Thursday, 25 February 2010

China could benefit from Swatch threat to halt component supply

Swatch Group’s plan to stop supplying rivals with key components threatens the “Swiss made” seal on which the industry rests and could force watchmakers to source from Asia, notably China, or simply go out of business.

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Guanyu 道 said...

China could benefit from Swatch threat to halt component supply

Reuters in Zurich
24 February 2010

Swatch Group’s plan to stop supplying rivals with key components threatens the “Swiss made” seal on which the industry rests and could force watchmakers to source from Asia, notably China, or simply go out of business.

Industry experts believe Switzerland’s watch brands have become too dependent on Swatch Group and have not invested enough in engineering, preferring instead to splash out on marketing campaigns featuring famous sports stars and actors.

“It is clear that a tightening of the supply market coupled with the need to redefine the business model could turn a few brands to quick and cheap sourcing alternatives in East Asia,” said Pierre Landolt, chairman of the Sandoz Family Foundation, which is behind high-end watch brand Parmigiani Fleurier.

“Watchmaking is one of the few global markets where Switzerland enjoys a position of leader. And the label ‘Swiss made’ is an essential reason for this,” he said.

Swatch Group said in December that it wanted to stop supplying the rest of the watch industry with important parts, broadening a move taken a few years ago to cut deliveries of watchmaking kits, also known as ebauches, from 2011 onwards.

Chief executive Nick Hayek accuses some watchmakers, without naming them, of being hollow brands that invest little in the craft and spend millions on ad campaigns.

“We want to stop this supermarket attitude,” Hayek said. “Some players have preferred to just invest in marketing and not in the most important thing, which is the content of the watch.”

Some experts say the threat from Swatch group, which owns brands such as Omega, Breguet and Blancpain, is aimed in part at large rivals like Tag Heuer, one of the industry’s biggest ad spenders whose campaigns have featured sports stars such Maria Sharapova and actors such as Leonardo DiCaprio.

Tag Heuer declined to comment on the matter.

Tag Heuer recently had to admit that it had bought the intellectual property for its first in-house movement from Seiko Instruments Incorporated. But it stressed the movement had been re-engineered by its staff and produced in Switzerland.

Watch movements consist of a few key parts including the winding and setting mechanism and the mainspring.

To get the “Swiss made” label, the assembly work on the movement and on the watch itself has to be carried out in Switzerland, with at least 50 per cent of the components of the movement made locally.

Analysts said such a move from Swatch Group would hit its profits and make life difficult for other watchmakers but thought it unlikely the group would go through with its threat.

“I don’t really believe that he will go through with this. All companies that do not have their own movement production will have a problem as there are not a lot of players around who can supply watchmakers with movements,” said Vontobel analyst Rene Weber.

“For example, Breitling, Tag Heuer and some of Richemont’s brands still depend a lot on Swatch Group. If Hayek were really to go through with this, it would have a short-term negative impact on earnings,” he said, adding that such a move would need a very long transition period.

Swatch Group’s manufacturing unit ETA, formed from a number of independent factories set up at the end of 18th century, is the lifeblood of the whole Swiss watch-making industry. It makes movements fitted in about 80 per cent of Swiss watch brands.

Some watchmakers said they could already get many dials, movements, hands and other parts from China that could be as much as five times cheaper than Swiss-made components.

In China, replicas of ETA movements are already available.