So there’s been some news floating around that ETA (owned by Swatch Group) will be barred from selling movements to third parties larger than 250 employees in 2020. As someone who’s not part of the industry, I thought I’d have a go at trying to figure out what’s going on.
Take a seat. Grab a drink. We’re going on a field-trip through history.
At the end of the last century, the mechanical watch industry was recovering from the quartz crisis. A small number of companies had the capacity to both produce mechanical movements as well as pump in the research and development required to innovate. These mass-produced movements were sold to small watch labels who didn’t have any of these resources. This relationship became the status-quo for a while and there wasn’t anything to challenge it…
… But then in the early 2000s, Swatch group announced plans to stop supplying movements to brands outside the Swatch group – citing concerns that it didn’t make sense to supply competitors who were selling products that would compete directly with Swatch group’s subsidiaries at the lower end of the market. This caused Swiss regulators to step in and try to reverse this on the grounds of maintaining competitive practice.
Eventually an agreement was reached between Swatch Group and Swiss regulators in 2013 to essentially allow ETA to limit the distribution of movements to third parties – with the provision by 2020, Swatch could decide to stop production entirely or continue business as usual. The idea was that the space of seven years would allow the market to wean off the embrace of ETA (throwing in some middle school level literature to jazz things up) and companies would move to alternate suppliers or figure how to develop stuff themselves.
So that seems like a really amicable situation right? The industry has a rough decade to adapt and ultimately everyone benefits from the deal. Ah. That’s where a reverse uno card is played.
It turns out Swatch Group continued to dominate the sector and had an essential monopoly to do whatever it wanted. A report commissioned by the Swiss Competition Commission apparently lead to the announcement that instead of giving the option of allowing Swatch Group to sell ETA movements if it pleases, it will instead prepare to ban the sale of movements to third parties altogether – with the exception of companies with less than 250 employees. I decided to share my take on the possible impacts.
How do I get my watch repaired?
I remember a short while back that there was a legal contest between third party watch spare parts suppliers/repairers against Swatch, ETA and Rolex. The argument was that by choking the supply of spare parts, organisations like Swatch Group were in breach of fair competitive practices since all parts or repairs will have to be sourced from first party channels- leaving customers at the mercy of whatever Rolex or Richemont repair centres decide is the correct price to have a watch serviced. It was argued that this is an abuse of being in a dominant position and in breach of competition practice. This was ultimately overruled in favour of the Swiss megabrands on the grounds that limiting spare parts protects a brand’s reputation in terms of quality and service and prevents the rise of counterfeits. It was also shown to the court that competition exists among authorised repair channels.
In this instance, ETA is the largest Swiss watch movement supplier. An outright ban on selling movements to medium size repair companies will straight up cripple the sector. It turns out that the vast majority of ETA movements are sold in the upper mid bracket of companies – removing the incentive for ETA to keep producing parts. You can probably expect a flooding of grey-market components at unreasonable prices.
Suddenly servicing your Tissot or that weird ‘affordable luxury’ watch that you picked up from Kickstarter might be a bit more of a dear choice.
Let’s use the other Swiss suppliers?
I’m not in the watch manufacturing sector so you’ll have to take my comments with a grain of salt, but here’s what I think.
First of all is the notion of buying “Swiss” parts. This is critical for the hundreds of small to midsize Swiss watch labels that won’t be able to outsource. If you disclude ETA, you essentially have two options in the mass-produced sector: Sellita for mechanical movements and Ronda for the quartz side. On the high end side, you have Vaucher and APRP ect (which are in a different league) Surely the possible ban means that these companies can just fill in the demand left by ETA?
The short answer is no – for the short term. There might be a short term flood of stock that has been sitting in a warehouse, but it’s not sustainable. Sellita has apparently sold through pretty much all of their movements for the 2020 production year. Ronda is unlikely to meet demands either.
Wait! There’s obviously Citizen, Seiko and Seagull. Just Switch to Asia!
This is an option to consider for companies not reliant on the ‘made in Switzerland’ branding. I see this from multiple perspectives.
If you take a look at Seagull, they single-handedly produce more mechanical movements than the entire Swiss watch industry combined. With the Japanese side; Citizen and Seiko have a solid reputation of building reliable movements with the movements produced for Campanola and Grand Seiko being considered cream of the top. Not to mention, Japanese and Chinese movements are substantially cheaper than Swiss movements. Just finish them up a little and you’ll be fine.
Well it’s not that easy. There are a whole load of trade-offs. If you’re outsourcing movements, there’s a good chance that you’re designing a watch around an existing movement and not the other way around.
ETA mechanical movements have more variety such chronographs (Valjoux 7750, 7751) to small seconds (ETA 2825) or even manual wind (ETA 2801). Also, Miyota and Seiko movements (that are sold to third parties) tend to be a whole lot thicker than ETA counterparts since they’re stamped out en masse with minimal finishing.
One of the reasons ETA is so sought after is that they’ve put in a lot of R&D towards their product portfolio with no other entity being able to compete with the supply chains and distribution networks that produce movements to the same quality as ETA. You just can’t compare a Miyota 8215 to an ETA 2892 on the same level.
You can probably say “buuuuuuutttt Grand Seiko exists and they’re better quality than most entry level luxury Swiss watches”. Well here’s the thing: Grand Seiko movements aren’t for commercial sale – and when you search “Seiko automatic” or “Citizen automatic” you’ll probably see an Amazon listing of watches at a sub US$100 price point. If you’re a watch label that produces watches at a three figure price tag, this won’t be a massive hit – but once you go above that, things get finicky. It’ll be super hard to charge over a Thousand dollars for a watch with a movement that is known to cost less than US$10. The reputation of Japanese movements will probably need a generation or two to catch up with the level of ETA. Switching to Chinese or Japanese movements can cause damage to a premium brand image.
I haven’t even mentioned Fossil Group, who might potentially ramp up the production of their own commercially sold movements and try to take a piece of the pie. But you still have the issue of filling in the void of desirability that Swiss movements currently have – an extremely difficult feat.
One other option is to use ETA clones (as many microbrands currently do). But it’s the same problem. You can’t expect to offer a premium product to the masses whilst stating you have a clone powering the insides.
What’s the call on watch labels in the short term?
I’ll start off with larger brands. I think the labels owned by Richemont and LVMH have essentially moved away from stuffing the guts of their watches with ETA parts. There’s a lot of in-house development going on through shared platforms and acquisition lead growth. An example would be Montblanc owning Minerva. Even then, the sector isn’t completely self-reliant. The first year might take a little tumble in the balance books, but the watch labels owned by conglomerates will be the ones to recover first.
The next part is small to mid-size labels. This will be where the real damage is done. Any watch label that uses ETA parts as the basis of their watches will be severely knocked off course. The immense resources required to remodel the movement architecture found in current models as well as after-sales service for previously sold pieces will probably put a lot of labels at over-capacity. This is especially devastating for watch labels who don’t produce anything of their own and rely on outsourced manufacturing outlets.
Boutique luxury labels such as Moser and FP Journe won’t have to worry since they produce their parts in-house.
I was speaking to a friend of mine, Praneeth Rajsingh – the chief operations officer at a boutique Malaysian watch label called Ming. The basic summary of our conversation was that if the move goes through, it will potentially blow the chances of being able to offer an entry level timepiece with an ETA movement in line with their brand’s portfolio.
And although MING has less than 250 employees, the manufacturers who manufacture the watches will be unlikely to fall into that category.
My final thoughts.
The Swiss regulators are ultimately trying to improve competition by possibly removing the main competitor. Except the fact that it wasn’t really a competition but rather sheer domination.
It’s that idea of dominating the sector that causes frustration all across the spectrum. I suppose there’s a massive shock to be expected if an immediate outright ban takes place. The market won’t be able to react to the discrepancies in supply and demand.
I think the option of letting the ban take place over a few years was put off the table on the basis that the last several years has led to ETA not really loosening its grip on the industry. Perhaps Swiss regulators thought that a severe knock in the short-term is what’s needed to disrupt the slumbering sector? Maybe now we can look at a new opportunity to seed innovation and inject liquidity into expanding domestic Swiss producers and R&D teams?
Suppose that after the first couple years of crisis management, the global watch manufacturing sector and watch labels manage to steady themselves. On the lower end of the scale, smaller labels (both current and new) would eventually have no choice but to switch to Japanese movements if there still isn’t a sufficient supply of Swiss movements. Brands will have less capacity to release new watch models and will have to adjust a whole lot of their identity.
But if the situation is managed accordingly and the right areas have investment injected into them; then you can look at companies such as Sellita becoming a much more prominent figure in the industry as well as a new period of innovation spreading through pure necessity.
So the situation is summarised as this: “Swatch group should continue to supply a minimum number of parts to external parties to allow competition. Actually no. Swatch Group should stop supplying parts to external parties to allow competition” it’s a catch-22.