Javier Fungairino Antonio “Chuck” Paguio Guillaume Beck Sophia Liang Spencer Rosen.

Javier Fungairino

Antonio “Chuck” Paguio

Guillaume Beck

Sophia Liang

Spencer Rosen

Agenda

• History

• Swatch Today

• Industry Analysis

• Financial Position

• Our Proposal

OurProposal

History

SwatchToday

IndustryAnalysis

FinancialPosition

Development of World Watch Market

Low Price

High Price

Prestige, Design,

Exclusivity

Rolex

TraditionalSwiss brands

17th~mid 20th Century: Swiss brands dominate the world market

Swatch

1984:Launch of Swatch

Seiko, Citizen

Cheap HK brands

1950s~1970s:Seiko, Citizen, Casio re-invent the industry: Analog and digital quartz technology

Cheap digital quartz watches from Hong Kong

OurProposal

HistoryHistory

SwatchToday

IndustryAnalysis

FinancialPosition

1970s Crisis in the Swiss Watch Industry

Luxury

Middle Range

Low RangeOur

Proposal

HistoryHistory

SwatchToday

IndustryAnalysis

FinancialPosition

1

World market

(%)

9

90

97

Swiss Share

(%)

3

0

World Market = 500 million watches

450 m

42 m

8 m

Swiss watches = Jewelry = Life time investment

COMPETING ON PRICE

Swiss

Benefits

Price

Fixed Cost

Variable Cost

OurProposal

HistoryHistory

SwatchToday

IndustryAnalysis

FinancialPosition

JapaneseHong Kong

Swiss direct labor > 30 % Total cost

Hayek’s 4Strategic Recommendations

(1980)

• Technological innovation

• Vertical integration

• Expansion of production

• Compete in all watch segments

Strategic Intent • compete in high volume market• control quality and costs

OurProposal

HistoryHistory

SwatchToday

IndustryAnalysis

FinancialPosition

Watch Unit Production Cost

Swatch

OurProposal

HistoryHistory

SwatchToday

IndustryAnalysis

FinancialPosition

Swiss JapaneseHong Kong

Benefits

Price

Fixed Cost

Variable Cost

Swatch charged “Swiss-made” premium but operated at similar costs as Japanese and Hong Kong competitors

Vertically Integrated

All in Switzerland

Highly automated

Economies of scale

Fast moving

Fashion WatchSeasonal

Non-conventional Marketing

Olympics, F1

Internet Time

Fashion Shows

The Swatch Value ChainM

argin

Marg

in

InboundLogistics

Operations OutboundLogistics

Marketing&

Sales

Service

High quality, high value

Mass marketing of individualized products

Low costs despite high wages in Switzerland

THE ONGOING CHALLENGE FOR SWATCH

OurProposal

HistoryHistory

SwatchToday

IndustryAnalysis

FinancialPosition

Swatch Today

Marketing Mix: The 4 P’s

OurProposal

History

SwatchSwatchTodayToday

IndustryAnalysis

FinancialPosition

LonginesLongines

TissotTissot

CertinaCertina

MidoMido

HamiltonHamilton

Pierre BalmainPierre BalmainSwatchSwatchFlik FlakFlik Flak

RadoRadoOmegaOmega

BlancpainBlancpain

Swatch groupWatch sales

14%

42%

44%

PRODUCT & PRICE

60%

Price US$

40

110

600

+500k

One profitable growing global brand in every segment

10%

OurProposal

History

SwatchSwatchTodayToday

IndustryAnalysis

FinancialPosition

PRODUCT: From Low-end to Mid-market

• From Plastic to Metal

Unconventional product

• Life Cycle Extension

Emotional product “Always new, Always different”

Swatch Extension of the Product Life Cycle

0

5

10

15

20

25

30

83 84 85 86 87 88 89 90 91 92 93 94

Mill

ion

Uni

ts

Stop Swatch

Automatic

Scuba

Chrono

Pop Swatch

Standard

OurProposal

History

SwatchSwatchTodayToday

IndustryAnalysis

FinancialPosition

A1-Misc-Basic Slide Formats- 12f

PLACE: Swatch’s distribution network

Brick & Mortar

• Swatch Store

• Swatch Megastore

• Online Store but only for limited markets

limited customization on Internet

OurProposal

History

SwatchSwatchTodayToday

IndustryAnalysis

FinancialPosition

• Unconventional promotion

Olympic Games Official Timekeeper

• Online expansion SIT (Swatch Internet Time )

• Swatch Club – Customer Loyalty & Following

PROMOTION

OurProposal

History

SwatchSwatchTodayToday

IndustryAnalysis

FinancialPosition

IndustryAnalysis

OurProposal

History

SwatchToday

IndustryIndustryAnalysisAnalysis

FinancialPosition

Development of World Watch Market

Low Price

High Price

Prestige, Design,

Exclusivity

Followers competing in the same segment as Swatch, (Benetton, Guess, etc.)

Licensed metal sports watches (Adidas, Puma, Fossil, etc.)

Rolex

TraditionalSwiss brands

SwatchSeiko, Citizen

Cheap HK brands

More local brands in emerging markets, i.e. China and India Our

Proposal

History

SwatchToday

IndustryIndustryAnalysisAnalysis

FinancialPosition

Swatch Group sales revenue in China is high but volume is low

Brand Market Share

1. Tianwang 4.32%

2. Fiyta 4.09%

3. Rossini 4.09%

4. Citizen 4.02%

5. Everbright 3.77%

6. Casio 2.64%

7. Tianba&Harpo 1.83%

8. Enicar 1.75%

9. Seiko 1.66%

10. Xinhuang 1.34%

Domestic Brands

Top 10 Brands in China (unit)

Source: China National Commercial Information Center, 2001

Brand Market Share

1. Omega 13.68%

2. Rado 9.26%

3. Longines 5.34%

4. Rolex 3.92%

4. Titoni 3.81%

5. Enicar 3.26%

6. Fiyta 3.24%

8. Citizen 3.13%

9. Tissot 2.86%

10. Tudor 2.78%

Top 10 Brands in China (value)

The Swatch GroupOur

Proposal

History

SwatchToday

IndustryIndustryAnalysisAnalysis

FinancialPosition

Major Competitors in the Global Mass Market

Swatch

$ 2173 m

73%/ Group

• Watch

• Watch & components mfg

• Electronic systems

Citizen

$ 1153 m

40%/ Group

• Watch

• Info& electronic equipment & devices

• Industrial machinery & equip.

Seiko

$ 921 m

47%/ Group

• Watch

• Clock and precision pr.

• Optical pr.

• Sports & toiletry pr.

Timex

N/A (private)

N/A (private)

• Watch

• Clock

• Eyewear

•Thermostat

• Healthcare

• Audio

Fossil

$ 781 m*

N/A

• Watch•Accessories (leather goods, belts, handbags, sunglasses, etc.)

OurProposal

History

SwatchToday

IndustryIndustryAnalysisAnalysis

FinancialPosition

73% of Swatch Group’s total sales come from watch sales

Trends

• Emphasizing FASHION

- Swatch: Calvin Klein

- Seiko: Nike

- Timex: Nautica, Guess?

- Fossil: Burberry, Emporio Armani, Diesel, DKNY

Fossil WritstPDA

Fossil MSN Direct

CitizenEco-Drive Timex

Bodylink

CasioGPS Pathfinder

• Emphasizing TECHNOLOGY

OurProposal

History

SwatchToday

IndustryIndustryAnalysisAnalysis

FinancialPosition

Trends (cont’d)• Swiss target HIGH END/ LUXURY MARKET

Average unit price of export watch by country (in CHF), 2003

• Increasing ADVERTISING- Brand ambassador- Sports event sponsorship

OurProposal

History

SwatchToday

IndustryIndustryAnalysisAnalysis

FinancialPosition

SWOT of The Swatch Group

• Expertise in core technology

• Vertical integration

• Brand equity

• Distinctive segmentation

• Economies of scale

• Low market share in mid-market

• Marketing not localized enough

• Lack of IT-converged products

• Competitors produce in low-cost countries

• Oversupply of watches in the global economy

• Mid-range market

• Super low-end market for developing countries

S W

T O

OurProposal

History

SwatchToday

IndustryIndustryAnalysisAnalysis

FinancialPosition

FinancialPosition

OurProposal

History

SwatchToday

IndustryAnalysis

FinancialFinancialPositionPosition

Swatch ROE is Superior

Swatch vs. CitizenROE

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1996 1997 1998 1999 2000 2001 2002 2003

Swatch Group ROE

Citizen ROE

OurProposal

History

SwatchToday

IndustryAnalysis

FinancialFinancialPositionPosition

Margins are superior

Margin (Net Income as a % of Sales)

-5%

0%

5%

10%

15%

20%

1996 1997 1998 1999 2000 2001 2002 2003

Swatch Group

Citizen

OurProposal

History

SwatchToday

IndustryAnalysis

FinancialFinancialPositionPosition

Market shows signs of recovery

Rebound & Recovery

OurProposal

History

SwatchToday

IndustryAnalysis

FinancialFinancialPositionPosition

Group Sales have slowed down

Sales Breakdown (million CHF)

2,3852,729

3,120 3,034 2,980 2,921

327377

468 422 508 511557

520

675 726 575 551

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1997 1998 1999 2000 2001 2002 2003

Others

Electornic Systems

Watches

-7%

OurProposal

History

SwatchToday

IndustryAnalysis

FinancialFinancialPositionPosition

OurOurProposalProposal

History

SwatchToday

IndustryAnalysis

FinancialPosition

Our Proposal

Recommendations

2. Create “Super Low-End” Brand

1. Target the Mid-Market Segment

INDIA

COMPETITION

CHINA BRAZIL

OurOurProposalProposal

History

SwatchToday

IndustryAnalysis

FinancialPosition

Target the Mid-Market Segment

1. Create mass customization via the Internet- localize sites- design your own watch online- purchase watches online

2. Change “Swatch The Club” to promote loyalty - strategic alliance with airlines: frequent flyer miles - link with ClubMed and resorts - award Swatch points, e.g.- thru Olympics

3. Invest more heavily in R&D, IT convergence - memory stick watches - GPS watches - watches with cameras - PDA watchesOurOur

ProposalProposal

History

SwatchToday

IndustryAnalysis

FinancialPosition

Research Creating “Super Low-End” Product

Nearly 5 billion people of the world’s 6 billion population are considered poor, earning less than US$20,000 per year. The key to success in these markets, such as India and China, is providing super low cost products in high volumes. - C.K. Prahalad

1. Develop cost reducing operations improvements

2. Explore producing outside Switzerland, e.g.- China, India

3. Research cost reductions in raw materials

OurOurProposalProposal

History

SwatchToday

IndustryAnalysis

FinancialPosition

Forecast for the Future

2. Create “Super Low-End” Brand

1. Target the Mid-Market Segment

OurOurProposalProposal

History

SwatchToday

IndustryAnalysis

FinancialPosition

Sales Breakdown

0

1000

2000

3000

4000

5000

6000

1997 1999 2001 2003 2005E 2007E

CH

F in

mill

ion

s Others (Movements, Components,Services)

Electronic Systems

Watches

Forecast +2% year over year in watches

Forecast -0.5% year over year in movements

Q & A

“Time is what you make of it.”