* Makers of dials, cases are coveted takeover targets
* Swatch Group delivery cuts driving consolidation
* Independent brands with production units not for sale
By Silke Koltrowitz and Stephanie Nebehay
GENEVA, Jan 24 Luxury watchmakers are fighting
over too few parts makers in order to keep up with a booming
market and counter supply bottlenecks caused by industry giant
Swatch's decision to cut vital contracts to its rivals.
The market for high-end watches was worth more than $46
billion in 2012 driven primarily by Asian customers, but
competition is fierce. As top names try to keep up with orders
they have bumped into a big problem: too few high-end parts
suppliers and not enough investment in training.
"Everybody is rushing to get organised," Jean-Marc Jacot,
head of independent watchmaker Parmigiani which has its own
production unit, told Reuters at a watch fair in Geneva.
"For dials or cases you can buy an existing firm that works
smoothly. But for all the parts going into the movement (such as
balance-springs) there is nothing to buy. Nobody invested into
these skills," he said.
Swatch Group, the world's biggest parts supplier,
has a near-monopoly on the delicate balance-springs that make a
watch tick and the "movements", or internal mechanism driving
all the moving parts of a watch. It has said it no longer wants
to be the industry's "supermarket" and started cutting back on
deliveries last year, keeping more parts for its own brands,
which include Omega and Longines.
Swatch has asked Swiss antitrust authority Weko to work out
rules allowing it to cut back and eventually stop deliveries to
others without skewing the competitive landscape. Weko has
allowed Swatch to reduce deliveries in 2012 and 2013 and is
expected to announce before July how the company can entirely
phase out deliveries.
That has left other watch brands grappling with supply
shortages and searching for other high-quality suppliers to buy
in order to preserve the coveted "Swiss Made" label.
Among the brands most affected are the ones owned by the
world's biggest luxury group LVMH : Tag Heuer, Hublot
and Zenith. LVMH only diversified into watches in 1999 so its
production facilities are less developed than their peers'.
Richemont, the No.2 luxury group which owns some of
the world's most prestigious high-end watch brands, and
independent big names Rolex and Patek Philippe, have more parts
facilities and have also strengthened them by taking over some
suppliers. They nevertheless rely on Swatch for some parts.
Independent watchmaker Parmigiani, which is owned by the
Sandoz family foundation, split off its production unit Vaucher
in 2003 to allow it to also make movements for third parties
while still supplying Parmigiani. Handbag maker Hermes
bought a 25 percent stake in Vaucher in 2006 for 25
million Swiss francs ($26.92 million) to secure movements for
its watch unit.
Jacot said brands were queueing to buy parts from Vaucher,
which produces 25,000 movements a year for 17 brands. It does
not want to expand any further so as not to enter a competitive
battle with Swatch nor to sell movements to direct rivals.
Another big independent player in mechanical watch movements
is Sellita. It relies, however, on Swatch's balance-springs for
the movements it assembles. It has said it wants to develop this
skill itself but did not wish to comment for this article.
Swatch owns ETA and Nivarox, the biggest suppliers of
movements and balance-springs respectively. Swatch chief
executive Nick Hayek has warned in the past that rivals invested
too much in advertising campaigns featuring sports and movie
stars and too little in production.
Consolidation in the suppliers industry picked up in 2011
when LVMH acquired Swiss movement and watchmaker La Fabrique du
Temps and Hermes bought a stake in case maker Joseph Erard. The
same year, PPR bought a majority stake in Sowind
Group, including watch brands Girard-Perregaux and JeanRichard
and a watch movement factory.
In 2013, with no balance-spring makers to buy, takeover
activity is focusing on areas like dials, hands and any other
part that needs careful manual work.
"Dials are very coveted because they are very complicated to
make. You need many different skills to make a dial and, for
some of these, there are no apprenticeships any more," said
Andre Colard, who runs a watch supplier trade show.
Some bigger suppliers have already been bought but there are
still many small players. Dial maker Metalem and hand maker
Aiguilla are bigger independents that could become targets,
Vontobel analyst Rene Weber said.
Employers association CPIH estimates there were about
200-250 watch parts suppliers in 2011.
Deals so far have been mainly small, in the single-digits to
low double-digits Swiss franc millions, according to Exane BNP
Paribas analyst Luca Solca. "But leveraging companies costs very
little," he added.
Hermes bought dial specialist Natebar in 2012 and LVMH took
over ArteCad in 2011. Audemars Piguet now makes dials for its
flagship Royal Oak model itself after supply failures threatened
"We still buy dials for other models. There have been
important delivery bottlenecks in this area in the last two
years," said Audemars Piguet marketing head Tim Sayler, adding
company sales still grew to more than 600 million francs last
He said brands had to try to build skills internally for the
balance-springs, or set up long-term partnerships with the few
Howard da Silva, leader of consumer business at Deloitte,
cited speculation of some Swiss component manufacturers being
actively marketed for sale, but did not give any names.
Independent brands Parmigiani, Greubel Forsey and Audemars
Piguet, which all have their own production companies, said at
the fair they had received takeover offers but their owners did
not wish to sell.