June 24, 2024

Dilemma for Swatch: It’s Too Popular

Swatch, the world’s largest watch company, wants to add as many as 2,000 employees this year — about 1,500 of them at home in Switzerland. It says that it is struggling to find people qualified enough to meet that target. It is also racing to add factory capacity in order to overcome production bottlenecks. Meanwhile, it is not getting enough watches on the shelves to meet demand.

“Managing our stock is at the moment not an issue for us because demand is so big that we unfortunately don’t even have the time to build up any stock,” Mr. Hayek said during an interview in late March at Baselworld, the watch industry’s biggest fair. “I hate that feeling of missing sales because of a shortage in products.”

Swatch’s production and staff recruitment difficulties reflect the overall health of a watch sector that rebounded well from the world financial crisis. Demand has soared in Asia — the region accounted for more than half of Swiss watch exports last year — with makers of mechanical watches capturing an increasingly large slice of a growing market. Exports of mechanical timepieces rose 32 percent in unit terms last year, compared with an increase of 18 percent for less expensive quartz watches.

Swatch posted a 42 percent increase in net profit last year, to a record 1.08 billion Swiss francs, or $1.22 billion, from 763 million francs in 2009, on a 19 percent rise in revenue, to 6.44 billion francs.

The company does not break down earnings by brand, but revenue in its main watch and jewelry division rose 28 percent last year at constant exchange rates, compared with an increase of 8 percent in revenue in its production business, which accounts for almost a quarter of total revenue.

Still, Mr. Hayek is on a crusade to change the modus operandi in his sector, from tightening rules on what defines a watch as “made in Switzerland” to forcing competitors to develop their own production of components. Swatch has been debating with competition regulators about how far it could cut back a third-party supply business that it claims generates relatively low margins and that requires investments that it said should be shared across the industry.

“People assume that it’s a good business to sell components, but the only really attractive business is to sell finished products of our brands,” he said. “We are in a ridiculous situation that would be like having BMW supply all the engines for Audi and Mercedes. In no other industry do you have one company supply all the critical parts to the people who then compete directly with it.”

A withdrawal by Swatch as a supplier would, however, amount to a sea change for the sector. As a result, such a move “cannot happen overnight,” said Jean-Frédéric Dufour, chief executive of Zenith, which is owned by the French group LVMH Moët Hennessy Louis Vuitton and is one of the few Swiss brands that does not buy from Swatch.

Still, Mr. Dufour said, by forcing rivals to invest more in their own production, Mr. Hayek “could help bring back the watch sector to how it was operating 100 years ago, when each brand really differentiated itself from others by the quality of its movements.”

Swatch’s hegemony over watch production is part of the legacy of Mr. Hayek’s Lebanese-born father, Nicolas, who died last year.

As a management consultant, Nicolas Hayek had been hired by banks to close down two manufacturers in the early 1980s, at a time when Swiss watchmakers were getting crushed by less expensive Japanese competitors. Instead, he merged and acquired a stake in the struggling companies and revived the whole industry with the introduction of the inexpensive plastic Swatch watch.

The fashion frenzy generated by the colorful Swatches in turn required the group to develop mass volume production, building up its leadership by later acquiring more component manufacturers.

Article source: http://www.nytimes.com/2011/04/23/business/global/23swatch.html?partner=rss&emc=rss

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