The War of Independence

by Carlos Perez

September 27, 2001

Beneath the cheerful reports of growth and prosperity, expansion and acquisition, there is a cold civil war silently being fought within the watch industry of Switzerland. It is not something which registers upon the consciousness of the average watch consumer, and which gains only cursory interest from most avid collectors, yet the battle lines being drawn today will shape the map of the commercial horology of tomorrow. The conflict of this war centers around the end of a tradition reaching back to the foundation of the Swiss watch industry the loss of a characteristic part of the Swiss horological identity and heritage.

For centuries Swiss watchmaking was a family-owned cottage industry of independent ateliers (workshops) which specialized in certain elements of watch production, supporting the cabinotiers and etablisseurs (assemblers) which produced and sold finished watches. It is this system of etablissage which was the foundation of much of the Swiss industry’s success and 20th century prominence. Even after the industrialization of production, the manufacture of ebauches, components, dials, cases, and other parts was usually separate from the etablissuers task of assembly, branding, and the distribution of finished watches for sale. Those brands which we would come to think of as manufactures would often structure their movement production facilities as separate corporate entities. This all lies in direct contrast with the contemporaneous American industrial model in which everything was produced in-house.

The first blow to etablissage came with the Great Depression, when many etablisseurs and ateliers were forced to shut down. Under the direction and sponsorship of the Swiss government some joined together to survive, while some etablisseurs turned to increased in-house manufacturing. For example Omega and Tissot combined to form SSIH in 1930, of which their brands became subsidiaries. Ebauches SA, a holding company founded just before the Great Depression in 1926, purchased various ebauche manufacturers during 1932, including Peseux and Unitas, and was itself purchased by ASUAG in 1934 with financial aid from the government. Another example was the Genevan etablisseur Patek Philippe & Co., which was sold to the Stern brothers in 1932. From that point on, the use of ebauches was minimized as most movement production was progressively brought in-house. The second blow to etablissage came in the 1970s, when the quartz revolution brought the entire Swiss industry teetering to the verge of collapse, and companies merged into the larger groups like ASUAG and SSIH, or were purchased by non-Swiss conglomerates. The diversity of movement production and sources was further reduced by the elimination of the Venus, Peseux, and Unitas factories by Ebauches SA. in 1983.

In a bold attempt to save the bulk of the Swiss industry from collapse in the early 1980s, Hayek Engineering organized the merger of ASUAG and SSIH, founding industry giant SMH. It is SMH, renamed the “The Swatch Group” in 1998, which is the superpower of the present horological conflict. Swatch owns 16 Swiss watch brands, as well as some of the major makers of cases and bracelets, hands, other components, and controls over 75% of the industry’s mechanical movement production capacity through its ownership of ETA, Frederic Piguet, and Nouvelle Lemania. It currently holds a monopoly over certain critical elements of mechanical movement production like hairpsrings (Nivarox-Far). Akin to a vertical keiretsu, these companies within the conglomerate have interlocking production and supply relationships – trading primarily with each other. The power held by Swatch was clearly demonstrated by the Great Hairspring Scare just before Basel 2000, when the supply from Nivarox-Far temporarily ceased outside of the Group.

Throughout the mechanical watch revival of the 1990s the high-grade ebauches of Frederic Piguet and especially of Nouvelle Lemania were the cornerstone of the watch production of high-end independent etablissuers, and filled the gaps in the movement production of the first tier of independent manufactures. As the mystique of prestige brands often hinges upon the perception of exclusivity, the widespread use of Lemania’s haute luxe ebauches undermined the status of Breguet, Swatch’s premier luxury brand, which is mostly based upon these movements, and in most senses is Lemania’s in-house product. In February of 2001, Swatch made one of the most open moves of this war by telling its customers that it would begin to stop delivery of Lemania ebauches outside of the Group (completely stopped by September 2001), and by reclassifying Lemania’s products as exclusive to Swatch brands effectively limited now to Breguet and Omega. High-end independent etablissuers like Daniel Roth now find their supply of tourbillons, minute repeaters, and even basic automatics cut off, as are the mass-market users of the sturdy 187x chronographs including Breitling and Tag Heuer (LVMH).

Swatch’s other Swiss luxury brand, Blancpain, faces a similar problem through its connection with Frederic Piguet, which has kept most of its complications exclusive to Blancpain while supplying some of the highest grade simple ebauches available to various brands outside of the Swatch Group. Frederic Piguet is now reportedly being restructured into three divisions, one of which will provide Blancpain with exclusive movements, a smaller division which will be devoted to exclusive movements for up-and-comer Omega, and the smallest division which will supply ebauches and finished movements for use by other brands within and outside of the Swatch Group. However these fine movements come with a new catch: All companies outside of Swatch using Frederic Piguet ebauches will be required to state so in their marketing literature a flagrant break from well-established traditional practice and a shot across the bow of the remaining independent first tier brands and those belonging to rival Richemont, who no doubt cringe at the thought of adding Swatch Inside to their exclusive luxury products.

The plight of independent watch houses is clear: With most of the former etablissage network a part of a single conglomerate, most nominally independent etablissuers of mass-market wristwatches are defacto thralls of the Swatch Group, and in the most important senses are Swatch products dependent upon Swatch for movements, components, cases, etc. For independent manufactures and etablissuers of high-grade watches the availability of basic components which was once taken for granted has now begun to prove unreliable. Combined with the gradual disappearance of high-grade ebauches from Jaeger-LeCoultre (Richemont) and the latest changes by the Swatch Group regarding Nouvelle Lemania and Frederic Piguet, we find that the tradition of etablissage within the world of luxury mechanical watchmaking has been effectively ended. Thus despite the apparent prosperity and happy calm of the Swiss industry, the independent makers of high-grade watches are in fact fighting for their very survival.

Perhaps with no little foresight, some of the more prominent of these brands have spent the last few years working towards a new self-sufficiency: They have bought up most of the remaining independent ateliers for their capability to produce ebauches, complications, cases, dials, etc, without being under the thumb or contributing to the profits of Swatch, or have made heavy capital investment in factory expansion and new manufacturing capacity, and the development of new high-grade calibres which are replacing those that they are now losing access to. Sandoz-backed manufacture Parmigiani Fleurier recently announced the introduction of its new in-house automatic calibre 331. A contemporary double-barrel design 11 lignes in diameter, I expect it will eventually serve as a drop-in replacement for the two 11 ligne calibres which are presently the basis of most of Parmigiani Fleurier’s watch production: Lemania calibre 8815 and Frederic Piguet calibre 1150. Parmigiani Fleurier pursued the production of its own automatic after its deal to use Chopard’s Michel Parmigiani-designed LUC calibre fell through. The bulk of Chopard’s annual output of 70,000 watches is based around ebauches from Jaeger-LeCoultre and the three Swatch Group manufactures, and its production of LUC movements only meets the need for 5,000 of those watches. Chopard intends to double the production of its various LUC calibres over the next four years still a far cry from total self-sufficiency.

Self-described moral champion of independence Patek Philippe is only slightly discomfited by the reclassification of Nouvelle Lemania at the moment, due to their healthy store of NOS ebauches of Lemania calibre CHR 27, and their low production of chronographs and chronograph-based complications. It will mean the eventual development of an in-house chronograph movement, and rumours indicate that this has already begun. Perhaps more annoying is the Frederic Piguet advertising clause which comes into effect regarding Patek Philippe’s limited production ultrathins, which are based upon Frederic Piguet calibre 21. It was thought a few years ago that Patek Philippe intended to replace this movement with an in-house one, and perhaps this will actually spur that development an expensive consumption of limited resources for a low profile product with a limited market, though the recent doubling of Patek Philippe’s production capacity with its new factory may take this into account.

This new factory has been supplemented with two recent acquisitions: The high-quality case manufacturer Calame & Cie, and a majority shareholding in micromechanical component manufacturer Ergas Sarl. This has also resulted in what is probably the largest ratio of employees to watches produced in the industry, which brings its own problems. It is also rumoured that after the Swatch Group acquired Universo SA, the primary supplier of hands to the entire industry, that Patek Philippe was abruptly cut-off from its supply forcing it to look elsewhere. So this very high level of self-sufficiency, which has been purchased at a steep price, has not yet brought it complete freedom. Further steps taken by Patek Philippe to ensure its independence come from its baldly stated focus on profitability. Profitability has been optimized by increasing production to a level about 30% less than projected market demand maintaining both the desired level of scarcity while maximizing revenue. Additionally, the bulk of this new production comes in the lucrative form of bejeweled quartz watches for women. Quartz is now thought to account for up to 40% of Patek Philippe’s total production watches that do not bear the Geneva hallmark.

Of all the independent manufacturers, Rolex has gone the furthest towards to fulfilling the old American model of self-contained industrial watchmaking. Over the past several years Rolex started the pattern of acquire-and-consolidate which other independent manufactures have only begun to follow over the past year or two. In a very logical step-by-step process, Rolex purchased most of its primary suppliers, including bracelet manufacturer Gay Frres, dial manufacturer Beyeler & Cie, and crown manufacturer Boninchi SA. What had appeared to be paranoia or an obsession with control a few years ago, now appears to an act of near clairvoyance. Rolex was of course unable to acquire Nivarox-Far which it relies on for its escapement components and hairsprings so it has instead begun the development of its own hairspring and escapement manufacturing capacity at great cost.

If there is anyway that independents like Patek Philippe can distinguish themselves from the prestige brands of Swatch, Richemont, and LVMH, it is through brand image, and brand image goes far beyond those obvious print ads in glossy magazines. High resale values are greatly appreciated by collectors (which will often rate one brand superior to another based simply on this), and this can be maintained by various strategies. Rolex maintains high resale value with an MSRP based on a lower than standard markup on wholesale, and a no discounts policy which results in real world discounts of no more than 5% to 10%. When combined with regular price increases on new watches, pre-owned watches generally sell for close to their original purchase price (more true for some models than others). Patek Philippe in turn regularly bids on and spends millions purchasing watches at auction to keep prices and scarcity high on pre-owned watches. Another way that both of these manufacturers protect resale value is their infrequent modifications of their classic designs. The planned obsolescence of model design a practice driven by the growth mentality of the large groups undermines the market value of older discontinued designs relative to current offerings.

Another venue for promoting brand image is the elite world of haute horlogerie. Perhaps restrained by the bottom line, the prestige brands belonging to the luxury and horological conglomerates do not appear to do as much with low volume super-premium complications for collectors. While no doubt very expensive to produce in terms of limited resources and development dollars, the press which often surrounds these works appears to outweigh their material costs, and they also have great effect on brand status within collector consciousness. While Patek Philippe specializes in rare supercomplications like its Star Caliber 2000 and the Sky Moon Tourbillon, and Girard-Perregaux specializes in tourbillons bridged with gold, no other brand has made high horology its focus in recent years to the degree that Audemars Piguet has.

Like the other high-profile independents Audemars Piguet has taken various necessary steps to ensure its independence: After selling its 40% stake in Jaeger-LeCoultre for a hefty sum it brought the production of its most important Jaeger-LeCoultre movements in-house; began the production of a high-grade in-house handwind; is currently developing a basic in-house automatic, and is looking to make acquisitions. While all of this assures the survival of the house and elevates its status at the commercial level, it is within the art of complex watchmaking that Audemars Piguet is truly setting itself above and beyond the prestige brands of the luxury conglomerates. Through subsidiary Renaud et Papi, which focuses on the development and production of high complications, Audemars Piguet has produced an unparalleled series of tourbillons, striking watches, and the only Grande Complication wristwatch with a movement of classical integrated design. The crme de la crme of their haute horlogerie offerings is the Tradition d’Excellence, or Cabinet series of eight masterpieces (1999-2006) produced in editions of 20. The second, shown above, is a chiming minute repeater with tourbillon, perpetual calendar, and large date.

The peaceful co-existence of etablisseur and manufacture which defined high-grade Swiss watchmaking in the 20th century fades before the dawn of a brave new world of independent, self-contained manufactories, which stand apart from titanic multi-brand conglomerates. No doubt some will rejoice at the thought of more all in-house manufactures, seemingly regardless of the quality of the product being manufactured. Some brands like Audemars Piguet appear to be taking this sea change as an opportunity to step up and produce products fundamentally superior to those of its etablissage years, while other are moving horizontally at best, and still others will decline or fall by the wayside. Yes, we now enter the age of the manufacture, of more exclusive products, and most likely of more expensive ones. Perhaps as in all wars, it is the innocent noncombatant which pays most of the price.

Image Credits

Warrior by Salvator Rosa (1615-1673)

Swatch automatic by Paul Delury

Patek Philippe ref. 5002 by Joacim Olsson

Audemars Piguet Cabinet #2 by Al Armstrong

The Knight’s Dream (detail) by Antonio de Pereda (1611-1678)

Copyright © Carlos A. Perez  2001

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