IIM Calcutta

Strategic Management

World Watch Industry

December 21th, 2009

Submitted By:

Group A5 – Section A

Gautam Adukia 022/46

Ajay Bansal 023/46
Alpesh Chaddha 026/46
Aman Deep 027/46
Amit Gupta 032/46
Amit Nagdewani 036/46
Amol Deherkar 040/46
Ankit Jain 048/46
Avinash Pandit 085/46
Ankit Kumar Singh 404/16
The World Watch Industry
The worldwide watch and watch movement production in 1970 was around 175 million units
and valued at about $1.3 billion dollars. In volume terms this was a fourfold increase from
the production in 1950. Although there were talks of market saturation, the industry showed
no signs of relenting.
Major Players: There were four major players in the watch markets and they accounted for
almost 80% of the world production. Switzerland led the pack followed by Japan, USSR and
United States. The production of Communist countries USSR, Germany and China
consisted of 17% of the world production but since this stayed in the eastern bloc, these
countries are not a taken into perusal.
Markets and Industry Structure
Switzerland: The Swiss watch industry was highly fragmented. Though destabilization
during late 1920s had given rise to major associations and government regulations, before
consolidation was allowed in 1966, more than 2000 firms existed in various capacities.
Consolidation drive in the late 1960s and early 1970s led to a reduction in the number of
firms to around 1000.
The industry existed as a two tier system of component manufacturing and watch assembly.
The manufacturing was further subdivided into specialized parts of escapements, balance
wheels, hairsprings and Jewels. This specialization and a highly skilled workforce were a
major contributor for the rise of Switzerland as a powerhouse in the watch industry.
Beginning second Half of 1960s also saw investments by Swiss firms in U.S watch firms for
gaining a firm ground in U.S markets.
In the watch markets, Switzerland was mainly an export oriented country with 97% of
production going for exports. Though it was involved into the technologies of Jewel Lever,
Pin Lever and Electric and Electronic watches, Jewel Lever watches constituted of around
82% of its exports by value. The major markets for Swiss watches were U.S, Europe and
Asia. U.S was an important market for both Pin lever and Jewel Lever watches. Eastern
markets were accessed via Hong Kong where almost 85% of the pin lever movements were
routed.
Japan: Japanese watch industry started its resurrection after World War II. There were only
four producers in the Japanese watch industry. Government policies helped stall proliferation
of marginal watch producers and encouraged highly concentrated industry structure.
Japanese producers competed on price on account of factors of zealous workers ready to
work at low rates and advances in mechanized and automated production techniques
combined with mass production of standardized movement and watch models. When the
cost of labour started to rise, Japanese firms shifted some of their production facilities to
Hong Kong.
Japanese exported their watches to Southeast Asian markets, Europe and U.S but almost
two thirds of all Japanese watch and watch movement exports were destined for U.S or
Hong Kong. Japanese initially produced only the Jewel Lever watches, later venturing into
electric and quartz technologies. They marketed complete line of watches, from low end to
expensive, in the Asian markets but reserved only the medium segment watches for the U.S
markets.
The US: The US companies had always struggled to cope with the labour requirements of
watch making. Watch making by traditional techniques was highly labour intensive and
called for its brand of skilled labour. Neither of these requirements was easily met in the US.
Thus as price cutting started from 1960s many of the US watch organizations became
marketing organizations, engaged in marketing Swiss and Japanese watches. Only few
domestic manufacturing organizations remained. The manufacturing firms concentrated the
domestic facilities for high technological and low workforce watches while opening
manufacturing facilities around the world for labour intensive manufacturing.
The US was both the world’s largest watch market and also the largest net importer. Of all its
domestic needs, 40% were manufactured at home and remaining 60% were imported from
foreign countries or from Virgin Islands.
Major Technologies and R&D
Major technologies were Mechanical (Pin Lever, Jewel Lever) and Mechanical-electrical
(Electric, Tuning Fork and Quartz Crystal). The display technologies of LED and LCD
combined with the electrical technologies and Integrated Circuitry were also giving rise to
purely digital watches.
Mechanical: Pin Lever watches used simple escapement mechanism and used metal pins
for the jewel tipped teeth in anchor fork. This reduced the cost significantly but also led to
lower performance than the Jewel Lever Watches. They were priced in the
Jewel Lever watches used synthetic jewels at all the critical pivot and contact points. They
had longer durability and higher accuracy.
Electro-Mechanical: Electric Watches used current from battery to drive balance wheel
motors and thus involved lesser number of mechanical parts. They could be produced in
highly mechanized processes so the cost reduction potential by increasing scales of
production were immense.
Tuning Fork watches used the vibrations of tuning fork caused by electric currents to gauge
time increments. This resulted in highly accurate measurements.
Quartz crystal watches used quartz crystal vibrations as a driving force for either electric
motors as in case of electric watches, or for exciting tuning fork devices. This resulted in
even greater accuracy. But they had to be adjusted for vibration frequency gain and were
sensitive to shock and temperature.
Digital: Digital technologies involved using electric, tuning fork or quartz crystal technologies
in combination with ICs and LCD or LED displays. This would give rise to purely digital
watches involving zero mechanical parts. These watches had very high potential for cost
reduction by mass production using economies of scale. The downside was that LCD/LED
technologies were currently underdeveloped.
Research & Development: The Swiss Industry was spending around $2.5 million in R&D
which amounted to only 0.8% of their sales. Since the Swiss watch manufacturers were not
involved in any other sector, their technological knowledge was limited. Japanese watch
makers had diversified portfolio involving high end technological products and this gave
them in-house technological know-how. U.S watch manufacturers were involved in
government supported research and development work and thus were in the most
advantageous position as far as technological edge was involved.
Swiss Dominance in the World Mechanical Watch Industry

First Mover Advantage: The manufacturing of portable watches started in Europe (France,
Germany, and Italy). In France, conflict between French Protestants (called Huguenots) and
Catholic churches led to armed wars. Huguenots, who were traditionally clock and watch
makers, left France and took refuge in Geneva. Geneva was known for jewellery by skilled
goldsmiths and enamellers but wearing jewellery was declared forbidden. The combined
efforts of these two communities brought about the existence of the Swiss Watch Making
industry, over 300 years ago. Independent, family oriented units were set up in Geneva and
later the rest of North-West Switzerland. Watch making remained a family business for a
long time, with skill-sets being passed on from one generation to the other. As a result the
Swiss became the most skilful craftsmen in the watch making arena.
Quality The transfer of skills and capabilities through generations, coupled with awareness
of the latest watch making trends and fashion, enabled the Swiss to provide unmatchable
quality which was popular throughout the world.
Learning Curve: Swiss watch making industry was dominated by family oriented
businesses. In this craftsmanship and knowledge of making watches were transferred from
one generation to the other. As a result the Swiss watchmakers were much high on the
learning curve than their counterparts in other countries.
Competition: For decades, there was no country which stood in direct competition with the
Swiss. They were supplying in all the major markets of the world, and remained a dominant
player in each one of them.
Entry Barriers
Skilled Craftsmen: The (un)availability of skilled labour remained the most important barrier
for entry of many nations into the mechanical watch making industry.
Brand Value: A strong brand name is another requirement for entry into the watch market.
The Swiss had established “Swiss made” as a brand by supplying good quality watches for
decades, together with the right promotional campaigns. Rolex and Omega were also well
known brands throughout the world.
Intellectual Capital: Swiss government made it mandatory for the watch making firms to
take approval for any transfer of knowledge regarding the making of mechanised watches.
This was done to avoid any increase in competition and to stop any new entry from foreign
firms into this industry.
Other Regulations: Swiss government had enforced restriction on changing the structure of
the watch-making industry. Firms were not allowed to acquire or sold out to other firms. This
also restricted entry of foreign players in this industry.

Change in Market Dynamics: Swiss Losing Market Dominance

The Swiss lost their dominance over world watch market due to the following reasons:
Fragmented market: Being largely composed of family owned business units, the Swiss
market was highly fragmented. There were around a thousand firms involved in
manufacturing and assembly of watches in Switzerland. This led to lower operational
efficiencies and no scope for automation or mass production. Further, promotional activities
were for “Swiss made” brand rather than individual company brands.
Standardized and Low Cost Products of Competitors: the Swiss owned smaller and un-
standardized production facilities. The costs of production were high leading to overall higher
retail prices. On the other hand, the Japanese watch industry was consolidated with four
firms occupying almost the entire market. They utilised mass production and economies of
scale, resulting in lower costs, while quality was still comparable to the Swiss watches. They
started exporting these products to the US watch markets, largest watch market in the world.
Due to this Japan was able to jeopardise Swiss watch making interest in two ways:
➢ Japan started capturing the US markets which was also the largest market for Swiss
imports. With very low home demand this was going to affect Swiss industry.
➢ Jewel-lever type watch movements and watches were five times in value to pin type
for Swiss imports. Japan producing low cost jewel-lever type products was affecting
Swiss business.
Lack of Mass Merchandising: Timex was the pioneer of mass merchandising of watches of
low and medium range. This had resulted in ubiquitous presence of watches. Swiss were not
able to market their products in this manner. Their main distribution partners were jewellers.
This had resulted in erosion of market share in low and medium range segment.
Less Research and Development: Swiss had started two major research and
development programmes in 1960s for the development of electronic watches. However,
investment in these two programmes was only 0.8% of industry sales which was rather
insignificant as compared to investments by the US and Japanese firms.

A Snapshot of Japanese Watch industry in 1970

The Japanese watch industry has seen a steady rise from producing for its home consumers
to being a major exporter of watches and components. The oligopolistic manufactures in
Japan did not have to waste resources in competing internally and thus could concentrate
better on their efficient and cost effective mode of production.
The dramatic growth of Japanese economy, at almost twice the rate of growth in developed
countries, has enabled the Japanese manufactures to further upgrade and enlarges their
production facilities. This has further strengthened Japan’s position since the competitors in
other countries have stayed away from making such large scale capital investments.

• Only a few major manufactures in the space as compared to a fragmented

industry with over 1000 players in Switzerland
• Concentrated on manufacturing jeweled lever watches and left pin lever to
the others
• Marketed jeweled lever watches at prices comparable to pin lever watches
in the bottom segment
• At the same time had a range of expensive watches for the top segment
• Competed in the medium priced category
• Mass production approach vs. prestige watch maker
 Powered By

• A ready supply of disciplined and zealous workers available at low wages

• Automated production techniques like the conveyor belts which enabled
the productive use of unskilled labor (further reduction in cost)
• Few vertically integrated industry under the control of a single
management to avoid conflict of interest.
• Mass production which facilitated further reduction in cost.
• Movement of production to countries with still lower wages of production
like Hong Kong in response to increasing wage rates
• Diversification of the watch companies into other technology products
which could impact the innovation in watch industry

Impact

• The Japanese watches had the ability to undercut their Swiss counterparts
by 15% to 45% on price.
• Seiko and Citizen: major supplier of watch movements and components to
the US industry.
• 5% of all the watches in US directly from Japan
• 50% of all components imported into Virgin Islands coming from Japan

Upcoming changes and sustainability in future

Manufacturers have diversified into other technology product, which would facilitate joint
research and development for watches and distribute the fixed cost of R&D over other
products. This will not only provide for technologically superior products in the future but also
keep the research budget to the minimum.
The trend suggests that the industry leaders of the future will be those firms which can
master array of new technologies and mesh the technologies with the market place.
Japanese watchmakers seem well placed in this regard and as far as mechanical watch
industry is concerned they look certain to pose a threat for their US and Swiss counterparts.
Advent of Electric and Electronic Watches
The advent of electric/electronic watch will change the industry structure in many ways:
➢ The low cost advantage due to labour won’t last for long as labour costs account for only
10% of manufacturing costs in electrical watches. The industry leader in electric watches
will be the one who can capitalise on technological breakthrough to improve efficiency as
well as costs of their products. The watch will move from a luxury item to a utility item.
➢ As the technology for electrical watches is easily available, there will be a large number of
new entrants who can produce mechanised products at low costs. They will either need
to move up the value chain (which is difficult as there would be progressive price
reductions without decrease in quality) or have volumes to create profitability.
➢ When the cost and quality of electrical watches will surpass mechanical watches, it will
create additional demand for them. This would ensure a volume game which will drive
their prices down further. Hence electrical watches will dominate the utility space.
➢ Although the electrical watch might not dominate the market share in short and medium
term, it will hurt the profitability of the mechanical watches to a great extent.
From the above analysis it is clear that it would be quite difficult for Swiss to dominate the
electrical watch segment which in turn may dominate the whole world watch industry. The
two options ahead of them are to acquire companies which are investing heavily in newer
technology to maintain the technology advantage. The second option they have is that they
should capitalise on the mechanical watch segment by positioning it as a luxury item.
Keeping in mind, the Swiss industry invests only 0.8% of industry sales in research and
development, the second options seems plausible.
The two contenders for the electrical watch segment to dominate would be Japan and the
US watch industries.
US: The US companies were mainly marketing firms which had acquired foreign watch
companies to maintain their low cost advantage. They also had advantage of high end
technology due to government supported research and development work but were not
linked with production processes as closely as their Japanese counter parts. The US
companies had the advantage of sourcing the technology for electrical watches through their
foreign subsidiaries and promoting in the world’s biggest watch market under their own
brand name.
Japan: The Japanese watch industry has been a pioneer in the old jewel-lever watches
mainly due to low wage rates, advanced mechanised and production techniques, vertical
integrations and mass productions of standardised movements. More over Japanese watch
makers had a diversified portfolio involving high end technological products and this gave
them in-house technological know-how. One of the earliest quartz watches was developed
by Seiko. Also any technological innovation would easily seep into world market as they
control the world market of watch movements which might help them dominate the world
watch market in future.
From the above discussion, Japan seems to dominate the industry in future as it virtually
controls the watch movements market and seems to be highly involved in technological
research for the electrical watches.