The “Swatch” – a piece of Swiss history

Patrick Müller and Nik Vontobel: There are entrepreneurs who are reluctant to invest in view of the present instability – keywords trade war and EU framework agreement.

Nick Hayek: Do you really mean entrepreneurs? Or aren’t you rather talking about managers and so-called investors?
As an entrepreneur engaged in exports, aren’t you afraid that Switzerland will isolate itself?
No. Of course we need contracts, but not only with Europe. We need them all around the world, and we have them. But you see, and I don’t mean to be arrogant: Switzerland is admired everywhere in the world, and sometimes even envied. Why should we, due to short-term opportunism, renounce our strengths and align ourselves with the failure stories of many European countries? Europe will benefit much more from us, if we if we remain as we are; and success in exporting our products has nothing to do with agreements.

Namely?

Our industry – and I don’t mean just the Swatch Group – manufactures innovative and high-quality products that enjoy a high degree of trust, not least due to their origins. We are often more expensive. And the strong franc acts like a brake, comparable with a customs duty. Nevertheless, we are successful, more successful than many export companies in France or Italy, which enjoy full market access without any obstacles.

Background

The historically interested person will inevitably think back to the beginnings of the Swatch Group at the end of the 1970s. In 1983, Nicolas Hayek, Nick Hayek’s father, co-founded the Swatch Group (then the Swiss Corporation for Microelectronics and Watchmaking Industries SMH) and began to build it up. Initially it was a rocky road. The “third industrial revolution” had begun. Computers were used more and more, and new, global means of communication were invented and began to change the world of work. Large traditional Swiss companies such as Alu-suisse, Brown Boveri BBC, Saurer, SIG and Von Roll ran into difficulties. Within a short space of time, thousands of jobs were lost in Switzerland. The watch industry was hit the hardest. There were special reasons for this: At the end of the 1960s, researchers at Swiss watch companies and at the ETH had invented quartz technology and the digitally functioning watch, which newly functioned with a battery. Their colleagues in Japan had made the same invention at about the same time. However, while the Swiss considered the practical significance of this new technology to be low and continued to prefer mechanical watches, Japanese companies such as Seiko, Casio and others opted entirely for the new quartz technology. The Japanese began to flood the world market with masses of watches that were precise but also much cheaper. In addition, there was another event that had no less serious consequences for the watch industry: As a result of the Vietnam War, the USA terminated the Bretton Woods currency agreement. The system of fixed exchange rates broke down and the US dollar began to fall. The gold-backed Swiss franc proved to be the safe-haven currency. In the following years, the US dollar nosedived from CHF 4.37 to around CHF 1.30. The USA profited because it was able to repay its war debts with depreciated dollars. Virtually all major currencies suffered massive losses in value in comparison with the Swiss franc. Even the rock-solid Deutschmark fell from CHF 1.20 as far down as to 80 centimes. The consequences for the export-oriented watch industry, the production of which took place fully in Switzerland, were much more serious at that time than they are today. While in 1970 an exporter had received more than 4 francs for one US dollar, a few years later it was less than 2 francs. The Swiss National Bank slammed on the brakes and introduced capital controls, negative interest rates of over 10 per cent and other emergency measures, but the consequences for the watch industry were nevertheless catastrophic: in the 1960s, 80 per cent of the world’s watches had still come from Switzerland, but in the 1970s its share fell to 10 per cent. More than half of the jobs in the Swiss watch industry were lost, and some augurs predicted its complete collapse (Breiding et al. 2011, pp. 79).

Should the state intervene?

In 1978, the Federal Council proposed an impulse programme: The federal government was to provide financial support for applied research, technology-related training and development in companies. Parliament drew up a programme of “measures to alleviate economic difficulties”. These included the promotion of new industries in crisis areas. Nicolas Hayek, a then still little-known management consultant who had grown up in Lebanon, took a stand against this type of state stimulation of industry. He contended that the Swiss people had a lot of confidence in their companies’ work. That these needed good framework conditions – such as good schools, good vocational training, moderate taxes and the like – so that entrepreneurial initiative could develop in the best way possible. Nicolas Hayek put into practice what he meant by this.
When many had already lost faith in the Swiss watch, Hayek founded SMH (later Swatch Group) with some of his comrades-in-arms, and became its head. Together with his engineers and researchers from ETH Zurich, he created a Swiss Watch. On 1 October 1983 he presented the result to the press: the Swatch – a Swiss quality watch with quartz technology for 50 francs – which came in 12 trendy designs. But that was only the beginning. The new watch was to become a fashion accessory, every woman and every man would be able to have several of them, one matching jeans, the other evening dress. In addition, the “Swatch” should also be an art object and a collector’s item. Hayek succeeded in winning well-known artists as designers. In the course of only 5 years, he sold 1 million watches.
As to politics, Nicolas Hayek and other admonishers were right in being critical of the government’s industrial subsidies, as decided by the Federal Council and Parliament. In a referendum in 1985, a majoritiy of 57 per cent of the Swiss people clearly rejected the Innovation Assistance Act (IHG).
At the same time, the course was set quite differently in neighbouring France. President François Mitterand and his economics and finance minister Jacques Delors reacted to a similar crisis in their country with massive state aid. The government participated in numerous large industrial enterprises or nationalised them completely. In this way, the two socialists attempted top-down central planning and controlling of economic processes. This did not make the country any happier. Deindustrialisation could not be halted in this way – quite the contrary. Unemployment and social problems are high in France today. Moreover, France is the country with the highest debt mountain among the euro countries. Jaques Delors was promoted to President of the Commission of the European Community EC in 1985, and the Maastricht Treaty was intended to make him the architect of today’s EU – not exactly a success story either.
The Hayeks were very different: in 1991 son Nick became head of marketing, and father and son began to conquer the world. In 2008, the 25th anniversary of the “Swatch”, 381 million watches had already been sold worldwide – each one of them an ambassador for Swiss quality and innovation.
A year earlier, Nicolas Hayek had advocated preserving and protecting the Rütli meadow – the “birthplace” of the Swiss Confederation. Two years later, in 2010, he died at his workplace at the age of 82.
Nick Hayek, too, is strongly anchored in Switzerland and continues the tradition of producing exclusively here. He is therefore dependent on the exchange rate, because 95 per cent of his domestically produced watches are exported. The case is different with, for example, Nestlé, which produces 95 per cent abroad.

Attack of the “locusts”

Strange things have happened in the last few months. The Swatch share has fallen by almost half on the stock markets – so much so that shareholders, who feel connected to the company, are rubbing their eyes in disbelief. What’s going on? Are there any serious difficulties? Is this a warning of impending disaster, as it was in the case of Swissair? – No indeed, the company is in good health and is not making any losses. Anyone who gets acquainted with the financial media will find the explanation: there are short sellers at work, and that is a hedge fund speciality. Political speculator George Soros may be active with his hedge funds. What prompted them? What is their purpose? And how do they proceed?
Swiss export statistics show that watch sales in the Swatch price range have fallen by about a quarter over the last five years (“Finance and Economy” of 20 July). Swatch has also faced competition from the Smartwatch watches launched by Apple and Samsung. “This new competition will break Swatch Hayek’s neck, and we will benefit from it”. That’s how the “locusts” will think, and they will invest millions. They sell Swatch shares “empty” in large quantities, so that the price falls. In other words, they sell shares that they do not own. They borrow them from pension funds, for example, or they sell them for the future. In other words, they receive the money immediately and do not have to hand the shares over to the buyer or return them to the pension funds until half a year later. The share price thus begins to fall, and ill-informed shareholders also begin to sell, because they feel that something bad is in the offing. These sales result in a falling price movement – exactly what the “locusts” want to achieve. After six months of this, they can buy the shares at a much lower price on the stock market and return them. High profits in the millions are the “reward”.
The “locusts’” strategy also includes a further option: perhaps there is a chance of taking over cheaply a company that has problems and comes under additional pressure from the activities of speculators, to divide it up and sell the individual parts at a profit. However, this danger does not exist for the Swatch Group because almost 40 per cent of the voting power is in the hands of the family.

Future prospects are good

Nick Hayek is confident. Admittedly, slightly fewer Swatch watches have been sold in recent years, which is not surprising after the phenomenal high flight that lasted a quarter of a century. Hayek also has a good foothold in China, where sales continue to grow. He knows the country well and is often there. Will the Smartwatches from Apple or Samsung replace the Swatch? – A computer on your wrist cannot replace the Swatch. Many people already have a screen in front of their noses at home and at work. In addition, there is the smartphone for their spare time. Do they all also need a computer in their wristwatches? Hardly. In addition, computer watches are not that cheap. The speculators who are already betting on the downfall of the Swatch are likely to be thoroughly mistaken.
People have very different needs. Nick Hayek is currently promoting Omega‘s Speedmaster (It belongs to the Swatch Group). Buzz Aldrin wore it on the moon 50 years ago. It is also noticeable that the independent family companies Rolex, Patek Philippe and Audemars Piguet in Le Brassus continue to generate record sales every year. They make first-class watches just like in our grandmother’s days. They are something special in our “Brave New World” of computers, and they are often still made by hand. “You never actually own a Patek Philippe. You merely look after it for the next generation”, is the advertising slogan of one of these companies. I think that also applies to Swatch. If you own one, you call a special watch your own and look back on a great piece of Swiss history.    •

Source: Breiding, R. James; Schwarz, Gerhard. Wirtschaftswunder Schweiz, Ursprung und Zukunft eines Erfolgsmodells (Economic Miracle Switzerland, Origin and Future of a Successful Model), Zurich 2011

(Translation Current Concerns)