Swatch Group supply cuts start to hurt watchmakers

Wed Jan 18, 2012 1:26pm EST

* High-end brands say they can cope with movements shortage

* Swatch Group reduces deliveries from this year

* Search for alternative suppliers behind the scenes

By Victoria Bryan and Caroline Copley

GENEVA, Jan 18 (Reuters) - Swatch Group's decision to lower watch part supplies to rival watchmakers this year has already impacted the industry, forcing some brands to hold back production and others to scramble for alternatives, executives told a fair this week.

The outlook for 2012 might be more gloomy than it was for 2011 but the Swiss watch industry is enjoying record demand, having recovered much faster than expected from the 2008/2009 downturn, putting unprecedented pressure on its production base.

Swatch Group has for decades served as the industry's "supermarket," to use its own words, with its ETA unit providing as much as 80 percent of Swiss movements and its Nivarox arm dominating the market for escapement and oscillating parts, which make up the heart of a watch's mechanism.

In 2011 Swatch's production unit, which supplies the industry's watch parts, had sales of 2 billion Swiss francs ($2.12 billion).

Since Jan. 1, Swatch Group is able to lower deliveries of watch parts to rivals to ensure that it has enough supplies for its own brands such as Breguet, Omega and Longines.

The move was approved in Dec. by Switzerland's Federal Administrative court, pending the outcome of an investigation by competition authorities.

Many brands at the Geneva watch fair, the luxury industry's first gathering in 2012, said they were confident they could cope with Swatch Group's decision, pointing to good relations with the group, but others hinted of tough times ahead.

LVMH brand Tag Heuer's Chief Executive Jean-Christophe Babin said on Wednesday that Nivarox had stopped supplying the brand starting this year.

"At least things are clear ... The contract has not been renewed," Babin said. In the short-term, he said the brand was fine as it had stock but it was in talks with alternative suppliers.

High-end watchmaker Girard-Perregaux, majority-held by PPR since last summer, is having to turn away watchmakers who want to buy its in-house movements.

"We have quite a high number of enquiries, just knocking on the door and asking for movements. Most of them, if not all of them, we have to tell 'no' for the moment," Chief Executive Stefano Macaluso told Reuters in an interview at the fair.

Like almost everybody else, the brand, which only makes about 10,000 watches per year and supplies movements to PPR's Boucheron and Bottega Veneta, gets its escapements from Nivarox.

"We produce quite a limited number of watches every year so (the reduction of deliveries) will not affect us. We have a very good relationship with Nivarox," Macaluso said.

If some small exclusive brands can find alternative suppliers because they need small quantities and command high retail prices, others have to make heavy investments and take on staff to cope with the shortage.

Richemont brand IWC's Chief Executive Georges Kern told a roundtable of journalists the brand was investing 50,000 Swiss francs to add 25,000 square metres to its production site in Schaffhausen in northern Switzerland but still could not keep up with demand.

"We cannot produce enough," Kern said at the Geneva watch fair, adding the new site should be up and running in 2014 or 2015.

Upscale watchmaker Parmigiani, controlled by the Sandoz foundation, is one of the few to make its own spirals.

"We make about 20,000 spirals per year. They are more expensive than those made by Nivarox because we have to amortise our investment and also because they are of very high quality," Parmigiani head Jean-Marc Jacot said.

MASTERING TECHNOLOGY

Kepler Capital Markets analyst Jon Cox said he assumed the market needed 8.2 million movements in 2012 and Swatch Group could hold back delivery of 1 million. He expects market growth to slow to 5 percent this year from almost 20 percent in 2011.

Juan-Carlos Torres, chief executive of Richemont's Vacheron Constantin, said the 250-year old brand was working to replace parts from Swatch Group by in-house production.

"We do not have ETA movements in our watches. What we lack are spirals, anchors and anchor wheels. We are working to make spirals in-house with the help of the Richemont group," he said. "It's a question of mastering technology."

The brand plans to almost double its headcount to 1,300 people from 700 currently by 2020, Torres said.

Bernard Fornas, head of Richemont's biggest brand Cartier, said the brand was increasing investment in production each year but a good relationship with Swatch Group was essential.

"We make a lot of movements ourselves. There are some movements that we buy from ETA. I think that we now have a good mix of what we do in-house and what we buy in," Fornas said.

Long-standing ETA and Nivarox customers like Cartier might indeed have nothing to worry about as Swatch Group is free to maintain its deliveries to them.

Swatch Group Chief Executive Nick Hayek has made it clear that he no longer wants to have to supply movements and parts to everybody and wants to be able to choose his customers. LVMH brands such as Tag Heuer, Zenith and Hublot appear to be top targets. ($1 = 0.9436 Swiss francs) (Additional reporting by Nathalie Olof-Ors; Writing by Silke Koltrowitz; Editing by Jon Loades-Carter and Astrid Wendlandt)

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