September 3, 2017
by Ariel Adams
I recently re-read an interview from 24 years ago with Nicolas Hayek Senior that felt surprisingly relevant today. In the 1980s Nicolas Hayek Sr. put together the company now known as the Swatch Group, aka SMH. Among many other things he did, Hayek is the person most people associate with the force that “saved the Swiss watch industry” after the “quartz crisis” which severely threatened the traditional watch industry back in the 1970s and 1980s. While Hayek didn’t act alone, a big part of his legacy continues to be the clever steps he took to save the Swiss watch industry, as well as its manufacturing base from the threat of cheaper – and in many instances more reliable – watches that could be produced much more cheaply in the Far East.
Today some 30-40 years after the quartz crisis, the Swiss watch industry is in the middle of a new type of crisis. This new one doesn’t yet have a name (only history can give it that), and also has both parallels and divergences from the original quartz crisis. This new crisis came about as a result of many business problems the luxury watch industry faces (of which I’ve all written about at length), which include issues such as outside competition, difficulty in managing salable production volumes, inefficient distribution, pricing problems, a challenge to produce effective marketing, and rampant ineffective leadership. Each of these things would have been matters Mr. Hayek knew a lot about, and would have had a lot to say about if he was around today. I didn’t even know him and I miss him.
Nicolas Hayek died the day before my birthday on June 28th, 2010. Given that the Chinese market boom from the time was still in full swing, and because the smartwatch industry was still very nascent, even though Hayek lived through the beginning of the current watch industry economic environment – we really don’t have a lot of information on what he felt or would have had to say about it. With that said, given Hayek’s often prolific commentary – we can make a lot of educated guesses.
I’ve frequently asked myself “what would Hayek do?” when faced with many of today’s Swiss watch industry issues. Sadly, I cannot ask the man himself. Nevertheless, I’d like to reference an often forgotten interview he did with the Harvard Business Review publication back in 1993. Full of choice quotes and wise “Hayekisms,” let’s see how Nicolas Hayek’s philosophy toward business and the Swiss watch industry might prove relevant today.
Allow me to inject my observation that much of what the watch industry is experiencing today, it already experienced in a very similar form during the quartz crisis or otherwise in history. More so, I want to point out that many of these things were observed and remedied by Mr. Hayek himself. If anything, the watch industry should be blamed for forgetting much of the wisdom Mr. Hayek attempted to leave behind. More so, aside from a handful of proteges such as Jean-Claude Biver, there are very few (if any) people in the watch industry today which are candidates to take over in Hayek senior’s shoes as “savior of the European watch industry.”
A bit more history for those who need it. The quartz crisis (or “quartz revolution” depending on which end of the table you were sitting) occurred when the traditional watch industry that was accustomed to producing mechanical movements was presented with the disruptive technology of quartz movements. At first, quartz movement technology – which was a miniaturization of larger clock technology – was expensive and exotic. While it came with a series of benefits over traditional mechanical watches such as vastly improved accuracy and overall reliability, quartz movements (to start) were often more expensive.
Eventually the cost of producing electronic battery-powered quartz crystal-regulated watches plummeted as it was found that they could be mass produced with a high quality at much lower prices compared to mechanical watches. When offered more performance for less money in a wrist watch, consumer markets responded accordingly – and in turn threatened to end the Swiss watch industry which at the time was experiencing precipitously lowering demand on a regular basis.
Hayek entered the picture in the mid 1980s as a technically savvy production and marketing consultant who if anything excelled at convincing the Swiss that he (Hayek) had a plan they should follow to save the watch industry. Hayek’s primary sway was with both the Swiss government as well as banks. He not only convinced the banks to consolidate the watch factories and brands that many of them now owned or were responsible for (due to rampant insolvency and defaulting loans), but managed to get the Swiss government involved for rules and regulations that would aid in his endeavor.
Hayek’s plan was essentially one of consolidation, removal of traditional business hierarchies, and production modernization (automation). He would merge many of the remaining Swiss watch industry manufacturing assets together and have them produce a range of both high-end as well as affordable watches. On the product side Hayek’s most brilliant move was to green light Swatch – an inexpensive plastic fashion watch sold for $40 and produced entirely in Switzerland. The idea came as a result of a famed (and controversial) 1982 report Hayek Engineering completed a year prior to Hayek’s takeover of the merger of SSIH and ASUAG (two companies that at the time owned a larger number of Swiss watch brands and manufacturing suppliers). The Swatch brand was the foundation of the Swatch Group both in volume and profits, and helped secure financing for the production of traditional higher-end mechanical watches. Perhaps the biggest irony of the average Swatch watch was that it, like the Asian competition which threatened to destroy the historic type of Swiss watch, used a quartz movement.
Few people directly attribute Hayek’s success with his stance on quartz movements of “if you can’t beat them join them,” and tend to credit Hayek’s manufacturing and job saving efforts. Nevertheless, a close inspection of many of his policies reveals that while Nicolas Hayek was unabashedly a fan of the traditional Swiss watch world, he implemented a series of radical changes in order to save it in the 1980s and into the 1990s. More so, Hayek himself was not Swiss (he was born in Beirut, Lebanon to a Lebanese mother and American father). This is important because it means that while he lived and worked in Switzerland (Hayek moved there in mid 1950s to work at a relative’s foundry and soon started Hayek Engineering as a consulting company in 1963), he was able to separate himself from Swiss cultural traditions such as the slow pace of collectivist consensus decision making, as well as the rigid conservatism of risk-averse policy making especially when it comes to financial decisions.
I return to the question of “what would Hayek do?” in today’s troubled watch market? My own conclusions as well as evidence from a wide range of sources strongly suggest that the primary issues marring the watch industry are the over-production of inventory, pricing practices which go contrary to market forces, and an adherence to archaic wholesale and distribution models that were last relevant before internet shopping. If I was running a company reliant on the health of the Swiss watch industry today, I’d want to know exactly what Mr. Hayek did or said about similar situations.
What I found so surprising (and a bit refreshing) was that a lot of the psychology of why the watch industry is having problems today is nothing new. In fact, if you read enough about Hayek’s work and the statements he made, he dealt with not only the same issues, but the same people (culturally). More so – and this is perhaps the most damning statement about today’s watch industry – is that since Mr. Hayek Senior’s passing, the watch industry has reversed much of the management and cultural changes he put into place. Of course, at the same time, much of the culture that Hayek built (not only at Swatch but the entire industry) remains and is carefully guarded by his disciples.
To complete this article I’ll comment on select statements/quotes that Mr. Hayek mentioned in the 1993 article (linked to above) with particular reference on how they relate to the state of the Swiss watch industry now circa 2017.
“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.”
Clearly a thought-provoking statement for any industry (or country) here. Hayek is referring specially to the importance of keeping watch making in Switzerland. Relevant or not to today’s economy, a large part of Switzerland’s manufacturing base goes to supplying the watch industry. Hayek’s pitch to Switzerland was that while watchmaking might not be at the forefront of modern technology, it came with an enormous amount of skill and values that the country needed to maintain. This is perhaps the broadest lesson from Hayek that I will discuss, but I want to prove a point when it came to his ability to perceive large ideas, as well as include a strong emotional argument to any business argument.
Applied today, this is an argument that whatever the watch industry does, it should always know how to do at home. Statements such as this hedge against total outsourcing, and offer a reminder as to why a people, place, culture, or country should always make sure it has enough people around to do everything possible to complete a particular task (such as design and manufacture watches). Assuming Switzerland loses that, it will irrevocably lose its edge in the watch industry.
“In fact, it’s not just possible to build mass-market products in countries like Switzerland. It’s mandatory. This is a principle I am passionate about—and a principle business leaders in the United States and Europe don’t take seriously enough. We are all global companies competing in global markets. But that does not mean we owe no allegiance to our own societies and cultures.”
Hayek was very proud of his ability to reduce the manufacturing costs of Swatch and other Swiss watches once he was in control. Often by using automated production techniques, this ability to reduce costs allowed brands like Swatch to compete on a global scale while still paying Swiss salaries. He liked to point out that people in other industries (and countries) often laughed about his insistence to keep watchmaking in Switzerland, as opposed to outsourcing the tasks to other people.
In fact, eventually that is exactly what the Swiss watch industry did, and despite the “Swiss Made” label, many components from cases to bracelets are made outside of Switzerland today. Some of the outsourcing began under Hayek, but it really sped up after his death. Hayek didn’t directly say it in the quote, but his notion isn’t just that Swiss watches need to be made in Switzerland, but rather that it isn’t really a Swiss watch in form or character unless it is produced by the Swiss watch industry. He felt that given all the small details required to make a great watch work, it was more worth it to have the various parts of Swatch Group watches be produced by Swiss suppliers, than have to check, re-check, and check again the design and quality of components made elsewhere – all by people who Hayek would have probably said lack the same culture and passion as those in Switzerland who often come from generations of watch industry personnel.
“The Swatch is based on radical innovations in design, automation, and assembly, as well as in marketing and communications. One of our plants in Grenchen makes up to 35,000 Swatches and millions of components a day. From midnight until 8 a.m., it runs practically without human intervention. Swatch is a triumph of engineering. But it is really a triumph of imagination. If you combine powerful technology with fantasy, you create something very distinct.“
Again, the hinted at element here is that the ability for Swatch to get away with selling inexpensive $40 plastic watches is dependent on production automation. In fact, the way that Swatch was able to keep costs low was to keep human labor costs low. Hayek would have been the first to say that when you buy an expensive Swiss watch, you are paying for more labor. The less expensive it is the less human labor you get. No matter what Swiss watch you get, it should have a good design and include a strong emotional element.
Notice the statement of “combine powerful technology with fantasy.” This is essentially what most luxury watches are about, and Hayek understood it perfectly. Hayek was also not at all shy to talk about how the watches were manufactured and enjoyed being open with the world about it. This is in stark contrast to the Swiss mentality of secrecy. In fact, the watch industry today is arguably more secretive than ever before, and accordingly it has few solutions to its problems because it is so discreet about its problems. Perhaps it is time to open up a bit more? What else could they lose?
“The two companies that became SMH were the flagships of the Swiss industry. One was SSIH, a company that had Swiss-French origins. Omega was the crown jewel of SSIH. Up until the early 1970s, Omega was one of Switzerland’s most prestigious brands—more prestigious than even Rolex. But Omega was so successful for so long that it ruined SSIH. The company got arrogant. It also got greedy. It wanted to grow too fast, and it diluted the Omega name by selling too many watches at absurdly low prices.”
For a few years in the 1980s Omega wasn’t the brand that it was historically, nor was it the brand it is today. Hayek returned Omega to its glory, but look at what Hayek said he needed to deal with. Hayek regularly mentioned “greed” and “arrogance” when talking about many people in the watch industry. Here you see an example of him mentioning these powerful terms, and how despite having a great history, greed and arrogance in management can destroy great brands.
Great watch brands today have been or are being destroyed by greed and arrogance (managers who both don’t understand the brand, and don’t care). Hayek was a man who believed that a job is also a culture, and you can’t have one without the other. Will there be a Hayek-style force to tell watch industry managers about how their greed (margins which or too high or unreasonably cost-cutting) and arrogance (no checks on quality, poor design, poor customer service, etc…) are ruining great brands?