RETROPERSPECTIVE - The Watch Year 2011/2012: AAA

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March 2012

AAA. It is the word of the year. Or, at least, the three most coveted letters of the moment. Well, there are the AAAs and then there are others. Those that are “only” AA+ are already a bit suspect. We won’t even mention the infamous B, C, or the definitive D, for “in default”. At this time, There are only twelve countries in the world that have the AAA rating: Australia, Canada, Denmark, Finland, Germany, Great Britain, Luxembourg, The Netherlands, Norway, Singapore, Sweden, and Switzerland. And, in Switzerland, you can be sure that the watch industry has also maintained its triple A rating.

The numbers speak for themselves (but the numbers do not always tell the entire truth): In 2011, Switzerland exported CHF 19.3 billion worth of watches! This represents 19.2 per cent more than the previous year, 2010, which itself saw an increase of 22.2 per cent over 2009, even though it was a more or less a “return to zero” after the downward slide of 22.3 per cent in that fatal year.

Admittedly, the Chinese infatuation with Swiss watches played a major role in this rather amazing result. By itself, Southeast Asia—more precisely in decreasing order, Hong Kong, China, Singapore, Japan, South Korea, Taiwan and Thailand—accounted for CHF 8.81 billion or nearly 50 per cent of the total of Swiss watch exports. More than ever, the growth engine for watches remains mainland China with the highest increase of 48.7 per cent.

Europe, reflecting the latent crisis, absorbed only 29 per cent, while the United States held its own surprisingly well, maintaining its second place position with an increase of 18.4 per cent, for a total of nearly CHF 2 billion, in Swiss watch imports. Having said that, the USA is still far behind the first market, Hong Kong, which imported just over CHF 4 billion worth of Swiss watch products.

Crushing domination of the groups

In this landscape, the large groups are becoming more and more dominant. The Swatch Group crossed, for the first time, the threshold of CHF 7 billion in turnover—CHF 7.143 billion to be precise—which represents an increase of 21.7 per cent at constant exchange rates, but “only” 10.9 per cent if you consider the increase in the value of the Swiss franc. The group’s profits are also up: CHF 1.276 billion that join the war chest of more than CHF 8 billion of the group’s own funds.

Richemont (whose fiscal year ends in March) enjoyed the same spectacular rise in sales. Watches account for nearly € 1.8 billion (CHF 2.18 billion) in turnover, although this number does not include the sales of € 3.480 billion (CHF 4.2 billion) for Cartier and Van Cleef & Arpels, which fall under the jewellery category. In all, counting its other activities (Montblanc, Lancel, etc.), Richemont’s turnover was € 6.9 billion (CHF 8.3 billion), even greater than the Swatch Group. This is a first for Richemont since, in 2010, its turnover was still below this level at € 5.17 billion.
The world’s largest luxury group, LVMH, announced a total turnover of € 1.2 billion (CHF 1.4 billion) for its watch segment alone.
To these watchmaking mastodons, we must add the king Rolex, whose sales are around CHF 3 billion. So what is left for all the others?

Investing is more necessary than ever

We can easily imagine that, sitting on this considerable war chest, with a nice outlook on the horizon (the “emerging” economies that are gradually supplanting the former bastions, such as Europe), the groups will do everything to consolidate and strengthen their pre-eminence by making maximum investments in the production tools of the future. And, it is a future that is approaching by leaps and bounds with the planned and progressive stoppage of deliveries of component parts and movements by the Swatch Group and its industrial muscle, ETA and Nivarox.

Investing in the future has become more necessary than ever. In mid-July, the expected decision by Comco (the Swiss Competition Commission) gave the Swatch Group the right to start decreasing deliveries to third parties beginning in 2012. This decline can vary between 5 and 30 per cent in relation to the level of orders placed in 2010. This decision involves the key elements of movements and regulating organs. Mathematically speaking, difficulties will certainly follow. This is especially true for the mid-range, which will most feel the pain since suitable alternatives are not yet available, despite the announcement by the Swatch Group already in the early 2000s, and officially reiterated in 2009, that it would start to reduce deliveries.

For every brand like TAG Heuer, which has already announced an agreement with Atokalpa (Sandoz Family Foundation, which also owns Parmigiani and Vaucher Manufacture), thus allowing it to totally forego Nivarox balance springs, how many other companies will be seriously affected by the difficulties in procuring supplies?

Having said that, alternatives are nonetheless in the pipeline. The Festina group has stated that it will move to true industrial production of quality escapements, with the goal of manufacturing one million units per year. This is crucial since no brand today can produce all the parts required for its escapements. Other alternatives are coming from Sellita, Technotime (which also makes its own balance springs, see the article in this issue), Soprod, Lajoux-Perret, Vaucher Manufacture (partly owned by Hermès), and Dubois Dépraz. Taken all together, however, these enterprises still cannot fill the void left by the ultra-powerful Swatch Group. And, it is hardly surprising that the Swatch Group currently has many close friends who repeat over and over that they “are on very good terms” with the group.

Opening large building sites

Industrial investments have thus taken on considerable importance and 2012 will see the opening of many new building sites. An in-depth investigation by Michel Jeannot and Serge Guertchakoff, published in Bilan magazine, indicates that CHF 685 million will likely be invested in 2012 alone by some twenty industry players, because not everything will be completed this year.

Rolex took the lead a decade ago and invested “more than a billion” Swiss francs over the last ten years. The brand will probably spend CHF 100 million this year alone to complete a 230,000 cubic-metre site grouping together the functions of assembly, machining, and thermic treatments, as well as an automated storage system that would be worthy of James Bond.

Richemont is also making large investments. Cartier has announced that, over the next fiscal year, it will invest CHF 100 million in a new production site, designed to increase the number of in-house mechanical movements. Vacheron Constantin is not remaining on the sidelines, either, and is planning on investing CHF 130 million over the next few years, in order to double its watch production, reaching 30,000 per year. Panerai is putting CHF 25 million into its new manufacturing facility, currently under construction, in Neuchâtel, while Piaget, with the goal of doubling its production, is putting CHF 15 million on the table. The biggest slice, however, is being put into the crucial sector of movements. ValFleurier will thus spend CHF 100 million on the construction of a fourth production facility, spread over 10,000 square metres.

Also at the Swatch Group, it is the industrial and manufacturing pole, according to the Bilan article, that will receive the greatest share of the CHF 200 to CHF 250 million that will be invested this year. On the menu are the expansion of Omega, a new headquarters for Swatch, CHF 66 million to enlarge Breguet’s ateliers, and the lion’s share going to ETA to construct two factories that will make dials and assemble mechanical movements. The Swatch Group also continues to improve its industrial vertical integration and has not forgotten to invest in the modest but vital component that is the watch hand, with a new structure for Universo.

Over at LVMH, they are piling up packages of “25 million”: CHF 25 million for Louis Vuitton and a new industrial facility in Geneva, which will bring all its activities together under one roof. Another CHF 25 million is being spent on Zenith for the restoration of the historical part of its manufacture, which requires an upgrade in order to accommodate new workshops for ten different skills. Another investment of CHF 25 million is also destined for TAG Heuer’s new production site. Finally, LVMH is allocating CHF 30 million for Hublot to double its facility.

As can be seen, these overall investments amount to more than CHF 700 million for what we might term the “back office”. As for the “front office”, the window to the world, we must mention the CHF 430 million invested jointly by taxpayers of Basel and the MCH Group to enlarge and renovate the structures that welcome BaselWorld. In this case, it is not only watches that are concerned, but clearly the economic importance of this sector has played a large role in the decision, following a popular vote, to invest this colossal sum of money.

The importance of training

Obviously, with these investments also come jobs. The upturn in watch sales mainly concerns the luxury sector—the most expensive watches, those with price tags above CHF 3,000 ex-factory, have seen the greatest increases, with 20.5 per cent by quantity and 27.1 per cent by value in December 2011 alone—and the accompanying increase in investments are directly translated into new jobs.

The Swiss watch industry is hiring on a large scale. The Swatch Group alone created 2,800 jobs last year, and that’s not all. Approximately 2,000 new positions are planned for this year by the various large groups and independent brands, such as Audemars Piguet, that is spending CHF 25 million on construction in Geneva for Centror.

With this massive hiring, training has become the keystone of the edifice, and there are countless initiatives in this domain. Each large brand, or nearly, has its own “academy”, its own school, or its own centres for apprenticeships. The arts and crafts skills are making a large comeback—enamelling, engraving, stone-setting, etc. The rarest of techniques and skills are being revived, such as the recent amazing “straw marquetry” being showcased by at least two brands. But the greatest portion is being allocated on the industrial level, for cutting, machining, polishing, and assembly. And this does not include the globalisation of operations being carried out by the groups.

Although impossible to know with precision, funds to create networks of brand-name boutiques and other increasingly monumental flagship stores also exploded last year. The race for the best location has become a primordial part of a brand’s strategy. Selling an expensive watch has in itself become increasingly expensive. And, in this regard, too, continuous training has become vital, especially since clients themselves have become very well informed. Often, they know more about a 30-degree inclined tourbillon than your average salesperson in Sichuan.

The erasure of secondary roles

The reverse side of this shiny coin is the gradual, but increasingly noticeable, erasure of the secondary players in the industry, who are seeing their share of the market eroded by the unequalled power of the large groups in terms of distribution, location, recruitment, training, and especially communication.

Apart from the large well-known brands, with established distribution networks, such as Patek Philippe, Audemars Piguet, Chopard, and in the mid-range, Raymond Weil (no need to mention Rolex that all retailers dream of carrying), we hear more and more independents complain bitterly about the growing difficulties in cracking open the doors of retailers. The dominant impression is that the markets are being locked down, one after the other, at an alarming rate, that all the niches are being filled. In a recent article entitled Killing the Competition, in the February 2012 edition of the American magazine, Harper’s, Barry C. Lynn, director of the Markets, Enterprise and Resiliency Initiative in the New America Foundation, analyses in detail the strategies for stifling competition. He focuses on the examples of Silicon Valley, the intensive factory farming of chickens and the world of publishing. In these three very different domains, he observes that the same strategies are rigorously used to try to strangle the competition. “Instead of a disruptive melee like that of the late 1990s, with its diversity of players and voices, the overwhelming tendency today is a further consolidation of power by the already powerful,” he writes, referring to the way that the large players in the information technology world, Apple at the head, have locked up the market for products just as they have frozen the job market. Isn’t the Swiss watchmaking industry suffering from the same syndrome?

In full concentration mode

In the same manner that the big players in Silicon Valley—the angel investors—focus only on the most promising small enterprises, so that they can take them over as soon as they achieve the desired results, the major watch brands take the best ideas from the independents, or even poach the people behind them. The goal is to occupy all the positions, including the most unexpected niches.

The race to acquire know-how has become a central element in the vast reorganisation currently happening in the industry. Sub-contractors are also being acquired at a rapid pace, accelerating even more the concentration in the industry, since mastering the supply chain is essential. LVMH has thus bought the movement designer, La Fabrique du Temps, which now works first and foremost for Louis Vuitton, and the dial maker Arcad. Hublot has acquired Profusion, a specialist in carbon, while Hermès has invested in the case maker, Joseph Erard. The Swatch Group has notably purchased Novi, specialist in the assembly of movements. And, the list goes on and on.

Painful distribution

Where the strategy of total occupation of the playing field is most painfully felt by the independent brands is at the level of distribution, which is also becoming concentrated at a rapid pace. Recently, one watchmaker, breaking the usual silence, declared in no uncertain terms to our colleague Bastien Buss, of the Swiss newspaper Le Temps, “Retailers are being suffocated by the big groups. They impose the brands, the quantities; when you arrive as a ‘small’ brand, you have almost no chance or, at best, you may get a small space in the third drawer on the left, but only if you agree to give your products on consignment,” explained Pierre Dubois, owner of the brand Pierre de Roche.

We are hearing this type of complaint more and more frequently this year. As another small independent confided to us, the distribution of his pieces is becoming increasingly more expensive since retailers, pressured, on one side, by the big brands to reduce their margins under threat of losing the account, are demanding, on the other side, enormous margins from a lesser known brand. Can this increasingly difficult situation be sustained?

We often hear that one of the side effects of opening a monobrand store, and therefore of re-qualifying the distribution networks for independents, is that new opportunities are created where everything had previously been locked up. But the very high numbers of companies trying to take advantage of this situation also create fierce competition there.

We must also distinguish between two types of watchmaking since, like social evolutions that have resulted in an increasingly “two-speed” world (or, one speed on one side, and no speed on the other, see our article in the previous issue, Europa Star 1/12, on acceleration as described by the German philosopher, Hartmut Rosa), watchmaking does not advance as a single block but at very different speeds. While some brands accelerate down the highway, others are stuck on the side of the road.

Independent watchmakers who benefit from the greatest media coverage are essentially those whose models are the most extravagant, stylistically different, or with exceptional workmanship. While this veritable laboratory for watchmaking of the future is essential for the entire industry, these toys for billionaires represent only a few thousand pieces sold per year. These “brioches” are not the daily bread of the watch industry. The large brands understand this. Although they strive to present talking pieces and concept watches as well in order to attract media attention, the real reasons are to better sell their models that are simpler, more classic, and more sensible.

Take the snuffbox, for example

Even in the domain of conceptual watchmaking, there is a certain feeling of lassitude—too many mechanisms presented as trophies, too many stylistic complexities, too many combinations of baroque materials. An era seems to be coming to an end. We can bet that, within one or two decades, we will certainly admire the creative explosion that happened at the beginning of the 21st century, but we will also wonder how anyone dared wear such things?

An editorialist in Le Monde, aptly described this idea, not for watchmaking, but rather for the snuffboxes of the 18th century. He cites a historian who wrote: “Under Louis XIV, one had a snuffbox for storing tobacco, while under Louis XV, one used tobacco in order to have the pleasure of owning a beautiful snuffbox and showing it off to people.”

Couldn’t we say the same thing today about a watch, or at least some watches? Snuffboxes disappeared a long time ago. Of course, this will not be the fate of watches, which have a different utility. Yet, the explosion of smart phones and the changes in consumer habits run the risk of gradually making the traditional watch as an object obsolete, relegating it to the ranks of collector’s pieces. Fortunately, we are not at this point and, in fact, are far from it.

Yet, there are some changes in distribution that offer interesting opportunities for independent watchmakers. The recent inauguration of the Maverick boutique at the Kempinski Hotel in Geneva is a good example. Besides some showcase pieces such as Zenith or Piaget, we find a mix of very different brands such as Alpina, Ateliers DeMonaco, Badollet, Borgeaud, Ellicott, Frédéric Jouvenot, Frederique Constant, Hautlence, Ladoire, Maîtres du Temps, MCT, Milus, Raymond Weil, Roberto Coin, RJ-Romain Jerome, Rudis Sylva and Snyper—watches that are sold for a few thousands, or tens of thousands of francs, or even hundreds of thousands of francs, all mixed in together. What a wonderful way for the consumer to find unusual watch products. Hopefully, this will serve as an example for other similar initiatives elsewhere.

Swiss Made: 100 per cent or nothing

Among the most important topics of the 2011 watch year is one that has largely fallen by the wayside—the debate over the term Swiss Made. Hardly anyone talks openly about it anymore since most have realised that the debate is a trap, that Swiss Made is nothing more than a G-string barely covering the essential, that a level of 60 or even 80 per cent of “Swissness” of a watch doesn’t really mean much.

Either the decision is radical—100 per cent or nothing—or it will resemble a plaster cast on a wooden leg. By introducing its own quality seal, Patek Philippe has shown the way. It is not so much the Swiss Made label that is important or that will make a real difference to consumers (the law leaves a lot of latitude for claiming a watch is officially Swiss even though its component parts come from elsewhere), rather it is the brand that must provide a guarantee of true quality, much like the automobile industry in Germany.

From an industrial point of view, the example of the German car is very instructive. The German industry has not only secured but also strengthened its pre-eminence because it assures a high level of quality for all of its cars, whether an entry-level model or one at the very high end (and this despite the fact that the component parts come from Romania, or Portugal, or wherever).

The considerable industrial investments that are planned in the years to come are thus essential for Switzerland to preserve its qualitative pre-eminence. This means, however, that the funds must be used for both the most expensive watches as well as the most affordable ones, since the winds can always change direction. It is, therefore, essential that Swiss watchmakers do not, like American car manufacturers a few years ago, continue to offer only enormous SUVs when the demand is turning towards smaller models.

At the mercy of opposing winds

But why should the winds change? Because nothing is impossible. The watch industry—we say it in these columns year after year—has a short memory. It has already forgotten the infamous day of September 14, 2008 when the symbolic—and literal—fall of Lehman Brothers signalled the dramatic worsening of the banking and financial crisis, a crisis that still bitterly affects many today. The following year, 2009, saw a decline of more than 20 per cent in Swiss watch exports, and thus reshaped a large part of its industrial fabric. All of that, forgotten…

Today, the world is not sheltered from other such cataclysms, and the dependence on China scares more than a few watchmakers who have put all their eggs in the bamboo basket.

While it is imperative that brands diversify their markets, it is also important to be able to offer a palette of diversified products. (We at Europa Star speak from our own modest experience, since we suffered only a small decline in 2009 because, unlike many publications which are devoted only to the high-end market, we cover the entire watch industry, from the most modest to the most famous.)

Whatever happens, history moves forward and watchmaking with it. In fact, it seems to be moving faster and faster, like the craze for high frequencies that literally took the industry by storm in 2011. 50 Hz, 500 Hz, 1000 Hz, 2000 Hz... The “regulating organs” are racing ahead, with or without a balance, thanks to the effects of resonance or even by means of “vibrating beams”. In turn, TAG Heuer, de Bethune, Montblanc and Zenith raised their frequencies. TAG Heuer has even developed a prototype that can mechanically indicate 1/2,000th of a second. Over at de Bethune, they are laying the foundations for a new science, the “résonique” that could theoretically reach 1/10,000th of a second. At the other end of the speed spectrum, Hermès has been mechanically suspending time in order to not have to count it.

Watchmaking—a mirror of our time and of our contradictions.

Source: Europa Star April - May 2012 Magazine Issue