Reference no: EM132965344

De Beers in 2000 Exhibits 5 6

In 2000, De Beers, with over $5 billion in diamond revenues, remained the world's leading diamond producer and distributor with extensive activities in exploration, mining, and distribution of rough stones as well as significant influence in processing, manufacturing, and marketing (and ). In 1990, De Beers placed its South African operations in De Beers Consolidated Mines and its non-South African interests in a Swiss-registered company-De Beers Centenary AG, which covered its activities in other parts of Africa, its diamond stocks, the DTC, its synthetics business, and research and development (R&D) and exploration activities. De Beers employed 22,000 people in 19 countries. Over 17,000 employees were based in De Beers' southern African operations. De Beers maintained cross-holdings with its sister company, Anglo American, founded by a former chairman of De Beers-Sir Ernest Oppenheimer-whereby the two companies owned 35% and 32.5% of each other, respectively. De Beers was listed on the Johannesburg Stock Exchange.

In 2000, De Beers was spending over $70 million on exploration, with a multinational team of 200 geologists involved in 25 joint-venture exploration and evaluation projects in over 13 countries across five continents. Exploration was under way in Canada, Angola, Botswana, Australia, Brazil/Venezuela, Guinea, South Africa, Zimbabwe, China, Gabon, Mauritania, India, and Russia. De Beers had discovered pipes in nine countries with potentially important finds in Canada and Angola.

De Beers mined more than 36 million carats in 2000, or one-third of industry output by volume and 45% by value, mainly in underground and open-pit mines. About 24 million carats were mined in Botswana, where De Beers owned mines jointly with the Botswana government; 10 million in South Africa; and the balance in Namibia and Tanzania (both also government joint ventures). De Beers' average mine productivity in 2000 was 43 carats per 100 tons. De Beers anticipated closing three of its least productive South African mines within the next few years.

The DTC purchased rough stones from other mining companies under formal contracts, and until 1999, on the open market through buying offices in Africa, South America, and Europe. Contracts typically ran for three to five years and covered 100% of the country's rough-diamond output, with exceptions made for the Alrosa mine in Russia, Argyle in Australia, and Ekati in Canada, which each transacted with multiple distributors. Purchase options were usually exercised in full, even though contracts permitted DTC to vary purchases. Contracts guaranteed up-front payments in hard currency at set prices that covered all categories of stones supplied, even those facing low demand. A commission was charged, which ranged between 10% and 15% in inverse proportion to average value per carat. The DTC's price guarantee attracted producers of the best stones.

The DTC held inventory that varied in the 1990s from under $3 billion to nearly $5 billion, or 100% of De Beers' annual rough sales. A market-intelligence group was responsible for tracking rough stones and monitoring inventories throughout the value chain. This group collected detailed information from sightholders as well as conducted extensive jewelry consumer surveys in key diamond-consuming nations. This information guided the DTC in adjusting the quantity and mix of diamonds that were released to the market. The total value of a DTC sight could vary by a factor of two within a six-month period.

Clients of the DTC valued its large-scale and sophisticated sorting and classification system, as well as its access to the best-quality stones available. Furthermore, clients of De Beers had access to De Beers' "network" of industry connections, market knowledge, and the like.

De Beers did not manufacture jewelry or operate retail stores, except for a small polished division, which purchased rough from the DTC, cut and polished the stones, and then sold them to wholesalers and jewelry manufacturers. This activity was designed for market-intelligence purposes.

De Beers invested heavily in advertising of diamonds with expenditures that averaged $170 million per year through the 1990s. De Beers' marketing campaigns positioned diamonds as heirlooms and gifts of love for special occasions, incorporating the cultural underpinnings of gift- giving between men and women in each targeted country. Ads ranged from encouraging a diamond engagement ring to appealing to women to purchase diamonds for themselves. De Beers' ads instilled the idea that the man should spend two months' gross salary on a ring.25 De Beers also supported independent organizations that classified stones for the retail market, such as the GIA.

A new management team was in place in 1998 with Nicky Oppenheimer as chairman and Gary Ralfe as managing director of the De Beers Group, Gareth Penny as managing director of DTC, and Stephen Lussier as head of marketing. Jonathan Oppenheimer, Nicky's son, became chairman of De Beers Consolidated Mines.

In 2000, Anglo American and De Beers announced details of a forthcoming restructuring to end the complicated cross-holdings, which equity analysts described as opaque. A consortium comprising the Oppenheimer family interests (45%), Anglo American (45%), and Debswana (10%) would acquire all the shares of De Beers, ending De Beers' 108-year history as a public company.

De Beers had been challenged by the antitrust authorities in consuming nations. In 2000, De Beers could not operate legally in the United States due to an outstanding criminal indictment because the firm had failed to appear for a suit alleging price fixing in industrial diamonds in 1994.

According to the paragraph:

Why did DeBeers vertically integrate into wholesale sales and not further?

Why has the CTO (DTC) been critical for the DeBeers strategy?