When De Beers launched its “Strategic Review” in 1999, managing director Gary Ralfe promised there would be “no sacred cows.” He wasn’t kidding. It’s been months since the Diamond Trading Company’s dramatic pruning of its sightholder list, and the industry is still reeling. De Beers not only gave 20% of its clients their walking papers but also excommunicated some of the industry’s biggest names—including companies that had had sights for half a century or more.

It’s a sign of how sensitive the situation remains that few, if any, sources are willing to go on the record concerning the names of the axed sightholders, despite their being widely known. (In January, De Beers will release a full sightholder list, and it should be clearer who has stayed and who has gone.)

With such a dramatic bloodletting, bitterness was unavoidable. The most frequent charge is that De Beers changed the rules in the middle of the game. When De Beers launched “Supplier of Choice,” it pledged to sell its diamonds to “people who will market them.” The result was a staggering flood of marketing initiatives—often at a staggering cost.

But in the end, marketing initiatives—even super-costly marketing initiatives—did not guarantee sightholder status. Some of the defrocked clients are among the biggest advertisers in the business, but De Beers said it couldn’t supply them because they wanted in-demand goods.

Here is how the post-launch, post-purge landscape shakes out:

WINNERS

India. Diamond people today speak of India with the same sense of awe they once felt when speaking of De Beers. It was the only cutting center to gain sightholders in the shake-up, and it’s rapidly becoming the world diamond center, diversifying its output from bread-and-butter smalls. One of the most interesting additions to the client list is Venus Jewels, the first Indian sightholder to specialize in larger stones. India also is home to a big (and potentially bigger) consumer market, which surely has not escaped De Beers’ notice.

Other low-cost labor centers. The biggest challenge to India’s supremacy comes not from Antwerp or Israel, but from other low-cost labor countries, particularly China—also home to a potentially large consumer market. Cutting in general is drifting to low-wage countries; Puerto Rico, for example, is becoming a more popular location for polishing, especially for U.S. sightholders.

Big companies. The message is clear: The future of the diamond industry belongs to the big. Most of the companies De Beers retained were large ones—names like Rosy Blue, Eurostar, Steinmetz, Pluczenik, and Shachter and Namdar.

Chains like Zale and Wal-Mart also favor large suppliers that can meet their needs. The non-De Beers mines also have sold mostly to big names, which means they haven’t been the boon to the “open” (non-DTC) market some had hoped.

Other diamond producers. With so many sightholders now out in the cold, other producers—including the two mines in Canada, Australia’s Argyle mine, and Israeli mogul Lev Leviev—will likely reap the benefits. Leviev has already told the Israeli press that he will sell local cutters goods equal to the amounts the DTC took away.

Lawyers. Several lawsuits already have been filed against De Beers, and more may be on the way. Plus, there are De Beers’ ongoing campaign to be allowed into the United States and the sudden flood of investigations (unrelated to “Supplier of Choice”) on 47th Street. (See “Up Front,” JCK, August 2003, p. 24.) If the last few years in the diamond industry were a windfall for marketing consultants, the next few may be a godsend for lawyers.

LOSERS

‘The pipeline.’ The industry consolidation that’s long been predicted is picking up steam—and “Supplier of Choice” has given it an extra nudge. Consider the current state of affairs in the diamond business: Companies offer too-generous terms to retailers, buy unprofitable rough to keep factories going, and contend with chronic shortages of desirable items. Given all this, it’s hard to avoid the conclusion that the current structure of the business isn’t working, and that there are too many people in the industry.

De Beers thinks so. One of its goals is to rid the diamond industry of what it calls its “complex and inefficient pipeline.” Sightholders have been told they need an “efficient route to market,” free of middlemen. At a recent press conference, Gary Ralfe boasted that the percentage of diamonds sold via “a very clear, fast, and efficient channel through to retail … grew to 23% [in 2002], from 15% the previous year.”

Some hate this idea. They argue that the diamond industry has always relied on small companies, which help spread debt around and add new ideas and innovations. This is likely to be a point of contention between De Beers and the rest of the industry for a long time to come.

Diamond associations. The diamond associations, particularly the World Federation of Diamond Bourses, have expressed dismay at attempts to shorten the pipeline. But considering that some of the defrocked sightholders are association heads (past and present), De Beers doesn’t seem to be losing any sleep over their opinions.

This leaves industry leaders in a thorny position. Can an association head express dismay about “Supplier of Choice” policies, and then follow them on instructions from De Beers? Quite a few axed sightholders have been publicly critical of the company in the past. De Beers staunchly denies that any dismissals were done out of pique. But with sightholder status suddenly so precarious, will they take the risk?

Israel, Antwerp and New York. Three major diamond centers—Israel, Antwerp, and New York—all lost sightholders in the shakeout and now are in a weakened position. The three centers have unique woes: Antwerp is still a major trading center, but a trading center may not fit into the new diamond order. Israel has been hurt by the security situation there, and its market share has been eroded by India. Cutters in New York are more advanced at marketing than those in other centers, and some thought that would help them with the new DTC. Instead, New York lost half the sightholders on its already small list. Its main selling point remains its proximity to the U.S. market.

UNDECIDED

Sightholders. Obviously, the axed sightholders have taken a hit, in prestige if nothing else. But the future looks a lot cloudier for all De Beers clients. However, some elements of the sightholder experience are better. De Beers has installed account executives to work with clients. Sights are priced so clients can make a profit. And a shorter list means more goods for the remaining clients.

But today’s sightholder cannot rest easy. They now have to justify every diamond they get—or risk being clients in name only. And when the current contracts expire after two years, De Beers will again add names and discard others—a prospect that sightholders take seriously now that De Beers has shown it will drop any company, even those previously thought to be untouchable.

Keeping sightholders in a state of perpetual insecurity arguably goes against the tenets of “Supplier of Choice.” De Beers wants sightholders to plan ahead, so it’s instituted the ITO (Intention to Offer) system, under which sightholders get more or less consistent allocations at every sight. But sightholders also have to live with the specter of being axed every two years—and that makes it hard to look to the future. It’s also hard to see why clients would advertise themselves as De Beers sightholders—as De Beers wants them to do—when they can be publicly stripped of that designation just months later.

De Beers. In many ways, De Beers has come out of all this ahead. “Supplier of Choice” has the blessing of the European Commission anti-competition authorities, and that could help its campaign to enter the United States. The program’s focus on demand has been a huge success, and diamond sales have held up remarkably well in a tough market.

Yet, there are still too many question marks—particularly on the legal front—to put De Beers in the “winner” category. The European Union is currently ruling on the legality of De Beers’ contract with Russia. Leaks coming from state production agency Alrosa indicate it will sell a lot less to De Beers in the future, and the company’s share of the market will likely shrink again.

Further, by angering so many sightholders and people in the industry, De Beers could be asking for trouble. Already, the Diamond Club West Coast has written to the EU stating its objections to the De Beers contract, and the influential Rapaport Diamond Report has urged others to do the same.

Even so, the furor over the new sightholder list shows that De Beers remains an extraordinarily important company—and a wily one. De Beers has never in its history controlled so little (around 60%) of the rough diamond market. Yet, it has more power over sightholders than ever, its diamond stocks are as low as they can go, sales are strong, “outside” rough is hard to find, and it’s been able to institute three price increases this year alone.

De Beers may be down, but it’s not out. Think of the DTC as the United States of the diamond industry: It isn’t the only player … but it is the only superpower.