A new smartwatch trend could hit luxury goods companies such as Richemont, which sells 13 high-end watch brands in South Africa.
Switzerland's watchmakers almost went out of business in the 1970s, when they underestimated the importance of the quartz watch. Though the industry recovered and is even prospering, today it faces a new technological challenge from smartwatches such as Samsung Electronics's $299 (about R3 000) Galaxy Gear.
As with quartz four decades ago, the devices are being met with a shrug. Two-thirds of executives in the Swiss industry say smartwatches pose no threat, according to a survey conducted by consultants Deloitte.
"How would you like it if your boyfriend brought you a smartwatch instead of a nice pavé diamond watch?" asks billionaire Richemont SA controlling shareholder Johann Rupert. The company sells 13 brands of watches, including Cartier and Vacheron Constantin. "I'm not sure it's going to have a huge impact on classic watches."
The industry should brace for the arrival of smartwatches, says Andreas Hofer, a partner at Boston Consulting Group in Zurich, Switzerland. Researcher Strategy Analytics predicts global sales of one million smartwatches this year and seven million in 2014. And research firm Sanford C Bernstein forecasts that Apple Inc could see iWatch revenue of $2.3-billion to $5.7-billion in the first year of selling such a device.
Swiss watchmakers "shouldn't say too quickly it's a trend that won't affect them", says Hofer, who uses his iPhone to keep track of time. "There should be some modesty."
The high-end Swiss watch is so low-tech that from a practical standpoint, it should no longer exist. Many consumers abandoned older, mechanical watches – both those that required winding and self-winders, which tap energy from the motion of the wearer's wrist – when battery-powered quartz watches arrived on the scene in the 1970s.
The number of Swiss employed in the industry fell to just over 30 000 in 1984 from about 90 000 in 1970 and companies decreased to 600 today from 1 600 in 1970, according to watch manufacturer association the Federation of the Swiss Watch Industry.
Quartz watches were cheaper and more reliable. Even the most expensive mechanical watches lose several seconds a week and require maintenance every few years that can cost more than two new iPhones. Timezone, a watch enthusiast website, calls them "an anachronism".
The industry has fortified itself since the 1980s despite its continued reliance on centuries-old technology. Switzerland's exports of timepieces rose by 11% last year to a record 21.4-billion francs (about $23.7-billion) based on wholesale prices, according to the Federation of the Swiss Watch Industry.
Mechanical watches accounted for a third of revenues in the $58-billion watch market last year, and the segment will expand by 33% by 2016, market researcher Euromonitor International forecasts. High-end Swiss watches can fetch stratospheric prices: Patek Philippe's Sky Moon Tourbillon runs to $1.3-million and Franck Muller's Aeternitas Mega 4 costs $2.9-million.
"The more you learn about watches, the more you realise there is real know-how behind them," says Gabriel Vachette (30), who runs a website about watches and owns roughly 20. He got the bug from his father, who has 100 watches.
"You can tell a story with a beautiful watch," says Vachette. "People who buy a Galaxy Gear will get rid of it in a year or two."
No replacement for a Rolex
Many Swiss watchmakers will likely continue to do well because a smartwatch may often be an addition to a collection rather than a replacement for a $5 000 Rolex, according to Jon Cox, an analyst at advisory firm Kepler Cheuvreux in Zurich.
"If you're a successful young investment banker, you can probably afford to own a luxury watch and a smartwatch," says Cox. "A Swiss watch really is a statement about yourself so other people can clearly see you're wealthy. You don't get the same wow factor with a smartwatch."
Low and mid-range brands are at greatest risk, says Cox. Timepieces in the price range of $200 to $400 will be in direct competition with smartwatches in the minds of many buyers.
Investors are backing the Swiss watchmakers. Swatch and Richemont shares have outpaced Switzerland's benchmark SMI Index this year, and 20 analysts recommend buying Swatch while none have recommended selling the stock.
"So far the concept of the smartwatch is questionable," says Michel Keusch, a portfolio manager at Bellevue Asset Management AG in Kuesnacht, Switzerland, which holds Richemont and Swatch shares among its 2.2-billion francs of assets. "You need to charge it every day. It's a miniature screen. Everybody has a smartphone anyway."
Keusch expects consumers will initially snap up smartwatches amid media hype and then the product may fade out, much like calculator watches did in the 1980s. He says sales may start at around two million units a year – a fraction of the one billion timepieces sold annually.
History is littered with high-tech watches that are no longer on store shelves. Microsoft formed alliances in 2003 with Fossil and Citizen for watches that could receive information such as news, sports, weather and stock prices. Swatch and Tissot joined the software maker with similar products the following year. They had all been pulled from the market by 2008.
One Swiss watchmaker embracing new technology is Arny Kapshitzer. His start-up, Hyetis, says its $1 200 Crossbow – a self-winding watch with a camera and GPS that can pair with phones – is the first Swiss smartwatch. Kapshitzer presented his idea to several Swiss brands, and the few that met him said smartwatches are just a fad that will die out quickly.
"I don't believe it. I think it's a real market and the future of the watch industry," says Kapshitzer. Swiss watchmakers "are still in a comfortable situation. We're in a situation of resistance to innovation. It's a big mistake". – Bloomberg