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01-4702-Conklin.qxd 5/10/2005 5:48 PM Page 51 The Dependence of Profitability on Industry Structure • 51 dedicated to its manufacturing and assembling frontier in the Vallée de Joux, Neuchatel and La processes. Mechanical watches consisted of Chaux-de-Fonds (see Exhibit 1). between 100 and 130 components that were to be The emergence of the watch industry in fitted together in the ébauche (winding stem, Switzerland was a blessing for the local farmers gear train) and regulating parts (mainspring, who could extract only modest agricultural rev- escapement, balance wheel). Most expensive enues from their mountainous terrain. In fact, watches contained at least 15 jewels (very hard many families—who had been educated through stones such as synthetic sapphires or rubies that a close-knit system of community schools— had been drilled, chamfered and polished), were looking for an additional source of income, which were inserted in places that were most particularly during the long and snow-filled subject to metal wear. The tiny dimensions of a winters. Thanks to advances in new machine watch case did not leave much room for approx- powered watchmaking tools, individual Swiss imation, and watchmakers were required to have families began to specialize, some in the produc- a great deal of micro-mechanical engineering tion of single components, others in assembly. expertise, craftsmanship spirit, patience, experi- The small size of watches and watch compo- ence and ingenuity. nents allowed for relatively easy transportation By most accounts, the first reliable pocket from mountain farms and villages to commercial watch was invented in 1510 by Peter Henlein, a centres. locksmith from Nuremburg, but the promising Swiss watches were sold exclusively through art of watchmaking in Germany was rapidly jewelry and up-scale department stores, which killed by the Thirty Years War (1618 to 1648). were also fully responsible for repair and after- Starting in the late 1500s, the development of the sales services. Watches were purchased as life- watchmaking industry in Europe traced its roots time investments and were often handed down to the flight of protestant Huguenots who were from generation to generation. Swiss watches driven out of France by a series of religious found ready acceptance throughout Europe and persecutions. The Huguenots found refuge in later in the U.S., in part because of their promo- Geneva, bringing with them skills in numerous tion by jewellers who saw them as a source of handicrafts. For centuries, Geneva had been a ongoing revenues through their repair services. centre of ornate jewelry making, but it was left In the 18th and 19th centuries, English com- with little industry after John Calvin’s famous petitors were a constant challenge for the Swiss Sittenmandate edicts against luxury and pleasure who undertook serious efforts to overcome had progressively put an end to the goldsmiths’ early British supremacy. First, the Swiss invested activities in the city. Looking for a new source of in education and training, establishing several income, and with their knowledge of metals, watchmaking academies at home and watch- skills in jewelry making and artistic flair, many repair schools in major foreign markets. Second, Genevan goldsmiths embraced the watchmakers’ and to strengthen their image internationally, profession. they created a “Swiss made” label, which would As they were becoming more and more become by 1920, an important symbol of quality, numerous, watchmakers decided to regulate their style and prestige. Third, the Swiss significantly activities, and incorporated into a guild in 1601. improved process technology, setting up the The development of the industry in Geneva and world’s first mechanized watch factory in 1839. the surrounding Jura mountains was rapid. By British watchmakers made no attempt to mass 1686, there were 100 masters in Geneva; 165 in manufacture watches until much later. Seeing 1716; and 800 in 1766 employing some 3,000 mass production techniques as a threat to their people. By 1790, Geneva exported more than craft, they persuaded Parliament to pass a law 60,000 watches throughout Europe. Many of barring the use of specialty production tools the Genevese moved north along the French in the British watch industry, and devoted 01-4702-Conklin.qxd 5/10/2005 5:48 PM Page 52 52 • CASES IN THE ENVIRONMENT OF BUSINESS G e r m a n y F r a n c e Schaffhausen A u s t r i a La Chaux-de-Fonds Solothurn Biel/Bienne Le Locle Neuchätel J U R A Vallée de Joux E A L P S T H Genève I t a l y Exhibit 1 Watch Production in Switzerland Source: FH, Federation of the Swiss Watch Industry. themselves to the production of very expensive introduced under the Ingersoll brand name by marine chronometers. As a result, the British the Waterbury Clock Company—were cheap but watch industry steadily declined during the 19th also of very poor quality. Anyone who wanted a century, while the Swiss industry was on its way “real” watch bought Swiss. to achieving world dominance, thanks to signifi- In the early 20th century, the hard economic cant advances in design, features, standardiza- times (collapsing sales and soaring unemploy- tion, interchangeability of parts and productivity. ment) following the First World War, led to a In 1842, Adrien Philippe introduced complicated profound reorganization of the Swiss watch indus- watches featuring perpetual calendars, fly-back try. Almost 2,500 distinct watchmaking firms hands and/or chronographs. Other early Swiss grouped together into three associations, namely names included Beaume & Mercier (1830), the Federation of the Swiss Watch Industry (FH) Longines (1832), Piaget (1874), Omega (1848), in 1924, the Ebauches SA in 1926, and the group Movado (1881) and Rolex (1908). Union des Branches Annexes de l’Horlogerie The U.S. watch industry appeared in the (UBAH) in 1926. The associations agreed to middle of the 19th century. Local production co-ordinate activities (for example, watch com- consisted of high-volume, standardized products ponents had to be bought from members of the manufactured in machine-driven factories. U.S. associations only) and maintain high prices. The watches—such as the US$1 Turnip pocket watch Swiss Laboratory for Watchmaking Research 01-4702-Conklin.qxd 5/10/2005 5:48 PM Page 53 The Dependence of Profitability on Industry Structure • 53 (CEH) was also founded in 1924, with the marketing and distribution strategy. Their first objective of strengthening the country’s techno- extensive worldwide advertising campaign on logical advantage. Finally, and in response to television, “Took a licking and kept on ticking,” the world depression at the time, the Swiss was to become a legend in marketing history. government pushed several important watch Consumer demand soared after John Cameron assembly firms to form a holding company, Swazey, a famous news U.S. commentator, was ASUAG, in 1931. featured in live “torture tests” commercials emphasizing the watch’s low cost and incredible durability. The disposable aspect of Timex POSTWAR COMPETITIVE watches (no local repair involved) pushed the company to develop new distribution channels, CHANGES (1945 TO 1970) including drugstores, discount houses, depart- ment stores, catalogue showrooms, military By 1945, the Swiss accounted for 80 per cent of bases and sporting goods outlets. By 1970, the world’s total watch production, and 99 per Timex (having changed its name from U.S. cent of all U.S. watch imports. Swiss watch pro- Time) had established a manufacturing and/or duction was divided among nearly 2,500 distinct marketing presence in over 30 countries and companies, 90 per cent of which employed fewer become the world’s largest watch manufacturer than 50 people. Despite the 200-year dominance in terms of units sold. of Swiss watchmaking companies, much would Bulova was the leading U.S. manufacturer of change in a short period of time. quality, jewelled-lever watches. Integrating the highly accurate tuning fork technology bought U.S. Competitors from a Swiss engineer in 1959, after the main Swiss companies had turned down the technol- The main source of competition for the Swiss ogy, Bulova introduced Accutron in 1962. Five arose from two American watchmakers, Timex years later, Accutron was the best selling watch and Bulova. Using a combination of automation, over $100 in the U.S. Bulova also formed a part- precision tooling and simpler design than that nership with Japan’s Citizen Watch Company to of higher-priced Swiss watches, U.S. Time produce the movements for the Caravelle line, Corporation introduced in 1951 a line of inex- designed to meet the low-cost/high quality chal- pensive (US$6.95 to US$7.95), disposable, yet lenge imposed by Timex. By 1970, Bulova had stylized and highly durable Timex watches, expanded its international presence all around whose movements had new hard alloy bearings the world, and become the largest seller of instead of traditional and more expensive jewels. watches, in revenue terms, in both the United Hard alloy metals allowed for the creation of States and the world overall. durable watches at lower costs than jewelled lever timepieces. They also allowed U.S. Time to Japanese Competitors more effectively automate its production lines, further lowering costs. Like the U.S. industry, the Japanese watch Traditional jewellers were very reluctant to industry was highly concentrated. In 1950, three carry the brand for a variety of reasons. Its prices main competitors, K. Hattori (which marketed and margins were slim compared to those offered the Seiko brand), Citizen and Orient accounted by the Swiss, while the watches’ riveted cases for 50 per cent, 30 per cent, and 20 per cent of could not be opened, thereby eliminating the the Japanese market respectively. Their positions possibility for jewellers to generate aftersales were protected by the 70 per cent tariff and tax repair revenues.