Swatch Sales of ETA Watch Movements to Big Rivals Halted 

(Bloomberg) -- Swatch Group AG faces a threat to sales of a key watch part as the industry reels from a plunge in demand for lower-end timepieces.

Switzerland’s antitrust regulator is temporarily banning Swatch from supplying mechanical watch movements to big rivals next year as it reviews whether there’s adequate competition in that market. The move came as a report Thursday showed that the country is on track to export fewer watches than it has in any year since 1984.

While still a blow to Swatch, the regulator’s move is a step back from a proposal for a total ban that it had reportedly been considering. Component maker Sellita is set to gain more business as it’s the largest alternative to Swatch’s ETA component-making unit. Rivals such as Richemont that use ETA movements in some watches may need to come up with new plans if they had expected to continue relying on Swatch.

The halt will start in January and applies until the regulator finishes a review to ensure there’s adequate competition in the component market next year. Swatch shares fell 1.5% in Zurich and are on track for a second annual decline.

Movements are the mechanisms that make watches tick, and Swatch used to make the majority of them after an industry-wide crisis put most rivals out of business. Many brands use ETA components for their mid- and lower-end watches.

Compromise Effort

The move by the regulator, known as Comco, looks like an effort to strike a balance between market-opening measures and Swatch’s interests, said Peter Picht, a competition lawyer at Schellenberg Wittmer. “But Comco needs to come up with a long-term decision soon, and it cannot be an outright ban.”

Swatch can deliver to smaller watchmakers, and the company is freed of any obligation to supply third parties, Comco Director Patrik Ducrey said by phone. The regulator said it expects to make its decision around next summer, though the provisional measure can be extended to the end of 2020.

The regulator is “interfering in economic policy and is restructuring the entire Swiss watchmaking industry,” Swatch said in a statement ahead of the formal announcement. “It is exceeding and violating its authority.”

The agency’s new position comes just two weeks before the market was expected to be fully liberalized for 2020. A decade ago, Swatch, which owns more than a dozen brands including Omega and Longines, was obligated to supply components to competitors due to its dominant position. In 2013, the company reached an agreement with the regulator to gradually reduce sales to third parties.

“Comco is doing a disservice to the Swiss watch industry,” Patrik Schwendimann, an analyst at Zuercher Kantonalbank, wrote in a note. While mechanical components represent only about 0.6% of Swatch’s sales, some customers may have serious planning issues for 2020 and 2021, he said.

Breitling, owned by CVC Capital Partners, has prepared itself for different scenarios and can cover next year’s demand with its own calibers along with purchased movements, according to a spokeswoman.

Watch Shipments

Switzerland shipped 18.9 million watches in the 11 months through November, down 13% from a year earlier, the Federation of the Swiss Watch Industry said Thursday. The last year exports were so low was in 1984, when the industry was in a crisis caused by competition from quartz technology. That’s also when the plastic Swatch emerged, breathing new life into Swiss watchmaking.

Read more: Swatch’s Component Sales in Jeopardy as Regulator Switches Tack

The Apple Watch and fitness bands have weighed on demand for lower-end watches, driving shipments of watches costing less than $200 down 20% in November. The slump bodes ill for Swatch, which relies on low- and mid-priced brands for the bulk of its earnings, according to estimates by Zuercher Kantonalbank.

Swatch said it reserves the right to claim damages due to the negative financial repercussions.

“Comco is effectively driving ETA out of the market,” Swatch said.

--With assistance from Albertina Torsoli.

To contact the reporters on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net;Hugo Miller in Geneva at hugomiller@bloomberg.net

To contact the editor responsible for this story: Eric Pfanner at epfanner1@bloomberg.net

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