Clash of the Angry Swiss Watchmakers

Let's say you go to a jewelry shop to buy your spouse a Swiss watch. Many thousands of dollars later, the timepiece is on his or her wrist, ticking with that steady purr that indicates the best workmanship. A perfect choice, except for one thing: There's a chance some of that watch's parts were made—brace yourself—outside Switzerland.

Even though most Swiss watchmakers won't discuss it, plenty in the industry, whose 2010 exports totaled 16.2 billion francs ($18 billion), use components made elsewhere. Since 1971, Swiss law has stipulated that local watchmakers can label their products Swiss-made only if non-Swiss parts equal less than 50 percent of the value of the watch's movement, or motor. That means the movement in a Swiss watch—the essential component—could be 49 percent Other.

Worried about the threat to their image, the Federation of the Swiss Watch Industry, which includes Swatch Group and rival Cie. Financiere Richemont, asked the government in 2007 to require even more local content. The government proposed minimum domestic content of 60 percent for an entire watch. Legislation can take a long time to pass in the world of Swiss politics, and the issue has dragged on. A final decision may be made next year, says Jean-Daniel Pasche, head of the watch federation.

The quest to keep Swiss watches Swiss has aroused strong feelings. At Mondaine Group, maker of Official Swiss Railways watches, the future of its $11 million plant in Solothurn and 110 workers would be jeopardized if larger rivals succeed in limiting the number of non-Swiss components, according to co-owner Ronnie Bernheim. Mondaine, which has made watches based on Swiss train station clocks for 25 years, uses imported dials and cases, although Bernheim won't say from where. "This law would be cutting the industry into two," he says. "The volume business will be killed, except for the big companies. Our foreign competitors are laughing."

The debate over watches is part of a larger campaign by the government to improve the "Made in Switzerland" brand. The majority of watchmakers agree the bar needs to be raised, according to Citigroup (C) analyst Thomas Chauvet. The watch federation argues that tighter rules will save jobs over the long haul, since they will reassure consumers of the product's authenticity.

Makers of luxury watches such as Swatch Group's Breguet brand would benefit from tougher standards because they already get most components from Switzerland, according to Rene Weber, an analyst at Bank Vontobel in Zürich. Less expensive brands made in Switzerland, such as Mondaine, use cheaper imported parts because they face more competition from Japan or China, Weber says. Mondaine's Official Swiss Railways watch sells for up to $595, while Breguet timepieces can exceed $700,000. "'Swiss made' is very important as the basis for this industry," Swatch Group Chief Executive Officer Nick Hayek Jr. said at a Mar. 10 press conference. "We're not going to produce in India, Russia, or anywhere else."

Bernheim says increasing Swiss content profitably is a "big hurdle." Building a local assembly line that makes the movement costs at least $22 million and can take 5 to 10 years of testing. Many watchmakers need to buy cases, crowns, dials, and hands abroad because not enough are produced locally. If the law is passed, Bernheim says, "There's generations of work done by people that will just go down the drain. This law would really be a slap in our faces."

The bottom line: The Swiss watchmaking industry could be dramatically restructured if a proposed law tightens requirements for domestic parts.

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