Watch Industry: Applications of a man-hours model for qualitative interpretation
One metric to rule them all…
A question that often gets asked is: “What justification has brand X to charge more than brand Y for a product that has the same characteristics?”
In other industries that have been subjected to mass production, “brand equity” is often the answer. Brand X can command higher prices, we are told, because people are willing to pay for it. And to some extent it might true.
My relationship with watches started as a collector, with hundreds of visits paid to boutiques to look at the products in person: not all watches are made equal. But it really required switching to the other side of the curtain (i.e. working in the industry) to be able put my finger on it.
You see, while watchmaking has embraced computer aided technologies such as engineering and machining, the complexity of shapes and their physical properties make it that manual finishing is still mostly carried out by hand.
Tudor factory. Image source Assembly Magazine
So besides the manipulation to and from industrial presses and lathes, refinishing and assembly are still mostly carried out by hand. If the plastic industry is capital intensive, with most of the cost going into moulds and the output being ridiculously cheap, the metalware industry is labour intensive, with moulds being comparatively much affordable but the output being costly.
And this does not only apply to watches. Any piece of industrial metalware, if it must meet strict measurement, will exponentially cost more based on the amount of work required to meet the requirements. Transportation is a good example.
Rolls-Royce propulsion engine. Image source Times Aerospace.
Having started to work in the watch industry in 2003, I visited dozens trade shows and workshops, where I could touch the raw materials and witness their progress through the manufacturing steps.
I am also trained in gold smithing, so I am familiar with the process required to reach different types of surface finishing. But it still took me several years to be able to put my finger on it: a brand can significantly raise the level of cosmetic finishing by investing in finer materials and skilled labour. I even wrote a piece about it, but it remains difficult for the reader to quantify.
That’s where the man-hours might help.
In late November 2022, the team at WatchesBySJX published a must read article written by their contributor Brandon Moore.
Using figures about turnover, volumes, head count, retail price and a little bit of extrapolation, the SJX team proposed to use watchmaker-hours to reflect the amount of labour that goes into producing these watches.
There are many limitations to this method, such as for example the proportion of staff that is directly involved in operations, the level of value that they add (between a highly sought artisan and an interchangeable operator) and the amount of subcontracting that the brand does. However, if we assume that there is a similar distribution of tasks between various brands, we can still take those numbers as indicative.
The SJX team thus observed that brands resulted in 5 different clusters, that they named as follows:
- The peak, which involves more than 300 watchmaker-hours
- Artisanal-industrial, which involves 100 to 299 watchmaker-hours
- Industrial haute horlogerie, involving 30 to 99 watchmaker-hours
- Industrial fine watchmaking, from 10 to 29 watchmaker-hours
- Industrial prowess, from 1 to 9 watchmaker-hours
So Rolex and Omega for example, require less than 9 watchmaker-hours per single watch, while Roger W Smith and Philippe Dufour require more than 300 watchmaker-hours per single watch.
I was very excited by the possibilities opened up by this method, and since the SJX article focused on the high-end segment, I decided to look more closely at the brands below 10 watchmaker-hours: Applications of a man-hours model for qualitative interpretation.
The concept behind watchmaker-hours consists in dividing the amount of yearly working hours (in this example: 2,000) by the quotient of the amount of watches sold per year (volume) for 85% of the employee count.
Although these numbers were either volunteered by brands in the first place, or extrapolated from export figures, one limitation is that the information about employee count is not regularly updated. It does then introduce a small error in the formula, which can still be taken as indicative of the economics involved.
Another caveat is that, while the man-hours reflect the level of internal operations that a brand sets up to take care of business, it does not include outsourcing. So the figure is more representative of the internal work that takes place between inbound component deliveries and outbound shipping of finished products.
The main differences with the SJX article are the following:
- I used 2020 figures for reference, since they could be matched with the corresponding head count. The SJX article focused on 2021 figures, or tried to make up for the lack thereof.
- The heat map is reversed from the SJX article, the reason being that the upper left of the chart seems to be an advantageous place for a brand to be: it can command a high wholesale price while at the same time it enjoys a low man-hours per watch for the price segment. So green means good performance, red means under challenge. As explored in the next paragraph, this does not necessarily reflect on the cosmetic quality, but is more indicative of the economies of scale achieved.
- The amount of hours per year was rounded off to 2,000.
- Watchmaker-hours are expressed as man-hours, since in high volume brands, most people involved in the manufacturing process are operators and not watchmakers.
A silver lining amongst the brands that appear on the left half of the charts, up to 50 MHpW included, is that their output is amongst the highest volumes of their segment.
Inversely, brands that are near the bottom right part of the chart could be seen as underperforming: they are spending significantly more man-hours while not managing to command a high price.
Example of clusters
Prior to the launch of the Moonswatch collaboration with Omega, Swatch seems to have been falling from grace, while seeing nearly two thirds of its 2014 turnover of USD 750 million shrink to USD 220 million in 2020 . The high MHpW for the segment might be attributed to the heavier head count in comparison to the production output, as Nick Hayek, much to his merit, tries to avoid laying off staff (at least Swiss employees) during economic slumps.
The Titan figures are probably the most indicative, since the brand produces most of its components domestically. Timex, Festina Group, Fossil Group and Seiko do heavily rely on outsourcing in China. Their labour probably consists in unloading the truck and storing the watches, possibly after an inbound quality control, and packing them for delivery to the sales channel. Interestingly, Swatch used to have the same level of efficiency, while relying on expensive Swiss wages.
The strong performers are Tissot, Longines and Tudor, and while Longines managed to raise their wholesale price at the cost of additional man-hours, Tudor seems to have raised their wholesale price while optimising their man-hours.
Eterna in particular, and to some extent, Maurice Lacroix, seem to be trailing behind. TAG Heuer comes second after Tudor when it comes to commanding the highest wholesale price.
Here again, the undisclosed proportion of outsourcing might skew the ratio and give them a lower MHpW than it should be.
Just like The Swatch Group’s Longines and The Fondation Hans Wilsdorf’s Tudor in the previous chart, the groups’ respective brands Omega and Rolex have been sliding upwards over the years. The same happened for Breitling. Hublot dominates the chart, and Girard-Perregaux and Jaeger-LeCoultre seem to be trailing behind. Girard-Perregaux saw its sales nearly vanish, from USD 180 million in 2014 to USD 15 million in 2021 .
The clear winner on the under 150 MHpW chart seems to be Audemars Piguet, with its steady growth. Just like its sister brand Swatch, Breguet seems to have hemorrhaged profits, with sales shrinking by two thirds from USD 750 million in 2014 to USD 272 million in 2020.
Conclusions
This method offers a new way of looking at a brand’s figures to make comparisons possible. It is effective for sorting brands in clusters according to MHpW and price, it remains limited by the challenge of representing a brand’s economies of scale.
It does however help to debunk claims that all similar designs offer similar quality, and it helps to articulate the difference in added value. So if a Festina, a Tissot and a Tudor that each offer a similar design are respectively priced at USD 400, USD 1,000, USD 1,500 and USD 1,775, there is more to it than just arbitrary pricing.
According to the MHpW model, the Festina and the Tissot both required a little more than 10 minutes to process, while the Festina is Made in China with a 50 years old movement design, and the Tissot is Swiss Made with a 40 year old movement design that has been re-engineered 3 years ago. The Tudor required almost 3 hours of labour, while the Eterna requires more than 10.
The model does allow to group brands in clusters based on price point, but it raises questions when it comes to interpretation. Does a 17 MHpW ratio VS a 6 MHpW ratio means that IWC Schaffhausen gives its watches three times more finishing than Rolex does?
The original story with references is available at https://woodshores.agency/trends/2022/12/applications-of-a-man-hours-model-for-qualitative-interpretation.
