When the rise of japanese movements threw the swiss into crisis in the 1980s, Swatch Group stepped in to save the day with huge investment in manufacture, thus building a near monopoly. Now after 20 years’ of warnings it is reducing deliveries of movements and components to third parties. is this a move that will crush the competition or force innovation? Rachael Taylor reports.
Swatch Group was widely credited with saving the Swiss watch industry from the onset of Japanese manufacturers offering cheaper solutions in the 1980s, but now it seems it could be set to do the reverse as it cuts off the lifeblood of the industry it saved by reducing supplies of its movements and components to other brands.
Swatch Group is undoubtedly the majority provider of finished movements and components to the Swiss watch industry through its subsidiary companies including ETA and Nivarox, but Swatch Group says it is fed up being the only group willing to invest in movements.
Since the late 1980s Swatch Group leaders, including the late Nicolas Hayek Snr and his son Nick Hayek Jnr, have been warning Swiss watch brands to start making their own movements and last year in an interview with The Wall Street Journal, Hayek Jnr put it flatly: “We do not want to be a supermarket, forced to deliver to everyone whatever they want.”
Swatch Group is a huge business with annual sales in 2011 of CHF7.143 billion (£4.87bn), however the differences in revenues gained from finished products versus sales of components is vast. Finished watches and jewellery accounted for 88% of net sales in 2011 while its production division contributed just 7%.
Finished product is starkly the money spinner for Swatch Group, not production, so it is easy to see why the company would be happy to sacrifice sales of components and finished movements to non-Swatch Group brands in exchange for increased competitiveness in finished product. After all, its customers on the production side of the business are its competitors in finished product. Other motives that the Swatch Group gives for its plans are that its components and movement blanks, known as ébauches, have in the past ended up in the hands of counterfeiters. It also believes that it cannot offer as stringent quality control assurances on movements accredited to it when they are being assembled outside of the group. It also brings up cases of watch houses buying in its components, assembling them and then passing them off as exclusive movements made in house.
But, unfortunately for Swatch Group, plans to snap up manufacture businesses and then close off access to other companies has not been a smooth ride, and in 2002 an investigation was launched into the business practices of ETA, a major manufacture owned by Swatch Group that produces quartz watches, hand-wound and automatic ébauches and movements.
ETA can trace its roots back to 1793 and the founding of Fabriques d’Horlogerie de Fontainemelon, and over the years it has swallowed up a number of other companies – Valjoux, Peseux and Lemania to name a few – to become the largest single manufacturer of Swiss watch movements and components.
The prominence of ETA in the Swiss industry meant that flags were raised when Swatch Group revealed its intentions to discontinue its supplies of ébauches and components to third parties as of January 2006, after which it planned to only sell finished movements to non-Swatch Group brands. Two ETA customers complained and subsequently an investigation was launched by the Swiss Competition Commission.
The investigation into what was at the time dubbed ETA’s monopoly over the industry lasted nearly three years. Eventually the parties settled on an agreement that meant Swatch Group would postpone cutting off supplies until 2010, giving watch houses the chance to make preparations.
Now Swatch Group is back under the microscope of the Swiss Competition Commission once again, but this time it was at Swatch Group’s request. In June last year the regulatory body announced that it was once again investigating the company. At the time Swatch Group released a statement that read: “This investigation was initiated by Swatch Group and should determine which mutually agreed solution is available to allow Swatch Group to reduce gradually its deliveries of mechanical watch movements and assortments to third parties, in the interest of the entire watch industry.”
The investigation is still underway and is expected to take until the end of this year to complete, but in the interim the Swiss Competition Commission announced that it would allow Swatch Group to begin reduction of its supplies. The group has used 2010’s production figures as a guide and has now been allowed to reduce its deliveries of mechanical movements to third parties by 15%, reduce deliveries of components by 30% and reduce deliveries of escapements by 5%.
Swiss watch brands outside the Swatch Group were outraged at the decision, including Frederique Constant chief executive Peter Stas, who took to his blog to make his feelings on the subject known. “In the Western world, when a monopolistic stakeholder decides to cut supply, antitrust authorities protect smaller players, giving them time to organise themselves,” he wrote. “However, in this case, the Comco [Swiss Competition Commission] immediately awarded the Swatch Group an ability to reduce deliveries up to 30%. So, do independent watchmakers have to give up? Certainly, a number of smaller manufacturers will be forced out of business.”
Stas went on to note that, fortunately, his business is large enough to develop its own movements, something that it has been pursuing since 2001 when it began development of its first manufacture calibre in collaboration with École d’Horlogerie de Genève, École d’Ingenieurs de Genève and the Horloge Vakschool Zadkine. The brand has since gone on to produce others.
TAG Heuer is similarly a brand that has invested in setting up its own manufacture after taking heed of the warnings from Swatch Group. Three years ago it started work on developing its own chronograph movement, the Calibre 1887, something that has cost the LVMH-owned brand millions of Swiss francs in development costs. It is also ploughing about CHF25 million (£17m) into the development of a new factory, work on which is due to start this month.
Despite these preparations, TAG Heuer was still hit hard by Swatch Group’s actions. The trickiest component to master in watchmaking is the escapement and previously TAG Heuer had been buying in the regulator escapement for its Calibre 1887 from Swatch Group-owned Nivarox, but in June last year is was served with six months notice that supplies would be stopped.
This bombshell sent ripples through the Swiss watch brand, says TAG Heuer vice-president of communication Françoise Bezzola, as it scrabbled to find suitable alternative arrangements. “We had no time to put together facilities and produce the escapement, which is very difficult because of the spiral,” she says. “It was impossible to put it together in six months, so the first thing we did was to look for internal solutions in Switzerland.”
This, however, proved to be a fruitless search. The independent watchmakers capable of doing the work couldn’t handle the volumes, and the watchmakers that could were owned by Swatch Group, therefore the watch brand had to take a controversial step – it struck up a partnership with Seiko Instruments Incorporated (SII).
Japan has become a dirty word in Swiss watchmaking circles after the rise of its watch industry in the 1980s nearly toppled that of the Swiss, but Bezzola says that TAG Heuer had no other choice.
One of the main resistances against working with Japanese producers is that brands can lose the Swiss Made tag that is still closely linked in consumers’ minds with quality assurances, but this is not the case for TAG Heuer. It is using five components in its Calibre 1887, out of a total of 320, that are made by SII and so is well within the rules of Swiss Made that state that 60% of a movement should be made in Switzerland.
“The movement is still Swiss but you have a lot of people here in Switzerland that are rigid,” says Bezzola. “In the 80s the Japanese brands nearly killed the Swiss watchmaking industry so you have a lot of reminders here in Switzerland and they see Japan as the devil.”
While as Bezolla says many Swiss brands have reservations about working with Japanese companies, they may soon have no choice. “SII were the only one to provide us with high quality movements,” she says. “On one side you have Nivarox stopping delivering the parts then ETA stop delivering the finished movements. If you start doing your own production, what do you do? You cannot ask ETA for more movements as they are reducing from year to year.”
Oris has similarly made the jump from ETA movements and is instead working now with Selitta, one of the larger independent movement makers in Switzerland and one of ETA’s few serious competitors. Like TAG Heuer, Oris had been listening to the warning klaxons delivered by the Hayeks and its move over to Sellita has been five years in the making.
“Swatch has now begun to restrict ETA unless you come into the group and we have no intention to do so,” says Oris UK sales manager Paul Thurlow. “We have been preparing for this for five years so we’re ready for it. We are a fully independent company and we intend to stay so.”
While Sellita and Oris have struck up a mutually satisfactory partnership, finding an independent Swiss manufacture that can produce the size and scale that brands have been used to getting from Swatch Group’s companies, and at the margins they’ve been used to making on finished product, is going to be tough.
Brands with limited runs and high price tags should have no problem finding independent Swiss workshops to source from, but the middle market will suffer – watch brands with high volumes but lower prices that need to stay competitive on margins. These brands have some tough choices ahead – invest huge sums of money in developing Swiss manufactures, move to Japanese movements and lose the Swiss Made tag, or drop out of the market altogether.
As Swatch Group moves closer to its long-held goal to pick and choose which brands it supplies, the Swiss watch industry is steeling itself for another period of turbulence and change that will make or break its brands.
NICOLAS HAYEK SNR. ON REDUCING SUPPLIES
“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 centers, 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.
"The major traditional Swiss watchmaking brands who have their own manufactures, and who are traditionally supplied in part by us, agree with us on this point and support and encourage us in our actions. We have therefore commenced discussions with the appropriate Swiss authorities to correct this obligation to deliver to everyone.”
This article was taken from the May 2012 issue of WatchPro magazine, out now. To subscribe to WatchPro magazine for free click here.