A watershed moment for Swiss watch production

The first warning shot was fired last December when, in two interviews published in the Swiss press, Nicolas G. Hayek dropped yet another bombshell. Swatch Group, which he chairs, would no longer be forced to supply the sector with movements and parts produced within the Group. A working party had been set up to discuss the terms of this process with the Swiss competition commission (Comco). What many wrote off as one of Nicolas G. Hayek’s famous rants proved serious a few weeks later when Swatch Group published its annual report.

A potent message

In his Chairman’s message, Nicolas G. Hayek reiterates in black and white his determination to no longer be milked by the Swiss watch industry. Naturally, this message was relayed at the Group’s AGM in mid-May 2010. Extracts: “Over the last few decades, Swatch Group – your group – has developed the vast majority of the expertise and production resources for mechanical watchmaking movements and complications in Switzerland. During the crisis faced by the watchmaking industry in the 1980s, our group was obliged to bear all the risks on its own and to take full responsibility for saving all the important production centres, such as Nivarox-FAR and ETA amongst others, since no other watchmaking company wanted to join forces with us.”

“Throughout all these years we have been forced to deliver our products, and in so doing also our know-how, to almost all the companies who asked for them; this situation created an entry level far too low for any company wishing to enter our industry, even those with no connection to the watchmaking industry. For over 20 years we have been requesting that these watchmakers develop their own production facilities for their timepieces, or at least part of them, which would indeed be feasible if they deployed the appropriate means, and this in the interest of the whole Swiss watchmaking industry. […] We have therefore commenced discussions with the appropriate Swiss authorities to correct this obligation to deliver to everyone.”

Under Comco's watchful eye

Swatch Group knows full well this decision will have to run the gauntlet of the Swiss federal authorities, hence its negotiations with Comco. Already in 2002, the world’s number-one watch group had announced its intention to cease deliveries of movement blanks as of 2006. The profession, up in arms, referred the matter to Berne. Comco intervened for the first time in 2004 when it forced Swatch to maintain deliveries until end 2010. The second outcry came last year when movement-maker ETA, a subsidiary of Swatch, increased the price of certain of its products, as announced at end 2008, by 8% to 12%. ETA also withdrew the 3% discount for prompt payment. On September 15th 2009, Comco took the matter in hand again and opened an investigation, the result of which probably won’t be known before the end of the year.

Certain quarters accuse the commission of overshooting its boundaries this time. A price hike on this scale represents an average increase of some CHF 30 (€21/$26) on an ETA movement which, as part of a Swiss-made watch, will probably retail for several thousand francs. As the Swiss financial daily L’Agefi recently observed, the average price of a Swiss mechanical watch has increased 333% in 17 years whereas over the same period, ETA has increased its prices by 70% on a Valjoux 7750 calibre for example. Spot the difference! Furthermore, while no one can deny this price increase has come at a difficult time for the Swiss watch industry, Swatch Group’s own factories have also suffered the backlash of crisis, with attendant cancellations in orders. Nor has the Group any intention of compromising on its industrial capacity or cutting back on investment, resulting in a 77% drop in its Production division’s operating margin, to 6.6%. This hasn’t, however, prevented the group from forging ahead in consolidating its industrial resources, as the recent integration of the movement and parts manufacturer Frédéric Piguet into Blancpain, and Valdar into François Golay, shows.

Substantial volumes

Ultimately, this all comes down to Swatch Group’s dominant position, guaranteed to raise the heckles of any self-respecting competition commissioner. But in practice? According to Federation of the Swiss Watch Industry figures, last year the sector exported 3.7 million mechanical watches and 1.1 million movements. Add the 200,000 to 300,000 watches sold in Switzerland that year, and this gives total production of some five million Swiss calibres for 2009. Swatch doesn’t publish figures itself, but estimates put the Group’s share at between 55% and 70%. In other words, the multi-national produces between 2.7 and 3.5 million movements annually, 59% of which are used by the Group’s 18 brands (including the Enduro private label). This leaves 1.1 to 1.4 million calibres for the market. Swatch Group is also key to the supply of certain strategic components, particularly the regulating organ.

This is an unnerving situation for those watch firms – and there are many of them among the 400 Swiss brands – that limit themselves to assembling bought-in parts. These are the firms that outsource their entire production and invest more in marketing than manufacturing. Nicolas G. Hayek has made his feelings on this point quite clear. “It’s not a question of no longer supplying Patek Philippe or Rolex,” he explained at Baselworld. “However, we can no longer tolerate that the cost of entry to the market is so low. Anyone can launch a brand from scratch for a few hundred thousand francs. This goes against the interests of any industry.” What can Comco do? Answer in a few years!