Market NewsCommentTaxi to the Loony Bin?

Taxi to the Loony Bin?

By Charles Wyndham.

The spectacle of the meltdown in the American auto business has been fascinating me, as I find it at once amusing, deeply troubling and redolent of so many other things going on or have gone on in our industry.

My amusement was kick started, as I have already written, when the three auto chiefs were asked, when they turned up in Washington to beg for some absurd billions of dollars, if any of the CEO’s had travelled commercial.

Obviously not, all had jumped onto their own private jet.

This ‘arrogance’ has been followed up by all three deciding to be driven by their chauffeurs the 500 miles to Washington for the follow up meeting, one way to spend time, I suppose.

This faux humility seems to have worked and they have got their billions, according to the papers I have read. Good luck to them.

But just how crazy are things becoming when Congress is demanding that those that come begging must show humility? I emphasise the word ‘show’.

If you were an employee of say GM would you be more interested in whether the CEO showed humility or simply had got things right or might at least get things right in the future?

Going back in time, I have never understood anyone buying an American car, but then I am seriously not into cars at the best of times. But those hideous monstrosities of the 50’s have been perpetuated in one form of excess or another ever since, reaching its apogee with the Hummer or those tax rebate attracting SUV’s, again to help the local auto industry out of a bind.

Also just to get another gripe off my chest, what about those absurd cars used as taxis in New York for example, where each car takes up more space than a double decker bus and even a midget has their legs crushed in the back.

Foreign competition and even European competition has been knocking the spots off the local auto kings for ages.

So going back to humility, one could say in Churchill’s words that those CEO’s had an awful lot to be humble about, but again that is not the point.

As Time Magazine wrote this week, “After 30 years of poor cars and worse management, the Big three want Uncle Sam’s help.”

James MacDuffie of the Wharton School of Business is quoted by Time Magazine as saying the worst sin was the failure to learn.

Time Magazine or the writer Bill Saporito, goes on to say that Detroit’s corporate culture is “obviously complicit in the industry’s deterioration”. He goes on later to say, “Management’s job was to create the products, design the production system and provide solutions if there were problems. Everyone else followed orders.”

All of this has uncomfortable parallels with our own diamond industry.

We are in an industry where for historical reasons it has been driven by the management of one company.

That company set out in 2000 a new strategy for the industry which was finally implemented a few years later in what was called the Supplier of Choice (SoC).

Even the most ardent supporters of De Beers now acknowledges that the policy has failed, which is not to say that everything about the policy was a failure; but, again the key goal of driving up prices has vanished in a world of lost dreams.

Our industry was willingly entwined in an opaque, arbitrary and manipulative pricing mechanism under the imperious control of Boney.

The combination has been pretty devastating, not that either of the above can be blamed for the financial meltdown; but, their actions and the craven support given to both (and even more worryingly still given by some if not many) has left our industry perilously exposed to the financial meltdown.

Let’s get away from the issue of structures and reorganisations and leave it to the maestros at Bain Consulting.

Whenever things go wrong everyone wants to have a new structure, which is virtually never the core issue, that is invariably the implementation or more succinctly the management.

Reorganisations have the great beauty of being seen to do something whilst avoiding the pain of accepting responsibility for what is there and making it work, before changing it.

Now that SoC has failed I read and hear with interest that De Beers and others if not most in the industry attack the concept of tendering diamonds as being a root cause of all our problems.

Price discovery and genuine competition is to blame, BHP’s tenders have been vilified as bringing our world down around us.

It really is such misguided piffle as to call it an argument is far too respectful.

Tenders and price discovery do not create more volatility, they just show the volatility for what it is, which when prices are going up everyone drools over.

In my experience even in a downturn tenders will get higher relative prices but inevitably lower prices as that is what happens in a downturn. It is the competitive element that provides some if not the only safeguard against a complete wipe out, so long as there is a market left.

No system can beat the market, look at the 70% discounts that show the harsh reality of the retail market that Saks on New York’s 5th Avenue have given to get customers into the shop.

For De Beers to argue that its system provides less volatility is about as convincing as some of those statements at the Mad Hatters Tea party.

Their’s is a system that over the time of SoC has seen producers deprived in most years of vast sums of income, and when that was not happening, say in 2006, the clients were getting screwed on the prices.

The DTC system has pumped out the majority of diamonds at any one time at the wrong market price which for the most part has been too cheap.

This selling at anything but the market price, whatever that is at one time, has been the major cause for volatility, a point made by our analyst Richard Platt over five years ago.

Therefore, this argument that diamonds are a luxury product and the price must be kept up, stable or whatever euphemism you choose, is supported by the dominant supplier deliberately ( I presume as otherwise it is even worse) selling its luxury product cheaply most of the time.

It certainly explains clients of De Beers / DTC being so reluctant to criticise the system as they have been the major beneficiaries of this intellectually stunted policy, just as those same clients cling to good old Boney.

But, just like the auto ‘giants’ in the US, it simply cannot go on forever, when it might change is an unknown but it just cannot go on forever.

It cannot go on because it does not work, the brutal evidence cannot be hidden forever.

Even the mighty GM, Ford and Chrysler have suddenly run into a brick wall after decade upon decade of seemingly omnipotent power.

To have thought about their possible demise even a few months ago would have requested an invitation to the local loony bin, but that is where we are and the issue is who was nuts those in the loony bin or those outside?

Next time around I think Congress should insist that the auto chiefs use one of those NY taxis to their own local loony bin or better still the one in Washington so they can have a nice long drive.

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