From The Editor, I am delighted that Andreas Felsl co-founder of HORAGE and THE Plus AG got in touch after our first article on the ETA v COMCO last week.
He brings a deep insight that I guarantee you will be worth your time reading.
Switzerland is not losing its mind; it is waking up to the practices of an out of control market giant.
In the past week, emotions were unnecessarily high on a NON-decision by the Swiss competition authority called COMCO. Let’s be clear this is a NON-decision because in fact nothing has been decided, except that some more time is needed to permeate the obviously very complex matter when it comes to fair competition in the global watch industry. We say global because what happens in Switzerland affects the entire global economy when it comes to our beloved mechanical watches.
The timeline of last week’s events could get misconstrued as to what happened and when. On December 18th, the Swatch Group hastily issued an “attack-dog” press-release before there was actually an official statement from the competition authority COMCO. The press release was reminiscent of a smear campaign against the rival government agency COMCO with hopes of landing a first hit delivered in classic Hayek Jr. style (Swatch Group CEO). Honestly, one could expect more professionalism from a manufacturing heavyweight that generates yearly revenue of 8 billion dollars.
Two days later, COMCO delivered a statement on the 20th of December.
In hopes of providing some rationalism to the ongoing discussion and calm the herding watch crowd our desire is to deliver an alternative view to the situation. As a component’s supplier, movement manufacturer and representative of some smallish brands myself and team have front row seats to the ongoing COMCO investigation. We are quite sure that the coming months will perhaps be the most interesting times that not only the watch industry but also the international anti-trust and competition community has ever seen. Even some of the diehard Swatch Group advocates might rub their eyes on the unfolding of events yet to come.
For law and business experts, this is a once in a lifetime constellation because the Swatch Group was formed out of the ashes of the quartz crisis. At the time of the crisis, the Swatch Group was awarded the opportunity and the responsibility by the government to consolidate horological knowledge and manufacturing capacities under one roof and supply the remaining Swiss watch industry with movements and components in the hope that the Swiss watch industry could recover from the existential threat of the quartz movement. It is a constellation that has further been intertwined with something that is called Swiss corporatism; questionable backdoor deal-making and a healthy dose of intellectual property abuse.
This mandate by the government was given to Mr. Hayek Sr. and it was heavily backed by banks, government authorities and funded with taxpayer’s money. For lack of a better word, it was a bailout of all participating players in the Swiss watch industry. It was not a blank check and came with the conditions that Mr. Hayek Sr. and his group would respectfully handle and unbiasedly share its future manufacturing capabilities and capacities with independent Swiss watchmakers. This constitution was bundled under the companies of ETA and Nivarox and these companies would be tasked with supporting and supplying any brand with a desire for a Swiss made movement. To put this in perspective we are talking about nothing short than putting nearly all of Switzerland’s production capacities under one roof. This means that not only movement manufacturing, but also regulating units were placed in the hands of Mr. Hayek Sr.
A government-backed and taxpayer-funded project with the aim of reviving the heritage and protecting the future of the Swiss watch industry is a nice feel-good story. However, this means the Swatch Group cannot be seen as a natural founder formed, private company. It is, in fact, a public company which was borne out of governmental decision making and because of that the Swatch Group was able to create a monopoly based on having been given an open door to incredible manufacturing power that would enable them to outcompete any potential competitor not only on price, but on sheer volume. Unnatural company formations as is the case with the Swatch Group need to be closely monitored. Power in manufacturing, but also in fire-walled intellectual property assets that are supposed to be made available to other industry players leads to a company that can become untrustworthy and unpredictable in their business practices.
This brings us to COMCO itself and why sophisticated market economies as we have them nowadays need authorities or in other words “watchdogs” to have an eye on market-dominating companies to enable fair competition. The most hardcore, wild and free-market economy is the USA, and in fact, the USA created the idea of the anti-trust regulation and the laws and mechanisms needed, to counteract the ultra-large conglomerates that emerged in the 1890s. These conglomerates de facto erased fair competition through illegal bully style business practices backed by incredible financial firepower and unprecedented scale of manufacturing.
The onset of the anti-trust and competition law is generally known as the Sherman Antitrust Act from 1890. Senator John Sherman made a nice quote that should make every critic of anti-trust authority think twice:
“If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessaries of life.”
Are watches necessaries of life?; its open for debate, but one can easily see that the Swatch Group was handed a government-backed golden ticket that they then manipulated in their favour, thus making them the untouchable monopolistic powerhouse they are today.
The Swatch Group simply cannot be afforded the opportunity to act any further as a warm, friendly, and fair market player as they would like the world market to believe. Too much evidence in the past and in present has proven that they have become akin to Switzerland’s spoiled child that continually demands more for their insatiable appetite of competitor destruction.
Having such authorities and laws is fundamentally important for all of us who mingle in the world of mechanical watches. Yes, we are facing significant challenges from smartwatches and the change in distribution models. However, this does not mean that we can or should write a blank check to a market-dominating company whose technological advances have arrived on the wings of government backing. The Swatch Group has clearly proven it is feeding its own brands better movement technologies than competitors and even worse they consciously decide to who, what and when or even if they will actually ship movements to independents. Power abuse at its best and this abuse of power breeds uncertainty and uncertainty is the crux that keeps smaller companies from having a chance of true and fair market growth.
It was said that a potential ETA shipping ban would cost incredible amounts of money, erase thousands of jobs and wipe out the small brands.
Let’s look back to a time when the industry was on what seemed to be steroidal levels of growth.
At this time, it was Hayek’s own wish to stop shipping to others and he made this pretty clear more times than not. Now let’s jump forward to the current day with an ETA production of approx. 500,000 movements being supplied to Hayek’s competitors that potentially will run the risk of not being allowed to ship. On those 500,000 units Hayek would lose between 50-70 million, literally a flash in the pan and peanuts, when you consider the Swatch Groups earnings. It will likely have no effect on their EBIT especially because Hayek, himself has always pointed out that they cannot earn any money with the movements they sell to competitors.
Please keep in mind, that in relation to the 8 billion they rake in yearly this movement business for them is roughly between 0.6% – 0.8% of revenue; a joke and populism play at its best. Looking at it from a job’s perspective… Swatch Group is able to assemble these 500,000 movements with approx. 120-150 people. In addition, these movements have not really changed in 40 years. They are selling a 40-year-old design and therefore there is more than enough manufacturing capacity that is highly automated and that can be turned on, or more times than not, off, with a metaphorical flick of the switch.
Let’s not forget that ETA is still producing an estimated 6 million mechanical movements a year which would mean 5.5 million of them go to without a surprise, the Swatch Groups own brands. One cannot stress enough that these 5.5 million movements are going to their own brands that are deemed separate legal entities operating as full-fledged competitors in the market. And not only this… these “separate entities” enjoy the latest technological upgrades.
The rest of the industry is being served 40-year-old rations, which means that the non-Swatch Group brands supplied with ETA movements will never be able to compete on price and especially not on performance like runtime, anti-magnetism, COSC certification, and decoration.
In contrast to Swatch Groups press release and due to the history of the company, ETA is still the largest producer and seller of Swiss mechanical movements and thus a market-dominating power and not Sellita which the Swatch Group would like us to believe. Mr. Garcia, the now CEO of Sellita, formed Sellita by assembling the ETA 2824 and 2892 movements from ETA and Nivarox supplied components and later transitioned step by step into cloning most of these components. He was able to do so based on the fact that the movements having been trusted to the Swatch Group by the government, meant their IP was open to the public. Mr. Garcia’s company would have been doomed by the announcement of the phasing out in 2003, but in contrast to many other Swiss companies, he had the balls to stand up to Mr. Hayek and defend not only his business but become the defender in this war over the freedom of the Swiss watchmaking industry.
Garcia is not a man to be taken lightly and this means Sellita has risen to a certain size and with size sooner or later comes a little, let’s say confidence in what you do. The fact is though Sellita is reaching just 20-25% of ETA’s total current capacity and thus we cannot seriously talk about any kind of Sellita market domination. Also, one should not forget, that Sellita is still a cloner, and far away from the massive engineering and manufacturing resources, the Swatch Group keeps for themselves. Labelling Garcia as the new market-dominating power is nothing more than a bad joke. Furthermore, Garcia being suspect to bribing COMCO is equally a joke and directly undermines the people working at COMCO as they are extremely well educated and professional law experts.
We can talk endlessly about these things, but there is another point to elaborate on during this post.
Are independent brands true victims?
Every person or brand that has been in the business for more than 10 years knows how ETA works, what they say and what the intention of the phasing out is. In the past year we have had countless companies complaining about ETA not wanting to fulfill any more orders (long before any of the current accusations against COMCO surfaced). Looking at the larger brands e.g. Chopard who have been prominently referred to in many of the recent articles have also been given fair warnings to safeguard their manufacturing. However, large brands like Chopard having an estimated revenue of around 1 billion CHF and a profit margin likely much higher than Swatch Group would have absolutely no problem to invest into their independence, but as of today, they have not taken the threat seriously and have not fully committed to their brands future independence.
You can imagine just how furious this would have made Hayek senior as aside from his deepest desire to ween the industries children from ETA’s supply and keep it all for himself, he also wanted to force the industry in general to invest into engineering; the foundation of watchmaking!
Because the other big players did not make big enough moves yet does not mean the smaller independents cannot do so. Our little brand has proven that with today’s technology and mindful collaboration there are ways to develop, manufacture and assemble an industrial level movement. It is more a matter of will and skill rather than sheer money reserves. However, since brands have been spoiled far too long by the cheap supply of ETA, it seems it was more convenient for brands to spend their money on marketing fluff and endless product lineup variations. Adding fuel to this story is that the individuals purchasing watches today are highly educated due to the access of information given by the internet and the individual can now easily detect if a company is a true watchmaker or just another cookie-cutter, make it pretty, design company that has no proven history in the real world of watchmaking.
Being a small brand has opened little in the way of doors for us and we have never been accepted by ETA and Nivarox as a customer. Something one could understand if we were actually dealing with a privately-owned company because small brands have small volume but create similar cost of doing business as the big players. But… the strange statement in both the Swatch Group and COMCO communication states that brands having less than a 25-person workforce are excluded from any exclusion and allowed to buy from ETA. This leaves a big question mark because ETA cannot actually supply these small brands with movements. Could it be that ETA cannot provide any movement to these small brands because they never actually intended to supply them? Just some speculation here, otherwise these convoluted statements do not make any sense…” Small brands can buy, but you won’t get anything!?!”
So finally, in our first public writing on this topic, we would like to talk about responsibility. Any founder or watch brand manager’s job is to protect his/her company against uncertainty and make sure the supply chain is predictable and stable. Today a mechanical watch consists of two core assets, the branding and design on the one hand and the movement inside the watch on the other hand. Neither of them can live alone and building a watch brand on a highly unstable supplier that is not only a market-dominating power, but the number 1 competitor in the retail market will predictably cause some problems for your company and your company’s future.
Consumers nowadays don’t only buy a watch, they buy a credible story of a watch company, especially when spending north of 1000 CHF for a watch. Complaining about COMCO in the hope that they will continue to allow Swatch Group to either flood the market or do customer cherry-picking is not a wise strategy. There have been companies like Breitling who reacted right after Hayek Sr. announced his intentions in 2003 and now Breitling prospers and continues to become more and more independent. More recently the house of Rolex which was been seen as an ally to the Swatch Group due to centuries of supply not only for their Rolex movements but also their “little” sub-brand Tudor, decided to partner with Chanel and push for independence known under the project name Kenissi. Rumours from within the inner watch industry circles indicated that the two heavyweights with a combined 15 billion revenue complained about Swatch Group’s inability to serve as a reliable partner for the future!
Again, it is not just the big guys, but also many other small brands like us who continually try to adopt alternative business models to reduce direct competition and critical dependencies with the Swatch Group.
The writing has been on the wall long enough and early on we realized for us to truly stand a chance as an independent watchmaker we needed control over our supply. Additionally, we understood that to be taken seriously by our customers we needed to step into the void and make our own movement. For over 10 years we have been investing into a movement under the project name K1 so that not only our brand but partner independents can stand a chance in the future Swiss and global watch industry.
We know of the challenges the independents face and for those that are currently operating or have a serious ambition to build a mechanical Swiss made watch company you are welcome to reach out to us. Our dynamic engineering team is working with independents large and small to help them realize true watchmaking independence.
Although we have to accept that we can never entirely compete against a mega power like the Swatch Group at least there is a regulating authority like COMCO that can protect us and other small manufacturers. The world needs such regulators to ensure that the up and comers stand a chance against the legacy superpower market players. This is the start of a positive way forward for the watchmaking world and in the preceding months there must be even more heavy lifting done to allow and enable fair competition.
The industry needs fair play and diversity now and not zombie brands that rely on the movement drip of a monopolist.
Andreas Felsl co-founder of HORAGE and THE Plus AG