In-Depth: Swatch Group Battles With COMCO Over ETA Movement Sales
For the past six years, Swatch Group CEO Nick Hayek had been looking forward to an unusually happy New Year’s Day 2020.
That’s because on that day, under the terms of a 2013 agreement between the Swatch Group and Switzerland’s anti-trust regulator, COMCO (Competition Commission), the market for Swiss-made mechanical watch movements would become unregulated. For the first time since its founding in 1983, the Swatch Group, Switzerland’s largest watch company, would be free to sell – or not to sell – mechanical movements to whomever it wants.
It didn’t happen.
Just 12 days before the deadline, COMCO announced that the 2013 deal was, in effect, off, temporarily and perhaps permanently. Blink and you might have missed it when the decision was announced over the holidays, but if you’re a consumer, the decision could mean even longer delays than already exist, between announcements of new models, and their release to the market.
COMCO said that due to changes in the market for mechanical watches since 2013, it was considering “whether it should revoke or amend its  decision” to allow the Swatch Group to stop selling watch movements to so-called “third party” customers, i.e., firms outside the Swatch Group.
COMCO said that for the past year, it has been studying whether Switzerland’s mechanical movement market was sufficiently competitive to allow the deal to go through. That study is not finished due to unspecified “delays,” COMCO said. It expects to complete its review this summer.
It is absurd, given the new situation, that COMCO is now completely prohibiting ETA from supplying its customers with movements.
Swatch Group Dec. 18, 2019 statement
Therefore, on Dec. 19, it issued a provisional ruling extending the terms of the 2013 agreement for another year until Dec. 31, 2020. As a result, the market is not deregulated, and the Swatch Group is not free, as it had expected and planned, to do what it wants with its mechanical watch movements this year.
Moreover, the Swatch Group is, in effect, prevented from supplying movements to all firms in 2020, except small companies with 250 or fewer employees. COMCO ruled that, de jure, the Swatch Group’s obligations under the 2013 agreement remain in effect for 2020. However, it conceded that, de facto, “deliveries will be temporarily suspended” because of the delay in issuing its order.
The decision stunned the Swiss watch industry and provoked a firestorm of confusion and controversy.
First to respond, of course, was the Swatch Group. The day before COMCO’s announcement, it reacted with cries of execration in an 11-paragraph statement calling the decision “absurd,” “incomprehensible,” and “unacceptable,” and one that “harms the Swiss watch industry.” COMCO was “violating its authority,” Swatch said. “COMCO is effectively driving ETA out of the market.” It insinuated that the regulator was no longer independent, but acting in cahoots with Sellita, the Swatch Group’s main competitor in Switzerland’s mechanical movement market.
The Swatch Group noted that, since it takes at least 12 months to fill new orders for movements, COMCO’s convoluted order would prevent it from supplying movements to any company until 2021.
Why So Late?
COMCO, in fact, took heat from all sides, both in and outside the watch industry. Why had the decision to postpone the market liberalization come so late, after an adjustment period lasting six years? Why did COMCO ignore the industry’s production timetable? Why was the wording about its provisional decisions in its official press release and accompanying background document so confusing?
“This lack of clarity has led to a cacophony of partly contradictory reports in the media,” wrote Andrea Martel, a reporter for Neue Zürcher Zeitung, Switzerland’s equivalent of the New York Times. “But one thing is clear. The decision came too late. [COMCO] failed to schedule its ruling in time for the period after 2019. [It has] mixed up the production processes in the watch industry with six months of uncertainty, which is now being extended by another six months. The losers are the customers who have to cope with delivery interruptions.”
“COMCO is doing a disservice to the Swiss watch industry,” Patrik Schwendimann, an analyst at Zürcher Kantonalbank told swissinfo.ch. “Some customers may have serious planning problems for 2020 and 2021.”
The Federation of the Swiss Watch Industry also weighed in. “I fear that this decision could contribute to the reduction of Swiss watch exports,” FH President Jean-Daniel Pasche told swissinfo.ch. “Several brands and suppliers told us that there are not enough Swiss mechanical watches on the market. But we need Swiss movements in order to produce Swiss watches.”
As the new year begins, the COMCO controversy is still raging and will likely remain a hot topic until COMCO issues its ruling this summer. At its heart is a simple question with an unclear answer: Over the past six years has the market for Swiss-made mechanical watch movements become truly competitive? Or, does ETA, the Swatch Group’s movement-making subsidiary, which six years ago held a 75% share of the market, still remain dominant?
In short, can Sellita really compete with ETA once the Swiss market for mechanical watch movements becomes free?
For the Swatch Group, the answer is bloody obvious. “In 2019 Sellita produced and supplied 1 million mechanical movements (roughly twice as many as ETA), making it the new market leader in this sector,” Swatch said in its Dec. 18 statement. “The market for mechanical movements in Switzerland has changed fundamentally. ETA is no longer the market leader.”
COMCO is not so sure. It takes a wider view. Sellita may sell twice as many mechanical movements as ETA to third parties. But ETA remains Switzerland’s top producer of mechanical movements by far, making six times as many as Sellita.
ETA produces an estimated 6 million mechanical movements annually, 5.5 million of which go to its 18 sister brands in the Swatch Group. The other 500,000 are sold to firms outside the group. What’s more, Sellita made its mark as an ETA imitator, cloning the ETA 2824 and 2892 movements. Is the ETA imitator really ready to compete head-to-head with ETA itself once COMCO deregulates the market?
‘I Am Fed Up…’
COMCO and the Swatch Group have been wrangling about this issue for 10 years. To understand the current controversy, it helps to know how and why it all started.
In one sense, it started with an annoying call to Nick Hayek’s father, Nicolas G. Hayek, Sr., from the man he called his “tailor”: Gildo Zegna, head of the eponymous Italian luxury fashion house.
For years, Hayek, Sr., Swatch Group’s chairman, had bemoaned the fact that the barrier of entry into the Swiss watch industry was so low. An industry had a right to protect its intellectual property and technology, he said. But because ETA held a monopoly-like share of the market for mechanical watch movements, he was forced to sell movements to third parties. Which enabled all manner of fashion, jewelry and God-knows-what-else brands to launch their own watch lines.
So, in December 2009, out of the blue, Hayek announced that ETA would no longer be a one-stop shop for anybody and everybody who wanted to get into the Swiss watch business. He declared that he intended to restrict sales of mechanical movements and parts to customers of his choosing; that is, to watch companies that invested in mechanical watch manufacturing. The announcement sent shock waves through the Swiss watch industry, as firms worried whether the Hayeks, Sr. and Jr., would cut them off.
A few weeks later, I met with Hayek Sr. at Swatch Group headquarters in Switzerland and asked if he was serious about restricting movement supplies to the industry.
The only real alternative has been Sellita. Others are struggling with quality problems or are not considered by the watch brands to be on par with ETA.
Andrea Martel, Neue Zürcher Zeitung
He was in a bellicose mood. “Look, I am fed up with people who have no manufacturing capacities who want to enter the watch business,” he told me. “Like my tailor. His name is here,” he said, pointing to the Ermenegildo Zegna label on his suitcoat. “He called me one day, and said ‘Mr. Hayek, I would like to make watches. Can I come and see you?'”
“Why the hell do you want to make watches?” Hayek replied. “You already make enough money selling me suits and shirts. Why watches?”
“Because Bain & Co. told me there is much more money to be made in watchmaking,” Zegna answered.
Hayek told him, “You can also lose very much money in watchmaking and you don’t know anything about it.”
“And I refused to make watches for him,” Hayek said. (Undaunted, Zegna called the late Gino Macaluso, the Italian owner of Girard-Perregaux, in La Chaux-de-Fonds, who did a watch deal with Zegna.)
Hayek explained the problem to me this way:
“Today, if you want to make watches called Joe Thompson, you go to any one of the several ètablisseurs [i.e., private-label watch companies] and they make them for you. You say, I need 10,000 Joe Thompson watches, and they order the movements from us, from ETA. And they take hairsprings from Nivarox-FAR [another Swatch Group subsidiary]. And they make a Joe Thompson watch for you. I cannot stop them. We are forced to deliver to them.”
“What I am saying now,” he continued, “is that I am not going to deliver anything – no movements, no èbauches, no hairsprings, nothing – except to people who are real watchmakers and manufacturers. I am free to do it.”
Right Of Refusal
Hayek wanted the Swiss watch industry to protect its technology the way the American auto industry does. “Can you go to General Motors and tell them, ‘I want to produce an American Joe Thompson car and you have to deliver me a Chevrolet engine’? They’ll tell you to go to hell.”
That’s what Hayek wanted to tell the newcomers. But not only them. He was tired of watch brands that claimed to make their own watches, but didn’t really. Instead, they relied on ETA. They spent a fortune on advertising and promotion, but made little or no investment themselves in mechanical-watch manufacturing. “All of them claim very loudly in public that they make their own movements and watches! So what the hell do they need from us?”
He wanted to restrict sales to eliminate easy access to fashion-brand extenders and to force ETA’s watch-brand customers to begin making their own movements to bolster the industry’s industrial base.
Can you go to General Motors and tell them ‘You have to deliver me a Chevrolet engine because I want to produce a Joe Thompson car?’ They’ll tell you to go to hell.
Nicolas G. Hayek, Sr., in 2010
But did he have the right?
To find out, in 2010, he asked COMCO to investigate and issue a ruling on the matter. He told me he was confident that COMCO would rule in his favor.
It did. Hayek did not live to learn of his victory; he died in June 2010. But in 2013, after a long investigation, COMCO issued a ruling stating that it “accepts in principle that Swatch Group can reduce in stages and under certain conditions delivery of mechanical movements.”
Under a plan designed to eliminate the Swatch Group’s dominant position in the market, it allowed ETA to reduce movement sales gradually to its current third-party customers, according to a formula agreed to by both parties: to 75% through 2015, 65% through 2017, and 55% through 2019. It specified which customers ETA was required to deliver to and the number of movements
Crucially for the current conflict, the agreement stated that Swatch Group would be released from all obligations to sell to third parties on Dec. 31, 2019.
Only One Alternative
COMCO figured that six years would be enough time for alternative suppliers of mechanical watch movements to develop to fill the void left by ETA production cuts. It hasn’t quite worked out that way.
“Various companies that announced full-bodied movement production in 2013 have now disappeared from the scene,” writes the NZZ’s Andrea Martel. “Others are still struggling with quality problems or are simply not considered by the watch brands to be on par with the ETA factories. The only real alternative to date has been Sellita.”
For two reasons, Swiss sources say. One is that investing in mechanical-watch movement production is a formidable undertaking. Making small series of expensive watch movements is one thing. Ramping up production to industrial quantities that can compete in quality and price with the long-established movement king is another matter altogether. It takes heavy capital investment, lots of trial and error. And time.
Especially if the Swiss watch market goes south for two years, as it did in 2015-16, due to a slowdown in China and a hyper-valued Swiss franc.
The downturn did two things. It punctured demand for mechanical movements, which had soared on the China boom of 2010-2014. Brands curtailed their watch output and canceled or cut movement orders, hurting the small firms trying to rival ETA, like Soprod and STP, in addition to Sellita.
It also hurt ETA and puts strains on what COMCO still refers to as “the amicable agreement of 2013.” In 2016, for the first time under the COMCO agreement, ETA could not sell the quota of movements COMCO required it to deliver.
“We had a massive panic reaction from some of the third parties” to the slowdown, Nick Hayek told me in a March 2017 meeting. One top ETA customer, with a quota of between 800,000 and 900,000 movements, ordered 75,000 for 2017. Another, whose quota was 120,000 to 130,000 movements, ordered 0 for 2017. “We still have a capacity of between 1 million and 1.5 million that has not been ordered,” Hayek said.
Under the circumstances, the Swatch Group appealed to COMCO to be allowed to sell movements to new customers. “We said, ‘Listen, because there is demand from others, we would like to give more pieces to other third-party players to compensate [for the lack of orders],'” Hayek said.
No dice. COMCO refused the request. Swiss sources say that COMCO wanted to protect the struggling ETA competitors, who might lose business if it allowed the Swatch Group to sell movements on the open market.
Hayek was annoyed and grumbled about COMCO restrictions that required ETA to supply specific quantities of movements to customers who were not required to place orders for them. Nevertheless, he took solace in the knowledge that all that would be over soon. “But it will be ending in 2019,” he told me. “We are free from 2020 on with the mechanical movements.”
The first sign of potential trouble for the Swatch Group came a year and a half later. In November 2018, 13 months before the deadline for the deal to expire, COMCO opened “a review procedure” of the Swatch Group agreement case. “The proceedings were opened on the basis of indications that from 2020 there may not be sufficient numbers of alternative sources available to satisfy the watch manufacturers’ demand for mechanical watch movements,” COMCO explained it its 2018 Annual Report.
“Given the current level of knowledge about the case, it is impossible to assess whether it is necessary to revoke or amend the decision that COMCO made at the time. This requires an analysis of the current market and competition conditions, which will be carried out as part of the proceedings just opened.”
Clearly, COMCO was having second thoughts.
Throughout 2019, as the clock counted down to the deadline, COMCO conducted its study, ignoring Swatch Group requests for a decision. Swatch Group “repeatedly tried unsuccessfully to draw COMCO’s attention to the urgency of the situation,” it said. Between September 2018 and August 2019, the period when it would normally take movement orders, it says it “officially” appealed to COMCO for a decision six times. “Other players in the watchmaking industry also warned COMCO in view of the approaching deadline,” the Swatch Group said. “In vain.” Because of the uncertainty, ETA wasn’t able to accept or confirm orders for 2020.
Finally, two weeks before the Swatch Group would be free at last, COMCO broke its silence, deciding not to decide until 2020.
COMCO’s announcement, as noted, confused some things, but it clarified others. One was that, in the original agreement, “COMCO reserved the right to reverse its decision if the market situation did not evolve as planned.” COMCO made it clear that, in its opinion, it has not.
Also clear was that COMCO had little sympathy for ETA customers’ complaints about any unavailability of ETA movements. “ETA customers have had since 2013 to prepare that ETA will no longer provide mechanical movements from January 2020,” COMCO said. “The COMCO Secretariat has repeatedly drawn clients’ attention to this fact.”
It is also skeptical about alleged shortages. “Is there really going to be a shortage of movements? I’m not so sure,” COMCO Director Patrik Ducrey remarked to Reuters after the announcement. “There’s also a gray market and brands have built inventories.”
There are indications that from 2020 there may not be sufficient alternative sources to satisfy watch manufacturers’ demand for mechanical watch movements.
COMCO Annual Report for 2018
COMCO’s concern, Swiss sources say, is what the Swatch Group will do in a free market for movements. Will it stop selling movements to third parties and concentrate exclusively on its own brands, as it said it wanted to do during the China boom? (Sales of mechanical components are a pittance for the Swatch Group, accounting for 0.6% of its total revenues, according to Zürcher Kantonalbank.) If so, are there enough alternative movement suppliers to provide the range of movements the industry needs?
Or, conversely, having ramped down movement production over the past six years, will the Swatch Group quickly ramp it up again, make its movements available at favorable prices and aggressively compete for key customers against Sellita and the smaller suppliers? This is the scenario that most worries COMCO, sources say.
What about Sellita’s customers? Will they stay loyal if ETA woos them with higher quality movements at comparable or lower prices? Or will they switch to ETA?
As for Sellita, will it be able to develop its own range of mechanical movements to become a true rival to a long-established competitor, backed by the resources of an CHF8.47 billion watch group?
COMCO is studying all of this. What it will do this summer, nobody knows. Including COMCO.
CORRECTION: An earlier version of this story stated that the number of employees in what is defined as a “small” company was 25, not 250. HODINKEE apologizes for the error.
Headline movement, ETA/Valjoux 7750.