New Swiss-Made Rules Good?

08 MAY 2017

New Swiss-Made Rules Good?

Do the new "Swiss Made" rules benefit the watch industry? Keith W. Strandberg asks two industry leads to weigh in with their views on the matter. by - Keith W. Strandberg

The Pro View:

New Swiss Made rules benefit the watch industry

The strengthening of the “Swiss Made” ordinance for watches by the Swiss Federal Council is excellent news, not only for consumers, but manufacturers too.

The term “Swiss Made” has long been associated with watches, and consumers often identify the “watch” as a product with Switzerland as the country behind it. This reputation has been forged for centuries and well-known sayings like “as accurate as a Swiss watch” still exist today. When Jean Calvin, an influential figure in the Protestant Reformation in Geneva, banned the wearing of decorative jewelry in the mid-16th century, the city’s goldsmiths and jewelers had to turn to watchmaking. This marked the birth of the unique watchmaking tradition in Switzerland and the country went on to build an unrivaled reputation and know-how in this field. It is this blend of tradition, experience and creativity teamed with the very latest technology that has made the Swiss watch industry what it is today. This incredible heritage benefits the whole Swiss watch industry, separately from the different brands and their market segments.

However, this heritage is dependent on consumer confidence and associated with responsibility. On the consumer confidence level, the Swissness Worldwide 2016 study by the Institute of Marketing at the University of St. Gallen shows that in a large majority of countries, more than 90% of consumers tend to buy a Swiss watch in preference to a foreign watch at an identical price. Even if the price of the Swiss watch is twice that of a similar foreign model, a majority of consumers would still buy the Swiss watch. In other words, the price premium for a Swiss watch is more than 100%! On the responsibility side however–and this is the counterpart–surveys show that consumers expect a Swiss watch to contain at least a significant proportion of Swiss components and value, across all market segments. To put it in a nutshell, consumers buy Swiss watches because they expect them to offer added value.

Such consumer confidence deserves adequate protection of the term “Swiss” in relation to watches. In regulatory terms, this has not been the case until now, as the former “Swiss Made” ordinance for watches did not state a percentage for the level of watch manufacturing costs incurred in Switzerland.

This meant that literally all the components of the watch, with the exception of the movement, which had to be Swiss for 50% of the value of the components, could be foreign, provided the assembly and final checking of the watch took place in Switzerland. The Swiss proportion of some specific “Swiss Made” watches was therefore very limited. As indicated above, this is drastically out of step with consumer expectations.

The new law now requires at least 60% of the manufacturing costs of a watch (as a whole, not only its movement) to be incurred in Switzerland. It also requires engineering and prototyping to be carried out in Switzerland for all mechanical and electronic watches. Therefore, it reassures the consumer that a major proportion of their “Swiss Made” watch really is Swiss-made and that the technical development of the watch takes place in Switzerland. This process, combined with the assembly and final checking of the watch in Switzerland, ensures that all the important steps in manufacturing a Swiss watch take place in Switzerland itself. At the same time, the minimum 60% level of production costs that have to be generated in Switzerland still allows the manufacturer–if it so chooses–to buy components from abroad to a certain extent, but much less than before. It will be up to the manufacturer to use this possibility responsibly by maintaining an adequate level of quality. As a matter of course, manufacturers who do not comply with the new rules still have the option to produce in Switzerland without using the “Swiss Made” symbol.

Thanks to the new rules, every single buyer of a “Swiss Made” watch now knows that his product is strongly linked to Switzerland and that all the important steps in production took place in the country. This is unique and now in line with high consumer expectations. Consequently, consumer trust will be safeguarded in the long term and all Swiss manufacturers will benefit from the tighter rules in the future. And last but not least, adequate rules in Switzerland will also help obtain better protection of the term “Swiss Made” abroad.

by Yves Bugmann
Head of Legal Division, Federation of the Swiss Watch Industry FH

The Opposition View:

Wrong Concept – Wrong timing

To avoid any misunderstandings, I am in favor of solid Swiss Made rules and I admit that my eight-year political fight against most elements in the new regulations was almost in vain. The new law is in place and we have to live with it, hopefully for less time than when the Swiss watch industry was regulated under the now-ending 1971 rules, which have allowed the industry to grow tremendously across all price ranges. My brother Andre and I developed our father’s brainchild, Mondaine, in 1951, and we bought and developed the Luminox brand over the last 10 years as a second pillar. Both brands, as well as our M-Watch, have always been manufactured in Switzerland and will continue in accordance to the new law. In our state-of-the–art watch factory with a modern “white room,” we assemble watches in a dust-free and temperature and humidity controlled atmosphere, employing manual and robotic work techniques.

So where is the problem? As manufacturers and entrepreneurs, we are confident in abiding by the newly imposed rules. But as an economist, having seen the ups and downs in our industry during the last 40 years, with the fundamental technological and marketing changes involved in the quartz and digital watch revolution in the 1970s, I question the conceptual shortsightedness of the new law.

Swiss stands for reliability, good quality and workmanship, and sober and consistent design. None of these key issues are honored or supported as these cost elements are, to a large extent, excluded from Swiss content. The development of marketing and distribution strategies in a digitally driven world–which is rapidly and irrevocably changing buying patterns, distribution channels, product information, services, prices and features–should be supported by a law and it should not punish efforts of companies to manage such challenges.

Instead of including Swiss cost elements as a part of Swissness, such costs are explicitly excluded from Swiss content. After-sales service, the base for longevity and reliability, is a costly element in a manufacturer’s calculation, as we keep parts and know-how for many decades in order to service even lower cost watches. Again, such costs are explicitly not part of Swissness. The law focuses on the materials and direct labor cost in a very complex and restrictive calculation: the imported versus the Swiss’ pure material and direct labor value. Research and design cost can be included if done in Switzerland. Lower cost watch manufacturers have hardly any advantage.

What would have been a better solution, guaranteeing consistency with Swiss values and work as an incentive in keeping a high degree of Swiss brainpower and know-how linked to Swiss Made watches? Compare the added value in Switzerland to the imported value. This way, all cost elements originating in Switzerland would be the Swissness contribution to the product and the services linked to it.

How do watch manufacturers deal with the new law? As expected, there is hardly any change for companies in the higher price bracket and for industrially verticalized big groups. A certain part of the collection for most brands will stay unchanged, as certain models fall into the framework of the new law. Certain models will see a price increase, and you will see a certain downgrade in quality when a manufacturer can achieve Swiss Made by buying an imported part, such as a watch case, at a lower cost by avoiding certain things such as screws on the caseback or using mineral crystal instead of sapphire crystal.

The new rules are focusing on a purely materialistic view of certain cost elements, a, dare I say, backwards approach, compared to embracing and supporting the innovative brainpower in marketing, distribution and long-term promises a typical Swiss product is expected to have. In companies such as ours, the part of not-material/production related costs, mainly manpower, is considerably higher than the production cost of that manpower. But this cannot be included as Swiss cost when calculating for the Swissness declaration.

Time is important for watches and timing was not on the industry’s side because the law was debated during a phase of economic euphoria. Talking to federal politicians, I hear that the law would not pass in its current form nowadays.

Wrong concept and wrong timing make the survival of many brands and factories more difficult. Only some big Swiss and non-Swiss Made companies will eventually benefit. But companies surviving beyond the technological, Internet and economic challenges, as well as the new law, will be truly long living. In all modesty, I count our brands among these achievers.

www.mondaine.com

by Ronnie Bernheim
CEO, The Mondaine Group