The Wall Street Journal had an interesting article about Nicholas Hayek, the chairman of Swatch. (“Nicholas Hayek: Time Bandit”)
Hayek is considered by many to be the one that saved the Swiss watch industry in the middle of the 80s. Hayek is credited with creating Swatch and demonstrating that one can manufacture in Switzerland at low cost.
Well, Hayek is striking again. In 2002 he announced that
in the beginning of 2006 (Swatch) would stop delivering unassembled movements. (Movements are shipped in two varieties: assembled, which are difficult to alter, and unassembled, or ébauches, which are easily customized and can lead to the production of more sought-after watches.) And the wave of controversy began.
The question is why stop supplying parts to others? Why would a component supplier stop selling sub components? Is it due to competitive reasons or is he forcing the national industry to renew itself, again?
Hayek has an explanation:
Let me explain what happened,” he says. “Swatch Group owns 165 factories in Switzerland and we produce for our own brands and for everybody else; for example, the Rolex Tudor is equipped with an ETA movement. Nobody produces 100 percent on their own, because they either need our movement or our Nivarox springs. In 1999, I found out that they were buying these ébauches from us, decorating them and selling them in China and making fake Rolexes. We were selling these things at a very low cost, even though we had people who made them by hand. So I sent a letter telling every customer that in four years we are not going to deliver any more ébauches, and to prepare to either make them yourself or buy the finished movement from us.
I think the story about trying to eliminate counterfeiting and fly-by-night brands is plausible. At the high end, you buy watches partially as investment and there is active second hand market. Anything that undermines prices in the second hand market, affects what the maker can charge for a new watch. But I think the other plausible explanation is that Swatch has a whole portfolio of firms ranging from high end to relative low end (at least cost-wise). However, none of them can compete with the really low end. One of the main lessons from the previous crisis is that you cannot allow for low cost competitors to emerge using your own technology.
Another interesting part of the story is the delay in the implantation, forced by the European anti-trust agency. I have to admit that I am not too familiar with anti trust laws, but how can you force a firm to sell sub components if it wishes to sell only assembled ones? Can you force Zara to sell only sleeves or force Apple to sell only processors?