Annual Report 2007 SWATCH GROUP Contents Annual Report 2007 Contents Message from the Chairman 2 Operational organization 6 Organization and Distribution 7 Organs of the Group 8 Development of the Swatch Group 12 Watches and jewelry 13 Retailing 76 Jewelry production 78 Production 80 Electronic systems 89 Corporate 98 Swatch Group in the world 104 Environmental policy 128 Social policy 129 Corporate Governance 130 Financial statements 141 Consolidated financial statements 143 Financial statements of the Holding 198 1 SWATCH GROUP Message from the Chairman Annual Report 2007 Message from the Chairman Dear co-shareholders, Ladies and Gentlemen, Another year has passed, and once again the Swatch Group can present superlative record results in terms of turnover, profits and growth. New records, new profits, new growth and the positive outlook for the current year of 2008: all these empower us. It is at this precise moment, against the exploding financial crisis currently raging round many banking institutions in the USA, Switzerland and other European countries, and its negative consequences for exchange rates and share prices, that the born pessimists, doubters and skeptics will yet again, with their mind focused on the stock market, find a thousand reasons why Swatch Group’s growth will stop in 2008 and 2009. I have experienced this situation many times over the last twenty-five years, and have heard all possible reasons, including the most hypocritical, as to why such a positive situation should find itself reversed. Some of these pessimists, doubters and skeptics honestly are worried by everything occurring in their lives and in the universe; others think they might be able to make a profit on the stock exchange by manipulating it and spreading false information. One of countless examples of this sort of thing was recently (23 March 2008) given by a journalist on a well-known and reputable German-language Swiss newspaper, who referred to it as“A ­modern ­form ­of ­bank ­robbery. ­By ­ means ­of ­a ­deliberately ­started ­rumor, ­persons ­unknown ­have ­manipulated ­the ­share ­price ­of ­ major ­British ­bank ­HBOS, ­generating ­a ­profit ­of ­one ­hundred ­million ­pounds ­in ­the ­space ­of ­a ­ few minutes.”­ For twenty-five years, I have been active at senior level in this Group – for an initial two years in an advisory and future planning capacity, then as a major shareholder and Chief Executive Officer, and now as Chairman. During these twenty-five years, I have had to listen to a whole host of reasons why this enterprise would soon be sliding into a far weaker financial state. Right from the start (1 October 1985) – at the time of purchasing 51 % of the shares of Asuag- SSIH that I had acquired with a few partners and co-shareholders for CHF 151 million – these doubters and negative thinkers were already at work, intending to convince me that I was making a huge mistake by investing so much in the hopeless future of an enterprise of this kind. Later, of course, along with the years of strong and moderate growth, there were times of stagnation. We even had to face a year or two of slightly negative growth, and cope with four major financial and stock market crises – with constant exchange rates and dollar losses. But at the beginning of October 2007, that CHF 151 million was worth CHF 11 billion on the stock exchange, while the real market value is considerably higher (in the meantime the shares were quoted lower at the beginning of 2008, due to stock exchange turbulence, as well as manipulations, but the real value of the Swatch Group remains unchanged and in excess of CHF 22 billion). 2 It is not at all my intention, ladies and These financial markets often hit crises, as is But we need to face up to a serious problem, gentlemen, to go around like a speculator the case at the moment; that is why stock ex- namely the control of the capital of this value- triumphantly boasting about our precisely change movements can be characterized ei- creating economy by what is to some extent calculated profits. No – those 11 billion Swiss ther by euphoria or free-fall. Speculative fever a “quick-fix, immediate profit oriented” new francs are a mirror of what the Group rep- and panic selling are indulged in mindlessly. global financial economic system. The basis resents and stand as proof of the creation I recently read in another Swiss newspaper of any investment in a manufacturing or of completely new wealth for a large num- that the Dow Jones chart shows there to have service-providing enterprise is the investors’ ber of people, for regions with hundreds of been eight great stock market crashes in the belief in the firm’s future and its strategies or thousands of inhabitants. This means newly last hundred years: 1907, October 1929, the projects they are investing in, and their created assets, products, jobs, increased 1962, October 1973, October 1987, 1997, emotional engagement in the process. This knowledge and skills, apprenticeships and so 2000 and the subprime crisis of 2007. These means not scampering away like frightened on, which the positive messages of our region, crashes, which mainly occur in the financial rabbits back to their burrows at the first sign of Switzerland, reflect to the world at large. sector, have recently had less effect on the of a problem – if possible after recovering their This is of major significance; it is not and real economy. So I can also assure you, that at investment plus dividend. Intelligently involved never has been a question of making money Swatch Group we will continue to make posi- investors, on the contrary, will achieve profits by playing roulette, because after subtracting tive results happen and create new wealth. on their substantial commitments by virtue of the amount each of us needs to live, whatever medium and long-term commitment. is left is a working instrument for the entre- At any time in the next ten years, there may preneurs at the head of this Group and its be a year of weaker results. Yet just as the The finance-providing banks were also and, shareholders. CHF 151 million grew to more than it is to be hoped, still are committed to future CHF 11 billion in the space of twenty-two investment projects, and will encourage That is what the world and Switzerland need: years, in the long run, Swatch Group’s power- them to develop wherever possible, even in entrepreneurship, which with much courage, fully motivated staff – the Group’s greatest difficult times. This is economic responsibil- work and mental toughness creates new real wealth – will, with their enterprising, inventive ity. It is worrying to see the development of values – not speculative casino games. spirit and cooperative culture, ensure that new huge anonymous groupings and amassers values continue to be created for everyone. of liquidity in global and international funds, Many industrial corporations in Switzerland hedge funds, financial corporations, etc., and worldwide have done as we have, thank Even if for one or possibly two years, the growth which are run by financial managers, who for heaven, and thereby helped bring about great rate against the previous year should be slight- the most part have no entrepreneurial expe- progress in the creation of new wealth. This ly slower or lower in percentage terms, in ten, rience, and have never been committed in is the value-creating economy, as a journal- fifteen and twenty years all those involved, be anything but money. These funds buy large ist called it recently; but he also said there they employees, shareholders or the general quantities of shares of industrial companies was such a thing as the value-destroying public will benefit, thanks to tireless efforts, on the stock exchange, thereby gaining great economy, to be found in the financial markets innovative creative powers and the absence of influence over those firms; they nevertheless of the globalized world economy. a speculative culture. firmly insist on their own short term interests, 3 SWATCH GROUP Message from the Chairman Annual Report 2007 which are sometimes in sharp contradiction to In addition to these fundamental problems environment with new ideas, investments and those of the company that they have invested arising from current conditions, the subject of events, thereby creating, with you and all the in, as many examples unfortunately show. this report is chiefly the year 2007, another staff, new wealth and new enjoyment. This dramatic situation can only be brought record-breaking year. Turnover of almost under control through massive reforms, which six billion francs, profit above one billion The Board of Directors and Group Manage- must be implemented quickly, so that the francs, and a number of major investments, ment Board promise to continue to work on systematic wrecking of future development including: your behalf for the progress and growth of and innovation is stopped. – Opening of the Nicolas G. Hayek Center in your, of our Swatch Group, using the latest Tokyo (Japan) tools and strategies, while staying firmly For this reason I very much hope – and I – Enhancement of over forty production units anchored to its culture and values. commit myself to this – that entrepreneurs, in Switzerland politicians and other major decision-makers – Expansion of distribution through own- On your behalf, I would like to thank the top engage with the problem and take sure steps name boutiques and wholesale activities management of this Group, the members of to develop the reforms so urgently required, to – Planning and establishment of Belenos the Executive Group Management Board and promote and drive forward the reorganization Clean Power Holding AG of the Extended Group Management Board, of the system.