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You can rely on Swiss watches

The Swiss watch industry is once again under threat from competitors, but Swatch will survive and thrive, says Alex Williams.

803-Swatch-1200

The Swiss watch industry is once again under threat fromcompetitors, but Swatch will survive and thrive.

Nicolas Hayek, a Swiss-Lebanese financier born in the 1920s, used to wear several watches on both wrists at once. It was a sign of his devotion to Switzerland's watch industry. For centuries, the country has led the world in clock design, but its watchmakers were under pressure in the 1980s as Japanese rivals flooded the market. Hayek was brought in to liquidate two Swiss firms, but spotted a future for the industry and rolled them into one new group, named Swatch.

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Today, Swatch is the world's biggest watchmaker and a barometer for the industry, but the future of Swiss production is once again under threat, this time from California. American tech giant Apple launched "Apple Watch", a wearable computer, in spring last year. It does not disclose its watch sales, but Swiss watch exports have tumbled ever since, falling for 11 consecutive months.

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In February, "smartwatches", which connect to your mobile and laptop, outsold Swiss watches for the first time, shifting 8.1 million units. Swiss brand Tag Heuer, which is owned by luxury goods giant LVMH, has responded by launching its own "connected" timepiece. But other pricey brands, from Cartier to Patek Philippe, have stuck to their traditional designs, calling Tag's new product "a joke".

Analysts following Swatch, which also owns Omega and Tissot, have been braced for falling numbers, but the market has been taken aback by the speed of the decline: sales are down 12% in six months, slashing profits in half. Its shares are down more than 40% since Apple's launch. Other factors have also slowed down Swatch.

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Hayek's son, Nick, whonow runs the business, has refused to shed workers, despite shareholder pressure, citing its highly specialised staff. A corruption crack down in China has also slowed sales in Hong Kong and Paris, a key shopping destination for wealthy Chinese tourists. The overall drop-off is "sobering", says watch website Hodinkee.

Much will depend on Swatch's ability to remain in fashion. As a part-family owned business, it eschews short-term market pressures, putting a "warning label" on its annual report in 2008, saying it was not for members of the "financial circus". Hayek has refused to cut the group's marketing budget, hitting margins in the short term, but ensuring Swatch's products live on as accessories and jewellery items.

Swiss watches have never dominated the mass market but have always outlived foreign competitors. And the Hayeks have looked foolish before for backing the industry's future. But with a 40% stake in Swatch, worth $14bn, that faith has been rewarded. At 13 times earnings, Swatch is almost the cheapest it's been for two decades. Buy.

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