Ralfe: De Beers Considered Vertically Integrating the Company

In a farewell interview with IDEX Magazine, De Beers managing director Gary Ralfe talks about what he is proud of in the diamond giant, what lessons he learned, what was the process that eventually led to Supplier of Choice (SoC), and what was plan B. Following are excerpts from the interview, the full interviews appears in the March issue of IDEX Magazine.

IDEX Magazine - In changing the status quo of the industry, to push it into that of a demand driven market, you implemented the Supplier of Choice program. Was SoC the only model you considered, or were there alternatives? For example, was there a Plan B if SoC had not been approved by the European Commission? And if so, what was the contingency plan?

Gary Ralfe - We certainly looked at another option. The other option was if it was legally possible or commercially desirable to vertically integrate our business. We were then a public company, with a major portion of our investments outside the diamond business.

The particular terms of reference set for the strategic review were if we could run our business in a way that would produce better results for our stakeholders and most particularly our shareholders. There was an emphasis on the shareholders. It looked as though under the previous regime the interests of the shareholders were very much in a secondary position. We revalidated the view that the core business of De Beers was the mining and marketing of rough gem diamonds. After arriving at that decision we then started to exclude the other option – the option of changing our business completely and becoming vertically integrated.

You asked if we had any reserve in our back pocket when we set out to see the European Commission? Frankly, I don’t think we were aware of how close to the wire we were. I was taken by a mutual friend, a man I regard highly who used to be a commissioner himself, to meet Mr. Monti, [Mario Monti, the EC’s then Competition Commissioner]. Mr. Monti walked up to me and said, “I am very pleased you have come to see me because it might not have been very long before we had come to see you.”

IM - Would the plan of vertical integration have been legally possible?

GR - One of the reasons we didn’t go down that path was because there were too many legal obstacles.

IM – Commercially, would it have been better?

GR - No. Commercially we had neither the human nor the financial capacity to be embarking upon such a route. It was by process of elimination. I remember a splendid break-out session in Kimberley. We were determining whether we should try and retain the status quo or turn to a demand driven basis (what we in due course came to call Supplier of Choice). We broke into two teams. Nicky led one and I, the other. We split into separate rooms and finally both came back saying we must change our business - not retain the status quo. There was tremendous unanimity amongst all of us regarding the feeling that we needed to change our business.