10 Topics Shaking the Watch Industry

May issue of this magazineThis article will introduce the turbulent times in the watch industry and some of the solutions that are being offered to address them.

1) The race to develop in-house movements has entered a new dimension

　"Stop" doesn't simply mean stopping. In the watch industry, "stop" also means going backward. However, mechanical movements are also among the oldest mechanisms in human history. Theoretically, their functional principles have remained unchanged for centuries. Whether it's a pendulum or a balance, a regulator breaks down time into defined intervals. These intervals are precisely counted by a gear train and displayed in analog or digital format. The balance has been an essential component of portable mechanical timepieces since 1675, when Christiaan Huygens invented a unique regulator: the balance spring. However, this time-honored, highly reliable regulator is now on the verge of becoming obsolete thanks to a new invention unveiled by Zenith in Le Locle on September 14, 2017. The regulator, comprised of approximately 30 components, has been replaced by a 0.5 mm-thick, one-piece oscillator, developed by the brilliant physicist Guy Sémon and a team of distinguished experts. This extremely complex structure, crafted from monocrystalline silicon and coated with a temperature-resistant oxide film, replaces the escape wheel, pallet fork, balance wheel, and hairspring in one single component. The revolutionary automatic movement, Caliber ZO342, operates at 108,000 vibrations per hour, eliminating the familiar ticking sound with a constant hum. This caliber boasts optimal isochronism and exceptional magnetic resistance, operating within a daily deviation range of +/-0.3 seconds per day in all positions. These performance specifications are guaranteed within a temperature range of -7°C to +5°C. Zenith and TAG Heuer demonstrated the new direction of watchmaking brought about by this futuristic oscillator at Baselworld 2018. With the LVMH Group indicating its intention to widely distribute this groundbreaking innovation within the watch industry, other brands are likely to follow suit.

The new movement, "Baumatic," was developed in collaboration with Val Fleurier. The balance spring, pallet fork, and escape wheel are made of silicon, and it boasts COSC-certified high precision, resistance to magnetic fields of 1500 gauss, and a power reserve of approximately 120 hours.

2) Will it become Asia's leader? The rapid rise of Singapore

　According to the Federation of the Swiss Watch Industry, Singapore remains the seventh largest watch market in the world, after Hong Kong, the United States, China, the United Kingdom, Japan, and Italy. In 2016, the figure was 1.013 billion Swiss francs, while in 2017 it reached 1.099 billion Swiss francs, an increase of 8.5% over the previous year. The global watch industry market grew 2.7% year-on-year to 199 billion Swiss francs. Over the same period, Hong Kong saw growth of 6% and China grew by 18.8%. What impact has this small island nation, with a population of 5.6 million (Source: Department of Statistics Singapore, 2015), had on the watch industry, let's take a look at the number of watches purchased and how it has affected it.

　Let's start by looking at Singapore's per capita gross domestic product (GDP). According to World Bank data for 2016, Singapore's per capita GDP was US$52,960, ranking ninth in the world. This is just behind the US's US$57,466 and higher than Japan's US$38,894. This high income rate is combined with a low income tax system. Singapore's current income tax rate for individuals is 0-22%.

　Prices for big-ticket items like cars and housing are significantly higher than in other major global cities. Take a car for example. Singapore is the most expensive place in the world to own a car. Import taxes and special duties total approximately 140-180% of a car's open market value. Furthermore, the government has a policy of controlling car ownership by limiting the number of new cars produced each year. Specifically, it achieves this goal by requiring a registration permit for each new car purchase. Because these permits are open to competitive bidding and limited in number, competition can be intense. Winning bids can be as high as 50,000-80,000 Singapore dollars on top of the vehicle's price. Adding all of this together, it's not uncommon for a car to cost roughly three times as much in Singapore as it would in Germany.

　As a result, only the wealthy can afford to own a car, and ordinary people cannot. Singapore has just 149 registered cars per 1000 people, which is 95th in the world. This means that while Singapore boasts the 9th highest GDP per capita in the world, car ownership, a typical high-value item, is quite low. This is not just due to the aforementioned cost issue, but also largely due to Singapore's excellent, inexpensive, and reliable public transportation system, which negates the need to own a car. As Singapore is a small island, commuting times are short. You can get anywhere within an hour's journey.

3) The new Swissness law will disrupt the Swiss watch industry

　The new Swissness law, which came into effect on January 1, 2017, was what one CEO of a small manufacturer called a "catastrophic measure," because it meant a complete overhaul of their business model: wrapping Swiss-made ébauches in foreign packaging, selling them with unique designs and innovative marketing.

　This business model, established in the 1960s, was one of the factors behind the passage of the Swissness Law in 1971, which stipulates the "purity" of watches, and led to further tightening of standards in 2017. So why 2017? The reason behind this is that the number of services and products bearing the name "Swiss" has increased by approximately fourfold over the past decade. The University of St. Gallen analyzed that branding using the name "Swiss" has increased sales prices by approximately 20% on average, and by approximately 50% in the case of luxury consumer goods. The value created by the name "Swiss" was calculated to be approximately 6 billion Swiss francs.

　The university also conducted a survey asking consumers in 15 countries about their perception of the Swiss brand, and the results showed that between 52% and 89% of consumers said they would choose a product labeled Swiss over one of unknown origin.

　As a result of Switzerland being forced to protect its brand image, the Swissness Law was revised despite much opposition. With regard to watches, the previous standards were: 1) More than 50% of the movement, calculated as a percentage of manufacturing costs, must be made in Switzerland; 2) The exterior must be installed in Switzerland; and 3) Final inspection must be carried out in Switzerland. In contrast, the new standards require that 60% of the movement and exterior must be made in Switzerland. Jean-Christophe Babin, CEO of TAG Heuer at the time, called for an 80% standard for both the interior and exterior, but this was opposed by other companies who wanted a more "flexible" implementation, and this was not realized.

　However, the new Swissness law had little impact on major manufacturers. Omega and Tag Heuer, among others, pushed the mechanization of their Swiss factories to an extreme degree in order to meet the 60% or higher standard. Some manufacturers also used their networks to devise sophisticated methods for laundering foreign-made parts, often so sophisticated that they were not readily apparent to outsiders. For example, a sapphire crystal made in China could be lightly refinished in Switzerland and then made into a Swiss-made watch.

4) What are the standards that antique enthusiasts should follow in the mixed antique market?

　It's very difficult to get an accurate reading of the current state of the vintage watch market, as the public, auction observers, and even vintage watch collectors are regularly bombarded with news headlines highlighting the astonishing prices that auctions have fetched for certain watches.

　In recent years, these headlines have focused on the dramatic price increases achieved for vintage Rolex Cosmograph Daytonas, primarily at public auctions. Given their relative quality and rarity, Daytonas, especially those with "Paul Newman" dials, now command unimaginably high prices. This surge in prices is the result of dealers "getting it" by fitting loose "Paul Newman" dials into contemporary Daytona cases; many vintage manual-winding Daytonas were never produced in the form currently in circulation. This is due in part to Rolex's failure to share information from its archives with the market, and as a result, the most common conversation among dealers has become one of right and wrong. Because the "Paul Newman" Daytona is both a cool icon for everyday wear and an instantly recognizable status symbol, it consistently tops the shopping list of even the wealthiest, first-time buyers recently entering the world of vintage watches. Reputable media headlines reporting Select Auction results reinforce these preferences, and dealers are happy to acquire these pieces, often "gotcha" watches, to satisfy their demand.

The Oyster Moonphase Ref. 6062 is a particularly rare and high-quality vintage Rolex.

The so-called Daytona "Paul Newman dial" is famous for being a favorite of actor Paul Newman.

5) The die is cast: E-commerce revolutionizes the watch business

　Do luxury watches and e-commerce go together? This is likely the question on which people in the watch business are currently focused. Before discussing the watch industry, let's take a look at the state of e-commerce in Japan. Generally speaking, the most familiar form of e-commerce is mail order. Currently, Amazon holds the largest market share in Japan. Following close behind is Rakuten, and the other is Yahoo! Shopping. These three companies are currently the top three in Japan.

This graph compares the total sales of department stores and the market size of e-commerce, including online shopping, between 2011 and 2016. The market size was roughly the same in 2011, but five years later, while department stores shrunk by 2.8%, the e-commerce market size grew by 74.1%.

　While there are various indicators for understanding the status of brick-and-mortar stores and e-commerce, the data I would like to present here compares e-commerce with department stores, which are more closely related to luxury consumer goods. As can be seen from the graph below, the e-commerce market, which rivaled department store total sales in 2011, continued to grow. Five years later, in 2016, it grew by 74.1%, while department store sales shrank by 2.8%. This alone clearly shows the rapid growth of e-commerce. To provide another statistic, comparing the combined sales of Japan's three major online retailers mentioned above to the total sales of department stores, in 2017, department stores generated approximately ¥5.9532 trillion, while the combined sales of the three online retailers totaled approximately ¥6.7 trillion, surpassing those of department stores alone (Nihon Keizai Shimbun, February 17). While these three companies' combined sales are still only about half those of supermarkets and convenience stores, if they continue to grow at this rate, it will only be a matter of time before they catch up with supermarkets and convenience stores.

　When it comes to watches, there are already examples of low-price range popular products and watch stores that have opened online e-commerce stores and are achieving success. Depending on the price range and item, it has been found that, just like with everyday items and clothing, it can contribute greatly to saving time and effort. In other words, it is easy to significantly reduce the cost of the time and effort spent going shopping, as well as the labor costs of carrying luggage home. Moreover, these costs will only increase in demand as the elderly population continues to increase and a society is promoted in which more women play an active role.

6) Will crowdfunding be a boon for small manufacturers?

　In recent years, crowdfunding has gained recognition as a platform for individuals to bring their own designs to market globally, with examples like Kickstarter in North America, which has raised a total of $20 billion, and Indiegogo in Europe, which has raised $10 billion. Following suit, crowdfunding sites seeking local backers have also been established around the world, with notable examples in Japan include Campfire, Green Funding, Kibidango, and Tokyo Mirai Mode. Funding for product launches using these sites generally requires a completed prototype, regardless of location. E-One's Bradley, an early crowdfunding success, is a good example. This watch, which began fundraising on Kickstarter, features small metal balls that rotate around the dial and the outer periphery of the case, allowing users to tell the time by touch. The Bradley, which is suitable for people with low vision, sold 3000 units in its initial stages and has continued to grow in popularity. It is now sold worldwide through distributors, stores, and independent networks.

This screenshot shows the actual crowdfunding campaign on Kickstarter, where Urban successfully raised a total of HK$1,960,430 from 1336 users.

　Today, I would like to share my own experience with crowdfunding, a platform with such great potential. When I founded Andon in 2014, we initially only had one model called the Aqua. Because the Aqua was a diver's watch with a large case, we received inquiries from customers asking if we were planning to produce a smaller-sized watch. So, we designed a new model and aimed to release it at the end of 16. We developed a watch that was thinner and more trendy than previous models.

　However, for the company at the time, launching a new model was a major investment and a huge risk. If it failed, there would be no chance of the company recovering. So we planned a large-scale marketing campaign to launch the newly designed Urban model in time for Christmas 16. Since approximately 70% of Andon's sales come from the US and European markets, Christmas was a very important time for us. However, we then encountered a problem. Production was significantly delayed, and it became impossible to complete the launch in time for Christmas. It was at this time that the idea of ​​using Kickstarter came up in a meeting.

7) Japanese watch manufacturers reaccelerating in the Chinese market through e-commerce expansion

An example of Casio's branding in China. The gorilla symbolizes the toughness of G-SHOCK. The brand concept "ABSOLUTE TOUGHNESS" and its Chinese translation "固突不断" are written in the upper right corner.

　In recent years, the domestic watch market has been heavily influenced by inbound tourism, particularly the boost in demand from Chinese tourists visiting Japan during the Chinese New Year holiday. According to statistics from the Japan Tourism Agency, the amount of spending by Chinese tourists on shopping trips soared from ¥3070 billion in 2014 to ¥8088 billion in 15, contributing significantly to the growth of watch manufacturers' business. In contrast, spending fell to ¥7832 billion in 16 due to China's hike in postal taxes (import duties on personal luggage and mail) and stricter customs inspections. However, it recovered to ¥8777 billion in 17 (preliminary estimate). However, watch manufacturers do not appear to be experiencing as much recovery as cosmetics manufacturers. Furthermore, while the impact of postal taxes remains, cross-border e-commerce taxes have been reduced for high-value items, suggesting a trend toward purchasing luxury watches in mainland China rather than in Japan.

　On the other hand, what stood out in the performance of Japanese watch manufacturers in the October-December period of 2017 was the recovery of sales in the Chinese market. Needless to say, each company had been expanding their brands in the Chinese market for some time, but growth had been sluggish due to several years of worsening anti-Japanese sentiment.

　However, it appears that all companies have recently seen a significant increase compared to the previous year. The reasons behind this are thought to be the increase in cross-border e-commerce due to the aforementioned tax changes, changes in sales strategies of watch manufacturers, and above all, the enormous size of the Chinese e-commerce market.

　China's e-commerce market has grown even larger in recent years, reaching 13.35 trillion yuan (approximately 225 trillion yen; source: China E-Commerce Research Center) in the first half of 2017, a scale that is literally orders of magnitude larger than Japan's annual e-commerce market, which is around 15 trillion yen (2016; source: Ministry of Economy, Trade and Industry). Sales on Singles' Day (Singles' Day, November 11th), which was launched by the Alibaba Group in 2009, have been particularly significant, with daily sales reaching 1682 billion yuan (approximately 2.8 trillion yen) for the Alibaba Group and 1271 billion yuan (approximately 2.1 trillion yen) for JD.com in 2017 (both announced by the respective companies).

　

8) Smartwatches are no longer just a watch-and-see phenomenon.

The third in the series, the Apple Watch, finally features cellular functionality. In my opinion, it has recorded the highest sales of any wristwatch in the world. There is no doubt that it is one of the most popular watches.

　Smartwatches, which have seen a rapid expansion in market share over the past two years, have grown to the point where they are having a major impact on the traditional watch market. Wristwatches with wireless communication capabilities, or so-called connected watches, include smart analog watches that combine analog and display functions, hybrid types, full-screen smartwatches, and wristband types such as activity trackers. These types are often collectively referred to as smartwatches. Connected watches are beginning to encroach on the quartz watch market, creating a phenomenon that could be described as disruptive to the watch market.

　Looking back, it all began in 2007 when Nokia's low-power communications technology, Wi-Fi, was integrated into Bluetooth, followed two years later in 2009 by the arrival of Bluetooth Low Energy. The arrival of this communications standard brought unprecedented business opportunities not only to the watch industry but also to the wearable device industry. It enabled the smartphone to function as the hub and the watch as the sensor, allowing for either a constant or one-time connection between the two. This made it possible for the watch to send data acquired via the smartphone to the cloud, or to send smartphone notifications to the watch, which would then vibrate to notify the user in real time. Until then, however, there had been no low-power communications method optimal for watches.

9) The spread of silicone materials will revolutionize the entry-level class

　Silicon technology made its debut in the watch industry with the release of the Ulysse Nardin Freak in 2001. It's a technique that applies deep etching, a technique that has been researched since the early 1990s, to silicon wafers, commonly used in the semiconductor industry, to create parts. The manufacturing process, which combines UV-LIGA photomasks with etching, commonly known as DRIE (Bosch process), is essentially a precision die-cutting process. However, thanks to the smoothness of the processed cross-sections and a processing precision said to be within 0.002 mm, the etched silicon parts are capable of being used as escapement components as they are. As long as the part is flat, the ability to reproduce the design shape is extremely high, easily surpassing traditional methods such as cutting.

This is a molded part of Zenith's new oscillator, which combines the escapement and regulating mechanism. Made of single-crystal silicon, it boasts magnetic resistance of 1100 gauss. It is then sandwiched between frames to prevent deformation.

　Silicon parts for watches first appeared in the form of escape wheel/pallet assortments, but in 2006 Patek Philippe announced a silicon (the company calls it silicium) balance spring. That same year, the Swatch Group, with which they had a collaborative research relationship, also announced a Breguet watch equipped with a silicon balance spring. Meanwhile, Rolex, another collaborative research company, has equipped its Tudor movements with silicon balance springs. The advantages of replacing regulator and escapement parts with silicon can be summarized as follows: its light weight reduces inertial mass; its hard and smooth surface extends the maintenance interval; and its high processing precision virtually eliminates the need for precision adjustments during assembly.

10) Biver vs. Kahn: A fierce battle over sports watches

In order to take on the mid-range sports watch market dominated by LVMH under Jean-Claude Biver, Breitling invited Georges Kern to join the company. Just six months after the transfer, Breitling continued to aggressively develop products, including the launch of the Navitimer 8.

　The big news of 2017 was the departure of Georges Kern, head of the Richemont Group's watch division, to become CEO of Breitling. Why did he leave his position as head of a major group to join Breitling? Various rumors circulated after his departure, but the following is a reliable source. At the time, Richemont pitted Montblanc CEO Jérôme Lambert against IWC CEO (and later Chairman) Georges Kern in an effort to rejuvenate the group. Kern won the competition and was promoted to head of the watch division, removing himself from frontline management and placing him in a position to oversee the bigger picture. It seems he was unhappy about this. Kern happened to live close to executives at CVC Capital Partners, the investment firm that acquired Breitling. During a business lunch, he reportedly complained to the company's executives about his lack of hands-on experience.

　CVC then brought in Kahn and appointed him CEO of the newly acquired Breitling. His intention to move to Breitling was clear when he refused to sign a contract renewal with Richemont, which included a clause that prohibited him from immediately moving to a rival watchmaker after leaving the company.

　Kahn plans to increase Breitling's sales from the current 450 million Swiss francs to 800 million to 1 billion Swiss francs over the medium term (roughly the same as Audemars Piguet's sales). He has focused on three core strategies. Specifically, these are similar to the measures he took at Richemont, where he previously served as head: integrating distributors into direct management, expanding the women's watch lineup, and streamlining the lineup. As a result, if Breitling achieves the expected sales figures, it will be able to compete on its own with the three watch divisions of the LVMH Group: TAG Heuer, Zenith, and Hublot. At the very least, sources said CVC is pleased with Kahn's performance, which saw the release of the new Navitimer 8 just six months after he took over.

The full story will be published in the May issue of this magazine.Amazon,Now on sale at bookstores