October 25, 2013 4:42 pm

Swatch to phase out supplying key components to rivals

©Bloomberg

Switzerland’s competition commission will allow Swatch Group gradually to stop supplying rivals with key components, in a long-awaited move that could trigger consolidation across the Swiss watch industry.

Swatch has long been forced to sell movements – the mechanical heart of a watch – and other components, such as regulating mechanisms, to other watchmakers as a result of its near-monopoly on their production.

However, in 2011, it approached the commission, known as Weko, to see if it could phase out deliveries to third parties. Swatch felt it was being exploited by other watchmakers unprepared to invest in their own manufacturing capabilities.

After a previous deal collapsed earlier this year, Weko on Friday agreed to phase out Swatch’s obligation to supply its rivals with movements by 2020. However, it will still be obliged to supply other key components, such as regulating mechanisms, as the commission felt that the market could not yet cope with reductions in these.

Swatch welcomed the move as a “first, albeit tentative, positive step towards making it clear to all brands and groups . . . that they need to invest in their own components and bear the risks of production themselves”.

The group added: “This is not a luxury, but is necessary for the long-term development of the Swiss watch industry.”

Under the timetable, Swatch can next year cut supplies of movements to 75 per cent of its 2009-11 average, followed by further reductions to 65 per cent in 2016 and 55 per cent in 2018. Swatch will not be allowed to pick and choose which customers it supplies, but must treat all equally.

Jon Cox, an analyst at Kepler Cheuvreux, said that the decision was good news for Swatch as it removed some of the uncertainty surrounding its supply obligations.

For the likes of Richemont and LVMH, having to build up their own movement-making capacity will not be the end of the world. But for the smaller players it will be much harder

- Jon Cox, analyst, Kepler Cheuvreux

“Swatch has in effect been passively subsidising the Swiss watch industry since the 1980s,” he added. “That was probably necessary in the 1980s and maybe also in the 1990s, but it is not needed in the 21st century. In that sense this move was long overdue.”

However, for smaller watchmakers, Weko’s ruling is likely to be less welcome. Beyond a handful of big players, such as Swatch, Richemont, LVMH, Rolex and Patek Philippe, the Swiss watch industry is composed of numerous small, often family-owned groups, many of which lack the financial clout to develop their own movements.

“For the likes of Richemont and LVMH, having to build up their own movement-making capacity will not be the end of the world,” said Mr Cox. “But for the smaller players it will be much harder. I think we will see further consolidation.”

Shares in Swatch were down 3 per cent at SFr568.50 in afternoon Zurich trading.

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