Economy Thursday, September 8th 2011
Swatch Group can cut back deliveries of movements and parts as of next year.
Nicolas Hayek dropped the bombshell in 2009. Now his son Nick is putting the plan into practice. The Swiss watch industry will ultimately have to manage without Swatch Group for its parts. As the late Nicolas Hayek announced, this concerns everything from finished movements and assortments to escapements, balances and springs.
The first leg in the process is already under way. As a provisional measure, the Swiss competition commission Comco has authorised the world's number-one watch group to cut deliveries of mechanical movements to 85% of quantities sold in 2010 (95% for assortments). This initial decision gives no clue as to the conclusions of Comco's investigation against Swatch Group, which should determine whether the Biel-based group's intention to end supplies constitutes "an abuse of a dominant position from the point of view of competition." Comco will be particularly attentive to whether or not alternatives to Swatch Group exist, and if necessary the timeframe required to set up such structures.
Reduced deliveries from 2012
Swatch's willingness to reach an amicable solution through a gradual reduction in deliveries already scores the group brownie points. This scaling-down could also take longer than the competition fears, as the federal authorities aren't expected to deliver their conclusions before at least 12 months. In the meantime, and given that Comco figures are only an average, watchmakers will have to learn to live with a reduction in supplies of up to 30% for certain parts.
Companies in the sector were quick to lash out against Comco. Many firms, particularly in the mid-range segment, have lambasted the calendar, which comes into force on January 1st 2012, not least the fact it includes deliveries of assortments. Several have even announced their intention to petition the Swiss federal administrative tribunal. "What exactly is Comco for, other than favouring monopolies?" asked an indignant Peter Stas, Chief Executive of Frédérique Constant.
The ball is rolling
According to Vontobel bank, Swatch Group has 70% of the market for mechanical movements and 90% for assortments. For Alain Spinedi, who heads the Louis Erard brand, this decision is akin to creating another stranglehold on supplies. The brunt is even harder to bear for two reasons. Firstly, the industry is just recovering from the 2009 crisis. Secondly, the alternatives that exist are being developed, but are still a long way from replacing the Swatch Group. Mr Spinedi criticised Comco's failure to realise that its decision will rekindle the grey market. "This is something we already experienced with the bottleneck in supplies in 2008, when prices increased threefold. Maybe a high-end brand can afford to pay CHF 750 (USD 865 / EUR 615) for a movement that normally costs CHF 250 (USD 290 / EUR 205), but for brands such as Louis Erard that shift large volumes, it's a disaster. We have no room to manoeuvre."
Whatever the outcome of the affair, the ball is well and truly rolling, and Swatch Group more determined than ever to have its way. Referring to Comco's "surprise decision," the analysts at Kepler Capital Markets expect deliveries of parts and movements to come to a complete end in six to seven years' time. All of which should set off warning lights for watchmakers, especially as, in principle, only the anti-trust law could oblige the multinational to go on supplying competitors. Previously, this obligation has applied sol
ely to the provision of essential or vital supplies and equipment, primarily in the telecom and energy sectors. The decision to end Swatch Group deliveries of movement blanks could set a precedent, which would be synonymous with an amicable agreement. Comco would then define a reasonable timeframe for each category of component.
"Swiss Made" under threat?
Watchmakers are therefore left with no other choice than to invest, and fast. Ultimately, it all comes down to big money rather than technology which was mastered years ago, balance springs included. The question is where to find the vast amounts of money required to build production resources that could match Swatch Group supplies? By means of example, it takes an investment of some CHF 100 million (USD 115 million / EUR 0.85 million) and 200 to 250 staff to manufacture 250,000 ETA 7750 type base calibres. According to Nicolas Hayek's calculations, in recent years Swatch Group invested between CHF 1.7 and 2 billion (USD 1.9 and 2.3 billion / EUR 1.4 and 1.6 billion) in its production tool, which includes ETA and Nivarox-Far. The group currently employs around 9,000 people in its various subsidiaries that manufacture movements and parts. The sector would have to invest CHF 1 billion (USD 1.1 billion / EUR 0.8 billion) and create between 4,000 and 5,000 jobs to equal just half this potential… figures that give some idea of the effort required and the price to pay to get a foot in the door of the Swiss watch industry.
The end is nigh for cheap movements and low-cost components, a risk that Richard Lepeu, Richemont's deputy CEO, recently highlighted: "For the good and the higher interests of the Swiss watch industry as a whole, we mustn't go too far in integrating production resources which could, at a certain level, entail exorbitant costs for those who want to produce everything themselves." Johann Rupert's right-hand man also referred to the pressure the sector was under from the dollar and euro exchange rates. "Our branch would be well advised to pool production of certain parts. The sector also has everything to gain from a network of independent, innovative suppliers delivering to all brands," he declared. Otherwise, chances are high that some brands will turn to foreign suppliers instead. And where would that leave "Swiss Made"? ■