Global Policy Forum

By Alan Cowell

A little over a year ago, De Beers, the mining colossus straddling the world's diamond trade, confronted double jeopardy. Human rights groups were accusing it of buying illicit diamonds from African rebels and rulers who used the proceeds to help pay for their wars. The essential mystique of its product, nurtured over decades of artful image-building and brawny cartel management, seemed threatened by association with these so-called blood diamonds.

At the same time, De Beers, a South African-based multinational corporation, faced a pure business challenge: the company's huge accumulation of raw gems, used to help control the supply and keep world diamond prices high, had become a costly albatross. De Beers's shrinking share of the market was making it harder to support prices by sopping up gems itself. Then, De Beers hit upon a way to use the controversy over blood diamonds to address its commercial problems. Turning necessity into a virtue with the same skill it has used for decades to promote diamonds as glittery icons of love and beauty, it recast and began promoting itself as the squeaky-clean crusader for guarantees across the industry that "conflict diamonds" -- as they are also called -- be kept out of the world of luxury goods.

Far from damaging the company, then, the controversy over diamonds of questionable origin has helped De Beers draw a line between the legitimate trade, which it still dominates, and the unlawful traffic in diamonds among African rebels.

Indeed, as Edward Jay Epstein, author of a 1982 book about De Beers, "The Rise and Fall of Diamonds," explained, by supporting United Nations embargoes on illicit diamond sales in Angola and Sierra Leone, the company has effectively enlisted the United Nations as a policeman to do the job that dictators and mercenaries once did in keeping more desperate competitors from dumping cheaper stones onto the market. "Another brilliant coup, in my opinion," Mr. Epstein said.

As it seeks to improve its image, De Beers is focused on turning itself into what it calls the supplier of choice -- a branded, high-value diamond trader looking to marketing to replace its old monopoly status and to maintain its leadership of the global market for uncut diamonds worth $7 billion to $8 billion a year. The death over the weekend of the company's patriarch, Harry F. Oppenheimer, is hardly expected to alter that strategy. The chairmanship was passed two years ago to his son Nicholas F. Oppenheimer -- universally known in South Africa as Nicky -- and family and continuity are important at De Beers.

With the company's shift in business strategy, using the moral high ground for a dollars-and-cents strategy, De Beers, by its own account, may well be starting to turn a corner. Buoyed in part by a millennial buying spree and robust American and Western economies, its sales of rough diamonds reached a record $5.2 billion last year and $3.4 billion in the first six months of this year. The surge in sales, De Beers announced last week, allowed it to reduce its stockpile to $2.7 billion as of the middle of the year from a $4.8 billion inventory in 1998. And the influx of cash from sales and corporate restructuring spurred a $1 billion acquisition push aimed at mining interests in South Africa and elsewhere.

"In a sense, this whole issue of conflict diamonds and the way they have handled it has fallen in their favor," said Bobby Craig, an industry analyst for Merrill Lynch who is based in South Africa. "They have been able to distance themselves in a very short period." De Beers executives have certainly acknowledged the pragmatism behind their decision. "It was the moral imperative and also the fear of what might happen to the diamond industry," Nicky Oppenheimer said in an interview published last month in the Rapaport Diamond Report, an industry newsletter. "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," he said, "it is obviously in all 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."

Or, as Gary M. Ralfe, the managing director, said: "De Beers as a company could not afford to even indirectly come anywhere near diamonds which can be termed conflict diamonds. Like Caesar's wife, we have to be above reproach."

But there is more to this picture. For a variety of commercial, rather than ethical reasons, the De Beers stake in many parts of the African diamond trade had been shrinking even before the United Nations and advocacy groups like the London-based Global Witness succeeded in pushing conflict diamonds into the public arena in 1998. Around the same time, investors were clamoring for more nimble, more profitable and more accountable corporate behavior from a company that in the era of apartheid in South Africa had been a secretive bastion of the white-run economy. De Beers's stock price sagged as its growth lagged behind that of other purveyors of luxury goods, like LVMH-Moí«t Hennessy Louis Vuitton and the Gucci Group. Even before that, the De Beers share of the world diamond market was falling as new rivals, notably in Australia, marketed their own stones. In the early 1980's, De Beers controlled roughly 85 percent of both production and global sales of rough diamonds. Today, the company says, its mines in southern Africa account for around 40 percent of production; marketing deals with Russia and Canada bring its share of sales to around two-thirds of the market.

The end of apartheid in its South African home base also forced the company into a long and complicated unraveling of its ties with a sister mining conglomerate, the Anglo American Corporation, which maintains its corporate headquarters address in London. Each company still holds more than 30 percent of the other's stock.

By the time that conflict diamonds were becoming a worrisome issue for De Beers, the company had already hired management consultants from Bain & Company of Boston to chart a new way of doing business. What De Beers wanted to do, Mr. Oppenheimer said recently, was "to move from being custodian of the market, which was never a very satisfactory position, to being the leader of the industry" with its own product.

There was another long-range motive: a more open and competitive image would help the company convince regulators in the United States, who have accused De Beers of fixing the prices of industrial diamonds, that it no longer runs afoul of antitrust laws. Until it does, De Beers cannot set up American operations to fully exploit its brand name in the world's biggest retail market for polished stones. "In the short to medium term," Mr. Craig of Merrill Lynch said, "the chance of them entering the retail market in any meaningful way will be very dependent on whether they can resolve the antitrust problem in the U.S."

Some results of this ferment are evident. In the last few months, De Beers has been actively seeking to regain ground among the world's producers with hostile bids for diamond mines in Australia and Canada, even as it prepares for a fight in Russia to renew its marketing contract there. All these moves are intended to bolster its position as the industry leader. De Beers has also sought to transform the marketplace. The company's power lies in an arcane system of selling exclusively to 125 "sightholders" -- diamond merchants from the world's leading diamond-cutting centers who gather 10 times a year in London to purchase stones from De Beers's exclusive sales unit, long called the Central Selling Organization and now renamed the Diamond Trading Company as part of the rebranding exercise.

The sightholders are a crucial link in the chain of brokers, cutters and wholesalers that eventually produces the engagement rings and other glittery jewelry of the world's fragmented $56 billion retail diamond trade, around half of which takes place in the final stage in American jewelry stores. Rather than regulate the price, the company hopes to use its influence to force a revolution in the supply chain, obliging the sightholders to espouse a new marketing ethic that would make their continued access to De Beers gems dependent on the ability to market and advertise diamonds as luxury goods. De Beers even introduced a new logo, the "forevermark," to differentiate gems from its Diamond Trading Company from other stones.

As managers and consultants wrestled with the company's makeover, the drumbeat from critics assailing its often-denied ties to Angolan rebels was growing louder. "De Beers came under a huge amount of pressure," said Charmian Gooch, a specialist on the diamond industry at Global Witness, the group that initiated pressure against De Beers. "They have only moved because they have been hit on the head repeatedly."

Managers, said Stephen Lussier, De Beers's director of consumer marketing, were focusing on "the pedestrian performance of the diamond industry against the competition" in the broader luxury goods market in the last half of the 1990's. The concern, he said, was that "we weren't generating the demand for the world's production; the process was built around creating more demand to reduce the stockpile." What soon became apparent, though, was that the conflict-diamond issue was not going to go away and must somehow be woven into the process of creating a new corporate identity.

"As the process went on," Mr. Lussier said, the issue of conflict diamonds "fitted into the code of practice" already under way, "along with other things we felt we needed to have in a modern 21st-century industry." Introduced last month, the code offers a guarantee that conflict diamonds will not be sold by De Beers or its associates. Some company executives assert privately that De Beers leapfrogged its critics by embracing even stronger measures than its critics had been demanding.

Since last October, De Beers has suspended all buying of diamonds outside its own proprietary stones and contractual purchases. In March, it announced plans to certify all diamonds sold to its sightholders as nonconflict stones. Since then, it has urged a variety of steps -- including the creation of a chain of warranties reaching throughout the business as rough stones are sold to wholesalers, cut, polished and eventually appear in stores. And, perhaps most significantly, it has told its 125 sightholders that they will lose their access to De Beers stones if they deal in blood diamonds.

Initially, the De Beers executives now acknowledge, the company was reluctant to respond to its critics. "We felt we were the wrong target," said Bill Lear, its corporate affairs director. Since then, he said, "we have come to realize that our leadership position means we must drive the illegitimate diamonds out of the legitimate sector."