STM Holding, an industrial saga on the road to China

In September this year, private equity investors Léman Capital sold the STM Holding production group to two Hong-Kong-based Chinese investors, also at the commands of the region's main distribution company Peace Mark. The objective: to provide a genuine alternative to the Swatch Group in mechanical movements.

STM Holding made headline news in September when it was bought out by Chinese investors. An industrial group specialising in the production of watch movements, STM had been gradually put together by the Léman Capital private equity investment firm. But things were slow to gel and after six years, like any other private equity investor, Léman preferred to pull out. Alain Guttmann, who Léman Capital appointed at the head of STM Holding to restructure its industrial activities, was recently called back by the new investors to see this task through to completion. He talks about how the group was formed and its outlook for the future.

STM originally made its name as a manufacturer of quartz movements. Why move into mechanical movements?

Alain Guttmann, CEO of STM Holding: STM is indeed a world-class player in quartz movements, producing 90 million units a year which sell for around 50 centimes each. This represents roughly 10% of the market. ETA, a subsidiary of the Swatch Group, was also active in quartz at that time. However, the arrival of three new Chinese firms meant the market became more and more competitive, not to mention Citizen and Seiko from Japan which have always been part of the sector. The pressure was on STM, which regroups SFT, Indtech, Swiss Ebauches and Sweb in China in the mid-range segment, and the profitability of its companies suffered.

Victor Bruzzo, founder of Indtech and CEO at that time, came up with two ways to diversify. The first was Calcio which enters into licensing agreements with sports clubs to make watches in their colours. The problem was that the group was selling Swiss-Made quartz watches at a price that didn't allow it to make money, particularly given the heavy investment it had to make in marketing. We now buy these products in China for $3 which has meant a partial return to profitability. The second diversification strategy was to move into mechanical movements, drawing on advanced production facilities. But this was a huge challenge. Production got under way in 2002 after the prototype phase and by early 2007 we had a reliable product. Put simply, it took five years and CHF 15 million to develop the Alternance 10 movement.

Is it a competitive movement?

Companies that take this route generally use production methods that still rely heavily on the human hand. Consequently, their movements cost between CHF 500 and 1,000 which just can't compare with what ETA has to offer. The way to bring prices down is to up volumes. This is where SFT could play its trump card in that we could produce quartz and mechanical movements indifferently on the same production lines. And the A10 has been a huge success. There are currently between 50,000 and 60,000 of these movements on the market and we're yet to have one returned. Demand is so strong we could already be delivering 250,000 units. For the moment though we have a production capacity of around 75,000 a year. Once we can double this figure we'll start making money. Our lowest-priced kit costs CHF 85 with an average price of CHF 150 depending on the additional modules or type of finish required, as we only deliver assembled and decorated movements. This is done by Soprod, the last company to be bought by Léman Capital and which joined STM Holding in 2005. In a word, I'd say that the only three companies producing movements for third parties today are ETA, Sellita and us.

Does this mean you're focusing more and more on mechanical movements?

In terms of high added-value products, we've also developed a high-end, Swiss-Made quartz movement which sells for around CHF 100 and which can, for example, incorporate five bi-directional motors. This is something one of the leading fine watch brands has done for some amazing functions. We do however want to phase out bottom-of-the-range movements and move away from large-volume production that only covers our overheads. In fact we're cutting back heavily on staff in China where we recently still employed 1,200 people compared with 220 across the group's various sites in Switzerland and France.

Why did Léman Capital sell STM Holding when it seems to be on the high road?

Léman Capital, which gradually built up STM Holding, is like any other private equity investment firm. They have a cut-off point in terms of investment, in particular for venture capital. After six years, including one year of intensive restructuring, Léman Capital preferred to sell rather than reinvest in the group. Two executives at Peace Mark, a Chinese watch distribution company quoted on the Hong Kong Stock Exchange, bought STM Holding in a private capacity, seeing it as a good investment opportunity. Having said that, they were fully aware they would need to inject a further 20 million to complete restructuring and provide us with facilities capable of producing 300,000 units a year, at the same time phasing out low added-value products. I was called back to fulfil these objectives. Not that the shareholding is in any way frozen. The two original investors have already yielded 35% of the group to other non-Chinese investors. To summarise, STM Holding, which will shortly disappear to make way for a new structure, Millennium, that will take over its assets, intends providing a genuine alternative to ETA. And I'm confident we'll soon be selling Swiss-Made to the Chinese.