PARIS — Switzerland’s competition regulator on Thursday rejected a request by Swatch Group to change an agreement governing its deliveries of components to other watchmakers in light of falling demand, prompting the world’s largest watchmaker to threaten “massive price hikes” to cover its costs.
According to the terms of the amicable settlement signed with the Swiss Federal Competition Commission in 2013, Swatch Group subsidiary ETA has an obligation to supply watch movements to third-party customers until 2019.
Swatch Group said the deal forced it to maintain the capacity to deliver roughly 1.5 million mechanical movements, even though major customers like Sellita and Tudor have reduced their order quantities for 2017 by about 700,000 pieces in total relative to the previous year.
“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,” it said.
“Swatch Group regrets COMCO’s decision and deems it utterly unrealistic,” it added, noting that it has spare capacity of almost 900,000 pieces. “In order to cover the additional costs arising from this enforced readiness to deliver, ETA will have to consider massive price hikes,” Swatch Group said.
In its ruling, COMCO said that current market conditions did not warrant any alteration of the existing agreement, in light of ETA’s dominant position. Exports of Swiss timepieces fell 10.2 percent between January and September, according to the latest data from the Federation of the Swiss Watch Industry.
“The key element in this decision was the survey of market participants, who emphasized that maintaining the amicable settlement unchanged was decisive for the market’s development. A change in the delivery schedule at this time would significantly endanger the market entry and expansion plans of ETA’s competitors,” it said.
The COMCO ruling can be challenged in front of the Federal Administrative Court.
Luca Solca, managing director at Exane BNP Paribas, said the decision implied a “small negative” for Swatch Group, whose share price has fallen 6.4 percent since the beginning of the year.
“Swatch looks like a prisoner of its own high upstream integration given the low flexibility; it appears stuck between the rock of suffering inventory build-up to keep utilization high, and the hard place of suffering gross margin percentage compression. And smart watches are on the horizon, potentially threatening its entry price point business,” he said in a research note.
Rogerio Fujimori, analyst at RBC Capital Markets, said the decision would give ETA some justification to raise prices next year. “Given its unmatched scale, ETA standard movements are still perceived to offer superior quality at a lower cost for entry price mechanical models, in our view,” he said.
He maintained his “outperform” rating on the stock, noting recent signs of improving sellout trends in Greater China.