The topic of the 21st episode of 8Past10 Watch Talks was the latest, and probably the most dramatic, update of the seesaw battle between the Swatch Group and Switzerland’s Competition Commission (COMCO).
As an independent federal authority, one of COMCO’s main tasks is: “monitoring dominant companies for signs of anti-competitive conduct.” Unsuprisingly, the watch industry monopoly Swatch Group appears right in their radar.
In the mid of December 2019, COMCO’s secretariat has announced that the Swatch Group subsidiary ETA be banned from supplying mechanical watch movements in 2020. And the final decision is postponed until summer 2020.
The announcement quickly sent a ripple of tumult through the watch industry.
What is ETA doing? And why are they so important to watch brands?
ETA (full name: ETA SA Manufacture Horlogère Suisse) is specialised in designing and manufacturing ébauche movement for both Swatch Group’s own watch brands, but also many outside brands like Tudor, IWC and Breitling.
What is the ébauche movement? Referencing to Hodinkee’s explanation:
In modern watchmaking, ébauche is a complete movement kit, minus the escapement components (which may also be supplied to the final assembler). For much of the history of watchmaking in Switzerland, a watchmaker would obtain an ébauche as well as other components, including the escapement, balance and balance spring, etc., from suppliers before finishing, assembling, and regulating the completed watch.
Today an ébauche is often contrasted with a so-called “in-house” movement although this distinction is in reality not so cut-and-dried – an ébauche, if of high quality and if finished well, can be more horologically interesting than an in-house movement, if the latter is poorly designed or finished. The word ébauche is borrowed from fine art, where it refers to the preliminary underpainting over which a finished painting is done.
As Nick explained:
Watch companies can either choose to build an in-house movement themselves, define how exactly you would do it. But that’s very expensive. Alternatively, you can also turn to specialised companies who are not a watch brand itself but are specialised in creating only the movements, like ETA.
There’s a consensus that ETA’s time-tested ébauche movements outperform many mediocre in-house movements, in terms of costs of making and restoration, durability and stability.
Like mentioned the is beginning of the article, ETA, as a subsidiary of Swatch Group, not only supplies to the rising number of Swatch Group watch brands with various movements, they also supply to external brands outside the Swatch Group. From leading watch brands to independent watchmakers, the ETA movement is ubiquitous. Many watch brands “are heavily relying on ETA movements, and so they have to deal with Swatch Group”, said Kristian.
Halted Supply of ETA’s Movements
Then, all of a sudden, in 2002, Swatch Group’s Nicholas G. Hayek expressed the wish to stop supplying movements and ébauches to companies outside the Swatch group. Noticing the repercussion this cold-turkey may entail (especially to smaller watch brands), COMCO stepped in with a series of investigations. (You can find the highlighted timetable by the industry veteran Joe Thompson over here.)
After years of back and forth, in 2013, Swatch Group and COMCO had signed a settlement that ETA has a supply obligation towards third-party customers until the end of 2019.
Presumably, the logic behind COMCO’s decision was that they estimated other Swiss movement manufactures would catch up when ETA was gradually declining supply. Meanwhile, watch brands would have enough time to look for alternative movement suppliers other than ETA. As a result, a more equally-balanced competition market would be formed by 2020.
Surprisingly, when Swatch Group’s ETA was about to be liberated from the supply obligation restriction signed in 2013, COMCO stepped in again to prohibit ETA from supplying mechanical movements to third parties in 2020.
As a Switzerland newspaper Grenchner Tagblatt addressed: “It’s quite a blow to ETA… In 2019, it sold half a million mechanical movements to Swatch’s competitors. In 2020 it wouldn’t be a single clockwork. A private company would be removed from the free market by a government agency for one year. Watchmakers who had planned with the ETA factories got into trouble.”
In the statement from Swatch Group, COMCO’s decision was accused of being “absurd and unacceptable”.
With its decision prohibiting ETA completely from making deliveries to third parties in 2020, COMCO is effectively driving ETA out of the market (exceptions for SMEs are stipulated in theory, but de facto impossible). On the other hand, Sellita will become an even more dominant player due to its production volume. COMCO has thus reshuffled the cards for the industry and is, in effect, making economic policy by completely restructuring a strategic market area.
ETA’s 5 Million Movements a Year
ETA made roughly 5 million movements in 2019, and only 10% of them went to outside Swatch Group brands, that’s about 500,000 movements.
“I think 10% is nice. Because it helps young watch brands establish themselves without a huge investment in producing in-house movement”, Kristian commentated.
ETA produced some of the most ubiquitous and illustrious ébauche models like 7750 Valjoux, 2824, 2895, etc. Many watch brands’ in-house movements are developed on the base of ETA’s ébauches.
ETA’s ébauche movement imparted the technical possibilities to watchmakers. It’s not uncommon for watch brands to buy the ébauche from ETA, then build their own complications on top of that.
Kristian recalled: “For instance, IWC did it extremely well during the 90s, they use a lot of ETA movement and build their own complications like Da Vinci Perpetual Calendar Chronograph in 1985”.
Debute in 1985 Basel World, The IWC Da Vinci Perpetual Calendar (Ref.3750) was developed by Kurt Klauson based on ETA’s Valjoux 7750 chronograph ébauche movement
Without ETA’s Movement in 2020
Kristian: Well, you won’t see any Tudor with ETA movement from now on. Look at Chanel, they own 20% of Tudor movement manufacture, so I think the Chanel watches would not be with any ETA movement either. And Bell & Ross, which is owned by Chanel, would not use ETA either.
Nick: of course, when there is a threat that you don’t get any movement from ETA anymore, you start looking into alternatives… In the past 10 to 15 years, a lot of alternatives has come to the market.
There are watch movement manufacturers like Sellita, Soprod, STP (Swiss Technology Production), Miyota, Citizen, and Seiko, etc. that produce movements for watch brands. Also, a number of watch brands have been developing their in-house calibers like Tudor, Breitling and Frederique Constant.
Would Sellita be the next ETA?
In the Statement released in December 2019, Swatch Group argues that ETA was no longer in the dominating position. They pointed out that Sellita has supplied one million mechanical movements in 2019, while ETA only sold half as much to outside watch companies.
Kristian: If Sellita can provide, then they will be probably one of the strongest movement makers in the whole Switzerland and take a powerful position in the worldwide spectrum.
According to James Buttery’s article, Sellita has been supplying 1.2 million mechanical movements annually in recent years, although their movements are mainly modified from ETA’s movement that has been out of patent.
Sellita was considered the “only one alternative” for ETA’s movements in Joe Tompson’s article for Hodinkee, Kristian questioned whether Sellita can quickly adapt to the instantly increased demand. “There is something wired about how they deal with the movement. Because they do it through the agents”. With the movement agents, watch companies would need to pay a marked-up price in order to acquire the movement they need. “It’s such a conservative way of thinking sells”, said Kristian.
Anyhow, It was believed that with the combination of the above-mentioned movement purveyors, the shortage of the 500,000 ETA movements would be fulfilled.
A Quality Problem
Even though the industry can easily come up with 500,000 movements elsewhere, the real condition is more complicated than that. For many watch brands that have been using ETA’s movements for years, it was not merely a matter of the quantity substitution. Moreover, it involves subjects including lead time management, the time and efforts required to build up a new relationship with new suppliers, and most importantly, quality control.
In terms of movement quality, as Nick noted: “ETA is often referred to as a ‘workhorse’, it is something that is going on and on, so the quality is beyond question.”
Kristian: “I don’t know how much research and development has gone through ETA. Take the 7750, which is one of the most trusted chronograph movement. It’s quite an old movement! Nothing really new in there, I don’t think there is a 7750 that’s actually anti-magnetic yet.”
Nick: “It reminds me of the Russian space program; they still use the capsule that produced in the 50s.”
Kristian: “Hey, can’t complain about good quality.”
Nick:” It’s not your fashionable fancy product, but it is something that works.”
K: “Of course, it’s a competition problem, but I think it’s also an a-matter-of-quality problem. I don’t know how many years that Tudor has worked on the in-house movement; I know they had some issues with GMT (the date wheel issue). That’s the good thing about ETA: you know they work, and you know that they can be repaired by any, even an amateur, watchmaker.
Who Would Benefit from the Halted ETA Supply?
The in-house movement does not mean great quality. It takes at least a decade to prove a movement was as good as ETA.
Kristian:
It takes time to build a trusted product, and keep the quality like ETA. For instance, I love the story what Carlos Dias did with Roger Dubius in the early 90s (Carolos Dias is the founder and previous CEO of Swiss luxury watch brand Roger Dubius), and he came out with this plethora, this whole plenty of in-house movement where like 80% didn’t work. He was so desperately wanted to do the in-house movement, and when Richemont took over, I think they kept 2 out of 19 or something.
And also look at Panerai, aggressively wanted to produce in-house movements, many of which, in the early stage, had problems.
The in-house movement does not mean great quality. It takes at least a decade to prove a movement was as good as ETA.
Meanwhile, from the information of an industry insider, the price of ETA’s movement has been increased. In that case, for watch brands inside Swatch Group like Hamilton or Tissot, they gained a competitive advantage by carrying the same movement but offers a way lower retail price compare with some external watch brands.
