The Richard J.

Fox School of Business & Management

Temple University, Philadelphia PA 19122, USA

Branding Time: Swatch and Global Brand Management 1

RAM MUDAMBI, 2005

ram.mudambi@temple.edu

Societe Suisse de Microelectronique et d’Horlogerie (SMH) was formed in 1983 by

merging the two leading Swiss watch groups, SSIH and ASUAG. SMH and its main
brand, Swatch, was the outcome of crisis for the Swiss watch industry. In a few short
decades, foreign competitors with superior technology had all but eliminated the Swiss
from a global industry that they dominated for centuries. The creation of Swatch is the
extraordinary story of how the Swiss re-invented their watch industry. Recognizing the
crucial role of brand intangibles to its future success, SMH changed its name to the
Swatch Group in 1998. Now in the new millennium the Group needs to chart a strategy
to preserve and enhance its stable of global brands.

A brief history of time

From the earliest periods man has used some form of time measurement, be it only the
seasons of the year or phases of the moon. As people began to congregate in villages,
and forms of religious ceremonies began, more refined methods of time measurement
were needed. Civilization in early times was concentrated in areas where there was lots
of sunshine and water aplenty for the then relatively small populations. Here time
keeping was developed along two main lines - from the shadow stick, probably the
earlier, and then the water clock. Sundials (first used in ancient Egypt, 1500-1300 BC)
and water clocks (developed by the Greeks, 400BC) were eventually developed to give
surprising accuracy. Various other methods were also used. Alfred the Great of England
was reputed to use burning candles to measure time (980 AD) while burning incense was
in use in China about the same time.

By the 1400s mechanical clocks were built in Europe using a mainspring and balance
wheel. In 1510 Peter Heinlein, a Nuremberg locksmith, introduced portability by
inventing the pocket watch. However, the accuracy of these clocks and watches was poor
and they usually required re-setting on a daily basis. In 1583, Galileo Galilei realizes that
the frequency of a pendulum's swing depends on its length and n 1657 Christiaan
Huygens used this theoretical advance to invent the first pendulum clock, capable of far
greater accuracy than any preceding timekeeper. But the clock did not work at sea, and
this was a crucial flaw.
1
This case has been written to provide material for classroom discussion. Only published sources were
used. Hence any opinions or interpretations presented in this case are not necessarily those of the Swatch
Group or any of its employees. Eston Griffin III, Frederick Null, Donald Rieck, Mathew von Wronski and
Elizabeth Zadzielski prepared the original presentation upon which this case is based.

RAM MUDAMBI, TEMPLE UNIVERSITY, 2005 1

Electronic copy available at: http://ssrn.com/abstract=634566

With the European Age of Exploration in full swing, ships were venturing into distant
oceans but under severe handicaps due to an inability to determine their longitudinal
position. To obtain longitude – the east-west location – from the position of the sun or
stars, you must know the precise local time, which was impossible with the day's poor
clocks. It was only in 1759 that John Harrison finally built a clock that only lost 5
seconds on a voyage from England to Jamaica.2

The rise of Swiss watch making

Protestant Huguenots, were driven from many parts of Europe and found refuge in
Geneva, bringing with them numerous skills and handicrafts. Geneva had been a center
for the jewelry industry for centuries, but John Calvin and his followers frowned upon it
as a manifestation of luxury and excess. Calvin took power in Geneva in 1541 and
promulgated his Ordonnances Ecclesiastiques, one of whose provisions banned the
wearing of the jewelry. Huguenot jewelers rapidly turned their craft skills, knowledge of
metals and artistic flair to a useful industry – watch making. The Watchmakers' Guild of
Geneva was formed in 1601 and was the first watchmakers’ guild in the world.

A century after Calvin, Geneva was becoming overcrowded and many watch makers
decided to move out of the city into the surrounding Jura Mountains. Watch making in
the Jura remains indebted to a young goldsmith called Daniel Jeanrichard (1665-1741),
who, for the first time, introduced the division of labor in watch making. By 1790,
Geneva was already exporting more than 60,000 watches.

The explosion of the

industrial revolution in
England forced the Swiss
industry to face the
challenge of foreign
competition, particularly
in the market for exports.
The fragmented Swiss
industry undertook
several cooperative
actions to defend its
competitive position.
The industry established
The Jura Mountains 3 several watch making
academies at home and
watch-repair schools in major foreign markets.3 To differentiate themselves from large
foreign competitors, the Swiss industry banded its small firms together under the
umbrella ‘Swiss made’ brand. By 1920, this brand (‘place of origin’ in legal terms) had
become an important symbol of quality, style and prestige. To this day, watches, clocks

2
Sobel (1995).
3
Federation of the Swiss Watch industry (FH) website, 2004.

2 RAM MUDAMBI, TEMPLE UNIVERSITY, 2005

Electronic copy available at: http://ssrn.com/abstract=634566

and alarm clocks manufactured in Switzerland bear the designation ‘Swiss made’ (or its
abbreviation ‘Swiss’) as well as the logo of the producer or distributor. And
globalization of trade has done nothing to diminish its importance. ‘Swiss made’
embodies a concept of quality that includes the technical quality of watches (accuracy,
reliability, water-resistance and shock-resistance), as well as their aesthetic quality
(elegance and originality of design). It covers both traditional manufacturing and new
technologies like micro-electronics (See Appendix).

Even as it continued to push the frontiers of technology, the Great Depression that began
in 1929 forced the Swiss industry to consolidate. In 1930, a number of firms including
Omega and Tissot banded together to form SSIH (Societe Suisse pour l’Industrie
d’Horlogerie). Another large consolidation in 1931 led to the formation of ASUAG
(Allgemeine Schweizerische Uhren AG). Both groups included watch brands and
companies that were 150 to 200 years old.

SSIH’s principal aim was to sell selectively and exclusively good quality Swiss products.
By taking over companies that produced high-quality movements as well as other brands
in the lower price segment, SSIH gradually managed to establish a strong position as the
pre-eminent Swiss watch manufacturer. Meanwhile, according to the company’s statutes,
ASUAG’s main purpose was to maintain, improve and develop the Swiss watch industry.
ASUAG initially amalgamated a number of companies that made movement-blanks.
However, it later absorbed firms manufacturing finished watches, which it merged to
form the subsidiary General Watch Co. Ltd. Both companies endeavored to combat the
major economic crises and unemployment of the 1930s through complementary research
and development programs in their respective companies. It proved difficult for both
SSIH and ASUAG to implement a common industrial policy for all of their diverse
subsidiaries.

In 1945, Swiss firms accounted for 80 per cent of the world’s total watch production and
99 percent of all US watch imports. The Swiss industry was composed of nearly 2,500
companies, almost all of which employed fewer than 50 people.4 All the while, the
quality and accuracy of Swiss watches continued to improve. In 1962, NASA bought an
Omega Speedmaster from a Houston jewelry store, subjected it to a battery of hellish
endurance and accuracy tests, and found it fit to fly in a spaceship around the world, and
eventually much farther. On July 20, 1969, when Apollo 11 made its historic lunar
landing, the Speedmaster became the first watch on the moon.

Technology revolutions

The commanding position of the Swiss industry, based on fine craftsmanship could not
last in the mass production era following World War II. US Time Corporation (later
Timex) used automation, precision tooling and simpler design to bring durable
inexpensive watches to market in 1951. While traditional jewelers were reluctant to carry
these low margin items, new channels like department stores, catalogue showrooms and
sporting goods outlets were rapidly developed.
4
Morrison (1999).

RAM MUDAMBI, TEMPLE UNIVERSITY, 2005 3

Electronic copy available at: http://ssrn.com/abstract=634566

 ’00 million units
85 FIGURE 1 5 In the two decades that followed the entry
80 of Timex, two major inventions in watch
75 4 making were made in Switzerland. A
Swiss engineer developed tuning fork
Swiss Share (%)

70

65 3 technology in 1959, and after it was turned

Demand
60
down by the Swiss industry, sold it the
55 2
Bulova Corporation of the US. Bulova
50
later formed a partnership with the Citizen
45 1
Watch Company of Japan to produce
40

35 0
movements for its watches.
1946 1950 1954 1958 1962 1966 1970
Year
The Swiss watch industry also invented
the quartz movement, but did not use the invention because it felt this technology would
destroy their existing market. Anyone could use the quartz movement, whereas only the
Swiss had the skills to make little cogwheels and balance springs. This classic
‘innovator’s dilemma’ almost killed the Swiss watch industry.5 Watchmakers in Japan
and Hong Kong eagerly grabbed the quartz movement, and in one year in the late 1960s
the sales of Swiss watches dropped by 25 percent. By 1970, the Swiss share of the world
watch market was down to about 40 percent and falling fast.6

To the brink …

Things got steadily worse for the Swiss industry. By 1983, its share of world watch and
clock exports had fallen to about 25%. The number of Swiss firms in the industry fell
from 1618 in 1970 to 630 in 1983 and employment fell from about 90,000 to 34,000
during the same period. SSIH and ASUAG, the two largest watchmaking groups in the
country, faced liquidation. Their Swiss creditor banks were on the verge of selling the
valuable branded assets such as Omega, Longines, Tissot, and others to foreign
competitors, many of them Japanese. At this late stage, Nicolas G. Hayek, at that time
CEO of Hayek Engineering, received an assignment to assess the chances of survival and
to develop a strategy for the future of both companies. The now renowned Hayek Study
recommended:
(a) the merger of SSIH and ASUAG
(b) the launch of a low-cost, high-tech line of watches with an emphasis on design

The merger led to the formation of SMH and the watch line that Hayek recommended
resulted in the Swatch brand. Hayek took over as CEO of the new SMH Group that
established its headquarters in Biel, Switzerland. This watershed event not only created
new possibilities but also launched a new culture that would make the SMH Group the
largest watch-making company (in value) within five years.

5
Christensen (1997).
6
De Bono (1992).

4 RAM MUDAMBI, TEMPLE UNIVERSITY, 2005

And back

What rescued the Swiss watch industry was a very unSwiss concept of the Swatch, a
simple and clever contraction of ‘Swiss watch’. Hayek recognized that telling time was
no longer the most important thing in a watch. ‘A $5 watch tells time every bit as well as
a $30,000 watch. The Swatch was not selling time so much as fun and costume
jewelry.’7 As Hayek told The New York Times, “We were convinced that if each of us
could add our fantasy and culture to an emotional product, we could beat anybody.
Emotions are something that nobody can copy.”

Ultra-thin watches featuring accurate timekeeping, innovative technology, and a sense of

youthful individualism have been the hallmark of the Swatch brand from the beginning.
The Swatch revolution consisted of three parts: (a) product quality; (b) manufacturing
excellence; and (c) design and image. Product quality included the hard aspects that
focused on quality, accuracy, water and shock resistance. Swatch backed these with a
one-year guarantee. Manufacturing excellence was based on
a dramatic reduction in the number of watch (from 91 to 51),
the use of common platform, a standardized plastic case and a
fully automated assembly line.

However, it was the design and image of Swatch that set it

apart from its competitors. Swatch’s great success was the
definition of the watch as a fashion accessory for the masses.
It was able to sell itself as a bridge the world of high fashion
with a technology twist. As a fashion item, it was able to
dramatically increase potential per capita sales. It launched
Swatch in the Guinness Book
the ‘amazing watch’ in Zurich on March 1, 1983 at prices
ranging from CHF 39.90 to CHF 50. Design critics
immediately acclaimed all 12 models. The launch was so successful that all prices were
raised to CHF 50 in the Fall. The initial sales target of 2.5 million for 1984 was exceeded
by over a million. Swatch sales and exports grew at double digit rates through the 1980s.

Swatch’s approach to marketing was two-pronged approach. The first prong consisted of
high fashion and edgy design with very a short product life cycle. The link to high
fashion was developed through linking products and launches to European haute couture
as well as a wide-ranging program of celebrity endorsement.8 The intelligent use of a
few common platforms to generate literally thousands of models made it possible to
ensure that product life cycles were sometimes measured in months. The second prong
consisted of the sponsorship of high profile special events and public relations activities.
In its first full year of existence, Swatch was listed in the Guinness Book of World
Records for the 13-ton 162 meter high Swatch at the headquarters of Commerzbank in

7
De Bono (1992).
8
Swatch launched the Pop Swatch at Prêt a Porter fashion show in Paris. It used celebrity endorsers
ranging from Cindy Crawford and Michael Schumacher to young stars in youth and fun oriented sports like
freestyle skiing, surfing and breakdancing. At the same time, it associated its luxury brands with images of
sophistication, e.g., product placement of Omega as the watch of 007 in James Bond films.

RAM MUDAMBI, TEMPLE UNIVERSITY, 2005 5

Frankfurt, Germany; sponsored the Freestyle Ski World Cup in Breckenridge, Colorado;
marched into Paris with the 40 saxophones of ‘Urban Sax’; and produced a special
edition Swatch for the First Breakdance World Championship in New York.

In addition to its upstream marketing and creative activities, Swatch also vertically
integrated downstream, by setting up and running hundreds of Swatch outlets. These
included dedicated Swatch stores as well as shop-in-shops. The company particularly
focused on the travel retail sector, putting kiosks in dozens of high traffic airports. Since
the retail markup in the watch industry is as high as 80%, the development of this
retailing expertise was to prove hugely profitable for the Group.

By the mid-1990s, it was clear that the Swatch revolution had saved the Swiss watch
industry. Through Swatch, the Swiss had successfully made the transition to quartz
technology and had created just the right mixture of fashion and technology to re-invent
the ‘Swiss made’ label (see Appendix). As fashion accessories, Swatch was able to
multiply the number of sales per individual. Swiss watch exports increased from just
over CHF 4 billion in 1986 to CHF 8 billion in 1995. Life was good in the Jura
Mountains again.

In 1998 SMH officially changed its name to the Swatch Group. The Group had a
worldwide market share of 14% in the luxury, prestige and top range (prices greater than
$300). In the US, its market share in this category was 21% while in the mass market
(prices less than $50) its share was only 9%.

Swatch continues to grow

In the 1990s Swatch continued to consolidate the Swiss watch industry. It acquired
Blancpain in 1992, along with its subsidiary company Frederic Piguet. In 1999, it
acquired Favre & Perret, a highly reputed Swiss manufacturer of watchcases, as well as
Groupe Horloger Breguet SA. Glashutter Uhrenbetrieb GmbH and Montres Jaquet-
Droz were added to the Swatch Group in 2000. In addition, Swatch continued to acquire
a number of small electronic component manufacturers to maintain its commitment to
technology.

This ongoing consolidation was not limited to Switzerland. In 1999, the French luxury
group LVMH acquired Tag Heuer, one of the big groups in the Swiss industry. However,
by the turn of the century, Switzerland still had about 600 watch-making companies with
about 34,000 employees, in addition to three big groups – Swatch, Vendome (now known
as the Richemont Group) and Rolex.

In the 1990s Swatch was still relatively weak in North America. Therefore it
aggressively attacked the US market, opening a mega-store in New York’s 5th Avenue in
1996, becoming the official timekeeper to the Olympic Games in Atlanta and mounting a
gigantic Swatch to count down the time to New Year, 1997 in New York’s Times Square.
As a result of these moves, Swatch was able to increase the share of its sales in the US
substantially. In 2003, Swatch sales in the US made up 19% of worldwide sales. For the

6 RAM MUDAMBI, TEMPLE UNIVERSITY, 2005

Swiss watch industry overall, the US accounted for 16% of total sales, indicating that
Swatch’s US penetration was slightly better than its other Swiss competitors. (See
Exhibit 1).

Swatch has continued to perform well in terms of overall group results. Even through the
difficult recessionary years of 2001-2, the Group was able to record an eviable record of
performance and increase employment. It outperformed competitors in the luxury
segment like LVMH, as well as in those in the value segment like Citizen. (See Exhibit
2).

These results seemed to indicate that Swatch is well positioned for the future. Hayek,
however, was not sanguine. He continued to see danger ahead, mainly in the form of
increased competition from Asian producers and what he has termed “mistakes” of other
Swiss firms.

Asian markets

China (including Hong Kong) continues to be the largest watch producers in the world by
volume, manufacturing about 80 percent of world production in 2004. However, they
compete in the bargain segment that is largely ignored by Swiss manufacturers, including
Swatch. The average export price of a Chinese watch was CHF 7 in 2004 compared to
CHF for CHF 378 for a Swiss watch, a multiple of 54. Further, China and Hong Kong
continue to be one of Swatch’s most important markets and are generally considered to
be the ones with the greatest growth potential.9

Thus Swatch has made significant moves to maintain its advantage in this market. It has
offices in Shanghai and Beijing and has a factory in Zhuhai that produces quartz
movements for the local market. A big part of its China strategy has been its sponsorship
of the 2008 Beijing Olympic Games. It has secured rights to be the official timekeeper at
the Games. Its current commitment to the Games totals about $47 million and is likely to
rise to $100 million by 2008. In the runup to the Games, Swatch plans to place a giant
‘Olympic Countdown Clock’ in Tian’anmen Square in Beijing. It is opening retail stores
in all brand segments and rolling out its all its top brands in China – particularly Omega,
Longines, Breguet, Jaquet Droz, Glashutte-original and Leon Hatot.

As of August, 2003, Swatch had twelve flagship stores in Hong Kong and mainland
China, as well as close to 200 retail outlets. At the end of 2003, Swatch opened
boutiques at both Beijing and Hong Kong International Airports. As Swatch
spokesperson summed up its Chinese retail strategy thus: ‘ We need to be in all key
cities.’ The company feels that this market is key to its overall future growth and that it
is crucial to generate first mover advantage here. Tariff rollbacks and the abolition of the
watch and clock import quota in 2005 (associated with China’s entry into the WTO) will
further expand the Chinese market. As Hayek has put it, “Looking at the growth rate the
China market has now, this opening may not last. This is a unique opportunity.” For the

9
China already constitutes the largest import market for clocks and watches, representing about 30% of the
world’s imports of these products in 2004.

RAM MUDAMBI, TEMPLE UNIVERSITY, 2005 7

six months through June 2004, three Swatch brands were in the top ten brands in China in
terms of sales: Omega (2.54%), Tissot (2.37%) and Longines (2.29%). For the same
period, the umbrella Citizen brand from Japan held the top market share (9.99%).10 The
Japanese Seiko brand held the 10th spot (2.15%).

The downside in China (whose currency was pegged to the US dollar), as in many other
markets, continued to be the strong Swiss franc, which exerted upward price pressure on
Swatch’s products. Representatives of Swatch and the Swiss watch industry generally
constantly complained to their government about what they perceived to be competitive
handicap generated by Swiss macroeconomic policy.

Japanese competitors continued to migrate upward in the watch brand space. However,
the average export price of a Japanese watch in 2004 was still only CHF 27. The upper
end of the Japanese competitive spectrum did compete directly with the lower end of the
Swiss industry. Both Citizen and Seiko internationalized their production facilities with
factories in Hong Kong, Korea, China and Germany. They competed with Swatch in
more than 100 countries. Swatch felt therefore that it was imperative to compete with
their manufacturers on their home turf and devoted substantial resources to ensuring
successful performance here. The Swatch Bijoux took the first prize in the 2003 Super
Goods of the Year consumer event, one of the most prestigious business events in Japan.
The company opened its flagship store in the Ginza district of Tokyo on July 6, 2004.
This is a multi-storey marquee building with an exhibition room to showcase Swatch’s
luxury brands.

Swatch considered India to be one of the key emerging markets for the future in Asia.
Swatch’s India strategy was based on highlighting ‘differentiators’ at all points of
contact. An India specific collection was developed to target a wide cross-section of
trend conscious consumers. The objective was to build an ‘aspirational’ brand image
targeting newly emerging class of fashion conscious youth with disposable income. The
company sought to constantly raise Swatch profile in front of the consumer. To this end
it invested in a high frequency, high decibel multimedia campaign in television and print.
It supported this communication campaign was an aggressive focus on distribution.

Swatch entered India in January 2000, and by 2004 it had 60 outlets in the country.
These included two executive stores and kiosks in Delhi and Mumbai as well as alliances
with a number of trendy store chains like Shoppers Stop and Planet M. Swatch also has a
presence in stores like VAMA, Eternia and Benzer in Mumbai and Ebony in Delhi. New
Swatch retail stores are in the works for Mumbai as well as second tier cities like
Chandigarh, Hyderabad, Calcutta, Chennai, Bangalore and Pune.

Swatch Today

At the end of 2003, the Swatch Group was the second leading producer of watches in the
world after Japan’s Citizen Watch Company Ltd. It had a worldwide employment of
nearly 21,000, manufactured about 25% of the world’s watches and operated 160
10
Horologe Association of China.

8 RAM MUDAMBI, TEMPLE UNIVERSITY, 2005

production centers situated mainly in Switzerland, but also in France, Germany, Italy,
USA, Virgin Islands, Thailand, Malaysia and China. The company continues to maintain
a high degree of vertical integration. It controls everything from design and the
production of movements as well as watches to marketing, brand and channel
management and retailing. It runs more than 500 Swatch stores, about 1000 Shop-in-
shops and some 140 kiosks mostly focused on the travel retail sector in airports. It
adheres to the tight restrictions of the ‘Swiss made’ laws and accepts the relatively higher
costs associated with them.

Hayek11, now aged 75, believes that maintaining a technological edge the key to the
survival of the Swiss watch industry. He claims that heavy investments in manufacture
and innovation are the only way to maintain this edge. This may be why he has
maintained such a high degree of vertical integration in the Swatch Group. Hayek has
accused Swiss watch companies outside his group of relying too heavily on blank
movements bought from the Swatch Group company ETA SA12 and ignoring production
themselves. His buyers have accused him of trying to cement ETA as the dominating
producer of Swiss watch movements, a move which they say threatens their existence in
the industry.

ETA sells so-called ‘ébauches’ or incomplete watch movements to third parties. It has a
dominating upstream position in the Swiss watch industry. Most smaller watch
companies, both Swiss and worldwide, buy their movements from ETA. Even the
Richemont Group, one of the big three Swiss watch groups whose luxury brands include
Cartier, Piaget, Vacheron Constantin, Jaeger-LeCoultre and Baume & Mercier, is heavily
dependent on movements supplied by ETA.13 Of major watch firms, only Rolex and
Seiko manufacture their own movements.

However, ETA has said it wants to halt deliveries by the end of the year 2005. This has
prompted a storm of protest from companies not belonging to the Swatch Group. “I said
I was not going to deliver any more of my movements unless they try to do their own
production,” Hayek said in January 2003. “Otherwise the Swiss watch industry will
suffer exactly the same problems it had before and it will go down”.

Clearly the Group Swatch believes that the Swatch brand is a unique competitive asset.
The irony of Swatch may be that even while it trumpets itself as ‘Swiss technology for

11
Hayek and his family control about 37% of Swatch stock. He stepped down as CEO of Swatch in late
2002, but remains the Group’s chairman. With a fortune of $2.4 billion, Hayek is the 6th richest person in
Switzerland and was 256 on the Forbes list of the world’s richest people in 2003. His son, Nicolas Hayek
Jr. is the current CEO of the Group.
12
ETA SA Fabriques d’Ebauches is headquartered in Grenchen, Switzerland, employs more than 10,000
people worldwide and supplies the movements for watches to all Swatch brands which themselves organize
production and distribution of the finished products. The world’s third largest manufacturer of movements,
ETA SA has over 15 production sites in Switzerland, Germany, France, Thailand, Malaysia and China. In
1998, ETA’s revenues exceeded one billion Swiss francs. (Cf: Alt, Fleisch and Osterle, 2000).
13
In addition to ETA, Swatch also controls the Nivarox-Far company, which has a virtual monopoly on the
production of balance springs for luxury mechanical watches. Even Rolex buys balance springs from
Nivarox-Far, though it does maintain a limited amount of manufacturing capacity.

RAM MUDAMBI, TEMPLE UNIVERSITY, 2005 9

the masses’, it makes most of its money from its luxury brands (see Exhibits 6 and 7).
The high costs associated with manufacture in Switzerland ensure that it struggles to
break even in the middle segment of the watch market. Thus, volume production has not
been very profitable for the group. “The Swatch is very important for the Swatch Group
brand name, but the problem is that its profit margin is very low,” noted Credit Suisse
luxury goods analyst Harald Zahnd at the Swatch 20th anniversary celebration in 2003.

In fact, the manufacture of movements – a business in which branding is virtually absent

– is more profitable for Swatch than the basic and middle segments of the watch market.
This is telling, since the margins on ETA blank movements are slim – buyers re-work
them only slightly and reap huge markups based on their brands. Swatch’s new
diversification moves into electronic systems (some in conjunction with the automotive
industry) are also significant contributors to its bottom line.

10 RAM MUDAMBI, TEMPLE UNIVERSITY, 2005

 EXHIBIT 1

SWATCH GROUP UNIT SALES BY REGION

1998 2003
North America 4% 19%
Europe 28% 16%
Asia 68% 65%

EXHIBIT 2

Return on Equity (ROE)

25
Swatch
20

15
Citizen
10

5
LVMH
0
1999 2000 2001 2002

EXHIBIT 3

SWATCH GROUP PERFORMANCE

CHF m 1998 1999 2000 2001 2002 2003
Sales 3,269 3,625 4,263 4,182 4,063 3,983
Net income 357 441 546 504 494 492
Market Capitalization 6,112 11,508 12,895 9,747 7,060 9,019
Employment 18,262 17,751 19,284 19,665 20,568 20,707
Per Share Data
Earnings per share CHF 1.26 1.51 2.17 1.69 1.69 1.70
Dividend CHF 0.21 0.24 0.55 0.20 0.22 0.29
Price/Earnings ratio 18.9 26.3 20.3 19.4 13.8 17.5

RAM MUDAMBI, TEMPLE UNIVERSITY, 2005 11

 EXHIBIT 4
SWATCH GROUP BALANCE SHEET
ASSETS Dec 31, 2003 Dec 31, 2002
CHF m % CHF m %
Non-current assets
Property, plant and equipment 1085 19.3 1072 22.4
Investment property 16 0.3 16 0.3
Intangible assets 315 5.6 284 6.0
Investments in associated companies 4 0.1 4 0.1
Other financial assets 6 0.1 6 0.1
Deferred tax assets 96 1.7 109 2.3
Total non-current assets 1522 27.1 1491 31.2
Current assets
Inventories 1481 26.4 1442 30.1
Assets held for sale 1 0.0 3 0.1
Trade receivables 662 11.8 670 14.0
Other receivables and prepayments 334 5.9 318 6.6
Available-for-sale investments 321 5.7 396 8.3
Cash and cash equivalents 1294 23.1 463 9.7
Total current assets 4093 72.9 3292 68.8
TOTAL ASSETS 5615 100.0 4783 100.0

LIABILITIES AND Dec 31, 2003 Dec 31, 2002

SHAREHOLDERS’ EQUITY CHF m % CHF m %
Shareholders’ equity
Share capital 137 2.4 137 2.9
Capital reserves 213 3.8 213 4.4
Treasury shares -369 -6.6 -369 -7.7
Convrsion differences -35 -0.6 -20 -0.4
Retained earnings 4060 72.3 3580 74.8
Total Shareholders’ equity 4006 71.3 3541 74.0
Minority interest 10 0.2 15 0.3
Liabilities
Borrowings 394 7.0 12 0.3
Deferred tax liabilities 317 5.7 314 6.5
Retirement benefit obligations 27 0.5 19 0.4
Non-current provisions 30 0.5 51 1.1
Non-current liabilities 768 13.7 396 8.3
Trade, other payables & accrued expenses 567 10.1 578 12.1
Borrowings 204 3.6 199 4.2
Current provisons 60 1.1 54 1.1
Current liabilities 831 14.8 831 17.4
Total liabilities 1599 28.5 1227 25.7
TOTAL LIABILITIES AND 5615 100.0 4783 100.0
SHAREHOLDERS’ EQUITY

12 RAM MUDAMBI, TEMPLE UNIVERSITY, 2005

 EXHIBIT 5 14

14
SOURCE: Swatch 2003 Annual Report.

RAM MUDAMBI, TEMPLE UNIVERSITY, 2005 13

 EXHIBIT 6

SWATCH BRANDS IN 2004

Basic segment (less than $50) Swatch, Flik Flak
Middle segment ($50 - $299) Tissot, Calvin Klein, Certina, Mido,
Hamilton, DYB
Luxury segment (greater than $300) Breguet, Blancpain, Jaquet-Droz, Glashutte
– Original, Hatot, Omega, Longines, Rado
Private label (price per focus group) Endura

EXHIBIT 7

SWATCH GROUP – SOURCE OF EARNINGS, 2001 15

EBIT Econ Value
Category CHF m % CHF m %
Luxury watches 470 60.41 6910 61.31
Consumer watches (basic and middle segments) 112 14.40 1180 10.47
Watch components* 119 15.30 1250 11.09
Electronic systems 127 16.32 1380 12.24
Central costs -50 -6.43 -650 -5.77
Total 778 100.00 10070 89.35
Net cash 1200 10.65
Implied Market capitalization 11270 100.00
* Mainly watch movements

15
SOURCE: Deutsche Bank Alex Brown

14 RAM MUDAMBI, TEMPLE UNIVERSITY, 2005

 APPENDIX 16

Watches, clocks and alarm clocks manufactured in Switzerland bear the designation ‘Swiss made’ (or its
abbreviation "Swiss") as well as the logo of the producer or distributor. This label (‘place of origin’ in
legal terms) enjoys a solid reputation throughout the world. And globalization of trade has done nothing to
diminish its importance. ‘Swiss made’ embodies a concept of quality that has been forged over the years. It
includes the technical quality of watches (accuracy, reliability, water-resistance and shock-resistance), as
well as their aesthetic quality (elegance and originality of design). It covers both traditional manufacturing
and new technologies (micro-electronics). The intrinsic value of the ‘Swiss made’ label is the result of
considerable efforts on the part of watch-making companies, who are ultimately responsible for
maintaining its reputation.
While prestigious brand names have thrived, they have never relegated the ‘Swiss made’ label to a
secondary place. The brand names and ‘Swiss made’ have always worked together in an alliance that
provides the consumer with a compound guarantee. It is hardly surprising that this asset attracts
counterfeiters. ‘Swiss made’ has to be constantly protected on every market. Providing this protection is
one of the principal tasks of the Federation of the Swiss Watch industry (FH) that conducts an on-going
battle through legal and administrative channels to thwart anyone abusing the ‘Swiss’ name. The weapons
used in this battle are the laws of each of the countries concerned, backed by international agreements.
These include bi-lateral treaties signed by Switzerland with several European countries as well as multi-
lateral conventions drawn up by the World Intellectual Property Organization and by the World Trade
Organization, e.g., the Trade-related aspects of Intellectual Property Rights (TRIPS) agreement.
Recognizing that it must set the example, Switzerland reinforced the legal instruments at its disposal. A
new law on ‘the protection of brand names and place of origin was passed on 28 August 1992 and it
introduced more severe punishments. The Swiss customs authorities keep a vigilant eye on all imports,
exports and merchandise in transit.
Moreover, a law ‘regulating the use of the name “Swiss” for watches’ sets out the minimum conditions that
have to be fulfilled before a watch merits the ‘Swiss made’ label. This law is based on a concept according
to which Swiss quality depends on the amount of work actually carried out on a watch in Switzerland, even
if some foreign components are used in it. It therefore requires that the assembly work on the movement
(the motor of the watch) and on the watch itself (fitting the movement with the dial, hands and the various
parts of the case) should be carried out in Switzerland, along with the final testing of the movement. It also
requires that at least 50% of the components of the movement should be manufactured in Switzerland.
Certain regions in Switzerland have their own ‘place of origin’ labels. One of the most renowned is
‘Genève’, which identifies top-quality timepieces made in the city and canton of Geneva. Like ‘Swiss
made’, this label is very popular with counterfeiters and therefore benefits from continuous protection
within the framework of the FH's anti-counterfeiting program. The Swiss watch industry is very active in
safeguarding the integrity of ‘Swiss made’ and its other regional labels of quality.
Legal Specifics
A Swiss watch
Only when it is Swiss, may a watch carry the indications ‘Swiss made’ or ‘Swiss’, or any other expression
containing the word ‘Swiss’ or its translation, on the outside. According to Section 1a OSM, a watch is
considered to be Swiss if:
- its movement is Swiss;
- its movement is cased up in Switzerland;
- and the manufacturer carries out the final inspection in Switzerland..
A Swiss watch movement
As we have seen, to be Swiss, a watch must use a Swiss movement. According to Section 2 OSM, a
movement is considered to be Swiss if:

16
This appendix is based on information drawn from the Federation of the Swiss Watch Industry (FH)
website, 2005.

RAM MUDAMBI, TEMPLE UNIVERSITY, 2005 15

 - it has been assembled in Switzerland;
- it has been inspected by the manufacturer in Switzerland; and
- the components of Swiss manufacture account for at least 50 percent of the total value, without
taking into account the cost of assembly.
If the movement fulfills these conditions, but the watch is not assembled in Switzerland, the ‘Swiss’
indication may be affixed to one of the components of the movement. The terms ‘mouvement suisse’ or
‘Swiss movement’ may then only appear on the outside of the watch. Section 3 § 3 OSM requires that the
word ‘movement’ appear in full, and be written in the same type-face, of identical size and color, as the
word ‘Swiss’.
Material extent of the use of the word ‘Swiss’
The word ‘use’ is understood in a broad sense: it not only covers the application of the above-mentioned
designation to the watch, but also, according to Section 3 § 5 OSM:
- the sale, offering for sale or putting into circulation of watches bearing such an indication;
- the application of this designation to signs, advertisements, prospectus, invoices, letters or
commercial papers.
Particular cases
Wristlet
The ‘Swiss made’ indication may only appear on a wristlet if it is of Swiss manufacture and if the watch is
also Swiss. A wristlet is considered to be Swiss if it has undergone an essential manufacturing operation in
Switzerland and if 50 percent of the production costs originate in Switzerland. When a Swiss wristlet is
attached to a watch manufactured abroad, it may only bear a reference to the word ‘Swiss’ if this
designation clearly shows that only the wristlet is of Swiss manufacture (for example, ‘Swiss wristlet’).
Case
The ‘Swiss case’ indication on a watch case betokens that the case is of Swiss manufacture. A case is
considered to be Swiss if:
- it has undergone an essential manufacturing operation in Switzerland (stamping, turning, or
polishing); it has been assembled and inspected in Switzerland; and
- over 50 percent of the manufacturing costs (excluding the value of the material) are due to operations
carried out in Switzerland.
When the ‘Swiss case’ indication appears on the outside of the case, and the watch is of foreign
manufacture, the origin of the movement or of the watch must also be affixed to the outside of the watch.
‘Swiss Quartz’ indication
Foreign manufacturers wishing to show that the quartz movement used is of Swiss origin often illegally
affix this indication to the outside of the watch. But, according to the OSM, the use of this indication on
the outside of the watch signifies that the watch is Swiss.
‘Swiss parts’ indication
This marking indicates that the movement is composed of movement-blanks that have been manufactured
in Switzerland, but assembled abroad. This indication may only appear on the movement, and never on the
outside of the watch.
Role of the FH
The FH has two roles in the protection of this indication of geographical origin. First, the FH advises the
companies on the lawful markings for watches and movements according to the Federal Council's
Ordinance governing the use of the word ‘Swiss’ for watches. Second, it may act against companies that
illegally use this indication, in order to protect the consumer, on the one hand, and, on the other hand, the
brand equity and intellectual property associated with the ‘Swiss made’ and related designations.

16 RAM MUDAMBI, TEMPLE UNIVERSITY, 2005

 GLOSSARY
Time indication by hands and dial; means corresponding. Originally an electronic term that was adapted by
Analogue
watch making with the spread of the quartz movement.
A watch whose parts are protected from but the very strongest magnetism; quartz watches cannot be
Antimagnetic Watch
disturbed by the phenomenon.
Applied Numerals Raised metal characters attached to dial
Automatic Watch Mechanical watch with a mainspring that is wound by the wearers’ movements via a rotor.
Auxillary Dial Small dial showing seconds only, up to one minute, usually at the six o'clock position
Back Winder Flat crown set into the back of the case for setting time and winding.
Baguette Rectangular movement, with a length at least three times its width. Popular shape for Art Deco watches.
Running regulator of mechanical watch; it oscillates about its axis of rotation, the balance spring making it
Balance swing to and fro (tick-tock) in equal time parts. Balances of modern wristwatches beat up to 10 beats per
second.
Circular box housing mainspring; teeth attached at edge drive gears; going barrel has great wheel mounted
Barrel
upon it.
Baton Numerals Undecorated non-numerical markers of hours, minutes and seconds.
Bezel Metal surround frame in which watch glass(crystal) is fitted.
Popular design by Breguet; the slightly tapered needle of the hand ends in a pointed head mounted on a
Breguet Hand
circle, which is pierced with a hole. Sometimes called a moon hand.
Button Better known as crown or winder; sometimes refers to chronograph.
Cabochon Crown Crown or winder set with a jewel.
Once used only to denote the diameter of a watch movement; now often only indicates type (e.g. mens’,
Calibre
ladies, automatic)
The official scale by which the purity of gold is determined. 24 carrot is pure gold, 18 carrots is 18 parts in
Carat
24 are gold etc..
Chronograph Watch which has an independent stop watch for short interval timing.
Chronometer Ordinary watch that has passed extremely severe precision and reliability tests in an official observatory.
Watch with functions not directly related to the time of day. (e.g., calendars, chronographs, moon-phases,
Complicated Watch
perpetual, repeaters etc..)
Crown Knob, generally knurled and positioned outside the case at three o'clock, for winding, correcting, setting.
Crystal Glass dial cover (made of glass, plastic, synthetic sapphire, or quartz crystal) fitted into bezel.
Two strips of hinged metal (curved to the wrist shape) on the watchband; upon closing, one folds over the
Deployment Buckle
other to cover it. Probably invented by Cartier.
Dial Face of the watch, showing hours, minutes, seconds. Other small dials are called subsidiary dials.
Divers Watch Water-resistant.
Also known as a duoplan or duodial. An auxiliary seconds dial is separated from the hour and minute dial;
Doctors Watch
useful for quick reference when taking pulse count.
Form Watch Watch in a very unusual shape.
Hack Features Balance stopping - Second hand that is stopped to synchronize time, when crown is pulled out.
Integral Bracelet Designed as natural extension of watchcase.
Jewels Used as bearings at points of greatest friction in movements; commonly fifteen to eighteen are used.
Lug Part or parts of watchcase to which band, bracelet or strap may be attached.
Mainspring Principal spring in watch; a flat spring is coiled in a barrel.
Mean Time Average length of all solar days in year; the usual time shown by watches.
Minute Repeater Repeating watch that sounds hours, quarters and minutes.
Month Aperture Pierced window in a mechanical digital watch, displaying month, often abbreviated.
Watch displaying phase of moon through twenty-nine and a half days (correction for extra forty four
Moon-phase Watch
minutes per month often incorporated).
Movement Complete mechanism of watch; from 120 to over 600 parts may be incorporated in it.
Oyster Case Rolex watch with water-resistant case.
Pave Literally "paved with", as in dial with precious stones.
Perpetual Self-winding automatic watch.
Perpetual Calendar Calendar mechanism with display which automatically corrects for long and short months and leap years.
Quarter Repeater Repeating mechanism that sounds hours and quarters.
Rock crystal (silicone dioxide) that can be made to oscillate by electronic switching, maintaining its very
Quartz
constant frequency, in accordance with its cut.
Rolled Gold An extremely hot sheet of gold pressed onto another metal.
Roman Numerals Besides Arabic, the most common numerals used on watch dials; note IIII instead of IV
In an automatic watch, the rotor winds the mainspring; in quartz watches, it is a permanently rotating
Rotor
magnet in the step-switch motor.

RAM MUDAMBI, TEMPLE UNIVERSITY, 2005 17

 The ruby referred to in watch making today is in fact corundum, a synthetic stone. It is used to reduce wear
Ruby
on pivot points.
Sapphire Glass (crystals) sold as scratch proof are made of synthetic sapphire.
A watch is held to be shock proof if, when dropped on to a hardwood surface from a height of 1 meter, it
Shock-Resistant Watch
does not stop, or if its daily rate does not change by more than sixty seconds.
Signed Movement The signature on a movement of its maker, which is likely not to be the same as that on the dial.
The dial of a skeleton watch has a separate chapter ring with the interior cut away, leaving only numerals
Skeleton Watch and exposing the wheels and interior mechanisms of the movement. The back plate is also cut away and
fitted with glass.
Split Second
Chronograph with sweep second hand, independent of chronograph hand.
Chronograph
Stem Shaft connection between winding mechanism and crown on outside of case.
Subsidiary Dials Smaller auxiliary dials that show elapsed minutes and running seconds.
Sweep Seconds Center Seconds - Second hand mounted at dial center and extending to chapter ring.
Tachometer Speedometer or revolution recorder on bezel.
Tank Case Today common name for a rectangular case; originally exclusive name for Cartier wristwatch.
Tonneau Case shape with wide center and flat tapered ends.
Invention by Breguet for nullifying vertical position errors by means of a revolving platform that goes
Tourbillon
through all such positions, so that they neutralize each other.
Tritium Luminous paint for dials, hands and numerals.
A transistor continually switching between two small magnets to regulate smooth running, oscillating 360
Tuning Fork times a second. The high frequency gives great precision in time keeping. Bulova Accutron made use of
the device famous, but then quartz watches usurped its popularity.
Expression for waterproof, which is illegal in the USA. Water resistant watches sold as such, must be able
Water Resistant to withstand water pressure at a depth of 1m for 30 minutes and thereafter 90 seconds at 20 meters. Divers
watches have much greater resistance

18 RAM MUDAMBI, TEMPLE UNIVERSITY, 2005

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