As mechanical watch parts and movements become harder and more expensive to come by, Rob Corder considers what effect this will have on high street prices.
It is one of the enduring anomalies of the Swiss watchmaking industry that, while almost every major industry in the world is regulated to ensure greater competition between participants, Swiss regulators have demanded that two monopolies remain intact.
ETA SA, the movement maker of Swatch Group and most of its Swiss competitors, enjoys the sort of market share that would have most countries hounding them through the courts for restrictive practices. Its Swatch Group stable mate Nivarox, which makes precision mainsprings for mechanical movements, is even more dominant.
However, such is the dependence of the majority of Swiss watchmakers on the components produced by ETA and Nivarox, they have lobbied for more than a decade to ensure that the manufacturers never turn off their supply. Even colossally wealthy groups such as LVMH and Richemont will remain hooked on their output until they can build or expand their own component factories.
There would be a misconception to imagine that the ETA monopoly is jealously guarded by its parent Swatch Group. In fact, the group has been trying to wean other watchmakers off its movements for 10 years. Back in 2002, the late Swatch Group president Nicholas Hayek announced that it intended to stop supplying ébauches (the term of French origin for a watch movement without its mainspring, dial or hands) to any companies that were not owned by Swatch Group.
Hayek argued that it was vital for the long-term health of the Swiss watch industry that it begin to create its own mechanisms, but Swatch’s competitors successfully claimed that they would be driven out of business if they had to move immediately away from using ETA’s parts.
The Swiss Competition Commission (Comco) opened an investigation into the issues in 2003. Two years later it concluded – broadly – that both Swatch Group and its competitors were right. Turning off the ETA taps too quickly would indeed be detrimental to the health of the wider Swiss watchmaking industry, but forcing ETA to keep making everybody else’s movements indefinitely would stifle innovation, competition, and ultimately lead to stagnation.
In 2005, Comco ordered that ETA continue to supply movements at the levels of the time until 2008. Supply could then be reduced at an agreed rate by ETA to the competitors of Swatch Group.
The draw-down from 2008 to 2010 was only partially successful, so the SCC recalibrated the rules – effectively giving ETA’s customers more time to get their acts together. As things stand today, ETA is permitted to reduce supplies by 30% by 2015, 50% by 2017 and 70% by 2019. The supply of Nivarox mainsprings can also be reduced by 70% from current levels by the year 2023. However, even these revised deadlines look set to be missed and amended as part of an ongoing negotiation between Comco, Swatch Group and customers of ETA and Nivarox.
The end to this parts war may be in sight, according an article in the Financial Times in November. Comco spokesperson Patrik Ducrey said progress was being made following a consultation with 60 companies that use ETA and Nivarox components.
The results of this consultation, which remain confidential, were sent to Swatch Group in October, and could lead to a new roadmap being outlined as early as January.
Meanwhile, major Swiss companies have been preparing for life after the divorce (or a gradual separation) from ETA, such as Sellita SA, Switzerland’s second-largest manufacturer of movements, which is doubling the size of its production facility to help cater for brands left out in the cold.
Meanwhile Richemont Group’s Panerai, Vacheron Constantin and IWC are all expanding their production facilities, as is LVMH’s TAG Heuer. All are moving towards complete vertical integration of manufacturing capability.
By 2020, Vacheron Constantin will have increased its production capability from 18,000 watches to 30,000. While TAG Heuer will be capable of doubling production to 100,000 chronographs in house once a new 2,000sqft factory in Chevenez, Switzerland, opens at the end of this year. That output could rise to 150,000 in the future, according to TAG chief executive Christophe Babin.
IWC’s plans are a little further off. It will begin work on extending its production facility in Merishausen, Switzerland in 2015. The project is expected to take three years to complete, costing CHF25 million (£16.7m).
Zenith, another LVMH brand, has always manufactured its own movements, but has also invested in a major refurbishment of its historic headquarters that will allow it to boost capacity.
Analysts say recent price hikes for Swiss watches have been at least partly driven by brands passing on the cost of their infrastructure investment. These price rises have allowed the total value of watch exports to increase, even while volumes have fallen.
In October, for example, export volumes dropped by 3.4% to 2.7 million units, while the total value of exports rose by an impressive 13.2% to CHF2.1 billion (£1.4m). The value of exports for the most expensive watches – those typically housing the mechanical movements at the heart of the ETA issue – rose fastest of all, with timepieces costing more than CHF3,000 (£2,000) soaring by more than 17% in October.
A decline in the Swiss franc against the British pound since a spike in the summer last year has softened the impact of this price rise, but shop prices in the UK are still at historic highs for mechanical watches.
The direction of travel on this long-running saga is towards an inevitable point at which the Swiss watchmaking industry will operate off a wider base of component manufacturers. The growth of specialists like Sellita will be part of the solution, and will be added to the direct investment in skills and capacity by the major luxury houses.
There is broad consensus that this will lead to a healthier and more robust industry that continues to profit from the history of Swiss-made watches and its historic brands. The only question remaining is how long it will take, and what opportunities will be missed by the wider country’s industry in the mean time?
This article was taken from the January 2013 issue of WatchPro. To read the magazine online, click here.