Retrospective-Perspective: The Watch Industry 2003/2004 - The year of living dangerously

April 2004

When the bubble burst
The year 2003 will not remain in the annals of watchmaking. Or, rather it will, but for the simple reason that 2003 was literally a year filled with dangers. Do we need to enumerate them once againı Haven’t we already talked enough about SARS whose effects were exacerbated by the beginning of the Iraq war, the generalized economic slowdown, and the sometimes mind-boggling product over-stocking that occurred at our retailer friends around the worldı
In 2003, the ‘watch bubble’ was deflating. But, isn’t this, after all, to be expectedı After a night of drunken euphoria, we usually wake up in the morning with a bad hangover! And, what does someone with a hangover usually doı He takes a few painkillers to help his headache and swears to never do it again. In reality, he does stop drinking for perhaps 24 hours, but at the next occasion, he will take only ‘one’ drink with friends. It’s human nature. It is also what is happening today in our world of watchmaking.
The first half of 2003 passed with varying degrees of headaches depending on the physical constitution of the drinker. Then, in the second half, off we went again down the same road towards a new euphoria. Lest we not forget, though, that this indisposition, however passing, leaves its trace in the body, eventually causing secondary effects.

Watchmaking is becoming more normalized
One of these secondary effects, the greatest and longest lasting, seems to be the ‘normalization’ of watchmaking. What do we mean by thatı
For the last ten years, watchmaking has seen its media image and social importance progressively grow. We at Europa Star, which is now in its 77th year, are well placed to observe the huge increase in the number of publications, supplements, and all sorts of articles devoted to the watch industry. The timepiece has rapidly passed from a useful object, ‘owned for life’, to an emblematic icon of lifestyle. From a practical object, it has become an object about which we fantasize. The number of watch ‘aficionados’ has exploded and the number of true collectors has strongly increased. The attraction of the timepiece has been ‘boosted’ by the global fashion universe, which has enveloped it, and now it reaches more new segments of the population.
In my opinion, the turning point of this story dates to the beginning of the Swatch effect. Swatch provoked an incredible, hitherto unheard of demand for its plastic pieces. Remember the scenes of hysteria in Italy as consumers jostled at the counters to buy these new watchesı The media attention to Swatch, a brand that was created almost from zero, resulted in a new generation of watchmaking fans, people who created clubs and exchanges to buy, sell, and trade the fashionable plastic timepieces.
As it matured, this new generation of watch addicts naturally became more interested in the higher realms of the art, the mechanical timekeeper. Thus, it happened that mechanical watchmaking, given up for dead at the end of the 1970s, began its remarkable rise from the ashes. This was a splendid period that embraced the ancient techniques and combined them with the opportunities afforded by the industrial process and the new CAD techniques.

The bubble is in place
In the mid-1980s, in a flourishing economy, everything was in place for the gradual birth of what we later would call the ‘watchmaking bubble’. During the feast years of the 1990s, the bubble began inflating at a fast and furious rate. Soon it reached gigantic proportions. Price was no longer an issue, everything was possible. Brands without the slightest watchmaking legitimacy, either industrial or artisanal, sold their products without any regard to the reality of the object. The resulting margins would make any ‘pirate of the Cayman Islands’ green with envy.
Towards the end of the 1990s, large amounts of capital, provi-ded by the large ‘international groups’, which were sometimes joined by the huge global ‘fashion’ brands, would begin to restore a semblance of order to this ‘timely’ free-for-all.
This call to order caused a flurry of mergers and takeovers. Verti-calization was the new industry buzzword. All sectors were affected, from design to production, marketing to distribution.

En route towards rationalization
The road to rationalization would mobilize important sums of capital. It started when the markets were at the top. The amounts involved in the buy-outs and concentrations attained phenomenal sums. Remember the 3.2 billion Swiss francs that Richemont paid for LMH, comprising Jaeger-LeCoultre, IWC and Lange & Söhneı To these numbers, we should add the money that was spent for the ‘reindustrialization’ or, quite simply, the ‘industrialization’ of production for these groups. And, this doesn’t even count investments made in new factories and facilities since then. The pre-occupation now was to establish something ‘solid’, durable, endowed with watchmaking legitimacy, with the greatest autonomy possible in production.
In 2001, coincidentally at the same time as the 9/11 attacks on New York and Washington, the ‘grain of sand’ from the slowing global economy, found its way into the well-oiled gears of the watch world. Soon after the other ‘bubble’ burst, embodying the ‘Nasdaq’, start-ups, Internet and other new technologies, the ‘watch industry bubble’ got hit.
Fortunately, though, it was not a total destruction, but rather a slow deflating of the Swiss watch industry, which in 2003 experienced results that were “slightly below its 2000 level,” according to the Federation of the Swiss Watch Industry (FH). In percentage terms, the decrease for 2003 was 4.4% in relation to 2002, which in terms of turnover represented a decline of about 500 million Swiss francs, of a total of 10.176 billion francs compared to 10.639 billion in 2002.

The peak has been reached
As mentioned earlier, watchmaking reached its historic and sociological high point in 2000-2001. At the current time, it is becoming more ‘normalized’, on an economic and stylistic (we will come back to this) level, as well as in the mind of the consumer. It is a safe bet that the industry will not, in the mid-term, return to those years of exceptional success. With the increase in media attention, watchmaking has become in a way a more commonplace.
In this respect, we are witnessing a rather revealing paradox, as indicated by our Italian correspondent, Paolo de Vecchi. He has observed a new trend in Italy, a country that is on the forefront of watch design as well as fashion in general. It seems that today what is IN is to wear copies and counterfeit watches. The real thing is OUT.
However caricatural and marginal this behaviour might be, this change in moral values is an outcome of a new state of mind, one that seems to be spreading. The consumerism of the 1990s is reaching its end, at least in the ‘westernized’ countries. To analyze this phenomenon from a different angle, we could say that today only the image of the object counts. The reality of the object itself is of little or no real importance.

Loss of confidence
Perhaps this attitude relates to a generalized ‘loss of confidence’ on the part of the consumer, who is weary of the Enrons and the Parmalats that are happening increasingly frequently. In the watch sector, we can also elude to several ‘affairs’ that shook the industry in 2003, and contributed to a loss of confidence.
In its own way, the ‘Franck Muller versus Franck Muller Watchland’ affair is our Enron, not so much in the nature of the facts that oppose the two former associates, but rather in the effect that it has had, as it echoes throughout the watch industry, tarnishing its global image.
The ‘Franck Muller Watchland’ situation embodies all the potential problems that can sap the confidence of the consumer. Besides the personal conflicts in this affair, we find evidence of other dealings, mixing ‘real-fake’ watches, copies, Russian movements in Swiss Made pieces, grey market sales, forced distribution, and the list goes on... Basically, this dispute sums up all the ‘sins’, real or imagined, that could happen to the watch sector.
That this conflict involves timekeepers, which are by their ostentatious style and colourful flamboyance emblematic of the years of ‘easy money’, is even more significant and marks, in a certain way, the end of an era.

Contamination of fashion
The same generalized confusion is seen in the sector of the so-called fashion watch. We have already analyzed this particular phenomenon in our columns, but to sum it up, the fashion watch has, in a sense, contaminated the rest of the watch industry. This contamination is seen at all levels. From a design point of view, the world of fashion has imposed its own canons, which has led to a 'seasonalization' of watchmaking and a more rapid rotation of stocks.
On the distribution front, fashion, which is more ‘globalized’ than watchmaking, has accelerated the uniformity already in progress. From a media point of view, it has also imposed its styles of communication, more aggressive and sexier, that focus less on the product than on the image.
On the production side, fashion has also accelerated delocalization. A buyer of Nike shoes, for example, knows very well that the shoes were made in Malaysia, Indonesia or elsewhere, but he does not care. He is buying a style, a membership in a tribe. He is not buying a ‘Certified Made In...’ label.

The ‘Swiss Made’
label is an empty shell

Viewed from this angle, the ‘Swiss Made’ label has seemingly little importance for these ‘new’ consumers. Is it still a guarantee of qualityı Yes, because the overall watch community, concerned about internal competition, oversees the situation to make sure that it does not get out of hand. However, this label is no longer a guarantee of origin worthy of the name because, as we know only too well, it covers all kind of practices and allows the label ‘Swiss’ to be placed on watches that are essentially Chinese. Let’s admit it. The ‘Swiss Made’ appellation is largely a masquerade. While debate on this topic was rather heated a few years ago, today it is hardly mentioned since the ‘flexibility’ of the label has turned out to be convenient for everyone concerned.

A return to values: an underlying currentı
Regaining confidence travels other roads. As drunkenness leads to temperance, generalized confusion is the prelude to a return to more authentic values and a more realistic price/quality/content ratio. This is historical. Swirling around the main currents, smaller eddies are born and propagate. This is why one should not be fooled by contradictory currents that we see on the surface, but rather to try and discover what lies beneath. The return to ‘real values’ is propagating beneath the surface.
In this vein, we see signs coming from all horizons. A new economic realism seems to be affirming itself. A few years ago, we still saw launches of new brands that immediately positioned themselves in the stratosphere. This epoch is over. Not only are newly created brands asking correct prices, but this lowering trend is giving the traditional game players pause for thought about their own ambitions.
In the technical arena, the same effects are apparent. After having dabbled in the most extravagant complications, the research in mechanical movements is focusing less on spectacular aspects in favour of being able to offer the most reliable and ‘useful’ complications (see our Cover Story on Patek Philippe).

The groups are not eternal
The deflation of the watchmaking bubble has affected all the participants, including, of course, the large groups. There is no shortage of examples. Take Gucci. Two years ago, or was it a 1000 years ago, Gucci was on everyone’s lips and on everyone’s wrists. Its models were quickly gobbled up by consumers and copied by competitors. With its ‘G’ watch, the brand started a new trend, giving birth to a whole alphabet. But where is Gucci today in the watch universeı Has it disappearedı Even though the groups are proving to be mortal, they are also adept at reinventing themselves.
During 2003, the groups showed their fragility. Their large size and the inertia of their integrated structure, which is an advantage when business is good, proved harmful in less optimistic times. And, while money can buy a lot, it cannot buy everything. One of the most glaring examples is the misadventure of LVMH with Ebel. Presumptionı Arroganceı Wrong analysisı Whatever the reason, all the money and creativity expended on the brand did not succeed in getting it back on its feet. It suffered a loss of 40 million Swiss francs in three years... not bad!! Yet, this example is not indicative that the entire edifice is in danger of falling. It is widely believed that the man at the helm of the “largest luxury group in the world,” Bernard Arnault, is not a soft touch, and some even categorize him as a “predator”. We can see why then that some of our good Swiss watchmakers smiled when they realized he was trying to constitute a watch group from nothing.
If, in the case of Ebel, the infusion of funds did not help, it doesn’t seem to be the same situation for TAG Heuer and Zenith. We could also mention Vuitton or Dior, whose success is quite obvious. TAG Heuer and Zenith were undoubtedly expensive purchases in money, time and energy. But their managers have succeeded in giving them a veritable identity as well as a new dimension, which should certainly make them pay off in time.
Zenith was repositioned after lowering its inflated prices, and today offers a palette of products that are well studied and well executed. The brand is also becoming a true industrial base. TAG Heuer is demonstrating great vitality and is extending its range to offer technically innovative products. The future of these two brands will be the judge, if the stock market gives them time.

‘Old Economy’ is back
If the large groups are mortal, it is primarily because they are dependent on the changing and fickle moods of investors. For the latter, the short-term is often already too long. More than just simply having production autonomy, a burden that they could actually do without, the creation of an industrial base is the best defence of the groups against stock market volatility. It concentrates the wealth of the company between four walls and entrusts it to those men and women whose savoir-faire is a guarantee. This is called the ‘Old Economy’.
This guarantee permits the groups to become less susceptible to the rumours that make and break fortunes. Richemont falls in this category. The group is still in the process of achieving its transformation. It is building a solid base, patiently waiting for the harsh winds, which have recently blown over Cartier, to pass.
The relative good health of the Swatch Group confirms our theory. Genetically industrial in nature and displaying a royal mistrust for ‘analysts’ and other trend-predicting gurus, the group is protected from friendly or unfriendly takeover attempts. It can continue along its merry way, without having to dodge the occasional corporate raider.

Mini groups
The emergence of the large groups has not gone unnoticed by smaller players on the watch terrain. They too have been con-taminated by the ideology of reaching their ‘critical masses’. Last year saw the appearance of a number of ‘mini-groups’. Each has its own niche: ‘luxury niche’, ‘design niche’, ‘fashion niche’, or on the contrary ‘transversal niche’ which groups together brands or labels targeting various specific consumers. As these new players emerge, they are tiptoeing into the vast spaces left vacant by the larger groups’ obsession for luxury.
One example we could cite is the Fossil group. It is actually not so ‘mini’ as that, but it always stumbles against the same obstacle, that is, the wall surrounding the rarefied air of Haute Horlogerie. Many brands have been trying to reach this supposed ‘nirvana’, image and reputation oblige, but they have not, up to now, ever really succeeded. How difficult it is to extract oneself from one’s own culture, whether it is ‘fashion’, the ‘mid-range’, the realm of ‘sports’, or anything else!

The healthy independents
The Oscar for the best performance of 2003 definitely goes to an independent, Audemars Piguet. This traditional brand from the Val de Joux could not have done better than its association with the Swiss Challenge Alinghi during the America's Cup. Who could have predicted that a boat, born between the Jura and the Alps several hundred kilometres from the sea, could actually win the mythic trophyı Another ‘lucky break’ for Audemars Piguet (but we wonder if it is the same for the California electorateı) was the election of the ‘testimonial’ Arnold Schwarzenegger, the first American governor to proudly wear a large Royal Oak Offshore on his ‘sponsored’ wrist.
While these events from the world of sports and politics largely contributed to the success of Audemars Piguet in 2003, they weren’t by any means the only things. The brand has demonstrated its faith in the future and its conviction that research remains the most important factor by inaugurating the new and technologically advanced production unit of Renaud & Papi.
Besides these examples, the good health of the independents speaks of their ability to react. Whether they are ‘large’, like a Bulgari with its impressive annual production of 200,000 pieces, and a Girard-Perregaux with its year after year successes, or they are ‘small’ like a François-Paul Journe or an Antoine Preziuso, the independents are managing quite well.

Personalized networks
A major reason for the success of the independents is the effectiveness of their distribution networks. Conviviality, warmth, identification and personal relationships are huge factors. Also, one independent is allied with another: their retailer. Whilst it is always possible to plan global marketing programs, the act of buying one of their watches takes place in total intimacy.
When the global advertising campaigns are said and done, the consumer’s final decision to purchase a watch depends, in most cases, on his relationship with the salesperson who is the most influential. This may happen in a store down the street or across the city, but the importance of having excellent customer service cannot be overstated. It follows as well that the after-sales service is also very important. Promises to consumers must always be kept. If not, word spreads rapidly, especially since the watch is no longer a necessity, but a luxury good, regardless of its price.

Overstocking and creativity
The mediocre results of 2002 and the bad results of 2003 pushed many brands to dump product. Consequently, the shelves of the world’s retailers are full. The last six months have seen a slight improvement, but stores are still far from empty. Could this be the reason that we have seen a relative pause in creativity this yearı
It is certainly understandable that a brand would not want to launch new products when the stores have not yet sold the older ones. Yet, is this the right ‘thinking’ı Isn’t it precisely in periods of crises that a company should invest in research and innovationı Of course, this is easier said than done, but many brands don’t see it this way. Look around. Most of the current watches are merely adaptations of last year’s models, disguised to varying degrees.

The chaos of trends
To the chapter on the famous ‘trends’, we can add an epilogue, or two, and embroider ad infinitum. The main observation remains the same. Everything and anything is possible. Against an extremely varied backdrop, large watches, small watches, steel, gold, colours, plain or fancy all co-exist in a joyful Capernaum.
One trend, however, is the gradual decrease in ‘diamond-studded’ watches. Remember last year, in complete opposition to the economic and political situation of the moment, everyone was adding diamonds, real or imitation to their timepieces. This year, the sparkle is dimming. The diamond has not disappeared, let’s be realistic, but it is much more discreet.
Another observation is that Italy remains the avant-garde force. In this nation, in good years and bad, trends continue to be formed and taken to the extreme. Showing a revival of the psychedelic sixties, dissonant forms, combinations of unlikely materials, and over-over-sized cases, the Italian watch industry continues its carnival. Is this a premonition of things to comeı Who knows…ı

The Chinese magnet
An increase of 110% in 2003! It is true that China comes from afar, but the large increase in Swiss exports to the Middle Kingdom has rung a bell of hope for marketing managers faced with a slow market in Europe and a more dynamic but still uncertain market in the United States.
The two post-communist em-pires, China and Russia, have become planetary casinos, with everyone edging their way to a prime spot around the gaming table. Having spent more than ten years in China, the Swatch Group has the lion’s share of the market. “Don’t worry, there will be plenty of crumbs for the whole world,” Hayek seems to say. The year 2004 will see many companies casting a hopeful glance towards this nation, as well as India and Russia. The three nations are the ‘new frontiers’ of watchmaking, and the pioneers are jostling for position.
While waiting, we can jostle our way through the crowded halls of BaselWorld and enjoy a leisurely stroll through the SIHH.
Heaven forgive me, after all that I almost forgot... Rolex, it’s business as usual!