Nicolas Hayek and the Swiss Watch

For all the Swiss watch lovers out there, of which I’m one, we are all in debt to the late Dr. Nicolas Hayek. In the course of my research into the world of watches, Dr. Hayek’s name has appeared many times. To that end, I’m devoting an entire post to him.

Early Life

Dr. Hayek was born in 1928 in Beirut, Lebanon. He moved to Switzerland as a young man studying physics and mathematics at the University of Lyon in France. He began his professional career as an actuary with the reinsurer Swiss Re. He left Swiss Re to head his wife’s family metal business in place of his ill father-in-law. After his father-in-law’s recovery, he moved on to start Hayek Engineering in 1963.

Hayek Engineering functioned as a management consulting firm. In a short amount of time, his company made a name for itself throughout Switzerland and Germany. By 1979 the firm had over 300 clients across 30 countries. Throughout the 80’s and 90’s Nick Hayek was a European corporate titan.

On the brink

After WWII, the Swiss made 80% of the world’s watches. By 1970, they were down to less than 45%. Three drivers that led to the dismantling of the Swiss watch industry. First, was competition from Asia. Second, changing consumer demand, and last was new technologies. To understand how desperate the picture was for the Swiss watch industry, we must cover some history.

For hundreds of years, the Swiss have been known for their expertise in fine watchmaking. The Great Depression hit the Swiss watch industry hard. Consolidations led to the formation of two major Swiss watch groups Société Suisse pour l’Industrie Horlogère (SSIH) and Allgemeine Gesellschaft der Schweizerischen Uhrenindustrie (ASUAG).

SSIH came into existence in 1930 as a result of a merger of Omega and Tissot watch companies. They were later joined by Lemania watch Company, A. Lugrin Company and L’Orient in 1932. According to Dr. Hayek, Omega was a premier Swiss brand and headline of SSIH. Tissot was in the middle of the range of Swiss watches.

ASUAG formed in 1931 and was the bigger of the two post-Depression industry groups. ASUAG formed with the help of the Swiss government and Swiss banks. ASUAG owned a few brands such as Rado and Longines. It also owned watch part manufacturers which supplied parts to the whole industry.

Both SSIH and ASUAG merged brands and component makers as competition increased.. By the 1970’s mismanagement and competition proved to be too much. With the trouble, foreign companies were looking to buy some of the vulnerable brands.

The banks call uncle

The Swiss watch industry needed a rescue. Swiss bankers called on Dr. Hayek to oversee the liquidation of SSIH and ASAUG. In a Harvard Business Review (HBR) interview in 1993, Hayek described the situation as such:

A chaotic jungle. An absolute mess. Most people who analyze the destruction of the Swiss watch industry in the 1970s emphasize price and technology. They point to the arrival of hundreds of millions of cheap quartz watches from Japan and Hong Kong and our decision to ignore quartz, a technology we invented. But we had huge problems beyond technology. There were problems of strategy, structure, management.

It is at this point that the magic Dr. Hayek spun his magic. In 1983, he advised the banks that the two watch groups should merge. So was born the Swiss Corporation for Microelectronics and Watchmaking (SMH). The banks proposed that Dr. Hayek buy a controlling position in SMH. Hayek formed a group of investors with his stake being largest. In the 1993 HBR interview, Hayek described the report given to the bankers about the state of the watchmaking industry.

In the report, we drew a diagram to describe our competitive environment. It looked like a three-layer wedding cake. Back then, the world market for watches was about 500 million units per year. The low-end segment, the bottom layer of the cake, had watches with prices up to $75 or so. That layer represented 450 million units out of 500 million. The middle layer, with watches up to $400 or so, represented about 42 million units. That left 8 million watches for the top layer, with prices from $400 into the millions of dollars.

The Swiss share of the bottom layer, 450 million watches, was zero. We had nothing left. Our share of the middle layer was about 3%. Our share of the top layer was 97%.

The plan – Swiss Made

Dr. Hayek went against the business theory of the day and the advice from the Wall Street types. He doubled down on being Swiss made instead of becoming stateless and producing overseas. Instead of being niche focused he broadened the companies markets. Instead of stripping the company to its profitable pieces, he built a vertical behemoth.

He viewed the Swiss as particularly good at making watches. To that end, they should continue to do so because it is part of the Swiss culture. Low-cost competition did not mean it was a race to the bottom. Rather, the Swiss were going to have to re-engineer how they produced quality watches. He was steadfast that Switzerland manufacture the watches. Otherwise, wealth creation for Switzerland would disappear.

Many happy wrists

As part of the turnaround plan, Hayek’s SMH bought the Swatch brand in 1985. The popularity of the Swatch brand, the focus on Swiss quality, and the streamlining of business led to one of the greatest corporate turnaround stories of all time. In 1998, SMH became The Swatch Group. Today, the Swatch group owns many watch brands as well as the ETA movement maker. It is also the largest watch group in the world.

We should all enjoy our Swiss timepieces and remember role of Dr. Hayek. Don’t forget that Swatch watches are the main reason many fine watches exist today. So, sport your Swatch watches with pride.

Sources:
Harvard Business Review – 1993 Message and Muscle: An interview with Swatch Titan Nicolas Hayek
Wikipedia – Swatch Group, Nicolas Hayek
Swatch Group History