Daily Management Review

As Investors Question Strategy, Watchmaker Swatch goes into Car Batteries


As Investors Question Strategy, Watchmaker Swatch goes into Car Batteries
Swatch Group was riding high three years ago. Record gross sales was reported by the world's largest watchmaker, known for its colourful plastic watches as well as upscale brands including Breguet.
He was taking the company in a new direction, launching a battery for electric vehicles with the goal of reaching $10-15 billion sales by 2020, chief executive Nick Hayek announced then in several newspaper interviews in 2015 and in early 2016.
With inventory rising and Hayek refusing to announce savings that go beyond day-to-day efficiency efforts and 2016 group sales predicted to be below last year's 8.45 billion Swiss francs ($8.36 billion), investors are questioning the group's strategy and have called the plan expensive and unrealistic.
Hayek had lost some credibility with investors because his forecasts had not always come true, said Urs Beck, a fund manager at EFG Asset Management who has Swatch among his top 10 holdings.
"When he says 10, you know it can be 5," Beck said.
"There is little information on the Swatch battery. Hayek is known for giving fancy forecasts that often only materialize in the long term."
"It seems to be coming back, but hope is not an investment strategy," said Carine Menache, who runs a family investment company and has Swatch among her biggest holdings. She said that Hayek should diversify more into luxury accessories and launch more limited editions or smartwatches while claiming that he was a good manager.
"I have not heard that they were cutting costs, but they should probably do that."
A spokesman for Swatch Group declined to comment on criticism of the group's strategy. He said that the company was not planning to reduce production capacity now or in the future and was always managing costs.
He pointed to an interview Hayek gave to Swiss newspaper Handelszeitung in October, in which he said: "We never just wait, we are always moving, but there is no reason to change our strategy. We always try to get better when it comes to efficiency and costs."
Swatch holds a 51 percent stake in Belenos Clean Power, which has jointly developed the car battery.
If numbers of electric vehicles (EVs) explode to two-thirds of all cars by 2030 in wealthy cities, car batteries are an attractive growth market.
But heavyweights like Tesla and Panasonic invest billions to gain scale and bring down costs for the currently dominating Lithium-ion batteries and hence it is also a highly competitive field.
Prototypes have not yet been presented to investors who are waiting for signs of progress and are being produced at Swatch's Renata battery unit near Basel.
"The timetable seems unrealistic to me. It is impossible to get from zero to 10 billion sales within just three years," said Paul Wyser, owner of Swiss battery maker Wyon and a former Swatch Group manager who still owns some shares.
"Battery development takes time because of the comprehensive safety tests. You also need to see if it works over the long term."
The cost associated with the project has been questioned by others.
"You need to invest a lot before you get a return," Vontobel analyst Rene Weber said.
While Hayek said in a newspaper interview that it signed a memorandum of understanding with Chinese car maker Geely, Swatch has not provided any financial details on the project.
But Geely sounded a cautious note: "This is one of many projects, we work with a lot of suppliers," spokesman Ashley Sutcliffe told Reuters by phone.
"It's early stages for both parties right now. Whether we'll develop it together or invest in the project, that is all too far away."
Beck said the outlook for the project was not clear.
"Investors do not have any figures, just this long-term fantasy that something could come of the cooperation with Geely...There are so many joint venture partners, that even if the project becomes a success, Swatch Group will probably only get a small share of it," he said.