Though many brands have begun manufacturing in-house movements, such as the Caliber 04 GMT from Breitling, many still depend on Swatch and its subsidiary Nivarox for the more specialized components.

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New York--If the Swatch Group gets what it is asking for, it will set into motion a monumental and immediate shift in the mechanical watch supply chain that some observers say will impact production and drive up prices.

On June 8, Swatch Group made an official announcement that it had asked the Swiss Competition Commission (Comco/Weko) to begin an investigation into allowing Swatch to reduce compulsory supplies of movements and movement components to third-party companies.

The commission put interim rules into effect that allow Swatch Group to begin reducing supplies of mechanical ETA movements to 85 percent of their 2010 levels and of Nivarox assortments to 95 percent in 2012, three months from now.

The interim measures are under review by a Swiss appeals court, and a ruling is expected before the end of the year.

It’s a move that came as no surprise to industry players. Rumors have been circulating for years that Swatch, allegedly tired of supplying movements to companies that were pouring all of their money into advertising and marketing, wanted out of its role as the watch industry’s main movement supplier.

The potential speed of implementation, though, is shaking up the industry.

When contacted for this story, the watch industry’s major players--Moët Hennessy Louis Vuitton (LVMH), Tourneau, Movado, Rolex--all declined to be interviewed.

Only Swatch Group rival Richemont, whose brands include Jaeger-LeCoultre, IWC and Baume & Mercier, offered this statement, a comment Executive Chairman and Group Chief Executive Officer Johann Rupert gave on the sidelines of Richemont’s annual general meeting on Sept. 7.

“I have great empathy with Swatch. None of these people want to invest in their own plants. We invest, Swatch invests, Rolex invests, but there are others who don’t but expect to be bottle-fed by Swatch,” he said.

He went on to say that if Swatch reduces supplies, it will increase costs for watchmakers. This will compound pricing problems for an industry already aggravated by rising commodity costs and the strength of the Swiss franc, which makes the country’s products expensive for those using other, weaker currencies, including the U.S. dollar.

“We can live with that,” Rupert said, “but not all of our competitors can.”

The case
Sellita Watch Co. SA, a Swiss independent movement manufacturer that supplies a number of watch brands, was among the group of about eight companies that filed an appeal with Switzerland’s Federal Administrative Court seeking to freeze the interim measures applied by Comco.

A spokeswoman for the Federal Administrative Court said on Sept. 6, a judge issued an intermediary decision that the interim measures are still valid while the court makes a final decision. That decision is expected by the end of 2011.

Following this ruling, a few watchmakers withdrew their appeals, the spokeswoman said.

In an e-mail interview with National Jeweler, Sellita President and CEO Miguel Gracia said that back in 2003, Comco granted Swatch Group permission to begin tapering off and eventually stop its deliveries of so-called “ébauche” kits--a set of all parts required to assemble a mechanical movement without the Nivarox assortment (the hairspring, balance wheel, anchor and anchor wheel)--and deliver finished movements as a replacement for the reduction of the kits.

Gracia said the reduction and eventual halt of supplies from Nivarox was never part of the discussions when they began eight years ago, and his company poured resources into developing ébauche kits, as it still was counting on assortment supplies from Nivarox.

Now those supplies are in jeopardy. Gracia said without Nivarox, the only company in Switzerland that produces assortments in volumes, his company will experience a 40 percent net reduction in movements they can offer to customers in 2012. “This will put us in big trouble as we do need--and we have counted on--the deliveries of Nivarox,” he said.

He also points out, quite astutely, that the reductions are based on 2010 production levels, a year in which the watch industry was struggling to get back on its feet following the financial crisis and order levels were low.

“Our goal is to be granted enough time by the Federal Administrative Court and by Comco to develop our own assortments and implement the structures required to ramp up production in the coming years to match the production of our movements and to offer the watch industry a real alternative to Swatch Group,” Gracia said.

In the meantime, though, the company is speeding up development and production plans for assortments. He said the company’s goal always has been to eliminate its dependence on the Swatch Group.

It was just not prepared to have to meet this goal so quickly.

“We’re talking many years of work ahead of us to gain this independence from Swatch Group in our ‘best-case scenario,’” he said. “It is not a question of three to four years but more likely 10 to 15 years.”

‘Not very happy’
Swatch’s desire to begin reducing supplies as soon as next year also isn’t sitting well with many of the watch brands.

“The way it is going now is not making us very happy....A lot of the independent brands are not very happy with it,” said Ralph Simons, global commercial director for Frederique Constant.

Perrelet CEO Fausto Salvi expressed a similar sentiment, noting that while they were not surprised by Swatch’s announcement, they didn’t expect the new rules to be applied so “quickly and radically.”

Prodded in part by the realization that Swatch Group would eventually halt supplies, Frederique Constant launched an in-house movement in recent years and now has a total of three, the latest version being the FC 938. “We had a feeling the way the industry was working could not go on forever, with one supplier of movements to all the brands,” Simons said.

Creating an in-house movement also gave Frederique Constant the opportunity to flip the movement so the balance wheel could be seen through the aperture on the watch’s dial for the “Heart Beat” collection, as seen here in the new “Heart Beat Manufacture GMT Automatic” with FC 938 movement.

He said watches with in-house movements account for 15 to 20 percent of the brand’s sales, and the goal is to increase that share to 25 to 30 percent in the coming years.

Frederique Constant also has been sourcing movements from Sellita for about 18 years, making it less dependent on Swatch Group than other companies. Still, the brand faces the same gap in the supply chain, or “choke point,” as it was described by one industry insider: the hairsprings and mainsprings supplied by Swatch Group/Nivarox.

Soprod SA, another independent manufacturer of movements that is owned by Miguel Rodriguez, who also owns Perrelet, has developed a movement that is produced 100 percent in house, including the mainspring, Salvi said. It’s a movement that’s been in development for the past five years and will power Perrelet watches in 2012. (Soprod did not respond to interview requests for this story.)

But it’s not enough for all the brands that depend on Swatch Group supply.

“I am not really allowed to talk about that subject,” said Simons when asked what the Frederique Constant plans to do to fill in the gaps in the supply chain. “We have a few things lined up but we want to keep that to ourselves for now. It’s definitely something we are preparing ourselves for right now.”

The price question
With the final ruling on Swatch’s interim measures still hanging in the balance, watch companies are hesitant to discuss the sticky issue of price.

“This is hard to say as we need to await the ruling to be able to determine the possible impacts on our pricing,” Gracia said.

“It’s a little bit tough to forecast this,” Simons said.

Frederique Constant raised prices once this year, in the 5 to 8 percent range. Simons said some of their competitors raised them twice.

While rising commodity costs and the looming Swatch issue likely will push prices up again next year, “what counts is that our prices stay competitive compared to our direct competition,” he said.

The brands do agree on one topic though: these watches they are producing with in-house movements are decidedly more expensive due to the research and development the brands have had to pour into creating their own movements.

As Breitling U.S.A. President Thierry Prissert puts it, “Independence has a price.”

At BaselWorld this year, Breitling introduced the “Chronomat Caliber 04 GMT.” The 04 GMT is the brand’s second in-house movement.

At the end of 2004, Breitling began research and development on its first in-house movement and was able to bring the “Chronomat Caliber 01” to market by 2009, said. The Caliber 01 was followed by the “Chronomat Caliber 04 GMT.”

The company plans to eventually outfit 100 percent of their watches with in-house movements though Prissert could not provide a firm date for when the transition would be complete. “That’s a goal but that’s not going to happen by 2015,” he said.

While the brand’s watches equipped in-house movements are more expensive than its models with outside movements, Prissert, like Simons, maintains that Breitling is competitive when compared to similar brands with in-house movements. 

“It’s a different price point with the brand because it’s a different price point when you have to have an in-house caliber,” he said. “[But] the value is very good.”

The challenge, he said, comes in explaining to the end consumer why the watches with in-house movements cost more than other timepieces.

Simons said for Frederique Constant, watches with in-house movements start at $2,750, making it among the most expensive watches the company produces but still “very accessible” compared to other brands.

He shrugs off the idea that price increases, whether they are due to outside costs, sourcing changes or the development of in-house movements, will hurt sales across the board for watches going forward.

“You cannot say that as a generic statement because it really depends on the brand and the strength of these particular brands. Very strong brands can afford to increase their prices very easily,” Simons said. “I am sure some brands will be hurt by it if they don’t really have a solution for these movement issues.”