Table of Contents Introduction
3
The start of an industry
4
The Quartz Crisis
9
Formation of SMH
11
Future of Swiss Watch Industry
14
2
Introduction Swiss watches embody perfection, elegance, tradition and precision to name just a few of their qualities. Swiss watch making started out in the 15th century. Germans, though, are considered pioneers in the watch making industry. Peter Henlein, a locksmith and clock maker has been credited with the discovery of the first watches. He was from Nuremberg in Germany and made miniature clocks or time pieces that could be worn around the neck or attached to clothes. The Swiss passion for excellence, their ability to innovate and adapt to changing environments, the organized nature of the industry along with a lot of other factor contributes to the hegemony of Swiss watches. The Swiss are proud of their traditions and heritage. The Swiss watch industry has faced many challenges over the years. They have managed to rise above everything and come out as world leaders in the global watch market. In fact the resurgence and dominance of Swiss watch industry has been the subject of several case studies in universities like Harvard and INSEAD. The industry has been studied at length and is a hot topic among magazines and newspapers alike.
3
The start of an industry In the 16th century Geneva was under the suzerainty of the Protestants and John Calvin. John Calvin’s reform movement had virtually made display of luxury of any sort a crime. Thus the highly talented goldsmiths in Geneva had to find an alternative outlet for their creativity. They started making exquisite pieces of watches and clocks. The expulsion of the highly skilled Huguenots from France and their subsequent settling in Geneva provided an impetus to the already existing watch industry in Switzerland. Geneva was a thriving mercantile centre having trade relations with most of the countries in the world. The establishment of several watch makers’ guilds in Geneva around 1600 also helped in the rapid expansion of the Swiss watch industry. The Watchmakers Guild of Geneva was established in 1601, the first of its kind in the world. By 1790, Geneva was already exporting more than 60,000 watches.
Factors which helped Switzerland become the hub of watch making Though countries like Germany, Britain, Italy, France had already started making watches by the 15th century, Switzerland became the hub of watch making industry by the late 16th century. The ban on the display of wealth by Calvin in Geneva and the influx of Huguenots from neighboring France proved a blessing to the traditional gold jewelers in Geneva who combined their jewel making skills and the French expertise of watch making to make watches. Watch making industry in Switzerland was concentrated on two regions- Geneva and the mountainous Jura region. The fast expansion of both these regions as watch making centres helped Switzerland become the leader among countries who were into watch making. The entire area of the watch making expertise has been named as Watch Valley. Watch valley refers to an arc- shaped mountainous region extending from Lake Geneva in the south to Basel in the north, an approximate distance of about 200 km. It is one of the three distinct geographical regions in Switzerland , stretching from the Lake Geneva in the south to Basel in 4
the north. The close proximity of the watch valley to the French border played a significant role in the development of the watch industry. This region includes the Swiss Canton of Jura, as well as parts of the Cantons Vaud, Neuchatel, Bern and Basel-Land. The three regions of Swiss Canton of Jura, Neuchatel and Bernese Jura are considered as the Mecca of the Swiss watch making industry. Till late 18th century, the mountainous regions of the Jura region were primarily dependent on agriculture and cattle rearing. But the poor soil quality and long periods of winter when snow covered the land made it necessary for the people to look for alternative income. The foundations of Swiss neutrality were laid as early as the 15th century continued through the First and Second World Wars. The neutral nature of the Swiss confederation contributed a lot to the economic well being and flourishing of industries like watch making, textiles. The rail road construction which began in the 19th century and continued on to the 20th century provided an impetus to export of finished goods. In 1798, French troops invaded and occupied Switzerland, leading to the formation of Helvetic Republic dragging the neutral Swiss alongside as allies in their own expansion plans. The French under Napoleon invaded the Jura region in the west of Switzerland as they wanted to control the Alpine passes. Around 1800, revolutionary trade legislation was introduced in Switzerland, which hampered the watch industry. But the French found it difficult to control the Swiss federation and withdrew their troops in 1803 by Napoleon’s Act of Mediation. By 1848, Switzerland had become a federal state. The early 19th century saw the Swiss watch industry attaining technological supremacy over the British and French watch making industry. The British watch makers were trying to satiate their own internal demands while the Swiss watch industry was trying to keep pace with the growing demand in international markets. The close proximity to France helped Swiss watch makers grow in stature. Watch making in the mountainous region of Jura was started as an alternative to supplement income of farmers in the region. The extreme winter conditions coupled with the seasonal nature of farming compelled the farmers to take up alternative sources of income. Thus watch making came to coexist as a cottage industry and as a family industry. Thus in winters families would engage in parts production for watches for which they were paid through contractors. These parts production for watches were known by the term “ebauches”. Soon demand overtook 5
production and by early 18th century, Swiss watch makers had set up factories producing mechanized ebauches. The Swiss government also did a great deal to create a competitive and cooperative environment that helped innovations and enhance the quality of skills. Thus an atmosphere was created to produce good quality watches at almost every price level. By the early half of the 19th century, mechanized production of watches started as in the case of Vacheron & Constantin who developed a complete set of machine tools for manufacturing its watches. By 1876, the Swiss became aware of the “American Crisis”. The Swiss got alarmed at the power, quality and pace of the mechanized production of American watch industry. From then on the Swiss tried to step up the pace of mechanization in the watch industry. The mechanization and tool making abilities of the Swiss contributed to accurate and less expensive watches than those made by Brits or French. Thus by the middle of the 19th century, the Swiss hold on the watch making industry was total. The cheapness and the quality of the Swiss watches were such that other countries tried to sell Swiss watches in their own product cases. Swiss rose to the top of the watch making countries of the world by virtue of being good international traders, having trade relations with almost every country in the world by the 19th century. They also made good use of their proximity to France and adapted the French’s sophisticated expertise in watch making to their own advantage. Plus they used their organizational skills to put in place the foundations for a sound manufacturing model which enabled them to become the best watch parts supplier in the world. Formation of ASUAG and SSIH The Great Depression years of 1929-30, had its effect on the Swiss watch industry too. The Swiss watch industry formed Allgemeine Schweizerische Uhrenindustrie AG (ASUAG) with the merger of Swiss watch manufacturers under the initiative of the Swiss governments and banks. The aim was to protect the watch industry and ASUAG helped the Swiss watch industry to become a dominant power in the world market by 1950s. ASUAG had become the world’s largest manufacturer of watch movements and watch parts by 1970. ASUAG offered the member companies to retain their individual identities while their ownership was consolidated. Société Suisse pour l'Industrie Horlogére (SSIH ) was formed by the merger of companies like Omega and Tissot in 1930 to enhance the quality of the watches 6
manufactured. Both ASUAG and SSIH helped to reinforce the “Swiss” label for the quality conscious consumers in the global market. During this period, Swiss watches became synonymous with quality. This emphasis on quality and increased production helped the Swiss watch manufacturers exploit the increased demand in the market after the Second World War.
La Chaux-de-Fonds The Neuchatel region in the Watch Valley includes the famous towns La Chauxde-Fonds and Le Locle. Both are UNESCO world heritage sites since 2009. The town of La Chaux-de-Fonds was founded in 1656 and was completely burnt down in 1794 by a fire. It was rebuilt by Charles-Henri Junod and designed with the watch making heritage of the town in mind. The town was rebuilt in an orderly fashion with both residential properties and workshops standing side by side. The rebuilt city reflects the urban manufacturing trend dedicated to a single industry –watch making. La Chaux-de-Fonds finds a mention in Karl Marx’s Das Kapital as cited below:
“La Chaux-de-Fonds may be considered to form a single watch manufactory.” Karl Marx, Das Kapital , 1867
Around the same time that Karl Marx mentioned La Chaux-de-Fonds, G.F. Roskopf , a watch maker in La Chaux-de-Fonds started producing the Roskopf watches, which could be sold for 20 francs and hence affordable to everyone. By 1860, the Observatoire de Neuchâtel started issuing rating certificates for watches. Then it was known as Observatoire Astronomique et Chronometrique de Neuchatel since the observatory was involved in assessing and rating timepiece movements for accuracy. The testing processes were stringent and lasted for approximately 45 days and the passed the tests were issued a certification from the Observatory called a Bulletin de Marche. These observatories played a key role in pushing the Swiss watch making industry to achieve higher levels of precision. Thus most of the mechanical watches developed around the time had high levels of 7
precision. But these mechanical watches could not compare with the precision of the quartz watches being developed and hence such certifications ceased with the advent of quartz watches in the late 1960s. The canton of Neuchatel and its principal town are both called Neuchâtel. (German-speakers in Switzerland call them Neuenburg.) The name means “new castle”. French is the official language of the canton, and the mother-tongue of most of its inhabitants. There are 6 administrative districts: Neuchâtel, Boudry, La Chaux-de-Fonds, Le Locle, Val-de-Ruz and Val-de-Travers. Daniel JeanRichard, is popularly regarded as the father of the watch making industry in Neuchâtel. He was born in La Sagne in about 1665. La Chaux-de-Fonds has streets named after most of the prominent horological heroes starting with Daniel JeanRichard, Pierre Jaquet-Droz, Abraham-Louis Breguet, Charles-Edouard Guillaume, etc. La Chaux-de-Fonds has about 180 watch companies, as of 2013.
8
The Quartz Crisis Swiss watches had dominated the watch industry for more than 100 years but by 1970, a number of factors came together threatening their very existence. The Swiss had formed two large consortia to fend off problems during the Great Depression years, but this proved counterproductive to innovations and development. The Swiss had a head start in the quartz watch industry with their innovative Beta 21 watches but they did not capitalize on it. Switzerland did not have an independent microelectronics industry, owing to which they ignored the potential for inexpensive watches. Overall, the Swiss watch makers identified watches as jewelry pieces rather than as functional time keepers. By mid-1980s the Swiss had lost their share in the least expensive watches segment and disappeared almost completely from that category. They started having only minimal presence in the mid-priced watch market also. Hong Kong was leading in the total number of watches produced annually by 1980, with Japan coming in a close second. Switzerland could not compete with Hong Kong in terms of the inexpensive labor available.
Quartz watches In 1967, the first prototype of the quartz watch known as Beta 21 was unveiled by a research laboratory called Centre Electronique Horloger (CEH) at the International Chronometric Competition, held at the Neuch창tel Observatory. The prototype was of the highest new accuracy, off only a few tenths of a second per day. An industrial consortium of watch makers was formed in 1968 to produce Beta 21 on a large scale. Its members were shareholders of CEH and were responsible for a specific component of the watch. Omega produced the micro motor. The watches were assembled by three separate shops that produced the final product which was tailor made to the requests of the Swiss companies that placed orders. By 1970, sixteen watch makers began selling the quartz watches with their own brand names. Although the Swiss were the first to first to make a prototype of a quartz watch, the Japanese were the Seiko 35SQ Astron was the first analog quartz watch to reach the market on Christmas Day 1969. In 1969, Tag Heuer created the first quartz watch with LED display and called it Monaco. It was named after the 9
Formula One racing and was the first automatic micro-winding chronograph. The Monaco was also the first square-cased and water resistant chronograph. It had a Beta-21 quartz caliber and LED display without moving parts. Despite the early start they had the Swiss did not capitalize on it and instead chose to focus on their existing mechanized watch production. By 1978, quartz watches overtook the mechanized watches in popularity, plunging the Swiss watch industry into crises. In quartz watches, conductive quartz crystals use electronic means for accurate measurement of time. The Swiss watches used fine hand crafted machinery. Swiss watch making was a close knit, traditional and organized industry. And unfortunately the Swiss watch makers were slow to sense the technological changes blowing in from Asia and America. Soon markets were swamped with cheap quartz watches from Japan, Hong Kong and America. Hong Kong had entered the market only in 1976 but by 1980, they were assembling 126 million units annually. The world fell in love with LCD watches from companies like Seiko. The quartz revolution afforded the potential for slimmer and affordable watches. The first casualty of the Swiss watch industry was the numbers or the strength of the Swiss watch manufacturers. Their strength came down from 1600 in 1970 to 600 in 1983.
10
Formation of SMH In 1985, in an attempt to salvage the Swiss watch industry, two leading Swiss watch making group of companies ASUAG and SSIH were merged to form SSIH/ASUAG Holding Company. This was named SMH (Société Suisse de Microélectronique et d’Horlogeriein) in 1986. The group was ultimately renamed as ‘The Swatch’ group in 1998.SSIH had Omega as its main brand and had Swiss-French origins. ASUAG had Swiss-German origins. It was mainly a manufacturing company which owned a few brands but the heart of its operations was Ebauches S.A., which was supplying parts to most of the watch manufacturers in Switzerland. So as most of the Swiss manufactures started closing, Ebauches S.A., also faced problems. ASUAG helped out a lot of the small watch firms when they were on the brink of closure by buying them out. Thus by 1982, ASUAG owned more than 100 separate companies ranging from big to small, modern to backward. Most of these rescued companies were family owned for generations and after ASUAG brought these into their fold, the family managers were allowed to continue. It was totally chaotic with most of the companies continuing their independent existence even under the ASUAG umbrella.
Nicholas G. Hayek and Swatch In the early 1980s the banks had named Nicholas G. Hayek as their chief advisor in the troubled Swiss watch industry. Hayek was the founder and CEO of the Zurich based consultancy firm, Hayek Engineering. Once it was decided to merge SSIH and ASUAG, bankers stepped in and brought in the Lebanese born entrepreneur Hayek to help with the restructuring of the companies. Thus Hayek was involved with SMH right from the beginning. As a first step, a thorough study was done about the products, their strategic positioning in the global markets. The report was in German and quite controversial and came out in 1982 and later came to be known as Hayek’s Report. In 1985, the banks proposed that Hayek buy a controlling equity stake in SMH. Hayek assembled a group of investors, retained the single largest equity stake of 11
around 51%.
Swatch Watches After the SMH was formed, Hayek empowered Ernest Thomke, the head of the watch division to create a contemporary, fashionable and affordable watch that could compete with the cheap watches coming out of Asia. In 1978, Thomke had been hired as managing director by ETA, one of the manufacturing companies under Ebauches, S.A. Thomke was recruited to revive ETA. In 1979, the Swiss watch makers under the direction of Thomke had managed to make the thinnest wrist watch “Delirium Tremens” with limited number of components. Swatch innovators went on to capitalize on this discovery when they were making their first models. For his Swatch venture, Thomke was assisted by Elmar Mock and Jacques Mueller. The Swatch team continued on from the Delirium Tremens trend where engineers could mount movements and others on to the watch case directly, rather than first assembling the movements and then building the case around the movements.
Revolution 51 and Swatch Traditional handmade mechanical watches have around 91 moving parts. Thomke and his team reduced the number of analogous parts to just 51and encased them hermetically in plastic cases. These watches were designed not to be repaired. The reduction in parts allowed the makers to fully automate the production process. The Swatch manufacturers claim that the CAD systems they used created some of the most advanced robotic assembling lines in the world. They were fully automatic compared to the earlier handmade Swiss watches. The automated assembly line model of making these watches made it cheaper by around 80% as compared to the traditional handmade watches. Nicholas Lopez named the new product as “Swatch” which is a contraction of the term second watch. The first Swatch collection with 12 watches was displayed in 1983. The first Swatch watches were plain and called GB 101. But aggressive marketing campaign combined with affordable pricing made them very popular. Celebrity endorsements from popular 1980s stars like Phil Collins, The Thompson Twins, Peter Gabriel, and others added to their popularity. The Swatch used the disruptive technology of quartz to the maximum. They tried to enhance the aesthetics of the Swatch models by collaboration with artists from various disciplines. The first artist to collaborate with Swatch was Kiki Picasso in 1984, less than a year after the first Swatch watches made their appearance. American 12
artist Keith Haring created a number of prototypes in the mid-80s. Artists like Alfred Hofkunst, Jean-Michel Folon, Sam Francis, Mimmo Paladino, Mimmo Rotella, Nam June Paik, Not Vital, Akira Kurosawa, Spike Lee, Renzo Piano, and Moby have collaborated with Swatch. Among the most well received work for Swatch have been timepieces designed by Agatha Ruiz de la Prada, Jean-Charles de Castelbajac, David LaChapelle, Cassette Playa and Jeremy Scott. Swatch went on to become a huge success, so huge that CMH changed their name to “Swatch Group” in 1998. Swatch Group has gone from strength to strength, acquiring luxury brands such as Breguet, Blancpain, Jaquet Droz, Glashütte Original, Omega, Rado, Longines, Union Glashütte, Tissot, Certina, Mido and Hamilton. It has emerged as the world’s biggest watch making group with eighteen individual brands and two multi-brand retail companies Tourbillon and Hour Passion. Swatch Group is selfsufficient in that it supplies all the components required by all its group companies. It also supplies watch movements and components to other watch making companies all over the world. It also manufactures electronic systems used in watch making and other industries.
13
Future of Swiss Watch Industry The high quality and precision of the jewelry-watch pieces is the reason why many people prefer Swiss watches. Tourism in Switzerland account for around 50-60% of the total watch turnover. Tourists from China and Gulf states are particularly interested in purchasing high end luxury watches. China is one of the biggest consumers of Swiss watches. China is the world’s third largest market for watches. Sales of luxury watches had fallen since the campaign of anticorruption campaign in China in 2012. The slowdown of the Chinese economy had affected the export of Swiss watches to China. The Federation of the Swiss Watch Industry had reported a drop of 11.6% fall in exports to China between January and August 2013. Thus the future prospects of Swiss watch industry is dependent on the global economy and especially the Chinese economy to some extent. In the reports given out by the Federation of the Swiss Watch Industry for October 2014, exports show high value levels are seen in both value and volume terms. Around a quarter of the industry’s main market showed downturn. This included China. China recorded a downturn for the seventh time in the year. The introduction of smart watches into the market also poses a serious challenge to the Swiss watch industry. Smartwatches are devices which when paired with a smart phone or on their own provide a series of functions like internet connectivity, offering GPS co-ordinates, locations, accessing stock or weather updates, fitness monitoring capabilities, etc beyond their usual mundane task of being a watch. Industry insiders are drawing parallels with the quartz crisis and the challenge posed by the smart phones to the watch industry. Swatch co-inventor Elmar Mocke has expressed his unease at the Swiss watch industry’s continued ignorance of smartwatches. The entry of electronic giants like Apple, Google or Samsung poses immense challenge for the watch industry. The Swiss watch industry would have to innovate and be open to ideas for maximum exploitation of the prospects that the smart watches have opened up.
14