Switzerland’s competition authority WEKO granted Swatch permission on Friday (Oct. 25) to phase out the the sale of movements—the critical internal mechanisms of mechanical watches—to other watchmakers. The deal allows Swatch to slowly cut its movements supply over the next six years, until 2020, when it will no longer have any sales obligations at all.
This is significant, as Swatch Group now supplies a whopping 60% of movements found in Swiss watches. Swatch has been trying to ease its commitment to other Swiss watchmakers for years, but WEKO hasn’t permitted that for fear that any scaling back would prove catastrophic for watchmakers dependent on the company’s manufacturing arm. Buying components from a quality, large-scale manufacturer like Swatch has allowed watchmakers to keep their prices in check. Without such as supply, their production costs are likely to soar, and with it, their prices. Partly in anticipation, a series of mergers and consolidations has taken place in the industry over the past three years, including the acquisition of over 40 watch and component makers.
With the new ruling, bigger watchmakers are going to have to shift more of their capital into manufacturing, and small watchmakers are going to have to find new—likely more expensive—providers. The phaseout “sends a clear signal to all the brands and groups that they should invest more in their own movements,” Swatch CEO Nick Hayek told the The Wall Street Journal. At worst, the larger companies will see their profits squeezed. But many of Switzerland’s smallest watch companies—the kind that churn out only about 1,000 watches a year—could find themselves incapable of keeping prices down, and ultimately go out of business.
On the surface, Swatch insists that its push to end its manufacturing commitments to the industry has to do with an inherent unfairness in bearing the development costs born by the industry as a whole. ”We are in a ridiculous situation that would be like having BMW supply all the engines for Audi and Mercedes,” Hayek told the Wall Street Journal back in April. But alleviating these sorts of holdover commitments also could be key for Swatch as global competition intensifies for smart watches. Entry-price Swatch brands, the sort that sell in the low hundreds of dollars, fall into roughly the same price category as the $200-$300 smart watches such as the Samsung Galaxy Gear that are arriving. Swatch currently allocates nearly two-thirds of its capital expenditure to manufacturing, some of which it could shift to marketing and advertising to better compete.
The company has been low key about any smart watch ambitions. But Swatch has been working on interactive watches for years, and even helped Apple with its smart watch development, according to Hayek. ”Technology has always been an intrinsic part of Swatch Group’s lower-priced brands.” he told Reuters last month. The end of selling its traditional watch movements could accelerate a shift in investment—and marketing—necessary for Swatch to try to do something no manufacturer has done yet: make smart watches that people want to buy.