De Beers chief seeks fresh settings
Tuesday, 25 March 2008
Michael Skapinker
EVERY year, Gareth Penny, managing director of De Beers, has an HIV test. He wears a badge with a tick on it and the words "I know", which means he knows his HIV status. His test and badge are ways of leading by example -- part of the diamond group's vast programme of Aids testing, education and treatment.
The HIV test is one of several ways in which the life of a De Beers executive differs from that of the average corporate leader in Europe or North America.
There is also the constant engagement with African governments. De Beers has opened open an $83m(£41m) diamond sorting centre in Botswana, around which will cluster independent diamond cutting and polishing businesses. By next year, the sorting of all De Beers diamonds, which currently takes place in London, will have moved to Botswana.
What Mr Penny calls "resource nationalism" is strong in all the African countries in which De Beers operates. "A lot of governments see diamonds as a kind of national treasure, and understandably, because it's not a bulk standard commodity," he says.
De Beers has 120 years' experience of weaving its way through African politics, from founder Cecil Rhodes' imperialist dreams to the company's dealings with South Africa's apartheid regime to today's demand from governments for a share of the business.
In Botswana, De Beers' biggest source of diamonds, the government owns half the local subsidiary. It is the same in Namibia, Democratic Republic of Congo and Angola. In South Africa, a black empowerment consortium owns 26 per cent of its mining operations.
The 45-year-old Mr Penny is sitting jacketless in De Beers' London office on the edge of the Hatton Garden diamond district. His manner is bluffly South African - direct and affable. His life is steeped in the intertwined worlds of De Beers and Anglo American, the company that became De Beers' largest shareholder in 1926 and now holds 45 per cent. (The Oppenheimer family owns 40 per cent of De Beers, which went private in 2001, and the Botswana government the remaining 15 per cent.)
The godson of Julian Ogilvie Thompson, former chairman of De Beers and Anglo, Mr Penny was educated at Cape Town's elite Bishops Diocesan College before travelling to England to do his A-levels at Eton. He joined Anglo straight out of Oxford, where he was a Rhodes Scholar.
His first job was to set up an Anglo and De Beers small business initiative. "That was all about finding ways to do business with emerging, principally black, businesses," he says. After that, he set up a diamond cutting factory in Botswana, which employs 400.
He has been De Beers' managing director since 2006 but it was the period before that, when he led a strategic review of the company, that helped change De Beers more radically than at any time in its history.
From its inception, De Beers was about monopoly. In South Africa's Kimberley diamond diggings, where the company began, Rhodes and his bitter rival Barney Barnato grasped that the way to support the price of diamonds was to restrict the supply, so they joined forces to form De Beers Consolidated Mines. In 1930, De Beers set up the Central Selling Organisation, which marketed most of the world's diamonds, including those mined by other companies. Just as Rhodes and Barnato had done, De Beers carefully controlled the number of diamonds on the market. It was an arrangement that meant that De Beers executives had to avoid travelling to America, where they could have faced arrest under antitrust legislation.
By the end of the 20th century, the monopoly approach had reached its limit. "Our old business model simply wasn't commercial any more," Mr Penny says. "De Beers was maintaining large stockpiles. When you look at economic profit, you have to take into account the opportunity cost of the capital that's tied up in those." Holding diamonds back meant "our own mines were not operating on full production. The world had moved on".
It was not just the US authorities who were on De Beers' back. The European Commission objected to De Beers selling diamonds mined by Alrosa of Russia and demanded that it reduce the number - and stop selling Alrosa diamonds entirely by 2009.
De Beers has reached a settlement with the US Justice Department, without admitting any wrongdoing, and has placed $295m in an escrow account. A hearing next month will decide how that is to be distributed to participants in a class action. Alrosa has mounted a legal challenge to the European Commission's insistence that De Beers stop selling its diamonds, but Mr Penny says he accepts the Commission's ruling and this is no longer De Beers' battle.
Instead, De Beers, which now mines 40 per cent of the world's diamonds and sells 45 per cent, has to behave like a normal company, finding new customers in a more open environment. This year will be difficult in the US, De Beers' biggest market. American sales growth fell to 2.5 per cent last year from 4-5 per cent in previous years. This year, with the credit crisis, the US market will be worse. "I think we'll be pleased with any growth this year," Mr Penny says.
But De Beers has two new markets, India and China. Indian brides traditionally opted for gold, not diamonds, but marketing, including a campaign fronted by Bollywood star Aishwarya Rai, has begun to change their minds. "The potential in India is enormous. We've seen double-digit growth in demand for diamonds over a 10-plus year period."
In China, he says, "if you went back 15 years, you would find virtually no diamond consumption at all, whereas if you look at the statistics today, on the eastern seaboard - Beijing, Shanghai, Guangzhou - you are seeing 70 per cent plus of brides getting what they call a wedding ring, as opposed to an engagement ring, and that's pretty remarkable. Now, it's a small percentage of the country, but the potential is enormous."
This month will take Mr Penny to Botswana, Namibia, South Africa, Canada, Russia and several European countries. His wife and two children live in Dorset, where, in spite of his itinerary, he manages to spend most weekends, sailing and walking.
"The one thing about Heathrow is you can get to and from most places."
He insists, however, that he has confidence in South Africa, De Beers' first home, and claims to be unbothered by the prospect of Jacob Zuma becoming president. "South Africa is a robust democracy. There are a considerable number of institutions and organisations that provide a balance of power in South Africa, from the churches to the unions to political parties." It is a diplomatic reply. But whatever Mr Zuma brings, Mr Penny is used to political upheaval.
FT Syndication Service
EVERY year, Gareth Penny, managing director of De Beers, has an HIV test. He wears a badge with a tick on it and the words "I know", which means he knows his HIV status. His test and badge are ways of leading by example -- part of the diamond group's vast programme of Aids testing, education and treatment.
The HIV test is one of several ways in which the life of a De Beers executive differs from that of the average corporate leader in Europe or North America.
There is also the constant engagement with African governments. De Beers has opened open an $83m(£41m) diamond sorting centre in Botswana, around which will cluster independent diamond cutting and polishing businesses. By next year, the sorting of all De Beers diamonds, which currently takes place in London, will have moved to Botswana.
What Mr Penny calls "resource nationalism" is strong in all the African countries in which De Beers operates. "A lot of governments see diamonds as a kind of national treasure, and understandably, because it's not a bulk standard commodity," he says.
De Beers has 120 years' experience of weaving its way through African politics, from founder Cecil Rhodes' imperialist dreams to the company's dealings with South Africa's apartheid regime to today's demand from governments for a share of the business.
In Botswana, De Beers' biggest source of diamonds, the government owns half the local subsidiary. It is the same in Namibia, Democratic Republic of Congo and Angola. In South Africa, a black empowerment consortium owns 26 per cent of its mining operations.
The 45-year-old Mr Penny is sitting jacketless in De Beers' London office on the edge of the Hatton Garden diamond district. His manner is bluffly South African - direct and affable. His life is steeped in the intertwined worlds of De Beers and Anglo American, the company that became De Beers' largest shareholder in 1926 and now holds 45 per cent. (The Oppenheimer family owns 40 per cent of De Beers, which went private in 2001, and the Botswana government the remaining 15 per cent.)
The godson of Julian Ogilvie Thompson, former chairman of De Beers and Anglo, Mr Penny was educated at Cape Town's elite Bishops Diocesan College before travelling to England to do his A-levels at Eton. He joined Anglo straight out of Oxford, where he was a Rhodes Scholar.
His first job was to set up an Anglo and De Beers small business initiative. "That was all about finding ways to do business with emerging, principally black, businesses," he says. After that, he set up a diamond cutting factory in Botswana, which employs 400.
He has been De Beers' managing director since 2006 but it was the period before that, when he led a strategic review of the company, that helped change De Beers more radically than at any time in its history.
From its inception, De Beers was about monopoly. In South Africa's Kimberley diamond diggings, where the company began, Rhodes and his bitter rival Barney Barnato grasped that the way to support the price of diamonds was to restrict the supply, so they joined forces to form De Beers Consolidated Mines. In 1930, De Beers set up the Central Selling Organisation, which marketed most of the world's diamonds, including those mined by other companies. Just as Rhodes and Barnato had done, De Beers carefully controlled the number of diamonds on the market. It was an arrangement that meant that De Beers executives had to avoid travelling to America, where they could have faced arrest under antitrust legislation.
By the end of the 20th century, the monopoly approach had reached its limit. "Our old business model simply wasn't commercial any more," Mr Penny says. "De Beers was maintaining large stockpiles. When you look at economic profit, you have to take into account the opportunity cost of the capital that's tied up in those." Holding diamonds back meant "our own mines were not operating on full production. The world had moved on".
It was not just the US authorities who were on De Beers' back. The European Commission objected to De Beers selling diamonds mined by Alrosa of Russia and demanded that it reduce the number - and stop selling Alrosa diamonds entirely by 2009.
De Beers has reached a settlement with the US Justice Department, without admitting any wrongdoing, and has placed $295m in an escrow account. A hearing next month will decide how that is to be distributed to participants in a class action. Alrosa has mounted a legal challenge to the European Commission's insistence that De Beers stop selling its diamonds, but Mr Penny says he accepts the Commission's ruling and this is no longer De Beers' battle.
Instead, De Beers, which now mines 40 per cent of the world's diamonds and sells 45 per cent, has to behave like a normal company, finding new customers in a more open environment. This year will be difficult in the US, De Beers' biggest market. American sales growth fell to 2.5 per cent last year from 4-5 per cent in previous years. This year, with the credit crisis, the US market will be worse. "I think we'll be pleased with any growth this year," Mr Penny says.
But De Beers has two new markets, India and China. Indian brides traditionally opted for gold, not diamonds, but marketing, including a campaign fronted by Bollywood star Aishwarya Rai, has begun to change their minds. "The potential in India is enormous. We've seen double-digit growth in demand for diamonds over a 10-plus year period."
In China, he says, "if you went back 15 years, you would find virtually no diamond consumption at all, whereas if you look at the statistics today, on the eastern seaboard - Beijing, Shanghai, Guangzhou - you are seeing 70 per cent plus of brides getting what they call a wedding ring, as opposed to an engagement ring, and that's pretty remarkable. Now, it's a small percentage of the country, but the potential is enormous."
This month will take Mr Penny to Botswana, Namibia, South Africa, Canada, Russia and several European countries. His wife and two children live in Dorset, where, in spite of his itinerary, he manages to spend most weekends, sailing and walking.
"The one thing about Heathrow is you can get to and from most places."
He insists, however, that he has confidence in South Africa, De Beers' first home, and claims to be unbothered by the prospect of Jacob Zuma becoming president. "South Africa is a robust democracy. There are a considerable number of institutions and organisations that provide a balance of power in South Africa, from the churches to the unions to political parties." It is a diplomatic reply. But whatever Mr Zuma brings, Mr Penny is used to political upheaval.
FT Syndication Service