Retrospective-Perspective: The Watch Industry 2009/2010 - Shuffling the cards

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March 2010


My, how time passes! And, what a short collective memory we have. But, let’s close our eyes and look into the past for a minute. Oh, not too far back. Say, only three years back. Three years? Only a drop in the ocean of watchmaking history and yet. . .
In April 2007, we began this same column with this same sort of ‘Retrospective–Perspective’ article, where we proclaimed (and I quote): “2006: What a glorious year! Should we repeat the figures, being shouted everywhere? Why not, since they are ‘historic’ numbers: Swiss watch exports (custom’s export statistics) officially reached 13.7 billion Swiss francs, an increase of 10.9% compared to 2005 (which was already up by 11.5% over 2004, itself higher by 9.2% than 2003, thus enjoying three years in a row of double-digit growth, or nearly).”
And when we examine the division of the markets for this same year, 2006, we realize that 2009 saw a complete reversal from three years ago. In 2006, we wrote, “Europe is picking up again strongly: France +21.3%; Germany +21%; Spain +15.6%; and Italy comparatively disappointing with an increase of 5.4% but nonetheless this nation is still the fourth largest market for Swiss watches.”
In 2009, it is clear that exports to these markets have all strongly declined. For example, let’s look at Russia. This nation was considered the rising market par excellence at the end of 2006 when it reached 13th place for its Swiss watch imports totalling 322 million Swiss francs. But in 2009, the Russian market fell back to 18th place, and had difficulty even importing 141.8 million Swiss francs worth of watches. To cite another example, in 2006, while people were saying that Japan was “strongly raising its head (+10.4%)”, this country’s figures are down 36.4% in relation to 2007.
In this comparative table, the only nations that have actually done well are China (+21.3% between 2007 and 2009), a surprising South Korea (+70.5%), Australia (+11%), Portugal (+11%), Qatar (+33.3%), and India (+9.4%).

Change in tone
So, three years ago, we triumphantly reported that the Swiss industry exported a total of 13.7 billion francs worth of watches for 2006. Compare this to the value for 2009 when exports totalled the nearly identical sum of 13.2 billion francs. Yet this year, the numbers are said to be low, even “pitiful”, among other remarks. What a change in tone! Obviously, the Swiss industry had become used to—or even addicted to—a double-digit annual growth rate: +11.5% in 2005, +10.9% in 2006, +16,2% in 2007...and then a small slowdown in 2008 with only +6.8%, before crashing in 2009 with a decrease of -22.3%.
But in 2007, we already warned of the danger since we had entitled our Retrospective–Perspective article ‘Watchmaking runs the risk of excess’ and dared to claim that “many signs tend to demonstrate more and more clearly that we have probably reached the peak of this ‘baroque’ trend and that it will gradually ebb, leaving space for a return to more classicism and moderation,” affirming that “to make oneself noticed, it is necessary to be stronger, larger, more visible, more complex, or more original at all cost. It is often sometimes the values of watchmaking itself that are lost along the way and, undoubtedly even more serious, the final consumers are sometimes ‘scorned,’ those individuals who purchased high-priced watches that no one can either maintain or repair.”
Well, we have arrived at just this point—at more moderation. Not by choice, but rather by necessity. The crisis has acted upon watchmaking like the ‘corrector’ that the industry did not want to see.

Two symbols: the triumph of the Swatch Group and the fall of BNB
In the current slump, there are some signs that are not wrong and that, in fact, take on a symbolic value. This happened with two recent and totally contradictory events: the fall of BNB, and the good fiscal results obtained by the Swatch Group.
During these trying times, the Swatch Group fared better than most of its competitors. Compared to the overall statistics for the Swiss industry for 2009 (down 22.3%), the group did somewhat better, seeing exports decline by 5.5% at constant exchange rates (down 7.7% taking into account fluctuating exchange rates) on a total turnover of 5.421 billion Swiss francs. This figure is similar to the group’s turnover in 2006 when, for the first time, the Swatch Group passed the symbolic bar of 5 billion francs. Even better, the group announced that the month of December 2009 saw an increase in watch sales of 28.8% and that January 2010 would be “the second best January” in its history. How can this performance be explained?
We can analyze the group, beyond the particular managerial style of the Hayeks, using two essential factors: the industrial strength and the diversity of the group’s offer. The Swatch Group is the only group to cover the entire range of timekeeping—from the very haut de gamme to the most economical watch.
Nicolas Hayek frequently reproached, and rightly so, his competition for not investing enough in their own industrial tools and for coasting on his group’s supplies while practicing often abusive margins. In 2002, he announced that the Swatch Group would no longer sell movement blanks as of January 2006, a decision that was later de-layed until 2008 after discussions with the Swiss committee for competition, COMCO. This year, Hayek again insisted that there would be a complete stop of deliveries to third parties, although the effective date was left unspecified. Only “loyal, serious, and longstanding” clients would be exempt from this decree.

Investments at the top
You might not know it, but Nicolas Hayek’s advice was, in fact, taken to heart by more people than was thought at the time. A number of watchmakers began investing in their own production tools (paradoxically, this year of crisis saw a large number of inaugurations of new production centres, including, among others, major installations for Chopard, Parmigiani, Hublot, Greubel Forsey, and Armin Strom).
At this juncture, the case of BNB is quite instructive. Most watchmakers invested at the top, we might say, and not at the base. A few companies, such as Sellita, mostly assembled and customized ETA movement blanks, or set about creating ETA-compatible movements, then began developing their own basic movements. On the other hand, a number of watch companies, surfing the exponential rise of the average price of Swiss watches, designed production tools for the top end in order to create small series of complicated specialty timekeepers.
Very rare are those brands that invested in the creation of basic movements. The rapid ascension of BNB accompanied the move upmarket by industry players that found themselves liberated from all inhibitions, looking for ways to distinguish their brands from all others, notably in the domain of ‘post-gravitational’ tourbillons.
In 2008, when the crisis started, the haut de gamme sector maintained the illusion, for quite some time, that it would be spared. But this was not to be. The December 2009 statistics vividly demonstrated that the most expensive watches, especially those in gold, were most responsible for the decline in exports. (The overall decline from December 2008 to December 2009 was 7.2% in volume, but for gold watches, it was down 23.3%, for platinum, down 36.7%, while bimetallic watches were up 53.4%.)


A two-speed haut de gamme
The fall of BNB is not only emblematic of the illusion of ‘always more’ but it also reflects the dividing line that the crisis has drawn not only on the watch industry as a whole but also at the heart of the haut de gamme sector. The high-end has been split between superlative and superfluous timekeeping—which has been hit full blast by the tempest—and a watchmaking more rigorously attached to its historical patrimony—which has better resisted the storm.
When confronted with crises, all brands are not equal, far from it, even if they work in comparable segments of the industry. It is often said that the independents—including all the young brands engaged in a ‘break-away’ type of watchmaking—were more reactive than the mastodons. Perhaps this is sometimes the case but these young Turks don’t have sufficient ‘war chests’ to see them through the bad weather, contrary to the large groups. From this point of view, 2010 will certainly be a pivotal year and, unfortunately, it runs the risk of turning out to be even more ‘ravaging’ than 2009. Without financial reserves, or because their wings have been clipped in mid-flight, the weakest brands are at the highest risk, even in a strong recovery.
The elder Hayek describes this risk in terms of a “natural, economic, and Darwinian selection” that has just begun. And assuredly, if his decision to cut off all access to component products made by his group comes to fruition (regulating organs, springs, gears and hands, glasses and crystals, etc.), although it is still far from being final, then it will only intensify and accelerate this ‘Darwinian’ selection process. This will thus give the large integrated groups (not only the Swatch Group but also Rolex, Patek Philippe and in some ways, the Richemont Group brands, whose industrial integration has greatly progressed) a definite advance, one that will be very difficult to catch up to for many long years to come.

China, China, China
The financial reserves of the large groups have not only allowed them to withstand the tempest and to methodically organize the necessary destocking of their products, but they have also given them the means to start up again when the storm subsides.
Let’s take the example of China, which everyone looks at greedily, and for good reason. While all other markets were in decline, China registered a 43.5% increase in Swiss watch imports in December 2009, moving to 4th place on the list. This figure does not even include the increase of 27.7% registered in Hong Kong, the Swiss watch industry’s largest trading partner. We are thus seeing a mad rush into China.
But there is a problem, and the brands that have been established in this market for a long time understand this difficulty all too well. The access to the Chinese market is complex, costly and convoluted, and requires creating partnerships with local companies. China is therefore a market that will automatically favour the large groups, which are the only ones able to set up obscure networks necessary for acquiring a real presence in this market, and the only ones able to spend the money and the time it takes—often a very long time—to see a return on their investments.
The independent brands will only be able to pick up a few crumbs in this vast marketplace, and it’s a strong bet that the Chinese ‘Eldorado’ will accelerate the general consolidation in the watch industry even more. This in itself is not without risks, of which there are two: on one hand, this may be the next bubble that will expand until it is ready to burst, while on the other hand, China may gradually become both the main export market and the main competitor for the Swiss watch industry.


The great American reservoir
On the other side of the world, the United States registered a decline of 37.9% in Swiss watch imports for 2009, while nonetheless conserving its second place in the hierarchy of trading partners with a total value of 1.4 billion Swiss francs. This is in comparison to the 2.3 billion francs of imports in 2008, nearly a billion less. This decrease affected nearly all sectors and all levels, from the very haut de gamme to more modestly positioned players (with the exception, perhaps, of Rolex, which does not release figures but is known to enjoy a very impressive sales network in the USA, with an incomparable reputation and an unequalled price/quality ratio).
In reality, the broad North American recession has resulted in a general shuffling of the cards, and the hands are not yet finished. Paradoxically, however, new opportunities have been born during the crisis in this market, since the USA is, and will remain, the realm of the entrepreneur. The high quality and affordable mechanical watch has enormous growth potential in the American market because, even though the watchmaking culture has made notable advances over the last decade, it is still marginal in terms of quantity (on this topic, see the article in this issue, ‘The American dream’ about Raymond Weil, a brand established in the USA since 1978). And, as difficult as it may be, this market in transition offers unusual niches to many small innovative brands.

Stylistic redistribution
Beyond the raw figures, the global slowdown has also—perhaps above all—revealed some radical reforms that are taking place. As we have said again and again, at the risk of seeming too repetitive, while the crisis was caused by financial and economic factors, it also revealed the generalized headlong flight in which watchmaking—as in real estate, automobiles, and ‘luxury’ in general—fully participated. Thus, the watch industry must take shared responsibility, at the same level as many other economic sectors, for its own problems. The industry should remember that it was not me, a simple journalist, who said it, but rather one of the highly placed leaders in the sector, Juan-Carlos Torres, CEO of Vacheron Constantin: “The watch industry has never learned from its mistakes. If a period of growth returns, it will think that it has survived the crisis and will forget all about it.” In Vacheron Constantin’s case, it is building its future on “long-term strategies” that were amply demonstrated at the recent SIHH with the presenting of one of the most compelling collections, constructed around three pillars: continuing research into traditional watchmaking complications; deepening knowledge of related crafts and skills; and a return to stylistic purity, notably the ultra-thin movement. It all comes together in harmonious dimensions suitable for the human physiognomy. In other words, the brand’s approach is the exact opposite of those who indulged in many precrisis abuses.

The moment has come
This redistribution of the stylistic cards is also obvious. But it should be understood that this is not about a mere nostalgic return to the past. Rather it is about reconnecting with certain ignored, forgotten and even suppressed values, such as: chronometry, readability, continuity, service and justified prices. But this is not a ‘conservative’ position, quite the contrary. ‘Conservatives’ are those who think that, once the crisis is forgotten, they can return to their past practices with no consequences. Again, it is not me, a simple journalist and outside observer, who is saying this, but a member of the luxury ‘nomenclatura’, Alain Némarq, President of Mauboussin, who advanced this point of view in the opinion column of Le Monde in February 2010: “Before, luxury was exorbitant prices tied to insane margins of the large luxury brands. But that was luxury before it became urgent to redefine luxury. Some, in this very closed and conservative world, undoubtedly still think that society has merely traversed a financial and economic crisis that justifies, certainly, a short-lived effort on prices, but does not justify challenging the basic principle of the luxury universe, the principle that a luxury product must be expensive to the point of being inaccessible to the greatest number of people. And yet it is life, or at least a certain manner of understanding and of caring, that invites us to shift luxury’s centre of gravity, to no longer define it solely on the basis of its inaccessibility to the largest number of people and the cynical concept of charging excessive prices. True luxury is not dividing those who can afford it from those who cannot. True luxury is something other than this kind of pseudo-differentiation. Luxury is much more than this. In fact, it has nothing to do with this at all. And, I think it is time to get this notion across.”
The most interesting point in this statement by Alain Némarq (whose brand, we add in passing, registered 20% growth in the first half of 2009) is the willingness to “shift luxury’s centre of gravity” by moving it away from the idea of inaccessibility to that of emotional sharing.
The crisis has, in fact, marked the point of no return for a certain exacerbated form of individualism, leading to a tragic impasse. Aesthetically and stylistically, this evolution is already being expressed and will continue to be more and more evident, beyond mere talk, in an approach to the object that is less differentiating but more unifying. As Alain Némarq went on to write: “Luxury must stop being only a combat sport for a certain elite, and become the universal language of emotion for the largest number of people possible. This is the only way for the world of luxury is to ensure its future, by respecting its contemporaries.”


Double proof
Two examples of ‘re-launches’ seem to demonstrate the idea of accessible luxury in an exemplary manner: Zenith and TechnoMarine (to which we dedicate two articles in this issue).
During the Nataf era, Zenith—an authentic and venerable manufacture—tried to reposition itself by seeking the dazzle, the celebrity status, the glamour, and the ‘differentiation’. While this strategy allowed this ‘Sleeping Beauty’ of a brand to return to the centre of discussion—or at least to create some buzz—the model crashed and burned at the first sign of the crisis.
The current positioning being carried out by Jean-Frédéric Dufour is just the opposite. It is no longer about imposing the brand on the client who is ‘addicted to luxury’ but rather about offering an accessible, high-quality, and substantial product at a correct price. In Zenith’s case, it is about reviving one of the loveliest movements in timekeeping, the El Primero. It is also about removing the most excessive design features from the preceding period and returning to wearable sizes with the accent on readability and harmony.
Over at TechnoMarine, the situation is quite different but not less instructive. Born as a brand combining two extreme worlds—plastic and diamonds—TechnoMarine will conserve its iconoclastic identity by combining other ‘extremes’ judged, up to now, to be incompatible: Haute horlogerie and availability to the largest number of wearers. To this end, the brand is adopting a similar approach as the high street fashion brand Hennes & Moritz. For certain of its lines, this clothes retailer is calling upon some of fashion’s best-known couturiers to create special collections as a way of democratizing their clientele. In this same way, TechnoMarine is calling upon some of the industry’s great watchmakers to democratize their following by creating occasional collections for the watch brand.

Need for a strong research and development department
These particular approaches towards the democratization of luxury should not, however, make us lose sight of the fact that watchmaking, like other industries and arts, needs powerful and strong research laboratories to support it. Let’s take a minute and compare it with another industry—movies. We have known for a long time that, for a national film industry to be strong, it must be able to produce both commercially successful movies, intended for the mass public, and more specialized films, destined for a more ‘elite’ audience. These two ends of the spectrum support and strengthen each other.
The same holds true for watchmaking. Mass-consumer brands must be able to co-exist with more experimental brands, which target a smaller clientele. The problem is that, because of the pressure to produce newer and newer items at all cost, nearly the entire watch industry has precipitated towards producing the exceptional timekeeper, while ignoring the more general and consensual pieces. Proof of this can be seen in the regular decline in the volume of Swiss timekeeping coupled with an increase in the average price of a watch. Now, however, it seems that the crisis has erected a stopping point to this rush forward that paradoxically has, by putting up ‘research’ everywhere, weakened its own strength.
Autistic in its own way, a certain type of watchmaking considered itself to be the centre of the world, and believed that the attraction for this art form would be without limits. But this is definitely not the case—the reservoir of collectors and aficionados is—surprise, surprise—not infinitely expandable. As for those individuals who, knowing really nothing about watches, see them uniquely as an exterior sign of wealth and power (we think of the Russian market, for example), this is a group of consumers that, by definition, is volatile and quick to disappear in the event of a reversal in economic trends.
A little bit of humility would not be a bad thing—economically—for the watch industry, which, beyond satisfying the suitable aficionado, must also address all those who think about watches only once a year. And, this is surely the case for the vast majority of the inhabitants of this planet.

Source: Europa Star April - May 2010 Magazine Issue