Column – The Swiss Watch Industry Is Bankrupt

Fratellowatches starts with a new series of articles as of today, columns written by others as well as by ourselves. Columns about the watch industry, watch collecting, trends, design and so on. We start our first column with a publication by Professor of Turnaround Management Jan Adriaanse.

Imagine

Imagine a world without Rolex. Imagine a world without Breitling. Imagine a world without Swatch. Can you? We can. But are most of the 140,000 visitors of Baselworld 2014 able to do so? We doubt it.

When we asked international acclaimed watch blogger-journalist Robert-Jan Broer he implicitly confirmed: “I haven’t seen smart watches yet at Baselworld (…) I doubt whether it is at the top of minds here in Switzerland”.

As the Swiss watch industry is currently at the peak of its success due to global economic recovery and growth, it is hardly imaginable that this very same industry – that has its origins in Geneva around 1541 – will be swept away soon. A bold statement, you might think. But is it?

To make it even more confusing, picture this. Earlier this year chief executive Nick Hayek of Swatch Group – the world’s biggest multi-brand watchmaker – stated in a telephone interview with Reuters: ” The smart watch is an opportunity for us, whatever happens. If people who never used to wear anything on their wrist start wearing a so-called smart watch, then we can certainly convince them quickly to try wearing a beautiful watch instead”. And when asked by the Financial Times at the opening of Baselworld 2014 he commented further:  “We have been in discussions – not ever initiated by us – with practically all players in smart wearables up until today… however, we see no reason why we should enter into any partnership agreement”.

A rather different sound comes from Larry Pettinelli, who is US President for high-end watch brand Patek Philippe, saying:  “it is conceivable that they [Apple] would be interested in developing a type of hybrid with some type of mechanical aspects… the Swiss watch industry is very adept at metallurgy”

Assumption crisis

To be honest. We think they are both wrong. Moreover, these statements ironically reveal the great existence crisis the industry faces, as we think that most Swiss industry insiders will feel the same. In turnaround management research we label this situation as “assumption crisis”, that in other established industries already has proven to become profit crisis eventually leading to liquidity crisis and in the end to… bankruptcy.

So what’s the problem?

Actually, based on what in organisational failure literature is called “the curse of success” some false assumptions are being made here. These are, for example, that future demand will (still) be based on mechanical and metallurgical superiority, that beauty and design are exclusively related to traditional Swiss watches, and that future success is simply guaranteed based on tradition, brand experience and superior new chronograph or Tourbillon technologies (or other “complications”). Moreover, the defensive reactions are probably based on a widespread human trait: we simply cannot handle the inconvenient truth of inevitability, at least when no direct warning signs (read: profit crisis) are present.

In other words, current market dominators tend to see the future as a variant of the past. Also, when faced with an external threat – above euphemistically and for the wrong reasons described as “opportunity” – these firms have the tendency to opt for well-learned or dominant responses, e.g. to further stress current market supremacy, to downplay new entrants in “their” market, as well as to look for evidence that confirms their assumed right way of thinking. In literature this phenomenon is called: “threat-rigidity-effect”. As an example, market research will probably confirm that customers worldwide prefer Swiss watches; or visit a Rolex or Omega internet forum and all enthusiasts will tell you that your brand is superior and that they will stay loyal forever, till death do us part. Not… The problem with customers is that they cannot tell you what their future behaviour is. Actually, even their current behaviour is unpredictable. Managers often think it is based on “customer needs” but instead it is rather more based on “customer pain”. What problems do we solve for our clients? Is it their unfulfilled longing to know exactly  what time it is (you’d better buy a battery-powered watch then)? Maybe it is based on emotion? Or is it Maslow-like esteem or self-actualisation? Probably none of them, at least in the fast-growing wearables market… a market estimated to have a 50 billion US dollar (!) potential in 2018 according to Credit Suisse.

It’s social disruption, stupid

Ignoring a potential 50 billion wearables technology market might already sound like quite an assumption crisis. But things get even worse. It is not really about left-hand e-mail or social media technology in this market nor about battery life, functionality or superior design (by the way, Silicon Valley has proven to be quite successful regarding that). No, it is really not about functionality, brand experience, status and emotions. It is much, much bigger. As it is “social disruption” that causes the Swiss to bankrupt soon. Smart watches are here to improve our lives. They are here to measure our well-being. In fact, they are here to extend and save our lives. They are here to monitor our heart rate, blood pressure, and to detect other potential health threats. Smart watches help to protect us against assaults, they help us to communicate with our environments, they warn of danger and can give us instant pleasure. In other words, smart watches help us live a happier and healthier life. They will even help us extending our lives. That is the real disruption. A social disruption. Not a technological one. They help us solve our ultimate “customer pain”. They help us to prolong our lives. Our ultimate human goal. As time is short.

Rolex GMT-Smart-Master II

So, forget about clumsy designs, forget about metallurgy, forget about brand heritage, about “Swiss made” and forget about Tourbillons or better mechanical Chronographs (who uses them anyway?). Start innovating, start experimenting, start co-creating. Design the Rolex GMT-Smart-Master II, the Breitling Smart-Professional Emergency (come on guys, you practically invented first-generation smart watches years ago) and create the Audemars Piguet Royal Oak Smart-Offshore…

The Swiss watch industry is bankrupt. Long live the Swiss smart watch industry.

The Author(s)

This column was written by Jan Adriaanse (Professor of Turnaround Management affiliated to the Law School of Leiden University) and Emile Voogt.

Smart Watches and Rolex? Read more here on Jake’s Rolex World Magazine.

11 Comments

  1. Boris Reply

    Interesting view, and I have done Turnaround work with small businesses in my past. But to compare the current development as a disruption, I doubt that is the case.

    Mechanical watches have become an Expression of Lifestyle, they have become an Investment vehicle (more or less, and this may only be in the perception of People, not in real life, although I know People who are very successful in investing in watches), and I still believe that the smart watch will not chase away the mechanical watch. Why else would People be so obsessed with inhouse movements? Why are there so many Forums around the globe where watchcollectors and enthusiasts are convening, arranging dinners and Meetings and creating new friendships they could never establish without the one Thing that is connecting them: the mechanical watch. Be it a Rolex, which is considered like a bank, it can be quickly turned into cash, anywhere in the world. Imagine, you are robbed in some Country far away from home, and all you have left is your Rolex on your wrist, how quickly can you get enough Money for it to buy a ticket to fly back home…

    The mechanical watch is there to last. Why? Because it is built to last. And because People who buy watches use it for additional purposes as to state who they are, what they like to be, and how they establish new relationships.

    While Baselworld may have shown that the constant growth is not past on past Performance, I still believe mechanical watches are to stay.

  2. Kai Jonas Reply

    The column makes a case for the need of turnaround management – well done.
    The question remains if the author of the column are not suffering from an assumption crisis themselves.

    Assumption 1: One wrist, one watch
    As far as I understand it the authors pit the smart watches (of which we assume that they are to be worn on our wrists, no matter if left or right one) against high quality mechanical watches (which we currently wear on our wrists, no matter if left or right one), and assume that smart watches will outsmart mechanical ones, if not integrated. This assumption of a future wrist conflict could be true.
    Maybe. Apple and Samsung try to market smart *wrist* watches, but will this be the gold standard of the future? If smart watches turn out to be more successful as smart *pocket* watches, then there is no wrist crisis, no bankrupt brands, and no turnaround management is needed. By the same token, mechanical watches could move back to be pocket watches if the wrists are taken over (while I highly doubt that some ladies would want to exchange their delicate Cartier Tanks for clumsy smart watches…they rather stuff the latter into their purses)

    Assumption 2: no one uses two gadgets with the same function at the same time
    We have an exact watch in our smart phones, still we wear less exact mechanical watches. We have a camera in our smart phones, still we use DSLRs. So why not wear two watches, one a smart watch and a mechanical one at the same time Or have and keep even more mechanical watches, for specific occasions, as pieces of heritage, while we throw away the smart watch each and every 2-3 years…

    Coda: I m sure, some smart watch approaches could be successfully be integrated in Swiss luxury brands if there is the need for it. Smart glasses seemed to have failed we hear, so why are we so sure that the smart watch will win? It may be more of a threat or cheaper quartz products, than for mechanical watches.

    In psychology, we know that past behavior robustly predicts future behavior. Surely there is room for innovation and change, but how this exactly will pan out is hard to forecast. I am not a trend spotter, but since no one in the 80ies thought that we would have beards again and dress like any fashion period that was there before, I suggest less of a doomsday scenario, or at least a better thought through one.

    1. Eric Reply

      It seems I am the only one here who actually agrees with the point being made.

      The main reason that mechanical watches survived the quartz crisis is that the functionality of both items is quite similar with as main difference the accuracy of the time they display. As long as knowing the exact time does not matter (its almost never life or death) your choice can be based on looks and status. Since there are as many different preferences as people both quartz and mechanical watches can coexist.

      With smart watches this can become different. A smart watch can offer functionality that neither a normal watch nor a mobile phone can offer. Think for example about constant heart rate monitoring which can help us to have a happier and healthier life. This functionality could improve your productivity, limit the amount of sleep you need, and increase your happiness. Not using it would set you back compared to your colleagues, seems selfish towards your kids and partner, and will make you look like a relic to everybody who does not know you. This will mean the end of the watch industry as we know it as wearing a high-end Rolex will be comparable to wearing a pocket watch in this age of time.

      So will people maybe wear 2 watches? I don’t think so. How many people do you know who wear both a mechanical and quartz watch at the same time? I know none.

      It will be clear that at a certain point everybody will need/want a smart “watch” just as it is hard to find people without a mobile phone nowadays. The big question is in what form do you carry them around? Do you wear them around your wrist like a watch or will it be a screen-less wristband, a ring around your finger, or a microchip somewhere else in your body? If you wear it around you wrist then the watch industry will die, otherwise they will have a very good chance to stay for a very long time.

      Btw; the main reason i did not buy a smart watch when i purchased my new samsung phone is that the added functionality is very limited. And of course i would miss my mechanical watches too much, but this reason will be less important for 90% of the population.

  3. ors Reply

    Boris……I think your answer is 100% correct and because of that I support your answer!!!

  4. Mike Reply

    I think that the article is in search of a crisis which simply hasn’t manifested itself. The quartz movement “crisis” of the 1970′s/1980′s was a real crisis, and the Swiss watch industry (thank you Mr. Hayek!) managed to come through that traumatic period. The biggest crisis that the Swiss watch industry faces, in my opinion, is convincing young men/women that they should have at least one nice watch in their wardrobe. So many young people hold up their smart phones and exclaim “Look, it has a time function!” as a rebuttal to investing in a nice watch. At best, a smart watch could be a low-end accessory that leads to the purchase of a “real” Swiss watch. In my opinion, there’s just no substitute for owning a sleek Patek Philippe Calatrava or an Omega Chronometer, no “smart” features needed.

    The article is still thought-provoking, and should be noted for addressing a market segment that will no doubt be addressed by Asia mfg in the upcoming future.

  5. Toby Reply

    All replies so far have a strong bias towards luxury watches. Smart watches will not compete with these, but the possible number of sales would make it a stupid move by the watch industry to completely ignore this trend. Addition of a traditional watch movement (quartz or automatic) would eliminate the smart watches’ biggest issue, battery life under continuous time display. An automatic movement might even be able to generate power for the electronic parts. Such a watch could be sold by Apple and would fit, with different styling, into Tissot’s range. A low-end model (no touch screen, only display of notifications) could even be introduced as Swatch model. A marriage of Swatch’s Sistem51 movement with Apple-esque electronics and software could be the perfect smart watch

  6. Chris Reply

    I’m not sure I agree here.

    As you said earlier, if you want to just tell the time, buy a quartz.

    Owning a luxury watch is about more than just knowing what part of the day you’re in. Its about heritage, its about tradition, status, beauty. The market as it stands today for people purchasing timepieces north of £3,000, encompasses just these things. Smart watches might alert us to new emails, might tell us our blood pressure and alert us of danger – but staying at home and eating salads will have a similar effect.

    The human nature (on mass) isn’t focussed on this – just take a look at the alcohol industry, recreational drug use, even things as obvious as driving fast or experiencing any type of thrill.

    We want to be alive, not dull. We also want to remember what it was like in the past when we didn’t have information overload. When conversations happened between strangers. When you didn’t have to put everyones mobile phone in a fruit bowl to stop each other checking social networks.

    The luxury watch industry is here to stay. Sure, smart watches will carve out a niche, but they’re not going to take a hold of the fan base that already exists – this is rooted much deeper than Samsung or Google will ever be able to compete with.

    Just my 2 cents! Great article.

  7. Theodore Diehl Reply

    Interesting article, great for stirring up a good and fascinating debate!

    However, I am not sure if the author is aware if the fact that in secret, Rolex, Patek and many others have been working on such subjects for many years now. One small example: Rolex devised and patented a date window that could show temperature and barometric pressure electronically in the 1990′s, Patek has been examining variants of quartz technology combined with information as well. However this has all been kept secret, why?

    Because the high end Swiss watch industry are unsure if the ‘mechanical’ public with turn their back on them if they go this route. I am pretty sure that once the iWatch and other products start making waves, the Swiss industry will jump on and tap into research already committed some time back, and then go further.

    Another issue is marketing and PR; if you have spent billions of dollars over the course of 50 years to promote the ‘hand made’ aspect of these mechanical wonders, how on Earth do you change direction and then promote hybrid mechanical/electronic devices? It’s a tough call, and can easily make a company look disingenuous and/or disloyal to their clients and philosophy.

    The lower end segment however does not have this problem; their pricing and image are more flexible and would easily allow these moves to hybrids or totally new electronic watches. The only problem that (can) remain for all in the watch industry is easy access to the the chips, software and know-how which out-dates itself faster than the watch hardware !

    All I am trying to say here is that in my view, it is not the Swiss industry that is really holding this back; it is the buyers. Once they decide to accept such a new direction, the industry will likely be certain to follow.

    Theodore

  8. james Reply

    I could not disagree with this article more – admittedly smart watches are an alternative to watches but they are an alternative to ‘bad’ watches – nobody that owns a rolex, iwc or patek is going to stop wearing it because a smart watch comes along. This is because they do not merely wear it because it tells the time, it means far more than that – meaning that a smart watch with a lifetime of 2 years can only dream of.

    Mechanical watches suffered but eventually weathered the storm of quartz watches and they will continue to thrive in a world of smart watches, period.

  9. Kosta Reply

    Most people don’t buy mechanical watches as a tool that tells time . Heck , I don’t even wear them , I use casio , seiko , for everyday use .
    People don’t buy tourbillons so they can tell time more accurate than a non tourbillon watch .
    Most people appreciate the craftsmanship , complexity ( or simplicity ) of the watch .
    To most people ( like me ) its art .
    Some people use them as tools , for example , all astronauts use mechanical watches as a back up .
    Divers prefer mechanical watches .
    Most of the rich people buy them as a prestige , some appreciate exclusive materials like diamonds , platinum , etc.
    I can go on like this forever …
    The day mechanical watch dies it would be the day that pure communism has arrived , that means that there will ne no Louis Vuiton , Cartier , Chanel , or any other non necessary item .
    In other words , people will no longer appreciate art and that is not possible .
    Some people will spend a million for painting but will never spend more than $100 , so what will your next column be , ” art has no use ” , art industry will go bankrupt ?

  10. Grant Reply

    I’m not sure whether or not I am educated enough to comment on this topic, but I don’t aesthetically like the idea of ‘smart watches’ I love a good clean wristwatch. In saying that I have nothing against the people who would wear one- like athletes and tech geeks etc. I’m sure most people don’t need to know their heart rate at any given minute during their day or call someone buy talking to their wrist- that’s what a $1000 iphone is for. The swiss watch industry isn’t going anywhere, I’m sure the men who spend thousands on a Saville Row wardrobe aren’t about to don a little computer with their cashmere overcoats.

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