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clockwork

Everything appears to be going like clockwork for Swiss luxury watch makers.

Japan's woes combined with unrest in the Middle East and North Africa have yet to dent booming sales or growth forecasts.

And the mood among executives at the industry's annual get-together this week was upbeat and optimistic, defying expectations that world events would cast a pall over the fair where the bulk of the year's orders are placed.

But there is one thing worrying them.

Demand is so strong they are struggling to keep up.

"We have huge backlogs and shortages," said Marc Hayek, chief executive officer of Swatch Group's Blancpain, Breguet and Jaquet Droz. "Even leather straps can be difficult to get. We are missing all kinds of parts."

As a result, many are racing to invest in component manufacturers and strike deals to secure supplies as production bottlenecks spread throughout the industry.

Mr. Hayek's comments are all the more striking considering Swatch Group owns Switzerland's biggest components makers and regularly threatens rival brands it will stop supplying them.

But the problems were echoed by several other watch makers, including Patek Philippe, which said this week it was in talks to buy up minority stakes in component makers as a way to guarantee access to supplies.

Industry sources and bankers said Rolex was also on the prowl for acquisitions.

"Today, everybody is trying to buy up what is on the market," said Thierry Stern, president of Patek Philippe, one of Switzerland's last independent watch making companies.

Many watch makers did not anticipate demand to rebound so strongly after the 2009 spending slump, which forced several suppliers out of business or pushed them into the arms of big groups.

"Before movements were the main problem but now there are also shortages of components like dials, hands or crowns. Swatch Group has to deliver a certain amount of movements to third parties, under competition rules," Vontobel analyst Rene Weber said.

Groups such as LVMH with brands including TAG Heuer, Zenith and newly acquired Bulgari were most exposed to sourcing problems, he added.

Aside from buying component makers, watch companies said striking long-term deals with suppliers was another solution.

Ulysse Nardin said it had good relations with its suppliers.

"We maintained our orders during the crisis but many others did not," said Rolf Schnyder, president of Ulysse Nardin. Like Patek Philippe, Ulysse Nardin had taken stakes in suppliers.

Appetite for Swiss luxury watches has been growing steadily since last year, pulled mainly by emerging markets and recovery in the United States, with exports rising 18 per cent in February, following a 17-per-cent increase in January.

"There is a very positive atmosphere in the markets these days which makes us hopeful," Mr. Hayek said.

He said Breguet, Blancpain and Jaquet Droz enjoyed sales growth on average of 40 to 45 per cent year-on-year in the first three months of 2011, marking the strongest rise in a long time.

His buoyant comments were echoed by executives of Patek Philippe, Longines, Omega, Bulgari and Ulysse Nardin, who all said they expect their brands to perform strongly this year.

Many executives at the fair said fighting in Libya, and demonstrations in the Middle East and North Africa had not impacted their sales yet because the region's main trading hubs in Dubai and Saudi Arabia were located far from the turmoil.

The two markets represent together about 6 per cent of total Swiss watch exports.

However, Japan as a market was likely to mark a pause following the catastrophic earthquake there, they said.

Japan, which still represented 10 per cent of Swiss watch exports in 2002, now makes up about 5 per cent, implying that the disaster would have a lesser overall impact on total sales.

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