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In-House Means In Control

Among many avid watch collectors, the term "in house movement" seems to elicit eyerolling disdain.
Pieces of an assortment, including balance spring, from a non-Swiss movement.
There is a sizeable perception that "in house" is, in fact, nothing more than an unnecessary marketing ploy designed to tease more money out of the wallet of buyers (by way of definition, an "in house" movement means that the mechanism inside a watch was predominently manufactured by a brand itself, kind of like "we make our own bread" at a restaurant). I'll confess that I'd begun to think similarly, that is, until I read a 66 page report posted by the Swiss Competition Commision on May 10, 2023. Yes, this is the kind of thing an economist finds interesting on a weekend, or at least this economist.

Before we get into the details of this report, in the interest of full disclosure I should say that the original document was in a different language: lawyerese. I'm only partially joking, because it was actually written in German lawyerese which is perhaps doubly challenging. So, I used Google to translate the document and did my best to decypher the English legalese. I admit that there could be innaccuracies in what I thought I learned, but I promise to openly acknowledge those innaccuracies if I'm notified of them. Oh, one more thing. The Swiss competition authority actually redacted parts of this report like it was some kind of declassified nuclear weapon blueprint (ok, maybe not that heavily redacted but you get the point). I think it is pretty absurd to obscure commercial information in this way but who am I to judge? None of what I write here will depend upon an effort to fill in the literal blanks in this report.

One of the most important things I learned was that, as recently as 2015, almost every brand that manufactured a watch with a Swiss movement had to deal with one company, either directly or indirectly: Nivarox, a subsidiary of the Swatch Group. The difficulties with sourcing a Swiss-made movement are well-known and typically involve the whims of another Swatch company, ETA, which manufactures entire movements. What was somewhat unclear to me before I read this report is that both ETA and almost every other manufacturer of Swiss movements, such as Sellita, Soprod and the like, depend severely on the availability of parts from Nivarox. These parts are the tiny fiddly bits which are exceedingly difficult to manufacture with quality, such as balance springs and pallet forks. The customary name for this collection of parts is an "assortment." A table in the report makes it clear that in 2014 and 2015, less than 10% of Swiss movements were made without Nivarox assortments. The situation changed a bit by 2020, but even then, somewhere between 60 to 70% of all Swiss movements were built around Nivarox parts.

The Swiss movement market apparently was even worse than a character from the TV show Seinfeld I'll refer to as the Soup Guy.
Movement Guy.
This character was notorious for yelling at customers if they ordered soup in the wrong way, ending with "no soup for you!" and kicking customers out of his shop. I knew ETA was analoguous to the Soup Guy, turning away brands who wanted movements for a bunch of reasons I don't really need to get into. But the situation was even worse, because anyone who thought, "fine, I'll make my own soup" then had to deal with the Broth Guy, aka Nivarox, who was just as prone to say "no broth for you!" at which point you definitely weren't getting soup (ie a Swiss movement). Of course, complicating the case even further was that both the Soup Guy and the Broth Guy worked for the same Guy named the Swatch Group.

It's important we acknowledge that having a super-high market share, such as Nivarox's share of the "assortment" market, is not itself problematic from an economic perspective.
Assortment Guy.
But we know that inefficiencies do emerge if a company uses its market power to restrict the availability of products and / or raises the price of products excessively. If Nivarox did something like that, then the Swiss movement market would involve an inefficiency called a "deadweight loss" and authorities may justifiably want to address this problem. And, to a large extent, that was the question investigated by Swiss authorities: did Nivarox abuse its market power?

When it comes to pricing, the Competition Commission (henceforth COMCO) noted that "Nivarox increased its prices a total of five times between 2013 and September 2021 (most recently in November 2018). The price increases cumulatively resulted in an increase in sales prices of around 55%." What this amounts to in your favorite currency unit is a little unclear from the report itself. COMCO does mention that Nivarox pricing ranged from a low of CHF 20 to a high of around CHF 1,000, meaning that the price hikes were between CHF 1.38 per year per sale and CHF 69 per year per sale. Nivarox cited rising labor and training costs (among other things) as a basis for their price increases. COMCO concluded that the price hikes were probably not an indicator that Nivarox was abusing its market position. COMCO came to this conclusion, in part, because Nivarox raised prices for fellow Swatch Group members (such as ETA) by the same amount that they raise prices for unrelated, third party, buyers.

COMCO also considered whether Nivarox inappropriately restricted the availability of assortments, a strategy that a monopolist would typically adopt. Here, the news for Nivarox was not as positive. Back in late 2013, Swatch Group issued a "declaration of intent" which indicated that Nivarox would only supply assortments to third parties up to a maximum determined by said third party's purchasing patterns over recent years. Strictly speak, this was not a restriction on the availability of parts, because Nivarox was offering a volume consistent with what buyers needed in the past. However, the declaration of intent also stated that "Swatch Group intends to begin negotiations with ComCo in mid-2016 regarding a gradual reduction in Nivarox deliveries, with the aim of concluding an amicable agreement with the Secretariat of the Competition Commission in this regard by mid-2018." This statement raised the spectre that the availability of assortments would be severely curtailed in the future.

Certain third party Swiss movement manufacturers were, apparently, not happy with the Nivarox announcement. According to COMCO, La Joux-Perret and Sellita reached out to the regulator and stated that, in their opinion, the declaration of intent regarding assortments ran afoul of an "amicable agreement" COMCO had arranged with Swatch Group designed to protect the availability of Swiss made movements. This outreach, and the declaration of intent, were two prinncipal reasons for the preliminary investigation which lead to COMCO's report.

So what did the commission find when it came to restricting quantity? There were a number of results. COMCO determined that Nivarox does have a dominant position in the relevant market and that Nivarox problematically discriminated against third-party buyers. The second of these conclusions was driven by the observation that "Nivarox has used the declaration of intent to limit the quantities and products available (see paragraphs 66, 75), refused to deliver excess quantities to certain third-party customers ... As far as is known, Nivarox's internal customers were not affected by such restrictions on purchasing options." In other words, Swatch Group buyers of assortments did not face purchasing restrictions that were similar to the limits that Nivarox imposed on third parties.

COMCO was careful to note, though, that any problematic behavior by Swatch Group / Nivarox would involve "relatively minor violations."
One of the Nivarox buildings in Switzerland.
Nivarox did sometimes supply assortments beyond the maximum implied by the declaration of intent and also made "technical adjustments" to assortments which were not required under the declaration of intent. For this reason, COMCO did not recommend a more in-depth investigation of Nivarox. However, COMCO did advise Nivarox that they should change their approach in order to avoid triggering more intense scrutiny and / or sanctions. The commission's recommendation read: "Nivarox [should fulfill] third-party customers' requests for the delivery of assortments within the scope of their specific production possibilities and [should] not discriminate against third-party customers - particularly with regard to the quantities and products available - neither against their internal customers nor among themselves." In other words, the commission suggested that Nivarox should probably cease imposing purchasing limits based upon historical patterns. Instead, supply limits should be determined by capacity.

All told, the outcome of the most recent inquiry into Swatch Group market behavior was fairly mild. Swatch was charged CHF 52,013.64 because their restriction of supply under the declaration of intent triggered the investigation and said investigation did find problematic behavior. COMCO indicated, though, that if Nivarox changed their approach in line with the recommendation described above, the matter would be largely resolved.

Let's get back to in-house movements though. It is fairly clear that sourcing assortments from Nivarox is a fraught prospect and the Swiss regulatory authority isn't really aggressively ensuring that assortments are available. From this perspective, manufacturing your own movement, including assortment components, is a very reasonable (but certainly costly) way to reduce the risk that the rug will be pulled out from under your brand by Nivarox. What's interesting is that there certainly is a growing competitive fringe which can serve as a non-Nivarox source for assortments. I was pretty surprised when COMCO wrote that Zenith (LVMH member) has purchased assortments from a Dutch supplier named Flexous Mechanisms. From a collector's perspective, though, it is rather unfortunate that production of assortments is increasingly fractured across numerous producers (including individual brands). COMCO repeatedly notes that production of these parts is subject to returns to scale, so that concentration of production in the hands of Nivarox, for example, would bring down component pricing. This, in turn, could potentially bring down watch prices as well.

What's clear is that COMCO is not inclined, nor empowered, to push things in this direction. Of course, in the rather tumultuous economic climate characterizing the global economy, lower watch prices may well emerge regardless of what happens when it comes to assortments. It remains to be seen if the trend towards independent assortment suppliers and in-house movement manufacturing will intensify or stabilize.
My book on the history of Rolex marketing is now available on Amazon! It debuted as the #1 New Release in its category. You can find it here.

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