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Re: WSJ re: Swiss Franc and Swiss Watchmakers

By JOHN REVILL
Updated Jan. 16, 2015 1:52 p.m. ET

ZURICH—Watchmakers gathering in Geneva on Monday for one of the industry’s champagne events will be anxiously digesting the impact of the Swiss central bank’s decision on Thursday to scrap a minimum exchange rate and allow the franc to surge in value.

The Salon International De La Haute Horlogerie is a showcase for the latest innovations from watchmakers owned by Cie. Financière Richemont, the world’s second biggest luxury group and owner of brands including Cartier, Jaeger-LeCoultre and Piaget, and others.

But this year’s event will be overshadowed by the Swiss National Bank ’s surprise decision to do scrap its long-standing policy of maintaining a cap of 1.20 Swiss francs per euro that was imposed in 2011 to head off deflation and protect Swiss exporters by helping keep prices for their goods in check.

Watchmakers have reacted with anger and surprise to the SNB’s decision, which Nick Hayek, chief executive of watchmaker Swatch Group AG , described as “a tsunami” for Switzerland and its export- and tourism-driven economy.

Swiss watchmakers are particularly vulnerable to a strengthening franc. This is because most of their costs are in Switzerland as they have to produce at least 60% of the value of their watches at home to qualify for the coveted “Swiss-made” label.

“We are very anxious,” said Jean-Daniel Pasche, president of the Swiss watchmakers’ federation. “We expect all kinds of difficulties.”

Mr. Pasche said 95% of Swiss-made watches are exported, often to either countries in the eurozone or places like Hong Kong, where the currency is linked to the U.S. dollar—a currency that has also tumbled in value versus the franc following the SNB’s move.

The move may aggravate what has already been a difficult environment for Swiss watchmakers in many parts of Europe. Exports to China and Hong Kong have also come under pressure because of the cooling Chinese economy and a crackdown by officials in Beijing on extravagant gift-giving.

Luxury companies also took a hit last year from roughly three months of pro-democracy protests in Hong Kong, the world’s largest export market for Swiss watches. Stores selling Swiss watches and other goods often temporarily closed as the city’s downtown shopping district was overwhelmed by demonstrators.

In 2011, during the last spike in the value of the franc, many Swiss watchmakers were able to protect their profitability by increasing their prices. Analysts expect some will take this action again, although they won’t be able to absorb all of the impact of what has so far been a 15% increase in the franc’s value relative to the euro.

“Some brands like Patek Philippe can increase their prices more, because they are more desirable,” said Mario Ortelli, an analyst at Bernstein. “But it’s harder for fading brands.”

“For sure this could lead to some consolidation in the industry,” Mr. Ortelli added.

Edouard Meylan, chief executive of privately-held H. Moser & Cie, a Neuhausen am Rheinfall-based watchmaker, wrote an open letter to SNB President Thomas Jordan to register his concern about the central bank’s recent move.

Some dealers had already called to cancel orders from his small firm following the SNB’s decision, Mr. Meylan wrote, adding, “On behalf of many small Swiss businesses employing so many Swiss citizens, I trust you have a strong plan to help all of us in the long term.”

Write to John Revill at john.revill@wsj.com

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WSJ re: Swiss Franc and Swiss Watchmakers
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