How Swatch’s decision to stop supplying parts to competing watchmakers will affect the industry as a whole.
“The supermarket era is coming to an end,” says Swatch Group AG’s chief executive, Nick Hayek. The iconic Swiss watchmaker – which supplies a whopping 70 to 80 percent of the country’s mechanical watch movements – will begin in 2012 to reduce its supplies to competitors. “We do not want to be a supermarket, forced to deliver to everyone whatever they want,” explains Hayek, of the controversial decision. Swatch has struggled in recent years to meet the demand for parts of its own brands, such as Longines, Omega, and Breguet.
The decision came in December 2011, when a Swiss court overruled an attempt by a coalition of nine watchmakers to force Swatch to provide essential parts and movements under the Swiss Cartel Act. Swatch’s market position precludes it from unilaterally cutting off supplies.
The provisional agreement negotiated between Swatch and the competition authorities will start off modestly, with the company continuing to provide 85 percent of its 2010 levels for movements and 95 percent for other components. And despite Swatch’s urgings in recent years to other watchmakers to invest in their own manufacturing capabilities, many are saying that they will not have enough time to adjust to the sudden shortage.
As the highly valued “Swiss Made” label becomes all the more salient, who Swatch chooses to continue to supply is difficult to foresee. But the move will likely affect watchmakers and luxury brands quite differently.
“This is positive for Swatch and for large self-sufficient companies who can make their own mechanisms likes Rolex, Patek Philippe, and good for Richemont, which has a good relationship with Swatch,” explains analyst Jon Cox, with Kepler Capital Markets. For these established watchmakers, their market share may even increase, with small watchmakers being squeezed out.
“The companies should start to produce components themselves, and not rely on one source. They should invest, and that should create jobs and this will benefit the industry” assures Hayek.
Some of Swatch’s clients have followed Hayek’s words and exercised some foresight, such as Hublot of LVMH Moët Hennessy Louis Vuitton, which has pumped 40 million francs (US 41.9 million) into its own manufacturing capabilities. If all goes well, Hublot stands to profit nicely from reducing its reliance on Swatch components, as the company projects their in-house made watches will bring in 75 percent of its revenue by 2015, a vast improvement from the current 37 percent.
And while Swatch made entry into the watch market remarkably easy for the small players, this move might make their exit even swifter. Though some say sound supply chain management would have lessened the blow.
“This whole battle is a result of people completely underestimating the risk that at some stage Swatch could cut off rivals, which is a legitimate decision to make in a free market,” says former Swatch exec, Olivier Müller.
Legitimate or not, the legal battles have yet to be resolved. The Swiss Competition Authority will likely complete its full investigation into the matter in the second half of 2012. The authority’s Deputy Director Patrik Ducrey explains, “If Swatch wants to stop totally the delivery of components, our investigation is to look at how long does the industry need to arrange other production and other suppliers.”
As possibility that Swatch may completely halt supplies to rivals looms, the company is quick to assert that the point is not to eliminate competition but rather improve it.
“This will not be the end of the watchmakers,” says Hayek. “It will be the beginning of real watchmaking.”