberley Process.

 

However, the interview fails to address the most fundamental question. Is there any evidence that diamonds finance wars or other conflicts? Was there a raison d’etre for such a huge bureaucratic mechanism to start with? Everyone was mobilized for the scheme – the US government and Senate, the European Union, the Security Council of the UN and even Hollywood. Everyone went forward to protect the market from an evil that never existed.

 

Well, I would not say that it never existed. When the UNITA wanted to finance its war against the government, they sold diamonds on the open market, but that was a different story. Financing a body the size of UNITA means that they had to sell a lot of diamonds. Actually, the size of the smallest parcel they sold was over $1 million and the goods were openly traded. It would have been quite easy to stop such a trade, had those who were interested been willing to do so; however it seems they were not since they used the money to sell arms, which have the nasty nature of killing and maiming people.

 

The reasons behind creating this huge scheme were in reality different, but that is another story. Ten years later we now have a mechanism that works smoothly, though aimlessly, and everyone is happy. We have a car with an excellent motor but without a gearbox allowing us to drive it to our destination. We have a set of rules that is followed to the letter of the law, but no one cares whether they achieve anything at all.

 

The rules on the regulation of the Kimberley Process were doomed to be unsuitable for the needs of the diamond industry to start with. After all, how can rules dictated by someone who does not even know the industry — its strengths and weaknesses, its ethical code and its motivators — dictate rules? Listen to what Brooks-Robin says:

 

“I don’t understand why KP meetings don’t have a session on the state of the industry. There are too many diplomats and bureaucrats who come into the KP and know zero about the industry. […] There are too many people who come into the industry like me and don’t know anything about it, and KP meetings don’t give you much of an opportunity to learn about it.”

 

Well, this is hardly news. In early 2000, based on advice from Bain and Co. consulting firm, De Beers decided that the industry needs brands. Nobody really knew what brands meant or how to create them or whether diamonds can be branded at all. Brand was in the air and as De Beers said, we don’t know what this drive means either or how it will revive the industry, but we will learn together with you. According to Varda Shein, the general manager of the Diamond Trading Company – the marketing arm of De beers – about $5 billion in cash went up in smoke without selling one single diamond.

 

How well did Bain and Co. know the industry? These consulting firms have tools for analyzing corporations, however when dealing with an industry that is exclusively entrepreneurial, one needs different tools and rules, that are not taught in business school. I personally witnessed this when I was in business school, when I realized that I need a very healthy measure of creativity and commitment to apply what I learned to my business. At least if there is a positive lesson to learn from the branding fiasco, it is that the diamond industry is quite flexible and ready to adapt to any trend or move. Well, one cannot expect less from entrepreneurs.

 

The diamond industry is clinically dead. The mechanism works and its body is supported by life-support machines, but its soul – the personal responsibility for its actions – went away a long time ago. How long will it take before a true leader brings life back to this beautiful industry?

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Genie out of the bottle – more transparency in diamonds?

Isaac Mostovicz writes...

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Sightholder status from the Diamond Trading Company (DTC) is bestowed the world’s top diamantaires (as chosen by the DTC) for “their ability to market diamonds effectively and distribute them efficiently.” DTC Sightholders get access to rough diamond supplies, and in return “deliver specified diamonds in predictable quantities, assure the quality and integrity of their diamonds, and provide value-added marketing support.” (Both quotes from the DTC’s site here)

Recently, six companies lost their DTC Sightholder status following the result a criminal case in Antwerp. On December 6, 2007, the Antwerp Correctional Court convicted these diamantaires (and seven others) of fraud, fictitious invoicing and smuggling between 1994 -1999.

The judges refused to approve a settlement between the Belgian prosecution and the thirteen diamantaires, and gave the companies a six months suspended jail sentence. The DTC is also suspending these companies’ diamond supplies.

This editorial, “The Genie is out of the Bottle,” by Chaim Even-Zohar, makes an interesting argument that it wasn’t so much fraud as industry practice at the time that these (relatively small) companies were doing–they were actually increasing their taxable income by moving values that were ‘hidden in inventories’ to actual revenues, which the law now makes companies do. Their conviction is merely for show when larger companies with greater transgressions at the time were not targeted in the lawsuit. In any case, Even-Zohar believes the decision will accelerate growth of transparency, good governance, and Best Practice Principles in the diamond industry. Do you agree?

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The diamond bubble: an email conversation (Part 6)

Isaac Mostovicz writes...

This is the final post in our mini-series documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking.


From: Isaac Mostovicz
Sent: 09 October 2006 20:39
To: Randy Pearson

Dear Randy,

Here are my comments:

You raise a classical point as companies under a pressure to produce short-term successful results, act against their long-term goals. There is no doubt that the act of the DTC was brilliant in the short-term and the SoC is only four years old. They managed to get rid of their stockpile and turn it into money. However, what happened in the last years shows that they did not take into consideration long-term consequences and as a result, they are unable to sell their entire intake and, effectively they build a second stockpile, they have a problem with their profitability and in spite of an increase of volume and price, their profits raised only marginally (I think that the figures for 2005 were 3%).

In regarding the Millennium experience, I have several observations to make. While we advocated high prices (we sold at +30% or more), other participants did not even thought that these prices are possible. Together with this, we advocated top make and had to fight with the other participants (mainly Americans) who wanted a much more lenient standard. To add insult to injury, the level of rejection by us was 3-4% and I knew beforehand most of which will be rejected. On the other hand, the rate of rejection by others was 30-40%! Last, but not least, to become a Millennium distributor we had to submit a marketing plan. When all participants met in April 2000, the DTC introduced them to the 4Ps which was considered by many as a brilliant novelty. My question is how exactly looked the marketing plan of the other participants? Taking into consideration that the DTC was not involved in the marketing of the product, it is not a surprise that the program crashed. Give a F1 to someone who does not know how to drive and he’ll crash it in no time.

Your last question is excellent. I must say that my imagination is limited and not every diamond is appealing to me or can be considered a luxury. Thus, I do not exclude Indian junk as long as it is presented properly. Rolex is a junk of a watch, unless you use it as a calendar but it is the finest example of what luxury is. The legendary Jaguar E Type is of the same league. However, when you treat cheap diamonds as junk, that’s what happens.

Isaac


We hope you have enjoyed this mini-series; do let us know what you think – the comments field is open!

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The diamond bubble: an email conversation (Part 5)

Isaac Mostovicz writes...

This is the fifth of six posts documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking.


From: Randy Pearson
Sent: Monday, October 09, 2006 8:55 PM
To: Isaac Mostovicz

To extend this a bit more, I see this point as one example of how SoC has worked as intended. DTC had a problem of stock that was unsuitable. Their existing sightholder base was not equipped to produce and distribute these type of goods that they had stockpiled. By bringing in “new sightholders” they were able to move out these goods and leave it to the banks and these clients to find a way to cash these goods. The banks took the sightholder status as collateral for the loans based on the experiences of the past and now they have a problem. These goods were consumed into the marketplace via the sightholder transfer of ownership from DTC to the SOC, but then we have a bottleneck as there was low demand at the consumer level for this article (that’s why they stockpiled them in the first place – remember there was no reason for them to stockpile other than low demand back in 1999 as markets were healthy). In one viewpoint, their tactic was brilliant as they did this on the backs of these “new SOC sightholders”, but on the other the banks that support the industry will suffer.

Of course, I do not have privy to how gets which box and assortment of goods, but you can get a clue based on who the new players are and who was eliminated. New Indian companies and new firms that polish in Africa. If they divert this unsuitable rough to these firms then they satisfy the political problems while liquidating dead assets.

Yes the standard of what is jewelry quality has slipped greatly. There is no doubt of this point. It has opened markets to the masses, but I would argue has greatly damaged the diamond dream and the symbolic value of diamond. On one hand you can argue that everyone should share in this dream and I tend to agree, but at what cost and where do you draw the line. Recall the decision of DTC in 1999 regarding the Millennium Diamond. They set a standard of rarity that was far higher than their average production. Do you imagine they did this without research to indicate that if you place the range too low it would not appeal to certain demographics or targets? Why did they not select smaller goods in promotional quality range? Were they concerned about the image of diamond as a symbol?

These are just thoughts, but it may very well come to pass that we have further segmentation in the industry when the dust settles. I would much prefer to be selling our range of goods than bags full of promotional goods selling on a volume basis during the next few years.

One question to explore is, “what is the definition of a diamond that represents the symbolic diamond dream?” Where is that line and how do we know if it is crossed?

Randy Pearson
S. Muller & Sons


Don’t forget to check back at the same time tomorrow for the final installment.

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The diamond bubble: an email conversation (Part 4)

Isaac Mostovicz writes...

This is the fourth of six posts documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking.


From: Isaac Mostovicz
Sent: 10/9/2006 6:24:12 PM
To: Randy Pearson

I think that Randy raises a point that needs a further exploration. Until the 60s the range of what were considered diamonds suitable for jewellery was much more restricted. The Indians learned how to produce rough that was previously considered unsuitable for jewellery. I raise the following question: is it possible that the market became too large in the sense that many of the goods that are offered are unsuitable for consumption? In other words, the production of real diamonds is very limited and if we manage to market only these goods, the offer will be limited but we will be able to raise prices to very high levels as the availability will not be there.

One of the reasons for the SoC was the unsold stockpile of $5bn (US). The claim of the shareholders was that the worth of this stockpile is nil, something that the DTC tried to prove wrong by selling the stockpile for the price they wanted. However, selling the stockpile was not an indication that the need for these goods exists. To take an analogy from what we have on hand, we, at Allied, have plenty of goods but if we want to be faithful to our program, only a limited part of this stockpile is suitable as need satisfiers. Nevertheless, it is our responsibility to find ways for using these goods for satisfying clear and existing needs.

Another example is Patek Phillipe that produces only 18000 watches per year regardless to more markets that open. It is very tempting to try and to cater to the entire world but there are other ways for making money and mass marketing may not be suitable for diamonds.

The last point that Randy raises is interesting. Good manufacturers burned their fingers in the last years by manufacturing. It is possible that people will try to slow down manufacturing as keep prices of rough at bay and gain from selling his existing stock, effectively lowering the level of stock. I am not sure that all will follow but as a different policy is the way of those manufacturers who might suffer and even close down, we are facing an interesting period.

Isaac


Once again, check back at the same time tomorrow for the next installment.

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The diamond bubble: an email conversation (Part 2)

Isaac Mostovicz writes...

This is the second of six posts documenting an email exchange between Randy Pearson, of Allied Diamonds and Isaac Mostovicz of Janus Thinking.


From: Isaac Mostovicz
Sent: 10/8/2006 5:08:29 PM
To: Randy Pearson

Randy,

It is very difficult to give such an estimate, as you know and comment. Some take 1ct or 0.5ct as a benchmark but this is not better either. Therefore, I preferred to rely on Even-Zohar as a source. He is honest enough to know the complexity of the market and provide these numbers as an illustration only. There are so many factors in building such a graph: the type of diamond (size and quality), the geographical market, the type of outlet, the time that the data was collected (now the situation is worse) and more. However, this complexity is more pronounced at the retail level.

You are correct about the squeeze at both ends, or throughout the pipeline. In the past, people were ready to suffer blows as they knew that in the long run they will win. This was the case with sightholders who were ready to overpay for their boxes, knowing that the DTC will pay back its loyal customers for the losses by offering special goods. Unfortunately, I believe that the DTC is not making money either, even when their mining operations are considered to be the most efficient in the market. De Beers is now a private company but did they stay a public company we’d see a hostile takeover. This article in IDEX confirms this squeezing trend.

Isaac


Once again, check back at the same time tomorrow for the next installment.

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