What a Swiss watch factory fire tells us about luxury and competition

December 31, 2013

Over the weekend, something catastrophic happened in Switzerland: A fire gutted a workshop that rust-proofs the component of a wristwatch that literally makes it tick, halting production for an untold number of weeks. And this isn't just any workshop. It's owned by the Swatch Group, which is the biggest supplier of parts for high-end timepieces made by brands like Richemont and LVMH, and a work stoppage could create shortages throughout the industry.

Heavens to Betsy! You might sarcastically exclaim. This is the digital era, where everyone has multiple screens that display the time everywhere around them constantly. Who even wears watches anymore, unless they display your e-mail as well?

You'd be sadly misinformed, however, in thinking the mechanical watch was on the way out. And the fire at the Swatch factory is the kind of disturbance that illuminates just how large and dynamic this centuries-old industry actually is. A few things to know:

1. Watch sales boomed throughout the recession. 

The New York Times first noticed the return of watches as a fashion accessory back in 2011, with a number of clothing labels developing their own lines of forearm bling (many of which were actually licensed by Swatch). Then, luxury sales really took off in Asia, as Rolexes and Patek Philippes became the impressive gift of choice in both business and government. Switzerland exported about $24 billion worth of watches in 2012, according to Credit Suisse, with China driving most of its growth:


That's why Swiss watch factories have been in overdrive for the past few years.

2. Mechanical watches are where it's at

China itself produces more watches than Switzerland, in unit terms. But they're mostly the cheap kind that you can get in a drugstore. Switzerland has a near-monopoly on the luxury segment, and has been increasing the price of each watch sold by cashing in on the cachet of finely-made mechanical devices, not digital ones:

Screen Shot 2013-12-31 at 2.43.38 PM

3. Nobody wants to depend on anyone else

Despite the number of watch brands, Swatch's subsidiary companies have long manufactured most of the generic components that go into them, just like Apple's competitor Samsung makes the chips in its iPhones and iPads. But as competition heats up, more companies want to distinguish themselves by controlling the whole package -- many are planning to open single-brand stores for marketing purposes -- and also not depend on rivals for elements they can't do without. That's fed a ferocious process of vertical integration, with watchmakers buying up smaller manufacturers to supply them with custom parts.

In addition, Swatch itself decided a decade ago to stop selling its components to other companies, keeping more for its own products. The process has been held up by Switzerland's antitrust regulator, which fretted that Swatch was abusing a dominant market position, but finally got the go-ahead last fall to choke off supply over time. As much as other companies want to become independent, the pace has put some in a difficult position, especially the smaller brands that don't have the reach to produce everything by themselves. In a Deloitte survey of watchmakers, 47 percent thought Swatch's decision would kill off some brands. And more thought it would be an inconvenience for everyone else:

ETA is the Swatch-owned company that makes "movements," which power movement. (Deloitte)
ETA is the Swatch-owned company that makes "movements," which power movement. (Deloitte)

 4. Swiss is as Swiss does

Swiss watchmakers aren't immune to the outsourcing trend. It's often cheaper for them to source components overseas, assemble the package in Switzerland, slap the "Swiss-made" label on it, and apply a gigantic markup. But the most solid gold luxury brands -- the haute horologerie -- want to maintain their exclusivity against the mid-range pretenders. So earlier this year, the Swiss parliament passed a law requiring all watches calling themselves "Swiss-made" to have 60 percent of their components made in Switzerland. That's a big win for Swatch, which now is starting to keep all its components to itself, leaving other companies with few satisfactory alternatives. And it's why a fire in one workshop is still a really big deal.

Lydia DePillis is a reporter focusing on labor, business, and housing. She previously worked at The New Republic and the Washington City Paper. She's from Seattle.
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