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Vertical integration: An item of diamond jewelry designed and manufactured by the Alrosa Group, using diamonds mined, cut and polished by the Russian conglomerate.

COMPANIES CONSIDER VERTICAL INTEGRATION TO CREATE MORE EFFICIENT DIAMOND PIPELINE

 

A decision by Alrosa, the Russian diamond mining company, to create a single production framework that encompasses all of its cutting and polishing facilities raises the prospect of vertical integration in the diamond industry, reducing the very fragmented structure of the diamond pipeline, by which diamonds pass through multiple hands on their way from the mine to the retail jeweler.

Alrosa’s decision was announced on October 22, where in a statement it said has begun delivering on its plan to create a single production framework. Dmitry Amelkin, who had been appointed Transformation Director of the Polishing Division this spring, will be in charge of the  project, taking over the management of the  company’s largest diamond polishing factory, Kristall Smolensk, to ensure the smooth transition.

As of today, ALROSA has a number of cutting and polishing assets in Moscow’s Diamonds Alrosa, Barnaul’s Diamonds Alrosa LLC, and Smolensk’s Kristall Production Corporation. Together, they account for more than a half of diamond cutting and polishing in Russia.

By 2021, the three facilities are expected to form a single organisational and legal structure. The goals are twofold – first, to make sure that diamond output is allocated more efficiently among the sites, and second, to facilitate the sharing of practices.

In addition, the facilities are going to provide backup to each other in case the pandemic in one of the regions gets worse. From early April till mid-August, almost all the factory employees had forced downtime resulting from the COVID-19 outbreak.

LONG AND OFTEN INEFFICIENT DISTRIBUTION CHAIN

While Alrosa has never indicated that it ever intends channeling all of its production to its own manufacturing plants, the Russian company is the only major rough diamond producer at present to be creating a significant vertically integrated production capacity.

This is a relatively new development in an industry that traditionally has functioned with a long and often inefficient distribution chain. Rough producers would sell much of their output to rough diamond dealers, most often based in Antwerp, but now also in Dubai and Israel, as well as to a select number of manufacturers would also get rough supplied directly. The goods would then be polished and then often sold to polished wholesalers, who in turn would sell the goods to jewelry manufacturers and jewelry retailers.

Alrosa’s diamond-cutting facility in Moscow.

Under the current system the same diamond will often change hands multiple times, frequently being shipped from country to country has it does. The profit margins vary substantially at the various stages of the pipeline, price of the stone will rise as its progresses along its journey, influenced by the cost of shipping, insurance and financing.

In principle, a vertically integrated company has the means to create a more streamlined, efficient and ultimately profitable production process, but there have only been a handful of firms that have done it successfully to date.

Although not owning the mines from which its diamonds are produced, Tiffany & Co is building a vertically integrated value chain from rough procurement to diamond jewelry retail.

TIFFANY’S INTEGRATED VALUE CHAIN

One company that has managed to establish a vertically integrated structure is not actually a rough diamond producer, but rather a retailer. In 2002 the company established Laurelton Diamonds, a wholly owned subsidiary, to procure rough diamond, and cut, polish and supply polished stones to its own jewelry manufacturers.

Tiffany does not own its own diamond mines, but its diamond-manufacturing subsidiary Laurelton Diamonds is both a De Beers sightholder and a member of the Alrosa Alliance, which enables customers to obtain guaranteed monthly supply. It operates production plants in the United States, Belgium, Botswana, Namibia, Vietnam, Cambodia and Mauritius and also its own gemological laboratories.

Up until 2014, Tiffany’s virtually integrated structure concentrated mainly on larger stones, with melee – or goods below 0.18 carats in size, being purchased on the open market.  The addition of the plant in Vietnam, and later the factory in Cambodia, enabled it to expand it in-house production capacity to include smaller goods, sometimes requiring the retraining of garment workers.

 

“Most of our industry still outsources this kind of work, but we’ve found that Tiffany’s internal facilities are highly efficient while offering workers a good standard of living, wrote Tiffany’s former CEO Frederic Cumenal, in an article printed In the Harvard Business Review in 2017.

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