UPDATE: Swatch Can Reduce Parts Supply To Rivals

UPDATE: Swatch Can Reduce Parts Supply To Rivals - Court

A Swiss court's decision to allow Swatch Group AG (UHR.VX) to cut its supply of parts to rival watchmakers could boost Swatch's sales but also force some smaller Swiss watchmakers out of business.

In its final decision, the Federal Administrative Court overruled an attempt by nine companies to force Swatch to supply movements and other parts, an obligation it had previously to carry out under Swiss competition rules.

One of the companies that brought the legal challenge, Frederique Constant SA, had previously warned that a number of smaller manufacturers could be forced out of business if they were deprived of supplies from Swatch.

But the move could be good news for Swatch--which can charge a higher price for its movements it produces, as well as keep more to sell through its own brands such as Longines, Omega and Breguet.

"This is positive for Swatch and for large self-sufficient companies who can make their own mechanisms like Rolex, Patek Philippe and good for Richemont, which has a good relationship with Swatch," said Jon Cox, an analyst at Kepler Capital Markets.

It could be damaging for companies like LVMH (MC.FR) and Chanel SA (MC.FR), which don't have the same production capacity and could have to scramble for extra supplies, and for smaller companies who don't have the resources to build it, Cox added.

"Some of the smaller players will go bust, while Swatch will be able to increase its market share further in mechanical watches," Cox said.

Because Swatch has a dominant market position, supplying up to 80% of to the Swiss watch industry's movements, it cannot unilaterally halt the supply without infringing the Swiss Cartel Act.

In September the companies, which include Frederique Constant and Sellita Watch Co SA, Switzerland's second largest movement manufacturer, failed to overturn the interim measures agreed between Swatch and the Swiss competition commission.

Under the agreement, Swatch can next year reduce the supply of movements to 85% and other components to 95% of 2010 levels, while the competition commission carries out an investigation.

The reasons for the final ruling would be given next year, and the companies can still appeal to Switzerland's highest court, a spokeswoman said.

Swiss Competition Authority deputy director Patrik Ducrey said the investigation was still ongoing, and would likely be concluded in the second half of 2012.

He said: "If Swatch wants to stop totally the delivery of components our investigation is to look at how long does the industry need to arrange other production and other suppliers."

Swatch Chief Executive Nick Hayek said the decision to reduce supply would strengthen, not weaken the industry.

He said: "The companies should start to produce components themselves, and not rely on one source. They should invest, and that should create jobs and this will benefit the industry.

"This will not be the end of the watchmakers; it will be the beginning of real watch making."

He said Swatch would not stop supplies to everyone, but wanted to stop being treated as a supermarket.

"We do not want to be a supermarket, forced to deliver to everyone whatever they want. The supermarket era is coming to an end," he told Dow Jones Newswires.

-By John Revill, Dow Jones Newswires; +41 43 443 8042 ; john.revill@dowjones.com

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