EC Approves Supplier of Choice; Objects to De Beers/Alrosa Agreement


January 16, 2003

EC Approves Supplier of Choice; Objects to De Beers/Alrosa Agreement

The European Commission formally cleared the De Beers Diamond Trading Co.'s Supplier of Choice strategy on Jan. 16, after a 19-month review. But it objected to De Beers' December 2001 five-year agreement with Alrosa, Russia's state-owned diamond company, to sell half of Alrosa's annual rough diamond production, worth about $800 million per year. EC's preliminary view is the agreement restricts competition on the rough diamond market by eliminating significant competition from Alrosa. The commission also says De Beers abused its role as the dominant marketer of rough diamonds by entering into the agreement. De Beers and Alrosa have two months to reply to the EC objections.

Supplier of Choice, which DTC expects to be fully functional by mid-2003, is the company's plan to grow demand for diamond jewelry and make the diamond distribution system more efficient. It proposes requiring its clients, called sightholders, to develop a direct pipeline to distribute the diamonds. Under the new system, DTC also will require sightholders to initiate marketing and branding ventures to increase the "noise" about diamonds in the consumer marketplace. Finally, all sightholders will be required to comply with a series of Best Practices Principles enunciated by De Beers, to spread ethical accountability and professional standards throughout the diamond industry. This last measure is meant to reassure consumers diamonds can be purchased with confidence.

In return, DTC is offering the sightholders who fulfill these criteria the chance to get a consistent supply of rough diamonds in the qualities and quantities they need, as well as DTC's marketing advice and consumer-research data.

DTC originally introduced Supplier of Choice in 2000, to realign the company away from controlling supply to enhancing demand. The EC originally objected to the plan, saying the criteria the DTC was planning to use in selecting its clients, as well as the amount of detailed confidential information and contractual commitments it required from sightholders, could restrict the sightholders' abilities to do business. DTC agreed to streamline its selection process for sightholders and give longer notice to clients with whom it wishes to terminate contracts. Finally, sightholders will only have to buy diamonds they've applied for and only after inspecting the gems. Prior to this agreement, sightholders often were saddled with diamonds from DTC that didn't suit their trading or manufacturing needs, but had to accept.

The EC apparently is still concerned, according to its press release, that DTC could use Supplier of Choice to artificially reduce the supply of diamonds, especially high-quality gems, which could drive up prices because DTC sells about 60%-65% of diamonds worldwide. But DTC and the EC agreed an ombudsman, who will be approved by the EC, will watch over the system to be sure abuses don't occur. The EC reserves the right to reopen its examination of Supplier of Choice if necessary.


by Peggy Jo Donahue



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