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EC Rules

Jul 26, 2001 4:38 PM   By Martin Rapaport
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EC Rules

By Martin Rapaport

In a very important announcement that is sure to have long-term ramifications for the diamond industry and De Beers’ the European Commission (EC) has unconditionally authorized De Beers’ plan to establish their consumer brand in a new joint venture with LVMH. At the same time and in reaction to a separate voluntary submission by De Beers, the EC issued a strong opinion that De Beers’ proposed new Supplier of Choice (SOC) marketing system cannot go ahead as planned.

The EC announcement says, “Following an in-depth investigation under the European Union’s merger control law, the European Commission (EC) has today authorized the creation of a joint venture between De Beers and LVMH. This joint venture company, Rapids World Ltd., will be active in the retail of diamond jewelry to be sold under the De Beers brand. Separately, the commission has sent a statement of objections to De Beers on its supplier of choice agreements, which have also been notified for regulatory approval, warning that the agreements violate EU competition law as they currently stand.”

While EC approval of the De Beers branding initiative is a great victory for the company and supports De Beers new direction and emphasis on added-value downstream marketing and branding programs, the EC’s rejection of the currently proposed Supplier of Choice program introduces great uncertainty regarding the future direction of the De Beers marketing system to the trade. By requesting approval from the EC for their Supplier Of Choice program, De Beers has opened up a Pandora’s box. Questions regarding De Beers control of the rough diamond supply and how they use their dominant position to the benefit or detriment of the trade and consumers are now on the agenda.

At this stage we do not know the extent of the EC’s objections to De Beers SOC program, but we do know that the EC is evaluating all aspects of how De Beers controls the supply of rough diamonds to the diamond trade. Perhaps the EC will only request minor modifications to SOC. On the other hand there is a reasonable likelihood that the EC’s review of De Beers will be broad based and require significant changes in how De Beers manages and markets rough diamond supplies.

The EC has told the RDR that De Beers dominant presence in the distribution sector of the market ultimately proved problematic for their Supplier Of Choice program.

“Our objections were with the distribution agreements which De Beers would unilaterally impose on the sightholders given its very strong, perhaps even to say dominant position in diamond industry,” said Michael Tscherny, competition spokesman for the EC. “The problem is the that the agreements and the content of them could represent an abuse of De Beers dominant position because they would be imposing unfair trading conditions on the sightholders.”

There is no fixed timetable for De Beers to respond to the objections, but the EC told RDR that it typically requires a response within two months.

In a press release De Beers has said, “The Statement of Objections will be helpful to the review process in identifying the issues that the commission would like De Beers to address. We will be responding positively to the issues raised.”

Legal Legitimization

It is important to recognize that the EC rulings have not come about in a vacuum. We are dealing with the direct and enormously significant consequences of the exciting new direction that De Beers has taken following their strategic review of 1998-1999. The strategic review did much more than simply change the focus of De Beers from monopolistic control of rough diamonds to promoter of added value marketing. It set into motion a series of events that are destined to bring about the legal legitimization of De Beers.

For all too long De Beers has operated in a legal twilight zone. De Beers did not hide the fact that they were a monopolist and did not seek the approval of government agencies for their actions. While the U.S. government has taken a strong anti-trust position against De Beers, governments in Europe adopted a don’t ask – don’t tell approach.

The decision by De Beers to rationalize operations, reduce inventory and cease direct monopolistic activity in the rough diamond markets opened up the possibility of legal legitimization. After all if De Beers was not doing anything wrong why shouldn’t it obtain approval from government regulators? The LVMH deal required regulatory approval anyway and the SOC initiative was designed to be pro-competitive. Furthermore, by involving sightholders in a contractual relationship with the DTC, De Beers had to make sure that such contracts were legal and did not create anti-trust problems for sightholders.

De Beers voluntary submission of their Supplier of Choice initiative for EC approval reflects the companies natural desire to be rid of their questionable past and establish a solid legal base from which they can develop long term strategy. De Beers management wants to leave the legal twilight zone because they know that sooner or later the legality of their business practices will catch up with them.

De Beers has now taken a bold and historic move – by turning to the government regulatory agencies for approval they have opened up the entire question of what is and what is not legitimate legal behavior by a company that has historically dominated the diamond industry. De Beers to their everlasting credit has decided to come clean and ask the EC to establish guidelines for their future business activities. De Beers is yielding control over what their company can and cannot do, indeed should and should not do. The question of how the diamond industry can be protected from the dominant market power of De Beers is now before the EC.

A series of negotiations between the EC and De Beers will now take place. While the official basis for the negotiations will be the legality of De Beers new Supplier of Choice program, the real story is that the EC will be establishing guidelines and setting limits on how De Beers can use their market power without unfairly restricting competition and profits in the diamond industry. In many ways the future of the diamond industry and De Beers role in the diamond industry is up for grabs. While at this stage the EC may limit their restrictions on De Beers to issues at hand, the “cat is out of the bag.” Future activity by De Beers will be monitored by the EC and public dialog with the EC is sure to continue. We can only hope and trust that the EC experts will carefully weigh the public welfare and policy issues that need to be considered and come up with a balanced approach that allows De Beers to grow and prosper while protecting the critical economic interests of the smaller firms in our industry and the consuming public.


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Tags: Consumers, De Beers, DTC, European Union, Government, Jewelry, LVMH, Sightholders
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