Seiko, Swatch, and the Swiss Watch Industry (with Aled Maclean-Jones)

Aled Maclean-Jones: Indeed.

Aled Maclean-Jones: Thanks very much, Russ. I’ve been a listener for a long time, so it’s a real pleasure to be here.

Aled Maclean-Jones: Yeah, so I chose that year, I suppose–that period, the early 1980s, was seen certainly within the Swiss watch industry as the pivotal moment. It’s also probably the moment of the Swiss watch industry’s lowest ebb. Certainly for the last 30 years prior, they essentially had a dominance over the global watch market. Watches meant Swiss. I think this was something they assumed would carry on forever. But, obviously what you then had happen was these quartz watches, this new technology.

And it’s interesting, a quartz watch–we call it a watch, but ultimately it’s a completely different technology. The only reason they share the same name is simply because they have, I suppose, the same function. But, this whole new technology entered the market and was really spearheaded by the Japanese. And, very, very quickly, as these things often do, the industry went from a position of global dominance to one of quite profound weakness. So, I think it’s around half of Swiss watchmaking companies went bankrupt in the years prior, and also two-thirds of jobs within the industry also ceased to exist.

And so, I begin the essay in this car park in Basel with these two figures, Jacques Piguet and Jean-Claude Biver. And, these were two slight sort of renegades and mavericks who had just bought a new watch brand called Blancpain, and they were ready to lead the fight back against quartz and try and save the industry. The problem was they didn’t really have any cash. So, they basically had, I think, a borrowed Volkswagen Westfalia, which is an excellent camper van by all sounds. And, they were there for the Basel Fair, which was at the time the main event of the watchmaking calendar that happened once a year in Basel. And, they were there to make their big debut and shake up the industry a little bit.

Aled Maclean-Jones: Yeah. Yeah. I think there’s two elements. So, firstly, I was laughing a little bit because you mentioned slide rule, because the book I’ve got next to me while recording this is called Slide Rule. It’s a memoir of a very niche English writer called Nevil Shute and has lots of loving references to slide rules. I totally agree with that.

And I think what’s also very interesting about the Swiss watch story is that the largest–the kind of incumbents, the really big players, for example, like Rolex, and I suppose Patek Philippe as well, who are dominant today–they had this sort of–I was thinking about Andy Grove’s idea of the inflection point and where there is a industry disruption and you’re going to get a very quick response.

What’s very interesting about this story is I think Rolex and Patek had the firepower to almost stay put and wait it out a little bit. And so, the impetus for change and renewal had to come kind of elsewhere.

Aled Maclean-Jones: Mmm. Yeah. No, totally. Yes, it’s an interesting one because it sort of started–I mean, the first kind of experiments happened in Bell–and it’s a classic Bell Labs theory-of-everything story as well, in that you had a team in the 1920s that sort of came up with the kind of original way of doing it. And then, there was this, just, race for kind of miniaturization. And, you can see–and it’s very interesting that the Japanese took it so seriously and you see it begins with–it goes then into chronometers, and then you have–I think it’s the Tokyo Olympics. Then it’s used as sort of timing mechanisms. And then, very quickly, then the team at Seiko come up with this quantum leap.

It’s not as well as if other people aren’t working on it. One thing that is very commonly told within the Swiss side of the story is that there was a–there was certainly a team there who were working on those watches–on quartz mechanisms–very early. And, there was a center, it’s called CEH [Centre Electronique Horloger], and that center was experimenting and working on it, and the watchmakers were all paying in. It’s just nobody took it quite as seriously as Japanese.

And also, when the article came up, again, it was that classic thing about market sizing and so on and so forth. Again, the market for a watch that’s a little bit of a gimmick with the size–that costs the same as a Toyota. That’s not going to be great, but it’s very, very fast. The innovations come thick and fast in the 1970s, and they’re very good at commercializing them as well. So, it’s one of those things where I think things happen slowly, but then very quickly, and this was a good example of that in practice.

Aled Maclean-Jones: I think that’s certainly–yeah, okay. I’m absolutely gutted to have found that Smith quote that I missed that, particularly The Theory of Moral Sentiments. It’s an interesting quirk. I mean, when Smith is writing that, it’s an interesting quote where you have–because ultimately the quest for a really accurate watch comes from essentially seafaring. Right? That’s the whole value of it. Because when Smith is–in that time, Smith is writing 50 or so years before there begins to be this push towards the idea of a unified time. So, at that point where Smith–there will have been an Edinburgh time, and that would be very different to it a Glasgow time and so on and so forth.

Again, it’s so fascinating reading from that period. The watch is this kind of communal coordination problem solver. That was what it was first and foremost. And, that bleeds into the–even in 19th century, the idea–the world that we have today where–so, in front of me recording this, I’ve got three ways of telling the time, two of them–essentially the monitor on my phone are both linked atomically. There’s a much more casual approach to time, which is essentially the default for the vast majority of the last half millennia.

So, Smith is right in many ways. Even then you can see as well the kernel of the idea that watches are–and not just about telling time, they’re about–there’s something innate about the craft that is very, very important as well.

Aled Maclean-Jones: So, I am. So, I’m not actually a watch person. So, I basically–I had never worn a watch until writing this article. The way I came to this article was–I was interested in questions of human work in a time that we’re slightly anxious about automation and so on and so forth: what was a really good example? It’s a bit more sophisticated than talking about horses or typewriters or stuff. About how people actually adapted.

And so, I wasn’t to start, but then it does kind of catch you a bit. You know what I mean? I was thinking about that Susan Sontag quote, like a writer is someone who is interested in everything. And, this is definitely one of the everythings that pulled me in.

So I do now wear a watch mainly–and it is a mechanical watch as well, but mainly–I thought if I write this article about the majesty of the watch industry, I’d better have some skin in the game or a watch on my hand.

Aled Maclean-Jones: Yeah. So, the other point to make there as well, is I think it’s important to get into the mindset of the Swiss industry at the time. I mean, the Swiss watch industry has always been really the winner on price. It was the British and the French watchmakers who were the ones that focused on quality in the 18th and 19th century. The whole point around Switzerland and the watchmakers and the Jura is that they were able to arbitrage. They were able to provide extreme quality at a much lower price. And, that was really–the last real challenge that I would say the Swiss watchmakers had would have been in the 1870s and 1880s, which was from American manufacturers, who were able to basically do the ultimate good-enough watches, but get them down to the cost of a dollar and so on and so forth.

And so, it was interesting that as well that it undercut the idea because they were being out-competed on value.

And so, the Japanese, obviously–so you have Seiko, Casio obviously follow as well. What essentially happens in Switzerland is you have a moment of desperation. So, firstly, you end up with companies that are stuck. So, some companies will basically respond by trying to do the whole quartz thing and doing it very heavily or expanding the number of models.

So, actually Omega is the real example of this that is often given, where they expand their number of models to almost a 1,000 apparently, and they sort of have a sort of–it’s a moment of a kind of spasm.

Then you have the kind of larger companies, who have the brand that is going to last. And, I think about Rolex here, which today is the dominant Swiss watch company. They sort of enter a defensive crouch, I would say, where they make one–they do some dabbling with quartz. You can still get these Rolex Oysterquartzes that are quite popular. They’re quite a niche line. But that was it. They were like, ‘You know what we’re going to do? We’re going to wait it out and see how things go.’

So, what then happens is ultimately the companies run out of money, and you get this very large consolidation play. So, you end up with–because at this point there’s a very strange relationship between the fact that the–you have the movement makers. So, you have the people that make what’s inside the watch. And then you have essentially the brands, and they’re the ones who focus on the casings and selling the watch as well. And so, you’d have a strange situation where if, say, a movement manufacturer is going to go bust, the watch manufacturer would be, like, ‘We’re going to buy–we’ll take you on.’ And, vice versa as well.

And so, you ended up with these two very large kind of conglomerations, basically–two very large lifeboats that were reliant on loans that were backstopped by the Swiss government, I think, to basically survive. And so, that was kind of–when we entered the 1980s, that’s kind of the situation. You have some manufacturing. The large players have gone into a defensive crouch. And then you have these two very large, very unwieldy lifeboats that are ones like–not orderly lifeboats: they’re like the ones in the Titanic where you’ve got lots of people clinging onto them and everyone’s pushing each other off.

Aled Maclean-Jones: No, totally. Yeah. So, they basically, at this point, they bought a slightly dormant brand and they have created a little bit of–well, I think Biver in particular has created a little bit of history around it: that lots of people on the Internet will argue about how old it is and so on and so forth, but it was very much positioned as a–and so they are working on watches together, and most importantly, I think they were positioning their watches as kind of, like, the antidote to quartz. So, this idea that these are made by human hands. That they were these makers in the mountains. And, what you are buying is not a device to tell the time, but you are solely buying a device that is a tribute to human craftsmanship.

And, they come out with lots of quite enjoyable slogans around quartz and around the company. And ultimately–of course, the problem is that early on, the don’t actually have–they don’t really have any product. So, it’s really wonderful marketing gimmicks. Because, of course, these Watch Fairs are–these stands will have loads of watches. I mean, I’ve talked about Omega and they’ve got a thousand models or whatever at the time. But they only had two when they went in, in 1984. And so, they were, like, ‘You know what we’ll do? We’ll create some mystique and an allure here. All the cases will be empty and you just have to come and speak to us about it.’ Rather than have two–smack two watches sitting in the middle of nowhere. ‘We’ll do that.’

And so, yeah: There was a whole story that they were telling. And I think that was the real innovation here, was the storytelling. Less a new technology entering the market, just a new way of positioning the product.

Aled Maclean-Jones: No, totally. Yeah. There’s a lot of debate online about that date in particular. But again, it just sort of, it kind of just unlocked a lot, I think.

And, I’m trying to think of a few others, but–

Aled Maclean-Jones: No, totally. Yeah. And, I think as well–it’s interesting as well what the luxury watch market looked like before Blancpain. In that, you know, like, ultimately, there were still watches that had a luxury element to them, but they were normally like luxury, for example, because of the number of jewels. Right? And that thing. And also, a lot of the watches that we would now see as luxury watches–like, the Royal Oak is a good example.

Or even at the Rolex Daytona. Right? I mean, they were around before this. They just never had quite managed to land the kind of messaging and positioning because there was still always a link with utility at the heart of it. These were sort of, like–the watch I’ve got is a Rolex Explorer 1. I mean, that whole thing was around–the story they generated there was around the fact that it went up Everest, allegedly, and this was the–and this was the watch of mountain climbers. I think I have a bit in the article–I think it made it in–which was around James Bond’s watch in the novels where he has a Rolex and uses it for many, many purposes, including a knuckle duster at one point as well. There was an element of prestige to them I think that’s very important to flag. But they were not–they just hadn’t quite found the marketing. It was still pegged in some way to the way they were used.

Aled Maclean-Jones: Yeah.

Aled Maclean-Jones: No, that’s totally right. And, I think the Eisenhower and the Rolex President is a really good example there, the kind of Day-Date [another Rolex watch model–Econlib Ed.] and the relationship with presidents. It’s not really the craft that they’re leaning on there. It’s the fact that you just end up with this very prestigious set of–you’re just in great company, aren’t you, when you’ve got yourself a gold Day-Date, whether it’s presidents or–now of course, Tony is probably more well-known for Tony Soprano, but at that point it was presidents throughout.

Aled Maclean-Jones: Yeah, so I think Nicolas Hayek is a wonderful figure. He was essentially a management consultant specializing in engineering works and built his own management consultant company, and was a relatively–and he got himself onto the radar of just the Swiss banks in particular for various bits of work. I can’t remember exactly, but it was something to do with the Swiss military and some tanks or something. I can’t remember exactly, but it was something excellent.

And, he was asked–so, I mentioned these two very large lifeboats [financial term for failing businesses that are barely being kept afloat–Econlib Ed.]. He had come in and was[?] asked, ‘Would you take a look basically at what we can do with these companies? Because, we’re sick of being in a situation where we are ultimately having to issue more debt and low guarantees and so on and so forth to keep them afloat.’

Aled Maclean-Jones: Exactly, right. Yes. And, one is more leaning towards the movements and the other one is slightly more brand-facing. And so, he essentially is told to go away and basically come up with a report. This is actually slightly earlier than the legendary Basel car park incident. So, I think this is 1982, off the top of my head, but he basically is–

Aled Maclean-Jones: He’s asked to get this report, and I tried to get it. I tried so hard to get it, but it’s very hard to get. But, anyway, the report essentially in a classic–he sort of rewrites the brief, essentially, and says basically, ‘I think it’s much better actually that we have one company and one company leads.’

And, they’re quite reluctant to do this. So, I think he said it takes a couple of goes to get this. He proposes it, and they say, ‘We’re not ready for it.’ And then, I think on go two or three, they say, ‘Yes, okay.’ And so, essentially a new large company is created, basically. And, with Hayek very much involved, his involvement increases over time. And, this is meant to be a new start for Swiss watchmaking, by which you can rationalize a lot of the things that need to be rationalized.

Aled Maclean-Jones: Yes, exactly right. Yeah. I mean, so Hayek is such an interesting figure because he’s sort of like–and it is interesting, the name, because he is slightly like a business philosopher. And, it’s very interesting watching his interviews. He treats this whole thing very philosophically.

I mean, there’s a quote I think that might still be in the article. He was obsessed with the idea of using this as a model to prove that Europe could build and Europe could compete essentially with–at this stage, his obsession with offshoring and so on and so forth. And, it’s upsetting as a Brit, because he always chooses the way to do things badly is the British automotive industry, which was extraordinarily good and then tried to do manufacturing and just didn’t get it right and lost the quality, lost the reputation. And so, there’s that quote where, “We must build where we live. When a country loses the know-how and expertise to manufacture things, it loses its capacity to create wealth–its financial independence. When it loses its financial independence, it starts to lose political sovereignty.”

And, as you say, the way he basically did that was he inverted the way things were done at this time, where you had–the brand stuff and the marketing stuff was very, very centralized within these lifeboats. And, he was very much, like, the way to solve that problem is to decentralize that and so to push it out. He has a wonderful quote that’s not in the article, which is, ‘Each brand is different, so each message is different. My job is to sit in a bunker with a machine gun defending the distinct messages of all my brands.’ That was the first part of it.

Aled Maclean-Jones: I suppose. I think it’s interesting as well, because, I mean, one way I was thinking about writing this, you could frame it as almost like you have the romantic and the rationalist. You have Biver as the romantic and Hayek as the rationalist. But I think–you know, Hayek himself, he was a huge–there was definitely a sense of a real love for the romance of it all. I think for him, he felt there was a much better way of–if you think about some of the brands that they then inherited–you think about Omega: Well, okay. We can position Omega in one way. And, you’ve got other luxury brands that you can position in other ways, and so on and so forth.

And, that’s kind of how the modern watch market works today. Right? Aside from a few of the standalone players–you think about Rolex or Cartier–you have essentially a number of groups who will have within them–they often paint it as a triangle, where you’ll have–you have the ultra premium at the top, you’ll have the high premium, the middle premium, and the low premium. A lot of them will share movements, for example. A lot of them will share movements, and they’ll–and again, that was the second piece of what Hayek wanted to do, was bring all of the movement-making and consolidate all of that. Which is interestingly like a play that is still developing today. Right? So, Rocca’s sister company, Tudor, that’s really lent into the movement side of it and is still a live debate about movements in watches–buying movements from other watches–what does that do to the quality of the watch?

But, for him, it was all about survival. There was a huge amount of automation that could be done.

Aled Maclean-Jones: Yeah. No, it totally was. Because for me, that’s the real genius of Biver and Piguet and Blancpain is that they essentially kind of showed this way. And then other companies picked this up and did it in incredible ways. You think about Patek and the real winners of the luxury watch market today, they are the ones that really took the lessons and learned it so well. And so, I think about Rolex and Patek and actually kind of Cartier now are doing really well.

And, again, it’s sort of taking the lessons from those two blokes in the van and applying it basically. It’s always wonderful to see–watch advertising done well is a really wonderful thing. Done badly, it can be excruciating, but when they do it well and you’re walking through the airport in Switzerland on the travelator and you’re getting bombarded and it’s the one that’s really good. You’re like, ‘Okay, hang on. Okay. Yeah. Okay. Well, God. I’m a custodian. God.’ It’s like my [inaudible 00:38:00] and inheritance. You know what I mean? I’m not buying it for me. I’m buying it for some indistinct future me.

It’s interesting, isn’t it, as well? You see a lot of people now who are working technology and stuff, I think–and traditionally, it’s always been about discussions of companies like big tech and Meta and Amazon and so on and so on. But, now the conversation is often about luxury companies now. One of the most enjoyable podcasts the last three years in tech was about LVMH [Louis Vuitton and Moët Hennessy] and the lessons from there as well. And, you will see a lot of people now really turning to luxury for the lessons on how to market.

Aled Maclean-Jones: Yeah. So I think–I totally agree with–firstly, if I was in Hayek’s shoes, and I [?] the pyramid, and I was, like, ‘There’s this whole market here that we’re not touching,’ I would be, like, ‘Stay away. Stay away. Stay away.’

Aled Maclean-Jones: But, I think this comes to the kind of philosopher within him. Because, he saw this as a challenge. For him, he wants to prove–and in a lot of interviews he gave, this was this thing–he wants to prove as well that the West could manufacture cheaply. I think that was one of the big things behind it. And so, he comes in and he’s very keen to be, like, ‘Okay, well. I want us to enter this market. I want us to create a cheap watch that can sort of out-quartz quartz. To show that we can take on Japanese manufacturers.’ And, fortunately for him, there’s a team within ETA [ETA SA Manufacture Horlogère Suisse, a Swiss company], I think, which is one of the main movement manufacturers, that have been working on this.

And, the story behind how they get there is very interesting. So, there’s a team who are first asked by an American businessman to basically create, for distribution to the American market, the world’s thinnest watch. The world’s thinnest watch, called the Delirium. And, they managed to do it, and it’s an incredibly thin watch. It’s like a matter of millimeters. But, they kind of come up with this innovation, which is that you can incorporate a lot of the movement into the casing of the watch itself, into the case back.

And so then there’s a team, and I think there’s a few people in there that I mentioned–so, Elmar Mock and I think Jack Moore–I can’t remember the name off the top of my head. So, they essentially are, like, ‘Surely we could do that with a plastic watch; and it would reduce the number of parts. It would reduce the complexity of the movement.’ Meaning, it could be a lot cheaper. And, they’d kind of been trying this a little bit off the books. There was a little bit of a wild-westiness to it, which I think indicates why they brought in Hayek and why Hayek was so keen to consolidate a lot of the manufacturing stuff if there were all these experiments happening.

But anyway, so they come to him with a bit of a ready-made proposal for a cheap watch. And so, they kind of begin with it. So, it gets the name the ‘Swatch’ and stuff, and they do some testing, and it doesn’t really land particularly well.

So, the interesting thing about the Swatch is–so they start by testing it in–I think it started in Texas. They test it in San Antonio, I think. And, it doesn’t go down that well. And, at that point as well, the Swatches, you buy it from–I think they’re mainly buying it from pharmacies or something. Or no, I think it was the jewelers, I think. I can’t remember. It wasn’t in very exciting colors. And there’s a good bit–I mean, Swiss watch-manufacturing is amazing for apocrypha. The one there is that they were very worried about whether it would succeed or not, but they had to essentially approve the manufacturing of it beforehand. So, it was in very neutral colors, almost army colors. And, the idea was that if the public didn’t buy it, they could sell it to the Swiss Army. I think. Again, I’m pretty sure it’s apocryphal–but I enjoyed that one a lot when I was reading it.

And so, it took a while for them to–so I think it took a few goes, a few iterations of the Swatch. But then, when it took off, and I think they figured out the bright colors, and when it took off, it really took off. And, it was a real phenomenon of the late 1980s.

Aled Maclean-Jones: I think I did when I was a kid. I think I did. Yes, I think I did. I think it might have been my first watch. There was something in there that was seeding my brain, despite my watchlessness, into returning to it.

Aled Maclean-Jones: It’s true. It’s true.

Aled Maclean-Jones: Yeah. Yeah. It’s interesting. Then the–the other innovation that occurred with Swatch as well. So, there’s an interesting life question about: What was the impact of Swatch? Because frankly, today, ultimately the way the market has settled–maybe we can talk about this in a bit–but, the way the market has settled is, it has been the luxury bit of the market that has been their most enduring. And, if you look at–

Aled Maclean-Jones: Yeah, of the Swiss. Yeah. If you look at revenue today, it’s almost exclusively luxury. And, there’s always this interesting life question about: What does Swatch do? It’s really important to not understate the kind of halo effect that Swatch had for the overall cause of Swiss watches, because they had this quite radical–the marketing was quite radical and it was very experiential marketing before Red Bull and so on and so forth did it. I think they arranged the world’s first–I think it was the world’s first break-dancing competition, I think. They did a national break-dancing competition. There was a hip hop tour, again very early.

And then, they did these stunts. The one I remember–there’s a wonderful image of it–is they hung off the side of the Commerce Bank Building in Frankfurt, they hung a 13-ton watch off the side of it. They did that, but also they began as well–the enthusiast trend, the whole trend. The whole point of the Swatches was, if they’re big on this, you don’t buy one. You got to buy lots. Buy lots. They’re all different and you can buy one depending on how you feel every single day. Again, I think that was, for me, where–the role that Swatch plays in the story is that it kind of had this halo effect that, like–teams that stay winning keep winning. And, it was just another example of Swiss watch manufacturing winning in the late 1980s, early 1990s. [More to come, 48:01]