Time for Change? A Case Study of the New Swiss Made Watch ‘Swissness’ Law

The laws in Switzerland used to only require a watch be 50% made in Switzerland. As of 2017, that has been increased to 60% with much controversy and criticism over whether that is the best move for the watch industry. This is a fictional narrative that will be published in two parts that outline the issues surrounding the decision. While the characters are real, this story fictionalizes their role in an otherwise real world scenario using real world facts. Enjoy this case study-style narrative discussing the difficult decisions regarding the increases to the requirements to call something “Swiss Made”.

This is a joint writing by: Aaron (Watch Ponder), Tom, Seunghyun, and Austin who are all MBA students studying business and international trade/investment. References will be denoted by [#] markings and sources will appear at the end of page.

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Introduction

Jura Switzerland swiss made watch swissness law

Jura, Switzerland (By Nemetonia (Own work) [Public domain], via Wikimedia Commons)

The president of the FH is a real person and the head of the FH, however, his thoughts and role in this case study are fictional and based on the written reports of the FH. This is a FICTIONAL narrative based on real world facts.

On a snowy December 2016 day, the President of the Federation of the Swiss Watch Industry, a trade organization that represented over 90% of Swiss watchmaking firms, poured over the most recent export data on Swiss watches.[i] Exports and sales of Swiss watches had continued their precipitous decline throughout the entirety of 2016. He recalled the words he had written one year prior in his 2015 Annual Report: “I hesitate to use the word crisis, since exports remain at high levels. However, this underlying trend conceals starkly different realities in the sector, with a number of firms forced to resort to layoffs or short-time working.”[ii] Market conditions and export figures had since deteriorated further. Producers were hurting: the two largest producers, Swatch and Richemont Groups, had seen their market capitalizations cut almost in half in the last 3 years with a loss of about 50% of operating results within just the last year.[iii]

(source: Google Finance – Yahoo Finance on 30 Nov 2016)

(source: Google Finance – Yahoo Finance on 30 Nov 2016)

He thought about the upcoming change to the new “Swissness” law that would go into effect in January 2017 making it tougher to call something Swiss Made. Three years ago, the Swiss government voted to make a change to the law regarding the requirements to label something Swiss Made.[iv] This included watches, a staple product of Switzerland, perhaps their most famous export to the rest of the world. When the law was passed, the industry was at its height in 2013 with revenues continuing to grow. As Hautetime had noted at the “time” of passage:

“the bill is anticipated to bolster Switzerland’s numerous manufacturers and will allow consumers to know that timepieces marked Swiss Made will genuinely be manufactured in Switzerland. According to the [Federation of Swiss Watch Industry], the bill is just the first in a series of moves designed to protect the highly valuable Swiss watch industry.”[i]

The FH president worried that now was potentially the worst possible time to implement this law. The industry had no way of envisioning the current crisis when they championed the law. An article published by Jack Wagner at one of the leading watch news websites, aBlogToWatch had raised a point the FH president had been mulling over:

The new regulation comes at a time when the Swiss luxury watch industry finds itself at a critical impasse due to dynamically changing consumer demands in Asia and a volatile global economy, so the impact of any change to this industry will be felt more keenly than in a period of relative calm.[ii]

Would the law make production more expensive and therefore less competitive in affordable price categories (<$3,000)? Jack Forster, a respected thought leader and managing editor of Hodinkee (another leading watch news website) stated in a June 2016 article: “forcing lower priced Swiss brands to adhere to stricter requirements, brands like Rolex (which already easily meets the criteria) benefit, at the cost of competitiveness for lower end brands.”[iii] If the ‘lower end’ companies disappeared, would the dream of owning a Swiss watch become unattainable for most income segments and therefore allow other global competitors to take over the affordable segment?[iv] Was this segment worth abandoning? In 2015 alone, the Swiss-produced 26.5M watches (of 28.1M total) in the affordable categories (though it only accounted for 34% of total value).[v]

Swiss watch sales data january 2017

Source: Federation of the Swiss Watch Industry, January 2017 (www.fhs.swiss)

In just a few hours, FH president had a final meeting to discuss the transition with the representatives of the Swiss government. Many companies had started to retool, but the long term play and effects on the industry were still to be seen. As he sat in his office on this blizzardy December day, he wondered whether he should try to lobby to change or waive some aspects of the law that would allow affordable watches (<$3,000 but more specifically <$1,000) less stringent requirements, even for just a few years? Perhaps instead he should lobby the government for subsidies to help the industry during this stressful period, one of watch sale downturns while at the same time implementing more stringent and costly production requirements? Swatch and Richemont served as pungent reminders of the drastically eroding profits of the industry over the last two years. Were these operating results just the smoke from the fire that was just starting to ignite? He had a lot to think about.

History of the Swiss Watch Industry

Early Watchmaking

The origin of Swiss watchmaking dates back to the mid-16th century, in the plateau region of Switzerland located around Geneva. French Huguenots, persecuted for their Protestant religious faith, fled Catholic France to the safety of Switzerland.[i] At the same time John Calvin, the famous protestant theologian, and reformer passed luxury laws in Geneva in 1560-66 that restricted the manufacture of religious items by goldsmiths, silversmiths, and jewelers. As a result, these skilled craftsmen gravitated towards the watchmaking industry (at the time, watches were considered tools, not jewelry), which was blossoming as the Huguenots were migrating into Geneva.[ii]

The Swiss weren’t the only people who were successful watchmakers. Many other centers of industry existed throughout history but fell away for one reason or another. Southern Germany was an early watchmaking center, but watchmaking began to disappear as the 30 Years War in Germany had a crippling effect on its watchmaking industry.[iii] Though it managed to survive, it lost much of its competitiveness and was relegated to being a sideline observer to the Swiss rise. Other competitors such as the British and French would rise to become predominant manufacturers in the 17th and 18th Century, but neither industry managed to endure competitively beyond about 1800.[iv]

A Cottage Industry

As the demand for Swiss watches grew, the local Geneva guilds were reaching maximum production output. With their restrictive labor laws, many in the industry looked outside the city to outsource their production. Though some turned back to France to outsource work, many looked north, to the Jura Mountains.[v] The northern cantons in and around Neuchâtel with their agrarian culture had no restrictions on work. Though the summers were often busy with farming, the cold and snowy winters afforded much down time. This, combined with the dexterous cow herders and the high compensation from watchmaking, allowed the industry to grow beyond the borders of Geneva. Thus, this diffusion of technical know-how allowed several manufacturers to set up their headquarters in Neuchâtel—spreading the industry across the western part of Switzerland.[vi]

Swiss chalet

(Source: pixelbay.com, licensed under CC)

At the same time, new developments in movement technology greatly reduced the size of the watches. By the end of the 19th century, most Swiss watchmakers were using the same movements in their watches. This technology crossed the ocean to the nascent American watchmaking industry. US manufacturers, concerned with volume, developed technology to mass-produce watches by mechanizing their manufacture. The Swiss took the opposite stance, focusing on the development of higher quality over quantity, eschewing mechanized mass-production.[vii] This focus caused the formation of watchmaking schools in Switzerland, which replaced the guilds as the apprenticeship program for the industry, the latter having been disbanded in the 18th century.[viii] This focus on quality over quantity was the foreshadowing to what would eventually be referred to as the “Swissness” laws.

Patek Philippe Gondolo movement macro picture

Intricate Patek Philippe movement (author’s photo)

The Crisis of Realization & Transition to Mechanized Production [ix]

Industrialization was sweeping the globe at the dawn of the 20th Century, which saw remarkable changes to the watchmaking industry, as well as the rise to preeminence of the Swiss brand. Neighboring watchmakers suffered greatly as the Swiss grew in popularity. Most of the European manufacturers were either too loathe to modernize or were too small to challenge the Swiss dominance.[x] The chief rival to the Swiss was also its chief export market: America. As mentioned earlier, US manufacturers were quick to adapt to mechanization of production and were able to output equal or better watches in volumes far in excess of the Swiss. This trend saw exports to the US drop from CHF 18 million in 1872 to CHF 4 million in 1877.[xi] In crisis mode, the Swiss sent delegates to investigate the American manufacturing methods, and were impressed by what they saw. When they returned, these delegates stressed the immediate need for mechanization of the industry in order to survive. This message was not well received in Switzerland.[xii]

waltham watch co factory today

Waltham Watch Co factory today…a shadow of its former self (Author’s photo)

waltham watch co movement

The movement of a Waltham pocket watch (author’s photo)

The very nature of the Swiss watch industry—its focus on quality over mechanization—shaped its current structure, which was dispersed and diversified into somewhat of a “cottage industry.” This structure made the capital requirements of mechanization all but impossible but for the largest of the producers.[xiii] Additionally, these workers “considered themselves as artisans and wanted to maintain a mode of production which allowed them to be autonomous and work within home workshops.”[xiv] Unfortunately, the forces of globalization were pressing them to change their model. Over the next 50 years, the number of workers employed at home in these workshops slowly and steadily declined going from a high of 87.5% in 1870 to 14.7% in 1929.[xv] This migration of labor away from the home was reflective of the trend towards consolidation of the industry into larger and larger watchmaking houses. Fortunately for the Swiss, they maintained their focus on quality during this consolidation, and the strength of their brand remained strong. By the time they had successfully industrialized and consolidated into cartels, they were back in a competitive position.[xvi]

Jacques David Longines

Jacques David, one of the early Swiss watchmakers to support modernization (source: History of Longines, translated by Richard Watkins)

Establishing Cartels

The postwar period saw watch demand drop sharply during the Great Depression. As companies competed on price, profits diminished to the point where many manufacturers were struggling. When the government stepped in, it created a cartel system that allowed for price setting and cooperation, saving the industry from itself. The cartels standardized production, but stifled innovation in the short term. It also marked the first point where the Swiss addressed the value of the larger brand of Swiss Made.[xvii] During the Second World War, production actually increased since competition was reduced with the guild architecture and the fact the Swiss were free to trade with both sides during the conflict.[xviii] Comfortably positioned at the top of the watchmaking industry, they were about to face their greatest challenge—one they helped to create.

The Quartz Crisis

The quartz timepiece was developed in 1967 as a more precise and simpler method of timekeeping, requiring no mechanical movements.[xix] However, the absence of these movements was met by the Swiss watchmaking industry with skepticism, arguing that it was not an extension of their craft, and thus was not worth their time.[xx] By 1980, Hong Kong produced the most watches with Japan trailing in the number two position.[xxi] The fragmented Swiss watchmaking industry was dealt additional blows when the U.S. Dollar devalued against the Swiss Franc in the 1970s following the end of Bretton Woods. By the early 1980s, two-thirds of all watch industry jobs in Switzerland were gone, and 60% of Swiss watchmakers went out of business.[xxii] Massive consolidation was needed, and against this backdrop, a budding quest to re-establish the Swiss brand emerged.

By Dr.K. (talk) 20:38, 18 July 2008 (UTC) (Own work) [CC BY-SA 3.0 or GFDL], via Wikimedia Commons

The Swissness Law

The existing 1971 purity law

A few years before the production of quartz watches had taken a firm hold on the market, the Swiss passed the “Swissness” law in 1971, codifying what it meant for products to be considered Swiss Made. It reinforced the brand that became synonymous with quality in the industry. This cultural pride, combined with the higher costs, weighed on several manufacturers in the industry, which decided to forego retooling their factories for quartz and instead chose to remain as mechanical producers. Unfortunately for the Swiss, the Japanese were not so resistant to change, and benefitted from an extensive knowledge of electronics. They were able to reduce the cost of a quartz timepiece by a factor of one hundred, and thus undercut mechanical Swiss watches in both accuracy and price.[i]

To maintain a long-established image of the Swiss watch’s high quality, the Swiss Parliament passed the law stipulating the conditions of the Swiss watch on December 23, 1971. According to the law, only watches that fulfilled the following conditions were allowed to stamp the seal Swiss Made (usually under the 6 o’clock hash on the watch face).[ii] The 1971 Ordnance stated:

Article 1a : Definition of the Swiss watch. A watch is considered to be Swiss if:

its movement is Swiss;

its movement is cased up in Switzerland and

the manufacturer carries out the final inspection in Switzerland.

Article 2 : Definition of the Swiss watch movement. A movement is considered to be Swiss if:

it has been assembled in Switzerland;

it has been inspected by the manufacturer in Switzerland and

the components of Swiss manufacture make up for at least 50 percent of the value, without considering the cost for assembly.[iii]

The Value of the Swiss Made brand

Nicholas Hayek, the founder and CEO of consulting firm Hayek Engineering, was hired to assess the future prospects for many of the floundering Swiss manufacturers during the Quartz Crisis. Believing that the Swiss could still compete, he stressed that Switzerland’s higher labor costs could be offset by automation, and that the term Swiss Made carried significant value: “In 1981, the firm conducted a market study and found that the Swiss Made mark on a low to mid-priced watch raised its value 10% above that of an identical watch made in Japan. The Swiss mark gave a 20% premium over the value of an identical watch made in Hong Kong.”[iv] He thus began to help the industry change its ways to remain competitive in the market segments it lost out in during the quartz revolution. He started by recommending extensive consolidation with new leadership presiding over a restructured industry.[v]

Audemars Piguet Royal Oak

(author’s photo)

Circumventing the law 

Despite its contribution to the survival of Swiss watches, the law proved to be weak and needed to be amended for the 21st century. The law was enacted when the concept of globalization was understated and not well understood. As a result, Swiss watchmakers began working around the 1971 law to maximize return to shareholders and reduce costs. For example, a company can produce only minimal components in Switzerland while component kits from Asia are sent to Switzerland for final assembly of the watch and inspection. Finally, the watch is sold with the Swiss Made label in accordance with the 1971 law.[vi] David Bredan, Senior Editor of aBlogToWatch wrote in 2014: “Manufacturers use a small amount of Swiss-made components…the cost of these Swiss-made components actually outweigh the cost of all the rest of the Asian-made components – or at least they do in the documents.”[vii]

Due to the outdated and ambiguous law, many Swiss watchmakers have criticized the Swiss Made Ordinance; the Federation of the Swiss Watch Industry strongly pointed out the irrationality of the current law. In an interview with Reuters, the FH president criticized the 1971 law: “Thanks to current weak Swiss law, watches produced almost in China can be sold legally under the Swiss Made label.”[viii] The Federation of Swiss Watch Industry stated that it should strengthen the notation of Swiss Made and began a movement to strengthen the Swiss Made requirements for Swiss watch quality assurance in 2007.[ix] Yet this was not enough.

The New Law

On June 21, 2013, the Swiss Parliament passed a new “Swissness” law, which enacted more stringent requirements to meet the Swiss Made requirement.[x] Under the new “Swissness” law, scheduled to go into effect in January 2017, the requirements maintained many of the standards of the 1971 ordnance, but now the movement must have 60% Swiss value (instead of 50%). Additionally, a new requirement stipulates 60% of Swiss value now applies to the whole watch (not just the movement) and includes research & development costs and certification costs.[xi] This means that parts previously not calculated in the value will now be included as well as other associated costs not directly included in the production. Not lost on the FH president, this meant the final cost of goods sold would increase for producers who were not currently meeting this standard. The increase in COGS could seriously diminish margins or lead to price hikes for some affordable segment producers adjusting to the new requirements.[xii]

TO BE CONTINUED….


Sources:

[i] Ryan Raffaelli, “The Re-Emergence of an Institutional Field: Swiss Watchmaking,” HBS Working Paper No. 16-003, 2015, p. 19.

[ii] The Federal Council, “Ordonnance du 23 décembre 1971 réglant l’utilisation du nom «Suisse» pour les montres,” https://www.admin.ch/opc/fr/classified-compilation/19710361/index.html, accessed November 2016.

[iii] “Ordinance governing the use of the appellation “Switzerland” or “Swiss” for watches” , Federation of the Swiss Watch Industry FH, http://www.fhs.swiss/file/14/ordonnance_swiss_made_1971_En.pdf, accessed November 2016.

[iv] Daniel B. Radov, “Rebirth of the Swiss Watch Industry, 1980-1992 (A),” HBS No. 9-400-087 (Boston: Harvard Business School Publishing, 2000), p. 5.

[v] Ryan Raffaelli, “The Re-Emergence of an Institutional Field: Swiss Watchmaking,” HBS Working Paper No. 16-003, 2015, p. 21.

[vi] David Bredan, “‘Swiss Made’ To Mean A Whole Lot More For Watches In 2017,” aBlogToWatch, December 22, 2014, http://www.ablogtowatch.com/swiss-made-mean-whole-lot-more-watches-2017, accessed December 2016.

[vii] Ibid, accessed December 2016.

[viii] Silke Koltrowitz, “What puts the Swiss in a “Swiss Made” watch?” Reuters Small Business News, March 4, 2013, http://www.reuters.com/article/us-luxury-watches-swissmade-idUSBRE9230KS20130304, accessed November 2016.

[ix] “The criteria for strengthening the Swiss made label,” Federation of the Swiss Watch Industry FH, http://www.fhs.swiss/eng/strengthening.html, accessed November 2016.

[x]David Bredan, “‘Swiss Made’ To Mean A Whole Lot More For Watches In 2017,” aBlogToWatch, December 22, 2014, http://www.ablogtowatch.com/swiss-made-mean-whole-lot-more-watches-2017, accessed December 2016.

[xi] “The criteria for strengthening the Swiss made label,” Federation of the Swiss Watch Industry FH, http://www.fhs.swiss/eng/strengthening.html, accessed November 2016.

[xii] David Bredan, “‘Swiss Made’ To Mean A Whole Lot More For Watches In 2017,” aBlogToWatch, December 22, 2014, http://www.ablogtowatch.com/swiss-made-mean-whole-lot-more-watches-2017, accessed December 2016.

[i] Pierre-Yves Donzé, History of the Swiss watch industry, 3rd ed. (Bern: Peter Lang), p. 5-7.

[ii] Ibid, p. 5-7.

[iii] Lucien F. Trueb, The World of Watches (New York, NY: Ebner Publishing International, 2005), p. 85.

[iv] Pierre-Yves Donzé, History of the Swiss watch industry, 3rd ed. (Bern: Peter Lang), p. 22-23.

[v] Ibid, p. 13-14.

[vi] Geoffrey Jones and Alexander Atzberger, “Hans Wilsdorf and Rolex,” HBS No. 9-805-138 (Boston: Harvard Business School Publishing, 2015), p. 4.

[vii] Pierre-Yves Donzé, History of the Swiss watch industry, 3rd ed. (Bern: Peter Lang), p. 14-15.

[viii] Ibid, p. 16.

[ix] Aaron wrote on aspects of this topic during this research at his blog about the watch industry in the article “Will you always prefer Swiss Made?” Watch Ponder Blog & News, Nov 24, 2016 at https://watchponder.com/2016/11/24/prefer-swiss-made/.

[x] Pierre-Yves Donzé, History of the Swiss watch industry, 3rd ed. (Bern: Peter Lang), p. 29.

[xi] Ibid, p. 30.

[xii] Ibid, p. 31-32.

[xiii] Ibid, p. 14.

[xiv] Ibid, p. 51.

[xv] Ibid, p. 55-56.

[xvi] Ibid, p. 56-57.

[xvii] Ryan Raffaelli, “The Re-Emergence of an Institutional Field: Swiss Watchmaking,” HBS Working Paper No. 16-003, 2015, p. 17-18.

[xviii] Geoffrey Jones and Alexander Atzberger, “Hans Wilsdorf and Rolex,” HBS No. 9-805-138 (Boston: Harvard Business School Publishing, 2015), p5.

[xix] Pierre-Yves Donzé, History of the Swiss watch industry, 3rd ed. (Bern: Peter Lang), p. 122.

[xx] Ryan Raffaelli, “Mechanisms of Technology Re-Emergence and Identity Change in a Mature Field: Swiss Watchmaking,” HBS Working Paper No. 14-048, 2013, p. 25.

[xxi] Daniel B. Radov, “Rebirth of the Swiss Watch Industry, 1980-1992 (A),” HBS No. 9-400-087 (Boston: Harvard Business School Publishing, 2000), p. 2.

[xxii] Ryan Raffaelli, “Mechanisms of Technology Re-Emergence and Identity Change in a Mature Field: Swiss Watchmaking,” HBS Working Paper No. 14-048, 2013, p. 25.

[i] Valerie Jack, “Swiss Parliament Passes “Swissness” Bill to Regulate Swiss-Made Watch Claims,” Haute Time, June 24, 2013, http://www.hautetime.com/swiss-parliament-passes-swissness-bill-to-regulate-swiss-made-watch-claims/25855/, accessed December 2016.

[ii] Jack Wagner, “Watches To Be 10% More ‘Swiss Made’ From January 01, 2017,” aBlogToWatch, December 6, 2016, http://www.ablogtowatch.com/watches-swiss-made-2017/, accessed December 2016.

[iii] Jack Forster, “A Level Playing Field, Swiss Made Vs. Made In The USA, And Thoughts On How Much It Really Matters,” Hodinkee, June 21, 2016, https://www.hodinkee.com/articles/a-level-playing-field-swiss-made-vs-made-in-the-usa-and-thoughts-on-how-much-it-really-matters, accessed December 2016.

[iv] Ibid, accessed December 2016.

[v] “Export of Swiss watches by price category,” press release, on FHS website, http://www.fhs.swiss/scripts/getstat.php?file=histo_gp_161010_a.pdf, accessed December 2016.

[i] “Who We Are,” Federation of the Swiss Watch Industry, http://www.fhs.swiss/eng/whoweare.htm, accessed 5 December, 2016.

[ii] Federation of the Swiss Watch Industry, Annual Report 2015, p 5, http://www.fhs.swiss/file/6/Annual_report_2015_web.pdf, accessed December 5, 2016.

[iii] Richemont, Interim Report 2016, p. 4, https://www.richemont.com/investor-relations/reports.html, accessed November 2016 and Swatch Group, Letter to Shareholders, July, 21, 2017, p. 1, http://www.swatchgroup.com/investor_relations/letters_to_shareholders, accessed December 2016.

[iv] “Swiss Made: the only true reference,” Federation of the Swiss Watch Industry FH, http://www.fhs.swiss/eng/swissmade.html, accessed November 2016.

 

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