* Investors question Swatch Group strategy in shrinking
* CEO announced new project to develop electric car
* Investors say have little information on Swatch battery
* They are concerned about timetable, cost of project
By Silke Koltrowitz
ZURICH, Dec 22 Three years ago, Swatch Group
was riding high. The world's largest watchmaker, known
for its colourful plastic watches as well as upscale brands
including Breguet, reported record gross sales.
Then in several newspaper interviews in 2015 and in early
2016, chief executive Nick Hayek announced that he was taking
the company in a new direction, launching a battery for electric
vehicles with the goal of reaching $10-15 billion sales by 2020.
Investors called the plan expensive and unrealistic and with
2016 group sales predicted to be below last year's 8.45 billion
Swiss francs ($8.36 billion), inventory rising and Hayek
refusing to announce savings despite slowing sales, they are
questioning the group's strategy.
Urs Beck, a fund manager at EFG Asset Management who has
Swatch among his top 10 holdings, said Hayek had lost some
credibility with investors because his forecasts had not always
"When he says 10, you know it can be 5," Beck said.
"There is little information on the Swatch battery. Hayek is
known for giving fancy forecasts that often only materialize in
the long term."
Carine Menache, who runs a family investment company and has
Swatch among her biggest holdings, said it had not been an easy
ride, but she had nevertheless added to her position when the
share price fell below 250 francs in August.
"It seems to be coming back, but hope is not an investment
strategy," she said, adding that Hayek was a good manager but
should diversify more into luxury accessories and launch more
limited editions or smartwatches.
"I have not heard that they were cutting costs, but they
should probably do that."
A spokesman for Swatch Group declined to comment on
criticism of its strategy but said in an emailed statement the
company was not planning to reduce production capacity now or in
The share price has fallen by 12 percent so far this year on
top of a 21 percent drop last year. That compares to 7 and 19
percent declines respectively at rival Richemont. Swatch
trades at a 17 percent discount to Richemont relative to
12-month forward earnings.
At over 20 percent, short interest in Swatch's bearer shares
is no longer at the peaks seen earlier this year, but still
high, IHS Markit data shows, reflecting short sellers'
expectation that the shares will fall further.
The car battery has been jointly developed by Belenos Clean
Power, in which Swatch holds a 51 percent stake, and the Swiss
Federal Institute of Technology (ETH) in Zurich.
Car batteries are an attractive growth market if numbers of
electric vehicles (EVs) explode to two-thirds of all cars by
2030 in wealthy cities, as several studies predict.
But it is also a highly competitive field, where
heavyweights like Tesla and Panasonic invest
billions to gain scale and bring down costs for the currently
dominating Lithium-ion batteries.
Prototypes are being produced at Swatch's Renata battery
unit near Basel but have not yet been presented to investors who
are waiting for signs of progress.
"The timetable seems unrealistic to me. It is impossible to
get from zero to 10 billion sales within just three years," said
Paul Wyser, owner of Swiss battery maker Wyon and a former
Swatch Group manager who still owns some shares.
"Battery development takes time because of the comprehensive
safety tests. You also need to see if it works over the long
Technical details have also been scarce. Swatch has said
that the new battery uses a vanadium pentoxide compound for the
cathodes and a new electrolyte composition, giving it higher
energy density, a longer life span, shorter recharging times and
a better safety profile than conventional batteries.
Wyser said vanadium pentoxide was available and cheap, but
was just one of many materials being tested for car batteries at
the moment with an uncertain outcome.
Hayek, who declined to comment for this article, has said
publicly that the battery could generate revenue of $10-15
billion by 2020, from use in cars, e-bikes, e-scooters and
Others have questioned the cost associated with the project.
"You need to invest a lot before you get a return," Vontobel
analyst Rene Weber said.
Swatch has not provided any financial details on the
project, but Hayek said in a newspaper interview that it signed
a memorandum of understanding with Chinese car maker Geely
in May and that the battery could be jointly produced
in China from early 2017 if tests were successful.
But Geely sounded a cautious note: "This is one of many
projects, we work with a lot of suppliers," spokesman Ashley
Sutcliffe told Reuters by phone.
"It's early stages for both parties right now. Whether we'll
develop it together or invest in the project, that is all too
Beck said the outlook for the project was not clear.
"Investors do not have any figures, just this long-term
fantasy that something could come of the cooperation with
Geely...There are so many joint venture partners, that even if
the project becomes a success, Swatch Group will probably only
get a small share of it," he said.
Nevertheless, Beck said liked the Swatch's long-term
approach and even the high inventory levels.
"It is when the cycle is at its lowest that you can gain
market share and Swatch Group is well positioned for that," he
($1 = 1.0111 Swiss francs)
(Additional reporting by Laurence Frost in Paris and Eric
Auchard in Frankfurt; editing by Anna Willard)