Raphael Minder

Nick Hayek, the chief executive of the Swatch Group, is facing a problem many of his corporate counterparts might envy: he?s doing too much business.

Swatch, the world?s largest watchmaker, is rushing to add factory capacity so that it can make enough watches to meet demand. It wants to add as many as 2,000 employees this year?about 1,500 of them at home in Switzerland. But it is struggling to find qualified people.

?Managing our stock is at the moment not an issue for us because demand is so big that we unfortunately don?t even have the time to build up any stock,? Hayek said last month at Baselworld, the watch industry?s biggest fair. ?I hate that feeling of missing sales because of a shortage in products.?

Swatch?s production and hiring problems reflect the overall health of a sector that has rebounded from the world financial crisis. Demand for watches has soared in Asia?a region that accounted for more than half of Swiss watch exports last year?with makers of mechanical watches capturing an increasingly large slice of the market. Exports of mechanical timepieces rose 32% in unit terms last year, compared with an 18% increase for less expensive quartz watches.

Swatch had a 42% increase in net profit last year, to a record 1.08 billion Swiss francs ($1.22 billion), from 763 million francs in 2009, on a 19% rise in revenue, to 6.44 billion francs.

While the company does not break down earnings by brand, revenue in its main watch and jewellery division rose 28% last year at constant exchange rates, compared with an increase of 8% in revenue in its parts production business, which accounts for about a quarter of its revenue.

Still, Hayek is pushing to change the modus operandi in his sector, from tightening rules on what defines a watch as ?made in Switzerland? to forcing rivals to make their own components. Swatch has been talking with competition regulators about how far it could cut back its supply business, without endangering manufacturers that rely on Swatch parts.

?People assume that it?s a good business to sell components, but the only really attractive business is to sell finished products of our brands,? he said. ?We are in a ridiculous situation that would be like having BMW supply all the engines for Audi and Mercedes. In no other industry do you have one company supply all the critical parts to the people who then compete directly with it.?

Swatch?s withdrawal as a supplier would be a sea change for the sector. As a result, such a move ?cannot happen overnight,? said Jean-Fr?d?ric Dufour, chief executive of Zenith, which is owned by the French group LVMH Mo?t Hennessy Louis Vuitton and is one of the few Swiss brands that does not buy from Swatch.

Still, Dufour said, by forcing rivals to invest more in production, Hayek ?could help bring back the watch sector to how it was operating 100 years ago, when each brand really differentiated itself from others by the quality of its movements.?

Swatch?s hegemony over watch production is part of the legacy of Hayek?s Lebanese-born father, Nicolas, who died last year. As a management consultant, Nicolas Hayek had been hired by banks to close two manufacturers in the early 1980s, at a time when Swiss watchmakers were getting crushed by less expensive Japanese competitors. Instead, he merged and acquired a stake in the struggling companies and revived the industry with the introduction of the inexpensive plastic Swatch watch.

The fashion frenzy generated by the colourful Swatches in turn required the group to develop mass volume production, building its leadership by later acquiring more component manufacturers.

In terms of volume, Swatch controls 70 to 80% of the sector?s watch movement production, according to a research study published last month by the investment firm Sanford C Bernstein & Company. The Hayeks own about 35% of the group?s equity, ensuring that Swatch remains essentially a family business. Hayek is joined by his elder sister Nayla as chairwoman, while the next Hayek generation is led by her son, Marc.

In an industry where executives tend to emulate the polished look that features in their luxury watch ads, the cigar-puffing Hayek cuts a different figure, more in tune with the pirate flag that he keeps in his office. The top buttons of his shirt are undone, and one of the sleeves of his suit is rolled up almost to the elbow, revealing a bright turquoise Swatch. In keeping with his father?s habits, he wears a different watch on the other wrist?on that day, a sturdier and darker Omega timepiece.

Hayek takes pride in not having responded to alarmist forecasts and cut back production at the onset of the financial crisis. He also says the US and other Western nations, too quickly abandoned manufacturing that formed the backbone of their economies.

?Instead of crying and blaming China for producing goods at a lower cost for the whole world, countries like the US should realise that outsourcing most of the production is a big mistake,? he said.

?The success of Switzerland and in particular of its watch industry?not just in the luxury segment?is the proof that entrepreneurship is likely to flourish in a country that believes in maintaining manufacturing and factories, even with a very high cost base. That is something that the US used to understand, but the days of Henry Ford and others are sadly long gone.?

Nick Hayek has yet to have as profound and broad an effect on the industrial landscape as his father, who is revered in Switzerland as the saviour of the watch industry. Still, other executives suggest there is more to come, particularly given his determination to overhaul production practices.