The secret location for making high-end technology products
Cutting edge technology, luxury products and high-end watchmaking. What is the relation? I am often asked “Why does this product say ‘Made in China / Czech Republic / Taiwan / …’?” and followed by “Those products are not made as they used to be made in the past”. The answer is “no they are not!”. Let me explain…
Luxury watchmaking
I was recently watching an interview of Kevin O’Leary, who apart from being a successful businessman is also a huge watch lover. He stated there “Do you think a (watch) maker should make their own (in-house) movement to be a real brand?”… “I have done a lot of soul searching on it”… “I want them to own the angst of building the movement and owning the maintenance of the movement and designing the movements. That is to me what the soul of the matchmaker is. And when you commoditize the movement and you buy it from a 3rd party as an OEM relationship you will never be a company brand, in my view”. And being a watch enthusiast myself, I also have to agree with that.
The luxury watchmaking industry went through all its ups and downs during the last 50 years and faced its external disruptions (e.g. the “Quartz” technology in the 60s, the global financial crisis in the end of the 2000s, the “smartwatch” in the 2010s, etc..). But it has emerged stronger than ever today. That is because the luxury watch found its niche not as a functional item, but as a manifestation of extreme mechanical engineering, craftmanship and of course elegant design that projects your personality. The more the watchmaker wants to double down on those, the more the need for vertical integration and customizing elements to push the boundaries.
By default one would think of the “Swiss Made” watches of Patek Philippe, Audemars Piguet, Jaeger-LeCoultre, Rolex, etc. It does not even have to do with the long history or heritage of those brands, as you can see even much younger brands, like F. P. Journe, excel in this space. Now here is the twist: once you close that back cover of the watch it is a self living “system” of its own. Nothing will ever affect it again. No external forces, factors, relations, connections… If you want to be scientifically accurate you can say of course that elements like gravity (or mechanical winding) will power it, while humidity and light exposure will have some very long terms affect on it. But those are pretty constant, well known and per-calculated. You can be sure that you can pass the timepiece to the next generations, as a heritage item, for the centuries to come.
You can gather all the best mechanical engineers, craftsmen, painters, etc. to work under one roof in a high-collaborative environment, towards the holy grail target of the ultimate timepieces that will last centuries. So what if development takes long, supply is limited and the waiting time for purchasing the ultimate time piece takes years? (e.g. a PP Nautilus 5711/1A has reportedly about 8 years waiting time for purchasing new in some cities). After all there are centuries waiting ahead to enjoy the product by you and your descendants. You are also willing to part with relatively high amount money, knowing that this is a true long lasting piece.
This is a clear example of a vertically integrated value chain. In this model, an industry can be seen as a succession of many suppliers, producers and distributors, transforming raw input to market-ready material, doing that one step at a time.
And this is the way competitors are also seen as similar vertical integrators, operating in parallel.
It is about managing the flow of goods and information. This model works when transactions costs are high (to coordinate suppliers, ensure quality, transfer components, etc) i.e. to orchestrate the value chain. Less transaction in the value chain means less cost and more control of the execution & quality. The more goods you build, the more you learn as a company, the more the quality increases, the cost decrease, etc. And of course digital transformation is happening in all businesses, with regards to the supply chain, the distribution and understanding & addressing the future customer needs, etc. The latter being the next big challenge of the luxury watch making industry.
Physical location really matters in this vertical integration model (Michael E. Porter and Scott Stern, “Innovation: Location Matters”, 2001). Because you want all your experts to be under one physical roof, in-house. And you want access to that talent pool in close proximity, considering also your competitors as talent pools. It is not random that in watchmaking the industry experts have been located in the area of Switzerland for hundreds of years now. That physical proximity and talent pool built-up allowed Athens to be the center of innovation at the times of Aristotle and Socrates, Florence excelled in Renaissance, Silicon Valley from the 70s (and strongly continuing to do so), with Shenzhen being the most recent example when it comes to electronics manufacturing excellence nowadays. Around those locations ecosystems are built up with experts, suppliers, venture capitalists, universities, etc. for their domain of expertise.
Cutting-edge technology products
Now let’s look at cutting-edge technology products. Could be a smartphone, a speaker or a television. Lets use the television as an example, which is probably the example most people can easiest relate to. A television is a highly connected & highly interacting with the “external world” product. Here are some of the disruptions that happened in the TV domain in just the last 15-20 years:
- Screen technology developed for CRT, to LCD, to OLED…
- Screen resolution developed from Standard Definition, to High Definition, to 4K, to 8K…
- Broardcast interface moved from analogue to digital MPEG-2, to MPEG-4, to IP…
- On demand content moved from VHS, to DVD, to Blueray, to DLNA/NAS, to Internet streaming
- Connectors moved from analogue SCART & RCA, to DVI, to HDMI x.y, to USB-C…
- Sound moved from stereo, to 5.1 surround, to 7.1 surround, to object-oriented surround…
- Network connectivity came to all TVs with WiFi, Bluetooth, soon 5G…
- App stores with content apps, for music, video streaming, games…
- Interaction with the product moved form traditional remote control, to include apps, voice assistants, integration with other IoT devices in a smart home context…
What you see in every one on those examples, except maybe the first bullet point, is that all those developments end up in an endpoint outside the product itself. In an endpoint that is part of an ecosystem, but external to the product and where innovation is driven at different speeds by different companies, not directly in the core TV business (e.g. 5G communications, IoT, apps, etc). You also quickly realize that a long lasting technology product is not only a product built with high physical quality, but a product that will be able to last with regards to adapting and supporting the latest developments on the plethora of those ecosystems it is linked to, especially as the customer expectations are high in this space... So you could say this is exactly the opposite of the watchmaking case, where the product is a closed system, not affected by external factors.
Developing high quality and long lasting products in this context of cutting-edge technology, requires two important things:
- Add value to the customers in a higher abstraction layer, than just the physical look & feel of the product or the mechanics. That means SW, services, integration and holistic experiences. Experiences that will be affected, hopefully towards becoming even more positive, over time (via SW updates, cloud services or other peripheral devices).
- Orchestrate your supply chain not only in the physical domain, when it comes to components and manufacturing, but more importantly in the digital domain when it comes to software, services, AI, etc.
It is also obvious that in this context you cannot get the experts to work under one roof, in a vertical integration model. No company can be expert vertically in so many different domains, such as manufacturing, assembly, craftsmanship, software, radio connectivity, services, artificial intelligence, interaction, etc. At least not if you really want to have truly the best experts. This is why in the cutting edge-technology products the importance is not where the product is physically made, but how it is designed and how the plethora of required expertise are orchestrated no matter their physical location.
Collaboration
The ones to succeed in this space are the ones that will highly collaborate. Collaborate with the best experts in the world, in any context required, let it be in-house employees, remote office employees, suppliers, technology partners, brand partners, universities, etc. The traditional Country of Origin (COO) rules are of course not modern enough to cater for a “Made by the Best Experts in the World” messaging. So, you might have seen label messages like this:
What they really try to convey is that those are product where the physical assembly is just one parameter of the product value. And it has to be performed where you get the best partners, suppliers, components, workforce, transportation infrastructure, etc. to optimize that “physical” part of the supply chain. Typically geographically close to that ecosystem of manufacturing expertise. But at the same time it means that even more value comes by designing the product with long lasting-ness in mind and establishing a virtual collaboration environment for employees, partners, suppliers, etc. to deliver to this complex product.
In this cutting-edge technology domain, multiple actors have to collaborate, in a non-vertical or sequential way, for the companies on the top to deliver innovation, while more expert companies on the bottom layers focus on scale sensitive business (like assembly, memory chips, connectivity, or lower level of SW and services). It is often the case that partner companies in one part of the value chain, might be competitors in other, or that the relations are actually changing very often. Adaptability is the key. This highly connected collaboration model allows also new entrants to come easier in the top layers and disrupt businesses, with lower entry barriers, as the heavier asset investments are done in the bottom layers, focused on scale, and they are easily available for access (see fabless manufacturing, telecom infrastructure, cloud computing, etc).
“Made in…”
“Those products are not made as they used to be made in the past”, no they are not. Because while physically on the outside cutting edge technology products might resemble some of the products from the past (televisions, speakers, smartphones, etc), they are radically different in the way they are connected and participate in the different modern, and complex, ecosystems. They are not simply “Made in (country name)”, but to be really standing out they need to be innovative and “Made by the best experts in the world”, no matter their geographical location. The winner is the one to best orchestrate this way of working. The secret location is collaboration.
