Watch out for swatch

Lebanese-born Nicolas Hayek turned the Swatch Group into a global powerhouse. Can his son keep the company on top?

By Gareth Smyth BEIRUT

Nicolas Hayek, 74, the Lebanese entrepreneur who transformed the Swiss watch industry, will this summer call time on his 50-year career, handing over operational control of Swatch to his 47-year-old son and heir, Nicolas, Jr., who joined Swatch eight years ago after an early career in film production. After starting out in the company’s marketing department, he has gradually assumed more and more responsibility.

High and low. His father’s story is one of the most remarkable of Levantine business. Today, Swatch employs 20,000 staff in 157 factories, and accounts for around 25 percent of the world’s watch production.With nearly 20 brands in its stable, Swatch is the largest watchmaker in the world. The company’s portfolio is extensive and covers practically all segments of the market: from low-end brands like Swatch to mid-segment Tissot to exclusive, luxury brands Omega, Blancpain and Balmain.

Nicolas Hayek, Sr., has always come across as a showman, often wearing three watches – from wrist to elbow – on each arm and mystifying interviewers with obtuse comments. He was raised in Beirut, where he was born in 1928 to a Lebanese mother and an American father. Hayek’s early childhood was comfortable, and his family moved to Switzerland when he was just seven. He studied chemistry, math and physics at the University of Lyon, in France, before founding his consultancy firm, Hayek Engineering.

Perhaps Hayek’s showmanship owed something to the Levantine business style. But he was not – unlike, say, Edmond Safra – forged in the hard-nosed, eyeball-to-eyeball trading of the souks. Like Jac Nasser, late of Ford, or Carlos Ghosn, of Nissan, he proved he could lead a company in a global market where customers are thousands of miles away. Few of those buying a Swatch – including customers in Beirut – likely realize that the company is headed by a Lebanese.

Whatever his origins, Hayek has always – or almost always – had a clear vision for his company. Today, Swatch is one of the few operators in the market that is completely vertically integrated. The company has its own design team; it has extensive facilities in Europe and Asia for the manufacture of components; it has hi-tech manufacturing facilities; and it has an extensive distribution network with a string of retail outlets.

Scilla Huang Sun, vice president and luxury fund manager of Clariden Bank, a subsidiary of the Swiss financial powerhouse CSFB, is extremely bullish about Swatch. “We are positive about their business strategy,” she says. “It is very focused. They are the biggest manufacturer, are vertically integrated and cover all the segments in the market.”

Mass markets. Although volumes are far higher for its mass-market products, especially the Swatch brand, the group makes most of its money from its upmarket, luxury brands. According to Huang Sun, the luxury brands contribute more than 50 percent to the group’s operating profits.

Huang Sun says that while the competition is very strong – and Swatch faces key brands like Seiko, Citizen and Rolex – Swatch’s strength is its collection of brands, depth of product range, manufacturing might and market-share muscle. Swatch has been acquiring big brands over the last few years in order to consolidate its presence at the luxury end of the market. Huang Sun says that she doesn’t think the group has overextended itself. “They have been very careful about where and how they spend their money,” she says. “I’m not worried.”

Swatch has taken a strategic decision to enhance its presence in retail, opening upmarket stores in key cities across the world. But running a retail store is very different from designing and manufacturing watches – which is Swatch’s core strength. “Getting into retail means that Swatch will have better control over its brands,” points out Huang Sun, “and it puts the company directly in touch with consumers, giving it a better idea of exactly what the consumer wants.”

Back in the 1970s – when Hayek was working as a consultant in cars, telecommunications, watches and steel – the whole future of the Swiss watch industry appeared threatened by cheaper Japanese imports. Two companies, SSIH and Asuag, through brands like Omega, Longines and Tissot, produced most Swiss watches. But the new quartz technology allowed the Japanese to undercut Swiss craftsmanship, and Swiss exports halved between 1974 and 1983. Hayek was asked to produce a report by the watchmakers’ bankers, who apparently believed that the industry would have to be liquidated. Instead, Hayek argued that the Swiss could regain their pre-eminence by reinventing themselves.

In 1984, Hayek bought a 51 percent share in SSIH and Asuag, merged the companies to form SMH and launched the first Swatch, a cheap plastic watch made with 51 parts instead of the usual 150. He slashed costs, revolutionized the industry and produced the bestselling brand of all time.

Skintight. Hayek said later that his key insight was that realizing the watch was an “emotional” as much as a functional product. “A watch is something people carry on their bare skin, sometimes 24 hours a day. We have to convince every individual that this particular watch fits his or her personal style and lifestyle the best.”

Swatch, in other words, expanded the market rather than edged out other watchmakers. Hayek realized that fashion-conscious consumers would opt to own three or four watches, choosing which one to wear according to mood or occasion. Priced at $30, new Swatch models (albeit with many common components) could be produced every few months. Economies of scale also eased production costs for Swatch’s upmarket brands.

Hayek has displayed an extraordinary gift for marketing. Some of his ideas – like charging a premium for the label “Made in Switzerland” – were extremely simple. He was also a shrewd player in acquiring other companies. One of Swatch’s subsidiaries, Nivarox-FAR, is the world’s sole maker of balance springs and other micro-components – meaning that it is impossible for anyone to manufacture a quartz watch in Switzerland without buying the essential parts from the Swatch Group.

One important inheritance from father to son is an attention to detail. Nicolas, Jr., already receives daily reports on the sales of each model. This isn’t just for accounting purposes – Swatch has ruthlessly withdrawn lines that perform under target.

Nicolas, Jr., dropped out of St. Gallen, the prestigious Swiss business school, before working in a foundry and embarking on a short career in film, working as assistant director on Swiss TV documentaries before setting up Sesame Films, a film production company in Paris. Recalled by his father, he helped with Swatch’s ad campaigns, rose to head of marketing and in 1998 became president of Swatch Watches. The next step up the corporate ladder, to CEO, looked inevitable.

Good timing. The timing of the current changeover is crucial. “What comes as a big relief,” says Huang Sun, “is that Swatch is a company that is not in a turnaround stage or facing major challenges in the market. Hayek, Sr., will remain a big shareholder and the chairman of the company and hence he will continue to influence the policies of the company.”

Last year was a tough one for most luxury goods companies, with giants Gucci and LVMH reporting disappointing results. Swatch, by contrast, continued to grow, although its profits fell marginally. One of the reasons behind this was that Swatch managed to keep a tight rein on its costs, a key factor in determining the profitability of a company.

The expectations for the luxury market for this year are hardly better, as it will continue to be under pressure as long as there are no clear signs of a broad economic recovery in the United States, Japan and Europe, which collectively account for over 90 percent of the global luxury market. Huang Sun’s predictions for Swatch this year are lukewarm: “It is a tough year and sales will be largely flat, with a projected earnings growth of about seven percent, though the fourth quarter may be better.”

Maintaining momentum requires constant innovation, which is difficult in any business. Swatch’s sales fell 1.9 percent to $2.6 billion last year, and its net income fell 7.7 percent to $312 million. The company also cut its dividend payout for the first time in seven years. Market analysts have argued that the company’s shares are undervalued because of concerns about the group’s strategy and (now resolved) doubts about succession.

Swatch’s new lines for 2002 include the 007 series – based on James Bond – and the Swatch Skin. And all the advertising talk emphasizes change – the T Touch from Tissot has, for example, what the company calls a “revolutionary” touch-screen mechanism. The sense of constant innovation, essential if consumers are to keep buying new watches, has been taken up by many rival watchmakers.

But a watch is, after all, a watch, and critics say the company has been searching for a new Big Idea for over a decade. Nicolas, Jr., seems to believe the future is in a convergence between the wristwatch and telecommunications. A speaking watch – a phone that literally tells the time – has failed to set the market alight. Neither has a Swatch with access – via a nearby computer – to the Internet.

Nicolas Hayek, Jr., clearly believes he can develop his father’s approach in the new century and maintain Swatch as one of the world’s best-known names. “Our main business is watches,” he said recently. “But, for Swatch as a brand, because we are about lifestyle and fashion, we have huge opportunities. If you talk about telecoms, jewelry or, who knows, perfume, Swatch has a perfect name if you control the distribution. Companies like Hewlett-Packard and Sega are approaching us, because we have a brand name that speaks to people.”               

Additional reporting by Harry Jenkins in Geneva

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