Commission told to get De Beers

Date: 22/06/06

An uneasy calm hangs over the tight-knit world of Antwerp's internationally renowned diamond district. Hidden from public view, in the hushed corridors of imposing, fortified exchanges, jittery dealers nervously express their growing concerns about a company whose tightening grip over the industry threatens to choke all competition.

Despite the use of questionable tactics that would scarcely be tolerated in any other industry, they say, De Beers, the world's leading supplier of rough diamonds, appears to be above the rule of EU law.

For almost five years, the European Commission has been investigating complaints against the diamond giant brought by a number of individual companies and two major trade organisations, the Belgian Association of Polished Diamond Dealers (BVGD) and German equivalent Idar-Oberstein. All complaints target De Beers' system for the distribution of rough diamonds among a select group of handpicked manufacturer-dealers known as sightholders. The system is called Supplier of Choice (SoC). Its anti-competitive methods, say complainants, are in violation of Article 82 of the EC Treaty. Put simply, they claim that De Beers is abusing its dominant market position, playing God with its clients with the aim of stamping out competition all the way down the supply chain to the consumer.

In parallel with the SoC inquiry, the Commission had been running a separate investigation on a relatively minor distribution deal between De Beers and Russian supplier Alrosa. De Beers was ordered in February to wind down purchases from Alrosa by 2009, a decision welcomed by the industry. But the diamonds that will be freed up represent a net worth of only 5.4% of the international market in rough diamonds. The ruling could hardly be described as a breakthrough. Complainants, who include sightholders operating within SoC and independent dealers, worry that the Commission will slowly abandon investigations into SoC, judging the Alrosa resolution a sufficient remedy. They feel that they have been badly shortchanged.

SoC was devised by De Beers six years ago when it was grappling with dwindling market share. As well as distributing rough diamonds, De Beers would boost consumer demand by providing 'added value' marketing services to sightholders and retailers further downstream. According to Lynette Hori, spokesperson at De Beers, SoC was designed to "open new opportunities for the diamond market, drive consumer demand for diamond jewellery and enable diamonds to compete successfully with other luxury goods". The company's market share now ranges between 58% and 65%, depending on who you ask. Supplies in the remainder of the market, as acknowledged by the Commission in 2001, are fragmented and somewhat unreliable.

A coveted place on the SoC list, determined through a detailed and secretive scoring process, gives sightholders access to private sales of rough diamonds held at the London headquarters of De Beers' sales and marketing arm, the Diamond Trading Company.

Ten times a year, sightholders flock like swallows to London, where they have the dubious privilege of collecting attach�ases filled with gems they have already paid for, but never before seen. Sales operate on a 'take it or leave it' basis. Most would opt for the former. The gems offered by De Beers are of a range and quality unparalleled in the industry.

Sightholders are, in many ways, a captive market for De Beers, a state of affairs that might not have rankled in the past.

However, with the advent of SoC, the company appears to have developed a fondness for strong-arm tactics that is pushing its clients over the edge.

Prior to SoC's implementation in 2003, sightholders would have gone on to sell their rough diamonds to whomever they pleased. Nowadays, as well as handing over an obligatory 2% of their turnover for marketing and branding services, sightholders who want to remain in the system must push manufactured goods downstream to retailers approved by De Beers. Refusal is not an option for those who want to secure a place in the next selection round. Recently, De Beers has even been sending private investigators to the offices of sightholders to check their books against information provided in application forms.

The scoring system for selection of sightholders is the main tool used by De Beers to maintain its stranglehold over the market, say critics. Touted as a democratic exercise in objectivity, the 20 questions, with their lengthy sub-sections, are seemingly aimed not only at assessing sightholders' suitability for a place in SoC but also at extracting maximum knowledge of their business practices. "It's a blind test. De Beers barely gives explanations to people who are kicked out. The candidate doesn't know how important his weaknesses are in the set of criteria," says one dealer who once participated in the system. Shrouding the process in mystery would appear to work in De Beers' favour. Pitted against each other in an obscure race to the finishing line, sightholders provide as much information as they can about jewellery manufacturers and retailers further down the line, tightening De Beers' control of the entire supply chain.

Andr�umuchdjian, former president of BVGD, says: "Sightholders are afraid to speak up. They are afraid of the scoring system. This is the perversity of the system. This is how De Beers exerts its control."

Meanwhile the SoC investigation file would appear to be gathering dust on Competition Commissioner Neelie Kroes' desk, following three consecutive changes of teams investigating the case in 2003-05. Faced with such clear examples of abusive tactics, the Commission's failure to act is puzzling. "Why is this investigation taking so many years?" asks one sightholder. "They have never done a market study, teams are changing and inadequate answers are being given." It is thought that supplies freed up by the Alrosa ruling could, in any case, fall into the SoC regime through the latter's contracts with some of the bigger sightholders.

In a cloistered world bound by traditional codes of trust and discretion, few speak out. Some sightholders have been clients of De Beers for generations and there is a reluctance to rock the boat.

But, with growing numbers becoming increasingly impatient with the apparent reluctance of the Commission to face the issue head on, some are voicing criticism more openly, albeit with fear of recrimination from De Beers.

The European Commission had no comment to make on the direction of future antitrust investigations into the company.

With the market in rough diamonds becoming ever tighter, survival outside De Beers SoC system is becoming increasingly difficult. Daniel Van Dievoet, current president of BVGD, smiles and says: "They call it Supplier of Choice. We call it Supplier of No Choice."

Article reports on the European Commission's investigations into allegations of anti-competitive behaviour against De Beers, the world's leading supplier of rough diamonds.