UPDATE: Swatch Seeks To Reduce Supplies To Other Watchmakers
June 08 2011 - 3:48AM
Dow Jones News
Swatch Group AG (UHR.VX) Wednesday said it had asked the Swiss
competition commission to launch an investigation aimed at allowing
it to reduce its supplies of components to other Swiss
watchmakers.
"This investigation ... should determine which mutually agreed
solution is available to allow Swatch Group to reduce gradually its
deliveries of mechanical watch movements and assortments to third
parties, in the interest of the entire watch industry," Swatch said
in a statement.
Swatch, the world's largest watchmaker, supplies movements and
other parts to rivals in Switzerland through its manufacturing
operations. In terms of volume, Swatch controls 70% to 80% of the
sector's watch-movement production, according to a research study
published last month by the investment firm Sanford C. Bernstein
& Co.
"People assume that it's a good business to sell components, but
the only really attractive business is to sell finished products of
our brands," Chief Executive Nick Hayek told the New York Times in
May.
"We are in a ridiculous situation that would be like having BMW
supply all the engines for Audi and Mercedes. In no other industry
do you have one company supply all the critical parts to the people
who then compete directly with it."
The Biel-based manufacturer, which numbers Tissot, Longines and
Omega among its brand, has been experiencing a sales boom this year
fuelled by soaring demand in Asia, and has suffered shortages of
some parts, particularly hands.
Swatch Group, which in February reported record revenue and
profit for 2010, is facing an exceptional situation this year, with
strong demand for all of its brands including the ultra-premium
Breguet.
CEO Hayek said in May he wanted to add up to 2,000 employees
this year to his 25,000 strong workforce and expand factory
capacity to increase production.
"We want to increase the capacity for cases, hands, and bezels.
We need extra production lines just to meet the demand, there is a
lot that needs to be done," Hayek said in March.
His position has earned some sympathy from other watchmakers in
Switzerland.
Compagnie Financiere Richemont SA (CFR.VX), which makes watches
under the Piaget, Cartier and IWC brands, receives around half of
its components from Swatch.
Richemont Chief Executive Johann Rupert said the Swiss
government had the best intentions when drafting regulations to
make Swatch supply parts, but it had suffered unintended
consequences.
"The pressure brought to bear on Hayek to supply everyone is
unfair," said Rupert in May.
"People come here with little capital investment and he has to
supply them. If I was in his position I would be upset."
Analysts expect LVMH Moet Hennessey Louis Vuitton (MC.FR)also to
be affected. The company, like Richemont, has been building up its
in-house production capacity but still uses Swatch Group components
in its Hublot watches.
Claudia Lenz, analyst at Bank Vontobel in Zurich, said for two
years the Swatch management has wanted to reduce the supplies to
third parties.
"They need more capacity for their own brands, but since they
have a market share of around 70% in movements and assortment they
have to supply third parties," Lenz said.
Sales of components to third parties were 51% of Swatch's
production division revenue in 2000, which had been reduced to
32%.
Lenz said: "I think this will take some time. Swatch will want
to gradually reduce the numbers of components it supplies."
Swatch shares closed Tuesday at CHF403.2. The stock has lost
3.3% in value since the start of the year.
-By John Revill, Dow Jones Newswires; +41 43 443 8042 ;
john.revill@dowjones.com
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