UPDATE: Swatch Seeks To Reduce Supplies To Other Watchmakers

Swatch Group AG (UHR.VX) Wednesday said it had asked the Swiss competition commission to launch an investigation aimed at allowing it to reduce its supplies of components to other Swiss watchmakers.

"This investigation ... should determine which mutually agreed solution is available to allow Swatch Group to reduce gradually its deliveries of mechanical watch movements and assortments to third parties, in the interest of the entire watch industry," Swatch said in a statement.

Swatch, the world's largest watchmaker, supplies movements and other parts to rivals in Switzerland through its manufacturing operations. In terms of volume, Swatch controls 70% to 80% of the sector's watch-movement production, according to a research study published last month by the investment firm Sanford C. Bernstein & Co.

"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," Chief Executive Nick Hayek told the New York Times in May.

"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."

The Biel-based manufacturer, which numbers Tissot, Longines and Omega among its brand, has been experiencing a sales boom this year fuelled by soaring demand in Asia, and has suffered shortages of some parts, particularly hands.

Swatch Group, which in February reported record revenue and profit for 2010, is facing an exceptional situation this year, with strong demand for all of its brands including the ultra-premium Breguet.

CEO Hayek said in May he wanted to add up to 2,000 employees this year to his 25,000 strong workforce and expand factory capacity to increase production.

"We want to increase the capacity for cases, hands, and bezels. We need extra production lines just to meet the demand, there is a lot that needs to be done," Hayek said in March.

His position has earned some sympathy from other watchmakers in Switzerland.

Compagnie Financiere Richemont SA (CFR.VX), which makes watches under the Piaget, Cartier and IWC brands, receives around half of its components from Swatch.

Richemont Chief Executive Johann Rupert said the Swiss government had the best intentions when drafting regulations to make Swatch supply parts, but it had suffered unintended consequences.

"The pressure brought to bear on Hayek to supply everyone is unfair," said Rupert in May.

"People come here with little capital investment and he has to supply them. If I was in his position I would be upset."

Analysts expect LVMH Moet Hennessey Louis Vuitton (MC.FR)also to be affected. The company, like Richemont, has been building up its in-house production capacity but still uses Swatch Group components in its Hublot watches.

Claudia Lenz, analyst at Bank Vontobel in Zurich, said for two years the Swatch management has wanted to reduce the supplies to third parties.

"They need more capacity for their own brands, but since they have a market share of around 70% in movements and assortment they have to supply third parties," Lenz said.

Sales of components to third parties were 51% of Swatch's production division revenue in 2000, which had been reduced to 32%.

Lenz said: "I think this will take some time. Swatch will want to gradually reduce the numbers of components it supplies."

Swatch shares closed Tuesday at CHF403.2. The stock has lost 3.3% in value since the start of the year.

-By John Revill, Dow Jones Newswires; [phone] ; [e-mail]