With new technologies such as the smartwatch posing a threat for the conventional watch industry, traditional watchmakers say 'bring it on'...
Ever since the creation of the Watchmakers Guild of Geneva in 1601, the global focus, the epicentre of the watch-making industry has been Switzerland. Although Swiss influence on the international market has varied over the centuries from undisputed mastery to almost total inconsequentiality, today its status as the main player is beyond question. While China and Asia are critical export markets for the luxury watch market segment and important manufacturing bases in the mass-market sector, Switzerland has maintained its iconic status, despite a near catastrophic failure to react to the quartz watch revolution in the 1970s.
The word Switzerland is sometimes used as a generic term for the Swiss watch industry, with Swiss exports often seen as a benchmark for the worldwide watch > <'market. And while there are other centres of technical excellence, this tiny landlocked country in the middle of continental Europe is the spiritual home of horology. Industry commentators routinely gauge Switzerland's reaction to changes in the stock market or to the threat of innovation coming from outside.
Year of the smartwatch
One such technological challenge is in the form of the emerging smartwatch. Despite consumer analysts predicting that 2013 would be the 'year of the smartwatch', products such as Samsung Electronics' Galaxy Gear are unlikely to ship a combined total of more than 1.2 million units before the year-end. The arrival of Apple's iWatch will help to develop the market by a factor of six or seven for 2014.
According to a new report by Global Industry Analysts (GIA) the worldwide watch market is currently forecast to be worth '30bn by 2017. As the smartwatch market will initially be significantly less than a tenth of the overall watch market, the question that follows is that of how much of a threat it poses.
Swatch Group chief executive officer Nick Hayek isn't impressed by the media hype surrounding smartwatches, and is frankly dismissive of the new wave of wristwatches, calling them 'nothing new'. Head of the world's largest watchmaker, with an annual turnover pushing '6bn, Hayek is arguably one of the most powerful voices in the industry; and when the man talks, the industry listens. Outspoken and distinctly unconventional in the buttoned-down watch world, earlier this year Hayek famously claimed to be feeling 'serene' about Apple's entry into the watch market, saying he had even invited Apple engineers to visit Swatch.
Hayek's sense of serenity is perhaps derived from the fact that one of the Swatch Group's brands – Tissot – has been producing electronic touchscreen watches since 1999, with products incorporating features such as altimeters and compasses. Perhaps, it is also based on the Kepler market report that forecasts smartwatches will have an impact of less than 5 per cent on Swatch's operational profit. But more than likely, it's simply too negligible a deal for the ever-bullish CEO to worry about.
In July 2013, responding to a tumble in Swatch's share price, Hayek told a press conference that he was not going to 'commit suicide' over the issue, before forecasting 'growth everywhere in the world' for the back end of 2013 and beyond. 'If you're looking for a juicy story, just write we're going to generate growth and invest our profits in creating jobs and new products.'
Hayek isn't the only manufacturer to have covered his bases by investing in R&D in the smart technology sector. Tag Heuer has partnered with Oracle to develop a sailing watch that can process weather and navigational data. Such alliances are cropping up frequently throughout the watch world in order to keep in line with technical trends. But according to one watchmaker, these relationships are largely speculative and a 'knee-jerk reaction' caused by the industry mimicking what everyone else is doing, 'without any cognitive thought processes going on. Smartwatches are interesting, but they will die out in a few years and we can all go back to concentrating on what we're good at, which is making real watches. Sure, they'll sell a few million while the press keeps writing about them. But I find it hard to believe that anyone who knows what they're talking about thinks they're a threat to anything'.
The luxury market
Peter Howarth is publisher of the UK's Brummell magazine, a publication that serves the financial sector in the City of London, specialising in the rarefied world of luxury goods, with a keen focus on high-end mechanical watches. Brummell's readers are all high rollers who routinely spend '5,000-plus on a watch, and its advertisers are the likes of Rolex, IWC, Breitling, Tag Heuer and Omega.
Does Howarth think that this market sector is going to be affected by the fledgling smartwatch? 'I don't think any sector of the watch market, including classic watches, will be affected,' says Howarth, who wears Breitling. 'The smartwatch is really just an add-on product that technology early-adopters are going to go nuts over. But that's about it.'
Howarth goes on to explain that there's nothing collectible, elegant or particularly imaginative about a phone the size of a tin of shoe polish stuck on your wrist. He thinks that once the design improves, the screens become curved, the power issue is addressed and somebody, somewhere, 'takes the trouble to make them cool, then there might be a reasonable product in there somewhere'. But for the moment, he concludes with a shrug of his shoulders that there's no future collectors' market and there are no classics in the making.
'You've got to remember that all this has been tried before,' says Howarth. 'As far back as a decade ago people like Fossil and Citizen were trying to load news and stock reports onto their wristwatches. Where are those models now?' The message is clear: smartwatches are for geeks and their presence is virtually irrelevant, while the tasteful upper end of the mechanical market is impervious to such vulgarity.
The last time the watch industry shrugged its shoulders and waited for something to happen was in the 1970s, when the mechanical watch market nearly collapsed. In a baffling moment of hubris that still has the power to shock today, the entire Swiss industry simply refused to accept that the arrival of battery-powered quartz technology had anything to do with them. The presumption was that the new technology was a fad and that it would disappear without trace. To get a steer on how badly the Swiss watch industry judged the issue, today's market splits at least two-thirds in favour of quartz watches. Mechanical watches have only clung on because the industry has carved out an incredibly lucrative niche in the 'more money than sense' market. Were it not for the sentimental sense of nostalgia for old school engineering, the technology would have died out decades ago.
Fiddling while Rome burns?
According to a survey by Deloitte, two-thirds of executives in the Swiss industry don't see the smartwatch as a threat. But what if they're wrong on the same colossal scale as they were four decades ago? The smartwatch industry today may be small potatoes, but if the market in any way follows the trend of the smartphone then Switzerland could be in for another seismic shock.
The so-called Quartz Crisis of the 1970s saw a thousand of Switzerland's 1,600 manufacturers go out of business. The industry moved to Asia where cheap watches were mass-manufactured using cheap labour. To add insult to injury, not only were these plastic watches incredibly reliable and accurate, but also the Swiss people were eagerly wearing them. Swiss watch exports plummeted, their global market share shrunk dramatically from just over 50 per cent to 15 per cent, while the workforce declined from 90,000 to fewer than 25,000.
With the industry on its knees and waiting for the axe to fall, Switzerland (whose third largest industry, after engineering and chemicals, is watch making) needed a miracle.
The stage was set perfectly for Hayek, and in 1983 a new Swiss company – Swatch – launched a mass-produced, built-by-robots, plastic timepiece made from only 51 components. The name isn't, as is generally assumed, a contraction of 'Swiss Watch', but 'Second Watch'. Hayek's revolutionary idea was that what you wore on your wrist could be something other than expensive jewellery: your second watch, which didn't need to come with a mortgage application form, could say something about who you were.
They would be cheap enough for the consumer to buy them on a whim, to match the colour of their clothes, moods or car. By 2006 Swatch had made 333 million units. Three decades after the first unit went on sale the brand is universally known, an icon of design, its 'Once Again' model perhaps the most instantly recognisable watch there has ever been.
It is also, curiously, the inverse of the 'Veblen good' watches at the top end of the market. Veblen goods are an economic phenomenon whereby a product – such as a Patek Philippe – is desirable principally because its exclusivity is protected by the conspicuous expense associated with it. But watches such as the 'Once Again', on the other hand, despite being cheap are still desirable, their relative affordability adding to, rather than decreasing, their consumer acceptability.
As a consequence of Swatch stabilising the mass- (under '30) and middle-priced ('30-250) watch markets in Switzerland, the upper- ('250-1,000) and luxury-priced sectors ('1,000-5,000) were able to regroup. Swatch is the only watch manufacturing group to have a significant presence in every price sector of the market: from its basic range of Flik Flak for kids and Swatch, right up to its eye-wateringly expensive prestige lines, including Blancpain, Breguet, Jaquet Droz, L'on Hatot and Omega.
Finding new watch markets
Today, mature markets such as north America and Europe are more reticent about buying units from the upper tiers, preferring to trade down to lower price points in a desire to acquire value-for-money in the form of feature-loaded watches. These 'frugal discretionary spending patterns' combined with waning consumer confidence have correspondingly helped to produce robust sales at the lower end. Meanwhile, the upper and luxury sectors are essentially recession-proofed by the enthusiasm of the Asian market uptake, which has created the fastest growing sector in the watch industry today, with a compound annual growth rate of 3.6 per cent.
According to the GIA, despite the economic recession taking its toll on the global watch market, manufacturers are finding markets. Growth over the next few years will be driven by demand in the luxury sector and increased demand from the emerging Asia-Pacific markets. These are the big issues facing a '30bn industry, and how the smartwatch fits into the picture will not be clear until a consumer behaviour pattern emerges. With the likes of Samsung, Sony and Apple not much further along than market testing, it may be years before we get this data.
According to industry commentator Charlie Bell of CBC Communications, to a certain extent the watch industry relies on its consumers owning multiple watches. 'It's not simply a case of the customer waiting to lose their watch or for one to break before they'll go out and buy another. People wear different watches for sport, work, casual and formal occasions. The fact that a consumer has purchased a smartwatch doesn't necessarily point to a lost sale elsewhere.'
In the Swiss watch industry, at the moment there is a groundswell of good-natured skepticism about new products that have the word 'smart' associated with them. Switzerland seems to be asking if the smartwatch will be coming to the party at all, rather than what damage it will cause when it gets there. The assumption currently circulating is that were the smartwatch to take off in a significant way, it will probably stimulate the market by bringing a different demographic of consumer to it. *