Retrospective-Perspective: The Watch Industry 2007/2008 - Effervescent exhilaration

April 2008

It continues. . . It continues to rise, unflappable, with no let up in sight. Every month, watches worth more than a billion (yes, with a ‘b’) Swiss francs pass through the offices of Swiss customs. And this number is the only really reliable statistic that we have concerning the output of the Swiss watch industry in general. On top of that, the figure refers only to the declared value at export by Swiss watchmakers, as the Federation of the Swiss Watch Industry (FH) carefully points out: “All the figures released by the FH refer to export data and not to the sales to the end consumer. Differences between these two types of data may therefore exist.”
Yes, there certainly may be quite a few ‘differences’ between what watchmakers declare as the value of their watches at export, and what the watches finally sell for at the end of the retail chain. But what does the record-breaking export value of nearly 16 billion Swiss francs in 2007 actually signify, once the watches are sold to the end consumer? How many mark-ups do we need to count in order to obtain a fairly accurate evaluation of the final turnover generated by the overall Swiss watch industry? Five, six, seven . . . ten? We will let you do the mathematics.
In 2007, Swiss watch exports enjoyed a positive growth rate of 16.2 percent, a figure not seen for the last 18 years, or since 1989, when the rate was 19.6 percent for a total value of 6 billion Swiss francs. [On the eve of the Basel watch fair in 1990, Europa Star thus realistically described the event as the “Fair of Optimism” and wrote about the “comeback of the mechanical watch,” noting that sales of these timekeepers had grown by an incredible 600 percent between 1988 and 1989!] And, January 2008 more than confirms this trend since that month alone saw an increase of 23.4 percent in watch exports as compared to January 2007.
Within this collection of increases, it should be noted that all price categories quite happily climbed in January 2008, which perhaps foreshadows a gradual recapture of the mid-range sector by Swiss brands. Having said that, however, the FH notes: “All price segments fared well in January, particularly higher priced products. The category of wristwatches costing more than 3,000 francs (export price) stood out clearly from the rest, recording an increase of nearly 40 percent by value and almost 45 percent by volume. Other products saw their value increase by 11.7 percent on average and their volumes by 6.3 percent.”

A train made up of locomotives
This confirms what we have been observing for several years now. The haut de gamme sector is the locomotive of a train that soon will be made up of only locomotives! And, we might add that this hit parade of exports resembles a real-time lesson in global geopolitics: Asian countries are changing the landscape of the major European markets and dethroning the United States as the largest importers of Swiss timepieces. For January 2008, the largest markets for Swiss watches were: Hong Kong (up 34 percent with a 30 percent share of the total), the United States (up 11 percent with a 27 percent share of the total), Japan (up 10 percent with 12.7 percent of the market), China (showing an extra-ordinary increase of 85 percent with 10.3 percent of the total), France (up 17 percent with 9.8 percent of the total) and Singapore (up 53.4 percent with a 9.5 percent share of the total market).
The overall global market of Chinese consumers (made up of Hong Kong, China, and Singapore) currently absorbs one out of every two watches exported from Switzerland. The increase in exports to these markets grew an average of 57 percent. The Chinese craving for Swiss Made, it would seem, is not about to diminish. On the contrary, it only cont-inues to grow.

The Chinese appetite
One of the unexpected manifestations of the Chinese appetite for Swiss Made can undoubtedly be seen in the recent acquisition of the heavyweight watch group STM, which controls Soprod (producing approximately 200,000 mechanical movements, modules, and added plates per year), Indtec (creating 90 million quartz movements per year, or about 10 percent of the market, with an annual production of 75,000 Alternance 10 movements and a demand that could exceed 250,000 units per year), Swiss Ebauches and France Ebauches. Control of STM was acquired by the Hong Kong based Peace Mark group, quoted on the Hong Kong stock exchange. Among the basket of brands owned by Peace Mark is the Swiss company, Milus. Besides its watch production factories in China, the Peace Mark group controls the extensive distribution of 100 brands—among them are some very large Swiss brands—in more than 150 sales points in the Middle Kingdom. Add to this the group’s recent joint venture agreement concluded with Tourneau, and you have a pretty good idea of what may gradually happen to Swiss timekeeping.
A few years ago, there was some concern that the Chinese would quickly reach the stage where they could produce high quality mechanical movements and thus compete with the Swiss. In fact, they are currently far from being inactive in this domain and it must be said that the quality of their pieces is increasing on a regular basis (as Europa Star was able to judge while in China; see issue 1.08). On the other hand, the incredible creative dynamism, which provides nourishment to the Swiss watch landscape, makes the Chinese venture into the mechanical arena more difficult over the long term. You might even say impossible, unless the Chinese players begin to work directly in the centre of the Swiss theatre of operations.

New virgin territories
What is striking, above all, is that Switzerland (with the exception of the Japanese company, Seiko, whose Spring Drive watch will soon adventure into outer space, see our exclusive coverage of the brand’s exploits in this issue) has become the real and only global laboratory for watchmaking research and development. Actually, Switzerland never really gave up this role except perhaps during the quartz era, which nearly proved fatal for Swiss mechanical timekeeping. But that story is now ancient history. The mechanical watch started to rise from the ashes some twenty years ago. From then on, it’s growth continued unabatedly in its quest for perfection. Later, thanks to the appearance of numerically controlled equipment, the sector continued to exceed its own expectations, and now it is experiencing an explosion in every possible direction. This year, we have the impression that watchmaking has taken a giant leap into new horizons that will bring a wealth of novel discoveries, with new and virgin territories to explore. Some of these advances have been nothing short of spectacular. Maurice Lacroix is introducing its MÉmoire 1, the first watch with a ‘mechanical memory’ that allows the wearer to alternate between the time function and the chronographic function using the same hands, without ever losing the memory of either one. De Grisogono has new toys and is presenting the first mechanical digital ‘LED’ type watch, the Meccanico, as well as the first watch with a sequential display, its new Otturatore. Parmigiani is launching its Kalpa HÉmispheres, the first dual time zone watch that displays all of the planet’s time zones, including the half-hours, as well as Nepal’s three-quarter hour difference. Harry Winston is offering a feminine complication in the brand’s Lady Z collection; it features —for the first time to my knowledge—a lunar phase indicator that also shows the trajectory of the invisible dark moon. The list goes on, and on, and on. In all domains, whether in technology, in design, or just offering up a bit of whimsy, unbridled innovation is the order of the day.

Everyone is drawn towards the high-end
These few watches—and many others that we have not yet discovered—are only the tip of the iceberg, as the quality of the mechanical watch in general is continually being improved. And, the brands active in the very up-market sector have drawn the overall industry towards the high-end. This is due to the ‘aspirational’ effect that has touched all segments. Some com-panies, such as Oris for example, which have never abandoned the mechanical sector, are now being greatly rewarded for their earlier efforts. Other brands, with a price/quality ratio based on the mid-range, are also finding great demand for their models.
In the movement sector, the Swatch Group’s stated halt in the delivery of movement kits and blanks has actually boosted research in this domain as was widely anticipated, even though a global alternative has yet to be found. Because of the current lack of any real substitute ‘tractors’ to replace the indestructible ETA 2892 calibre, among others, the research labs, constructors, and engineers in this sector have more work than they can handle. There is fierce compe-tition to produce movements that are original and innovative.

In terms of movements, many of the large watch brands have now reached their cruising altitude. This is seen, for example, in the many new models by Jaeger-LeCoultre, whose technological new pieces have been supported by ‘fundamental’ research of the type that led to the creation of the Extreme Lab. A certain effervescence is also taking place among the ‘small’ independents who are becoming stronger and bolder with each passing piece.
A positive signal for the contribution of the smaller players was evident at the 2007 Geneva Grand Prix, which recognized two particularly deserving independents, Kari Voutilainen, for his quest for absolute chronometry, and Jean-Marc Widerrecht, as a movement designer and specialist in retrograde systems. Unique and totally artisanal creations or the willingness to launch new brands continue to see the light of day. Every year, newcomers alight onto the scene.
One new recruit, for example, is FrÉdÉric Jouvenot who intends to give the automatic movement “renewed youth after 230 years of history” by placing an oscillating weight and the complete winding system of his Automatic Chronograph Evolution timepiece on the front of the watch. This would “leave the back of the piece free to accommodate the greatest mechanical follies and most beautiful finishing.” There is also LÜtolf Philip, who has embarked on an adventure to create a new helical spring regulator, developing a force of ‘ten kilos.’ These are but a few of the many innovators that we invite you to discover during the spring watch shows.

The pioneers and the archaeologists
The enthusiasm for, and the appreciation of, the art of timekeeping are the reasons for the appearance of an unprecedented number of niche brands. Nearly all want to position themselves in the stratosphere, being highly tempted by the vogue for what we call ‘Über watches’ (see Europa Star 1.08). This involvement also extends beyond the watch world as exemplified by LÜtolf Philip. He is not a watchmaker by training but is a former international businessman who gave up everything for his timekeeping passion.
As these new brands come on the scene, we can see two fairly clear types. On one hand are the adherents of a futuristic type of watchmaking. We could call them ‘pioneers.’ They are exemplified by the ‘big band’ of Max BÜsser & Friends, the trio of HD3, the duo of Jean Dunand, and the solo players of Urwerk and Vianney Halter, as well as other horological players and composers such as the latest group to take the stage, the MaÎtres du Temps (see an article in this issue), who are three solo artists (Christophe Claret, Roger Dubuis and Peter Speake-Marin) performing under the conducting baton of Steven Holtzman. On the other hand are a number of brands that place themselves on a historical pedestal. They are the ‘archaeologists.’ Some want to revive the forgotten names of the past, such as Badollet and Louis Moinet. The goal of others is to re-launch brands that enjoyed prestige in earlier times. One such example is the current re-launch of Favre-Leuba.
These new brands are like bees swarming around us. They have talent and sometimes sheer genius, but the hives are, to a large extent, all located near the same nest, the one whose occupants have a great deal of purchasing power.

The super concierge and the Über rich
But among all these new players, among all the veritable horological creators, inventors, and passionate fans, are also a number of pure marketers. And, unfortunately, some of the latter have little or no scruples and are more than willing to make their honey on the tombs of others. But isn’t it also a paradoxical sign of vitality that the sector is attracting so many participants? Having said that, however, the recurrent problem among the newcomers is having the capacity to provide quality service.
Once the famous ‘emerging markets’ are wrung out, such as China and even Russia, populated with somewhat ill-informed—only for the time being—nouveaux riches who are in a hurry to be seen with the latest tourbillonesque folly on their wrist, the froth will subside and the criteria of quality and service will rise to the top.
While the large brands are quite cognizant of these issues, we are seeing more and more emerging brands place the concept of service at the centre of their offer. The trend for the ‘super concierge’—someone capable of being able to deliver, within the hour, a flock of pink fla-mingos or of reserving, at the last minute, the best table in a restaurant that has been booked for six months—is responsible for creating simi-lar expectations in the watch world. And, the ‘Über rich’ fully expect to receive these kinds of ‘small favours’ along with their latest timepiece.

A return to elegance...
Far away from this lavishness, a new wind is blowing and is bringing with it a ‘return’ to classi-cism. Our correspondent in Italy commented on this in our last issue. Italian women, always on the avant-garde of watchmaking trends, are slowly beginning to tire of their enormous and diamond-studded underwater chronographs in favour of more refined, more lightweight, and more elegant timepieces.
There is also a noticeable return to slimness. This is seen in many of the new models by some of the biggest names. Vacheron Constantin, Piaget, Chopard, and Jaeger-LeCoultre are all emphasizing refinement and classicism in some of their pieces. The word ‘icon’ increasingly comes to mind, at least with more knowledgeable consumers. Durability and perpetuity are also regaining favour. As we stressed in our editorial, the waters of ‘bling bling’ will begin to ebb, if they have not already started, and more perennial ‘values’ will rise to the surface.

...and the metiers of art
As a corollary, we are also witnessing a return to the ‘metiers of art’ (the Fondation pour la Haute Horlogerie is actively promoting these crafts and skills in a series of small films available on its website – www.hautehorlogerie.org). And, like a beacon, Patek Philippe is leading the way. This year, the Geneva brand is promoting the art of enamelling as well as the ancient art of ‘skel-etonizing’ (this is not exactly the same thing as showing off one’s own innards, as is the trend today). This return to the ‘virtue’ of traditional savoir-faire does not, in any way, signify the brand’s abandonment of cutting edge research, quite the contrary. Patek Philippe is announcing this year at BaselWorld its new advances in the use of silicon technologies. For the Geneva company, the issues are all about improving the performance of the movement and perfecting the technology of the motor without, however, neglecting the elegance of the ‘body work.’ [In passing, we notice the same sort of design prudence at Ulysse Nardin in its advanced research into silicon technology for the brand’s remarkable Freak InnoVison timekeeper.]

Counterfeits and margins
Metiers of art and technological innovation—or tradition and exploration, or even memory and projection—often go together. This dual relationship is even more important since it is a major element in maintaining the Swiss watch industry’s sovereignty for the long term. One of the dangers to the industry, however, is counter-feiting. Global annual sales for all types of counterfeit goods are in the neighbourhood of the incredible sum of 500 billion Euros.
A recent article in the Revue d'Économie industrielle, reprinted by the newspaper, Le Monde, enlightened readers as to the price differences for real and fake luxury products. Looking at the examples given, the counterfeit watch seems especially ‘attractive’. For example, an original Louis Vuitton handbag is priced at US$400, but its counterfeit copy sells for between US$30 and US$60. An original Chanel scarf costing US$300 will see its fake counterpart going for US$10. However, the prices for these items are less ‘interesting’ for a consumer than the price differential between a real Rolex selling for US$4,000 and its copy that can be purchased for between US$15 and US$35.
After having purchased (for reasons of pure research!) a few counterfeit watches this past autumn on the sidewalks of Shanghai, we can affirm that the quality of these fakes is constantly getting better, even to the point of becoming actually confusing. How is it possible, you might ask, to produce a complete watch—steel case, automatic movement, glass, hands, dial—at such an amazingly low price? And to pay, quite miserably, the whole chain of intermediaries? Perhaps one of the most insidious and pernicious effects of counterfeiting is that it casts suspicion and doubt on the margins enjoyed by watch manufacturers!
And speaking of margins! It is a taboo subject among taboo subjects. Between a balanced price/quality ratio (irrespective of the price, since it can be ‘balanced’ and adjusted appropriately for a US$100 watch as it can for a US$100,000 watch - that is not the question), an unfair ratio or a ridiculously scandalous calculation, the watch industry allows its business to be conducted with the greatest opacity possible.
The watch industry offers the possibility to earn incredible margins; perhaps even more so than any other domain, and this is perhaps the reason why it attracts so many adventuresome entrepreneurs. This enthusiasm for the sector, often motivated only by the lure of monetary gain, is feeding the watch ‘bubble.’ When it explodes, it will damage everything around it, hurting perfectly innocent players as well as authentic watchmakers.
We had a foretaste of this with the ‘Antiquorum affair’ that was widely talked about and written about in 2007. This settling of scores, carried out partially in public, has caused many people to have misgivings and doubt as to the real ‘value’ of watches as an investment. “Vilify, Vilify, some of it will always stick,” says the French proverb. [As a bit of trivia, this saying originated with Pierre de Beaumarchais (1732-1799), the famous French playwright, who was also a talented watchmaker, having invented a more accurate escape mechanism for pocket watches.]
Until now, sales of watches at auction do not seem to have suffered from these reports. But the results of the large auction conducted by Antiquorum on March 15th and 16th in Geneva, during which most of the lots were sold at the lower end of their estimated range, show that collector enthusiasm seems to have cooled.

Online sales
Another question that evokes opposing opinions in the watch industry is whether or not to sell products directly on the Internet. It seems that the entire industry is edging near the water, gingerly getting its feet wet. Some have already taken the plunge, while others have openly declared they will jump in shortly. Still other brands are silently (officially at least) preparing to sell online, while maintaining their previous stance of never venturing into cyberspace boutiques.
What is certain, however, is that the day when one of the horological heavyweights decides to sell online, the others will be forced to follow suit. A major factor in this decision depends on the degree to which the various brands have integrated their distribution. It is difficult to find the right balance between the preservation of the retailer networks that have been established over years, or even decades, to the establishment of a network of brand-owned bout-iques and the possibilities still unexplored with the Internet.
Other essential elements are also at the heart of this consideration, notably after-sales service, the status of the brand, and its standing. One risk of selling online is becoming ordinary or commonplace. In a world where everything is available everywhere and at once, the idea of a certain rarity and having direct physical relationship between the product, the seller, and the buyer in a special environment are strong arguments in favour of the bricks and mortars. Prestige and being available at the click of a finger do not necessarily make the best of marriages.

Media consolidation
We are also witnessing the online phenomenon in our own world, the media, especially in the watch press, which is our main concern. The era of major consolidations, which the watch industry has already witnessed, has come. The ‘luxury poles’ of the publishers are getting stronger as they seek to grab the largest territories. The offer has become excessive—and confusing—since the Internet blurs the economic models and greatly mixes up the genres: forums, blogs, traditional revues online, virtual boutiques, wire stores, social networking, private clubs, special interest sites, online encyclopaedias, as well as all sorts of unauthorized sellers peddling information are multiplying at a frantic rate and with no real structure.
The advertising ‘cake’ is crumbling and breaking into pieces. Yet, similar to what is happening in the sales of luxury products online, the physical relationship to the printed product is not, in our opinion, irreparably condemned to oblivion by this outpouring. The contrary is perhaps true. The two approaches are complementary (we know this quite well because Europa Star was one of the first watch magazines to launch its own website already 13 years ago, in 1995).
But gradually, paper will turn into a true ‘luxury object.’ As it becomes ‘rarer,’ it will assume an even more precious status because, when all is said and done, paper offers a more profound, more durable, and more intimate relationship with the visual information it conveys. Often, though, we are told that these are merely the reflections of a ‘dinosaur,’ and that today’s generation of young people—those who have grown up with a mouse in their hand—have lost all connection to the physical object! Hmm, not so fast. How can we explain, then, that such an outdated technology as the mechanical movement—quartz fulfils infinitely better the main function of a watch, which is to tell time—is the category that is most desired? Cold efficiency is not the total goal. It is also necessary to know how to give time to time. As proof, you have just finished reading this article. And, now it is time to turn the page and discover what today’s watchmakers have prepared for you.

Source: Europa Star April-May 2008 Magazine Issue