Why the Swiss Watch Industry Must Disappoint
As I type these thoughts I am wearing my black dialed Tudor FXD, one of my favorite divers. Yet its release was surrounded by a fair amount of vocal disappointment. Most commentators wanted more. Some wanted a revamped Heritage Chrono or a Big Block. Others were hoping for a thinner Black Bay Pro or maybe something METAS certified. Instead we got a new dial color and another round of milsub nostalgia.
Nor is Tudor alone on this front. Omega is waging a “will they, won’t they” marketing campaign over the possibility of a Speedmaster Professional with a white, rather than the traditional black, dial. Indeed, the biggest news in the watch industry over the last few years seems to be a profusion of green dials and their stabilization as a fixture on the consumer landscape. It’s a welcome addition to what has traditionally been a very limited color pallet, but is this the best that the Swiss watch industry can do?
It is instructive to contrast the major Swiss groups with what we see in other areas. Grand Seiko released so many new references last year that I am actually unsure how to even count them. The German watch manufacturers seem to be going through a renaissance before our very eyes. Whether its Glashutte Original, Hanhart or Sinn, there is always a lot of new stuff to like. The micro-band space is growing at a pace that is, again, difficult to track. And within it we are seeing exponential increases in quality among the very best references.
Yet all of this is merely the warmup act. Chinese watchmaking seems to be going through its own Cambrian explosion of new and wonderful (if often short lived) experiments in horology. That is certainly something to watch very closely in the next 10 years. More importantly, China is currently outpacing the rest of the globe in terms of the number of watchmakers it is training and employing. In Europe and North America training programs are closing or scaling back even at a time when industry leaders openly acknowledge the issues being caused by a lack of skilled workers. In China the number of trained watchmakers is exploding. If even 1% of these people decide to enter serious haute horology it could shake up the entire global industry.
In contrast the big Swiss brands seem content to give us new dial colors while we beg them to reduce their case thicknesses to the same proportions that they had once achieved during the 1970s, or to put the quick release and adjustment systems that they have already developed on all of the watches that they already sell. Is that too much to ask? Perhaps the answer is yes.
With “Watches on Wonders” rapidly approaching we are already getting prediction posts and videos. In that spirit of prognostication, here is my prediction. There will be some notes of drama, but the major Swiss players will mostly under-deliver. We will get a new dial color here or there, perhaps a case will shrink by a mm or two. And when Rolex changes the color of a single bezel we will all shake our heads and proclaim them geniuses of industrial design.
But I think the real question should be, why does so little change? Why would a new dial color on the Speedmaster, or a new bezel on the GMT Master II, hit us like a religious awakening? It is because we are dealing with an industry that has, since its emergence from the quartz crisis, deliberately chosen a lack of substantive innovation as a core corporate value. Indeed, the lesson they seem to have taken from that dark period in their economic history was that innovation was costly and dangerous.
Those that bet on quartz and attempted to adapt found that they could not compete on economies of scale and production costs with the Japanese. On the other hand, companies that either chose to back away from innovation (Rolex post Oyster Quartz), or simply could not afford to develop radical new production technologies (Blancpain) were most easily able to make the transition to the luxury market. But was the really the right lesson to learn?
This hesitancy is a choice and has nothing to do with mechanical timekeeping being a mature technology as certain commentators assume. Again, other players in the watch space are innovating at a furious pace both in terms of the material used and even with how the time is presented. We see that happening at both the budget friendly and avant-garde segments of the market. The things happening in more geographically isolated corners of the global market are also moving at a head spinning pace. But to understand why the bulk of the Swiss industry has chosen a different path we need to consider the type of market structure that we are dealing with.
In my professional life I was trained as a political economist. When teaching classes we tell our students that markets will produce the right amount of a certain good at the proper price point to clear if a list of basic conditions are met. One of our assumptions about these theoretical “perfect markets” is that there must be an infinite number of buyers and sellers. Or more realistically, there are so many sellers that none of them (and no simple combination of them) can impact the price at which the market clears by increasing or decreasing their production. To me that sounds a lot like the current microbrand space. And its explains quite a few things, not least of which is the price to quality ratio you see in those watches.
This does not sound at all like the bulk of the Swiss watch industry. What we see there are a handful of highly consolidated groups (Swatch, Richemont, LVMH, Rolex, etc….) who control almost all of the total output.
Sure, there are a handful of companies that don’t fall into this core dynamic. We might list Breitling (CVC Capital Partners), Oris and Frederique Constant (Citizen group). And they do release some pretty innovative stuff. But they also account for a tiny share of the Swiss watch market. A huge percentage of all sales, measured in terms of their units or value, is captured by half a dozen big actors. Economists term that sort of consolidation an “oligopoly.” These are players so big that they can (and do) impact the price that is paid for goods through their own production decisions.
We often think of monopolistic players as increasing their profits simply by raising their prices. But that is something of a popular misconception. Consumer budget curves don’t change just because you gained market power. And unlike truly inelastic goods like food or gasoline, watches are something that most consumers can live without. Indeed, it has never crossed the minds of most people that they might need a luxury mechanical wrist watch. (I should add that luxury goods behave a little differently from other sorts of consumables, but for the moment let’s see what we can explain using only basic market principles. We can delve further in the luxury aspect of these pricing strategies in another post.)
So if Rolex is going to aim for a higher spending group of consumers (as they appear intent on doing) they need something like Tudor to be able to continue to capture sales from the less wealthy group they are leaving behind because those consumers are not generally going to be inclined to save up to follow them. In that sense the vertically stratified structure of the big groups makes a lot of sense. Much of what we see in the industry can be explained with some basic economic theory.
Which brings us to our central point. How monopoly players capture much of their surplus profits is not by raising prices per se, instead they actively restrict the supply of innovation. They under-invest in research and development. Even when they have great new solutions sitting on the shelf they don’t release them, because updating your tooling in the middle of a production cycle is expensive and it eats into your per unit profit. Everything comes down to these sorts of detailed calculations.
What maximizes profits for an oligopoly player is making sure that those thinner movements languish in development for years, that already existing quick adjust clasps are rolled out at a painfully slow pace (I am looking at you Tudor) and that consumers are made to clutch their pearls at the thought of a white Speedmaster or Coke GMT Master II.
Granted, things don’t always work out. Tudor failed to capture the hearts of the masses with their new FXD dial color. And every once in a while they do release something new and exciting (like the METAS Ceramic Black Bay) in ways that they probably don’t have to do. Microbrands and independent brands outside of the luxury space are forced to innovate and upgrade at a much faster pace because if they do not they will simply go out of business. The competition that characterizes these more crowded markets demands that firms innovate as much as possible. Yet the halo of luxury that surrounds the mid-tier Swiss brands, and the oligopolistic structure of the watch market (and the implicit collusion between groups that this encourages), ensures that innovation will be carefully managed and rationed.
In truth I want to see the new releases from Watches and Wonders as much as anyone else. Who doesn’t love a good trade show? But I also go into these events with tempered enthusiasm.
Glacial change is not so much a problem that the Swiss watch industry needs to address as it is a core feature of their economic system and something the big groups are fighting to protect. The lack of innovative change literally drives the immense profitability of these groups. Nor is this unique. We see it across almost all monopolistic and oligopolistic markets.
There are even some upsides for consumers. The immense profitability of these companies increases the probability that they will still be around in five or ten years when we need our inhouse movement serviced. That is always a more difficult conversation with newer microbrands.
Further, the incremental pace of innovation can support a certain continuity in models and design that luxury consumers generally appreciate. A Rolex sub from the 1960 looks very much like today’s model. And I have no doubt that the submariner our grandchildren will be unable to buy at retail will also be pretty recognizable. Yet when things are not working as well and brands need to adapt, these same tendencies can complicate the process.
The really interesting thing, so far as I am concerned, is the ability of certain individual designers, corporate leaders and watchmakers to continue to innovate and do interesting things despite the very strong structural headwinds that they all face. As I have talked to more people in the industry I have become interested in these sorts of stories and how hard certain individuals work to maneuver around these structural constraints. I wish we could tell more of those stories. And who knows, maybe at the end of the day a change in dial color will be exactly what my new chronograph or diver needs.
A student of time and space with a watch on his wrist.
Fantastic read! When you think about it, that restriction of innovation you discuss explains quite a few of the head-scratcher decisions the big boys in the industry make.
Fantastic read! When you think about it, that restriction of innovation you discuss explains quite a few of the head-scratcher decisions the big boys in the industry make.
I suspect so. Glad you enjoyed it @GullibleAndroid!
Good long form post, and good read! 🍻
I just want more LHD, countdown, acrylic, options at all price points. But nobody cares 😂😆.
Calling/tagging the WC Chapter Reclusiarch @Porthole.
Along with another 10lb brain peep who will have far better, more insightful things to say than I. 🤏🏻
@Mr.Dee.Bater
Nicely considered! I enjoyed reading it.
Excellent post, thanks for taking the time to write it.
I think this needs to be analyzed from somewhere other than the "watch community", because we all tend to have a limited view of the watch industry.
Most people buying watches don't want weird and wonderful designs or colours. If that is what sold Tissot would be the most interesting Swiss brand. Tissot is the most boring brand ever, because boring sells watches to the masses. Seiko, Citizen, Timex, etc., also all sell boat loads of boring watches.
Much of the thickness of modern watches is down the the better movements people demanded. People wanted more accurate, and more robust movements, so brands made them. Now people want slimmer watches, so brands will make them.
Mechanical watches are a dead technology, because quartz made them redundant more than 50 years ago. They exist now solely because people want the "romance" of a mechanical watch. Large Swiss brands have the history and brand cachet to make the most of that romance, so they stick to using name recognition to sell watches.
The watch enthusiasts are a complete side show that doesn't matter to the big brands at all. We are good free marketing when we rave about mechanical watches, but beyond that we have little impact how how they choose to do business, because we aren't the target audience.
Yeah, great post. I do wonder if companies like Christopher Ward, formex putting micro adjust on everything will eventually force the longines and Tudors of the world to adjust and catch up
Or at least make microadjust easier to find on the aftermarket... I struggle to even find deployant clasps aftermarket
This is the part of the watch world that makes my eyes roll. In the grand scheme of life watches are just fancy things. Don’t get me wrong, I like these fancy things but I couldn’t care less about all the other stuff.
Really well-written and thought-out post! Enjoyed the read. 👌🏼
Very well done. I agree with @KristianG. So few people want change, and even fewer buyers. Whimsy is lost on most. Bright colors are lost on most. I would still argue smaller watches are lost on many. So that leaves us in the current state.
Great read, thanks for taking the time to put this together.
Excellent post.
Do Veblen goods need to evolve & innovate?
A 20 year old single malt whisky is much the same as it was a generation ago.
Folks buy a luxury watch because it looks the same as it always has. A Sub must stay the same- if Rolex changed it drastically it wouldn't be the Icon it's become.
There is innovation, think Co-axial or spirate, or the monolithic escapement - but these are usually "under the hood" or often undetectable material developments, because preserving that "legacy" design is critical for reasons mentioned above.
So yes I agree it's frustrating that the watch world will get all excited when Rolex releases a new bezel colour at Watches and Wonders next month but it's inevitable they aren't going to deviate from the winning formula by much.
🤔
Excellent thought provoking post, Cheers 🍻
you answered your own question
also, watch buyers would dictate that they do not want change. I have argued that they are stupid. I stand by it. Take the Black Bay and the North Flag. The latter was the watch we all wanted, the former is the watch that we all bought… go figure.
The tropes are just those; they say sex sells, but in terms of watches, replace sex for Genta, sport, and submariner (there’s a dream that would need a therapist) and you’ve pretty much covered 90% of the desire of your market. Remember who buys luxury watches… it’s not watch fans.
I’ve talked about apathy - this is the biggest risk to the watch industry, and the lack of desire to change-up will only fuel the apath-ocalypse. It is a problem that every brand will suffer from, including the micros. Too much, too homogeneous, too confusing, and therefore whilst it might not be a monetary “-calypse”, it will kill off the art and the love. One could argue that the watch industry is a zombie anyway, post 1980s, listlessly growing and consuming all. What happens in zombie movies when the resistance fails? Nothing. It just carries on, aimlessly.
Excellent post.
Do Veblen goods need to evolve & innovate?
A 20 year old single malt whisky is much the same as it was a generation ago.
Folks buy a luxury watch because it looks the same as it always has. A Sub must stay the same- if Rolex changed it drastically it wouldn't be the Icon it's become.
There is innovation, think Co-axial or spirate, or the monolithic escapement - but these are usually "under the hood" or often undetectable material developments, because preserving that "legacy" design is critical for reasons mentioned above.
So yes I agree it's frustrating that the watch world will get all excited when Rolex releases a new bezel colour at Watches and Wonders next month but it's inevitable they aren't going to deviate from the winning formula by much.
🤔
Excellent thought provoking post, Cheers 🍻
You are right, there is little innovation because watches are no-longer a consumer product. (How would I "consume" my watch, exactly?) They are collectibles, anachronisms, or possible status symbols.
As the status symbols as they are, and the only real function that they serve for many luxury buyers, also implies that they are easily recognizable. Change makes them less so.
So they are at a stage similar to the Gucci purse. (A reference I use way too often.) They couldn't change the design if they wanted to, because it would risk their business model. How about Tiffany switching to a purple color scheme for the sake of innovation? Sounds great, right? No, these brands are locked in.
I'm amazed by the sheer scale of things whenever I get to think about it. Tissot, Seiko etc. sell boring mechanical watches "to the masses", with the "masses" being a tiny fraction of the world population besides those who wear anything between a Casio F-91W and an Apple watch as well as the bare-wristed part of humanity, and microbrand lovers like myself being a tiny subset of said "masses". And yet we are a critical mass providing a market for so many watch and accessories brands, influencers, forums like WC etc. to thrive in.
That was truly a fantastic read 🍻
Thanks for writing the long form. It generates thoughtful responses, most of which I agree with in all or part.
Great read, thank you for sharing your thoughts. The guys at Collective Horology have started a podcast called Openwork which deals with the business side of the watch industry. Anyone interested in these sorts of industry questions should check it out, I’ve found it really well done so far.
Great read, thank you for sharing your thoughts. The guys at Collective Horology have started a podcast called Openwork which deals with the business side of the watch industry. Anyone interested in these sorts of industry questions should check it out, I’ve found it really well done so far.
Thanks! I will be sure to check it out!
Agree with most of the economic points already raised. So I’ll add this instead. There is a famous speech by Orson Welles in the film “The Third Man” where his character, Harry Lime, perfectly encapsulates the Swiss:
“Like the fella says, in Italy for 30 years under the Borgias they had warfare, terror, murder, and bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance. In Switzerland they had brotherly love - they had 500 years of democracy and peace, and what did that produce? The cuckoo clock.”
Hey Benjamin,
This is an excellent post, as a fellow university economist in my previous life, I appreciate the nuance you captured about monopolies not just increasing prices but also slowing down innovation. This benefits them in two ways: 1) it lowers their marginal costs which boosts profits and 2) it prevents them being displaced. We’ve seen something like this play out in semiconductors with Intel essentially being a monopoly for much of the PC history and only relatively recently getting challenged by the likes of AMD, etc.
One nuance you had mentioned but didn’t go too deep on is that watches are veblen goods (aka luxury goods). In such kinds of markets, it benefits the sellers to jack up exclusivity (through price and access). Demand while still being elastic is definitely more inelastic and so any demand decrease will likely be overshadowed by the price increase so net-net we can expect prices will go up over time.
Btw, we see this not just in typical luxury goods like watches and bags but technically even education can be thought of as a veblen good. Look at how much tuition has increased and how competitive admissions have become over the years. Some of that is globalization, but some of it is “keeping out the riffraff” so to speak. This boosts the returns that are captured by those “in the club” which incentivizes even more gatekeeping. We see a similar dynamic play out in professional credentials like CFAs, JDs, etc.
Agree with most of the economic points already raised. So I’ll add this instead. There is a famous speech by Orson Welles in the film “The Third Man” where his character, Harry Lime, perfectly encapsulates the Swiss:
“Like the fella says, in Italy for 30 years under the Borgias they had warfare, terror, murder, and bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance. In Switzerland they had brotherly love - they had 500 years of democracy and peace, and what did that produce? The cuckoo clock.”
Thanks @Mattison I love that quote!
Hey Benjamin,
This is an excellent post, as a fellow university economist in my previous life, I appreciate the nuance you captured about monopolies not just increasing prices but also slowing down innovation. This benefits them in two ways: 1) it lowers their marginal costs which boosts profits and 2) it prevents them being displaced. We’ve seen something like this play out in semiconductors with Intel essentially being a monopoly for much of the PC history and only relatively recently getting challenged by the likes of AMD, etc.
One nuance you had mentioned but didn’t go too deep on is that watches are veblen goods (aka luxury goods). In such kinds of markets, it benefits the sellers to jack up exclusivity (through price and access). Demand while still being elastic is definitely more inelastic and so any demand decrease will likely be overshadowed by the price increase so net-net we can expect prices will go up over time.
Btw, we see this not just in typical luxury goods like watches and bags but technically even education can be thought of as a veblen good. Look at how much tuition has increased and how competitive admissions have become over the years. Some of that is globalization, but some of it is “keeping out the riffraff” so to speak. This boosts the returns that are captured by those “in the club” which incentivizes even more gatekeeping. We see a similar dynamic play out in professional credentials like CFAs, JDs, etc.
All excellent point! There is certainly a lot more to be explored here. And we still haven't really explored the proud (and very interesting) question of cartel formation and management in the history of the Swiss watch industry.
The most interesting developments affecting the Swiss watch industry in the long term may very well be taking place in China. The development of the domestic Chinese watch industry is likely going to be consequential. Due to changes in Chinese governmental tolerance for Swiss watch imports, the deterioration of the Yuan relative to the Swiss Franc and the incredible availability of reasonably priced labor in Japan in comparison to the tighter Swiss labor market, Chinese imports of Swiss watches are decreasing. China is already a major exporter of parts and cases to Switzerland. As the Chinese watch industry evolves and moves towards higher quality watches, Chinese horological exports of finished watches will also increase. Right now, brands like Ciga seem to combine design from Europe and Chinese manufacture. But as China develops a greater domestic horological design capability, more and more totally all China designed and manufactured producers like Wien are going to pop up. The craze in China for Swiss watches and Swiss horological imperialism has probably peaked and will start diminishing as Chinese makers develop their reputations for quality and value as Kentaro Hattori did at Seiko. As a BRIC leader, China may be expected to become a leading horological supplier among the various BRIC nations. Despite the concentration of power held a small group of Swiss producers and conglomerates (Rolex, Swatch and Richemont), the Swiss watch industry is irreversibly bound to high production costs which explains why lower priced watches are disappearing from Swiss production lines for the most part. Grand Seiko has not in any way disrupted the Swiss watch industry but it may be the harbinger of what China can do in the future to disrupt the Swiss watch industry. What GS did was to convince a sizeable number of people and the global watch press that consumers could enjoy most of the quality of fine Swiss horology for say 50% of the cost without too great a diminishment of prestige. As in the 1960s when Seiko’s success at observatory trials became more and more evident, the Chinese will probably create some incredible high accuracy, highly finished movements second to none despite a serious lower cost than any comparable movement can be produced in Switzerland. The movements will be incorporated in beautifully conceived and assembled Chinese watches that will be priced at 30% of any comparable Swiss watch. The Swiss will be caught in the cross hairs. In the end, the brand equity of the Swiss horology houses will not be enough to insulate the Swiss industry from this onslaught. The Breguet logo will not be enough to get me to pay 300%+/- more for a Swiss watch which is not demonstrably better in anyway from an on the mark Chinese reference. As certain Swiss makers outside of Rolex, Swatch and Richemont fail, the trade names and IP will be acquired by Chinese concerns so that some of the Chinese production will be marketed under familiar Swiss names. I may very well be wrong on some of my assumptions but I think that it will be interesting to see what happens in the next decade or two.