We know the famous story of the first economic ‘bubble’, in which the irrational mixed with speculation, but there was also the celebrated tulip bubble (or to be more exact, the tulip bulbs) that broke out in the Netherlands in February, 1637. Before this particular bubble broke, a simple tulip bulb could cost more than a house located along one of the canals in Amsterdam.
During this tulip craze, we find all the ingredients that, inevitably, make economic ‘bubbles’: the attraction of the new, combined with a certain rarity of the offer; the speculation on the profits to come; the rapid collapse in prices.
Is the haut de gamme watchmaking sector today inflating like a soap bubble that will inexorably end up by bursting? Is the model of the tulips of the 17th century applicable to the current state of luxury and prestige timekeeping?
A watch consultant working for the Swiss banks recently declared in the newspaper, Le Temps, “We are seeing everything. The amounts being demanded (by the watchmakers) sometimes rise to more than 100 million Swiss francs while the business plan is meaningless or nearly so. It seems that people are losing their sense of reality.”
This “loss of a sense of reality” is actually typical of every self-respecting bubble. In the very recent context of the ‘copper bubble’, we observed that the metal, whose price in 2005 was US$3,000 per metric ton, reached US$9,000 by 11 May 2006, before settling back to around US$6,000 at the end of May.
How can we rationally explain such fluctuations? “The rational calculation, founded on basic economic principles such as the supply/demand ratio, the cost price, the elasticity of the demand, the degree of rarity or the possibilities for substitution, has been moved to the back burner in the frenzy of the markets that cross resistance thresholds and break points with no qualms,” explains Philippe Chalmin, economic writer for the newspaper, Le Monde.
The euphoric period that watchmaking is currently enjoying lends itself particularly well to the folly of glory that has seized more than one actor in the sector. The increase in value of certain brands thus seems unrelated to their growth potential. The number of players rushing into, or seeking to get into, the highest level of watchmaking possible has exploded over the last few years. In two years, nearly 20 new brands have been created and all want to make and sell the exceptional product. Many are they, which, having reached their critical mass, are seeking partners, financing, sub-contractors, and sales prospects.
The bursting of a bubble does not mean the disappearance of the product in question. Today, as yesterday, we need copper, and tulips are selling quite well, thank you (the USA alone imports 3 billion bulbs per year). But what is also certain is that when a bubble does burst, it causes a lot of damage.
Will the current watch craze lead to the bursting of the bubble? And, if so, who will we need to aid, care for, help back on their feet … or bury?
Source: Europa Star August-September 2006 Magazine Issue
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