The “Watch Series” (5): Smart Watches vs. mechanical Swiss Watches (and Fitness trackers)

Management summary
In the short term, I don’t think that the Apple Watch is a big danger for Premium Swiss Watch brands. Why ?
– putting some gold on a mass-produced electronic gadget didn’t work for smart phones either
– the smart watch doesn’t have a killer app yet and we don’t see an overall smart watch boom
– the observed decline in Swiss watch exports seems to be mostly caused by overall weakness in Hong kong and Macau
– however lower or medium priced brands could be affected especially in the coming Christmas season

The short-term danger to Premium Watches is much more a further cooling of Chinese and Emerging Market demand. Mid to long-term there could be issues as the market seems to be in the early stages of significant technical changes

Before I jump into more details I have to make a confession: I am myself not an expert on watches. As a matter of fact, I haven’t worn a wrist watch for the last 25 years.

Smart Watches

I have mentioned it in all my posts about Watch companies before: Smart Watches especially the Apple Watch currently seem to be a big danger to the Swiss watch industry. Depending on what you read, exports and sales of Swiss Watches are dropping already as a direct result of the Apple watch. However if you look deeper into the industry, for instance Richemont reports that the decline in Watch sales in Q3 is related to lower sales especially in Hong kong and Macau. For some reasons or another (maybe the stock market crash) , Chinese tourists seem to take a break from shopping in their favourite locations.

Let’s look at some of the attractions of the smart watch and the Apple watch in particular

+ you can use it as slimmed down version of a smart phone (check messages, see who has called etc.)
+ fitness apps (pulse, step counter) give added value
+ ability to change watch faces
+ coolness factor (at least for a time)
+ signals: I am trendy, fit
+ first Iphone was not that good but got better, so will the Apple Watch

There are also clear disadvantages of Smart Watches

– they will be technically quickly obsolete (2-3 years) and not a good “store of value”
– need to be recharged often (daily)
– not really individual, mass production
– data security
– fitness trackers are cheaper

Smart watches vs. Apple Watch & Apple “Fan boys”

Watch sales are always a big secret in the industry, so it is hard to get any numbers. This article for instance says that wholesalers are cautious in ordering lower priced Swiss Watches as they are not sure if they will sell.

One interesting aspect in my opinion is the following: There is no general Smart Watch boom, it is really an Apple Watch boom. Apple seems to be responsible for around 95% of all Smart Watch sales. So despite other “Giants” offering smart watches like Google/Motorola, Samsung and Huawei.

One explanation for this is a very easy one: Apple has sold around 600-700 mn Iphones over the past 3 years which most likely are still in use. There is a certain percentage of “Apple hard-core fans” which will wait for hours in front of an Apple store to get any new product. If you look at the installed base, “only” 1% of Iphone owners actually bought an Apple Watch.

This could easily be mostly the “Apple Fan boy” guys who just buy everything from Apple. Interestingly, in some studies people mentioned the “High price” of the Apple Watch as a reason not to buy one. As the Apple Watch starts at 400 USD, those potential Apple Watch buyers are clearly not in the market for an Omega Seamaster James Bond at 7000 USD.

I am not sure how good estimated sales numbers of Apple Watches are, but for instance this website claims that from the 3 mn watches old by Apple in the first quarter, only ~2.000 were expensive gold watches, so less than 0,1% of sales. If that is true then the AppleWatch doesn’t really look like a big issue for expensive Swiss watches.

If this is true then this would mirror something we see in the smart phone area: It is not that easy to just put some gold and diamonds on an electronic device and sell it for a lot more than the normal device. Vertu, the luxury phone subsidiary of Nokia was sold for only 200 mn USD in 2012 to EQT and then sold a few weeks ago for an undisclosed price to a Chinese inevstor. Overall one can say that Vertu was never a success. They seem to have sold ~500.000 devices over 10 or more years which is a pretty lame for a global luxury brand. I don’t think that they aver made a profit on that.

Mechanical Watches

This directly feeds into the competitive strengths of Expensive/mechanical watches

+ they are similar Jewelery, show status, success
+ individuality, taste (limited editions)
+ long-term store of value(for the next generation)
+ not easy to copy as manually created
+ increase in value / investment
+ Collectors, buy more than one

When Swiss Watch executives are asked they always repeat the same “Mantra” along those lines:

But in all other areas, it’s not even the same type of device. In fact, in many ways the Apple Watch is the opposite of the most coveted luxury watches — it’s mass-produced, it doesn’t have history, it’s digital, it’s not hand-made by some expert watchmaker and, most importantly, millions of people will soon have one on their wrist. In the world of horology, being unique or a part of a very small group is desirable. Seeing everyone around you carrying the exact same hardware — gold case or no gold case — on your wrist is not.

I think this is something which held true for a long time. In fact, this was the answer of the Swiss Watch industry to the crisis in the 1980ies. In the 80ies, the Swiss Watch industry was more or less wiped out by the first digital watches for a simple reason: Before that, watches were still used to actually know what time it is. So when Quartz and digital watches came along, they simply did a better job in telling the exact time.

This is from the Wikipedia entry:

Despite these dramatic advancements, the Swiss hesitated in embracing quartz watches. At the time, Swiss mechanical watches dominated world markets. In addition, excellence in watchmaking was a large component of Swiss national identity. From their position of market strength, and with a national watch industry organized broadly and deeply to foster mechanical watches, many in Switzerland thought that moving into electronic watches was unnecessary. Others outside of Switzerland, however, saw the advantage and further developed the technology,[10] and by 1978 quartz watches overtook mechanical watches in popularity, plunging the Swiss watch industry into crisis while at the same time strengthening both the Japanese and American watch industries. This period of time was marked by a lack of innovation in Switzerland at the same time that the watch-making industries of other nations were taking full advantage of emerging technologies, specifically quartz watch technology, hence the term Quartz Crisis.

In any case a good example that any moat can be quickly become obsolete by technological changes. There is a very interesting documentary (in German) about the Swiss watch industry including the crisis on Youtube:

part 1:

part 2:

part 3:

The Swiss made their comeback mostly by persuading people to pay a lot for “hand-made” watches which reflect the status and sophistication of the person who wears it. So in effect an expensive Swiss watch is a status symbol.

Watches as store of value or investment

I think in the current times with negative interest rates, all the stories about QE and EUR crisis, a lot of people like to have “tangible” assets. We can see this in real estate but also in collectables like art, old cars and watches. Watches have actually become something you collect. A few days ago for instance one rare Patek Philipe watch has been auctioned for 7,3 mn USD. Even pretty normal watches can actually increase in value at least on paper.

As the Swiss watch makers were able to increase prices year by year for new watches, used watches in good conditions can actually increase in nominal value. A side effect of this is that there are an increasing number of well off or rich people who buy more than one watch. I personally know at least a handful people who “collect” watches in the several thousand Euro price range.

Mechanical Watches weaknesses

Personally, I am not 100% sure that the Swiss Watch industry will be 100% unaffected by the current Smart Watch / Wearables trend. One sign that at least parts of the Swiss Watchmakers are paying attention is the new TagHeuer Smartwatch. I have my doubts that this will be a success. They call it “Swiss Engineered” but it seems to be technically inferior to other smart watches and much to expensive. Let’s see if this is getting traction but I have my doubts.

There are clearly also structural issues with mechanical watches:

– young people don’t wear watches, will they do if they get older ?
– new brands can be created/revived (very expensive watches). Examples: Nomos, Glashütte
– dependent very much on rich EM consumers (oil, crisis…)

Another question is, if the trend to “watch less” youngsters is a danger to future watch sales is a difficult one. I think expensive watches is a hobby of older and rich people anyway and much of the potential future demand is driven by Emerging MArkets and not post materialistic Western teenagers. On the other hand, there seems to be some concern. In this interview for instance Nick Hayek tries to spin the story that the Apple Watch could reintroduce the “millions and millions of young people who don’t wear watches anymore” to classic watches. So long-term this could be an issue, especially if Emerging markets consumer quickly follow this trend.

Mechanical watches Brand value

One thing I found interesting is that it seems to be possible to “create” luxury watch brands out of nothing or revive dormant ones. One example is Hublot, now owned by LVMH which was founded only in 1980. Another example is the revival of old German brands after the end of the Cold war. Glashütte used to be the center of the german watch industry until Communism took over. After 1990 a lot of old brands were re established and even new ones like Nomos seem to be quite succesful.

Clearly the large brands with their big marketing budgets have an advantage, but other than for instance in the automobile industry, the barrier to entry seems to be lower. I guess this has to do with the lower capital needed and the individually preferred from watch buyers.

Fitness Trackers

One very interesting development can be seen in the fitness tracker area. The recently IPOed Fitbit proudly told investors that they sold 4,8 mn devices in Q3 against 4 mn in Q2 which is more than Apple sold despite they have no “installed base”. Those fitness trackers are a lot cheaper than smart watches. They seem to have started as a kind of “weight loss” device but are now moving upmarket with additional functionalities. In the US , where most global trends come from, fitness trackers seem to be already mainstream. They actually work better in that regard like smart watches because their battery lasts for more than a week and you can monitor your sleep which is difficult with smart watches.

Even in German television one can see increased advertisement for those fitness trackers quite often. My guess is that at least for the next 2-3 years this could be a big trend.

Interestingly, most people who I know personally who wear a fitness tracker, wear a mechanic watch on the other wrist, I have even seen an expensive Cartier watch and a fitness tracker on the same wrist but never a fitness tracker and a smart watch.

Disruptions often come from the low-end and from rather unexpected places. FitBit for example targets companies bundled with social media offers. The combination of step counting, pulse measurement etc. looks quite interesting, especially when you match up departments or subdivisions against each other. Even on German television one can see a lot of advertisement for FitBit or competitor Jawbone.

The function of such a fitness tracker is very different from a watch. Interestingly enough, most traditional watch makers were very slow to embrace this trends. Fossil was a good example but also Movado seems to be behind the curve. Even Swatch, which used to be quite innovative doesn’t have anything with in the program. They are experimenting with a payment function but in my opinion this is not really “smart”.

Personally, I do think that fitness trackers could eat rapidly into the smart watch business unless the smart watches can come up with something really useful besides step counting and pulse measurement.

So as a kind of word play I would say: Watch out watch maker to what comes from below….

China & Hong Kong

I think this NYT article nicely describes the current problems of Swiss Watch sales in China.

“The slowing demand for luxury watches in Hong Kong and China is mainly due to two factors: the Chinese authorities’ crackdown on extravagant gift-giving and more mainland Chinese traveling and buying luxury products abroad,” said Alice Tsang, an economist on the Greater China Research Team at the Hong Kong Trade Development Council.

The renminbi’s recent strength against the weak euro has bolstered Chinese tourism in Western Europe, with concomitant growth in luxury purchases, which are not subject to the import tariffs that are placed on mainland purchases.

But again, no one knows if the Chinese might trade the next Swiss Watch for an Applewatch as they are obviously great Apple fans. There is clearly uncertainty in the market.


I don’t think the current incarnation of the Apple Watch or other Smart Watches are a direct threat to high-end Swiss Watches. Just adding some gold to an electronic mass-produced gadget doesn’t work so easily as one could see in the smart phone market.

Short term, the behaviour of Chinese consumers is much more important and they are to a large extent responsible for the current decline in Swiss Watch exports. Mid term however, there could be issues if either Smart Watches come up with a “killer app” or maybe even fitness trackers develop into something essential which could chip away at Swiss watch sales especially at the lower and in the middle.

It looks like that the overall watch industry is relying on Watches being a status symbol and/or fashion accessories which, at some point in time might not be enough. On the other hand, I think any industry does face similar challenges and for the watch industry, the challenges are at least clearly on the table.


  • The problem with watches is that you have only one wrist to wear one (unless you are Nick Hayek). Smartwatches provide some convenience in everyday life that people might not want to do without. Somewhere I read that smartwatch users look “up to” 80 times a day at their watch, mainly to read the time. Let’s assume the average is 50 times a day and they save 5 seconds from not having to take the phone out of their pocket. That adds to roughly 20 hours a year in time saved. Suddenly the $400 price tag of an Apple Watch does not seem so crazy anymore, depending what value you put on your time. For the same reason the wristwatch supplanted the pocketwatch some 80 years ago. This development may not happen over the next year, just like the iPhone did not grow to its present volume in year one.
    Since the wrist is already taken, and you are addicted to your smartwatch, it may not be so compelling anymore to buy a dress watch. This may also affect the number of people who pick up the hobby to collect them, because you will not become a collector, if you never built a personal relationship with them.
    So I do not buy the argument that the high end of the industry will not be affected. It may be affected later or less badly.

  • What about this? Much better idea than Apples smart watch

    • Could be difficult in cold weather……but anayway, i guess a lot of new stuff will come in the future. Some ideas will suceed, many Won’t…

    • Not going to happen. The contrast is low, unless your skin is perfectly white. The brightness is low, which limits the readability in sunlight. The crispness of the image is bad, since your skin has hair, is not flat, and the projection is done at a very small angle. Your index finger casts a shadow on the image…

  • I for myself could never understand why anybody would buy the mid-end watches and I don’t know anyone who does, but it seems one should not extrapolate from ones own decisions. Before the rise of the smartwatch there was a legitimate/utalitarian case for owning a (cheap) watch, like casio/swatch to simply tell the time, now the phone does it.

    People who buy or even collect handcrafted mechanical watches are connoisseurs (or maybe snobs, not in a negative/judgemental way, similar to the single-malt crowd) and do really care about the mechanics, history and brand (and recognize each other based in this). It’s a tasteful expression of individuality and status and kind of timeless (no pun intended) accessoir. A Patek is maybe a fashion-statement, but does not fall under the cycles of fashion or trends and is therefore kind of a long-term store of value. How else can a successful person show off their wealth, since the possibilitites of spending on clothing are somewhat limited and a luxury car is physically not always on you.

    In the first seconds I saw the iWatch I thought who is in the market to buy this? It’s quite expensive to just tell time and the main point is: it’s supposed to -not- be a technical/computing instrument like the iPad, Mac. The reason you would buy those is mainly to achieve something, but in the case of the iWatch it was clearly produced as a fashion-item. But does Apple have the brand to be or become a fashion-like brand? Does it tell something about the wearer? The beauty of the iPhone for example is that you could carry it in your pocket and nobody knows your phone is from Apple, but now everybody knows in the case of the iWatch (visibly on your wrist) you have no sense of self-respect and overpaid for a mass-market techie-thing which is obsolete in 1-2 years.

    tl;dr People under 30 don’t wear watches, since they “grew up” with the smartphone, anyone who has a watch for under 3k is a fool and maybe isn’t even aware of it. The only manufacturers who will survive (in an ideal world) are the luxury (swiss) companies.

    • Anon,

      thank you for your perspective.

      • It feels that all of us converge to the same conclusions then…. by this logic Richemont is better position that swatch. They own Vacheron Constantin, Lange and have a JV with Audemars Piguet (acquisition target from what I hear).

        Perhaps we should focus our valuation efforts on this group? – problem is that it is too expensive at this price in my view


      • Here is an article in german:
        Stats from the study:

        I guess that’s the point, it is mainly used as a watch -> fashion-accessoir. Maybe to check your social-feed, but doesn’t it become annoying to receive realtime-updates on your wrist (with vibration/sound?) Users may become tired of this. Siri is not even heavily used on the phone as far as I know, at least below expectations.

        In the case of fitness-trackers: I’m no fitness-guru, but isn’t it obvious that things that can be measured easily have almost no real value, for example heartbeat frequency? What is your real-world applicable conclusion of knowing your heartbeat throughout the day? You could have measured it before with other devices but didn’t, I wonder why. It’s similar to blood pressure, you can check it at home fairly easily but noone ever does, except for some seniors for whom it is critical, and this is even a more relevant medical variable.

        The trend is going in the direction of more screen-real-estate: The watch is now positioned at the very low end of display-size, to encapsulate the gap left by the 3.5-4″ phone moving to 4.7-5.5″. I can see the main usage-scenarios in possibly the nfc-pay-functionality or some keyless-auth-system (car/home?), both years(?) in the future.

        Can Apple pull it off to become a fashion-brand like e.g. burberry/rolex/LV/etc and at the same time have one foot in the tech-industry without losing credibility in the consumers eyes? Two years ago you could argue on a pure rational objective level that the macbooks/air/pro were a fine piece of equipment and were not even that expensive considering the TCO. One step in the fashion-direction is the new gold-coloured macbook. It could be quite hard to sell those to efficiency-minded business/IT-people. Strategically speaking; isn’t the fashion industry as such even more frickle than tech?

        • This is another perspective on Apple in general:

          Either way, if the Watch turns out to be successful, the branded-mid-tier market will suffer or is actually doing it right now. The low end will experience competition from the spreading of low cost (smart)phones even in emerging markets and africa. The basic use-case for traditional wristwatches, besides the true luxury-segment, is no longer viable. Under these circumstances you have to see the recent move by swatch to try to enter into the nfc-payment market. It will be really tough to compete against Apple though, they lack the eco-system, UX, and dominance in relationships with banks/cardproviders etc.

        • a watch is fashion. people take a lot effort to show a unique style in fashion. this is not a winner takes it all scenario.

          the lack of the eco-system is no problem for something like “daniel wellington”, even the lack of a date display on the watch is.

  • I would be most concerned about the possibilty of the smart watch becoming a necessity in a couple of years, much like the smartphone is today.

    If this becomes the case at some point in the future close to nobody will buy other cheap and mid priced watches anymore and also way fewer people will wear (and therefore buy) even a high end swiss watch. Just ask yourself, would you put a luxury watch next to your smart watch just to have a piece of luxury on your arm? I think the majority of people would find this quite akward. The status symbol would be turned upside down…

    I think the smart watch trend has the potential to kill the swiss watchmakers over time, but my guess is it won’t be a question about prices.


  • Assuming a disconnect, where smart watches overtake the value to mid-range market (bye bye casio, seiko and swatch), handmade artisan watches (appropriately called “complications”) will retain their status for 2 reasons:

    1- a luxury item: after all, a watch is the only piece of jewellery a man can wear without putting his sexuality into question
    2- the flight from digital to analogue (not to be underestimated). Just look at the valuation of air-cooled 911s from the 90s and the revival in sales of LP records. Mantra is: back to simpler times AND look different/daring/cool.

    Then diversified groups like Richemont and Swatch will have to shed their mid-range to focus on the top end in an atrophic environment where the industry will have to shrinking massively as a whole.

    “young people don’t wear watches, will they do if they get older ?”

    I looked at the Finnish fur auction house a few weeks ago when it was mentioned on this blog: An interesting observation comes from a noticeable shift in luxury consumption. People are wearing less fur as the new generation favours modesty and under-the-radar behaviour instead of the Donald Trump flashiness of babyboomers.

    Would the upper end of the watch industry suffer from the same? If so, the highly expensive watches (EUR10k+) will become collector items at best, and not everyday wearable/consumable.

    Still a falling knife for me. Would look at a much more focused nimble entity like Franck Muller if there were listed shares…


  • Mechanical watches are a form of luxury kitsch: fake instrument for the measurement of time – every electronic gadget is better suited for the task – . The high prices are only the result of a very expensive marketing. Unlike works of art ,high prices are not going to last, since watches are brand products and not the work of an artist like work of Jeff Soon to name a master of kitsch. The young Hayes behaves and thinks just like the past watch tycoons. If you are looking for a fine piece of mechanical precision buy a Curta calculating machine for 50 $

    • The high prices are only the result of a very expensive marketing.

      Well, this is the definition of almost any luxury product. Brands have to be created by marketing, a lot of marketing. And th border between art and manufacturing is always not black and white. Damien Hirst for instance has some 40-60 people working for himwho actually create the “art” and he then just signs it. Not that much differentfrom a watch.

      And I didn’t call watches art but for some people it is a collectable, like stamps, coins etc.

      Thanks for the link with the Curta. Unfortunately you cannot wear it on your wrist…

    • nobody needs to drive a BMW to get from A 2 B. It’s nice, though 😉

  • “So as a kind of word play I would say: Watch out watch maker to what comes from below….”

    Time ro revisit the concept of disruptive innovation!
    Very interesting article on HBR:

    20 years after the initial concept, its inventor shares a few thoughts.
    Seems to apply here quite well!

    All the best!

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