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Marketing Strategy of De Beers Consolidated Mines Limited/De Beers Centenary AG

Marketing Strategy of De Beers Consolidated Mines Limited/De Beers Centenary AG

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Marketing Strategy of De Beers Consolidated Mines Limited/De Beers Centenary AG
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Anjali Khurana
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Marketing Strategy of De Beers Consolidated Mines Limited/De Beers Centenary AG - December 16th, 2010

Statistics:
Public Company
Founded: 1880 as De Beers Mining Company Ltd.
Employees: 25,000
Sales: R 24.85 billion (US$4.49 billion) (1998)
Stock Exchanges: Johannesburg London Paris Brussels Frankfurt Zurich Geneva Basel
Ticker Symbol: DBRSY
NAIC: 421840 Diamonds, Industrial, Wholesaling; 421940 Diamonds (Except Industrial) Wholesaling; 339913 Jewelers' Material & Lapidary Work Manufacturing; 42194 Jewelry, Watch, Precious Stone, & Precious Metal Wholesalers; 212399 Precious Stones Mining; 421940 Precious Stones Wholesaling


Company History:

The De Beers Group dominates the world market in rough diamonds. In 1990 it was split into two basic parts, De Beers Consolidated Mines Limited (De Beers Consolidated) and De Beers Centenary AG (Centenary). The first is a South African holding company controlling the group's South African assets. The second is a Swiss-registered holding company created to direct all the De Beers interests outside South Africa. The two share identical boards of directors and their stock is traded as a linked unit. De Beers Consolidated has a 9.5 percent interest in Centenary.

The combined group's main activities include: prospecting for and mining diamonds; the tightly controlled global marketing of its own rough--that is, uncut and unpolished--diamond production and that of cooperating producers via the Central Selling Organisation (CSO), the De Beers marketing arm; and, exceptionally (given that it does not retail the finished product), the worldwide advertising and promotion of diamond jewelry. It also manufactures synthetic diamond and abrasive products. In the late 1990s De Beers produced about half of the world's rough gem diamonds, and through the CSO, based in London, was marketing approximately 70 percent of the world diamond production.

Formed by Cecil Rhodes and others, De Beers is a close associate of the Anglo American Corporation of South Africa (Anglo), founded by Ernest Oppenheimer in 1917. Together they are often referred to as the Oppenheimer empire or "greater group," forged by Ernest Oppenheimer. Since 1929 they have almost always shared the same chairman. De Beers Consolidated has held a large stake in Anglo, and Anglo has had large stakes in De Beers Consolidated and Centenary; these relationships, and De Beers's investment portfolio, were in the process of being significantly modified in 1999. The greater group wields significant influence within the South African economy. The vision and dogged determination of four chairmen--Cecil Rhodes, Ernest Oppenheimer, Ernest's son, Harry Oppenheimer, and Harry's son, Nicky Oppenheimer--have dictated the path taken by De Beers and the modern diamond trade over most of its existence.

1866 Diamond Discovery Led to De Beers's Founding in 1880

The first authenticated diamond discovery in South Africa occurred in 1866, setting the modern diamond industry in motion. Prospectors came by the thousands to stake claims along the Orange and Vaal rivers. Between 1869 and 1871 six major diamond pipes or veins were discovered: Bultfontein, Koffiefontein, Jagersfontein, Dutoitspan, De Beers, and Kimberley, or the "Big Hole," as it became known. Rhodes arrived at the New Rush settlement, renamed Kimberley in 1873. He began by supplying drinking water and ice to the community and contracting to pump water from the De Beers and Dutoitspan mines with a friend, Charles Rudd; the two bought a claim apiece, and from here Rhodes was to build his business empire.

De Beers Mining Company Ltd. was founded on April 28, 1880, by Rhodes and Rudd, with other partners. The company arose once the restrictions on the number of claims individuals could hold were lifted. Barney Bamato, Rhodes's main rival in acquiring dominant control of South African diamond production, meanwhile purchased claims in the center of the Kimberley mine and in 1885 merged with the Kimberley Central Mining Company. Rhodes, however, raised a £l million loan from the London merchant bank N.M. Rothschild & Sons to outbid Bamato in 1887 to acquire the important Compagnie Francaise des Mines de Diamants du Cap claims adjacent to those of Kimberley Central. Rhodes and Bamato drained each other's profits by their rivalry through the mid-1880s. Bamato, however, eventually gave way to Rhodes's vision of a single controlling company and agreed to exchange his shares in the Kimberley Central mine for shares in De Beers.

De Beers Consolidated Mines was established on March 12, 1888, controlling around 90 percent of contemporary world diamond production. It owned the De Beers mine, three quarters of the Kimberley mine, and held controlling interests in the Dutoitspan and Bultfontein mines. The merger of the De Beers and Kimberley Central mines was contested in court by unhappy Kimberley Central shareholders. Rhodes and Bamato overcame this obstacle by liquidating Kimberley Central. De Beers paid the liquidators 5.34 million for Kimberley Central.

The move toward the consolidation of South African production was followed by a centralization in the control of sales of South African diamonds. Prior to De Beers Consolidated's creation, individual mines sold their production through different London dealers. In February 1890 De Beers concluded a sales contract with a new dealers' and brokers' syndicate, the London Diamond Syndicate. Ties between production and sales control were thus strengthened, several of the dealing firms having significant shareholdings in De Beers.

Fluctuation in demand, however, led to great ups and downs in these early days. In 1890, for instance, the company closed down operations at Dutoitspan, which was proving uneconomical. A new pipe, Wesselton in Kimberley, was discovered the same year. De Beers purchased it in 1891, determinedly continuing its policy of acquisition. De Beers, though, was deprived of the excitement of the discovery in 1893 of the Excelsior diamond at Jagersfontein, the second largest rough diamond ever found. The Jagersfontein mine would finally be acquired by De Beers in 1930.

The end of the century was marked in South Africa by political upheaval and the Boer War. Kimberley lay under siege by the Afrikaners between October 1899 and February 1900. Once the war was over, the great threat at the start of the new century came from the Premier (Transvaal) Diamond Mining Company, founded in 1902 following the discovery of diamonds near Pretoria. Its chairman was Thomas Cullinan, after whom the world's largest rough diamond, 3,106 carats, found at Premier in 1905, was named. The rich finds at the Premier mine opened a new period of bruising competition.

The U.S. financial crisis of 1907 to 1908 severely affected the demand for diamonds and, coupled with Premier's bid for independence of sales when it abandoned selling via the syndicate in 1906, had a crippling effect on trade. Premier soon recommended selling via the syndicate after the price it was receiving per carat had almost halved in a year, and the two companies agreed to limit sales. But De Beers had already had to reduce its mining activities considerably.

Still more significantly, diamonds were discovered in 1908 along the coast of then German South West Africa. Exclusive prospecting and mining rights were given to German companies. The Germans set up the Diamond Regie to regulate their production and marketing. For a brief period De Beers, with the London Diamond Syndicate, had an agreement to purchase diamonds from the Regie. But the latter moved to selling first to an Antwerp syndicate, then onto the open market by tender.

The discovery of diamonds in South West Africa heralded a great expansion in the areas of diamond production, further threatening De Beers's control. Alluvial diamond gravels were discovered in the Belgian Congo (now Zaire) in 1912. The Belgian Societé Internationale Forestière et Minière (La Forminière) began production in 1913. The year 1912 also saw the discovery of diamonds in Angola. The Companhia de Pesquisas Mineras de Angola (Pema) was created to exploit these finds.

The outbreak of World War I brought De Beers to a standstill. Mining was suspended in 1914, and the Diamond Syndicate stopped its contract. Only an essential core of workers remained, many others leaving to join the forces. In 1915 South Africa invaded South West Africa, defeating the German forces there and paving the way for the takeover of German diamond interests in the region.

Anglo Founded in 1917

Ernest Oppenheimer, who had arrived in South Africa in 1902--the year of Rhodes's death&mdashø work as an agent for the diamond brokers A. Dunkelsbuhler & Co., founded Anglo in 1917. One of this company's primary aims was to mine gold on the eastern Witswatersrand. In 1919 it set about acquiring diamond interests in South West Africa previously belonging to the members of the German Diamond Regie, beating De Beers in securing them. These interests were transferred to the specially incorporated Consolidated Diamond Mines of South West Africa Ltd. (CDM) in 1920--the year in which the League of Nations mandated South West Africa to South African administration.

De Beers had secured a controlling share of its previous rival, the Premier mine, in 1917. At the time the purchase seemed important for maintaining its control of diamond production. Under Francis Oats, chairman of De Beers from 1908 to 1918, it was slow to respond to its encirclement by Ernest Oppenheimer, who continued busily acquiring diamond interests outside South Africa. Added to this, in 1918 the world's largest contemporary diamond deposits were found by a Belgian rail company in the Bakwanga region of the Belgian Congo.

While De Beers faced another depression in world markets at the beginning of the 1920s, exacerbated by the new government of the Soviet Union's sale of diamonds and jewelry confiscated during the Russian Revolution, Anglo continued buying into various areas of the southern African diamond industry. In 1923 it purchased a 16 percent share in Diamang, the new name given to Pema in 1917. Then in 1924 it was granted membership in the London Diamond Syndicate, only to rock the boat. Anglo and Dunkelsbuhler were asked to retire from the syndicate, having attempted to bid for the entire South African output.

The new Diamond Syndicate created in 1925 by Sir Ernest (Oppenheimer was knighted in 1921) quickly caused the London Diamond Syndicate's dissolution by offering better terms, and bought out its assets. Oppenheimer had been steadily building up his shareholding in De Beers and cementing a friendship with De Beers's largest shareholder, Solly Joel and his firm, Barnato Brothers. In 1926 Oppenheimer was elected to the De Beers board.

Spectacular new diamond discoveries were made in South Africa in 1926 and 1927, first in Lichtenburg, where hundreds of prospectors were allowed to rush off from a starting line to stake their claims, and then in Alexander Bay. By January 1927 Oppenheimer had secured a controlling interest in the Lichtenburg region and by 1929 he had bought out the remaining interests belonging to Dr. Merensky, the discoverer of the Alexander Bay deposits, for just over £1 million. The markets were flooded, however, by these massive discoveries, and De Beers suffered considerably. Through Oppenheimer's dynamic policies, his ever-expanding acquisitions of diamondiferous areas, and his control of the syndicate, he was elected chairman of De Beers in December 1929. He took the helm as the Great Depression began. Sales throughout the 1930s were poor to nonexistent; in 1932 mining came to a complete halt.

Predecessor of the CSO Formed in the 1930s

Important structural changes for De Beers and the diamond sales pipeline, however, were put in place during the decade. Oppenheimer felt the original purpose of a diamond syndicate to sell South African production was becoming too restricted. He envisioned a single organization for the producers and sellers of rough diamonds that would become, as far as possible, the exclusive marketing channel for world rough diamond production. The Diamond Corporation Ltd. was founded in 1930. De Beers, CDM, Premier, and other leading producers took a 50 percent holding, the Diamond Syndicate the other 50 percent. Sir Ernest became chairman. Anglo gave up its CDM holding for De Beers shares in the same year. This arrangement radically diminished the divergence of interests between the diamond producers and the sellers of rough diamonds, and effectively saw the start of a single central selling organization. The Diamond Corporation also established important financial resources to enable it to acquire further outside production. The Diamond Trading Company (DTC) was further formed as a subsidiary of the Diamond Corporation in 1934 to sell at "sights," the process by which boxes of rough gems prepared by the DTC (which painstakingly grades the individual diamonds and selects a percentage of the graded categories) are offered to the individual clients or "sightholders," diamond manufacturers and dealers it has carefully chosen from the world's cutting centers. The combined structures have become known as the CSO.

The concept behind the Diamond Corporation was expanded with the creation in 1934 of the Diamond Producers' Association (DPA), encompassing the members of the Diamond Corporation and representatives of the South African government and the administration of South West Africa. The DPA arose to create a pooling arrangement to enable the large producers to protect the market together. On the industrial diamond side, the Diamond Development Company Ltd. was created in 1934 to explore new uses for industrial diamonds. By 1936, a British company, Sierra Leone Selection Trust, entered into an initial marketing agreement with the Diamond Corporation.

World War II brought production to a halt. But just prior to the outbreak of the war, De Beers embarked on a significant new venture advocated by Harry Oppenheimer: its first advertising campaign, which was launched in the United States. Thus De Beers, selling the rough product, built a bridge of promotional support and solidarity with the jewelers, retailers of the final product. The De Beers campaigns, and in particular such catch phrases as "A Diamond Is Forever" and "Diamonds Are a Girl's Best Friend," have become something of a legend, promoting the romantic image of gem diamonds.

During World War II the company's production of industrial diamonds acquired greater importance. Sales of these rose to £4.3 million in 1942, representing nearly 40 percent of the total trade in diamonds. Surprisingly, the diamond market recorded record sales in 1943 (£20.5 million) and 1945 (£24.5 million). Conflict, however, arose with the U.S. government, which accused De Beers of being unwilling to loosen control of its diamond stockpile to help the war effort; it was further concerned about the shortage of industrial diamonds, and about Britain falling under enemy control. Sir Ernest denied the accusation and the shortage, and proposed the compromise of stockpiling in Canada. Industrial diamond sales were in fact supervised by the British government and prices were frozen. But Sir Ernest had angered the U.S. government, which pursued De Beers as an anticompetitive cartel. The U.S. Justice Department filed antitrust actions against De Beers in 1945, 1957, and 1974. De Beers did not take up the challenge of the U.S. courts and did not operate in the United States.

A further important discovery of diamonds had been made in Tanganyika (now Tanzania) at the beginning of the 1940s by a Canadian, Dr. John Williamson. Williamson first agreed to join the Producers' Association in 1947, but then changed his mind. He stockpiled his production and threatened to damage the CSO's position. Harry Oppenheimer eventually managed to negotiate a settlement. On Williamson's death, Oppenheimer negotiated with Williamson's heirs and secured a 50 percent share in the Williamson mine in 1958, the government taking the other 50 percent.

In 1952 De Beers was to benefit from a windfall profit of £40 million thanks to the sale of a stockpile of diamonds held since the Great Depression, helping to strengthen its financial base substantially. The unknown quantity for De Beers in the 1950s came from the production of synthetic diamonds by foreign companies. The Swedish Allmanna Svenska Elektriska Aktiebolaget was the first to successfully create synthetic diamonds. But it failed to secure the patent rights, taken up exclusively by the U.S. General Electric Company (GEC) in 1955. In response, De Beers set up its Adamant Research Laboratory in Johannesburg. By 1960 De Beers founded Ultra High Pressure Units Limited for the commercial manufacturing of synthetic diamonds. Only in 1966 would a lengthy and costly dispute with GEC over the patent rights be resolved. De Beers Industrial Diamond Division continues, with GEC, to be one of the main market leaders in synthetic industrial diamond production.

In 1955 De Beers began prospecting in the Bechuanaland Protectorate (now Botswana), and 1956 saw its founding of the Diamond Corporation Sierra Leone Limited (Dicosil). The Sierra Leone government granted it sole exclusive exporting rights. Outside De Beers control, Russia had been finding diamonds in the Urals and Siberia. In 1959 the first short-lived marketing deal was signed between the Diamond Corporation and the Soviet government for sales via the CSO. Diamond buying offices were established by the CSO across West Africa with the incorporation in 1961 of the Diamond Corporation West Africa Ltd. (Dicorwaf). The offices purchased diamonds from the independent individual alluvial diggers, helping to maintain market price stability.

That year independent prospectors discovered rich diamond deposits: Sammy Collins made a discovery on the coast off CDM's concessions, and Allister Fincham and William Schwabel (forming the Finsch mine) made a discovery in South Africa, northwest of Kimberley. By 1962 De Beers had secured a contract to prospect the latter; in 1963 it bought the rights to the Finsch pipe for £2.3 million, leasing the 70 percent state share. By 1965 it had taken a controlling stake in Sammy Collins's Marine Diamond Corporation by buying 53 percent of his Sea Diamonds Limited. De Beers's pursuit of rights may have been relentless, but certain smaller interests remained outside its control, for example in Ghana, the Central African Republic, Guinea, and South America.

Late 1960s Botswana Discoveries

A dramatic discovery, the Orapa pipe on the edge of the Kalahari desert in Botswana, was made in 1967 by De Beers geologists. De Beers Botswana Mining Company Limited (Debswana) was incorporated in 1969 as a joint venture between De Beers and the Botswana government. Further discoveries ensued at Letlhakane and Jwaneng, the latter--buried some 150 feet in the sand--hailed as a particular technological triumph. Debswana became a 5.27 percent shareholder in De Beers in 1987 in exchange for De Beers's acquisition of the diamond stocks built up by Debswana from 1982 to 1985.

Business cooperation did not always go so smoothly with the other African diamond-producing countries through the 1960s, 1970s, and 1980s. Newfound independence, political upheaval, vacillating policies, and illegal mining led to certain unstable relationships for De Beers. Sierra Leone declared an open market in 1974. Dicorwaf, which had superseded Dicosil, lost its sole exclusive exporting rights. Its supposed monopoly had been undermined by theft from and illegal mining on Selection Trust's concessions.

For some 50 years, until the early 1970s, sales of Angolan diamonds by Diamang via the CSO went smoothly. The Portuguese withdrawal before the country's independence in 1975 and the civil war that raged afterwards saw this position collapse. Diamang's operations disintegrated, leaving a great deal of production to be smuggled out to Lisbon in Portuguese luggage and to Antwerp. The volume of this trade was so important that the CSO was forced to buy quantities of these diamonds when they came onto the open market in Belgium to maintain price stability. In 1977 the government took a majority interest in Diamang, later to become Endiama, and De Beers was left with a nominal shareholding. The government could not be seen to be dealing with a South African company, being officially at war with her neighbor. Thirty Cornish tin miners were recruited in London by Mining and Technical Services, a Liberian-registered company with several members of De Beers as directors, to go to Angola to advise and assist the state company. Endiama sold what diamond production there was by tender to Antwerp dealers. Following growth in production, however, Endiama signed an agreement with the CSO in 1991 for the marketing of all the diamonds from the important Cuango River region and for help in extending production.

After independence, the Tanzanian government fully nationalized the Mwadui (formerly Williamson) mine and set up its own sorting and valuing office. Production was run down and investment lacking, but the diamonds continued to be sold via the CSO. In Zaire, the CSO had set up a buying company, British Zaire Diamond Distributors Limited (Zaïrebrit, later Britmond) on the former La Forminière site, and from 1972 embarked on exploration. De Beers's involvement in Zaire underwent a serious crisis when the Zaire government broke off its contract (in operation since 1967) for the exclusive marketing of the Société Minière de Bakwanga (MIBA) diamonds by the CSO. Unhappy at being offered equal sales rights as one of four, the CSO withdrew from the country. The situation was resolved in 1983, first when the government allowed the CSO amongst others to buy the open-market production, and then when a new agreement was signed for the exclusive marketing of MIBA's production via the CSO. Elicit mining and black market buying have been even more rife here than in Sierra Leone.

In Namibia, De Beers's CDM enjoyed a remarkably stable position since the 1920s, only briefly troubled by Sammy Collins. To exploit the foreshore alluvial reserves of very high-quality gems, it developed sophisticated techniques, basically shifting sand dunes seaward, pushing the sea back by up to a quarter of a mile along ten miles. The area was said to have the most concentrated fleet of earth-moving equipment in the world. Security was high, though diamond theft was a problem. In the late 1960s and early 1970s, CDM production accounted for up to 40 percent of De Beers's total taxed profits. After 1974, no separate accounts were published. South Africa ignored the United Nations' lifting in 1966 of its Namibia mandate and the International Court of Justice's 1971 ruling that the territory be surrendered. Namibia finally achieved independence in 1989. De Beers was accused in the early 1980s by an ex-employee of deliberately overmining its Namibian territory before it might lose out with independence, and of transfer pricing. The Thirion commission supported allegations of overmining and tax evasion, but a government white paper later exonerated CDM on both counts. At present CDM remains 100 percent De Beers-owned and holds the lease on the area until 2010.

The largest diamond discoveries in the 1970s and 1980s were in Australia, which became the world's largest diamond producer in carats. The mainly Australian Katalumburu Joint Venture began prospecting in Kimberley, Northwest Australia, in 1972. Conzinc Riotinto of Australia Ltd. (CRA) joined the consortium in 1976, building up a 35 percent stake, which increased to almost 70 percent some years later. In 1977 it took over the management of the joint venture, later named Ashton Joint Venture (AJV). Ironically, De Beers had surveyed and dismissed the region in the 1960s. In 1982 CRA and Ashton Mining Ltd., holding 95 percent of the Australian production sales rights, approved a sales contract with the CSO until the end of the decade, the CSO guaranteeing its purchase of the entire production regardless of the state of the markets. This important contract was renewed in 1991.

In the late 1970s speculation by diamond traders, who had purchased and stockpiled large quantities of rough diamonds as a hedge against inflation, resulted in large numbers of diamonds in excess to jewelry demand later being released on the markets. Consequently, the early 1980s were adversely marked for De Beers. It had to limit its sales substantially so that the stocks that had built up in the cutting centers could be absorbed into the retail markets. Owing to De Beers's strict control over supply and thanks to the strength of its investments outside diamonds, it managed to ride out the severe recession.

The Soviet Union, which became one of the world's largest diamond producers, had abandoned official dealings with the CSO in 1963 because of De Beers's South African status, though it was revealed in the media that the Soviets were involved in covert dealings via a third party. Having developed their own cutting industry, though, the Soviets were able to sell certain stocks onto the open market independently. Occasionally they dumped large amounts onto the international market, for example in 1984. Once again, the CSO weathered the storm. In 1990 dealing between the two parties came back into the open, and Centenary concluded an extraordinary US$5 billion sales agreement with Glavalmazzoloto, the main precious metals and diamonds administrative body in the USSR, under which the CSO would market the USSR's rough diamond production for five years.

The acrimonious takeover bid by Minorco--an international mining investment house of the greater Anglo-De Beers empire in which Centenary later held 21 percent--for Consolidated Gold Fields (Consgold) brought De Beers unwanted publicity. Rudolph Agnew, chairman of Consgold, argued the undesirability of a South African group wielding such power over the gold industry, and attempted to discredit De Beers by asking the British Office of Fair Trading (OFT) to investigate the CSO as a "negative monopoly." In May 1989 Minorco's bid fell through due to legal obstacles, but in August 1989 the OFT announced that it would not mount an investigation into the CSO.

Controversial Dealings

It was not without controversy that De Beers exercised its formidable power over the diamond industry. It was frequently attacked as an anticompetitive, secretive cartel, a system De Beers referred to as a "producers' cooperative." De Beers was also attacked for profiting initially from exploitation through colonialism and then from the system of apartheid. Within South Africa, De Beers and Anglo were considered liberal. The greater group consistently opposed the government on its racial policy. Harry Oppenheimer served for many years as a member of parliament for the antiapartheid opposition, but progress in conditions for black workers was slow.

A fully integrated wage scale was established for all employees, regardless of race, in 1978. In 1981, for the first time in South African mining history, a recognition agreement with an established black trade union was signed, allowing for the representation of black employees in wage and other negotiations. At the end of the 1980s most of the black workers still migrated to the mines from neighboring states or South Africa's so-called homelands and lived in single-sex hostels away from their families. In 1988 the law was changed, giving blacks the right to acquire blasting certificates, opening the way for them to fill more skilled posts. Black workers' pay at the end of the 1980s was, on average, one-sixth that of white workers, who were generally skilled workers. De Beers, with Anglo, made major investments in social programs, calculated on a percentage of Anglo-De Beers dividend payments, via the joint Chairman's Fund. It embarked in 1987 on an employee share-ownership scheme to which 9,000 soon subscribed, and on a small-scale home-ownership scheme. It encouraged small black business enterprises by contracting out work to them and was a major contributor to the Urban Foundation for black housing. The greater group was recognized as a leader in South Africa in such initiatives, seeing its interest in encouraging the creation of a prosperous, capitalist black middle class.

New exploration and operations continued, with particularly important new developments for the 1990s at the Venetia mine in South Africa, at Elizabeth Bay, Auchas in Namibia, and in North Saskatchewan in Canada. Harry Oppenheimer stepped down as chairman in 1984 to be replaced by Julian Ogilvie Thompson, also chairman of Anglo and of Minorco, and Harry Oppenheimer's son Nicky became deputy chairman of De Beers and chairman of the CSO.

At the end of the 1980s sales soared to new heights, reaching a record $4.17 billion in 1988, almost four times what they stood at in the early 1980s. The massive De Beers advertising budget of around $172 million was spent on major campaigns in 29 countries. Twenty-five years ago, the tradition of the diamond engagement ring hardly existed in Japan; now 77 percent of Japanese brides receive one.

1990s and Beyond

In 1992 De Beers Marine recovered some 360,000 carats from CDM's offshore areas, and is developing the technology for sea-floor mining. But political, ethical, and economic problems plagued De Beers in the early 1990s. International calls for an end to apartheid in South Africa had repercussions for the country's largest conglomerates. The African National Congress (ANC) rallied for the unbundling of South Africa's largest conglomerates, including Anglo and De Beers. ANC leaders felt that the eventual dissolution of these companies would open big business to more blacks. More than 80 percent of the Johannesburg Stock Exchange was comprised of South Africa's six largest companies. Leaders of the ANC insisted that the country's economy was constricted by the conglomerates, and that the lack of competition inherent in the South African economy discouraged foreign investors. But De Beers and Anglo spokesmen saw their companies' strengths as a necessary attribute for world competition once South Africa became a fully accepted member of the community of trading nations.

In April 1992 De Beers's ethical standards came under the scrutiny of the U.S. Justice Department, which accused the diamond giant of price fixing in cooperation with General Electric Company. Although industrial diamonds fall outside the CSO's purview (and in any case bring only one percent of the price of gems), the Justice Department's lawsuit claimed that GEC and De Beers conspired to control over 90 percent of the worldwide market for high-grade industrial diamonds. In December 1994, however, a U.S. District Court judge threw the case out of court, having concluded that the Justice Department had failed to prove its case.

De Beers's control of the gem market was threatened in the early 1990s by the twin demons of recession and rogue diamond producers. The worldwide economic downturn depressed diamond sales in the United States and Japan, which together accounted for 66 percent of diamond jewelry sales. In response, De Beers cut back its purchases from diamond producers 25 percent in 1992 to adjust supplies according to demand.

Unfortunately, as De Beers limited its supplies, political upheaval in Angola resulted in more than 50,000 unauthorized diamond diggers in that country's rich diamond fields. De Beers was forced to spend an estimated $6 million per week on these illegal diamonds to guarantee a stable market. Add that to De Beers's contracts for $4.5 billion in diamonds and total rough sales at $3.5 billion, and a deficit situation was clearly at hand by September 1992. The company was forced again to reduce all its contracts by another 25 percent that month.

To make matters worse, Russian suppliers in the Sakha region began to demand more control over the sale of diamonds produced in that region. They based their demands on the fact that, by value, Russia had the world's largest diamond production as well as a stockpile of diamonds rivaling De Beers's own $3.3 billion reserves. In 1993 cash-strapped Russia began violating the 1990 marketing agreement signed between the CSO and former Soviet leader Mikhail Gorbachev. Russia began selling large quantities of low-quality diamonds outside the CSO, forcing the CSO to lower its prices for low-quality gems. This in turn prompted Argyle Diamond Mines of Australia, the leading diamond producer in the world, to leave the CSO in mid-1996 and sell still more low-quality diamonds outside the CSO. In response, De Beers and the CSO decided to concentrate on higher-quality stones.

In 1997 Nicky Oppenheimer took over as chairman of De Beers. That year the diamond industry was further rocked by the beginning of the Asian economic crisis, which collapsed demand in that region. Sales of rough gems in the first half of 1998 fell 41 percent, and revenues for De Beers Consolidated and Centenary fell from $6.42 billion in 1997 to $4.49 billion in 1998. De Beers also faced the prospect of potential new rivals in Canada, where Australia's largest company, BHP, and the world's largest mining company, U.K.-based Rio Tinto, were beginning to mine high-quality diamonds. On the positive side, after two years of contentious negotiations, De Beers and Russia finally reached a new diamond-trading agreement, a one-year pact, in late 1997. A year later the agreement was extended for three more years, with Russia agreeing to sell about half of its output to De Beers and gaining the right to sell five percent of its diamonds independently on the international market.

In the early years of the post-apartheid era, Anglo American had begun restructuring in part to protect its assets from possible nationalization. By the mid-1990s Anglo had transferred all of its non-African, nondiamond assets to an offshore affiliate, Luxembourg-based Minorco. Then, near the end of the decade, Anglo and Minorco reached an agreement to merge their businesses into a new U.K.-based company called Anglo American plc, which would have its primary listing on the London Stock Exchange with secondary listings elsewhere, including the Johannesburg exchange. At the same time, Anglo and De Beers agreed to rationalize their elaborate cross-holdings and common investment portfolios. In April 1998 De Beers acquired from Anglo its interests in the CSO and CSO affiliates, thereby bolstering De Beers position in diamonds. De Beers and Anglo also agreed to a scheme whereby De Beers would transfer the bulk of its noncore investment portfolio--which included interests in such firms as Anglo American Platinum Corporation Limited, Mondi Limited, Namakwa Sands Limited, and Samancor Limited&mdashø Anglo, after which De Beers would hold a 42.1 percent stake in Anglo. De Beers would emerge from these maneuvers with, by and large, two main areas of operations: diamonds and its stake in Anglo.

By the late 1990s, the CSO marketed about 70 percent of the rough diamonds mined around the world, a decline from the 80 percent of the early 1990s. Nevertheless, and despite the defection of Australia and the difficulties in controlling the Russian and Angolan markets, the long-predicted demise of the De Beers diamond cartel had yet to materialize. In fact, De Beers was able to gain a long-sought foothold in the emerging Canadian diamond industry in early 1999 when it reached an agreement with BHP and Canada's Dia Met Minerals Ltd., who promised to sell 35 percent of their output to the CSO. It thus appeared likely that the De Beers stranglehold on the diamond industry would continue well into the new millennium.

Principal Subsidiaries: CDM (Proprietary) Limited; De Beers Industrial Diamond Division (Proprietary) Limited; De Beers Central Selling Organization (U.K.).
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