Well, I was asked about my opinion on the recent article spread by Dow Jones Newswire about Swatch wanting to cease shipments of watch components to third parties altogether.

The Swatch Group has blue prints to sizeable growth over the coming years. By establishing Swatch World stores and going the route of direct sales through the net for Tissot and Omega for example they strive to outpace the industry in hoops.

Due to the scarcity of skilled manpower in Switzerland, France and Germany the growth potential of the watch industry and even Swatch Group's at that is limited.

The recent turmoil in the Far Eastern components industries has not been particularly helpful either. According to some estimates up to 40% of the manufacturing base there has disappeared in the black hole of the economic crisis. In Switzerland some 25% of all components suppliers went out of business. This because many brands were suddenly unable to balance their collections by using components sourced from the Far East. Their suppliers there had disappeared. This led the surviving brands to move upscale and limited their volumes severely and consequently also their purchasing power at European components suppliers. The brands reliance on Swatch Group manufactured components started to hamper the Swatch Group brands' growth plans over the course of 2009.

Swatch Group was and remains the most important manufacturer of dials, hands, cases, etc, etc. in Switzerland. This is not the fault of Swatch Group but of the past bank and government forced mergers which had lead to the creation of Swatch Group.

As you know the Swatch Group controls the market for mechanical Swiss Made movements supplied to third parties to the tune of some 75% - 80%. Since 2002 there is a ruling in place that obliges ETA to continue supplying kit-based movements till the end of 2010 to those companies having enjoyed use of these deliveries in 2001.

ETA has rightly encouraged its customers to start developing their own mechanical movements. Over the years some alternatives from companies like Sellita, Claro-Semag or Technotime have sprung up. However, due to the high sums involved in developing and manufacturing mechanical movements, the contenders are unable to grow as rapidly as Swatch Group would like to see them grow. The more so that most of these companies depend on Swatch Group owned FAR-Nivarox for their barrel springs.

In November 2009 TAG-Heuer have re-launched their Silverstone range with a new chronograph movement they called 1887. This movement is based on a Seiko 6S37. TAG Heuer having bought exclusive rights to manufacture the movement in Europe. They have invested some US$ 20 millions in this project.

That TAG Heuer had found a top-class partner in Seiko and thereby gained a kind of added independence from ETA was not to the liking of everyone. Especially so, since Seiko is one of the companies making highest quality balance springs. Swatch's management now knew they had to act swiftly. Seiko is just the first company from abroad having found a larger scale industrial partner in Switzerland to manufacture high quality mechanical movements. Companies like Miyota-Citizen, the Indian HMT have been rumoured for a few months already to be moving to the starting blocks to set-up a manufacturing shop in Switzerland as well. They not only have the movements but the know-how of the all important high quality barrel springs to power these movements. So far Seiko is the only company having made the all important final step, however.

The coming about of large scale competitors in the all important movement part of the industry is a blessing to Swatch and they jumped on the occasion to get the idea across at their customers cum competitors that they would also like to re-treat from supplying other components as fast as possible. Eventually, this will have to happen if Swatch Group wants to continue to grow its own brands at the rate they say they would like to.

In the short term their intentions will lead to higher prices and to margins at the larger independents that will be even lower than what they are. Brands depending on third-party distribution command gross margins of not more than 10% of turnover. This is insufficient to maintain an industrial base. So expect a shake-out amongst those brands not being able to go up-market on short notice.

In the mid-term we shall see a variety of well-financed companies entering the components business. Depending on their skills of nursing skilled workforces they might be able to grow rapidly. It is interesting to see how companies like the Swiss Adax Holding suddenly started pouring a lot of capital into the revival of components manufacturers. This will bolster those brands surviving.

Another trend which will continue to grow on the back of Swatch Group's announcement is the one of direct sales. Bell & Ross's recent initiative being just one among many in the not too distant future. One of the most likely candidates to take the Bell & Ross route is certainly some brands of the Richemont Group. Another, albeit smaller, trend is the Red8 concept launched by Bedat recently.

What is for sure is that the industry's largest players will grow at the expense of the smaller companies and that retailers will the longer the more have to orient themselves towards special niche brands like MB&F, Silberstein, Marvin and many others as the large brands take over with their flagship stores and internet sales.

So the announcement of Swatch wanting to discontinue supplying all and everybody with components makes industrial and consumer sense.