The Rise of Swatch: How Switzerland Recaptured Its Watchmaking Crown
The emergence of mass-produced quartz watches nearly killed off Switzerland’s watch industry. This is the story of how the Swiss got their mojo back.
SECTIONS· The quartz crisis
· Roaring back with Swatch — the “second watch”
· The emergence of Swiss luxury watchmaking
· The rise of Rolex
· A growing customer base
The quartz crisis
At the turn of the 19th century, Switzerland dominated the global watchmaking industry. Swiss watchmakers based in the Jura mountains, backed by local iron and brass tradesmen and supported by the national government, focused on the production of highly accurate mechanical watches.
In the 1960s, Swiss watchmakers developed a prototype for a quartz watch. Unlike a mechanical watch, quartz watches used batteries and were more accurate. Still, Swiss watchmakers were not interested in making quartz watches. They “did not see the quartz watch as an extension of their craft,” says Ryan L. Raffaelli, a Harvard Business School professor.
After all, making a quartz watch did not require the type of skilled craftsmanship used by the Swiss to make mechanical watches. In addition, shifting to quartz production meant the Swiss would need to overhaul their mechanical watch production system.
Around this time, Japan was undergoing a period of rapid industrialization. Soon after the Swiss came up with their prototype, the Japanese invented a mass production system for quartz watches.
Using American-designed mass production systems, Japan had an edge in mass production, leading to lower costs of manufacturing. The lower costs were passed on to consumers, who began picking Japanese watches over Swiss ones. Soon, Japan was producing tens of millions of quartz watches every year.
By 1980, Japan had surpassed Switzerland to become the top watch manufacturing nation. Japan’s success brought its watchmakers — like Seiko Holdings Corporation (TYO: 8050) and Casio Computer Co Ltd (TYO: 6952) onto the world stage — while crippling the Swiss watchmaking industry. Between 1970 and 1980, Switzerland lost 60% of its watchmaking companies and two-thirds of its workforce.
Roaring back with Swatch — the “second watch”
Something needed to be done. A few major Swiss watchmaking groups joined forces, creating what’s today known as The Swatch Group (SWX:UHR). Along with adopting quartz technology, the company also focused on vertically integrating its manufacturing systems, slashing production costs.
Swatch positioned its watches as a cheap, fashion accessory, instead of a highly accurate timing device. This approach set it apart from Japanese quartz watches, which marketed themselves as highly advanced, tech-heavy devices.
According to watch historian Joe Thompson, Swatch’s main goal was to be so affordable and fashionable that buyers would keep coming back for more watches. This explains the “S” in Swatch, which stands for “second” — as in a “second watch.” To execute this marketing strategy, Swatch unveiled cheap watches with an endless variety of eye-catching designs and designer dials. By 1993, Swatch alone was selling 30 million watches a year.
The emergence of Swiss luxury watchmaking
Swatch’s success helped Switzerland regain its feet in the watchmaking industry. Taking the idea of “watches as fashion” one step further, Swiss watchmakers began positioning their more expensive mechanical watches as luxury goods.
The Swatch Group acquired Blancpain in 1992, and in later years, it purchased foreign luxury watchmakers Breguet and Glashütte Original. In 1999, European luxury group LVMH Moët Hennessy Louis Vuitton (MC:LVMH) began investing in Swiss makers of high-end watches — buying up Zenith, TAG Heuer, Hublot, and Bulgari.
The focus on luxury helped the Swiss face off later challenges, such as the rise of Chinese watch manufacturers in the 1990s.
Today, Switzerland makes just 2% of all watches globally, but captures about 50% of sales value. The industry has also grown by leaps and bounds: from CHF2.6 billion in revenue in 1970, Swiss watchmakers now generate around CHF20 billion in annual revenue.
The rise of Rolex
As Switzerland became the de facto name in luxury watch-making, a few players began standing out for their marketing and branding prowess. Leading the charge was Rolex, which had a long reputation for pioneering marketing in the watch industry.
Its stunts included displaying Rolex dive watches in aquariums, clocking land speed records, and getting precision certificates for its watches. The first James Bond movie — starring Sean Connery — featured a Rolex Submariner.
As Rolex’s then chief executive, Andre Heiniger, said: Rolex is “not in the watch business. We are in the luxury business.” Over the years, this singular focus on luxury branding helped Rolex — a single watch company not linked to any mega group — capture the biggest share of Swiss luxury watch exports.
A growing customer base
Between 1980 and 2008, the Swiss watch industry grew almost five times in value — going from CHF3.5 billion to over 20 billion CHF in 2020, according to data published by Watches of Switzerland Group (LON:WOSG), one of the world’s biggest luxury watch retailers. Increasingly, the bulk of value creation has taken place in the market for luxury watches above CHF3,000. Sales of these watches grew from CHF3.15 billion in 2000 to CHF14.18 billion in 2019, according to Swiss industry data.
We believe the key driver of luxury watch demand has been — and will continue to be — the growing number of high net worth individuals (HNWI) around the world (see chart above). After all, who else would be able to afford a Rolex Submariner or two? This is a watch that retails on second-hand marketplaces for anywhere between USD10,500 to USD141,000.
Thankfully for Rolex and its peers, the luxury customer base is growing fast. As the stock market grows increasingly vibrant, the rich have benefited from the benefit of compounding wealth over time. And because HNWIs grow their wealth from financial assets (like stocks and bonds), they have been able to acquire bigger chunks of non-financial assets, such as real estate.
For these reasons and more, HNWIs have experienced consistent net worth increases — even during economic crises. With this in mind, it’s not surprising that most HNWIs are based in the U.S. and China, home to the world’s two biggest equity markets.
According to the New York Times-bestselling book, ‘The Politics of Rich and Poor,’ there were about 500,000 American millionaires in 1979. By 1988, there were 1.5 million of them. In 2015, that number hit 10.4 million. It doubled again 5 years later, hitting 22 million in 2020, according to Credit Suisse’s estimates.
China’s emergence as an economic superpower has resulted in a growing wealthy class. Between the year 2000 and 2018, the number of millionaires from China went from 41,000 to 5.3 million — a 129x increase.
Together, the U.S. and China make up almost 50% of world’s HNWIs population. As more millionaires are minted in the United States, China and fast-growing economies like India, Credit Suisse expects the number of global HNWIs to cross 80 million by 2025.
A drop in a massive pool
Let’s circle back to watches for a moment. In 2020, the wealth of all HNWIs was USD191.6 trillion. Annual Swiss luxury watch exports were valued at CHF14.18 billion (USD15.5.93 billion) in 2019, right before the COVID pandemic.
Factoring in a 70% retail markup, that’s about USD26.3 billion a year.
If all existing luxury watch buyers bought 10 pieces over their lifetime, that works out to USD262 billion. A lot of money indeed — but barely 0.2% of the massive pool of HNWI assets.
And that doesn’t take into account the growing number of HNWIs globally.
In 2020, the number of HNWIs grew by 5.2 million, even as most economies were crushed by COVID-19. The exclusive group of “ultra high net worth” individuals — HNWIs who own more than USD50 million in assets — grew even faster. It added 24% more members, the most since 2003.
What do all these numbers mean? To us, it means the luxury watch market still offers fantastic growth potential. Even if luxury watchmakers were to sell two or three times as many watches in a year — customers have more than enough cash to lap it all up.
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