The Management of Global Trade Distribution - De Beers - Essay Example

? The Management of Global Trade Distribution - De Beers I. Background De Beers as a company started along with the diamond rushin the 1800s when massive diamond mines were discovered in South Africa. A businessman name Cecil Rhodes bought as many diamond mine as he could together with a farmland owned by the De Beer family (De Beers Industry Profile 2013). By 1900s Rhodes had hoarded enough diamonds to the point that he owned the majority supply of diamonds in the world. He then set up a company named De Beers Consolidated Mines Limited. In the mid-1920s a financier Ernest Oppenheimer was able to achieve a controlling stake in De Beers and expanded the company’s operation into the various aspects of the diamond industry with the goal of monopolizing its distribution. It was able to exert monopolistic influence among suppliers in the diamond industry to sell their rough diamonds to De Beers’ channel which was then the Central Selling Organisation or CSO which then enabled De Beers to control the global supply of diamonds even if the diamonds did not came from De Beer’s mines (Ziminisky2013). II. De Beers distribution system: Monopoly De Beers is one of the few companies that exerted monopoly in its supply and distribution that it creative a competitive advantage for the company. During its height in 1902, it was able to control an overwhelmingly 90 percent of the diamond industry that it can dictate the price and availability of diamonds (Sehgal 2011). Monopoly exists when a only a single company exists to dominate a certain industry in the provision of goods or services (Milton 2002). Its high price today and its perception of being a valued commodity can be attributed to De Beers’ strategy to justify the increase of the price of diamonds because diamonds perse have no practical use and its high price does not reflect its scarcity because its price remains high even if it is in abundance (Yu nd). III. Forms of distribution of De Beers: CSO and DTC De Beers is probably the most successful and biggest monopoly company in the world that virtually operated in almost absolute cartel from its beginning in 1800s until 2001. It was able to establish its cartel like monopoly in the diamond industry when Ernest Oppenheimer achieved a controlling stake in De Beers in the mid 1920s when it expanded into various operations of the diamond industry with the goal of monopolizing its distribution. It did so by influencing suppliers in a multitude of ways to sell its produce of rough diamonds to De Beers’ channel which was then the Central Selling Organisation or CSO which then enabled De Beers to control the global supply of diamonds even if the diamonds did not came from De Beer’s mines (Bergenstock et al 2006). De Beer’s cartel like distribution channel which is the Central Selling Organisation or CSO and later evolved to become Diamond Trading Centers or DTC is probably the most successful monopolistic distribution system in the world. It can basically dictate the entire diamond industry because it can determine what should be sold, when, where and how much. Since it controlled majority of the supply (85% to 90% of the market) through its CSO or DTC, buyers have no choice but to avail diamonds through De Beers’ distribution system of CSO or DTC. To be able to buy diamonds from De Beers’ distribution system, it has to become a member or “Sightholder” because De Beers only sell diamonds to qualified “Sightholders” until today. According to De Beer, this event of selling diamonds are known as “Sights” because, “during the sales period, [their] customers are able to physically inspect the stones we are offering them before deciding whether to purchase” (De Beer 2012). These customers are selected according the “Supplier of Choice contract criteria” (De Beers 2012). In essence, however, these “Sightholders” are powerless during “sights” because they have to accept the terms set forth by De Beers where they are not allowed to negotiate and can only accept or reject boxes. They are not even allowed to sell to retailers who will lower prices and is mandated to give information about their market and inventory with the right for De Beers to audit “Sightholders”. “Sightholders” who will violate the terms dictated by De Beers are penalized either by denial of supply or selling them at higher prices (Yu nd). IV. Dismantling of De Beers’ distribution: Russian separation and Argyle mine De Beers virtually enjoyed monopoly in the diamond since its incorporation in the 1800s until 2001. It also imposed its monopolistic business through its distribution system which was initially known as CSO until it evolved to its present nomenclature of Diamond Trading Centers or DTC. Its monopoly on the distribution and business of the diamond industry however was weakened by a series of events that begun with the Russian separation from De Beer’s DTC cartel in the 1990s to the separation of Argyle Mine in Australia also in the 1990s. These two diamond mines constituted one of the largest mines of De Beers’ that the distribution cartel was severely hurt and untenable after the separation of these two mines. V. Dismantling of De Beers’ distribution: Government regulation  The final blow however to De Beers’ monopolistic cartel distribution that officially ended its monopoly both in the distribution and business in the diamond industry was in 2001 when various lawsuits were filed in the U.S. Courts that charged De Beers with unlawful monopoly in the supply and distribution of diamonds. De Beers was also charged with Antitrust Violations where US Department of Justice charged De Beers and General Electric for conspiring to fix the price of industrial diamonds where the two companies allegedly exchanged advance information to each other about the prices of diamonds (Yu nd:11). De Beers was also charged for raising and controlling the price of diamonds and issuing false and misleading advertising. The Court ruled against De Beers and after a series of appeals, the Supreme Court decided in 2012 to deny final petition for review. De Beers ended for a settlement in the amount of “$295 million with an agreement to refrain from engaging in certain conduct that violates federal and state antitrust laws”. VI. Update and present distribution system of De Beers The 2001 charges filed by US Department of Justice virtually ended the monopolistic distribution system of De Beers through its DTC. At present, the diamond industry is now controlled by market forces instead of De Beers’ DTC cartel. Supply and distribution of diamonds is no longer dominated by De Beers and as a result, its prices modestly declined as it can no longer be dictated through the facility of De Beer’s distribution system. Diamond prices declined and by 2005, diamond prices became volatile which is characteristic of a market dictated price instead of a company’s distribution system. At present, De Beers remained to be profitable registering sales of $3.3 billion in the first quarter of this year but does business under a competitive environment unlike before where it dictated the price of diamonds (Reuters 2013). Bibliography Bergenstock, D, Deily, M, & Taylor, L 2006, 'A Cartel's Response to Cheating: An Empirical Investigation of the De Beers Diamond Empire', Southern Economic Journal, 73, 1, pp. 173-189, Business Source Complete, EBSCOhost, viewed 17 November 2013. 'De Beers SA Industry Profile' 2013, De Beers SA SWOT Analysis, pp. 1-7, Business Source Complete, EBSCOhost, viewed 17 November 2013. De Beers – Rulers of the Diamond Industry. (n.d.). The Rise and Fall of Monopoly. Retrieved November 17, 2013, from http://are.berkeley.edu/~sberto/DeBeersDiamondIndustry.pdf  Friedman, Milton (2002). "VIII: Monopoly and the Social Responsibility of Business and Labor". Capitalism and Freedom (paperback) (40th anniversary ed.). The University of Chicago Press. p. 208. ISBN 0-226-26421-1. Reuters. (2013, July 26). De Beers sees diamond market growth on U.S. recovery. | Reuters. Retrieved November 17, 2013, from http://in.reuters.com/article/2013/07/26/x-debeers-results-idINDEE96P08F20130726 Sehgal, Vivek (2011). Supply Chain as Strategic Asset. The Key to Reaching Business Goals. John Wiley & Sons Inc. ISBN: 9780470874776 Ziminsky, Paul (2009). Diamonds: Driven by market forces for the first time in 100 years. (n.d.). Resource Investor. Retrieved November 17, 2013, from http://www.resourceinvestor.com/2013/04/09/diamonds-driven-by-market-forces-for-the-first-tim?t=commodities Read More