Marco conceptual

As indicated in figure 17 the value chain agents were asked to answer a short three question open answer questionnaire to map their activities and challenges as participants of the Namibian diamond industry. Responses were received from four cutting and polishing companies that are also NDTC sightholders. The responses are a good way to begin analysing the challenges of this part of the chain. After the responses other views learned in the interviews are presented. The questions and responses given by companies are given below. For question 2 the responses are divided into four categories. The answers are corrected for spelling.

1. What do you as an active diamond industry company see as the most important reasons / competitive advantages for doing business in Namibia?

i. We have a guaranteed supply of rough and we are operating in an EPZ zone. ii. Namibia is a beautiful country.

iii. Setting up a factory in Namibia is a challenge. The people of Namibia are hard workers and friendly.

iv. The main motto is to create employment in this country and to transfer skills to the locals to make them productive in the diamond field.

v. We want to see Namibia as Botswana, which is now considered a hub of the diamond industry.

vi. The Namibian goods are the best goods in the African continent, and there is a good demand for the goods on the world market.

vii. The most significant competitive advantage, substantially exceeding all others in importance, is the prospect of access to adequate quantities and qualities of locally-mined rough diamonds.

viii. A secondary advantage is a stable, relatively transparent operating and regulatory environment.

ix. Availability of rough diamonds direct from the source. x. EPZ system for manufacturing companies.

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It is worth nothing that the answers can be grouped under three categories. Firstly, the most important incentive of the companies to be located in Namibia seems to be access to rough diamonds. Second, the EPZ status is very important to the companies, though it seems plausible to assume that the first incentive of access to rough diamonds is paramount, meaning that even though the EPZ licence was not available to the companies, they would still locate their activities in Namibia as access to rough diamonds is on the global scale a scarce resource. Third, the companies indicate transfer of skills and local beneficiation as an important consideration to them. As is already pointed out here by one company, and becomes more evident in responses to question 2, the costs of cutting and polishing in Namibia are high in comparison to other locations in the world. The local beneficiation and business cost arguments are thus at least to some extent contradictory.

2. What are the main business challenges you as an active diamond industry company are facing in Namibia?

Financial and cost issues

i. Manufacturing is very expensive. This comes from the fact that labour, electricity, transport etc. costs are very high. It makes manufacturing here not very competitive in comparison to the Asian markets.

ii. Labour turnover in this industry is very high, and as every single material has to be imported, the cost of production is high.

iii. Diminishing manufacturing margins caused by increased competition from lower-cost Asian manufacturing centres, and from other centres around the globe where manufacturing is subsidized and/or has greater supporting infrastructure (e.g., feeder services) than in Namibia.

iv. Banks and insurance companies have neither experience nor desire to work with the diamond business. Their services are too expensive in comparison to the services in other diamond manufacturing countries. This is the reason why all diamond manufacturing factories have financing and insurance from foreign companies and service payments in hard currency must go overseas.

v. International Transport Companies charge three times higher for goods transfer because they think that Namibia is a country with high security risks.

120 Regulatory environment

i. We have a few problems which start from the purchase of goods until we receive the goods in the factory. Even if the payment is done in time there is a lag in opening of diamond parcels and putting it into manufacturing. To open the parcel the police, customs and Ministry of Mines and Energy are all involved. The transactions should happen like in London; as soon as the payment is done the customer receives the goods.

ii. Goods transfers for import and export purposes are very complicated and slow. It takes a minimum of one week for customs and clearing procedures in Namibia. In other diamond countries it takes from 2 hours to one day maximum. The diamond business is very capital intensive and companies pay financial institutions interest for each day the delivery of goods is delayed.

iii. The Mining Union of Namibia creates a lot of problems for all diamond manufacturing companies because they do not understand the difference between mining and manufacturing. MUN managers do not want to work together with factory management to create a system which will accommodate the interests of both employees and the companies at same time. MUN simply turns the workers against companies.

Availability of diamonds

i. There is an absence of actual access to adequate quantities and qualities of locally-mined diamonds. Those available under the terms of GRN’s agreements with DeBeers have proven unpredictable and insufficient up through this year (2014). Though there is hope now that those agreements are being renegotiated. ii. There are no privileges to domestic manufacturing companies in Namibia. Prices for rough are the same for Namibian and overseas buyers. In India, Russia and Israel there are special supporting policies for domestic manufacturing companies through the lower rough prices (Russia) or special financing with lower interest rates (State Bank of India).

Skills and resources

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As seen above, throughout the four groups of responses the underlying argument concerns the relative cost of cutting and polishing in Namibia. Whether it is the high direct cost of labour – electricity, transport or security – or the indirect costs – delivery lags, financing premiums or location costs due to Namibia being classified as “high risk” – the arguments are related to comparisons made with respect to the large diamond hubs in Asia, India, Russia or Israel. In essence this continues the theme set by questions 1, meaning that the main incentive of the companies locating in Namibia is the access to rough diamonds. A related and important argument was also raised in discussions with Namdeb, where it was as stressed that location cost differentials are not only result of higher wages, but also of labour legislation, which for example in India allow for longer working hours.

3. What do you think about the method of value chain analysis in understanding and developing your industry?

i. I believe there has never been any real study done on the cost of manufacturing. It is an illusion that since a company manufactures diamonds and not clothes that there are millions of profits that are not shared with the locals. They have not understood that the goods are very expensive and that manufacturing in Namibia is also very expensive, which makes it very uncompetitive in comparison to the rest of the world. Maybe an analysis will develop a more in- depth understanding, which can be shared with Ministries, employees and any other stakeholder in this industry.

ii. Value chain analysis will help to study the industry well in all areas so that Namibia can encourage foreign direct investment into the country, which will create more employment and growth to the economy.

iii. Perhaps useful but also extremely limited in this case, as only a very small part of the relevant value chain is accounted for by diamond manufacturing, and the fate of manufacturers is deeply dependent on different parts of the value chain, both upstream (mining) and downstream (sorting, wholesaling, distribution, and retailing).

The third question was put into the questionnaire to capture some of the dispositions of the companies towards the analysis done. The responses reflect the opinion repeated in interviews that the global dynamics of the cutting and polishing industry as a highly competitive creating a small portion of industry margins and value added is not often understood. Based on global

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industry analysis and data acquired for the sample of companies active in Namibia this seems to be the reality the companies are facing.

In addition to the above considerations few remarks are in order from discussions with the industry representatives. Firstly, one company stated that the main reason they are not selling diamonds to local jewellers is that the EPZ regulations do not allow it. This is why they sell a 100 % of their output into Europe. If this were to be changed and they wanted to supply the local market, they would need to apply for a different status within the EPZ framework. Second, market penetration in cut and polished diamonds and downstream jewellery manufacturing requires a steady supply of high quality goods the interviewees saw as still not present in Namibia. The market penetration argument was repeated in a different form as some interviewees pointed out the relatively small size of the African market, which would mean that for significant industry development the target markets would be in USA, China, India and Japan, which according to global industry analysis are the main markets of final consumption. Here the remoteness of Namibia with respect to these markets presents additional challenges that do not, however, take into account the potential growth of home markets on the African continent.