Synthetic Diamonds

Synthetic Diamonds

                                                     Introduction

De Beers had for decades enjoyed a monopoly in the diamond business. The monopoly had reached a point where the terms De Beers and Diamonds could be used interchangeably. Between 1888 to the 1980s, De Beers mined about 90% of diamonds produced annually. The firm rooted its monopoly through strategies such as purchasing all the available diamonds in the market, stockpiling them, and releasing only the required diamonds each year in order to exert control over the supply of rough diamonds to maintain consumer confidence and ensure price stability. The success of this approach is asserted by Kleingeld, De Sousa, and Penny (2001) who state that diamonds were the only products whose price had steadily increased since the Depression. However, by the end of the 20^th century, there were a number of forces threatening De Beers’ dominance in the diamond industry: declining profitability, growing competition from new entrants into the industry, and loss of market share. Also, new technology paved way for the creation of synthetic diamonds, which are indistinguishable from those created by natural forces. Synthetic diamonds are an alternative for natural gemstones as their cheaper pricing takes into consideration low income earners; they are flawless, and available in different colors.

Assessment of the competitive landscape

Small to medium-scale firms serving a particular region or country, and major players like ALROSA, De Beers Group, and Rio Tinto characterize the diamond market. Since entering the upstream scale is difficult due to the existence of established players, this scale is dominated by the major players in the industry. According to Grand View Research (2019), the global diamond market size is expected to grow at a compound annual growth rate (CAGR) of 3.0% with an estimated value of 87.31 billion dollars as of 2018. The steady growth of the industry is attributed to the increasing demand of jewelry application in emergent economies in Asia Pacific such as China and India. The value chain of the diamond industry entails downstream, midstream, and upstream activities. Downstream processing entails designing jewelry from the polished diamond and its sale in retail stores. Midstream activities comprise cutting and polishing of rough diamonds for production of a finished product. Upstream processes involve exploring, producing, and sorting rough diamonds. In 2018, the natural product segment had a revenue share of 96.2% hence dominating the market. Although natural diamonds are confronted by the challenge of cheaper lab-grown diamonds, it is clear that they have remained resilient. However, over the past five years, the market share for synthetic jewelry has risen due to a huge reduction in the cost of production. According to Mordor Intelligence (2019), the market for synthetic diamonds is predicted to record a CAGR of 7.85% in the forecast period of 2019-2024. Since synthetic diamonds are a crucial heat-enabling technology that prevents the overheating of semiconductor materials such as silicon, their demand in the electronics industry has risen. Due to the rapid growth of electronics manufacture in Asia-Pacific countries, the demand for synthetic diamond has heightened in these countries.

Prices of natural diamonds are unpredictable due to supply and demand uncertainty. Since lab-grown diamonds are not associated with production difficulties, manufacturers are now focusing their attention to introducing synthetic diamonds for jewelry applications. The global market for synthetic diamond is largely fragmented, with different small, mid-sized, and large players centering their focus on research and innovation, to accommodate the increasing demand. Owing to the fact that the synthetic diamonds market is demand-oriented, production is dependent on specifications from end-users in the industry. The main stakeholders in the industry include New Diamond Technology, Sumitomo Electric Industries, Element Six, Pure Grown Diamonds, among others.

Current Strategies at De Beers

Clearly, De Beers has managed to dominate the diamond market over the years owing to specific factors being at their advantage. For instance, it is known widely that the company stockpiles stones and buys them from other manufacturers in an attempt to control supply, stabilize price, and preserve the scarcity and luxury perception associated with diamonds (Cadieux, 2005). However, the company is confronted with three critical challenges: consumers have become aware of the social cost of producing diamond; Canada and Russia have increased their capacity of production beyond control by De Beers, which has resulted in increased cost of stabilizing prices by mopping surplus supply in the market; the intensifying power of anti-trust regulators and political antagonism towards the dominance of De Beers. These challenges have forced De Beers to launch new strategies that target maintaining De Beers’ strong brand name. These include: creating the De Beers brand diamond, formulating a joint venture, and launching the “supplier of choice” campaign to open the sale of rough diamonds.

Creation of the De Beers Brand Diamond

According to Chang et al (2002), a plan to brand De Beers’ diamonds with the logo “Forevermark” was underway. This tiny logo that can only be viewed under a microscope will be entrenched on diamonds to certify that they had not been sourced from conflict regions and assert that the stone meets a criteria of quality reported on a certificate accompanying it. This strategy is aimed towards developing new markets in the diamond market for authentic diamonds in the hope that this will enable the company to control this market with the same iron grip it has utilized in the industry.

Suppliers of choice

The “suppliers of choice” strategy was developed in attempt to counter the growing threat of dramatic drop in diamond prices owing to the increased number of producers of jewelry. The company came into terms with the fact that its market share had fallen, and could therefore, no longer control price by regulating supply. The company realized that the only way of maintaining high prices was by raising the demand for a unique luxury product. The demand for diamonds is atypical and can only be explored using Veblen’s model of conspicuous consumption (Chang et al, 2002). The theory suggests that the higher the cost of an item, the higher the demand, and this hence substitutes the previous downwards-sloping curve of demand with an upward-sloping one. For diamonds, this postulation means that if their price falls, their overall demands also declines. It is therefore in the best interest of players in the diamond industry to maintain high prices for the coveted jewelry. De Beers is hence shifting economics in the diamonds industry from supply to demand oriented by maintaining a high price.

Joint Venture with Louis Vuitton Moet Hennessy (LVMH)

De Beers announced the formation of a partnership in January 2001 with LVMH. This strategy was aimed at entering the retail market and selling De Beers diamonds to US jewelry consumers directly. Jewelry consumers in the US contribute more than half of the world’s diamond jewelry demand. The approach marked the first step of fully exploiting the company’s brand in the retail market for luxuries (Chang et al, 2002). Apart from helping the company to push its items through distribution channels, the strategy is also aimed at creating a platform for diversifying product lines. If De Beers manages to fruitfully brand itself as a supplier of quality and luxury products, it can then look into the prospects of diversifying into other luxury products such as handbags and watches. The entrance of the firm into the retail business opens doors of acquiring the highest profit margins and offers others sources of revenue as the dominance of supply declines.

Critiquing Past and Current Strategies

Before its monopoly was shaken in the 1990s, De Beers, through its central selling organization, chose how much to sell, whom to sell to, and at what cost. Those who refused to buy from the company did not get an invitation to buy from De Beers again. Those who chose to buy directly from a mine instead of doing so from De Beers were punished financially while others got dropped (Mc Adams & Reavis, 2008). Such practices triggered anti-trust regulators from the European Union and the US to intensify their efforts of ending the company’s practices of controlling diamond prices. In 1994, company was served with an indictment by the US for fixing the cost of industrial diamonds. Price fixing is unethical and De Beers, being the leading producer of diamond, kept the prices high with an aim of trying to make the world believe that diamonds were scarce. Apart from exploiting South African diamond mines, the company also forced their competitors to buy products from them. This was achieved by stockpiling which limited supply of diamonds in the market.

Overall, the diamond industry has harmful effects on people and the environment. According to the St. Antonius Institute (1996), the industry is linked to child labor and unsafe working conditions for workers. De Beers is not exempted from this ignominy and it has been accused of helping the government to impact heavy taxes on Blacks in South Africa (St. Antonius Institute, 1996). Most of this people did not have a cash economy as they lived in villages, and hence had no money to pay for these taxes. They had no choice but to work, and this got De Beers abundant cheap labor. This clearly shows that the company has little regard for its employees and for the environment where they obtain diamond. Diamond mining produces toxic waste that leaks into water supplies, leading to environmental dilapidation. According to MiningWatch Canada (2010), about two million tons of toxic wastes were disposed in waste rock piles between the years 2006 and 2009. These wastes contains pollutants such as sulfuric acid and arsenic which are detrimental to people. Clearly, De Beers has failed socially and the only reason they have developed initiatives to help local communities is to procure marketing benefits.

Strategies to Mitigate De Beers

One of the real barriers for the synthetic diamond industry is the strong emotional element associated with diamond. When a consumer purchases an engagement ring for instance, the diamond has a critical emotional attachment as it represents how much they love the other person. Focusing on this emotional attachment and encouraging pride among consumers purchasing synthetic diamonds is crucial in breaking the dominance of De Beers. Effectively, funds should be set aside for consumer education. People should be reminded that chemically speaking, there is no difference between synthetic and natural diamonds. Unlike natural diamonds which require several tones of the earth to be extracted and this often have detrimental effects on animal and human habitats, synthetic diamonds are grown in the lab and hence eco-friendly. Consumers should take pride when adorning themselves with synthetic stones as these did not come at the expense of wildlife habitats or people’s lives.

Formation of strategic partnerships with other players in the synthetic industry will be a critical source of competitive advantage. The access to new ideas offered in these partnerships provides an opportunity to improve the available products and create new ones. The strategy provides a platform for diversifying into different products like rings, earrings, watches, and watches among others. Companies in the synthetic industry will therefore be competing with De Beers in different fronts, which may help mitigate the company’s influence in the market.

Customer’s Point of View

Synthetic diamonds are almost identical to their natural counterparts. However, they are much cheaper going for about a tenth of the price of the natural ones, available in different colors, eco-friendly as their production does result into destruction of natural habitats or forests, and they are flawless because they are created in the lab. Therefore, for these reasons I would purchase a synthetic diamond.

Conclusion

In conclusion, synthetic diamonds have a bright future in many industries and not just the jewelry industry. This is because their chemical constituents allow them to be utilized in other areas, particularly in the electronics industry. Synthetics are cheaper due to a reduced cost of production, environmental friendly as they are processed in the lab, flawless as they are not exposed to elements in the environment, and they are available in a variety of colors. Because of these advantages, the emergence of companies dealing with synthetics is a major threat to those dealing with natural diamonds. However, one of the factors constraining consumer adoption of synthetics is perceived personal value, that is, how a specific product boosts someone image. The term “synthetic” undermines the value and regal association with diamonds. Most consumers want to be associated with luxurious and unique products, and this need is met by natural diamonds. Therefore, for synthetics to increase their market share, players in this industry must find a way of convincing consumers that synthetic diamonds are as valuable as their natural counterparts.