Industry trends

Commentary: The Swatch Group strikes back, act five

The Swatch Group’s handling of their supply of movement has had more drama than a soap opera. In the long run, I think that this 5 acts telenovela might only have caused harm to the Swatch Group.

Nick Hayek, CEO of the Swatch Group

Nick Hayek, CEO of the Swatch Group. Image credit Severin Bigler. Reproduced under Fair Use/Fair Dealings

ACT I - If Your Friends Are Close, Your Enemies Are Closer

In the early 2000’s, the Swatch Group was in a dominant position. They had a portfolio of brands with a strong equity (Omega, Longines, Rado, Tissot), and they were supplying most of the industry in movement blanks and in complete movements from ETA, Valjoux, Peseux, Unitas and Lemania.

If you are familiar with scale models, movement blanks are the equivalent of scale model parts: you get them in the same coarse machines finishing as everyone else, but it’s up to your level of skill, patience and effort how nice the finished product will look.

Eterna watch movement production

Eterna watch movement production, image credit Don Corson

The challenge with movement blanks is that you have to maintain heavy machinery in your plants to produce them, with the moulds needing replacement after several thousands of runs. The rising demand that came with the industry revival at the turn of the 21st century meant that the Swatch Group had to incur heavy investment into new machinery to keep up.

It turns out that Sellita, one of ETA’s client/suppliers, was managing to sell complete movements made with ETA blanks, for less than what ETA was charging. The Swatch Group felt that enterprises like Sellita were competing on uneven ground, since they did not have to worry about investing in heavy machinery like the Swatch Group did.

So the first glove slap by the Swatch Group was to announce in 2002 that they would phase out the supply of blanks, which would undercut Sellita’s sales of complete movements, and force third party clients back to the ETA waiting queue.

slap contest

To make matters worse, ETA kept raising prices as new investment expenses popped up, but they could not do more to prevent the lead times from stretching from 6 months to 12, if not 18. They might also have tried allocating movements in priority to “loyal customers”.

All this fuss made several significant clients unhappy, and they banged at the door of the COMCO (the Swiss anti-monopoly commission) to ask for an inquiry into monopolistic practices.

ACT II - Move Along, There’s Nothing to See Here

This caused the ire of Nicolas Hayek Senior, who was still alive at the time. In his eyes, how dared those ingrates bite the hand that was supplying them with movements? In 2009, he announced his intention to also phase out the delivery of complete movements, which triggered a full investigation by the COMCO.

Since most of the patents on ETA movements had fallen into public domain, the Swatch Group didn’t seem to mind having other companies base their movements on it. So, almost as a dare, they invited competitors to come up with their own movements, even if these were based on expired ETA IP.

After a lengthy investigation, the COMCO concluded in 2012 that the Swatch Group did not have a monopoly. Afterall, there were alternatives such as Ronda, ISAswiss and Soprod when it came to quartz movements, and if a brand needed three hands mechanical movements, there were a few factories that could deliver movements, although not for the same price or in the same volumes.

By 2013, the COMCO sat down with the Swatch Group and the plaintiffs to agree on a timeline of the phasing out. This ultimately ended up pushing a lot of disgruntled ETA customers into the arms of Ronda for quartz movements and Sellita for mechanical movements. These two companies could not have dreamed of a better opportunity. If there is a thing such as burning bridges, the Swatch Group obliterated the bridges with their former clients with dynamite.

Blown up bridge

Blown up bridge. Image credit Associated Press. Reproduced under Fair Use/Fair Dealings

When we consider that Japanese enterprises such as Citizen Holdings and the Seiko Corporation sell almost 10 times more movements than complete watches, it begs the question as to why the Swatch Group isn’t happy with selling more movements.

ACT III - If the Milk Turns Out to Be Sour

Having worked within the Swatch Group during those big strategic shifts, I almost felt that the strategy was to squeeze brands from the bottom, and that the Swatch Group was a bit too naively hoping that it would be able to absorb the yearly volumes of complete movements by selling more of their existing brands.

So during that time, Sellita worked hard to give itself the machinery and tooling that would allow it to meet this overnight demand. It also helped that in 2017 Sellita managed to hire Dr. Sébastien Chaulmontet, a lawyer turned business horological innovator, who had been instrumental in shaping LaJoux Perret and Graham into what they became before their acquisition by the Citizen Holding.

Before the arrival of Dr. Chaulmontet, Sellita’s catalogue featured dopplegängers of ETA mechanical movements. It made sense, since they were reverse-engineered on original ETA patents. However, within a few years, Sellita started to offer layout variations of its core movements, and they now have a broader catalogue than what ETA ever had.

So over the last decade, we saw a major industrial shift, from a reality where ETA was the leading supplier of quartz and mechanical movements, to a reality where Ronda has become the leading supplier of quartz movements, and Sellita has become the leading supplier of mechanical movements.

In 2016, Ronda announced the launch of their first automatic movement in 30 years, the R150, but they seem to have run into issues, because until 2021, there haven’t been many of that movement seen in circulation.

ACT IV - Was there a Method in the Madness?

In 2019, brands of the Swatch Group started to roll out upgrades of ETA movements fitted with silicon hairsprings. Just like the Clinergic allowed the watch industry to make a technological leap in terms of chronometric performance (Jacquerye, 2018) in the early 1970s. The Clinergic was using an escapement wheel with 21 teeth instead of the usual 15, and allowed to boost the pace of mechanical escapements from 18,000 Alternances per hour (5 Hz) and 21,600 A/h (6 Hz), to “high beat” such as 28,800 A/h (8 Hz) or 36,000 A/h (10 Hz). It also required newer and better performing synthetic lubricants.

With silicon hairsprings, which for a few more years are locked behind patents shared by a consortium made of Rolex, Patek Philippe, Jaeger LeCoultre and the Swatch Group, we could say that the Swatch Group has managed to democratise chronometric performance. Starting at $155, the Swatch sistem51 makes use of this technology.

Silicon hairspring

You can probably count on one hand the amount of companies in the world who have a formula for an alloy of steel that lends itself to making hairsprings, which the Clinergic still relied upon. These must then be processed by hand through a labour-intensive process to create a spiral shape as close as possible to the ideal one, which still has its shortcomings, and no two hairsprings are identical.

The revolution that silicon introduced is that, once that you have the perfect geometry, you can photographically print it on an industrial scale, and all hairsprings will be identical, thus completely removing the need for manual labour. This is more a capital-intensive process, but you can amortise at scale.

Even by lowering the pace at 21,600 A/h, ETA still manages to preserve the precision while boosting the power reserve from 38/42 hours to 80 hours.

Eterna movement

So when Nick Hayek was feigning disinterest in expired ETA patents, was he playing a long game? By letting Sellita and Ronda focus on investing into machinery to produce 20th century movements, was he making the Swatch Group focus on investing into machinery to produce 21st century movements?

Nick Hayek

Nick Hayek, image credit Neue Burcher Zeitung, reproduced under Fair Use/Fair Dealings

What we know is that by 2019, the Swatch Group asked if they could cancel the planned phasing out of complete movements.

So unfortunately for the Swatch Group in malicious compliance, the COMCO forced them to stick to the pre-agreed plan that after all, the Swatch Group had been the ones to request by twisting everyone else’s arm.

This attempt at backpedalling suggests that the Swatch Group ended up with more movements than what they know to do with. As I suspected, they failed to absorb this surplus into their existing brands.

The reasons are that from 2007 to 2013, the Chinese market was a mirage for many Western brands. In the aftermath of the Subprime Crisis, sales had tumbled in the Old World (Europe) and the New World (the Americas), but a loosening of regulations in China had made it possible to start selling luxury good by truckloads. So focusing on China was a way for luxury companies to avoid facing the music.

However, with the appointment of Chairman Xi Jinping in 2013 came a slew of reforms, which mostly translated into less business opportunities in China. This is why, according to me, we have seen Swiss exports drop since 2013. It has been the reality of the Great Recession catching up with them after they could no longer use the Chinese ”mirage”.

ACT V - As you make your bed, so you must lie on it

So things might not have been going according to plan for the Swatch Group: while they had been working on upgraded versions of their mechanical movements, they could still have benefited from the sales to third parties.

In comparison, Citizen Holdings and the Seiko Corporation sell spare movements by the hundreds of millions, while they sell complete watches by the tens of millions. The Swatch Group almost sells half as many movements as they sell complete watches: circa 0.5 million movements (Ge, 2020), against circa 9 million watches.

Surely, they could have benefited from selling movements, even to competing brands. Citizen Holdings and the Seiko Corporation don’t care: it’s good business. And in fact, Sellita has reached the volume of 1.2 million movements, which could have been the Swatch Group’s share.

So it’s a chicken or egg situation.

On one hand, had the Swatch Group not flexed muscles, clients would have expected to continue sourcing movements from them, and no competitor would have made an effort to increase capacity.

On the other hands, the Swatch Group might have had to focus on investing more in the production of 20th century movements, leaving little capital for aspirations of producing 21st century movements, but they would benefit from the combined sales of 1.7 million movements.

So in a sense, the Swatch Group might inadvertently have jumpstarted a new reality, in which multiple stakeholders now have leverage.

The smoothest transition might have been like what Citizen Holdings did: they reserved solar movement and radio-controlled technology to their own brands, while the standard battery-powered movements are available to third parties.

Similarly, the Swatch Group could have continued to supply movements to third parties, while rolling in the silicon balance springs for their own brands. There might not have been a need to burn bridges.

So What Does the Future Hold?

The Swatch Group managed to further differentiate its brands. Today, there are Swiss watches that use 20th century technology. And then there are 21st century Swatch Group watches.

ISAswiss has gone out of business in 2018, leaving Ronda as the main supplier of quartz movements, even though the Swatch Group still sells theirs very selectively.

Sellita has become the main player in mechanical movements, with Soprod struggling to keep the pace. There are a few other players such as Concepto, and LaJoux-Perret (now under Citizen Holdings).

LaJoux-Perret has quietly been rolling out solar movements, which found their way into the Cartier Tank Solarbear and the TAG Heuer Solargraph, thanks to the backing of the Japanese group. They are also rolling mass produced mechanical movements, which could be a solid alternative to Sellita.

I think that for a lot of brands, the options are either to use Ronda or Sellita movements. Even if the Swatch Group was able to sell movements again, all categories included, brands would think twice (Fool me once, shame on you. Fool me twice, shame on me).

If Sellita manages to beef up its own movements, maybe not in terms of silicon technology, but in terms of power reserve, the stakes are likely to get high.

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