Start from the first post on Swatch.
When the Japanese started making watches in the 1970s, it decimated the Swiss watch industry. Production in Swiss movements declined from 40 million units per year to 4 million units (90% Crash!). Most Swiss movement manufacturers bankrupted and Swatch was formed initially as a merger of a few movement companies. The most important two being ETA SA and Nivarox FAR. This resulted in Swatch having dominant market share in various parts from 50% to almost 100% for some key components.
Today, movement unit sales have risen to about 6-7 million shipments (up from 4 million 30 years ago) and Swatch produces 3 million movements via its ETA subsidiary, roughly half of which is being used for its own brands. The bulk of the remaining movement makers are Rolex, Patek, Audemars Piguet and Jaeger-LeCoultre (Richemont) that produces movements for their own usage only. Two independent players Selitta and Soprod makes a few hundred thousand movement each. As you can see, this industry is a closed oligopoly. New entrants have a hard time since they have no way to produce or source enough movements to make an impact.
It is estimated that a mechanical watch has approximately 130 parts and the movement which forms to core of the watch sells for roughly USD 200 (Swatch's estimated average selling price). As history has it, Swatch/ETA produces movements to supply other players such as Richemont and LVMH for years, in fact since its inception from the aftermath of the Japanese onslaught. It was a neat arrangement for the industry to counter the Japanese. But today, these other brands will take these movements at USD 200, put on their own outer design and branding and sell for USD 5,000 to the end consumer.
Hence Swatch decided to prioritize in-house use a few years ago, announcing that they would like to reduce supply to external buyers, earning the wrath of its clients. This issue went all the way to the Swiss Competition Commission for arbitration which ended in favour of Swatch. Swatch/ETA will reduce its supply to external parties by a few percentage over a few years, forcing the other players to find alternative sources of movement or invest in new capacity on their own.
So that's the story of ETA but what's more powerful is Nivarox FAR (or Nivarox in short). Nivarox produces nano mechanical components such as escapement and balancing mechanism and hairsprings needed for "automatic" mechanical watches. This innovation basically allows mechanical watches to self-wind whenever the wearer moves and also increases the no. of hours without winding (the reserve). It is estimated that Nivarox has 80-90% market share here with the rest of the players basically producing a portion for their own in-house use.
As a example, Rolex both produces such escapement and balancing movements in-house but also procures from Nivarox because it does not have enough capacity to supply all its watches. So if one day, Nivarox says, "Rolex, we are sorry, we won't supply you anymore.", Rolex will be in a tight spot. But this is also the story for every Swiss watchmaker as Nivarox basically supplies to all the big brands including Rolex, Patek and most of Richemont's brands (IWC, Panerai etc). As a result, Nivarox is actually one of the most critical company in the mechanical watch industry. Swatch owns Nivarox.
Despite Swatch's recent change of heart, the Swiss watching making industry has come a long way since its near death experience. The industry is very closely knitted and it is unlikely for Swatch to turn very hostile towards its peers/competitors. To add, Nivarox does not necessarily sees it the way Swatch does. The company will dutifully produce its nano components be it Rolex or Patek or Tag Heuer since they are all Swiss watches and have gone through a lot together. Besides, Swatch has 150 production centres in Switzerland with employees with friends and relatives all over the industry. It is not as easy as to just cut supply outside Swatch Group tomorrow.
Also, Swatch earns 20+% operating margin in its movement business, quite a good margin as a result of its dominance. The difference in operating margin is about 3-5% between its movement and brand business (brand being higher). So while there is some product mix improvement by producing more movements for in-house brands, it is not game-changing for Swatch. Swatch would most likely continue both businesses while shifting marginally to increase its brand business over time.
To be continued...