Retrospective-Perspective: The Watch industry 2008/2009 - Children of the Bubble

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April 2009

Last year, at this same time and when the market was in full euphoria, we wrote in these columns that, “when the watch bubble will explode, it will damage everything around it, hurting perfectly innocent players as well as authentic watchmakers.” And alas, here we are.
The watch bubble has indeed exploded, following all the other bubbles. The ravages that this explosion has caused cannot yet be quantified—far from it—since the shock waves are still reverberating throughout the industry. Although some people expected the SIHH to close its January edition to announce unpleasant news, others are waiting the end of the eight-day BaselWorld show to clean up.
How did we arrive at this situation, at this point of collapse? In hard numbers, the very cautious FH (Federation of the Swiss Watch Industry) estimates that for January 2009 alone, Swiss watch exports declined by 21.5 percent (note that these figures reflect only customs’ statistics). This translates into 860,000 units less than January 2008, for a loss of CHF 227 million. For those who thought that the haut de gamme sector was immune to the global recession, obviously this was not the case. While it is true that watches costing more than CHF 3,000 (export price) are faring a little better than the others, their exports have still fallen by 14 percent.
No market—or so it seems—has escaped unscathed. The Chinese Eldorado for Swiss watches has shrunk 42.6 percent while Singapore slid more than 60 percent. Japan, the third largest market for Swiss timepieces, declined 24.2 percent, somewhat less than the United States, off 28.5 percent. Hong Kong, the hub for Swiss pieces and their largest market, saw its imports decrease by 12 percent. Russia is down by more than 50 percent.
Europe stands a little better in this sombre picture with France declining 5.5 percent and Germany by 8.3 percent. As might be expected, the nations with the greatest declines in Swiss watch imports are those that have been most hurt by the financial and housing crisis—exports to Spain fell by 18.7 percent and those to Britain by 13.9 percent. The only country in Europe to stay afloat was watch-loving Italy, with a slight increase of 0.6 percent—a small and perhaps temporary consolation.
In this distressed panorama, however, some countries proved the exception to the rule. Surprisingly, South Korea—the twelfth largest importer of Swiss watches—showed an amazing 66.8 percent increase, mild in comparison to Oman’s 115 percent increase. Then again to put this in perspective, exports to Oman totalled CHF 3.4 million, perhaps the price of a luxurious wedding, during which the guests were offered a Swiss watch.
So, we ask again, how did we get to this point?

Multi Madoffs
Let’s not close our eyes to the fact that it’s much too easy to always claim to be the victim, bemoaning that, “it is the fault of someone or something else—the fault of the crazy financial situation, the fault of America, the fault of the subprime mess.” It’s too easy to absolve oneself of any responsibility in this crisis because the watch industry, like so many other sectors, has dangerously played its own sort of Ponzi game. Carried away by short-term myopia and fascinated by the incredible margins offered by the Über-watches, many watchmakers (but not all) have acted like the frog in the fable by La Fontaine. They have expanded, expanded, expanded—to the point of exploding.
We clearly see this explosive trend in watch design. Like the American car manufacturers, watchmakers felt they needed to construct huge `hummers´ for the wrist. The watches became bigger, ever bigger, crazy, ever crazier, ever more ostentatious, and ever more flamboyant.
The “pastoral art that is practiced in silence,” as we quoted a watchmaker in another column, has raised itself to the noisiest of podiums in its quest for more and more glamour. The watch industry has sought, at all cost, to become more erotic, sexy. Then, one by one, the lights began to flicker before finally going out.
It is a human story that continuously repeats itself. It seems we can only advance in successive phases of euphoria and depression. The watch industry, like all the others, will eventually come out of this depression—or recession, or whatever you want to call it—but no one knows when. On the other hand, one thing is sure. When it does pull out of this malaise, it will no longer find itself in the same landscape as before.

A change of era
The topography will be different because the `crisis´ will sweep away certainty, and will shake up the (false) hierarchies that we used to think were solidly established. Some of those watchmakers who were ridiculed because of their prudence, their slowness, and their lack of reactivity will see themselves paradoxically rewarded. Contrary to the great watch crisis of the mid-1970s that denoted a fundamental technical rupture (before the `old´ mechanical timekeeping was able, after a decade, to regain its strength and relegate quartz to inexpensive watches and economic marginality), the current crisis represents more of a cultural break. It marks the end—finally—to the ultra-liberal ideological hegemony and the so-called omniscience of the marketplace whose deadly policies have only made the gaps wider—gaps between an Über-style of watchma-king and a fashion-oriented mass market. There was nothing, or hardly anything, between the two extremes.
Nicolas G. Hayek had sensed this gap, this danger, coming, as did FranÇois Habersaat, former president of the FH, who at the beginning of the bubble, often declared, although few were listening, that Switzerland should not ignore the mid-range. But while the Swiss industry had largely repudiated the middle part of the market, the middle class was the most weakened as was demonstrated later.
In opposition to the flight towards the high luxury end, Nicolas G. Hayek continued imperturbably to consolidate his production, knowing well that a pyramid is built on an industrial base that is as large and solid as possible. This base is what allowed Hayek to (re)construct and to (re)place a brand such as Breguet at the summit of the pyramid. (On this subject, see the article on Breguet by Bastien Buss in this issue). And this base has allowed his group to weather better than the others the current storms.
We would like to believe, when we pull out of this crisis and the landscape has been cleaned up, that the survivors will adopt a certain restraint and that watchmaking will return to more reason—or, in other words, that it will have more substance and a fairer balance of price and quality. It should not, however, renounce certain positive things—there are some—that we saw in this extravagant period, namely creativity, research, and development. Some signs already indicate that this may be the case.
Children of the bubble
At the height of the bubble, a number of creative and enlightened brands were born, but then the bubble burst. What will happen to these “children of the bubble”? Their fate is not unrelated to the future of timekeeping since it is in these young entrepreneurs that we often find the greatest creativity. Forced to clear a place in the jungle, to find a little light under the shade of the large baobab trees, these new brands have doubled their efforts in trying to renew the art of mechanical timekeeping. Skilfully combining design concepts with computer tools, many have proposed new solutions and explored new forms and functions. These agile gazelles have revived watch design and have influenced the `elephants´.
At the same time, many of these young brands have been dazzled by the prevailing one-upmanship, and have thus tried to forage from the same high branches. As a result, prices reached into the sky. It is often quite common for a totally unknown brand to present its first watch at a six-figure price tag (and without a strong guarantee that it `runs´ correctly, that it is reliable, and that it has convenient after-sales service).
AttachÉ case in hand, their representative—often the CEO himself—travels to Singapore, Miami, or Moscow to present their costly newborn to the famous `collectors´ whose names are discreetly traded in the lounges of the various world’s intercontinental hotels. How many of these `collectors´ are there in the world, anyway, with their safety deposit boxes full of double and triple tourbillons? A thousand? Two thousand?
Is it possible to build a brand for the long term if you depend on collectors? This question is even more pertinent today, since the crisis also debunks another of timekeeping’s myths, the investment value of watches.
How many disappointments are waiting on the horizon? The safes of collectors are filled with pieces that, not worth the money they paid for them, are simply gathering dust or waiting to end up on the gray market. The brands sold these pieces as a dream, of course, while using the same vocabulary as a financial consultant.
For each brand whose products have proven that they have both investment and patrimonial value (for example, Patek Philippe, whose primary promotional efforts are based on these values), how many other brands will see their prices inexorably decline? For each brand that has enjoyed fame for dozens of years and whose high quality iconic products are sold at relatively reasonable prices (Rolex, for instance), how many other brands sell pure `marketing´? The `crisis´ will put an end to these practices. Yet, we should not lose the creative revival that the past excess has stimulated.

Watchmaking is not an art but a craft
This creativity, however, will most likely change, becoming more oriented towards substance. During this time watchmaking has thought of itself as purely an art, and not as a craft, which it fundamentally is, leading it to be tempted by sculpture and the plastic arts. Paradoxically, this has resulted in a return to a practice that was abandoned with the arrival of quartz— chronometric competitions.
Is the watch industry returning to its basics, to values that some considered obsolete? Certain signs seem to point in this direction. The current slide in Swiss watch exports has something to do with its claim to be a fine art. But isn’t the art market falling in the same way, poisoned by financiers and speculators? This does not at all mean, however, that art itself is in danger. On the contrary, it is returning to values that go beyond fashion trends; it is directly addressing the human condition, without obligatorily passing by the `market´ phase. In the same manner, perhaps, watchmaking is returning to its own more pragmatic values—precision, reliability, and well-made goods.
The subtle but significant emergence of a brand such as Moser & Cie offers a good illustration, as does Lange & SÖhne, an established brand whose approach has been commendable. It is true that these two examples operate with a certain Germanic rigour, but it is not by chance that they are on the periphery of Swiss timekeeping (Schaffhausen for one, Saxony for the other), and thus are removed from the tumult at its centre. These two companies also demonstrate that traditional timekeeping can go hand in wrist with innovation. Citing only two examples, Lange & SÖhne has regulated the tourbillon to the second, while Moser & Cie has created a regulating organ that is exchangeable with a twist of a screwdriver.
Another more recent example, and one that remains to be fully proven, is also found on the `periphery´. In the French town of Morteau, Pequignet is creating a `basic´ mechanical movement that seems quite promising. This is surprising since we did not expect Pequignet to be involved in this kind of activity. (To learn more, see our article on the French brand in this issue). The brand’s movement brings together the best of the `two worlds´—a totally new integrated construction plus serious requirements for reliability, precision, and ease of after-sales service. Perhaps this calibre prefigures watchmaking over the next few years—Haute Horlogerie at an affordable price.

Haute Horlogerie at an affordable price
The bad habit was so widespread that, only a short time ago (a few weeks, a few months), everyone looked a bit askance at a watch whose price did not display multiple zeroes. This prevalent arrogance wanted us to believe then—and still today—that only those at the summit of timekeeping were worth anything; the rest could be ignored.
The media largely played their role in the dissemination of this false feeling of su-periority. Unless it was a double or a triple, the birth of a new tourbillon was not even worth the ink to write about it. Unless it had a patatoÏde shape or sported the muscular form of a body builder, a new case was not given any sensible coverage. Perhaps I exaggerate a bit, but not by much. The timorous and the modest had no right to a column, unless their marketing budget was vastly oversized.
Today, modern tools used for watch design, modelling, and production illustrate that products coming out of research laboratories can become more democratized. They can create a new type of timekeeping, one that is qualitative, inventive, and pertinent, and. . .affordable (no, affordable is not a bad word). In other words, it is now possible to make Haute Horlogerie a more democratic product.
This is not only a question of the business plan—it is also a question of attitude. And attitude, as we move out of this crisis, is going to forcibly change. To leave our Swiss tropism aside for a moment, the example that we have cited many times in our columns—that of Seiko—is enlightening. A technical and positive technological success such as the brand’s Spring Drive has not been given its true worth by the watchmaking `community´. And yet, here is a watch whose technology—part mechanical, part electrical, and part electronic—is truly revolutionary. Seiko’s calibre is the fruit of 25 years of development (following a research avenue that the Swiss abandoned). Its precision is amazing and its `gliding´ hand offers a new symbolic interpretation of the passing of time. The watch has been artfully finished and decorated, yet its prices remain in balance with its quality. The Japanese of Seiko have time on their side—they know their time will come.

The pendulum swings back
This crisis may very well call into question everyone’s positions, upset the tacit hierarchy of the brands, and overturn many small empires. Territories will be exchanged. The balance of power will be altered, and is, in fact, already being modified in terms of the relationships that link the brands, retailers, and their intermediaries—agents and distributors, if any are left.
Over the last few years, retailers’ storeroom shelves have been filled to the brim and are now overflowing because of the pressure exerted by the brands (“If you want 15 references of this watch, you must take 30 of that line.” “If you want this collection, you must also take that collection.” “This collection is not available in less than 15 references.” “If you want our brand, you must not carry such and such competitor.”)
As in the subprime mortgage crisis, the `toxic´ elements have been mixed with the healthy objects and abandoned collections have been attached to a few proven locomotives. Hardly has a new item been announced and ordered that another has supplanted it, without the first one having even been delivered.
We are not, however, going to pity the retailers too much since they, like everyone else, have largely profited from the largesse of the era—except those who, against their will, were `cleared out´ from certain distribution lists, often after dozens of years of good and loyal service. Now, however, suddenly solicited and the object of much attention after having suffered years of constraints, these retailers see the current reversal as a `just´ return of things. It is now their turn to dictate conditions! It is now up to them to make their own choices!
Agents and distributors are seeing themselves rehabilitated. Thanks to their keen understanding of their markets, the system, and the networks resulting from years of experience in the field, they are better armed than the young MBA graduates could ever be—even after being sent to earn their stripes in the branch offices before joining the headquarters of the parent company.
This crisis will perhaps also mark the end of the brands’ `boutique-mania´ craze, as they realize that maintaining a fleet of flagship stores around the world is expensive, very expensive, in spite of the high profit margins. We are already hearing about the freezes for store openings that have long since been planned.

Service oblige!
A columnist for The New York Times recently wrote about his experiences in the luxury boutiques on Madison Avenue. Dressed in a sweatshirt, jeans, and dog-walking shoes, he visited more than a dozen prestigious stores, where he found that the attitude of the salespeople had completely changed from “impenetrable to inviting, seemingly overnight.” In the past, as a former employee at the Yves Saint-Laurent shop confided to him, it was “a common and effective practice to size up a customer by looking at two simple things: his watch and his shoes. If the accessories are not expensive, he is not worth the effort of even a simple hello.” Today, recession oblige, these same people are now bending over backwards to offer service. Every potential holder of a credit card is welcome.
He also wrote of his stop at Chanel. “Within 30 seconds of walking into Chanel’s fine jewellery store at 735 Madison Avenue, I had a $4,500 black ceramic J12 watch snapped onto my wrist and a cheerful salesman telling me he had just read a book that claimed men who wore big, chunky watches were often remembered by those who met them as being taller than they actually are.”
The writer concluded his experience with, “I had walked in wearing a digital watch that cost less than $3 (made by Acqua. . .), which was placed gingerly on a velvet tray.”
Ah yes, arrogance and haughtiness are no longer the rule. The quality of service has become a central issue beyond the simple welcoming hello to the client. This is especially true in the world of watches, a technical object that requires care, regular maintenance, and possible repairs down the road. The quality of the product, the rapidity of the service, and reasonableness of its price will now make a much greater difference than in the past.
The other day I read a warning in a watch blog. A collector was cautioning his peers: “When you buy an Haute Horlogerie watch, expect to pay a ‘rental’ as long as you own it because the after-sales service costs are considerable, and don’t expect to see if for many months because the delays are also very long.”
We stand well warned.
Getting out of the crisis?
“Who'll stop the pain?” wrote Paul Krugman at the end of February. This recent Noble Prize winner in economy and editorial columnist for The New York Times compared the current recession not to the Great Depression of 1929 but to that of our great grandparents (the Panic of 1873 that lasted more than five years). Krugman explained that while the crisis is “bad news for the near term. . .the seeds of the eventual recovery are already being planted.”
He took the example of the car industry. “At current sales rates, as the finance blog ‘Calculated Risk’ points out, it would take about 27 years to replace the existing stock of vehicles. Most cars will be junked long before that, either because they’re worn out or because they’ve become obsolete, so we’re building up a pent-up demand for cars.”
Watches are, of course, not indispensable as are cars, but after more than 500 years of existence, there is no reason why the demand for timekeepers should weaken. When the industry finally does recover to its before-crisis levels, it will turn towards a product that will be more consistent, more advanced, more reliable, and more precise. There is, therefore, no reason to throw in the towel. On the contrary, the moment has come to advance in research and development, to improve quality, strengthen service, and to offer new solutions. So, get to work, “Children of the Bubble.”

Source: Europa Star April-May 2009 Magazine Issue