First time learning about Nicolas Hayek. Probably the person that shaped modern Swiss watchmaking industry the most, and interesting case study of business leadership. Loved the down to earth interview too (can we go back to 1993 interviews please?).
We must build where we live. When a country loses the know-how and expertise to manufacture things, it loses its capacity to create wealth—its financial independence. When it loses its financial independence, it starts to lose political sovereignty.
But you know consumer markets are fiercely competitive. How can you absorb even a modest cost disadvantage? This is not commodity competition. Let’s say you have three similar watches. One says “Made in Japan” and sells for $ 100. Another says “Made in Switzerland” and sells for $ 110. A third says “Made in Hong Kong” and sells for $ 90. Which watch will consumers prefer? In Europe, between 75% and 95% of all consumers will prefer the Swiss watch—in spite of the 10% premium. In the United States, depending on which region you are talking about, between 51% and 75% of all consumers will prefer the Swiss watch. Only in Japan itself will a majority of consumers prefer the Japanese watch to the Swiss watch. What does that mean? If you have a manufacturing process in which direct labor is less than 10% of total costs, you have eliminated those costs from the competitive equation. When we created SMH, our direct-labor costs, on average, were more than 30% of total costs. Today they are well below 10%. If we paid our workers full salaries and the Japanese paid their workers nothing, we could still compete.
This same logic applies beyond watches. CEOs must understand this point. If you can design a system in which direct-labor costs are less than 10% of total costs, it is cheaper to build mass-market consumer products in the United States than in Taiwan or Mexico.
Omega is an elite watch for people who achieve—in sports, the arts, business, the professions—and help shape the world. It is a watch for people who are somebody because they made themselves somebody, not because their grandfather left them a trust fund or because they made money from insider trading. The astronauts who landed on the moon achieved something. They were smart, healthy, courageous. They wore Omega. So did the Soviet cosmonauts. That message had been destroyed.
Omega designs most of its own mechanical movements and buys them from Frédéric Piquet, as do most high-class Swiss watches. We own Piquet.
Imagine if we got so uncompetitive in movements that we had to get out of the business altogether. And imagine if, like so many companies in other industries, we then focused on design and marketing and final assembly. And then imagine if we designed a great new model for Tissot, a watch that was going to be a big hit in the United States and hurt our rivals. Now, what if our Japanese supplier recognized the appeal of that new model? You can imagine what might happen: “We are very sorry, but we are having capacity problems at our plant. We know we used to charge you $ 3.50 for that movement. It is now $ 12.” Well, that destroys the economics of the watch. So the next thing the supplier says, “Of course, we can make special arrangements in our plant. But we prefer to deal with partners rather than customers. We are prepared to become 50% owners of the brand and supply movements at more favorable prices.” That sounds conspiratorial. We heard that argument about Japanese leverage in computers because they dominate flat-panel displays and power supplies. The Japanese compete fiercely among themselves, why should they conspire against European companies? Let me correct myself. It is wrong to talk about “the Japanese” in our business. In movements, there are only two Japanese companies that really matter—Citizen and Seiko. The moment you get five or ten Japanese companies in the same industry, they do fight like hell. But there are plenty of industries where that is not the case, and ours is one. By the way, I am not suggesting that movement suppliers would single out Europeans or Americans. We sell lots of movements to watch companies in Japan. Why? Because Citizen and Seiko sometimes can’t or won’t supply them. We sold movements to Casio when it started making watches. Why? Because Citizen and Seiko couldn’t or wouldn’t supply them. That’s the reality.
You also invested hundreds of millions of Swiss francs to make semiconductor chips. But the world is flooded with chips. Isn’t that a case of unnecessary vertical integration? No, it isn’t. The world is flooded with five-volt and three-volt circuits—the chips used in computers, televisions, and VCRs. But watches use 1.5 volt chips. There are three companies in the world that dominate production of 1.5 volt chips. One is SMH. The other two are in Japan. We must make our own chips to maintain our independence.
We are big believers in decentralization. This company has 211 profit centers. We set tough, demanding budgets for them. I personally participate in detailed budget reviews for our major profit centers. Then we track performance closely. We get monthly sales figures for all profit centers on the sixth day of the following month. We get P&L statements about 10 or 15 days later. The moment anything looks strange, we react very quickly, very decisively, very directly. And we are big believers in project teams. Find your best people, let them tackle a problem, disband them, and move on to the next problem. I suppose this comes from my consulting background. Every company needs certain functions. You have to watch costs every day. You have to watch quality every day. But you don’t decide every day whether to launch a Swatch Pager or whether to build a new chip plant.