Lev Leviev vs De Beers

Abstract

South Africa-based De Beers has enjoyed an unchallenged monopoly in the global diamonds business for close to 100 years. Until a few years ago, De Beers determined who could buy uncut stones, in what quantities and quality. De Beers also decided which cutting centres would be used. But its share of the international rough-diamond market, 80% five years ago, has now reduced to 45%. Meanwhile, Lev Leviev (Leviev), a former De Beers sightholder (one of the few exclusive direct buyers of De Beers rough diamonds) has emerged as the world's largest cutter and polisher of precious gems. Frustrated by De Beers' high-handed treatment of buyers, Leviev has decided to operate on his own. Leviev has begun dealing directly with diamond-producing governments, thus undermining De Beers' all-important relationship with sightholders. Leviev is the diamond industry's first dealer to operate across the value chain - from mining and cutting to polishing and retailing. The case discusses the circumstances leading to Lev Leviev's rise and the consequent decline in De Beers' monopolistic power. The case also explains how De Beers is repositioning itself to regain its lost glory.

INTRODUCTION

For about 100 years De Beers, the South African company had been the unchallenged monopoly in the diamonds business. Until a few years back, De Beers could determine who could buy uncut stones, in what quantities and quality and decide which cutting centers would be used. But its share of the rough-diamond market, 80% five years ago, had reduced to 45% by mid-2004.

Leviev had begun dealing directly with diamond-producing governments. This undermined De Beers' all-important relationship with sight holders. Leviev had taken significant business away from De Beers in Russia and Angola--two of the world's largest producers of rough diamonds.

Leviev's defiance had inspired others like Rio Tinto, owner of Australia's Argyle mine, to bypass De Beers for the first time in 1996 and sell 42 million carats directly to polishers in Antwerp. In the early 1990s, the Russian government also began selling some of its rough supply to others despite its long time exclusive deal with De Beers. A key operator in Russia, Leviev had cultivated good relationships with the political leadership in that country.

Realizing that its monopoly was under threat, De Beers was also reorienting its strategy. It was trying to capture more value, undertake branding exercises and establish strong relationships with carefully selected sight holders. It remained to be seen how the battle between De Beers and Leviev would unfold.

ABOUT DE BEERS

For most of the 20th century, De Beers sold 85% to 90% of the diamonds mined worldwide. With this monopoly, it could artificially keep diamond prices stable by matching its supply to world demand.

The De Beers legacy was more than 100 years old. In 1888, Cecil Rhodes successfully consolidated South Africa's diamond mines, laying the foundation for De Beers. He formed a cartel with the ten largest merchants. Each was guaranteed a certain percentage of the diamonds coming out of De Beers' mines.

In return, they provided Rhodes with market data, enabling him to ensure a steady, controlled supply. In the subsequent years, De Beers refined its system for distributing diamonds. Its original partners in the cartel were replaced by 125 of the world's most powerful manufacturers.But the basic principle of De Beers' business model remained the same: to match the supply of diamonds with demand.

Over time, De Beers began to manage its supply chain in a unique way. Its London-based marketing arm, the Central Selling Organization (CSO), purchased the production of 13 mines owned or co-owned by De Beers in South Africa, Botswana, Namibia and Tanzania.

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        Case Code   ECOA125
   Case Length    13 Pages
              Period    2004
 Organization     De beers, Lev Leviev
        Pub Date     2004
Teaching Note    Not Available
     Countries    South Africa, Global
      Industry    Diamond,

Issues             -

Lev Leviev; De Beers; Diamond industry; Sightholder; South African company; Russia; Angola; Cecil Rhodes; Branding diamonds; Forevermark; Tashkent; Namibia; Vivid Collection; South African mining giant; LVMH (Moet Hennessy-Louis Vuitton).

Please note:

This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.