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As China Slows, Watch Brands Invest in Innovation

Facing a sharp slowdown in growth following a record 2012, watch brands pulled out the stops at Baselworld.

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A piece from 88 Rue du Rhone.

Courtesy Photo

Jaquet Droz's The Bird Repeater.

Jaquet Droz's The Bird Repeater.

Courtesy Photo

Swatch's Sistem 51.

Swatch's Sistem 51.

Courtesy of Swatch

BASEL, Switzerland — Facing a sharp slowdown in growth following a record 2012, watch brands pulled out the stops at Baselworld.

This story first appeared in the May 13, 2013 issue of WWD.  Subscribe Today.

The world’s biggest watch and jewelry fair, totally redesigned after a three-year renovation, drew a record 122,000 visitors between March 27 and April 3, up 17 percent versus 2012. An unprecedented 3,610 journalists were accredited for the event, up 9 percent from the previous year.

Stephen Urquhart, chief executive officer of Omega, said he was “amazed” at the number of nonprofessionals who flocked to the industry’s biggest annual gathering.

“I think it’s becoming more than just a trade fair,” he said. “I spent two hours walking up and down, and I really felt how many potential end consumers there were here.”

Many brands doubled or even tripled the size of their stands for the occasion, enlisting award-winning architects such as Toyo Ito, who designed a striking wooden lattice structure for Hermès.

RELATED STORY: Ushering in a New Era at Baselworld >>

The show of force came as the Swiss watch industry is experiencing a tumble in exports to Hong Kong and China, its number-one and number-three markets, respectively.

In China, a crackdown on the custom of giving expensive gifts to government officials, combined with slowing economic growth, has sharply dented sales. In March alone, exports of Swiss timepieces to Mainland China fell 31.4 percent, according to the latest data from the Federation of the Swiss Watch Industry.

As a result, officials are forecasting Swiss watch exports will post single-digit growth in 2013, following a 10.9 percent rise in 2012 and a 19.4 percent jump in 2011.

“The forecast for the year for the Swiss watch industry is for 5 to 10 percent growth. Everything that is in that range is a very good result,” said Nick Hayek, ceo of Swatch Group, the world’s largest watchmaker. “We hope to be at the upper end of that range.”

In terms of sell-through, or the number of units shipped that are sold to end consumers, Hayek described a “split situation” in China.

He estimated that year-to-date, prestige brands in general have posted at best a single-digit increase, and at worst, declines of up to 45 percent. By contrast, Swatch-owned midrange brands like Longines and Tissot were up 15 to 60 percent in comparable terms, he said.

“With these brands, you can go into third-, fourth-, even fifth-tier cities. If you take a city with 500,000 people in China, it’s considered a very small city, but in this city you could open four Tissot stores,” Hayek remarked.

That view was echoed by Jean-Claude Biver, chairman of luxury watchmaker Hublot.

“Anyone who predicts the decline of China hasn’t got a clue. What we are seeing is temporary, because China has not even begun to deploy its potential,” he declared. “Growth without consolidation is dangerous, because anything that grows too fast or flies too fast will come crashing down,” Biver added.

Philippe Mougenot, president of Chanel’s watch and jewelry division, noted that luxury brands knew since last summer that there would be a drop in demand during the government handover period leading to the nomination of new Chinese premier Li Keqiang, who has pledged to crack down on corruption.

“I think it would be somewhat indecent to complain just because China has slowed slightly since the start of the year, after delivering several years of exceptional growth,” he said.

“Everybody knew the change in government in China would lead to a wait-and-see period on a number of fronts. We think it’s going to last until the end of the first half, and things should return to normal from this summer,” Mougenot predicted.

Thierry Stern, ceo of Patek Philippe, also reckoned the slackening did not represent a long-term danger.

“The danger was perhaps to have focused everything on one single market. That is, of course, something that should be avoided. I think all the brands have now understood that, but unfortunately, it’s a bit late for this year,” he commented.

Indeed, many brands are looking to mature markets to balance demand after years of focusing their expansion plans on China. Tudor, the sister brand of Rolex, said that it would resume distribution in the U.S. after a 17-year absence as part of its efforts to establish a separate identity for itself.

Watch executives were keen to emphasize that the current fall-off does not compare to the crisis the sector experienced in 2009, but they expect retailers to play it safe.

“They know that they want to invest in iconic brands and iconic products,” said Giorgio Sarne, general manager of Tag Heuer. “They want to be sure that the quality is very high. They don’t want to disappoint their end consumers.”

Accordingly, brands sought to play up their heritage with a number of anniversary pieces.

Tag Heuer marked the 50th anniversary of its Carrera collection with the Carrera Caliber 1887 Jack Heuer Edition chronograph. The piece signals the end of an era, as Jack Heuer, the great-grandson of the brand’s founder, will retire this year at the age of 81.

Meanwhile, Jean-Christophe Babin is moving to Bulgari after 13 years at the helm of Tag Heuer. Bulgari and Tag Heuer parent LVMH Moët Hennessy Louis Vuitton has since said that Stéphane Linder, a 20-year veteran of the firm, will succeed Babin, effective June 1.

Seiko celebrated its 100th anniversary with special editions including the Ananta chronograph, featuring a hand-painted lacquer dial in a rare deep blue shade.

Swatch, present at the fair for the first time in its 30-year history, made a splash with the launch of its Sistem 51, billed as the first mechanical watch for the masses. The company, which is credited with saving Switzerland’s mechanical watch industry in the early Eighties, has developed a revolutionary movement consisting of only 51 parts and a single screw, meaning it can be automatically assembled.

Hayek said Swatch wanted to sell “millions” of units of the Sistem 51, which will be priced between 100 and 200 Swiss francs, or $106 and $213 at current exchange, compared with an entry price of 60 Swiss francs, or $64, for its quartz watches.

The launch has a political dimension too, coming at a time when Swatch Group is poised to secure a long-sought deal to cut sales of key components to other brands in what would be a serious setback to rivals like LVMH and Compagnie Financière Richemont SA.

Hayek has contended the easy availability of his group’s components has made rivals disinclined to invest in their own production capacity, and allowed them to divert spending to marketing and store networks instead. He sees the Sistem 51 as proof that it is possible to produce mechanical watches in Switzerland at a low cost.

“I planted this flag because I think we are at a critical moment in countries like France, Italy and the United States. We need to encourage entrepreneurs to try to make mass products that are innovative. That’s how you create jobs in these countries again. It’s not with accounting measures,” he told WWD.

No date has been fixed for the ruling by Switzerland’s Competition Commission (ComCo) that will allow Swatch to reduce its supply of components, but rival brands have been preparing for it for several years.

Francesco Trapani, president of watches and jewelry at LVMH, noted the group has increased production of movements, cases, dials and bracelets.

LVMH, which owns brands including Zenith and Hublot as well as Bulgari and Tag Heuer, has acquired suppliers such as Swiss watch-dial manufacturer ArteCad SA, though it remains dependent on third parties for essential regulating mechanisms like high-tech hairsprings.

“Going forward, internal production will increase, but we don’t have as an objective to become totally internalized. Nobody is totally independent, and it’s not convenient from an economic point of view,” Trapani said.

“So the ComCo decision does not preoccupy us, because we are well equipped with the right plans for the future,” he added. “Today, I cannot exclude further acquisitions, but we don’t have anything in the pipeline, and it’s more about investing in what we already have in order to increase production capacity.”

Even brands rooted in the fashion industry have been bolstering their watchmaking credentials:

• Louis Vuitton is building a new facility in Geneva, which it hopes to open in the first half of 2014. The plant will bring together under one roof its product-development center, currently located in La Chaux-de-Fonds, high-end movements unit La Fabrique du Temps and watch dial manufacturer Léman Cadran.

• La Montre Hermès revealed shortly before the start of Baselworld that it had bought a majority stake in Swiss watch-case maker Joseph Erard Holding. Hermès ceo Patrick Thomas subsequently said the luxury group could eventually increase its 25 percent stake in Manufacture Vaucher, which supplies it with movements.

• Kering is equipping Gucci and Boucheron timepieces with movements manufactured by its top watch brand, Girard-Perregaux. The Gucci Dive automatic watch signals the creation of a niche segment of premium timepieces within the brand’s offering. Meanwhile, Boucheron unveiled a new watch collection, the Epure, available in a minimalist version or in a jeweled Epure d’Art edition, all equipped with GP 4000 movements.

• Chanel launched new limited-edition versions of its women’s Première Flying Tourbillon, developed in collaboration with Renaud & Papi — the advanced research and development branch of Audemars Piguet. Introduced last year, the timepiece was voted best ladies’ watch at the Grand Prix d’Horlogerie de Genève awards.

• Versace has teamed up with the Ecole d’arts appliqués of La Chaux-de-Fonds to launch the Versace Watch Talent contest. The winner will be revealed at Versace’s Via Gesù headquarters in Milan on June 6, and their design will be produced by Vertime, the Timex Group unit comprised of the Versace and Versus brands.

The most visible sign of industry consolidation, however, was the announcement on the eve of the fair that Swiss luxury watchmaker Corum had been sold to Chinese watch manufacturer and distributor China Haidian Holdings Ltd., which also owns the Swiss brand Eterna.

Corum ceo Antonio Calce said he hoped to gain visibility in China and double output in the next seven years to between 25,000 and 28,000 units — but he dismissed suggestions that Corum would alter its positioning.

“I want this brand to remain exclusive,” he said. “We have a lot of room to increase volume, but Corum is not a mass brand, so we will never produce 100,000 watches.”

Swarovski said it was on the acquisition trail, as it bids to topple Cartier and Tiffany & Co. to become the global leader in the fine jewelry segment.

Robert Buchbauer, a member of the executive board at Swarovski, said that goal might appear ambitious for a company primarily known for fashion jewelry. He went on to explain that Swarovski is diversifying into fine jewelry and plans to grow into a multibrand group by buying firms in the bridge and fine jewelry segments.

“We want to strengthen our position further by reaching out a little bit beyond what we’re doing now, by extending our price positioning upwards by means of internally developing new concepts and brands to a certain extent, and making acquisitions that make sense,” he said.

Swatch Group chairwoman Nayla Hayek — who on Friday was named ceo of Harry Winston — lifted the lid on some of the group’s plans for the luxury jeweler, which it snapped up in January for an enterprise value of $1 billion. She confirmed Swatch Group is in talks with Harry Winston’s former owner, Dominion Diamond Corp., to form a joint venture for polishing diamonds to be used in watches.

As expected, Swatch Group plans to ramp up manufacturing and distribution of timepieces, which account for 25 to 30 percent of Harry Winston’s revenues. But it also intends to invest in jewelry production, in a bid to remedy stock shortages that have curbed sales of more accessibly priced ranges, like the Lily Cluster collection.

“Harry Winston is in the family but will stay Harry Winston as a brand and has to be Harry Winston as a brand. There will definitely be some opportunities to integrate Harry Winston watches also in our retail network, but the Harry Winston Salons will remain,” Hayek said.

Among the most striking directions at Baselworld were women’s watches with larger round dials, reflecting growing female interest in mechanical timepieces, which typically require a wider diameter in order to incorporate technical functions such as a chronograph or a perpetual calendar.

Bulgari, for example, unveiled Il Giardino Tropicale di Bulgari, its first grand complication ladies’ watch. Its 37-mm. dial, adorned with miniature painting and set with 61 brilliant-cut diamonds, opens up to reveal a tourbillon movement.

As part of its new Tambour Monogram line, Louis Vuitton presented a 38-mm. tourbillon in pink gold set with diamonds, featuring a mother-of-pearl dial with a sunray guilloché pattern and subtle monogram engravings.

Dior added a dramatic black 38-mm. version to its La D de Dior range. In diamond-set steel or pink gold, it features an onyx dial with diamond hour markers. Girard-Perregaux introduced elegant variations on its 1966 ladies’ watch, also with a 38-mm. dial, in mother-of-pearl embellished with diamond-inset curves.

Rose gold made a strong showing across the board, as did blue dials, which were all the rage for men’s watches at Tag Heuer, Rolex and Omega, among others.

Cindy Livingston, president and ceo of Sequel AG, credited Michael Kors with popularizing rose gold, which features prominently in the Gc and Guess watch collections, for which Sequel holds the license.

But rather than go head-to-head with Kors in the sports watch category, she decided Guess needs to play up its extravagant side, with plenty of animal prints on offer too.

“When you get as big as we are, people tend to get safe, and this is not the time to be safe,” Livingston noted. “That’s what is really selling through at retail, all the really fun, aggressive, fashion stuff that nobody has in their closet.”

NEXT: Standout Pieces >>

 

STANDOUT PIECES
 
• Hublot’s MP-05, designed alongside Ferrari engineers to be the watch counterpart to its flagship “La Ferrari” supercar. Boasting 637 components, it has a record-breaking 50-day power reserve thanks to its 11 barrels, arranged like a spinal column down the center of the dial.

• Breitling’s Emergency II, which has a built-in dual-frequency transmitter that allows the wearer to be located by satellite — perfect for hikers, sailing enthusiasts and millionaires living in countries with high kidnapping rates.

• The Jaquet Droz The Bird Repeater, an authentic automaton celebrating the brand’s 275th anniversary. Its three-dimensional dial represents two blue tits who come to life mechanically, feeding their offspring in a nest as an egg splits open to reveal a tiny chick, while a gong strikes the hours, quarters and minutes.

• Harry Winston’s Opus XIII, developed by watchmaker Ludovic Ballouard, which tells the time thanks to a complex mechanical dial featuring 59 pivoting minute hands, 11 rotating triangles for the hours and a sliding trapdoor under a faceted dome that opens twice a day to reveal the Harry Winston logo.

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