A ruling by the Swiss competition watchdog is set to prolong a bitter battle among watchmakers over the delivery of moving parts, with Swatch Group, vying for domination of the luxury market, determined to take advantage of its monopoly.
In rejecting an agreement reached between its own secretariat and Swatch Group that would have allowed deliveries of watch components to tail off in stages, the Competition Commission last month sided with the group’s competitors who claim they cannot source yet essential mechanical parts from a supplier other than Swatch Group.
Pierre-Yves Donzé, an expert on the Swiss watch industry, author of a book on the history of Swatch Group and professor of economic history at Kyoto University gives swissinfo.ch his take on the reasons behind the dispute.
swissinfo.ch: What should we read into the dispute between Swiss matchmakers over the delivery of components for mechanical watches?
Pierre-Yves Donzé: We are at the heart of a war that has seen the biggest watchmakers face off for over a decade, and which is set to continue. For almost 20 years, Swatch Group did not really profit from its inherited monopoly in any more than a general sense (see box). But the upheaval which transformed the industry in the 1990s and led to the development of the luxury market changed the situation.
By positioning itself in the luxury market, notably with the acquisitions of Blancpain and Breguet, and through the repositioning of Omega, Swatch was able to increase its turnover considerably. At the same time, large competitors such as Richemont (Cartier, Vacheron constantin) and LVMH (TAG Heuer, Zenith, Hublot) established themselves in the space of a few years as powerful players in the luxury watch market. From then on, Swatch Group’s competition no longer came solely from Japan (Seiko, Citizen), but also from within Switzerland.
The monopoly over the production of mechanical movements and individual pieces now represents a major advantage for Swatch Group. So it’s logical that the group is reluctant to deliver parts to competitiors. But the competition commission’s decision is understandable; it gives the industry time review its position.
swissinfo.ch: Is there a link with the public debate surrounding the «Swiss made» label?
P-Y.D.: It is exactly the same logic. For Swatch Group, increasing the number of components manufactured in Switzerland from 50 to 60 per cent was a means of consolidating its position in relation to the other groups, who were unable to dispute the move publically for fear of being ostracised by the industry.
swissinfo.ch: With the launch in April of its new, entirely automatic movement Simstem51, Swatch wanted to demonstrate that it is possible, in the space of two years, to design and produce a new mechanical piece that is 100 per cent «Swiss made».
P-Y.D.: The conception of Simstem51 is explained by the fact that Swatch Group, the only Swiss watchmakers also present in the mass and middle markets with brands such as Tissot, Swatch, Calvin Klein and Longines needed an effective industrial tool that could generate economies of scale. It cannot afford to rest on its laurels in such an ultra-competitive industry. And it has also manufactured quartz movements overseas (therefore not «Swiss-made») for the global market.
swissinfo.ch: Was the head of Swatch Group, Nick Hayek, wrong when he said too many watchmakers in recent years have simply benefited from the cash cow that is «Swiss made» without investing enough in research and development and effective industrial tools?
P-Y.D.: Swatch Group’s large competitors have, in theory, the financial means to manufacture components, notably the famous spirals (springs which ensure a watch’s precision) that are not very difficult to produce. But some of them have neglected to invest in their production facilities.
Ironically, brand advertising by watchmakers almost exclusively focuses on technological innovations in watch movements when in fact innovation is very rare. What should prevail is not necessarily the innovation, but the means to be independent.
swissinfo.ch: In the medium term, will the turning off the tap by Swatch Group result in increased industrialisation in Switzerland or a delocalisation of production of components for Swiss watches to other countries?
P-Y.D.: Manufacturing watch movements is a sensitive issue because it goes to the heart of Swiss know-how. That said the globalisation of Swiss watchmaking is already a reality. Over the last 15 years, imports of separate moving parts have increased while exports have stagnated. That means that foreign parts are more and more present in every Swiss watch.
Thai and Chinese companies are capable of manufacturing movements of the same quality as those produced by ETA, the industrial arm of Swatch Group. TAG Heuer is now sourcing its spirals from Seiko.
You also have to remember that only the movement and the final assembly are concerned by «Swiss-made». The watch design is not protected by the Swiss label even though it is an essential element of a luxury product. Almost all the form, the face and the bracelets of Swiss watches are manufactured internationally, essentially in China.