Breakfast with Gareth Provides Food For Thought
June 23, 06 by Chaim Even-Zohar
In our industry, there are some “defining moments” – occasions one will come to refer to as the time “before” or “after.” A few seemingly off-the-cuff, but nevertheless clear and pointed, remarks made by De Beers Managing Director Gareth Penny at a Gaborone breakfast will reverberate in southern African political echelons and renew the internal industry debates on the various southern African manufacturing options.
Whether Gareth intended to make a remarkable declaration or not is a moot point – it simply happened. The two largest and perhaps most celebrated South African Sightholders, Steinmetz and Safdico, who between them hold the lion’s share of South Africa’s total DTC Sights, and whose names are associated with glamorous jewelry brand names and events, have been given to understand that if they applied for an additional Sight in Botswana (something they haven’t done so far), the DTC would be most supportive.
Technically, it may not reflect a change of current DTC policies, but the strong visible support given to South Africa’s largest Sightholders for their Botswana entry raises mind-boggling issues in regional diamond politics, putting the South African (and to a lesser extent the Namibian) government on notice that domestic diamond cutters have a choice whether and where to expand.
Though there is a widespread perception that DTC Sightholders are only allowed to have one Sight in any one of the South African producer countries, Gareth clarifies, “we have never had such a policy.” To be precise, Gareth says, “It is our policy that Sightholders have the ability to take up to two Sights from DTC International. Both of these could be in southern Africa.”
Clearly crossing (or maybe abandoning) the traditional De Beers institutional boundaries by solidly demonstrating an earnest De Beers desire and commitment to make the domestic beneficiation in Botswana a success, Gareth reiterates that DTC Sightholders “can redirect goods to anywhere in the world that they wish to, subject to whatever legal or regulatory provisions are in place for various countries.”
What is astounding is the timing and the setting. Why making it so crystal clear now and to so many people? After all, the support message came well before the factories have been built. So, what actually happened?
Sights for Breakfast
It started at the ungodly hour of 7:30 a.m. in a conference venue turned breakfast room in Gaborone, Botswana. Some 200 notables, government, and industry leaders from a number of southern African countries came to celebrate the formal launch by Safdico and Steinmetz of the establishment of the Botswana’s Diamond Technology Park.
This initiative formally elevates Botswana from a producer country with a few isolated manufacturing companies to a major fully-fledged cutting center. It confirms and reiterates that Botswana is now slated to become a major manufacturing player with a potential to grow to 3,000 workers annually, manufacturing well over $1 billion worth of rough within the next 3-5 years. What a difference a breakfast can make! If I remember correctly, it was Nicky Oppenheimer who once remarked (it must have been in a Thailand context in the late 1980s) that, “having a few cutting factories somewhere, doesn’t make the place a cutting center.” He is right.
A cutting center requires a trading infrastructure, a supportive banking system, and availability of all services ranging from courier services, insurance firms, gem labs, hotels, equipment suppliers and buyers and sellers – and even a diamond manufacturers association. It also needs one thing more: the unequivocal support of De Beers, especially in a southern African producer country. All these elements are now in place. It is going to happen – fully driven by private entrepreneurs.
Safdico (Brian Gutkin) and Steinmetz (through Ori Temkin, the head of the Steinmetz South African cutting operations) made headlines a year ago when the government of Botswana granted them manufacturing licenses, reportedly without “first checking” with De Beers. Both of these DTC Sightholders already have cutting operations in other southern African countries. At the time, De Beers recommended the names of six Sightholders to the Botswana government as candidates for a Botswana manufacturing license. Safdico and Steinmetz were not on the last. To dispel any possible implied notion of “friction”, however, Gareth stresses that, “these Sightholders have kept us informed of their plans whilst not requiring our approval.” Clearly, they received that approval now – in a most public way.
At the time Safdico and Steinmetz were awarded the manufacturing licenses, all involved diplomatically noted that the recipients of the governmental manufacturing license had neither asked for, nor received, any guarantees for a rough supply. Moreover, it was specifically stated that having a license in Botswana doesn’t mean you will be supplied by the DTC. Formally, that is still the case.
It was clear to all breakfast attendants though that these companies can be assured of DTC support – and, when the applications are made, it will be a challenge for DTC managing director Varda Shine and her team to find the right modalities (DTC Botswana; DTC International; etc.) through which that support is materialized. (In a phone conversation, Varda stresses that new Sight allocations are only considered in the context of the normal application context; no changes or promises can be made in the midst of a contract period.)
Embracing Governmental Aspirations
At the June 20, 2006, breakfast at Gaborone, Gareth expressed support for the Diamond Technology Park initiative and for the factories that will be erected there.
The significance of Gareth’s attendance at the breakfast goes far beyond a polite courtesy to important clients. Safdico’s and Steinmetz’s purpose for the assembly was to unveil their vision of a state of the art diamond center to be established in Gaborone. At a cost of $50 million, the companies are materializing the Botswana government’s aspiration for the establishment of a major downstream diamond industry, meaningful assisting in the alleviation of unemployment, and the creation of skills.
The concept of the Diamond Technology Park is one of a supply chain cluster that will house the relevant downstream players in a centralized, finite manner. It will be built in phased developments. The model creates many opportunities for small, medium, and micro enterprises and generates greater efficiencies and security for all.
The park’s tenants will be drawn from the world’s leading diamond companies who enjoy superior levels of expertise and solid experience. Other tenants will include companies that service the diamond manufacturing industry such as banks, courier companies, machinery suppliers, IT companies, cleaning companies, security, a laboratory, restaurants, retail shops, and self-catering accommodation. Scheduled to start in the early second half of 2006, the first factories to be built are Safdico’s and Steinmetz’s. The promoters eye the development of clusters of factory buildings and offices custom built to cater to different requirements that will vary in size and content. Says Gutkin, “this will help the Botswana government fulfill its ideal of creating a sustainable, finite, and economically viable diamond industry.”
Pioneers in Partnering
The two major Sightholders signaled something to both De Beers and to the Botswana government by staunchly supporting the Botswana government aspirations and risking the ire of their Supplier of Choice. Gareth’s “coming to breakfast” served to openly demonstrate the De Beers support for the cutting center objective – and, indeed, represents a reversal of the policy that guided De Beers in Botswana for almost 40 years.
“Some of the factories that were here were never expected to make profits so that others wouldn’t get the same idea [of coming here]”, said one senior government official a few hours after the breakfast. Sightholders recall that it was only a few months ago that the DTC was going to recommend the issuance of the potential Botswana Sightholders from a list of six. The government, instead, accepted all the six on the list – in addition to those who were NOT on the list, such as Steinmetz and Safdico.
The new De Beers managing director has pragmatically and wisely embraced the inevitable – and is now positioning himself as a staunch supporter of the development of a Botswana manufacturing center. The names Steinmetz and Safdico are identified with large stones. (In South Africa, every year some 5,000 stones in excess of 5 carats each are mined – many of these end up between these two companies, though there are competing for these goods with very capable niche players.) Developing that expertise in Botswana will affect not just South Africa, but also Israel, New York, and Belgium. Indeed, Safdico’s declared focus on state of the art, excellence, training, etc. very much sets the parameters of the “moving north” exercise. Its Botswana plant will only process rough of 2 carats and higher, explains Brian. The Steinmetz factory, “still examines what sizes will be economically most viable to cut in Botswana,” says a cautious Ori Temkin.
By his broad endorsement – and by doing so now – Gareth has overnight gained serious additional leverage in South Africa and Namibia. He improved Varda’s and his own negotiating positions. We’ll get to that in a second.
The Emergence of a Cutting Center
The Botswana government has so far issued 15 manufacturing licenses (with the re-entry of Lazare Kaplan Botswana and Tiffany being the last two) and within a 1-3 year time span, they’ll all be operating. What are the economics? What are the politics?
For a factory to be successful, it needs a critical mass of rough supply. This requires, say Botswana players, between $50-$75 million a year per factory. We are talking close to, or maybe in excess of, $1 billion worth of rough – in the better qualities.
Most Sightholders now acquire about 40 percent of their needs from the DTC while the remaining 60 percent is bought on the market – and often consists of indirect DTC rough. It is expected that DTC Botswana will become the principal supplier of most of the requirements of the 15 factories. Moreover, there is no guarantee that the government will not issue additional licenses.
The four existing factories have been using rough of an average of $380-$420 p/c. As the Diamond Technology Park – and the specific manufacturing skills of their founding members – are aiming at the larger and more expensive goods, the average price is expected to rise to the $500 p/c range. At labor cost (in Botswana) of $45 p/c, this certainly sounds like an economically viable proposition.
Currently, there are around 800 diamond workers in the Botswana cutting industry. Some 300-plus in Teemane (which is the former De Beers factory that was actually built by Gareth Penny, its first manager); a similar number of workers are employed by the Schachter & Namdar Botswana company (which was previously the Lazare Kaplan operation); then there is Star Diamonds (previously the Doppelt factory) with approximately 100 workers, and the Eurostar company (with 100 workers as well). Others are in the process of building a factory. Safdico’s Botswana operations wouldn’t require more than 50 production workers and, probably, a similar number of local support staff.
When Sightholders have a choice, or when they can be in more than one place, the objective “environmental” (read: competitiveness) conditions become a key factor. Botswana offers an enticing environment – and a government that is exceedingly helpful to those applying for manufacturing licenses.
Botswana has never been “colonized” in the historical sense. When the British still ruled, prior to the 1966 independence, there were hardly 500,000 native people (in some eight different tribes) in a country of the size of France, which is 80 percent covered by the Kalahari Desert. There was “nothing” for colonial powers “to take” – and, legend has it, that De Beers probably knew that there would be diamonds in Botswana, but “waited” until a few months after the British departure. Otherwise, says the street talk, “the British would have never left.” Not an unreasonable assumption.
The diamond wealth enabled the maintenance of a stable, democratic, and peaceful environment – and though most of the present 1.8 million people remain poor, they are all proud Batswana. Therefore, unlike South Africa, there is no “pay-back time” mentality. No need to rectify “past sins.” On the contrary, the love story of the late President Seretse Khama and his (white) wife Ruth has become an integral part of local folklore and pride. So in Botswana there is no Black Economic Empowerment (BEE) – and as is obvious to any visitor, Botswana is clearly a color-blind country. There is a commitment, however, to Batswana people and to free economic enterprise. With a top income tax rate of 25 percent and a corporate tax rate of 15 percent for manufacturing companies, the legal and fiscal environment is transparent and attractive.
What Gareth has achieved by endorsing the “one player in multiple southern African countries” concept, is setting off true competition as to where one wants to manufacture, go further downstream, expand, or scale down. The South Africans cannot impose trade barriers without losing the risk of losing some players.
That was NOT the situation on the evening before the breakfast.
Competing as Partners of Choice
Companies will be judged by what they do on the ground and not by what they did or didn’t say. Safdico, for example, as part of its commitment to contributing to the development of a diamond industry in Botswana, has already initiated a training process with the recruitment of a few Batswana graduate engineering students. “These talented young people,” says Safdico’s Shanee Orbach, “are now at our Johannesburg factory where they are receiving intensive instruction on the entire diamond cutting and polishing process. Our company’s in-house training department has an excellent track record in terms of equipping its employees with the skills necessary to attain internationally recognized qualifications within the diamond industry.”
Steinmetz echoes that message. “We will establish a superior diamond cutting factory which will produce premium cut diamonds out of Gaborone of the highest quality with a competitive edge internationally,” says Ori Temkin.
Obviously, the “new Botswana” industry will compete squarely with South Africa and the traditional cutting centers. Where will the $1 billion of rough 3-grainers and up come from?
Ironically, the current South African policies, which favor the retention of all cuttable goods within that country, will backfire – in favor of Botswana. The total De Beers South African production of better qualities of 3-grainers and up (the desirable goods) is not more than $320-$340 million a year. I refer to the Large Stones, Crystals (+3 grs to 10 cts), Fine (+3 grs to 10 cts), Regular (+3 grs to 10 cts), Fancy (+3 grs to 10 cts) and Browns (+2 cts). Add to these the less desired colored/browns (+3grs-10 cts), Makeable (+3grs - 10 cts), Spotted (+2 cts) and Commons (+2 cts). The DTC might sell a further US$200 million – if it finds enough buyers for these lesser desirables. So far, De Beers has always supplied the South African industry with around $200-$250 million of rough that came from other sources – mostly Botswana.
That may not continue. Clearly, the currently inflexible South African policy (which, I expect, will change – common sense somehow must prevail), will deny the local manufacturers access to these more desirable goods – and other companies may, in addition, prefer moving to Botswana. Though I assume that Gareth didn’t have this on his mind when he spoke at the Gaborone breakfast, his very staunch (and we must say sudden) enthusiasm for turning Botswana into a major cutting center certainly doesn’t go unnoticed south of the border. Gareth isn’t “locked in” to beliefs and attitudes that have passed their time; he displays pragmatism and realism and doesn’t hesitate to adapt positions.
The bottom line is that two of South Africa’s leading DTC Sightholders have now been virtually (albeit implied) assured a rough supply for their respective Botswana operations. But they got much more.
By being in more than one southern African location, they gained the ability to shift manufacturing to where it is economically more attractive. Manufacturers will welcome this change in DTC policy. It is bound, however, to trigger a change in South African government policies as well. If the entire De Beers production is aggregated in Gaborone and the traditional “London mix” will become a “Gaborone mix” – only a change in name, not in substances, southern African Sightholders will gain. Botswana contributes to South African boxes, not the other way around.
Botswana versus South Africa
Intriguingly and sadly, the best interests of South Africa may suddenly run counter to the best interests of Botswana. Gareth was exceptionally nice in his brief congratulatory words – and we’ll never know whether his words were merely an expression of support for the Botswana industry or, in addition, a clear effort to break the impasse with the South African government. His political leverage and maneuverability space has undoubtedly increased. It may allow him to regain the advantage in the De Beers – South African government debate. It may reduce the proposed export tax and/or mining royalties.
If this was a diamond World Cup, both Botswana and De Beers came out as winners, and so did Safdico and Steinmetz. But in a zero-sum game (and that is the game of rough supplies), these gains are always at the expense of others. Safdico and Steinmetz have scored nicely themselves. Their independent approach of last year by going straight to government has paid off handsomely.
It has changed the political and economic diamond map. That became patently obvious to all who attended the breakfast and sensed the mutual respect and appreciation between the manufacturers and their host government. They not only deserve to be complimented, they also deserve the gratitude of many of their colleagues and of the Botswana government. Botswana will be a major manufacturing center – and Sightholders will be able to leverage and contribute to making southern Africa a more level playing field. Every stakeholder will have to wonder what it means to their business – wherever they are.
Have a nice weekend.