Sunday, March 18, 2012

Curious case of the Chinese Tourbillon

What is the first thought that comes to your mind. when I say "I am wearing a Chinese Watch"? Not a Casio, Made in China watch, but a Chinese watch?

It's a fake? Copy of a Rolex. Omega Seamaster clone.
Well, yes. There are those, but there are also Chinese brands like Sea-Gull, Parnis and my personal favourite Tao International (primarily for great finish and sub $100 prices (including shipping)).
So the Chinese (watchmakers for now), like the Japanese, 40 years back are starting to make the slow long climb to respectability.
But first…
A flashback on respectability and watch technology
The Swiss watch industry (with notable exceptions like Patek Philippe) was chasing the volume market and like anyone going down that path was known for indulging in counterfeits. Copies of British marques like George Graham and Eardley Norton was common and for a while the American brand Walthams (Walthams became famous, because they brought precision mass manufacturing to the watchmaking business) was often copied. Not just the designs, but straight copy of brands. Sometimes they even created British sounding names or near enough names to get some respectability.
(admittedly, the above assertion is sourced from this Wikipedia article, so you can take it in that vein, but I have no reason to doubt this.)
Eventually (1870’s), the Swiss watch industry gave up on the mass market space and started working on their own brands and started to occupy the higher end piece of the pie. For a hundred years the Swiss watch industry ruled this piece. They laid foundations for major advances in timekeeping, but were also insular about using them in order to keep their primary offering alive e.g. the Tuning Fork and Quartz, both of which ironically were adopted by competitors to break their stranglehold. Till the 1960’s the Swiss had 90% of the world watch industry. All good so far. Then the Quartz revolution happened (Read this for more).
The arrival of quartz watches with unheard of accuracy nearly suffocated the Swiss watch industry. From 1600 watchmakers, the numbers fell to 600. Till, the Swiss industry, banks and government got together and granted themselves a near monopoly in the form of the Swatch Group (which included brands such as Omega and Tissot). The Swatch Group was a great comeback from the brink. Even more ironically, this comeback was built on the very technology that was dismissed by the Swiss i.e. Quartz.
Along with the consolidation represented by the Swatch Group, came also an even bigger consolidation in the form of ETA which became a monopoly in creating automatic movements for not only the Swatch group, but also other competitors. Essentially Swiss watchmakers bought the guts of a watch from ETA and cased them in unique designs. This is somewhat similar to buying the engine and drive train of a car from elsewhere and slapping a body on top of it. Some players also buy movements, refinish to their quality standards. Either tweaking for accuracy or additional features. But these are exceptions and not the norm.
Which brings us to branding and marketing
Let’s face it. Watches are useless. There is no place in modern life where you are not without access to time. Be it your phone, Wall Clock, Laptop etc. The marvel of the watch industry is that they have taken a product which should have gone the way of the teletype and created into an object of desire. Jewelry even, especially for men, who don’t have as many options in jewelry.
The Swiss Watch industry (largely) has successfully moved to the right space in the marketing lifecycle of a product. In fact, they have moved the image of an entire country into an ultra-premium segment. And yet, the imagery that Tag Heuer tries to sell you, i.e. of a watchmaker in his workshop is largely false. Somewhere in their history, they may have had that, but they don’t do things that way anymore.
In mid 2000’s, ETA/Swatch Group Chairman reputedly said, that he is seeing a decline in innovation in the watch business and and this was due to the monopoly of ETA (To me he seemed to be a little jealous of the ridiculous margins that Swiss watchmakers were enjoying on the back of his company). Citing this, ETA triggered an annual decline in component supplies to competitors. So, the larger watchmakers, who could afford it added in house movement production facilities. The smaller watchmakers who couldn’t afford it, started to look elsewhere.
Which brings us to China
Chinese sold nearly 700 million watches last year compared to only 30 million by the Swiss. The comparison is like chalk and cheese, because the corresponding comparison by value is $4 Billion to $22 Billion.
The last few years have had a huge jump in quality in Chinese made automatic movements. Companies like Sea-Gull have mastered the basics and are now progressing rapidly towards mastering fancier technologies like Tourbillons.
Tourbillons for the uninitiated are contraptions introduced inside watches to improve accuracy. While it is debatable, if they ever did improve the accuracy. Tourbillons are now more decorative than functional with a window on the watch face displaying the mechanism (Read more about Tourbillons here).
So much so, that automatic movements from China are showing up in global watch brands (including some Swiss brands). Other enterprising Chinese businesses have started buying out failing Swiss brands and using stock Chinese movements like those produced by Sea-Gull to produce something a watch which may carry an establishment mark as far back as the 1700’s. Yet other businesses have created German sounding names like Breytenbach and Burgmeister which use similar Chinese movements.
So much for brand and heritage (Essentially, Tag is doing the same, but with ETA movements instead of Chinese movements).
Which brings us to Chinese Watch Brands

You’ve heard of Sea-gull a few times now. Watch snobs (their snobbishness, being second only to audiophiles), have been raving about this and other Chinese watch brands for nearly 4 years. Fine. What’s the big deal.
Sea-gull US last year raised prices of their watches to the $300 range citing complaints by another distributor regarding under-pricing. Still, no big deal.
Till you realise that companies retailing watches using the very same movements are selling them for almost a third lesser than Sea-Gull. Tao International is 2/3rds lower.
As anyone who buys items in India knows, expecting warranty and service from a low end Chinese product is well… useless. The Chinese have to get their act together on service and they are golden.
Moral of the story
The first and only reason for a brand to exist is to create a positive preference towards your brand which allows you to extract better margins over the garden variety of the same product. That’s it. Nothing else.

Watch the aficionados on Internet forums. What are they raving about? Sea-Gull is making a conscious effort to increase prices is recognition of the fact that a select set sees value in the brand and is willing to pay for it.

If respectability, vintage, heritage is the criteria for a great brand. That is available for sale (the failing Swiss watch co’s).

This is being seen in all sorts of places like Model Railroads where failing brands are being snapped up by Hong Kong based Chinese business men et al. (As an aside: Cottage  Industry approach to any Industry will result in that Industry failing and brands being sold in all probability to Chinese businesses who can bring production scale. But that is a post for another day.)

But no, people are specifically looking for a Chinese brand and paying a premium for it.

Chinese brands are here and they are gunning for the very top of the luxury food chain. For something as useless as a watch.

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