ut major changes are underway: the watch industry offers less added value than other activities and is being pushed back further; assemblers, lacking orders, merge or close ... or launch their own brands! In the background, the entire logistics chain must change. Visit and analysis.
The “gentrification” of Shenzhen
An airy and green city, abounding with electric bikes and which even has a small hipster neighbourhoud and a shopping centre inspired by the marine world. Copenhagen? No, Shenzhen! The link is a little artificial, but “gentrification” is well underway in this “factory of the world” city of 12 million inhabitants, in the immediate vicinity of Hong Kong, in the heart of this famous economic zone of the Delta of the “river of pearls”, a megalopolis of 66 million inhabitants.
Already, the textile industry has had to leave the workshops of the metropolis to relocate to countries with even cheaper labour, especially Vietnam, or other provinces of China.
Two sectors dominate everything, now: high-tech, with the emblematic Apple installing a new R&D centre. And real estate, of course, with prices that tend to climb almost as fast as Hong Kong, the second most expensive city in the world. Not to mention the constant importance of finance. Traditionally, watch assemblers are headquartered in Hong Kong and their factories across the border in Shenzhen. But the workshops of watchmaking subcontractors, this low-tech industry in a downturn for the last two years, are pushed ever further from the centre, in the face of the appetite of computer engineers and very dynamic real estate developers. “We will have to move in a few months, but we will take the opportunity to enlarge our production area by three times”, explains Rémi Chabrat, founder of assembler Montrichard, who works for Timex but also TW Steel.
The same goes for Vishal Tolani, boss of the Solar Time Manufacturing Group: “Shenzhen is becoming the global hub of the Internet of Things, a hub for talented young engineers, which are very high added value industries. Furthermore, you can earn in real estate ten times what you do in watchmaking in Shenzhen if you sell your industrial site to turn it into a residential complex.”
- Ming Hung, Team Gain
“Shenzhen is becoming ever more expensive,” says Ming Hung, of the Team Gain assembler. “Some producers are moving to Dongguan or Huizhou (8 and 4 million people, respectively). Sometimes the authorities expel you from Shenzhen because they need space for other activities with higher added value or for residential areas, especially with the extension of the metro line! In a few months, our factory will find itself connected to a new metro line and I’m afraid they will be forcing us to leave.” In the assembler’s opinion, Shenzhen is now trying to become a new Hong Kong, that is, to get rid of factories and focus on services. As a result, watchmaking is moving further away from Shenzhen and is no longer a government priority in the face of these higher value-added industries. In addition, the market is less buoyant. So, what to do?
Concentrations and closures
Impossible for now to move to other provinces or other countries, because it is around Shenzhen that lies the entire watchmaking ecosystem, without which the assemblers would be at a loss. “We have more than 3,000 suppliers in the region!”, says Ming Hung of Team Gain, “and our main customer has a local subsidiary in Shenzhen.”
Head of operations at Montrichard in Shenzhen, Ben Djeghdir explains that all subcontractors are within a 50-kilometre radius. “We have to stay close to them because we have to have strict quality control over them, and it is here that we find people who are already qualified and have already worked in the watchmaking assembly.”
The manager continues: “Shenzhen has developed well in the assembly of watches but it remains very manual. There is very little automation and workforce skills remain important. Swiss watchmaking is automated for cost reasons as the labour is very expensive, here it will not be changing.” Since it is not really possible to lower the cost of labour again to offset the downturn in orders, we are witnessing a phenomenon of concentration and mergers in the outsourcing sector. Some big assemblers have also lost their license: this is the case of the one that produced Puma, Esprit and Givenchy watches. “The problem is that a lot of subcontractors have seen the market change but did not react, and brands that have withdrawn their licenses are no better today,” said Ben Djeghdir.
For his part, Ming Hung feels “lucky” to be able to work at 90% for a big Japanese brand, which continues to do well. “The market is changing a lot and today many of our customers are in trouble: one of them who was ordering two million watches five years ago produces only 800,000 today. We find fewer customers and those we have order less.” Here, everything is still assembled by hand. “In aggregate, we produce 5.5 million watches per year, most of them being entry-level plastic LCD and battery watches. But we also have American and Swiss customers and we also produce analogue watches with quartz movements. We cannot automate the assembly because the references are too numerous, it would not make sense from an economic point of view.” Alexander Meerovitsch, the founder of the subcontractor Optimo Group, has been based in Hong Kong for 22 years. “American fashion groups have teamed up with subcontractors like us, they entrusted us with production to focus on marketing and distribution. There was a golden age for outsourcing here, which everyone benefited from. But now everything has changed, and you have to revise your way of thinking.”
With the crisis, some subcontractors are abandoning watchmaking or diversifying. “For example, those who made watch glasses now produce for smartphone brands,” says Vishal Tolani of Solar Time, “and I, personally, do not only hire people from the watchmaking industry. but more and more engineers from the high-tech world.” Other assemblers made a different choice: they decided to launch themselves!
When the subcontractors launch their own brand
Beyond the connected watch and the declining appetite for watches through the world, a new generation of brands has upset the field of the entry-level watch, with repercussions felt as far away as Shenzhen, at the assemblers, or Dallas, at the headquarters of a world-leading fashion watch company like the Fossil Group.
Almost every day, new brands are launched on crowdfunding platforms like Kickstarter. And these are not so much the fruits of watch geeks as specialists from the digital world. Almost all knock on the door of Shenzhen’s main assemblers. “We are constantly solicited and are taking in new brands, while selecting them very carefully,” says Rémi Chabrat of Montrichard. These brands target a new digital native clientele, with often a classic or vintage design, in line with successful brands such as Cluse or Daniel Wellington. Their goal: to devote maximum resources to digital communication, to create a community of online buyers. The quality of the product does not come first in the minds of these entrepreneurs, who are often extremely young. Their appearance must be impeccable, however, and their promotion extremely neat. The priority is perceived value!
“Today, the biggest change is the migration to digital and social
networks,” Vishal Tolani observes. “New brands are asking us to take care of the production from A to Z while they focus
only on digital marketing. We have entered the age of disruption
and everything is changing very quickly, and while we
have had a good time since 2001, we have made the mistake of
not diversifying ourselves enough and in the end depending
too heavily on some customers as subcontractors.”
Should we accept these newcomers – at the risk of accentuating
an addiction to start-up, which are even more fragile
than the larger fashion groups — our traditional customers
— which are themselves in difficulty? And why place our entire production capacity at the disposal of actors with limited means, which they will invest first and foremost in their own digital marketing?
A growing number of subcontracting players, in Hong Kong and Shenzhen, intend to mitigate this dependence on players in financial difficulty or with limited means. How?
By putting their production capacities at the service of... their own brands! Time for income diversification. Since the turn of the financial crisis of 2008-2009, Solar Time has created no fewer than six brands of its own, for which it manages production, marketing and distribution. “Today, we produce between 1.2 and 1.5 million watches a year, 60% for third parties and 40% for our own brands, explains Vishal Tolani. This has required developing different skills in marketing, photography, etc. It’s not something ‘natural’ in a region that has always focused more on production.”
The team is targeting several niche “tribes” with its brands, positioned between $100 and $800: for example, Avi-8 is for aviation enthusiasts; McCabe is for coffee lovers; Dufa, an old German brand, was resurrected with a Bauhaus design... “This is a brand of German origin driven by a watch company based in Hong Kong with an Indian at its head! Globalisation… but the watch industry is still wary of that.”
For its part, Optimo Group has just launched Perry Ellis, in collaboration with the American fashion brand of the same name, with a price positioning of 150 dollars. “As outsourcing is declining and margins have decreased in this business, we are in a diversification effort with this new challenge and we will also soon launch our own Swiss brand, called Nove,” explains his boss Alexander Meerovitsch.
New infrastructures must be developed, and it is for him to find the right formula on two “O to O” axes: online to offline and offline to online. Present at the Hong Kong Watch Trade Show in September, the new brand is being distributed in China, South Korea, Japan, Southeast Asia, South Africa, Egypt and India ... and of course online.
“Now we have to learn a new business around marketing and not just production,” admits Alexander Meerovitsch. There are a lot of fashion and ready-to-wear actors who make watches but we think of ourselves first as a watch company.” Nevertheless, the change will not happen overnight and outsourcing will remain a key activity in the Shenzhen area. So, how to improve processes?
Rethinking the supply chain
Montrichard also launched their own brand, called Grayton, but primarily as a showcase for new capabilities and a new way of thinking about the production chain. This requires a much stronger and instant match between brand orders and assembly capabilities. The objective: to avoid excessive and unsold stocks ... and replace inventories worth $10 million with stocks worth $800,000. And at the same time, to avoid the bottleneck of insufficient liquidity. In the case of Montrichard, this involves the development of dedicated watchmaking management software called FINS (Flexible Industry Solutions) while many brands use big standardised software such as SAP. The management software was developed in a Montrichard computer centre in the Philippines, from where the firm also offers marketing services such as blog tracking, website creation and content management.
- Grayton Automatic Watches
In appearance, the Montrichard workshop is no different from any other. It is on the fulfilment of the orders that everything hinges: “We want to match supply and demand: better management of cash and inventory through better predictability of orders.”
Ben Djeghdir continues: “How do you solve the problems of a watch brand in terms of financial flows? You crush stocks! We improve cash flow and we increase sales by following the trends by the minute. We went from a 20 million turnover and 6 million in stocks to 21 million turnover and one million stock.” Other industries are much more advanced from the point of view of digitising manufacturing orders. “For example, you can easily customise your Converse sneakers on the Nike site, or Zara, H&M and Uniqlo, it’s both very fluid and simple.” “Today, we are pursuing a model closer to that of Amazon than that of a traditional watch factory. Everything is coded, scanned and standardised, and each component can be tracked individually online by the customer. This is a system that is constantly being developed and offers detailed reporting such as the performance of each model by colour or by country. The goal is to customise the production to be as close as possible to the market.”
“We already have access to the stocks of our suppliers, we are just assembling so we can make very limited productions. We standardise the components to better manage them and to achieve a better ‘time to market’. Our customers are watch brands that can cope with year-old sell-out and inventory problems, we ‘blow up’ their component models and trace how many cases are available from our suppliers. The goal is to have a faster and more personalised process, and work on a just-in-time basis, with good database and inventory management, just like in the automotive industry.”
The first historical customer of this system was Disney. Montrichard has also just announced a partnership with the American giant Timex for the implementation of the FINS software, with the aim of drastically accelerating their timeto- market. “The goal is to change the dynamics of an inventory based sales process to a demand driven model,” says Tobias Reiss-Schmidt, President & CEO of Timex Group.
“We are very familiar with the number of components we have in stock and customers can know in real time the quantity available and the order lead time,” says Jérôme Sollier, director of the Montrichard plant in Shenzhen. Chinese suppliers have remained in a mentality where data management is not taken into account. They remain simple assemblers.” But today, watchmaking meets computers. “It’s different from automation: here we’re talking about better logistics management. Brands like Daniel Wellington or Cluse have their assemblers in Shenzhen but they have to pay them 30% in advance. This can create liquidity bottlenecks when you end up with excessive inventory. The bottom line is that today, brands pay their suppliers and assemblers at order time. We aim to make them pay for the watch only when it has already been sold, which is a big difference that responds to the challenge of cash and inventory.”
According to Solar Time’s Vishal Tolani, “The watch production process is being reversed: until now, the brand has been planning with its retailers and distributors the volume of production and geographical distribution of the collections.” Tomorrow, via personalisation and orders on the internet, people will buy the watch before it is produced, so there will be a much better match between supply and demand, whereas markets have been crumbling under unsold stocks for two years.