GENEVA (Reuters) - Luxury watchmakers are fighting over too few parts makers in order to keep up with a booming market and counter supply bottlenecks caused by industry giant Swatch's decision to cut vital contracts to its rivals.
The market for high-end watches was worth more than $46 billion in 2012 driven primarily by Asian customers, but competition is fierce. As top names try to keep up with orders they have bumped into a big problem: too few high-end parts suppliers and not enough investment in training.
"Everybody is rushing to get organised," Jean-Marc Jacot, head of independent watchmaker Parmigiani which has its own production unit, told Reuters at a watch fair in Geneva.
"For dials or cases you can buy an existing firm that works smoothly. But for all the parts going into the movement (such as balance-springs) there is nothing to buy. Nobody invested into these skills," he said.
Swatch Group UHR.VX, the world's biggest parts supplier, has a near-monopoly on the delicate balance-springs that make a watch tick and the "movements", or internal mechanism driving all the moving parts of a watch. It has said it no longer wants to be the industry's "supermarket" and started cutting back on deliveries last year, keeping more parts for its own brands, which include Omega and Longines.
Swatch has asked Swiss antitrust authority Weko to work out rules allowing it to cut back and eventually stop deliveries to others without skewing the competitive landscape. Weko has allowed Swatch to reduce deliveries in 2012 and 2013 and is expected to announce before July how the company can entirely phase out deliveries.
That has left other watch brands grappling with supply shortages and searching for other high-quality suppliers to buy in order to preserve the coveted "Swiss Made" label.
Among the brands most affected are the ones owned by the world's biggest luxury group LVMH (LVMH.PA): Tag Heuer, Hublot and Zenith. LVMH only diversified into watches in 1999 so its production facilities are less developed than their peers'.
Richemont CFR.VX, the No.2 luxury group which owns some of the world's most prestigious high-end watch brands, and independent big names Rolex and Patek Philippe, have more parts facilities and have also strengthened them by taking over some suppliers. They nevertheless rely on Swatch for some parts.
Independent watchmaker Parmigiani, which is owned by the Sandoz family foundation, split off its production unit Vaucher in 2003 to allow it to also make movements for third parties while still supplying Parmigiani. Handbag maker Hermes (HRMS.PA) bought a 25 percent stake in Vaucher in 2006 for 25 million Swiss francs to secure movements for its watch unit.
Jacot said brands were queueing to buy parts from Vaucher, which produces 25,000 movements a year for 17 brands. It does not want to expand any further so as not to enter a competitive battle with Swatch nor to sell movements to direct rivals.
Another big independent player in mechanical watch movements is Sellita. It relies, however, on Swatch's balance-springs for the movements it assembles. It has said it wants to develop this skill itself but did not wish to comment for this article.
Swatch owns ETA and Nivarox, the biggest suppliers of movements and balance-springs respectively. Swatch chief executive Nick Hayek has warned in the past that rivals invested too much in advertising campaigns featuring sports and movie stars and too little in production.
Consolidation in the suppliers industry picked up in 2011 when LVMH acquired Swiss movement and watchmaker La Fabrique du Temps and Hermes bought a stake in case maker Joseph Erard. The same year, PPR (PRTP.PA) bought a majority stake in Sowind Group, including watch brands Girard-Perregaux and JeanRichard and a watch movement factory.
In 2013, with no balance-spring makers to buy, takeover activity is focusing on areas like dials, hands and any other part that needs careful manual work.
"Dials are very coveted because they are very complicated to make. You need many different skills to make a dial and, for some of these, there are no apprenticeships any more," said Andre Colard, who runs a watch supplier trade show.
Some bigger suppliers have already been bought but there are still many small players. Dial maker Metalem and hand maker Aiguilla are bigger independents that could become targets, Vontobel analyst Rene Weber said.
Employers association CPIH estimates there were about 200-250 watch parts suppliers in 2011.
Deals so far have been mainly small, in the single-digits to low double-digits Swiss franc millions, according to Exane BNP Paribas analyst Luca Solca. "But leveraging companies costs very little," he added.
Hermes bought dial specialist Natebar in 2012 and LVMH took over ArteCad in 2011. Audemars Piguet now makes dials for its flagship Royal Oak model itself after supply failures threatened production.
"We still buy dials for other models. There have been important delivery bottlenecks in this area in the last two years," said Audemars Piguet marketing head Tim Sayler, adding company sales still grew to more than 600 million francs last year.
He said brands had to try to build skills internally for the balance-springs, or set up long-term partnerships with the few suppliers around.
Howard da Silva, leader of consumer business at Deloitte, cited speculation of some Swiss component manufacturers being actively marketed for sale, but did not give any names.
Independent brands Parmigiani, Greubel Forsey and Audemars Piguet, which all have their own production companies, said at the fair they had received takeover offers but their owners did not wish to sell.
Additional reporting by Oliver Hirt in Zurich; Editing by Sophie Walker