"You want to talk about stepping into somebody's shoes?" asks Nicolas Hayek Jr. slyly as he rummages in the drawers of his fourth-floor corner office. Nick Jr., as he's known around the company, is the only son and namesake of the legendary Swatch Group founder. At 50, he is also the heir apparent at the world's largest watch group, with $3.1 billion in sales in 2003. The company includes 18 brands, ranging from such luxe watches as Omega, Breguet and Blancpain to more accessibly priced lines like Tissot, Calvin Klein and Swatch, plus industrial watch components and microelectronics divisions. Wearing jeans, a shirt, no tie and sneakers, his thick gray hair swept back from his face, Nick Jr. suddenly finds what he has been looking for: an enormous leather sneaker. "My Shaq shoe," he says grinning, referring to 7-ft. 1 in. basketball star Shaquille O'Neal.

From Swatch headquarters in Biel, at the foot of the Jura mountain range, to the nearby valleys where most Swiss watches are made, to watchmaking's emotional center in Geneva, all eyes are on a new generation of executives taking over at key companies. At Chopard, Karl Scheufele—who acquired the business from the grandson of founder Louis-Ulysse Chopard in 1963—and his wife are turning operations over to their son and daughter. A hand-off is being prepared at Girard-Perregaux and at Patek Philippe, where Thierry Stern, 34, has rotated through various posts and is now vice president, reporting to his father Philippe Stern. The companies hope to pull it off as successfully as did Rolex, where Patrick Heiniger replaced his father André as managing director in 1992 in only the second management change since the business was founded in 1905.

Generational change is nothing new, since many watchmakers have been in business for more than a century, but this time around, the transition is particularly poignant. The executives stepping down are heroes in Switzerland, company leaders who watched in horror in the early 1970s as Japanese manufacturers flooded the world market with inexpensive mass-produced quartz timepieces. Philippe Stern, 66, remembers how families who had been involved in watchmaking for generations panicked and began to dump their tooling. "In Switzerland you had about 100,000 people working in the watch industry at that time, and in just a few years, it dropped to 30,000," he says. "We didn't know what to do, but I took a decision to stick to mechanical movements."

For Patek, a private company that produces 30,000 watches a year and is said to have revenues of $407 million, maintaining independence in the face of rising marketing costs and bigger competitors is the priority. "It's my obsession to keep Patek Philippe in the family," says Philippe Stern in a joint interview with his son at the company's workshops on the outskirts of Geneva. "The growth potential is fantastic. It's a question of keeping the know-how alive." And Thierry says, "We must be very wise in our choices and very aware about costs."

Swiss watch exports were up 10.9% over 2003 in the first eight months of this year, collectors are paying record prices at auction for vintage pieces, and luxury-goods conglomerates are eager to expand their watch and jewelry businesses. In this environment it's hard to remember how uncertain things looked three decades ago, says Joe Thompson, a senior writer at the trade magazine WatchTime. "It was worse than Detroit in the '70s. Today there are new challenges, but the challenges faced by Hayek Sr. and Stern Sr. were infinitely tougher."

Of all the handovers, the most scrutiny—and gossip—is reserved for Swatch Group, a publicly traded company that produces 55% of Swiss watches. Hayek Sr., 76, is an entrepreneurial pistol, a career-management consultant who became a billionaire by merging two failing Swiss watch concerns. The son of a Christian Lebanese mother and a dentist father from Chicago, the elder Hayek passionately defends an economic view in which the world is composed of two categories of people—entrepreneurs and others—and developed economies can successfully compete in manufacturing with low-wage producers as long as they play their trump cards of technology and creativity and apply extreme cost controls. And he waves his Swatch as proof. To avoid layoffs at his merged company, he began mass-producing the plastic watch, which retailed for $35 at its 1982 launch. At a stroke, he snatched back market share from the Japanese and revived enthusiasm for Swiss-made watches.

A quasi-celebrity in Switzerland, Hayek Sr. has been known to wear as many as eight watches (today there are four—the first Swatch off the production line, a $100,000 Breguet tourbillon, a $70,000 Blancpain tourbillon and a vintage Omega Special Seamaster) and is a shameless, sometimes comical name dropper: former European Commission president Romano Prodi, Cindy Crawford and the Sultan of Oman all made their way into the conversation. Breguet, which Hayek Sr. purchased in 1999 and dusted off, is the group's most élite brand and his pet project. He has upgraded the production facilities and opened stores and has been plotting to get his hands on the company's most famous creation, a pocket watch commissioned for Marie-Antoinette that was stolen from an Israeli museum in 1983.

"I have never tried to build a dynasty," he says, explaining that it was the six other company board members who pushed for Hayek Jr. The father controls a voting majority, and his only other child, daughter Nayla Hayek, is also on the board. (Her son Marc runs Blancpain for the group.) The board wanted Hayek Jr. for his many talents and to "keep the warm atmosphere and the entrepreneurial mentality in this company," he explains.

Hayek Jr. dropped out of business school (with Dad's blessing) to study filmmaking in Paris and after several years, including a feature film with Peter Fonda, joined Swatch in 1994 to work on marketing. In January 2003 he was named president of the group's executive management board—effectively the CEO of the company—and he's well liked within Swatch for his human touch. Still, it can be hard to escape Dad's shadow. "Yes, my father is a genius. It's very rare to have people who are both visionary and pragmatic, so of course I admire him, but I could not work here if I made him into a god," says Hayek Jr., who flies a pirate flag outside his office window. "I'm coming from a different place. I think he can learn a lot from the marketing side," he continues. "I'm listening probably more to people. That's a big difference between him and me."

Not everyone is convinced by the plan to keep Swatch in the family. Recent articles in the Swiss and German press have criticized the Hayeks' management of the company. At a shareholders' meeting last spring, a Swiss pension-fund manager pressed for changes on the board of directors; he was quickly and overwhelmingly voted down. Hayek Sr. had to interrupt his summer vacation to rebut a speculative article in the financial weekly Wirtschaftswoche that suggested he might sell off Swatch and reposition the group as a luxury-only concern. It's true that, for all its luxury brands, Swatch Group shares are traded at a 20% discount compared with luxury-only groups like Moët Hennessy Louis Vuitton (LVMH) and Compagnie Financière Richemont, which includes Cartier, Baume & Mercier and Piaget. "It's the biggest stupidity ever written," he groans.

But nothing stung more or generated more buzz than a front-page article in the Zurich financial paper Cash shortly before the watch world's annual spring convention in Basel. As competitors and retailers pecked at velvet trays loaded with millions of dollars' worth of watches in the back rooms of the fair, they chewed over the headlines HAYEK SENIOR DISEMPOWERS SON and THE JOKE'S OVER AT SWATCH, as well as a particularly saucy sidebar titled IT'S ALL GETTING TOO PERSONAL—LOVE AND CONSPIRACY À LA SWATCH, which detailed romantic liaisons between board members and executives. "I'm convinced there's a real corporate-governance issue," says Victor Weber, the journalist who penned the critiques.

Hayek Sr. waved off the charges, particularly the idea that he has revoked power from Hayek Jr. "It's not true. I'm as hard on him as I am on every other director in the group, but I was doing only my job as chairman," says the elder Hayek. "Haven't we been complaining about chairmen at other companies who let people do whatever they want?"

Succession has not been a dominant issue for financial analysts, however. After suffering more than other luxury categories because of recession, Iraq and the SARS epidemic, watches are on the rebound, and the Swatch Group is among the best placed to benefit, they say. Although Swatch sales have fallen off in some markets, Omega, which contributes a whopping 44% of the group's earnings, continues to pick up speed, and there's growth potential for the group's other high-margin luxury brands. When Goldman Sachs surveyed international watch retailers at Basel, they said Cartier, Omega and Rolex were the brands they expected to show the fastest growth through the end of the year. IWC, Jaeger-LeCoultre, Tag Heuer and Breitling also looked strong.

Incredibly, given prohibitive entrance costs and the accent on century-plus pedigrees, there are even start-ups. Simone Bedat, a founding partner of the Geneva firm Raymond Weil, and her son Christian left and set up a new firm, Bedat & Co., in 1996. Gucci Group, looking for a better position in the watch sector, scooped up Bedat in 2000. "Could we have kept going independently? Yes, but for how long?" Christian Bedat says of his decision to sell. "I wanted my retailers to know that I was not going to go bankrupt in five years. I could not guarantee that on my own, but I could guarantee that as part of Gucci."

Other ventures have not fared so well. One of the most successful young companies in recent years, Franck Muller, known around Geneva for adding to watches' sex appeal with inventive designs and graphics and for creating one of the fastest-growing high-end businesses, nearly imploded earlier this year when founding designer Muller left the company after a noisy feud and a court battle.

Then there's Frenchman François-Paul Journe, the industry whiz kid. He produces around 1,000 complex watches a year and insists that each be made from start to finish by one watchmaker. A dedicated mechanical engineer, he delights in reorganizing the way information is presented on the dial.

So many of the Swiss watches have a great story. These days, Hayek Jr. wears an Omega Railmaster, which pairs a new movement with a design inspired by watches developed a century ago for the Chinese railroads to resist the magnetic distortion caused by iron locomotives. And the $35,000 extra-thin Patek that Philippe Stern wears has a perpetual calendar that takes into account leap years, but it won't keep time as well as your computer or mobile phone. The finest mechanical watches still gain up to 10 seconds a day, though Patek insists on accuracy from -3 to +2 seconds. "A Patek Philippe is not really something to give you the time. It's more a piece of art, like a painting," says Stern.

That's why the next generation of watchmakers is busy looking to apply its vast mechanical-problem-solving talents to a different set of issues. "Up until now, watches have been designed by scientifically minded people to display information in the same way a cockpit panel does," says industry veteran Jean-Claude Biver, who revived and sold Blancpain to Swatch and is now CEO of Hublot. "I imagine a watch dial that is more interactive, not only using complications to transmit technical information but to visually express emotion. That's the next step." •