Retrospective-Perspective: The Watch Industry 2005/2006 - Behind the velvet curtain

March 2006

2005 – the year to break all records: the year the Swatch Group declares “the best results in its history” – a turnover of 4.5 billion Swiss francs, or a “gross” increase of 8.3 percent; the year the Richemont Group announces an increase of 16 percent for the fourth quarter of which 19 percent comes from watches; the year the LVMH states that its watch and jewellery sales enjoyed an organic growth of 17 percent; the year the Bulgari Group reports a 10.5 percent increase in revenues for a total of US$ 1.1 billion; the year the Federation of the Swiss Watch Industry rejoices, because, for the first time, exports have exceeded the 12 billion Swiss franc mark (up 10.9 percent compared to 2004); the year the … Stop. OK. We get it ... It is abundantly clear that the Swiss watch industry is doing well, thank you, quite well indeed!
Yet, what lies hidden behind all these glorious results? What grand manoeuvres are happening in the wings of this superb scene? What changes are taking place in the decor? Who are the emerging players? Who are the champions of tomorrow? To better understand the stakes and the ins-and-outs of this resounding success, let’s try and scratch the surface a bit here and there; let’s turn over the soil; let’s look into our crystal ball (Baccarat, of course).

The power of the virtual
While the play unfolds majestically on the stage, the light in the wings is often very dim. Yet, it is here, in the semi-obscurity where the behind-the-scenes players make it all happen. In ancient theatres, the illusion of the setting is created through the use of machinery: cords, pulleys, and traps permit the birth of a world of dreams.
Today, this world is created through the power of electronics, which allows the formation of illusions in the form of virtual universes. But as always, the tools that are available shape, and even dictate, the performances.
When it comes to watch design, often not much is said about the considerable role that virtual imaging plays in creating a timepiece. Its influence is seen not only on the design level, but also increasingly in the modification of production methods themselves. Thus, it is now possible to design a product, technically, and then to completely test the steps involved in its manufacture and operation in a purely virtual manner. The traditional production stages are being drastically changed and the time from conception to fabrication has been considerably shortened. Only a few years ago, it took three to five years to design a new movement, construct a prototype and then test it, today the entire process can take only a few months.
This acceleration of the industrialization processes is certainly the reason behind several phenomena: a sustained rate of new and original movements hitting the marketplace; the acceleration in the verticalization of new manufactures; the growing sophistication of mechanisms, with the avalanche of tourbillons and complications that we have been witnessing.
On the design and construction front, virtual imaging tools also have important consequences. In a way, they have liberated designers, opening a world of forms that is easier to explore. The realism of the virtual images, which lets the designer “see” a piece from every angle before it even exists, has allowed decision makers to be a little more daring than in the past.
But there is also the reverse side of the coin for this resource. Since the watch “exists” before it exists, there is a great temptation to launch a few models, or even entire collections, that are only phantoms, some of which will never take on a physical presence.
This increase causes a somewhat artificial spiralling of the offer, leading to a general feverish state of affairs, provoking an artificial race to make new products. At the end of the day, this weakens the entire edifice. And, we are already seeing the appearance of a few cracks.

Disenchantment of the watch fans
Just as too much beauty kills beauty – because it is valid only through a certain rarity – too much marketing kills marketing. In the situation that we have just described, we are seeing the beginnings of disillusionment with some people – connoisseurs, collectors, and avid enthusiasts. The watch industry is inundated with a flood of words – to which we others, journalists, also actively participate. Often this talk is redundant or even useless, but it contributes to clouding the message. In this vein, a collector friend (he is not the only one) told me recently that he “has had enough” of all the marketing blah-blah that is basically the same from one brand to another, making him feel like “stopping everything,” like dumping watches and moving on to something else.
This epidermal reaction is rather symptomatic of a state of mind existing, at least, on the “saturated” watch markets. When the whole world claims to be “authentic”, a “manufacture”, “bastion of savoir-faire”, “master of complications”, when everyone affirms loud and clear, to “have a soul”, to “be heir to an ancestral history”, “to have legitimacy”, the watch enthusiast, a little lost in this flood of dogmatic assertions, is looking desperately to separate the wheat from the chaff. This same disenchantment, or the same mistrust, is also being felt by more and more retailers.
It is as if, with everyone in this race for luxury having climbed to the summit, which is then hidden from our view, enveloped in clouds and fog. Everyone is now at the summit but we no longer can see anything.
To distinguish themselves from the rest of the crowd occupying this very small piece of the pyramid, some brands are pushing exclusivity. Thus, we are seeing a boom in “limited editions”, or even “ultra-limited editions”, and “unique models”.
This trend, also facilitated by computer-aided design and production technologies, has suddenly given birth to a new wave of “micro-brands”, small companies that specialize in rare pieces. From being cluttered, the landscape quickly became overloaded, and in the bargain, some collateral damage was to be expected. When a person buys a perpetual calendar timepiece, they expect to still have after-sales service when, at the fated time, it will be necessary to re-adjust the watch (in this case, February 28, 2100, which, despite the fact that this is a leap year, will exceptionally, as happens every 400 years, not be followed by February 29…). But then again, these are the perennial concerns that are not included in the business plans of today’s young shoots.

All at the summit or all at the bottom
In fact, the current watchmaking situation, this upward move to the summit, is merely the reflection of profound socio-economic phenomena that touch society as a whole. Gradually, we have thus passed from a regularly divided offer, encompassing a little at the low end, a lot in the middle range, and a little in the very haut de gamme, to a situation where the market has been sharply cut into half. Now, there is plenty in the low end, and plenty in the haut de gamme, but hardly anything in between.
In reality, the disappearance of the mid-range segment is a mirror of a growing polarization of society and the progressive disappearance of the middle classes in the so-called “advanced” countries.
In strongly developing nations, such as China, the rapid access to consumer goods for many levels of society opens up even wider gaps. In Beijing, we move, with no transition, from the absolute luxury of a shopping centre constructed of marble to the dusty small roads of a hutong. In the former, the most luxurious diamond-set complications in existence are on sale. Just next door, however, a multitude of copies are spread out on the sidewalk. Between the two: nothing or almost nothing.
In this sense, the evolution of the watch industry should not be surprising. As with all commercial activity, timekeeping follows the paths marked out by the large socio-economic mutations of the planet.

Worrisome decline
The strong decrease in the mid-range is nonetheless worrying to someone like Jean-Daniel Pasche, President of the Federation of the Swiss Watch Industry. In five years, the average export price of a Swiss mechanical timepiece has increased from 1,500 Swiss francs, in 1999, to 2,148 francs, in 2005. He sees, in this situation, a danger for the “leadership” of the Swiss watch industry in the medium term, because, as he puts it, “It is important to be present in all segments, including the low end, in order to be able to master the savoir-faire and the technologies.”
To offer an analogy of a quite different sector, take the cinema, for example. American movies dominate the planet because they provide everything, from the most perceptive film d'auteur to the cheapest horror film, including, of course, the most technically advanced blockbusters. In Europe, the only movie industry that has been able to counter this domination on its own territory is the French cinema, and exactly for the same reasons. It offers mediocre comedies as well as high-budget extravaganzas. “To cover all” is one of the – only – reasons for this long-lasting domination. A word of advice for the watch industry!

Innovation remains the key for the future
Historically and right up to today, the transfers of timekeeping pre-eminence from one nation to another have often taken place during periods of technological advances. For example, the invention of drilling, around 1700, by the Geneva watchmaker Nicolas Fation de Duillier opened the door to the technique of setting rubies (jewels). But, because he worked in England, it was English watchmaking that seized this revolutionary technique and used it to its advantage for nearly a century. Switzerland only regained the upper hand because of a series of technical innovations. Another example is the American watch industry. At one time, it flourished because watchmakers in that nation were the first to introduce mass production. Also we must remember how the watch industry in Switzerland was shaken to its very foundations, even to the point of disappearing, when Japanese watchmakers starting using quartz. Of course, today, perched on the summit of luxury, there is a tendency to feel sheltered from such turnarounds. But can we be so sure in the medium or long term?
Some companies, among the industry’s most outstanding and also the most authentic and traditional, have well understood that to ensure continuity in their timekeeping reign, they must innovate. In this respect, we must salute the importance of the advances recently realized by Patek Philippe, followed by the Swatch Group and Rolex in the utilization of “selective photolithography” that allows not only to “machine” but to “clone” gears or balance springs (see Cover Story on Patek Philippe), while waiting for the technique to extend to other elements.
During the press conference that introduced this latest technological development, a journalist asked about the future of artisanal methods in mechanical haute horlogerie, the element that is responsible for the price tags in the haut de gamme. The response was that the art of timekeeping and its traditional savoir-faire would not disappear, but that it would, by necessity, become hybridized. The prestige watch of the future will contain a mix of futurism and perpetuated tradition. The industry cannot step backwards when offered the advantages of silicon. In this case, it means the absence of lubrication (the headache of mechanical watchmaking), an increased working precision, and performance stability. This development serves as a healthy reminder to the industry because there has been a trend over the last few years to forget that the essential goals of timekeeping are… precision and reliability. Moreover, in this regard, we suggested, already a year ago, that it would be perhaps judicious to bring back the chronometric competitions, and to open them to, for example, tourbillons. You can bet there would be more than a few surprises in the offing.

Since we are on the topic of the importance of technological advances in chronometry, do you know when the last Swiss chronometric contest was held? You’ll never guess in a million years! It was the day that Seiko won. Yes, Seiko, the Japanese brand that is presently launching, in the haut de gamme marketplace, its “revolutionary” Spring Drive movement (developed after 25 years of research and development).
This is also an example of hybridization, but of a totally other type. We already know about quartz movements that are no longer energized by a battery but by the action of a rotor. However, the Spring Drive is completely different. The energy from the rotor is transformed into electricity and charges a quartz which is then used as a regulator brake on a traditional escapement. Therefore, it is a highly precise mechanical watch that also contains an electronic chip.
Swiss watchmakers, who explored this avenue at the same time as the Japanese, apparently decided to drop it, preferring to concentrate on mechanical exclusivity, with the success that we all know. Without a doubt, this abandon resulted partially from concerns about communication and marketing, since it is very difficult to make the public understand, in a direct and simple manner, this technology and its advantages. Purely mechanical timekeeping holds the winning hand, which up to now seems unbeatable, offering a “sentimental” analogy between the “living” mechanical timepiece and our own human nature. A mechanical watch is reassuring in a world where technology seems to be spiralling out of control, a world that is often full of risks, a world that is “cold” and detached.
It is undoubtedly this “reactionary” side of mechanical watchmaking that explains its long lasting success. To provoke an economic shake-up, a new technology must also be able to “push” its advantages in an obvious and simple manner. This is what happened with quartz – it offered a precise timekeeper that would not stop working even if left abandoned for months at a time, a definite advantage for the ladies, besides allowing for smaller watches, who like to be able to change watches with no problems.

Swiss Made? An empty shell
There are other dangers, or threats, that seem to be peaking over the horizon of Swiss watchmaking predominance, even if they are
still minor.
We know it. We say it. And, it is being discussed more and more. The appellation “Swiss Made” is a shell that has largely been emptied of its substance. Increasing numbers of watch enthusiasts, and even regular clients, are realizing this. But, as long as this term is associated with quality, there is no problem. However, it is only necessary for the quality to be called into question, to create doubts about what Swiss Made really means. Actually, the term covers a wide spectrum, ranging from pieces that are 100 percent designed and produced by artisans in the Vallée de Joux to pieces that are 95 percent fabricated in China. The most authentic brands now want to separate one from the other. But how can this be done?
Several initiatives, all quite different from one another, have recently been launched. Above all, we think of the establishment of the Fondation pour la Haute Horlogerie (FHH), created by Franco Cologni, visionary guru of the Richemont Group, Jasmine Audemars, a shareholder in Audemars Piguet, and Gino Macaluso, owner of Girard-Perregaux. This Foundation, whose goal is to include other major players in the Swiss haut de gamme sector, intends to defend and promote the “values of Haute Horlogerie.” One of their main goals is to educate the youngest sector of an international public, and to make them aware of the codes of prestige timekeeping, while, at the same time, continuing to train retailers around the world. This initiative goes beyond the idea of only “Swiss Made” since the German brand A. Lange & Söhne is also a member, demonstrating that the “borders” of prestige timekeeping are shifting. Unquestionably, there will be a gradual move away from the sole idea of “Swiss Made”, making it rather difficult to return to it, without confronting very divergent interests.
In fact, we are seeing in this area many forms of the famous “globalization” that is constantly hammering our ears, and our wallets. Today, the distribution of advanced technologies means that a Chinese manufacturer already possesses or will very soon possess the same production tools as his Swiss or European counterpart. The rest, or in other words the difference in savoir-faire that determines the quality, is only a matter of training… and of culture.
These two notions are what we observe when looking at another newly formed group, more modest this time, called “Time aeon”. Master watchmakers have come together to create this organization, whose goal is to share and transmit the know-how of mechanical timekeeping. At the same time, they are sounding the alarm: the savoir-faire and skills that hold the keys to prestige watchmaking are gradually disappearing. The members of Time aeon feel that it is urgent to ensure the longevity of the art of timekeeping in a similar manner as the “guilds” of yesteryear. What is particularly noteworthy about this group is the origin of these master timekeepers. While they work in Switzerland, only one of them, Philippe Dufour, is Swiss. The others come from France, Great Britain and Finland. We are tempted to ask when will there be a Chinese “apprentice” joining the illustrious group. This is a good example of creating a sort of “international” quality that, one day or another, will supplant the single and outdated notion of “country of origin”.

Marriage of luxury and the Internet
Another phenomenon that is undeniably going to cloud the game, and redistribute the cards, is the Internet.
For a number of years now, watchmakers have loudly declared: No, we will not use the Internet as a sales channel. But, in this domain too, things are changing as can be seen by a number of initiatives, still modest, being tried on the web. We have witnessed the birth of the first online boutiques selling luxury goods (notably at LVMH), and these online sales continue to climb year after year with true timekeeping regularity.
Unquestionably in this arena, the “old Europeans” (who are most of the watchmakers) have overestimated the power of attraction of the old-style “boutique”. The new consumer markets, or as certain sharp-tongued commentators would say, the markets of the “nouveaux riches”, consider the Internet to be synonymous with openness and liberty, and they don’t have any hesitancy about using it. For a new Chinese or Russian millionaire, the idea of being able to buy on the Internet and have their items delivered in 24 hours by DHL or some other courier, is something quite “chic” and “luxurious”. To rightfully belong to the Internet sphere is, in their opinion, a privilege to cultivate.
Another, and parallel, phenomenon occurring on the Net is the blogospshere, which is beginning to play an increasingly important role. Not only are consumers better informed, but henceforth they can easily share their opinions with people around the world. Lately, we have seen many new watch blogs appear on the web, ranging from the naive commentaries of an avid fan wanting to share his latest acquisition, which he has probably photographed from every possible angle, to spiteful denunciations or the downright demolitions, not sparing, in some cases, journalists and specialist magazines.
Coming from the “base”, these blogs can be credited for bringing different views to the landscape where all the players – watchmakers, retailers, and journalists – are somewhat embedded in the grand timekeeping army (a little like the snippets of truth that we get on the reality of the war in Iraq through the blogs of U.S. soldiers). Little by little, with their outrageousness and their presumed subjectivity, the blogs are transforming communication, permitting it to escape from the yoke of the single “official language”. A new “transparency” is here, for better or worse.

The return of the ultra-flat watch
But, let’s return for a minute to the product, to the famous trends. What can we say about them as we lean over our crystal ball, with the mist swirling within?
Technical advancements, as we have mentioned earlier, are often the source of economic shake-ups. In a similar manner, these technical advances shape the “trends” to come. The recent introduction of silicon in the mechanical movement is a case in point. The silicon balance spring presented by Patek Philippe offers, among other advantages, a smaller size: 0.12 mm in height compared to 0.40 mm for the “Breguet” balance spring. This particularity permits watchmakers to envision a whole new generation of ultra-flat move-ments. Therefore, it is probably safe to say that one of the trends, in the short or medium term, will be the return of the ultra-flat watch. What pleads also in favour of this hypothesis is the simple “pendulum effect” – after so many oversized watches, it is quite natural that the pendulum would swing back to more discretion.
The plausible return to thinness will certainly be accompanied by a return of an aestheticism dominated by more classicism. Again, it is a safe bet that the new “values” of watch design will move towards a purity of lines, reliability and precision.
But, since it takes all kinds to make a world, the contrary of “purity” will certainly clear a path for itself. As we can already observe, an ultra-baroque styling, which exaggerates the proliferation of forms, materials and colours, is beginning to be considered a “trend”.
The perilous assembly of “stones”, the mixture of materials (gold and rubber, ceramic and diamonds), formal research, and nostalgia for the grand siècle (just think of the success of the Queen of Naples by Breguet), all make a contrasting and highly colourful landscape. The polarization, noticed in all domains, is also apparent on a design level.

The hunt for the new
The hunt for new watches will reach its heights during the upcoming Spring fairs. Some watchmakers, and not the least of which, seem to have learned an essential lesson: one has to be able to deliver the products presented, and if possible, deliver them immediately. In this respect, retailers are complaining about a phenomenon that, racing ahead oblige, has become more and more important. The brands announce the launch of their new items with a fanfare, surround them with the greatest media hype possible, and create a strong demand, but then… they take months to deliver these same products. This happens so much so that retailers, who have just been delivered the new items from … last year, see their new stock age instantly, or find themselves faced with clients who are disappointed at not being able to purchase the great watch they saw on the glossy pages.
Combined with the continuous supply of new models added to collections that have hardly been launched, this situation causes a product bottleneck that is discouraging to the retailer. But, on the bright side, it now seems that the importance of these potential dangers has been more or less understood this year, with greater numbers of brands taking care to emphasize that they are “able to deliver immediately”.

Training, strategic stakes
Manufacturers also have concerns when it comes to retailers. Among them are training and service. In the muddled landscape that we have just described, where values become unclear, the training of a store’s sales people – the last links in the chain, but the first to incite the client to buy – has become a strategic issue that the brands are quite concerned about.
The more advanced the training, not only in technical terms but also in aesthetic terms, the better will be the understanding of the watchmaking landscape and its authentic values. This understanding also favours the brands possessing true watchmaking legitimacy.
Teaching the sales staff how to avoid letting “the wool be pulled over their eyes” has thus become capital. But this training amounts to nothing without the assurance of an excellent after-sales service, which currently is still not, and by far, the case. If Rolex has succeeded in dominating and mastering the markets to such a degree, it is notably because of its excellent after-sales service on a global level. Today, the notion of service has become vital. And, it is for the betterment of all – watch brands and consumers – as well as for clarifying the debate.

So, the most important stakes are not on the stage, in front of the spotlights. On the contrary, they are concealed behind the velvet curtain, in the wings, where the most decisive battles are being enacted.

Source: Europa Star April-May 2006 Magazine Issue