In his best-selling book, Capital in the Twenty-First Century, French economist Thomas Piketty makes the point that wealth accrues to capital much more rapidly than to labour. The result is increased inequality, with more and more wealth ending up in the hands of the richest segment of society. The same is true in watchmaking, which, as a business, is far more capital intensive than that of any other luxury goods.
Though the outlay on luxury goods is similar regardless of product (think prominent advertising and lavish stores), manufacturing watches requires more investment and higher fixed costs than making handbags, scarves or liquor – thus requiring more capital.
That’s because watches are an industrial, engineered product, more akin to cars than handbags. Making more of them reduces costs and improves quality. That is why the industry has coalesced around three major watchmaking enterprises – Richemont and the Swatch Group, both luxury conglomerates, and Rolex, essentially a single-brand behemoth.
The results of this concentration have been impressive. The large watchmakers are very large and very profitable. Richemont’s revenue in 2013 was just over US$13.2 billion (S$17.5 billion), with profits of just over US$2.6 billion, while turnover at the Swatch Group, which unlike Richemont concentrates only on watches, was US$9.1 billion, with profits of US$2 billion.
Growth has been even more impressive. A decade ago, the big watchmaking groups were barely a third of their current size.
But in the luxury-goods business, wealth is found not just in the watchmaking groups. In fact, it is the larger luxury conglomerates that have breathtaking financial firepower. LVMH, for instance, is nearly three times as large as Richemont, with a third of its sales coming from its flagship brand Louis Vuitton. LVMH, as well as its fashion and leather goods compatriots Hermes and Chanel, has been investing impressive amounts of capital in its watchmaking operations, despite not being traditionally associated with fine watchmaking.
Paradoxically, the very fact of the unrestrained growth of the large luxury-goods companies means that tiny independent craftsmen will always be in demand. The very nature of luxury goods – mystique, rarity, craftsmanship – means that small-scale, but inordinately expensive, brands will always have an appeal.
Carmaker Pagani makes some three dozen supercars a year, compared to the 4,000 made by Rolls-Royce and the 7,000 by Ferrari, which intends to boost that figure to 10,000. Yet, Pagani has been in business for over 20 years, and remains an automobile object of desire, even among Ferrari enthusiasts.
The parallel with independent watchmakers is obvious. Examples include Englishman Roger Smith, who painstakingly makes by hand some 10 watches a year, or Philippe Dufour, who has made not more than 200 watches in a career of nearly 50 years.
In contrast, the traditional “holy trinity” of watchmaking – Patek Philippe, Vacheron Constantin and Audemars Piguet – together produce well over 100,000 watches each year.
Though wealth does accumulate faster to capital – and the big luxury brands will only get larger – the lone craftsman in his cramped workshop will always have a place in fine watchmaking.
The trick for the collector who wants to see the value of his investment maintain or increase over time is determining which craftsman is the one whose creations will one day be in a museum, instead of at a flea market.