The year of the wearable (or lack thereof)

How things change in 12 months (well, really 23, but you’ll see the point of focusing on the last 12). In the first half of 2015, you couldn’t walk past the offices of a traditional watchmaking company without overhearing frantic conversations about the looming threat of the “smartwatch". The world’s two major trade fairs for the watchmaking industry—SIHH in Geneva and BaselWorld in Basel—were consumed by speculation, fear, panic and uncertainty. To be fair, the fear was not of wearables or smartwatches as a concept. Those ideas have been around for a long time. Eric Migicovsky’s Pebble smartwatch, perhaps the first device to market and deliver a product that embodied the essential features of a smartwatch, began to ship in January 2013.

What drove the Swiss into apoplexy in the first few months of 2015 were rumours that were rife that Apple—the sower of market discord and the reaper of global profits—was about to launch a smartwatch. The Swiss, as they say, lost their minds. And when the Swiss lose their minds, they do one of two things: They innovate rapidly and try to respond in any way they can, or they retreat into complete and utter denial. Most did the latter.

The traditional Japanese watchmakers, on the other hand, seemed unperturbed. Which was either stereotypical Japanese stoicism and understatement. Or, and this increasingly appears to be the case, insight. The Japanese have been cramming electronics into watches for decades. Surely they sensed some sort of threat to their gizmos from Apple? But in many conversations with this correspondent, the senior management at several Japanese brands kept making one point: Watches could be tools or luxury products. Rarely, if ever, could they be both in any meaningful way.

So even when the Swiss brands flaunted grand complications that housed chronographs or equations of time indicators—all essentially tools and instrumentation—they did so within the paradigm of luxury. You bought a grand complication not because of what it did but what the watch represented—unlimited craftsmanship, limited edition, eye-wateringly expensive. These watches were signals of wealth, taste, or often but not always both.

The Japanese assiduously maintain this luxury-tool dichotomy. A sensible if sometimes counterproductive strategy. Tell someone that the Grand Seiko is one of the best mechanical watches made on the planet and many consumers will roll their eyes as they walk towards their nearest Swiss watch store. But the Japanese did this because they believe that while
the Swiss could flaunt utility within the paradigm of luxury, it was nearly impossible to market luxury within the paradigm of utility. In other words, the Japanese seemed to be saying, Apple was free to try and sell a luxurious instrument, but we aren’t going to run around like headless chickens just yet.

In 2016, we witnessed the slow, and ultimately painful denouement of the wearables boom. By the first few months of this year, traditional watchmakers already had other things to worry about. They were getting pounded by uncertainty in the global economy. Markets all over the globe were contracting, none more so than China and Hong Kong. As we have written in these pages before, Swiss watch exports are going through a sustained period of contraction. In October, exports fell by 16%, the worst month in seven years. At both SIHH and BaselWorld, the smartwatch was no longer the main topic, survival was.

And then something fascinating happened. If Swiss watches were crashing, then smartwatches were crashing and burning. Apple appeared to be the only brand in the market that was actually selling in large volumes and, perhaps, making any money off sales.

Earlier this month, analyst Neil Cybart put together some numbers which suggest that Apple completely dominates a smartwatch sector that appears to be contracting. Of the top seven manufacturers—and the tail is very short—only Apple, Garmin and Samsung, Cybart estimates, sold more than 200,000 smartwatches. Four of those—Pebble, Motorola, Huawei and LG—are either going out of business, stopping the business or going slow on it.

Meanwhile, the overall wearables market is also struggling for growth. Fitbit share prices tumbled in 2016. Whisper it softly, but wearables may not be as big a deal as we thought they would be. Especially if the wearable doesn’t have the brand Apple on it.

What did all the analysts and pundits get wrong? I think there are three sets of problems here.

Number 1: The Swiss watch industry does not get technology. This is a business that still hands out press kits on CDs. They simply didn’t get the idea of wearables and so essentially lost their minds.

Number 2: The technology guys do not get the Swiss watch industry. They don’t understand the appeal, the terms of engagement or the driving forces that sustain an industry which, from a technology standpoint, should not exist. Why in the world does anybody buy a watch when they have a phone? This appears to be the essence of their engagement with that world.

Number 3: Nobody really knows what consumers want or are willing to pay. Perhaps not even consumers. As readers of these pages will be aware, this correspondent has always been somewhat sceptical of the utility of a screen on the wrist.

So what will 2017 hold for this sector?

Nobody knows. But you can count on one thing, the Swiss, and the Japanese, will still be making mechanical watches in December 2017.

Write to sidin.v@livemint.com