For Swiss watchmakers it’s the best of times—and the worst.

“Swiss watch manufacturers have never had it so good, especially the major prestigious brands,” says veteran Swiss watch executive Jacques J. Duchêne, vice president of the Federation of the Swiss Watchmaking Industry FH. He called 2006 a record year for the third year running. Exports rose 10.9 percent to 13.7 billion Swiss francs (about $11.3 billion).

But there’s a downside: “Record numbers of counterfeits are now being made,” Duchêne says, and at a rate and quality that could threaten Swiss watches’ worldwide success. The Swiss produce about 25 million watches a year, but 40 million counterfeits are made annually.

“Our industry can become vulnerable at any time,” Duchêne told journalists at this year’s BaselWorld. He’s president of BaselWorld’s exhibitors’ committee. “We export 95 percent of our production, so we’re totally dependent on the international environment. The statistics speak for themselves: The situation is becoming really dangerous.” He estimated losses from the illegal trade at around 800 million Swiss francs (about $656 million).

It gets worse. “The days of cheap imitations are over,” Duchêne said. “Counterfeiters’ technical skill has increased considerably, and fake products are becoming more difficult to detect. Only experts are in a position to tell the difference.”

Because of the growing threat, he said, some companies, especially smaller ones, may have to lay off employees because of a decline in work, “a totally unacceptable situation” for a small industry, which is also a major contributor to the Swiss economy.

Since watch counterfeiting is worldwide, “a considerable economic commitment must be made for measures [against it] to be really effective,” Duchêne told the international journalists. “Without the help of governments, we’ll continue to lose ground.”

In February, Switzerland launched its “Stop Piracy” campaign to raise public awareness of the effects of product piracy, and recently, the third World Congress against Counterfeits and Piracy was held in Geneva by the World Intellectual Property Organization in cooperation with the World Customs Organization, Interpol, and the International Chamber of Commerce. “This was a significant step, because it brought together government representatives and authorities responsible for intellectual property rights,” said Duchêne.

FH has an anticounterfeit group, including a team that daily seeks copies and imitations on the Internet. BaselWorld’s also has an anticounterfeiting panel, which identifies counterfeits at the show and expels them.

Still, the biggest obstacle may be watch consumers. “I am afraid, despite efforts to raise awareness, the majority of the public still isn’t aware that purchasing imitation watches supports Mafia-style structures and money laundering,” said Duchêne.