Switzerland is renowned for being the land of chocolates, Alps and luxury watches. However the famous market encompassing notorious brands such as Rolex, Zenith and Swatch was severely threatened in the 1970s following a revolution of Cheap Japanese digital watches. These Japanese quartz watches were produced on automated production lines and hugely ate into the Swiss watch industry’s market share. Japanese firms like Casio exploited their economies of scale to drastically reduce the costs of production and then pursued a policy of limit pricing which severely dented the demand for Swiss products. Limit pricing is where a firm deliberately reduces the price of their product so that they can price out their competitors rather than focusing solely on profit maximisation as the conventional firm theory assumes it would. This had a stark impact as Switzerland suffered massive job losses in the neglected region of Jura, a region dominated by the watch industry, on Switzerland’s western border. This event was known as the Quartz crisis since it ended the Swiss hegemony of the watch industry allowing foreign firms to expand into the market. By 1983 the number of watchmakers in Switzerland declined to only 600.

The solution to the crisis was generally in two different approaches both of which paved the path for a massive recovery of the industry which is currently thriving. Firstly some of the leading Swiss producers decided to focus on the skilled, artisanal aspect of Swiss watches. As such they drastically improved the quality and aesthetic of the products. This especially attracted wealthy Asian buyers who were enticed by the concept of expensive and detailed handiwork by experienced watchmakers. They therefore revolutionised their market to a luxury one where larger prices than Japanese firms would not reduce their demand as they differentiated themselves by the quality of their product. This strategy was adopted by most of the larger firms like Rolex and Zenith and was highly successful as the brand effect has hugely increased demand for their products. Rolexes and other luxury brands have become synonymous with wealth meaning that regardless of the price the demand is consistently high making the product price inelastic, allowing the companies to increase their prices and profit maximise. This resulted in decades of highly profitable growth and creation of new jobs as when the companies grew so did the demand for allied administrative staff. This has therefore allowed the industry to recover and not succumb to automation allowing Switzerland to boast simultaneously high growth and low unemployment from this sector.

On the other hand the other method has been to embrace the automation to create watches at more competitive costs allowing Swiss firms to seize back a share of the market for affordable watches. The most notable example of this is Swatch which had a smaller number of moving parts (51 compared to 91 for most other mechanical watches), was sealed in a plastic case and was produced in an automated process. These factors all helped cut the cost of production significantly compared to the traditional methods. The company would become the Swatch Group, the largest watch manufacturer in the world.

As the graph above shows the share of mechanical watches has rapidly increased especially in recent years. For this reason, and the fact it has kept unemployment low, I would argue that the approach of improving the quality has been more effective in reviving the Swiss industry.

The industry now faces another challenge in the form of the rising popularity of new smart watches, however this is unlikely to damage the luxury brands which have more expensive prices and are still widely recognised as a status symbol.