PPage 56age 56 DCF and valuation pIndustry oaramevervieterws I Points of view from EY’s global sector Challenges of the Swiss watch industry specialists and outside experts investment — both in marketing as well as The future of the manufacture Of course, the industry is also closely watching the tax reform (RIE III4 verticalization capex (e.g., for monobrand stores) and It might almost seem old news, but the industry is ), which is expected to be debated M&A (for the integration of distribution) — is sizable, still feeling the effects of both the more stringent in the second half of 2015. and this adds complexity to capital allocation “Swiss Made” requirements (60% of the cost) and the decisions. phasing out of the supply of movements and Time is up! 3 We have looked at some of the challenges that the Riding the CHF tsunami assortments by ETA (Swatch Group) in the second half of the decade. In recent years, this has driven the Swiss watchmaking industry faces. Those challenges At the start of the year, the Swiss National Bank has verticalization of production. And while the strongest all combine to exert pressure on the industry. Will released the floor it had hitherto maintained against players have taken steps to adapt — also at the cost of this pressure create diamonds? We believe that the the euro, sending the Swiss franc to new heights significant investment (design of internal movements, forces at play require a renewed and relentless focus (currently at or around 1.05 CHF/EUR, or construction of production capacities and more) — on what makes the industry unique: a distinctive approximately 15% higher than the previous 1.20 this continues to challenge the smaller and watch and a distinctive brand. Those who do not minimum exchange rate). While the shock effect has independent players. possess such attributes risk becoming irrelevant. This passed, the repercussions of this event will long be will fuel transformation and concentration, and we felt. Some watchmakers have quickly announced Location Switzerland expect to see strong interest for M&A activity, not price increases (Patek Philippe in EUR, Rolex and The home country of the watchmakers is known for least among the suppliers to the watchmakers. Omega, Longines for instance), but margins in the its friendly attitude towards businesses. And people A generation ago, the quartz crisis all but wiped out industry will continue to be under pressure. For seem to react positively as Switzerland has been the low-end segment in Switzerland, with China now example, Richemont’s operating result on the voted the happiest country in the world in a recent being by far the largest producer. Today, the watchmaking segment decreased from 26.1% in the poll. Yet, there is currently some degree of political challenges magnify the importance of the most year ending 31 March 2014 to 23.4% in the year and economic uncertainty affecting the Swiss watch distinctive watchmakers (mainly, but not only, the ending 31 March 2015.2 And this affects the full industry and Swiss industry as a whole. The high-end, as distinctive organizations are also value chain, from distributors to watchmakers to uncertainties stems in particular to the popular vote well-equipped to resist and to thrive) relative to those their suppliers. Again, we believe this will be on 9 February 2014 in favor of the initiative aiming at whose proposition is less compelling, those stuck in contributing to the accelerated transformation of the restricting immigration, while a significant part of the the middle. However, this is a trend observed in many industry. people of the trade are not Swiss citizens or cross- industries; it is called the hourglass effect. border commuters. 2Source: Richemont 2015 annual report 3 4 ETA is Switzerland’s dominating manufacturer of movements and watch Tax reform resulting from EU and OECD critics on the Swiss favorable tax parts and is part of Swatch Group, which decided in 2009 to reduce policy for certain types of corporations (including holdings) supplying of mechanical movements to competitors. The luxury and cosmetics financial factbook 2015