There is a lot of talk about ‘the economy’ today, as usual. Personally, my favourite quip is to remind people of Canada’s extraordinarily high household-debt ratio, predicated on the likes of car loans and consumer debt. Well, things are a bit different in Switzerland, where the watch industry has always been significant to the economy. And for most of the 19th and 20th century it has been one of the country’s biggest exports.
Switzerland faced a challenge in the late 19th century as American companies were beginning to industrialize their production processes. Swiss companies, most of which were in the north-west of the country historically, were now competing with Americans who could offer their watches at a fraction of the price. Swiss latched onto the new technology, with Longines among the first Swiss brands to build a new factory capable of mass-production, led by their technical director Jacques David.
Watchmaking: A Key Industry in Switzerland
Going back to the mid-1800s before pocket watches and the like were industrialized, and towards the end of the century, Swiss watch exports were always around 10% as a percentage of foreign trade. In fact, watches were the second most important export after textiles until the mid-20th century. Between the 1930s and 1950s the share of foreign trade was about 20%. So certainly, a very important industry, and I believe we all know the tale of the French Huguenots who were forced to move to Switzerland and brought their skills with them, as a starting point for watchmaking becoming so important in Switzerland.
Longines Factory in 1950 / Credit: Longines
The industry was especially important in the early 20th century when it was still the second most important export but was also a much higher share of exports than previously, jumping to the aforementioned ~20%. Moreover, Switzerland already controlled the world market by a significant majority in 1900. In 1901 an official census shows that the country had nearly 700 watch companies employing about 25,000 workers! That’s out of a population of about 3 million at the time. Now, it is important to note that factories were defined as companies that employed more than 5 people. In fact, only about half a dozen watch companies had a workforce exceeding 500 people in 1905, Longines among them with 853. This was at a time when Swiss watch exports were about 10 million watches per year. Longines, the second largest company accounting for only about 1%! In short, a highly fractured market, ripe for the mergers and acquisitions that were to come.
Protectionism Beings in the Swiss Watch Industry
It was in the interwar period that Switzerland enacted its first ‘Statut horloger’. These were laws created to protect the Swiss watch industry, particularly from chablonnage, the practice of selling parts abroad for reassembly, in avoidance of established customs taxes. 1936 saw the introduction of an export and manufacturing permit for Swiss watchmakers. Previously, groups of businesspeople who were already feeling disdainful towards the practice of chablonnage had organized themselves into associations in an attempt to curb it, one of which was called Fédération Horlogère founded in 1924. While it may have put a strain on the balance sheet of some smaller operators – remember the highly fractured market that existed at the beginning of the century – larger companies could relish in the fact that their high-quality Swiss products would not be undermined by cheaper variants on the global market, to an extent at least. This was the precursor to having a full-on quality control law, which was actually introduced in 1972 – the law that regulated what could be marked ‘Swiss made’. This was also the first in a series of laws that went between limiting export and liberalizing it, throughout the 20th century. Like a 1952 law that saw tariff freedom be introduced after decades of limitations.
Tissot Seastar Automatic ref. A550-X on its original bracelet, for sale here.
Swiss Watch Cartels Emerge
The cartelization of the Swiss watch industry is another important consideration, one that goes back to before the laws above were first enacted but was certainly helped by them. Ébauches SA was founded in 1924 as a union of different ébauches, this began like the aforementioned HF association, also founded in 1924, as an attempt to unite against the effects of chablonnage. Then, in 1931 ASUAG was created, bringing under its umbrella Ébauches SA and other independent ébauches. ETA at the time was still a subsidiary of Eterna and was effectively expropriated from Theodor Schild for this government sponsored corporate shakeup, it too was incorporated into ASUAG. The creation of ASUAG was a strategic move both by business elite in the country and the government at the time to exert control over the industry. By centralizing the production of watch components and movements, they were able to improve the supply chain for watchmakers, but this also assured that any technological advances were kept close and exports of components were limited. SSIH was also founded in 1930, merging Omega and Tissot.
This is where the creation of the Swatch group comes in and the cartelization takes an even greater shape, as competition from Japan caused the Swiss industry to crash, with employment falling by more than half between 1970 and 1985. There are many factors that played into the demise of the Swiss watch industry at the time, but as a result both ASUAG and SSIH were spiraling downwards, and fast. Three large Swiss banks, UBS, Credit Suisse, and the Swiss Banking Corporation, were convened to restructure the two, ultimately investing a further 900 million CHF, with the consortium now controlling the companies. This is the lifeline the companies needed as they had been bleeding cash before, seeing sales decline considerably and old inventory pile up throughout the 1970s.
The Birth of Swatch Group
This is when the banks tapped Nicholas Hayek, a consultant, to reorganize the new group, Hayek who advised on merging the two companies in a new entity called ‘Swatch Group’, eventually buying out the shares of the newly formed Swatch Group from the banks with the backing of new investors.
And with that we’re more or less in modern times, having gone from the early industry, even mentioning the Hugenots, to touching on the difficulties of competing with American industrialization, the introduction of protectionist policies and market fragmentation, to finally the cartelization of the industry.
In the modern era the watch industry has continued to face its fair share of challenges. COVID-19 has, of course, impacted several facets of the industry. What has been excluded, however, is of interest historically, as in both the Great Recession and Depression this segment of the market fared better than the others. That is the luxury segment. Or the collector’s market, as in general collectors may not be affected as much as the rest of the population, as many collectors already fit into certain socioeconomic groups. Conversely watch sales/watch brands on the lower end of the market have been impacted more every time. There are many examples of this today, but notwithstanding other areas have been impacted greatly. Retail is the obvious one as in many countries it has been shut down entirely, forcing both large and small retailers to rely on e-commerce. Tourism has also greatly affected retail; you can grasp even from some of our interviews that tourism can play a noteworthy role in a company’s bottom line.
IWC ref. R 1009 A in 18k yellow gold, for sale here.
Before this however, Swiss watch exports were already on the decline in key markets in East Asia. Quartz watches have also seen a decline in demand, as the market has continued to turn away from ‘utility’ and more towards the emotional aspects of watch collecting. There’s also been the introduction of new platforms, and the acquisition of many, like the growth of Hodinkee and its acquisition of Crown and Caliber. Deloitte noted the growth of the second-hand market in their 2020 report on the watch industry, with the growth of online sales being a key driver. This is certainly competition to keep an eye on from the perspective of the Swiss.
It seems that although we are in a new age with what are really mostly new sales channels, many aspects remain of the old industry. On one hand, the cartelization of the industry has led to most brands being in the hands of a few people, often with little to no connection to Switzerland itself. And Switzerland continues to rely on ever-competitive export markets for growth in watch sales, this seems to be an important theme in the history of the Swiss watch industry, as many of the effects described above are, in effect, a result of this dependence. Of course, with 10 million people or so you can’t expect the Swiss to buy millions of timepieces themselves, but it does leave me wondering whether or not we will see a power shift from Switzerland to perhaps another locale in the watch industry. Or have we already?
By: Andres Ibarguen
Read more:
Donzé, Pierre-Yves. The History of the Swiss Watch Industry. Second edition. Peter Lang. November 7th, 2012.
“Population: Demographic Situation, Languages and Religions.” European Commission, December 2nd, 2020, https://eacea.ec.europa.eu/national-policies/eurydice/content/population-demographic-situation-languages-and-religions-115_en.
Donzé, Pierre-Yves. “From the Industrial District to the Global Firm: Swatch Group and the Swiss Watch Industry, 1960-2010.” Revista de Historia Industrial, January 2017, pp. 191-213.
Boillat, Johann. "Statut horloger." Dictionnaire historique de la Suisse (DHS), May 1st, 2012, https://hls-dhs-dss.ch/fr/articles/013790/2012-05-01/.
Schluep Campo, Isabelle & Aerni, Philipp. When corporatism leads to corporate governance failure: the case of the Swiss watch industry. Banson Cambridge UK, June 2016.
Donzé, Pierre-Yves. “The Comeback of the Swiss Watch Industry on the World Market: A Business History of the Swatch Group (1983-2010).” Discussion Papers in Economics and Business, April 2011.
Credit to: Varnholt, Dr. Burkhard & Alder, Oliver. “The era of strong growth is over in Switzerland too.” Credit Suisse, March 2019.
Grampp, Dr. Michael & Rohr, Damian & Egerth, Kristi & Buti, Mauro. “The Deloitte Swiss Watch Industry Study 2020.” Deloitte, 2020.