When Swiss watchmaking executives convened at a Geneva trade show in last January, they feared the worst. Smartwatch competitors Apple Inc. and Google would be in full swing while waning Chinese tourism to Europe and Hong Kong was creating a sense of urgency. “We expect 2016 to be a very, very difficult year,” Vincent Perriard, chief executive officer of luxury watchmaker HYT, said at the time.
Those fears are coming true. Exports of Swiss watches have fallen for 11 months straight, as Bloomberg Gadfly noted last week, and the industry is in a state of distress. Cie. Financière Richemont SA, parent company of Cartier, already moved to cut 350 jobs in February and expects no reprieve over the next few months. Swatch Group AG, maker of pricey brands such as Omega, along with cheaper plastic watches sold under its eponymous label, hasn't yet cut jobs, even though results couldn't get much worse. The company recently warned that first-half profit would plummet more than 50 percent.
Much of the pain has to do with factors the watch companies couldn't hope to control—including the strength of the Swiss franc and climbing gold prices—and Swiss watches have proven remarkably sturdy over the years. It's not crazy for watch executives to think they wait out the latest storm.
"The most resilient part of the industry is that you buy a Swiss watch because you want to say, 'I have a Swiss watch,'" said Paul Swinand, an analyst at Morningstar Inc. Even during tough times, it has that image to fall back on. The world is only a few years removed from the boom in Swiss watches in the early 2010s, so there's reason to believe people still want to wear those swag timepieces.
But what happens if Swiss watches lose that luster?
Look back to the 1970s, when the industry nearly collapsed under siege from such Japanese upstarts as Seiko Holdings Corp., which pushed technology as a cheaper, more accurate alternative to Swiss watches. The mechanical watch fell out of favor, sparking a decade-long crisis that saw factories close and thousands of watchmaking jobs disappear. Then came Swatch, a breakthrough, low-cost answer to the onslaught of Japanese competition. Marketers lauded the Swiss reputation for design, even though the small plastic wristwatches were little like their beautifully hand-crafted counterparts. Bright, fun styles brought watches to a younger shopper, and Swatch became a global powerhouse.
Meanwhile, Switzerland's higher-end crew led their own renaissance in which mechanical watches become prestige items, not time-checking essentials. Watches from Rolex SA, Patek Philippe & Co., and Breitling SA became the coveted luxury items we know today, and the industry was reborn.
"The significance of the watch as a means of keeping the time became increasingly negligible," wrote a team of economists at Credit Suisse Group looking back at this revival in 2013. "The Swiss watch industry succeeded in identifying this paradigm shift from an early stage and found new selling points that are aimed more at the symbolic and emotional aspects of the product."
The latest turmoil, much like the threat from Japanese watches in the 1970s, comes from a potent combination of smartwatches and younger consumers with changing tastes. Global shipments of smartwatches surpassed those of Swiss wristwatches in February, according to data from market research firm Strategy Analytics Inc.
Aside from TAG Heuer SA, which released a $1,500 smartwatch last year, Swiss companies have been slow to respond this shift. Only 25 percent of watch executives consider smartwatches a competitive threat, according to a survey last year by Deloitte. There's been no major effort so far to design a way out of the current crisis.
In May, Richemont CEO Richard Lepeu said Swiss watchmakers "should never be arrogant" and rule anything out. "Technology's progressing very fast, and we never know what might happen." For now, however, Lepeu and his counterparts seem confident that they can ride out currency and commodity fluctuations while waiting for the return of spending tourists.