Switzerland’s Competition Commission (COMCO) has approved a plan allowing the Swatch Group to reduce gradually sales of mechanical movements to companies outside the group over the next six years, and to halt sales completely in 2020. Click here for details on the ruling.
The mechanical movement ruling settles a controversial issue that has bedeviled the Swiss watch industry for the past four years. On the related – and even more controversial – issue of sales of escapements, the regulating organ in a mechanical watch, COMCO left in place its July 12 ruling that it is “premature” to allow any reductions in Swatch Group sales of those key components.
The Swatch Group issued no formal reaction to the decision on mechanical movements. But it is a clear victory for the company, which declared its intention to stop selling mechanical movements and parts in late 2009. In June 2011, the Swatch Group officially informed COMCO of its decision and asked COMCO to rule on the matter.
The Swatch Group is the world’s largest watch company. It owns 18 watch brands and is Switzerland’s dominant producer of mechanical watch movements and parts; it holds a 75 percent share of the market, according to a 2004 COMCO investigation. Because of its monopoly-like share of the mechanical movement business, the group needs the approval of COMCO, Switzerland’s anti-trust agency, to reduce movement supplies.
COMCO’s decision establishes that the Swatch Group has the right to refuse to sell movements to third parties (who amount to Swatch Group competitors). However, for the sake of an orderly transition, COMCO’s Secretariat negotiated an agreement with the group “to reduce deliveries in installments,” COMCO said in a statement. “The obligation to deliver mechanical movements remains valid until 31 December 2019.” Using the average number of movements supplied per year in 2009 to 2011 as a baseline, the agreement specifies that the Swatch Group will supply 75 percent of those movements in 2014 and 2015, 65 percent in 2016 and 2017, and 55 percent in 2018 and 2019. After that, its obligation to provide movements ends. The agreement specifies that the Swatch Group and its ETA subsidiary would “treat each of its customers equally” during the phase-out.
The agreement also contains a clause that waives the agreement in the case of small and medium enterprises (SMEs) that need special consideration. “In addition, the clause allows for SMEs in particularly difficult situations to depart from this rule in favor of affected customers.”
The new decision follows a surprising announcement on July 12 that COMCO did not approve an agreement reached in the spring between its Secretariat and the Swatch Group. It’s clear now that COMCO’s problem with the spring agreement had to do with mechanical components, particularly escapements, not complete movements. That agreement set the terms for a staged reduction of supplies to third parties of mechanical movements through 2021 and assortments (i.e. escapements) through 2025. COMCO instructed the Secretariat and the Swatch Group to renegotiate the agreement. As a result, the movement phase-out was moved up by two years, from 2022 to 2020.
For COMCO, the sticking point remains escapements. The anti-trust body clearly feels that the Swiss watch industry will develop alternative sources and sufficient supplies of mechanical watch movements by 2020, so that the industry as a whole will not be harmed by the Swatch Group’s supply cuts. It has no such confidence about escapements, where the Swatch Group, through its Nivarox-FAR subsidiary, holds a much higher share of the market, in excess of 90 percent. COMCO repeated its assessment that it would be “premature” to allow the Swatch Group to begin reducing escapement supplies with a view to terminating sales in 2025. “Developments in this area remain uncertain,” COMCO said. COMCO stated that, in principle, the Swatch Group has the right to withhold supplies of escapements, provided that alternative sources develop. It said it would continue to monitor industry developments in escapement production, “in particular test phases at the various [alternative] producers,” as well as “litigation in the Federal Patent Court.”
The ruling makes it clear that it will be some time before COMCO allows the Swatch Group to halt escapement sales.