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Fundamental Change: An Interview With Nicky Oppenheimer
Jul 27, 2000 4:59 PM
By Martin Rapaport
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Nicky Oppenheimer discusses De Beers new strategic initiatives and their impact on De Beers and the the industry in this exclusive interview with Martin Rapaport, London 07/14/00.
MR: You have said that the new strategic initiatives are the most important development at De Beers since the 1930’s. Why are these new initiatives so important?
NFO: We are moving from being the seller of last resort to being the seller of choice. That is a very fundamental change. Our priority has shifted from controlling supplies to driving demand. We will be providing our clients with an added value package that will ensure that they choose to buy from us rather than other suppliers.
MR: How will the new program help De Beers and its sightholders?
NFO: In today’s market you don’t have to be a genius to have a good diamond business. The test will be when the downturn comes. When our sightholders see that the value they are getting from De Beers is so good, they are going to buy from De Beers even though other diamonds on the market are less expensive. The sightholders and their clients are going to see that they can get a higher return dealing with diamonds from the Diamond Trading Company (DTC) than diamonds from other sources. That will be the test of our new strategic marketing plan.
MR: Is De Beers leaving the monopoly game and becoming more of a regular competitive market player?
NFO: De Beers is certainly not giving up it’s leadership role in the diamond industry. I actually think the new initiatives are going to increase our role in the industry.
MR: How about the U.S. anti-trust issues?
NFO: I’ll only know the answer to that if and when we are able to sit down with the Justice Department and discuss how we operate and what we need to do for them to approve of us. I don’t know when we will get to that situation and whether there will be a meeting of minds at the end of the day. We are ready to discuss the matter with them.
MR: Will the new plan change the way you work with your suppliers?
NFO: I would hope that the plan would be very attractive to our suppliers, because they, like us, have taken the pain in the past when the downturn came. They have had to go on to quota’s and not sell their full production. When we get Supplier of Choice to work properly, it will limit the negative impact of a downturn on our sales. They will be able to sell more diamonds in difficult markets.
MR: So you are saying to the governments of Botswana, and Namibia, we are able to add value to your diamonds and do a better marketing job?
NFO: Yes, and at the end of the day we may also get better prices.
MR: How concerned are you about De Beers market share?
NFO: De Beers market share has obviously declined over the past years. Recently it has gone up again. I don’t think it will go very much lower in the near future. If you look ahead you can see the new production that is going to come on in the next five to seven years. Diavik is obviously going to start producing diamonds and we will be able to produce more as Orapa 2000 has just come on. The overall increase in outside diamond production is not going to be dramatic.
MR: Will there be any decreases in production like what happened with Argyle?
NFO: Argyle obviously had an important decrease in carats, but not in value relative to global production. The only mines which are coming to the end of their lives are the Kimberly mines, which will last longer due to our new treatment plant.
I suppose the biggest change in production has been alluvial diamonds from the Cuango Valley in Angola. As you know UNITA occupied that valley for a long time and then pulled out voluntarily. I think that might be because they thought they had extracted all the diamonds they could from the area.
MR: Regarding De Beers decision not to buy diamonds from Angola and other conflict areas, how much of that decision was the moral imperative and how much was based on the fact that De Beers does not want to increase its inventories?
NFO: The market has been extremely good and there would not have been any inventory problem if we bought these goods. It was the moral imperative and also the fear of what might happen to the diamond industry. When you look at the volume of conflict diamonds which are less than 4 percent of the world production compared to the 96 percent plus that come from good areas, it is obviously in all of our interests to drive this 4 percent away. Why should any of us put our business at risk for peanuts like this? That’s crazy.
MR: Do you think that the industry can do something about this problem?
NFO: I think we can have a chain of warranties from the producers to the cutting centers and that this can go a very long way to resolve the issue.
MR: Would De Beers allow Global Witness or other NGO’s to audit their diamond sourcing?
NFO: We are audited to a very large extent by government diamond valuators who properly audit the diamonds we buy from Botswana, Namibia, and South Africa. We believe that as far as De Beers is concerned, if we issue a certificate on our boxes guaranteeing that there are no diamonds from conflict areas in the boxes, then we are believed. We do not make such a statement lightly because in a public statement you are putting yourself at legal risk if you tell a lie. It is not the sort of thing that you can do as a large major company unless it’s true. I think that at the end of the day if they wanted auditors then that is something we can look at. It doesn’t give us a problem.
MR: Do you think that the situation in Africa can be favorably resolved? Can the diamond industry help end conflict?
NFO: That is a very big question. Conflict happens in many parts of the world and is financed in many different ways. At the end of the day diamonds don’t actually kill anybody. You have to have a gun and someone behind the gun to pull the trigger. Everybody must do what they can to resolve these issues. The diamond industry must do what it can. If we can drive conflict diamonds out, we will be contributing a small piece. Will we resolve the overall issue of conflict? I doubt it.
MR: What do you think of Leviev’s opeation in Angola?
NFO: Leviev has been very successful. I see him as a competitor but not as a threat to De Beers. Time alone will tell how this whole issue in Angola will be resolved. As you know De Beers’ position is that we had a legitimate contract there and we are uncertain about the legalities of how this was taken away from us. This is something we will be looking to discuss with the Angolan government.
MR: How about the Russian situation. The contract is going to be up in a while. Do you think Leviev will make a play for the Russian goods?
NFO: I don’t know. We have had a good relationship with the Russians for over 40 years now. I would be very surprised if the contract was not renewed.
MR: How important is the Russian production to De Beers?
NFO: It is an important production. It is the third largest element after the South African and Botswanan production and slightly ahead of the Namibian. We would obviously like to go on marketing their diamonds and I think we do a good job for them.
MR: When you look at the overall profits of De Beers, the part contributed by the Diamond Trading Company is very small. Why are you bothering with the build-up of the DTC?
NFO: I don’t think we do so badly with the DTC. You must ask the question – does the leadership role that we have on the marketing side protect our profits from the mines?
MR: Why do you need the DTC to ensure mining profits?
NFO: You mustn’t think that if the downturn comes De Beers inventory stocks will not go up. They will go up because we produce between 40 and 50 percent of the world production. What we are going to ensure through the DTC and the Supplier of Choice program is that stocks do not go up in the way they did before. When the downturn comes we are not going to stand back as we did in the past and say to every other producer in the world, you sell everything you can and when you are finished De Beers will come in and sell the balance. We are going to be up in front of the other suppliers and they are going to sell after us, because our sightholders will prefer to buy from us. We will be the suppliers of choice.
MR: Do you expect sightholders to buy exclusively from De Beers?
NFO: I think some will, but not all of them. The Supplier of Choice program will try to ensure that sightholders get the goods they need to operate efficient marketing programs. I think there is going to be a much closer relationship between De Beers and its sightholders. Not a one way traffic, but very much a two way traffic.
MR: Is there going to be better profitability then a few years ago? Has De Beers changed it’s policies regarding the profitability of sightholders?
NFO: I think that any sightholder over the last year-and-a-half would have made a pretty good return on investment, As the Supplier of Choice initiative develops, working margins for our sightholders will increase. As I have said before, at the end of the day, unless our sightholders make money we haven’t got a business.
MR: Now that you have moved to a more flexible pricing model, how is this affecting the prices to producers and the Price Books?
NFO: When we change the price book, fundamentally as we did in the old days, we will certainly go to our producers and tell them about it. They obviously want to know exactly what is going on to be quite certain that they are getting the right value for their diamonds. We will continue exactly as we did before and change the price book when prices change. All that we are not going to do is tell the public and notify our competitors.
MR: How will the new Supplier of Choice program affect the dealer sightholders?
NFO: Anyone who says that the dealers are coming to an end misses the point. I think that the dealers are going to have a very important role to play in the new Supplier of Choice program. We will want to know from the dealers how they handle our goods in the secondary market and understand how they are getting those diamonds into the right hands. A lot of them deal in polished so they will be very important buyers back of polished.
MR: How do you see De Beers position in the years ahead?
NFO: I am quite certain we will be the leading company in the diamond industry. We must get our new programs working well and this will take some time. We will also develop a business plan that makes good use of our De Beers brand name.
MR: Will you compete with your clients?
NFO: Absolutely not. When we first took on Bain they provided an easy textbook answer. They said, "this is absolutely splendid – what you should do is polish all your own production and sell it." We said, "this may look great in a textbook, but life is not like that in the diamond business, the polishing of diamonds is a very specialized area in which we have no skill. This is not an area we have any intention of getting into."
MR: There is concern in the diamond industry that the new plan will hurt non-sightholders. How should the rest of the industry relate to the new De Beers initiative?
NFO: I think that our plan is undoubtedly going to be good for the whole diamond industry. Certainly, the people we are dealing with first hand are our sightholders, but there is going to be an add-on effect that will benefit the whole industry. As we blaze the trail, the industry will come along right behind us. Others must participate as well, they must look at what we are doing and do similar things in their own way. I am quite certain that clients of the Australians, Canadians, or whoever else, will see our plan as being very sensible and they will increase their marketing as well. If we can drive demand for diamonds all of us are going to benefit.
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Tags:
Angola, Argyle, Conflict Diamonds, De Beers, Diavik, DTC, Government, Leviev, Namibia, NGO, Polishing, Production, Sightholders, South Africa
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