Watch industry quarrels over Swiss-made labels

Switzerland makes only about 3 per cent of the world’s watches, but it dominates the luxury end.

Lest anyone doubt that the watches it makes are Swiss, Swiss Mountaineer emblazons Switzerland’s national flag on the dial of each timepiece.

Does it matter that except for their Swiss movement, the watches’ components are made at a factory in Shenzhen, China? Or that Swiss Mountaineer is owned by a Hong Kong company called Golden Hawk?

Under Swiss rules that are as precise as its clockworks, Golden Hawk can label its watches Swiss-made as long as at least 50 per cent of the value of the movement comes from Switzerland.

But as part of a growing national ‘Swissness’ movement, the Federation of the Swiss Watch Industry and its most powerful member, the giant Swatch group, are out to change those rules.

They want to tighten the labelling requirements, which they see as necessary for protecting the value and quality reputation for an industry that is a pillar of the Swiss economy.

“More and more foreign companies, particularly from Asia, have realised how easy it is to call a watch Swiss-made and in effect mislead clients and sell at higher prices than what they could otherwise justify,” said Jean-Daniel Pasche, president of the watch federation.

Vincent Chan, Golden Hawk’s director, makes no apologies for Swiss Mountain’s methods, or its watches, whose top-of-the-line model sells for $450.

“Even if everybody in Switzerland isn’t perhaps happy about what we do, there’s nothing they can do about it because we follow the rules,” Chan said in an interview last month at Baselworld, the world’s biggest watch fair. “I would personally be interested to know whether all the smaller Swiss companies respect the rules as well as us.”

Most of the approximately 500 members of the watch federation support the demand for tighter rules, which would raise the percentage of Swiss-made components to 80 per cent of a watch’s total value – not just the movement, or time-keeping mechanism, covered by the current rules, which were established four decades ago.

But some smaller Swiss companies oppose the proposed rules change. They warn that the country’s watch sector risks undermining itself by wiping out smaller Swiss players that buy components from China and elsewhere to remain competitive.

The small companies say they can probably not afford to invest more in local production because of Switzerland’s strong currency and high labour costs.

Pasche predicted the opposition could be overcome. “We’re aware that stricter rules could hurt some of our companies,” he said. “But the problem can be limited if a transition period is provided for them to adjust to new rules.” Swatch, based in Biel, Switzerland, is the world’s biggest watch maker, with revenue last year of $7.8 billion.

Its products include its ubiquitous Swatch watches and luxury brands like Breguet, Blancpain, Omega and Longines. Almost all of the company’s production is in Switzerland.

Swatch does produce some watch components in China, Thailand and Malaysia, but the company says they are only minor parts. “I’ve got no problem with the Chinese and others buying in Switzerland,” said Nick Hayek, the chief executive of Swatch, “as long as everybody plays by the rules and helps protect the value of what is being made in Switzerland.”

The Swissness bill

The watch federation draws inspiration from the Swissness bill that passed in one of Switzerland’s two parliamentary houses in March and is meant to protect virtually everything produced in the country – whether machine tools or Emmentaler cheese – against counterfeiting or misleading use of the Swiss brand. A vote in the other legislative chamber is expected before the end of the year.

Parliamentary endorsement of the Swissness bill would be “a good first step,” Pasche said. But updating the 50 per cent rule would require the Swiss government to approve a new decree specifically for the watch sector.

There is little question that few manufactured products derive more value from their association with a specific country than do Swiss watches. Switzerland makes only about 3 per cent of the world’s watches, but it so dominates the luxury end of the industry that Swiss watches account for more than half of the monetary value of the $40 billion global watch market, according to Rene Weber, an analyst at Bank Vontobel.

Some smaller Swiss companies argue that the one certain outcome of stricter labeling rules would be increasing Swatch’s dominance. They say that Swatch is already cutting back the supply of movements – where its manufacturing market share is about 70 per cent – and the sale of other components to smaller rivals.

“I think this Swiss-made campaign is more about weakening rivals within Switzerland than about protecting against a Chinese invasion or unfair competition from outside,” said Laurent Alaimo, chief executive of Technotime, a privately held Swiss maker of movements. The company sells part of its production outside Switzerland and has a Chinese shareholder, Chung Nam, that owns 80 per cent of its equity.

China is both a rising rival and a growing market. A surge in Chinese consumer demand helped the Swiss watch industry report record exports last year of 19.3 billion Swiss francs, or about $21.2 billion. Exports to China and elsewhere by Swiss component makers have climbed 37 percent in the last three years, with most of that increase attributable to rivals of Swatch.

Chinese investors have recently acquired a handful of Swiss watch companies, like Eterna and Emile Chouriet, which are still members of the Swiss industry federation.
Jean Depery, the Geneva-based director of Emile Chouriet, said his company had long relied on some components from China. What the new Chinese ownership has done, he said, is “completely carve open their consumer market for us.”

As a result, Emile Chouriet plans to make 70,000 watches next year – selling 90 percent of them in China – compared with only 9,000 watches in 2010.

“Everybody proudly displays Swiss-made on its facade, but if you scratch below the surface, you will often find a lot of surprises,” Depery said. “If everything in a watch really had to be Swiss-made, a large part of the Swiss industry would already have been destroyed.”

Several companies that exhibited their watch wares in March at Baselworld also displayed inventive ways to tap into the value of being associated with Switzerland.
One was Xetum, a San Francisco company started in 2009 by Jeffrey Kuo, a former management consultant and a full-time watch aficionado. Xetum, he said, sells “California-designed but Swiss-made watches.”

Because the company buys its movements from ETA, a subsidiary of Swatch, Xetum watches can be labeled Swiss-made.

“For a new brand, it really helps to have the quality associated with Switzerland,” he said. “But of course we’re not in any way trying to out-Swiss the Swiss.”