Be Careful What You Wish For!

So a few days back, Swatch got served up a mighty cold cup of espresso.

This is the original statement provided by Swatch Group -

Courtesy of the Swatch Group

I realize that the text is a bit small, so here is a link to the statement on their site -

Swatch Group Statement

And while schadenfreude has many more "scholarly"definitions, I think this little snippet from a "poem as definition" courtesy of Luke Wehner and posted by the Urban Dictionary sums up how a lot of people in the industry currently view Swatch Group's predicament:

Waking doormen from their naps

Watching tourists reading maps

Football players getting tackled

CEOs getting shackled

I was speaking to a colleague from the Fourth Estate and we were both pretty bemused by the "everything happens to me" tone of the Swatch Group statement. So let's dissect this little missive to see if we can read anything from the entrails -

Based on the amicable settlement between Swatch Group and the Competition Commission (Comco), which was signed in 2013, the company ETA has a supply obligation towards third-party customers until the end of 2019. The supply quantity agreed upon has - by a substantial amount – not been purchased by these third-party customers, and certain major customers did not place any orders for 2017, while ETA, due to its imposed supply obligation, must continue to maintain the capacity to deliver roughly 1.5 million mechanical movements. 

Okay, let's take this first bit. What it underscores is that Swatch had, for all intents and purposes, gained nearly total control of the movement manufacturing market. The language used at the time of the Comco settlement and the time leading up to it was that Swatch was a benevolent master, hoping to encourage their competitors to grow and flourish and develop new solutions of their own, as in develop and make their own movements. Now the subtext of this was clear for a lot of people who were not imbibing the corporate Kool-Aid, and we called bullshit. Because when you started to drill down to a more granular level there were several other contributing factors that were probably closer to the reality:

1. Not only does Swatch make movements, they also have a handful of brands that you might have heard of. Brands like Tissot, Longines, Hamilton, Rado and others. These brands have had to compete with others for market share. And it gets harder and harder to differentiate between many of these brands because when you "lift the hood" they are all, essentially, running the same engine. This then becomes a marketing wedge for the little guy - "Hey, why pay $2,900 when you can get essentially the same watch for HALF that amount WITHOUT the fancy name?" Spend any small amount of time on a watch forum or listen to the patter of the brands or salespeople who do NOT sell Swatch group brands, that will inevitably come up as a reason to buy brand X and not buy a Swatch group watch. So common sense would tell you that you would be better off if those companies were not able to make that pitch. Because let's face it, ETA is the standard. Soprod, Sellita, Techno Time? Well, according to some "experts" out there, there is no comparison. So if you take that possibility away, well then the differences between Swatch brands and others is far clearer. Moreover, if these independent/non-Swatch group competitors don't have a new solution or provider lined up who offers a reputable alternative? well that might cause them some pain, but the Swatch brands are just fine because you control the means of production ; )

2. There have been competitors in the production of movements for some time, these are not exactly brand-new entities. And the move to use other people's movements was in full swing even back in the "boom" years when several brands would openly complain about the scarcity of available ETA movements, and more specifically the delays of deliveries of ETA movements, which in turn caused them major problems in completing the assembly and delivery of their own watches to their customers. What Swatch was not counting on is that the brands that they had in the past kept over the barrel were now in a stronger position, that Soprod was developing some very good solutions, and that customers were now taking advantage of them.

Therefore, Swatch Group requested from Comco that ETA should be allowed to offer and sell the non-purchased quantities to all its third-party customers. The Swatch Group proposal never intended to deviate from the amicable settlement but rather to supplement it in order to take the abusive customer behavior into account. This request has been rejected by Comco.

So the basic point here is - we campaigned to be allowed to stop supplying movements to our brands' competitors, you agreed, and those pikers came up with their own solutions faster than we thought they would. NOT FAIR! I particularly love that phrase - "abusive customer behavior".  Essentially, their customers cut their orders owing to the global downturn in watch sales, therefore they (the customers) are abusing Swatch group by doing what is best for their business.  In other words, exactly what Swatch asserted was the motivation for them curtailing and finally eliminating movement sales to brands outside of the group.

Swatch Group regrets Comco’s decision and deems it utterly unrealistic. Swatch Group is forced to maintain the production capacities for third-party customers – with substantial financial and personnel expenditures – although in some cases, the third-party customers have drastically reduced or even completely dropped their order quantities. 

Basic translation?  The shoe is on the other foot, and it pinches.


With this decision, ETA and Swatch Group must once again assume their customers’ economic risk. In spite of the fact that major customers such as Sellita or Tudor have reduced their order quantities for 2017 by about 700,000 pieces in total relative to the previous year and although the difference between the effectively-ordered quantities and the spare capacity amounts to almost 900,000 pieces, ETA must maintain the determined capacities for the coming years in order to meet its supply obligation as defined by Comco. 

What this really underscores is the entire watch world's refusal to recognize and adjust to the economic realities that have been brewing for the past two years.  It is also interesting that Swatch goes to the trouble to identify two particular villains in their version of what went wrong.  The truth is that owing to the agreement that Swatch actively pursued, Tudor, Sellita and others were going to get cut off soon enough.  And let's not forget that Tudor is not exactly starved for movement making know-how.  You might have heard of another little upstart called Rolex that happens to be in the same "family".  

Plainly put, when you continue to try and "shock and awe" all of your customers into looking for new solutions, you have nobody to blame but yourself when they actually listen to and act on your messaging.  What the f*&k did you think was going to happen? 

As a result, the decision of the Comco penalizes a market participant – ETA – which has made substantial investments in innovation and development of industrial capacity, while other market participants again preferred to focus their investments solely on marketing their products. In order to cover the additional costs arising from this enforced readiness to deliver, ETA will have to consider massive price hikes. 

Again, calling bullshit on this one.  The real innovations were happening in other places.  Soprod makes movements with some truly interesting complications for some of the industries big dogs.  Eterna offers a lot of interesting ideas, the only thing holding them back is the unrealistic pricing structure they seem unwilling to let go of.  And other competitors have popped up.  Now what Swatch is not saying in this statement, which if I'm honest is the real issue that is impacting movement orders, is the slow down in the watch business as a whole.  Simply put, brands that ordered thousands of movements annually are not ordering ANY movements until 2018 at the earliest.  What that means is that they are sitting on a boat load of movements that they haven't even used yet, and don't anticipate using for the next 18 - 24 months.

And therefore, when supply far outstrips demand, the only thing that apparently makes sense is to -raise prices!

Well, I am certainly no Hayek, but I have to question the sanity of this approach.  Because there are a few flaws in this idea.  Keep in mind that every movement manufacturing concern is suffering right now due to unrealized orders.  If ETA chokes off the movement supply to other brands, there are a few suppliers who could step in.  My hunch is that this is more of a "no really means no" situation, and Swatch is playing chicken with themselves as they race towards the cliff.