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World Watch Industry
December 21th, 2009
Submitted By: Group A5 – Section A
Gautam Adukia Ajay Bansal Alpesh Chaddha Aman Deep Amit Gupta Amit Nagdewani Amol Deherkar Ankit Jain Avinash Pandit Ankit Kumar Singh 022/46 023/46 026/46 027/46 032/46 036/46 040/46 048/46 085/46 404/16
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.
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 unstandardized 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.
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