The Swatch Group’s 10-year-long quest for the right to sell – or not sell – its mechanical watch movements to whomever it wants in whatever amounts it wants came to a successful conclusion last week.
On July 15, Switzerland’s anti-trust body, COMCO (for Competition Commission), issued a two-part ruling on the “Swatch Group Delivery Freeze Case” that began in 2010.
It ruled that the market for mechanical watch movements in Switzerland has opened enough that the regulator could lift restrictions it had placed on the group in 2013 because of its monopoly-like share of the market.
“Alternative suppliers of Swiss-made mechanical watch movements have effectively gained ground,” COMCO president Andreas Heinemann said at a press conference. “This means watchmaking companies have become less dependent on Swatch’s ETA unit,” referring to the group’s movement-making subsidiary.
“ETA is free to provide third-party customers with movements,” COMCO decreed. But it also ruled that ETA continues to hold a dominant position in Switzerland’s mechanical movement market, “and thus remains subject to cartel controls.”
With that, COMCO closed a complex, controversial case that began in December 2009, when the late Swatch Group Chairman Nicolas G. Hayek, Sr., announced, out of the blue, that ETA would no longer be a one-stop shop for anybody and everybody who wanted to get into the Swiss watch business. Hayek declared that he had a right to restrict mechanical movement sales to third parties and asked COMCO for a ruling on the matter. (For a detailed account of the case, see “Swatch Group Battles With COMCO Over ETA Movement Sales,” Jan. 7, 2020.)
Concerns About Sellita
After a long investigation, COMCO ruled in 2013 that Swatch Group could restrict movement sales provided it reduced its dominant position in the market. COMCO and Swatch Group agreed on a “phase-out plan” that allowed ETA to gradually reduce mechanical movement sales over the remainder of the decade to allow time for ETA competitors to get a foothold in the market. ETA agreed to continue to produce movements for its customers according to COMCO quotas through 2019. The agreement stated that Swatch Group would be released from all obligations to sell to third parties on Dec. 31, 2019.
As the deadline approached, however, COMCO got cold feet. It worried that, due to changed market conditions (the sudden decline in luxury watch sales to China during the government’s crackdown on corruption was one; the sudden rise in the value of the Swiss franc was another), the mechanical movement market had not developed sufficiently to enable Sellita, Soprod, STP, and others to compete with ETA.
In November 2018, COMCO opened “a review procedure” of the case “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.”
The key question was whether Sellita, ETA’s chief rival, could really compete with ETA once the Swiss market for mechanical watch movements was deregulated. When COMCO did not complete its new investigation in time to lift restrictions on the Swatch Group by the Dec. 31, 2019 deadline, it extended the terms of the 2013 agreement for one more year. The move sparked a firestorm of criticism from the Swatch Group and others in the Swiss watch industry. Swatch Group CEO Nick Hayek accused COMCO of favoring Sellita and trying to drive ETA out of the market. COMCO said it expected to conclude its review procedure in the summer of 2020.
20,000 Page File
The review procedure was comprehensive. COMCO interviewed about 200 watch and movement manufacturers. It said it “analyzed changes in market conditions and competition on the basis of market share, production volumes and capacity, market entry and the substitutability of mechanical movements.” The case file contains more than 20,000 pages.
COMCO concluded that the Swiss market for mechanical movements has become more competitive, with enough alternative suppliers to meet the market’s need for mechanical movements.
These were its major findings:
- “The demand for Swiss-made mechanical movements has declined considerably. The problem of the shortage of 2013 no longer exists.” This is the result of the Swiss watch sales downturn of 2015-2016 and this year’s disruption of the global watch business caused by the coronavirus pandemic.
- “ETA competitors have increased their production and capacity.”
- “The number of customers who source mechanical movements with ETA has decreased. They have developed alternative sources of supply.”
- “The most important source and competitor, Sellita Watch Co., offers alternatives comparable to many of ETA’s best-selling mechanical movements in price, quantity and quality.”
- “Some ETA customers have developed and expanded their own production.”
‘A Dominant Company’
While ETA now has a significantly smaller share of the market of movement sales to third parties, COMCO stressed that it is still the dominant player in the field. “ETA remains by far the largest provider of Swiss-made mechanical movements,” COMCO wrote in its decision. “It sells the majority of its production within the [Swatch] Group. Existing production volumes and capacity would allow it to sell quickly higher volumes outside the group in the event of a price change or business opportunities.”
COMCO supplied no data, but Swiss sources estimate that Sellita supplies about 1.2 million mechanical movements in a normal year. ETA produces an estimated 6 million mechanical watch movements. However, 5.5 million of those are for Swatch Group brands. It supplies about 500,000 movements to third parties. Today, Swiss sources say Sellita has roughly a 60% share of the third-party market for mechanical movements, ETA roughly 30%, and 10% shared by the others. COMCO’s concern is that, given ETA’s strength, those percentages could change quickly.
COMCO stated that, while ETA is no longer bound by the restrictions of the 2013 agreement, “As a dominant company, ETA remains subject to the rules of conduct and cannot abuse its dominant position.” It specifically noted that making movement sales contingent on purchases of ETA quartz movements or assortments from Nivarox-FAR, the Swatch Group’s hairspring manufacturer, “would be illegal.”
“COMCO will continue to monitor the evolution of the Swiss mechanical movement market and will intervene if it deems it necessary,” it said.
The Swatch Group has not reacted to the COMCO ruling. Sellita CEO Miguel Rodriguez told Reuters it was important that COMCO considered ETA the dominant player in the market because it meant ETA had to abide by competition laws.