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Investing in diamonds Featured

11:29am EDT July 21, 2004
During World War II, President Roosevelt needed natural diamonds for the manufacture of airplanes for the war, but the United States' supply was depleted. Diamonds are used as abrasives and cutting tools in the manufacture of products such as automobiles and planes.

The largest diamond miner in the world, De Beers of South Africa, was supplying Hitler and refused to sell diamonds to the United States. To counter this dependence on an outside supplier, Roosevelt commissioned General Electric to develop a technique to manufacture diamonds, and GE Superabrasives was born.

The sale of the global synthetic diamond manufacturer by GE to private equity firm Littlejohn & Co. of Greenwich, Conn., was finalized on Dec. 31, 2003, and its name is now Diamond Innovations.

"GE's strategy was to only own $1 billion platforms," says Diamond Innovations CEO Tanya Fratto of the reason behind the sale.

And even if GE had purchased all of the company's competitors, customers and suppliers, there was no way it could ever have been a $1 billion platform. But Fratto is positive about the change of ownership.

"We were low in terms of importance at GE," she says.

Diamond Innovations stood in line behind power systems, aircraft engine manufacturers and other large companies. At Littlejohn & Co., says Fratto, diamond Innovations receives more attention.

"Littlejohn will be more focused on our industry," she says.

The biggest drawback to the new ownership, says Fratto, is the loss of international recognition that the GE name garnered, especially when it came to recruiting employees.

"A lot of people want to go work for GE," she says.

Smart Business spoke with Fratto about the pros and cons of the new ownership.

What prompted the separation from GE?

The real big thing was we experienced a change in leadership. Jeffrey Immelt, the new chairman of the board and CEO, looked at the GE portfolio and felt that what would be the best strategy for the company was to maintain $1 billion platforms.

The portfolio has an aircraft engine business, a power system that just bought a wind-powered system, and others, all huge businesses. In the superabrasive industry, there is nothing that would make it a $1 billion platform.

GE could buy all of our competitors, suppliers and customers, and it would still not be a $1 billion platform, and that wouldn't be good strategy. Immelt looked at the portfolio and asked if we belonged, and, in a nutshell, we did not in terms of the company's strategy going forward.

How will the new ownership impact operations?

It won't. The leadership team is staying, and there will be little disruption to the company. Our plants will be running the same.

The real big change is that I am working for a board now, and I am on the board. When it comes to financing, we go through a budget approval process similar to that of GE, only it is presented and debated by the board members.

What are the biggest advantages of the new ownership?

I think one of the advantages is that we are important to Littlejohn. At GE, we were an orphan. They didn't really know what we did as a business. We had to get in line behind power systems, aircraft engine manufacturers -- we were low in terms of importance.

Also, GE set the priorities for all its companies, and we were managed to a set of priorities that might not make sense for our industry. At Littlejohn, we will be measured with measurements geared toward our industry.

Our customers feel it is the best thing that could've happened for us. Now we are a private business similar to our customers. Our customers are used to seeing the top management at GE transition every three years. From a customer standpoint, that is a disadvantage. Many of our customers are entrepreneurs and owners of their companies; now they will see a similar consistency.

Are there any disadvantages to the new ownership?

One of the disadvantages is that being part of a large corporation makes it easier to open doors, especially when recruiting employees. We have to recruit differently now. We are reaching out to the local community more as well, since we are an individual company.

We are more involved with the chamber of commerce and the schools; the Fisher College of Business is a great resource for us when it comes to recruiting, as well as the other local schools.

Who are your biggest competitors, and what differentiates you from them?

Our two biggest competitors are outside the United States -- one is De Beers in South Africa, the other is in Korea. What differentiates us the most is that we offer a full line of products -- seven or eight product lines -- for eight to 10 industries. We are the only U.S.-based company making superabrasives.

Which products are most profitable?

The nice thing is we are diverse enough that when one industry slows down, others are usually up. We make cutters for the oil and drilling industry, tools for the automotive and aerospace industries.

No one product line or industry dominates consistently, which allows us to be flexible with the economy and in allocating our resources.

What are the company's growth plans?

We are working on a couple of different things. One is a composite diamond coating material used for material removal. This material is extremely wear-resistant. When you coat parts that are used over and over with this material, it allows them to last longer.

There are still a number of applications in material removal using traditional abrasives, which could convert to super abrasives. Another area is in the oil and drilling industry.

We currently have a small portion of the market, and the market itself is getting much bigger. It is expected to double. Also, natural gas companies are switching to diamond applications to do their cutting. We feel there is potential to grow our penetration in these markets.

What are the biggest challenges of managing a global operation?

We have employees in 11 countries, products in 25 countries and operations in Hong Kong, Ireland, Florida and our headquarters here.

The biggest challenge is communication. We have to be cognizant of the different time zones and cultures. Selling to customers in Germany is different than selling to our Japanese customers. We have to be respectful of the different cultures.

We have terrific leadership in Asia and Europe and Ireland. All of our leaders are local to the countries. Our European leader speaks five languages. Our goal is to hire local talent that thinks globally.

What are your biggest operational challenges and how do you meet them?

I think the biggest challenge everyone is facing is the economy -- it is "on" one day and "off" the next.

We have to be flexible with our processes and work force. We have to look every day at the competition and the global economy and respond to it. We have to be quicker and a lot more flexible than our competition.

The challenge is manufacturing product quicker, and in a more flexible manner to compete -- offer the best service and still make money, too. How to reach: Diamond Innovations, (614) 438-2000 or www.abrasivesnet.com