SWGAY Swatch Group AG (PK)

Swatch Group AG (UHR.VX) said Wednesday it wants to be able to reduce its supply of watch components to competitors and focus instead on its own business.

The world's largest watchmaker supplies movements and parts to rivals in Switzerland through its manufacturing operations and controls 70% to 80% by volume of the sector's watch-movement production, according to investment firm Sanford C. Bernstein & Co.

But the margins on finished watches are far higher than on components, and Swatch has long since been trying to reduce its supplies to competitors to concentrate predominantly on the manufacture of its own watches.

Its dominant position in supplying the rest of the industry however is a major stumbling block to achieving this and means the company cannot unilaterally halt its supply to other companies, such as Compagnie Financiere Richemont (CFR.VX) and LVMH Moet Hennessey Louis Vuitton (MC.FR) without infringing the Swiss Cartel Act and potentially incurring substantial fines.

Swatch has therefore asked the Swiss competition commission to launch an investigation to allow it to reduce its supply of dials, movements and other parts 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.

The Competition Commission will speak to watchmakers in the next few months to determine the likely impact of Swatch's intentions, and is likely to report back in the second half of 2012, Comco spokesman Patrik Ducrey said.

Swatch has built up its manufacturing operations in recent years through investing heavily in its ETA manufacturing subsidiary, and has consolidated its manufacturing position by buying nine watch component makers since 2000.

But Chief Executive Nick Hayek told Dow Jones Newswires it is "insane" that the company is forced to deliver to most of its competitors.

"There is no industry in the world where one player should be obliged to sell the most important component to competitors. It's like BMW being asked to deliver an engine to all its competitors."

He said he did not want customers to use Swatch like a supermarket where they could pick and choose which components they wanted.

He said the company is willing to sell to competitors, but wants to choose who to sell to, rather than being forced to sell to third parties

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 he sympathized with Hayek's position.

"People come here with little capital investment and he has to supply them. If I was in his position I would be upset," Rupert said in May.

LVMH Moet Hennessey Louis Vuitton (MC.FR) uses Swatch Group components in its Hublot watches, so is also likely to be affected if Swatch halts supplies, although, like Richemont, it has been building up its in-house production capacity.

Biel-based Swatch, which numbers Tissot, Longines and Omega among its brands, has been experiencing a sales boom this year fuelled by soaring demand in Asia, and has suffered shortages of some parts.

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.

-By John Revill, Dow Jones Newswires; +41 43 443 8042 ; john.revill@dowjones.com

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