Swiss luxury watchmakers defy turbulent times

* Turmoil in Middle East, N.Africa not impacted sales yet

* Watch demand so strong manufacturers face shortages

* Watchmakers racing to buy component makers

By Astrid Wendlandt and Silke Koltrowitz

BASEL, March 24 (Reuters) – Everything appears to be going
like clockwork for Swiss luxury watchmakers.

Japan’s woes combined with unrest in the Middle East and
North Africa have yet to dent booming sales or growth forecasts.

And the mood among executives at the industry’s annual
get-together this week was upbeat and optimistic, defying
expectations that world events would cast a pall over the fair
where the bulk of the year’s orders are placed.

But there is one thing worrying them.

Demand is so strong they are struggling to keep up.

“We have huge backlogs and shortages,” Marc Hayek, chief
executive of Swatch Group’s (UHR.VX: Quote, Profile, Research) Blancpain, Breguet and
Jaquet Droz, told Reuters. “Even leather straps can be difficult
to get. We are missing all kinds of parts.”

As a result, many are racing to invest in component
manufacturers and strike deals to secure supplies as production
bottlenecks spread throughout the industry.

Hayek’s comments are all the more striking considering
Swatch Group owns Switzerland’s biggest components makers and
regularly threatens rival brands it will stop supplying them.
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NOT ENOUGH HANDS

But the problems were echoed by several other watchmakers
such as Patek Philippe, which said this week it was in talks to
buy up minority stakes in component makers as a way to guarantee
access to supplies.

Industry sources and bankers said Rolex was also on the
prowl for acquisitions.

“Today, everybody is trying to buy up what is on the
market,” said Thierry Stern, president of Patek Philippe, one of
Switzerland’s last independent watchmaking companies.

Many watchmakers did not anticipate demand to rebound so
strongly after the 2009 spending slump, which forced several
suppliers out of business or pushed them into the arms of big
groups.

“Before movements were the main problem but now there are
also shortages of components like dials, hands or crowns. Swatch
Group has to deliver a certain amount of movements to third
parties, under competition rules,” Vontobel analyst Rene Weber
said.

Weber added that groups such as LVMH (LVMH.PA: Quote, Profile, Research) with brands
including TAG Heuer, Zenith and newly acquired Bulgari (BULG.MI: Quote, Profile, Research)
were most exposed to sourcing problems.

Aside from buying component makers, watch companies said
striking long-term deals with suppliers was another solution.

Ulysse Nardin said it had good relations with its suppliers.

“We maintained our orders during the crisis but many others
did not,” Rolf Schnyder, President of Ulysse Nardin said. Like
Patek Philippe, Ulysse Nardin had taken stakes in suppliers.

Appetite for Swiss luxury watches has been growing steadily
since last year, pulled mainly by emerging markets and recovery
in the United States, with exports rising 18 percent in February
following a 17 percent rise in January.

“There is a very positive atmosphere in the markets these
days which makes us hopeful,” said Hayek.

Hayek said Breguet, Blancpain and Jaquet Droz enjoyed sales
growth on average of 40-45 percent year on year in the first
three months of 2011, marking the strongest rise in a long time.

His buoyant comments were echoed by executives of Patek
Philippe, Longines, Omega, Bulgari and Ulysse Nardin who said
they expected their brands to perform strongly this year.

Many executives at the fair said fighting in Libya,
demonstrations in the Middle East and North Africa had not
impacted their sales yet because the region’s main trading hubs
in Dubai and Saudi Arabia were located far from the turmoil.

The two markets represent together about 6 percent of total
Swiss watch exports.

However, Japan as a market was likely to mark a pause
following the catastrophic earthquake there, they said.

Japan, which still represented 10 percent of Swiss watch
exports in 2002, now makes up about 5 percent, implying that the
disaster would have a lesser overall impact on total sales.
(Additional reporting by Nathalie Olof-Ors; Editing by
Alexander Smith)

Swiss luxury watchmakers defy turbulent times