the swiss watch industry: challenges and my future role

What do you believe are the greatest challenges facing the sector or industry you would like to specialize in at IE?What role do youhopetobe able toplay in thesector or industry in themedium term?

LUCA ORDUÑA

Brand Management

At IE Business school, I would like to specialize on Brand Management with a focus on the luxury industry in Asia. I believe the Swiss watch industry to be a very good example as virtually no other sector is so focused on exports and reliant on achieving success in an international environment.

Furthermore, I am personally involved in the watch business. Over the last two years I was involved in setting up a distribution company for timepieces over Asia, with currently subsidiaries in Japan, HongKong and Taiwan. In those territories we support watch brands entering the market and help establishing the brand. I hope that in the future the company can become an important player in the region and further expand to other Asian regions like Mainland China, South Korea, India etc. In the long run I would like to become an expert for consumer goods especially for luxury and lifestyle products across Asia pacific with an understanding of how to build a brand, using the right channels and offering services and consulting.

Luxury Industry

Swiss Watch Industry

Asia

The Swiss Watch Industry: Brand management with a focus on Asia1. The Swiss Watch Industry 2. Challenges 3. My Future Role 4. Endnotes

KEY FACTS: Switzerland with quasi-‐monopoly in high-‐end watches • Switzerland produces only around 2.5% of the global production of watches (units) but it is by far the leading exporter of watches in value terms.

• Switzerland has a near monopoly situation in the luxury watch segment (mechanical watches).

• 95% of the watches produced in Switzerland are exported.

• Pronounced almost dead in 1970 and threatened by the Quartz watches from Japan, the Swiss watch industry made an impressive rebound thanks to a refocus on high-‐end watches and a global boom for luxury goods.

• A handful major conglomerates dominate the watch industry : Swatch Group (brands include Swatch, Omega, Harry Winston, and Tissot), Richemont (Montblanc, Piaget, Cartier), LVMH (Tag Heuer, Hublot, Zenith) and Rolex (Rolex and Tudor).

• The “Swiss Made” label, the key reference in the watch industry, can only be obtained if the watch is assembled and inspected in Switzerland, with at least 60% of the parts produced in Switzerland.

1. The Swiss Watch Industry 2. Challenges 3. My Future Role 4. Endnotes

KEY FACTS: Asia is the most important regionExports of Swiss wristwatches reached a new record in 2014 of CHF 21 billion CHF, making Switzerland the country with the highest export value of watches. From 2000 to 2014 the Swiss watch industry grew by 38%. Looking at the numbers over 25 years, the growth is even more impressive: Watch sale more than quadrupled. Despite this impressive growth, the quantity (Number of watches) exported is smaller than it was in 1988. This can only mean one thing: The average export price must have increased significantly. In 2000 the average price was 310 CHF compared to 730 CHF in 2014.

With 11.8 billion CHF (2014), Asia is responsible for over 50% of all Swiss watch exports. Hong Kong is by far the most important market with a share of 18.5% at the end of 2014, followed by USA (10.7%) and further two Asian countries China (6.3%) and Japan (6.0%).

Over the last years, Asia was as the main driver for growth in the Swiss watch industry. In overall terms, Asian countries were responsible for around 70% of the growth in exports in the 2000-‐2012 period. The growth came mainly from Hong Kong and China, which together generated more than 40% of the growth. Singapore, the United Arab Emirates (UAE), South Korea, Taiwan, Saudi Arabia, and Japan are also among the 15 countries that provided the biggest contributions to growth.


CHALLENGES IN SWITZERLAND

Swiss Made LabelSupplier SituationInvestment in facilitiesCurrency (CHF)

CHALLENGES IN (ASIAN) MARKETS

Lower growth in main export countriesImportance of travelers and less regionalism Costly set up of distribution systemNegotiation power of main playersExpensive advertisement costsImportance of Digital MediaChange in consumer behavior because of new product categories (smart watches)

CHALLENGES OVERVIEW


STRUCTURAL CHALLENGES IN SWITZERLANDIn Switzerland itself, the companies are facing several structural challenges which combined are resulting in an upward pressure on the prices.

One reason for the upward pressure is the movement production. The mechanical movement is the heart of any watch. Up until recently, most of the brands bought their movements from ETA, a company owned by the Swatch Group. This made the Swiss watch companies highly dependent on the Swatch Group. Swatch Group made the decision to limit the deliveries of their ETA movements to competitors. Therefore the brands with limited or without own movement production will need to either negotiate independent deals with the Swatch group or invest in creating their own movement.

The big customers like Richemont and LVMH, as they are able to buy in a bigger quantity than independent brands, will probably still be delivered by Swatch Group with ETA movements. Still brands have to more and more look for alternatives. This is why brands all over Switzerland need to invest more and more into the construction of new production facilities. It is a big challenge to produce at the same quality and price like ETA as they have a critical mass and benefiting from experience, facilities and economies of scales. For other brands, the investment in production facilities, Know-‐how of movement production and less quantity will increase the prices of the movements.


STRUCTURAL CHALLENGES IN SWITZERLANDThe “Swiss Made” Label is extremely valuable in the watch industry and is used by the brand as marketing and quality label. It allows to sell the watches at a certain premium. The parliament passed in 2013 a “Swissness” amendment with stricter criteria governing the use of the Swiss Made label, stating that at least 60% of the production costs must be attributable to operations in Switzerland and that the watch must be developed, assembled and inspected in Switzerland.

This leads to greater demand of Swiss watch components and combined with the limited supply from Swatch Group (previous slide) further intensifies the need for brands towards vertical integration and to invest in production capacities.

Another challenge is the Swiss Franc’s exchange rate. Since the Swiss National Bank in January gave up efforts to cap the franc’s value against the euro, the Swiss currency has strengthened by more than 10 per cent. Furthermore, the decline of the euro, ruble, yen and renminbi and the rise of the dollar have also contributed to watchmakers’ headaches.

The limited supply by the Swatch group, the increased demand of Swiss made parts through the Swissness initiative, not having the possibility to shift production abroad and therefore be more exposed to the exchange rate which developed adversely for the brands, are testing the pricing power of Swiss Watchmakers. This can have an adverse impact on the competitiveness especially for the smaller and mid-‐sized companies in the lower and medium price range. Brands had to increase and renegotiate prices, which is still easier in the high-‐end watchmaking. Nonetheless, not all brands can adopt price increases the same way, especially in the lower-‐prices market segments .


ASIA: LOWER GROWTH IN MAIN MARKETSEven though the Swiss watch industry is very diversified, the growing significance of the Chinese market poses a degree of cluster risk for the industry. Thanks to a growth jump, mainland China moved up to third place and accounted for 8% of Swiss watch exports in 2012. If Hong Kong, Macao, and Taiwan are also included, by the end of 2012, 30% of the watch exports went to the Chinese Market. It is not ultimately surprising that those growth rates could not continue in the same way, but, as indicated by the graph, since 2012 the sales is declining.

This declining intensified in 2015 and for example in July 2015, all the eight leading markets were down, often steeply.

The pessimism about China and Hong Kong can be explained by the lower rates of growth in the economies of many emerging markets, the devaluation of Yuan and also the anti-‐corruption and anti-‐kickback legislation in China (crackdown on exorbitant spending of party official)

The picture for Hong Kong is even worse, as currently a lot of challenges are occurring. There is the effect of the strong Swiss Franc, falling tourism from China to Hong Kong (also due to less stringent conditions for Chinese people to get travel visas to other destinations) and the effects of the Umbrella Revolution. This decline has started to create a build-‐up in inventory and inventories have reached a 6-‐10 months of sales of some brands.


ASIA: CHINESE TOURISTSBesides the sales in China, one of the most important customer group are and continue to be the Chinese travelers. The high sales tax is reducing the domestic purchasing and the Chinese customers take advantage of buying the Swiss watches abroad at a lower price. Studies say that in 2012 37% of the Chinese travelers bought a watch during their trip. For a long time, around half of the watches were bought in Taiwan, Macao or Hong Kong. In Europe, the most sales occurred in Paris. Because of political developments and less stringent rules for visa for the Chinese, a lot of new destination came into focus of shoppers. Therefore it is crucial for the major brands to have presence where the Chinese customers are traveling to. The head of the LVMH watch division, Jean-‐Claude Biver, for example said: “We will follow the Chinese customer wherever he goes and offer them the possibility to buy our watches”

From 2013 to 2014, Sales of watches to Chinese in South Korea for example rose significantly but dropped even more after the virus MERS broke out. That followed a significant increase in Sales in Japan because the Yen is at lowest level in real terms since early 1970 and has depreciated almost 50% against the renminbi. This shows the challenge of the watch industry as it is necessary to have the desired products available at the right time at the right place. Furthermore the Chinese market has to carefully taken care off, so that the Chinese buy the specific brand while traveling. The internet and the flow of tourist have removed regionalism and brands have to think and act globally in every kind of aspect like product planning, availability of product and marketing.


CONTROLING DISTRIBUTION CHANNELSAs already mentioned on the last slide, optimization of sales channels is one of the important strategic point of the watch brands. Well established, financially solid brands have to decide to what extend and in which markets they want to handle and control the distribution by themselves. Smaller brand face the challenge that vertical integration is very costly and often not a strategic option. Therefore they must evaluate the most efficient method of gaining access to markets.

In the past, almost all luxury watches were sold via specialist retailers and regional retail groups. Through the market consolidation and the increasing strength of larger groups, the groups have an increased influence on the specialist dealer and it gets challenging for smaller and medium brands to obtain shelf space. Less known brands represent as well a certain financial risk for the distributor and the retailer. This makes it difficult for smaller and independent brands to get into a retail store and if space is offered, the watches are mostly only on consignment. Therefore the establishment of a global presence for brands is costly and needs a lot of experience in the different markets. The high costs of managing and the difficulty of finding a distributor for the brands made them often try to directly contact retailers or sellthe brand over internet. This leaded to a confusing situation in some markets where the purchasing experience is unclear or not available to many customers. Often potential customers don’t know where and when certain products are available.

Well established Brands from the big groups try to control the distribution by establishing monobrand boutiques and M&A in vertical direction by acquiring suppliers and retailers. This allows the brands to control the environment and sales process (trainees staff to transmit brand values, control discounts/grey market, control collection). Furthermore it is easier for the brands to better supply the actual needs at distribution points and react to changes.


HIGH ADVERTISMENT COSTS and DIGITAL MANAGEMENTIt gets more and more important to spend a significant amount on marketing efforts. The major brands invest a lot on sponsoring selected events to strengthen their brand image and position. Sports plays an important role in the marketing mix and brands sponsor marathons, selected tournaments (golf, tennis) and teams (soccer, F1 racing, sailing). Furthermore brand ambassadors like tennis players (Roger Federer, Stanislav Wawrinka) are an integral part of the marketing. Last but not least product placement in movies is gaining in importance due to the recent blockbusters (007).

Those strategies are more often used by large brands that can afford them. Small independent brands, which usually have limited marketing budgets, focus more on social media and the internet, as these offer a better opportunity to reach a global audience and engage with target customers at a lower cost.

Online marketing campaigns, homepage, social Media and Blogs play more and more a role during the buying decision. Brands need to permanently monitor the online activities and it gets necessary to install teams which support those efforts.

An increasing number of watch brands are experimenting with the possibility of online sales channels. A challenge is to balance exclusivity and ubiquity, mass and class. The goal is to make everyone as aware as possible of the brands promise but keep the achievements of the brands exclusive. A big obstacle of online sales are the counterfeits. Furthermore, through the high growth rates over the last year, during a slowdown of the economy, a lot of second hand watches could become available.


New Product categories: Smart watchSmartwatches are increasing the total market for watches but are as well in competition with the traditional Swiss watch brands. Especially cheaper brands are hit the most by the new product category which is steadily establishing itself and soon to be bigger than the tablet market. In the USA already every 4th person is said to be wearing a smartwatch or a so called wearable, giving access to health relevant data. Especially quartz watches have to be more and more ’intelligent’. It is expected that sooner or later around 30-‐50% of the Quartz watches exported from Switzerland have a smart function. Compared to mechanical watches, in this segment the worldwide competition is undoubtedly bigger as major electronic companies are fighting for their share (Apple, Google, Amazon etc. )

The mechanical watches still offer a different buying argument, as especially the longevity of a mechanical movement is celebrated. But as well brands in the middle segment can no longer neglect the trend towards smartwatches or devices with intelligent functions on the wrist as recent products of Tag Heuer, Breitling, Victorniox and Montblanc show. The market for watches in total is increasing but it is yet to show how the traditional Swiss watch industry is affected by the changes.


Development of export of Swiss watches in different price segments

Development Sales in Mrd $ of conventional watches and smartwatches (grey: smartwaches, orange: traditionall watch industry not Switzerland, orange

My role: Building up a distribution in Asian countriesMy goal is to establish together with my business partners a new distribution network in Asia specializing on independent watch brands, cultivating the tradition of Swiss watchmaking with a focus on technological innovation. As described in the slices above, especially for independent small and medium sized brands it gets more and more complex to manage their brand globally. The goal of our company is to become become a strong partner for upcoming watch brands and offer those brands efficient distribution and market expansion services across Asia.

In 2014, my business partners and me started a new company with the headquarter in Switzerland and subsidiaries in Japan, Taiwan and Hongkong. The goal is to find a good mix between global management with standardization and regional management with localization. The office in Switzerland helps us to keep close contact with the brands locally and identify new and innovative watch brands. The subsidiaries in three major Asian markets give us a certain credibility and we can profit from knowledge exchange between the markets. Therefore the brand message and image can be equally conveyed in our markets. Having a local team in Japan, Taiwan and Honkong allows us to cope with the challenges of the local market. Together with the brands we want to grow in the current markets and open up new markets together.


My role: Be connected over AsiaThe backbone of the Swiss Watch industry are without doubt the big players like Swatch, Richmond and LMVH. Nonetheless, every industry needs some entrepreneurial spirit and there are a lot of very interesting independent watch brands. I want to create a success story with a watch brand in Asia and then further support and consult brands in Switzerland with my market experience.

I am currently located and working in Japan with occasional business trips to Hongkong, South Korea and Taiwan. Through this I experienced how the major brands compete within the markets. On one hand I want to build up a profound knowledge of the Asian markets and the needs of Asian luxury consumers and on the other hand I want to deepen my knowledge of the watch production in Switzerland. With this expertise I intend to build a bridge and transfer know-‐how between the Asia and Europe respectively Switzerland. By consulting upcoming brands how to be successful in the Asian market I hope to support to further promote the Swiss watch industry.

The goal for the company is to have a handful watch brands in different price segments and with different unique selling positions. By uniting several independent brands and manage them in different regions across Asia we can achieve a certain strength and cope with the challenges of the industry.

In the current early stage of the company, we try to identify the best possible brands. Furthermore I challenge myself to deepen the business relationships for example with local partners in Japan. Within the market I need to build up a reliable basis of contacts in the retail business and gain credibility in selling high-‐end watch pieces to valued customers. I want to build up a network in Japan and further regions and be well connected with the wholesale and retail business, the media people, influencers and watch lovers.


Besides the Asia wide management of a brand, my goal is the set a special footprint in the watch industry in Japan and make a small contribution to support Japan to become a more international place and promote entrepreneurship.

Japan has a incomparably rich tradition and cultural heritage. This is as well a reason why the business manners are very traditional and companies are organized in a hierarchic way, making it difficult for young employees to stand out with their ideas. I hope my company in Japan we can be a role model and by getting bigger, I wish that our voice will have a certain value. Furthermore, I believe that trading with foreign goods can help to convey a message and make people learn about other countries. This is why I want to be involved sooner or later for example at the Chamber of Commerce and Trade.

Relating to the watch industry, especially in the current digital age with the fast moving technology industry, I want to promote, as a young professional in Japan, European craftsmanship like the Swiss watch industry and explain young people the fascination of mechanical watches.

My role: Overcome challenges in Japan


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