SEIKO WATCH CORPORATION: MOVING UPMARKET

We have very strong brand awareness, with around 70 per cent recognition of Seiko as a watchmaker. But there was some confusion about the brand Customer perception of the brand should be the same in Tokyo, London, Paris, New York or Sydney. That meant building a brand image that conveys core values, no matter what the market.

- Kenji Hagiwara, managing director of Seiko UK1

Founded in 1881, Tokyo-based Seiko rose to international prominence in 1969 by commercialising the worlds first watch based on quartz technology.2 As a vertically integrated watchmaker, Seiko held an advantage over its rivals in the Swiss watch industry, which comprised thousands of firms specialising in various aspects of mechanical watch production. Seiko invested heavily in research and development and by the 1980s had unveiled several timepieces featuring technological innovations: the first quartz watch with day and date; the first LCD watch with an hour, minute and second display; the first quartz chronograph; the first calculator watch; the first TV watch; and the worlds first automatic quartz watch.

Through internal development, mergers and acquisitions, Seiko diversified into new businesses over the years. But the watch businessfor which the name Seiko was best knownwas being challenged by forces that were transforming the worlds watch industryMCMilitsa ChervenkovaCore Problem. The advantage derived from Seikos automated production capabilities during the quartz revolution had been erodedMCMilitsa Chervenkova by inexpensive Chinese watch producers and a resurgent Swiss watch industry, dominating the low and higher ends of the market respectively. Meanwhile, competition from Citizen, Casio and a profusion of new fashion brands meant that Seikos position in all market segments was being challenged by an ever-growing number of competitorsMCMilitsa ChervenkovaCauses. In the face of these changes, Seikos watch sales declined MCMilitsa Chervenkovaeffectthroughout the 1990s, prompting the decision to establish Seiko Watch Corporation in 2001 as a completely autonomous subsidiary of Seiko Corporation. The move was intended to streamline internal decision-making and allow for a more focused brand vision.

In 2005, the high-end segment of the watch market was emerging as the most lucrativeMCMilitsa Chervenkova, while narrowing margins plagued the lower-priced segments. Shinji Hattori, president and CEO of Seiko Watch Corporation, felt adamantly that Seiko should raise its perceived image outside Japan, move upmarket and even challenge the Swiss in the domain of mechanical watchmaking. During the year, Seiko launched an innovative new watch movement, the Spring Drive, which was based on mechanical watch technology but featured an entirely new system for regulating time that incorporated a control circuit and quartz crystal oscillator. This hybrid watch technology was the result of 28 years of research and development and would showcase Seikos unique standing as the worlds only mechatronic manufacture3a vertically integrated watchmaker that excelled in both mechanical watchmaking and micro-electronics.

While Seiko had historically produced luxury watches for the domestic market, its high-end lines were little known internationally, with 95% of production sold in Japan and the remaining 5% in other Asian countries.4 In Europe and the US, the brand Seiko was often perceived as reliable, but unremarkable. Industry analysts commented that Seiko had too many budget-price models, and it failed to attract affluent watch enthusiasts and collectors. On Seikos brand status, James Dowling, editor-in-chief of TimeZone.com, remarked:

Seiko doesnt really get the respect it deserves, at least in Europe. The build quality is phenomenal. But theres a misperception of their brand Cheap, in the public mind, means poor qualityeven if its not the case. The best Seiko designs never get the chance to build a following, whereas the best Rolex or Omega watches stay in production for 20 or 30 years. For collectors, its a problem.5

In 2007, it was apparent that Seikos push into the upper ranks of international watchmaking status would require an overhaul of consumer perceptions, particularly in Europe and the US. Could Seiko transform its image in the international marketplace with the Spring Drive technology? Could it successfully appeal to discerning watch enthusiasts and collectors by repositioning itself from a mass brand to a premium brand? Would the new technology generate sufficient turnover from the watch business or alternative sources to recover the cost of developmentMCMilitsa Chervenkovaanother big problem?

The Origins of Seiko6

Seikos roots could be traced to a home-based clock repair service started in 1877 by Kintaro Hattori, an 18-year-old who had apprenticedMCMilitsa Chervenkovaapprenticed under several clockmakers. In 1881, he established K. Hattori in the Ginza area of Tokyo to sell and repair second-hand clocks, and soon expanded to become a retailer and wholesaler of imported clocks. By 1892, Hattori established Seikosha (in Japanese, Seiko means exquisiteMCMilitsa Chervenkova, while sha means house), a manufacturer of wall clocks based in a disused glass factory. In the factorys first year of operation, 70 wall clocks were made a day; daily production had reached 300 units by 1895, and by 1897, Seikosha had become the largest wall clock manufacturer in the country. In the mid-1890s, Seikosha began assembling pocket watches using imported Swiss parts. While Seikoshas factory developed and expanded, Hattori actively developed a retail business in parallel with the manufacturing operations and established a shop in the Ginza area of Tokyo. As business boomed, the store outgrew its premises and relocated to the Ginza 4-chome7 corner, soon becoming the most prestigious watch and clock shop in Tokyo.

Hattori had been a board member of the Osaka Watch Company, which gave him early exposure to the use of machine technology in watch production. In 1899, Hattori travelled to the US and Europe to visit various production facilities and returned to Japan the following year convinced that Seikosha had to adopt the American system of centralised mass production. Hattori succeeded in purchasing foreign-made automatic machine tools, while Seikoshas factory manager also developed machines in-house. In the first years of pocket watch production, income from the sale of pocket watches did not cover expenses. Seikoshas approach to developing this business was emblematic of Hattoris long-term approach of funding innovations in one area with profits from another in this case, from the production of wall clocks.

The end of the Meiji period in 1912 marked the arrival of many new domestic companies that produced clocks and pocket watches. At this time, Hattori aimed to produce Japans first wristwatch an endeavourMCMilitsa Chervenkova that involved greater technical difficulty due to the precision engineering required to make the smaller wristwatch parts. In 1913, Seikoshas first wristwatch, the Laurel, was launched. In 1923, Seikosha launched the first watch to carry the name Seiko. Kintaro Hattori died in 1934 and was succeeded by his two sons. By 1937, the company accounted for about half of the total Japanese timepiece production, with annual sales of about 2 million units.

Seikosha spun off the companys watch production activities with the creation of a manufacturing company called Daini Seikosha (meaning the second Seikosha). Daini Seikoshas Nagano operation then merged with a parts manufacturer, and was spun off as Suwa Seikosha Co. The resulting two divisionsDaini Seikosha and Suwa Seikosha maintained separate research, design and production facilities and developed a rivalry to design and supply watches for K. Hattori.8 In the subsequent years, Japanese watchmaking was dominated by three major firms: K. Hattori (the watch-related activities of group companies have so far been attributed to Seiko), Citizen and Orient, respectively accounting for approximately 50%, 30% and 20% of total production in 1950.9 The Japanese watch manufacturers produced timepieces chiefly for domestic consumption and were able to dominate their domestic market, aided by government tariffs and sales taxes on imported watches.

In the mid-1950s, Seiko was under pressure to upgrade its watch movements to bring the companys technology up to the standards of the Swiss. Seiko set about the task of improving accuracy and adding features such as waterproofing, automatic winding mechanisms and calendars. With domestic machine toolmakers expressing little interest in developing products for the niche market, Seiko and other Japanese watchmakers were forced to develop internal engineering departments to develop the necessary equipment to manufacture precise components. By 1965, Seiko was said to have the most automated production units of all watchmakers. By the early 1960s, Seiko-produced timepieces were comparable with Swiss products in terms of accuracy.

Seiko focused on the expansion of overseas sales and by 1970 had become the leading watch brand in most Asian markets.10 The US was the largest market in the world, but Japanese watchmakers had struggled to win consumer acceptance there due to perceptions of inferior quality. To address this, Seiko established a major sales operation in the US, arriving at a series of non-exclusive agreements with some 50 distributors.11 Seiko invested in television advertising to build brand recognition and established repair centres in New York and Los Angeles that earned a reputation for rapid processing. During the 1960s, a number of exclusive national distribution agreements were also made with wholesalers in various European countries.

Technology Development

Mechanical Watchmaking

Every watch contained certain common elements: a movement to measure the passage of time, an energy source, a display, a casing and a bracelet or strap. The mechanical watch movement was driven by the release of energy from an unwinding mainspring and transmitted through a series of gears to a balance wheel that controlled the hands on an analogue display as it rotated back and forth at regular intervals. Mechanical watch movements typically contained over 100 parts and varied in quality according to the precision of the individual components and the care taken in assembly. In the production of the highest quality mechanical timepieces, very skilled workers were needed to finish the surfaces on the components and to adjust watch movements at different positions.

Having mastered all aspects of watchmaking and earning renown for the mass production of mechanical timepieces, Seiko launched the Grand Seiko line in 1960 to cater to the high end of the domestic watch market. After dominating the domestic watch-quality competition in the late 1950s, in 1964, Seiko participated for the first time in the wristwatch category at the Swiss chronometer competition held each year in Neuchtel. The results in Seikos first year of participation were disappointing. The highest placing produced by the Suwa Seikosha plant was 144th. In 1967, the movements of an entry produced at Daini Seikosha took the second place award at Neuchtel, while an entry from Suwa Seikosha placed third. When the following years competition was cancelled, Seiko opted to participate in the Geneva Observatory competitions, where its entries were awarded every place from 4th to 10th, making Seiko the overall winner.

During the 1960s, the Grand Seiko line of mechanical watches was produced for the Japanese market by a development team aiming to exceed Swiss chronometer standards. Watches bearing the Contrle Officiel Suisse des Chronomtres (COSC) designation were tested and certified by the official Swiss chronometer testing institute to a level of accuracy of 4/+6 seconds per day. Grand Seiko watches were not submitted for COSC certification, but were instead produced to watch in six positions (to account for variations in the performance of watch movements when positioned at different angles), as opposed to COSCs usual practice of testing in five positions. The Grand Seiko line was marketed in Japan from 1960 to 1975, where it was met with great demand until quartz watches arrived on the scene.

Quartz Technology

By the late 1950s, the horological industry had entered a period of technological revolution with the application of electronics to watch technology. The Hamilton Watch Company of Pennsylvania launched the worlds first electric watch, the Ventura, in 1957, employing a battery in place of the mainspring that stored energy within mechanical movements. In 1962, New York-based Bulova had miniaturised the technology for a line of high quality watches introduced under the Accutron brand. Within five years, the Accutron (which was claimed to be five to six times more accurate than the best mechanical watches at the time) had become the best-selling watch over US$100 in the US.12 Quartz timekeeping technology had been available in the public domain and was based on the properties of a quartz crystal oscillating at precise frequencies. By the 1940s, quartz clocksmore accurate than the most accurate mechanical clockswere being used for timekeeping in scientific laboratories. Yet the production of quartz wristwatches had yet to materialise due to the difficulty of miniaturising components and the lack of dependable batteries small enough to fit within the casing of a watch.

In 1958, Seikos first quartz clock, produced for use by a radio station, had been equivalent in size to a filing cabinetMCMilitsa Chervenkova

dresser,cabinet

. In 1960, a contract to become the official timer of the 1964 Tokyo Olympic Games set off a period of intense research and development within Seiko to develop equipment specifically for the Games. The task of preparing for the Games led to the development of the companys first portable quartz chronometer clock for timing the marathon event, as well as a host of new items such as giant clocks, displays, photo-finish imaging systems, backup systems and small electronic printers to produce official records.

By the late 1960s, Japanese and Swiss watchmakers were in a close race to bring the first quartz wristwatch to market. Seiko became the first company to launch a quartz wristwatch the Astronon 25 December 1969. Development work for Seikos first quartz wristwatch had begun at Suwa Seikosha 10 years earlier. Seikos development team refined the key technological components in quartz analogue wristwatch movements (a quartz crystal oscillator, an integrated circuit and a stepping motor) to be reliable and durable enough for a commercial product. Following the Astron, Seiko launched several new quartz wristwatch models in quick succession. Sixteen Swiss companies released quartz wristwatches of their own the following year. But the approaches of Seiko and the Swiss differed in several respects. While the Swiss timepieces featured a single integrated circuit to manage the functions of the watch, Seikos quartz watches used hybrid integrated circuits that combined various circuits on a single base material. Seiko also used its own proprietary quartz crystal in the shape of a tuning fork, which it believed to be superior to the bar type used by its Swiss competitors. The Swiss quartz technology was financed by a consortium MCMilitsa Chervenkova - .of Swiss watch companies, with manufacturing distributed across three factories, each responsible for producing different components of the movement. By contrast, Seiko produced all components in-house, freeing itself of external production restrictions and quality control problems.

Following the companys quartz success, Seiko continued with development work that led to further innovations. Joint research between Daini Seikosha and Tohoku University resulted in liquid crystal display (LCD) technology adopted in Seikos line of digital quartz watches from 1973. By 1979, 72% of Seiko watches used quartz technology, up from 20% in 1975.13 In the late 1970s, Seiko acquired Jean Lassale, a Swiss watch brand then known for producing the worlds thinnest mechanical movements. In an effort to market watches at higher price points in international markets, Seiko launched a collection of luxury quartz dress watches under the sub-brand Seiko Lassale. This collection, however, was not well received in the US and Europe and was eventually discontinued. Seikos next major milestone in electronic watch technology arrived in the 1980s with the development of battery-free quartz watches that could be powered by the movement of a wearers wrist. Seiko Kinetic watches were launched in the late 1980s, with early models able to maintain average monthly accuracy of 15 seconds.

Following the launch of its Kinetic line of quartz watches in the late 1980s, the company continued to introduce innovative watch products, such as the Scubamaster, which incorporated a dive table into a computerised divers watch and the Seiko Perpetual Calendar watch, which featured an automated calendar until the year 2100. Also introduced in the 1990s were the Kinetic Auto Relay series of timepieces, capable of going to sleep when unworn and waking up to the correct time within a period of four years, and a Thermic watch, which generated electricity by harnessing the difference in temperature between the watch and the wearers skin.

The Seiko name remained in the international spotlight through the companys continued involvement as official timekeeper in major sporting events: the 1990 FIFA World Cup, the 1992 Olympic Games in Barcelona, and the 1994 (Lillehammer), 1998 (Nagano) and 2002 (Salt Lake City) Winter Olympics.

From Watchmaker to Industrial Conglomerate

Seikos early decision to develop in-house machinery and component manufacturing capabilities led to the organisations diversification into new lines of business. To highlight the Seiko brand, K. Hattori and Co. changed its name to Hattori Seiko Co. in 1983. The company was renamed once more as Seiko Corporation in 1990 and underwent a period of restructuring to streamline its businesses. Seiko Corporation served as a holding company for a family of companies that reflected Seikos progression beyond its tradition in horologyMCMilitsa Chervenkova. In addition to the watch and clock business, subsidiaries of Seiko Corporation were involved in making and selling products as diverse as camera shutters, optical products, golf clubs and jewellery.

In 1968, Seiko launched the companys first commercial mini-printer (the EP-101). The name Epson was coined for the companys later printer products. Meanwhile, the in-house manufacturing of CMOS integrated circuits for Seikos quartz movements resulted in its development as one of the worlds largest manufacturers of CMOS chips. In 1985, Suwa Seikosha and Shinshu Seiki (then renamed Epson Corporation) merged to form the Seiko Epson Corporation, a major manufacturer of information products, electronic devices, semiconductors and other product lines.In a similar vein, Seikos major manufacturing arm, Daini Seikosha, developed into new lines of business. In 1983, Daini Seikosha changed its name to Seiko Instruments and Electronics Ltd, before being renamed Seiko Instruments Inc. in watches (both for Seiko and licensed brands), Seiko Instruments manufactured electronic components, precision parts, scientific instruments and other items. Seiko Epson and Seiko Instruments remained the watch manufacturing arms of the Seiko Groupa corporate group consisting of three independent companies (ie, Seiko Corporation, Seiko Epson and Seiko Instruments) linked by a common origin and an alliance in timepiece technology [see Exhibits 1 to 4].

The Global Watch Industry and Competitive Landscape

Switzerland

Watchmaking was perhaps Switzerlands most identifiable industry. With Asian and US producers manufacturing hundreds of millions of quartz watches a year in the 1970s, the Swiss industry was still steeped in the mechanical watchmaking tradition and slow to adapt to quartz watch production on a mass scale. Many firms consolidated or closed during the decade.14 From the mid-1970s to 1983, the Swiss watch industrys share of the world market dropped from 30% to 10% in units sold.15 Exports of mechanical watches plummeted from 40 million in 1973 to 3 million in the span of ten years.16

In 1979, the ASUAG group (Socit Gnrale de lHorlogerie Suisse SAwhich included brands like Longines and Rado and was Switzerlands largest producer of watch movements and components) embarked on a plan to produce a line of inexpensive quartz watches in an effort to reverse the decline in its business. Following a merger with SSIH (Socit Suisse de lIndustrie Horlogre., another ailing industry group with brands such as Omega and Tissot, ASUAG-SSIH launched the Swatch brand in 1983. ASUAG-SSIH was later renamed Socit Suisse de Microlectronique et dHorlogerie, and in 1998, renamed the Swatch Group. The merged entity was committed to building and assembling the watch entirely in Switzerland under a vertically integrated model, employing fully automated manufacturing processes that would bring production costs down to Asian levels. In a break from the Swiss practice of using high quality metals and jewels in watchmaking, Swatch watches were encased in micro-moulded plastic parts, and featured only 51 parts (compared with more than 125 parts in a conventional mechanical watch). Available at retail prices typically under US$50, the Swatch range included a profusion of styles and models, and was developed with the collaboration of prominent designers. Approximately 30% of the Swatchs retail price was spent on advertising. Overriding objections that the Swatch would cheapen the Swiss image of high-quality watchmaking, Swatch watches became fashion statements in the 1980s. Within ten years, cumulative sales exceeded 100 million units, making Swatch the best-selling watch in history.17The Swatch phenomenon had a profound effect on the Swiss watch industry. In addition to recapturing lost market share in the low- to mid-price segment, heavy investment in automated production resulted in technology that allowed Swiss watch companies to market quartz watches across a variety of price ranges. Through worldwide promotional campaigns, the Swatch Group trimmed product lines and repositioned the brands in its portfolio (which included Breguet, Omega, Longines, Rado, Tissot and Hamilton). Individual brands had autonomy in product design, marketing and communications, but would negotiate manufacturing and assembly through the Swatch Groups manufacturing and assembly arms.18 The Groups manufacturing subsidiary, ETA, was the largest third-party supplier of watch parts in Switzerland and also supplied watch companies beyond the Group, including prestige firms like IWC and Rolex.

As quartz movements gained acceptance among Swiss watchmakers, a number of firms such as Omega, Rolex and Patek Philippe remained committed to high-grade mechanical watch production and emphasised timepieces with finely crafted movements and precious metal casings that established their brands in the luxury segment of the market [see Exhibit 5].

Through successful promotional campaigns, Swiss firms were able to corner this market and with the exception of several German, Italian and British brands, the Swiss Made label became a virtual prerequisite for participation in the luxury segment. The decision to stay with tradition appeared prudentMCMilitsa Chervenkova, in later years, when mechanical watches regained popularity amid growing global demand for luxury goods. With the ubiquity of computers, mobile phones and electronic devices, the functional need for watches diminished and the need for an accurate timepiece was to some extent supplanted by consumers desire to make a lifestyle statement with their choice of watch.

In 2005, the Swiss watch industry achieved the best results in its history, with watch exports reaching a total value of US$ 9.83 billion, an increase of 10.9% from a year earlier.19 Asian markets accounted for 42.9% of the value of Swiss exports, while the US was the largest national market, accounting for 22%. More than half the value of the watches sold worldwide was generated by the Swiss industry [see Exhibits 6 and 7]. Mechanical watches constituted only 14% of Switzerlands 24.3 million finished watch exports, but accounted for 62% of the total value. By 2003, luxury watches costing more than US$2,563 accounted for 71% of Swiss watch exports by value, compared with 57% a decade earlier.20 According to the Swiss banking group Pictet & Cie, eight playersthe Swatch Group, Rolex, Richemont, LVMH, Patek Philippe, Bulgari, Chopard and Guccihad cornered over 90% of the luxury watch market (defined as being those with a factory gate price of over US$444corresponding roughly to a retail price in excess of US$1,268.21

United States of America

American watchmakers had been a force in the international watch market since the 19th century. In 1950 the US Time Company introduced Timex wristwatches, a collection of inexpensive watches with imitation-jewellery casings that were produced with hard alloy bearings instead of jewels. The US Time Company (later renamed Timex Group) distributed the watches in unconventional outlets such as drug stores at extremely low prices. In the early 1970s, Timex and Bulova introduced quartz analogue watches using components from outside suppliers. Timexs first analogue quartz watch retailed at US$125the lowest price of any quartz watch then on the market. In 1972, the Hamilton Watch Company introduced the first digital watches in production with the Pulsar line of watches; they featured a flashing red light emitting a diode (LED) time display.

A number of American semiconductor firms applied their experience in microelectronics research and integrated circuit production to the mass production of digital quartz watches. In 1976, Texas Instruments shocked the industry by introducing a US$20 watch line featuring plastic-cased LED watches. Subsequent price-based competition forced many watchmakers out of business and only a few established companies were able to survive. By the late 1970s, consumer demand for low-cost digital watches was declining, while price competition meant pressure on margins. By the early 1980s, most American semiconductor firms had completely exited the watch business. The Hamilton Watch Company sold its watch division to the Swiss in 1974; its separate Pulsar division was later acquired by a jewellery firm, which then sold the rights to the name Pulsar to Seiko. After three successive years of losses, the Bulova Company was purchased by Loews Corporation22 in 1979.

Hong Kong and China

Before the adventMCMilitsa Chervenkova of quartz watches, Hong Kongs nascent watch industry was involved in the production of accessories (such as cases and dials) and the assembly of inexpensive mechanical watches. To take advantage of lower labour costs and low tax rates, American, Japanese and Swiss watchmakers had established plants in the territory. In the 1970s, many firms in Hong Kong were involved in the assembly of LEDand later, LCD display watches.23 A number of Hong Kong semiconductorMCMilitsa Chervenkova manufacturers also began to produce low-cost digital quartz watches, which were sold inexpensively on an original equipment manufacturer (OEM) basis, or under obscureMCMilitsa Chervenkova brand names.

By the late 1970s, Hong Kong had emerged as the fastest growing watch production centre in the world.24 But with intense price competition and declining demand for low-cost digital quartz watches, many firms were losing money.25 The industry promptly shifted to the production of analogue quartz watches in the 1980s; Hong Kongs watchmakers output accounted for approximately 7% of domestic exports in the mid-1980s.

The appreciation of the Yen in the late 1980s, coupled with the devaluation of Asian and Latin American currencies strengthened Hong Kongs position in the low-price watch segment. In the 1990s, Hong Kong revised its trade law to allow for watch origins to be determined according to the source of its parts rather than the country of assembly. This meant that Hong Kong watch producers were able to use the label Made in Switzerland or Made in Japan on watches using imported parts. Consequently, a trend emerged whereby watches assembled in Mainland China were re-exported from Hong Kong. Manufacturers were increasingly developing original designs and becoming more sophisticated with branding. In 2005, the export of some 627.3 million units of watches and clocks from Hong Kong amounted to a total value of US$ 5.9 billion.26

With low labour costs and an efficient supply chain, China had emerged as the worlds largest exporter of watches by volume, accounting for much of the global output of low-end watches by the early 2000s [see Exhibit 8A]. Intense competition was prompting Chinas watchmakers to make attempts at branding their own products and to shift to mid-range production. However, most Chinese producers lacked the large sums of investment needed to develop and market their own brands internationally, and production of watches with higher-end functionality required a level of technology that most manufacturers did not have. In 2005, Chinese producers exported 884.6 million watches (an amount 15% lower than a year earlier).27 Watches exported by China were sold at an average price of US$1 (at factory gate prices) as compared with US$6 for watches leaving Hong Kong, and US$377 for Swiss watches.28

Japan

For many years, Japans big-three watchmakers consisted of Seiko, Citizen Watch Co. and the Orient Watch Co. (Seiko later acquired a 54.8% controlling interest in Orient).29 Intensifying competition and rising domestic wages led the Japanese firms to pursue relocation strategies and investments outside of Japan, starting in the 1950s. By the late 1970s, Seiko, Citizen and a new entrant, Casio, were buying cases, bracelets and glass from Hong Kong. The major Japanese watchmakers had established assembly facilities in Hong Kong, Taiwan and other locations and would later concentrate assembly and case, hands, and dial production in less expensive Asian countries, primarily China.

Founded in 1930, Citizen initially produced and marketed private label watches before promoting its own brand of accurate and affordable watches in the 1960s and competing directly with Seiko in subsequent years. In the 1980s, the company diversified into new areas of business such as information/electronic equipment and industrial machinery, reducing the share of watch and clock sales in total turnover to 34% (US$1.09 billion) by 2005. Citizen was a vertically integrated watch producer with fully automated production lines and was the second largest selling brand in most Asian countries, behind Seiko.30 Citizen was known particularly for its Eco-Drive watches that were powered by light. In keeping with other recent initiatives by Japans major watch producers, Citizen released a range of radio-controlled watches that were capable of receiving time signals to synchronise with government-maintained atomic clocks. Citizens subsidiary, Miyota Co., was the worlds largest supplier of watch parts to a variety of fashion brands and private labels.

The Casio Computer Company was a major new entrant to the watch market in the mid-1970s, with a product line that featured a range of multifunctional digital watches. Casio watches were sold through new channels such as consumer electronics and sporting goods shops. By the early 1980s, the company was second to Timex in the low-priced segment but faced increasing competition from lower-cost digital watches from Hong Kong.31 In response, Casio developed increasingly advanced digital watches for specialised uses and added a range of functionality to its watches, such as calculators, world time display, thermometers and altimeters. The companys signature line of shock-resistant (G-Shock) digital watches was introduced in 1983 and carved out a strong position in the market. More recently, Casios strategy was to develop a market for its solar-powered, radio-controlled watches. In the fiscal year ended 31 March 2006, the companys net sales for timepieces totalled US$611 million.

Japans watch business, while accounting for more than half of the worlds watches and parts, endured a period of stagnation during the 1990s. Competition from Swiss brands, an increase in mid-priced fashion brands and a glut of low-end watches from Chinese suppliers (many of which featured inexpensive Japanese parts) prompted Japans watchmakers to reduce production.32 Meanwhile, the domestic economy was miredMCMilitsa Chervenkova in recession and a strong Yen had driven up production costs. To stay price competitive, Japans watch producers established plants in China, where labour costs were 10% of those in Japan.

In terms of value, Japan accounted for half of the worlds total export of watches and parts (US$15 billion) in 2004, followed by Switzerland (US$9 billion), Hong Kong (US$3.5 billion) and China (US$1 billion) [see Exhibit 8B].33 Many of the Japanese watches were made by overseas plants of Japanese watch companies, and locally made Japanese watches accounted for only about 5% of the worlds watch exports by units. The US was the largest market for Japanese watches, accounting for 29% in terms of value, followed by Asia (24%), Europe (23%) and the Middle East (12%).34

Overcoming Roadblocks to Growth

In the early 1990s, Seikos business was severely affected by fierce competition, domestic recession and economic difficulties in its export markets. Its sales declined from US$3.1 billion in 1990 to US$2.9 billion in 1996; it posted five consecutive full-year net losses, culminating in a US$96 million loss in 1996.35 It was becoming apparent that Seiko could not rely on technology alone to differentiate its watch lines and defend its market share.

Restructuring and Relocation

During the 1990s, Seiko Corporation undertook a number of restructuring initiatives to streamline its various business lines. Seikosha Co. Ltd, the clock-making affiliate, was split into two companiesSeiko Clock Inc., a vertically integrated clock producer, and Seiko Precision Inc., a company that manufactured and marketed camera shutters, printers and other equipment previously made by Seikosha. In 2000, Seiko S-Yard Co. Ltd was established to assume responsibility for the sports and consumer electronics business.

In 2001, Reijiro Hattori, chairman of Seiko Corporation took the decision to spin off the watch division as Seiko Watch Corporation (SWC), an autonomous subsidiary of the holding company. The formation of SWC was seen as a profound transformation of Seiko, to mark a new management philosophy and to allow for quicker decision making in the interests of the watch business.SWCs mandate was to design and market watches, sourcing from Seiko Epson and Seiko Instruments. The two manufacturers had long since developed into enormous companies in their own right, generating greater profits from products other than watches (Seiko Epsons annual production of 6 million watches, for example, accounted for less than 1% of the companys turnover). 36 As a result, the company often made manufacturing-oriented

507-110-1

management decisions rather than making them from the standpoint of managing a branded watch business. A clearer division of labour between the two manufacturing arms of Seiko Group was established to avoid overlapping development costs. In a break from the historical policy of encouraging internal rivalry between the two arms, each would now concentrate on their manufacturing strengths in a close working relationship with SWC: Seiko Epson focusing primarily on quartz watch production and Seiko Instruments on the production of mechanical watches at various price points.

To remain price competitive, much of Seikos labour-intensive watch manufacturing operations (eg, assembly and case, hands, and dial production) were relocated to less expensive Asian countries, primarily China.37

Branding and Market Repositioning

Because of our intention to offer watches to everyone, we ended up not having a specific target clientele Seiko, in the desire of pleasing everyone, has been too flexible Up to now, it was our product offer that made our identity. Now, it is our brand identity that must determine our product offer. This is a major reversal.MCMilitsa Chervenkova

- Tsutomu Mitome, first president of Seiko Watch Corporation38

In the 1980s and 1990s, Seiko approached the watch business with a market-share oriented culture, exploiting opportunities to achieve mass sales by introducing watches at various price points, even at the risk of altering its image. In addition to its core brand, Seiko managed a portfolio of sub-brands: Pulsara line of mid-priced quartz wristwatches sold in the US and Europe (the Pulsar brand was acquired from the Hamilton Watch Company in 1979), Alba an affordable collection of youth-oriented watches sold in Asia and the Middle East, Lorus a line of affordable watches introduced in 1982, and Credora collection of luxury dress watches sold at select outlets in Japan. Beginning in the 1990s, Seiko produced a range of fashion watches, such as Agnes B and Mandarina Duck under license from the brand owners.

In the international market, the value of Seiko watches was typically perceived as lying in the US$150500 range, with the brand characteristically associated with reliability and value for money [see Exhibit 9]. However, in the domestic market, Seiko was known as a fully integrated watch company and sold more expensive watches for the top-end of the market in addition to mid-range watches. The Credor collection, for example, included gold and platinum watches set with gemstones, that could carry prices of more than US$10,000.

Seiko launched the Grand Seiko line in 1960 to cater to the high end of the domestic watch market. Reflecting the companys desire to counter Swiss competition in the high-end segment, the Grand Seiko collection was re-launched in 1988, initially featuring quartz movements. In 1998, the focus of the Grand Seiko collection began to shift to high-grade mechanical movements. Although early models in the re-launched collection were made with refinements to the companys existing movements, Seiko management soon approved the development of an entirely new high-grade movement for the second generation of Grand Seiko watches. Mechanical Grand Seiko and Credor watches were manufactured by Seiko Instruments at its Morioka Seiko factory, the site of possibly the largest watch production line in the world.

Tsutomu Mitome, the first president of SWC, had worked in the US market and believed that Seiko was in need of a more focused brand image. While in some markets, the Seiko brand was associated with inexpensive watches, in Japan and other parts of Asia it was known for high quality timepieces. And while some customers associated Seiko with leading technology, others connected the brand with specific watch designs. Mitome described Seikos pricing position as such:

It is a double-edge swordMCMilitsa Chervenkova, , . If it is a definite advantage that consumers see Seiko as having an excellent price to quality ratio, it is also a disadvantage that they expect, at the same time, to pay less for a Seiko than another watch.39

SWCs management undertook the task of identifying a new direction for Seikos watch business. A focus for the brand was expressed through the following vision, identity and core values statements:

Vision:Seiko, in its longstanding tradition of trustworthiness, will bring to people who are in the mainstream of society, products and services representing innovation and perfection. These products and services will encourage, impress, and instil expectations of innovation and advancement.

Identity:Seikos identity shall be that of innovation and refinement.

Core Values:Seikos core values are reliability based on quality and worldwide brand recognition. Seikos additional strength is as a manufacturer, with its power to combine, seamlessly and at a high level,a. technological development capabilities that continue to achieve world firsts andb. design development capabilities that can create original designs.

The concept of innovation and refinement was to extend to the full gamutMCMilitsa Chervenkova of SWCs activities: product development, sales and advertising promotions, as well as distribution and pricing [see Exhibit 10]. Traditionally, Seiko had focused on developing products where sales opportunities existed at particular price points, allowing its global network of ten subsidiaries and some 30 distributors to employ marketing and merchandising strategies suited to their regions. This approach compounded the problem of varying customer perceptions in Seikos different markets around the world.

Seiko continued to offer frequently updated product lines and sub-brands in different markets (the greatest variety existed in the domestic market for the many niches of Japanese consumer demand), but placed new emphasis on value over volume, shifting lower-priced watches to sub-brands such as Alba. Seiko had also gradually increased the average sales price of its collections. As a result of the change in pricing strategy, contribution attributableMCMilitsa Chervenkova to low-end or regular collections had decreased from 41% to 26% of sales from 2003 to 2005.

The company also implemented yearly global marketing campaigns for core collections that were sold in all markets.40 To overhaul branding, Seiko revamped its public profile, from billboard and TV advertising to in-store presentation and packaging, moving from product-based messaging to advertising that emphasised the brand image of innovation and refinement.41 By 2002, SWC had begun opening a number of Seiko shops around the world and was restricting the supply of watches through parallel distribution channels, making it more difficult for discount retailers to obtain Seiko watches.

Signs of a turnaround emerged in the fiscal-year ended 31 March 2003SWC posted net sales of US$894 million,42 breaking seven successive years of decline in sales in Seiko Corporations watch business segment. SWCs operating income of US$60 million represented an increase of 24% from a year earlier.

The Seiko Spring Drive

The Spring Drive Movement is only the beginning. We are sending a strong signal to the international watch market Seiko is moving upmarket! The Spring Drive demonstrates our innovative potential and will gradually open markets for us in the mechanical haut de gamme sector. This is a long-term strategy.

- Shinji Hattori, president and CEO, Seiko Watch Corporation43

Among watch enthusiasts and collectors, watches made by manufactures were usually held in the highest esteem. The French term carried varying definitions, but typically referred to a watch producer that made and assembled all of the components and parts of a watch movement in-house. Although the term usually conjuredMCMilitsa Chervenkova , up a handful of prestigious mechanical watchmakers such as Patek Philippe, Audemars Piguet, Jaeger-LeCoultre and Rolex, Seiko qualified as a manufacture in its own right. Moreover, SWC management assertedMCMilitsa Chervenkova that Seiko was the only watch company in the world that could lay claim to being totally integrated in both mechanical and electronic watchmaking at the highest levels. Thus, the term mechatronic-manufacture was coined to highlight Seikos unique capabilities.

In 2003, Shinji Hattori, the great grandson of Seikos founder Kintaro Hattori, was appointed president and CEO of Seiko Watch Corporation. Upon taking over the reinsMCMilitsa Chervenkova, at SWC, Hattori was determined that Seiko break through the customary price range of US$150500 its watches commanded outside of Japan. A new hybrid watch movement (that had been the product of more than 25 years of research and development) seemed to provide an unprecedented opportunity for Seiko to market a premium-priced watch outside of Japan and dramatically enhance the brands perceived value.The Spring Drive movement was first conceived by an engineer at Seiko Epson44 in 1977, as a means of combining the most appealing aspects of mechanical and quartz technologies, while dispensing with the weakest aspects of each. Although quartz movements offered superior accuracy, they contained consumable parts (ie, a battery or other storage mechanism) and lacked the mechanical intricacyMCMilitsa Chervenkova valued by luxury watch buyers. Mechanical watches were appreciated for their craftsmanship and elegance, but were less accurate and relatively prone to fault.

The development of a working SpringMCMilitsa ChervenkovaSpring Drive Drive prototype in 1982 convinced management to commit additional resources for research and development. Over the next 15 years, Seiko developed an array of new materials and technologies (amassingMCMilitsa Chervenkova over 200 patents in the process) and presented a theoretical paper describing its project to the Swiss Society of Chronometry.45 In 1999, the Spring Drive movement first appeared commercially as a limited edition model in the luxury Credor range sold in Japan. The movement featured a mainspringMCMilitsa Chervenkova , a mechanical gear train and a time regulation system termed the tri-synchro regulator. In the process of developing the movement, engineers at Seiko Epson and Seiko Instruments eliminated the escapementthe weakest component of a traditional mechanical movementdeveloped an integrated circuit that could run at half the power required by a conventional chip, and created a new alloy for the mainspringSpron 510, which offered superior elasticity, strength and corrosion resistance.

The Swatch Group had presented a theoretical paper outlining a similar movement in 1997, but SWCs Swiss rival had not filed any related patents since then. SWCs management felt confident that Seiko would remain dominant in the hybridisation of mechanics and electronics, with few if any competitors possessing the necessary expertise to develop a similar movement.

The Spring Drive exemplified Seikos capabilities as a mechatronic watch producer and offered certain qualities that SWC management believed would appeal to high-end watch buyers:

The Spring Drives accuracy of +/- one second per day far exceeded that of a chronometer-grade mechanical watch (which operated within a range of +6/-4 seconds per day) and approached the accuracy of a quartz movement.

The elimination of the escapement removed the weakest link in a traditional mechanical watch and allowed for the hands of a Spring Drive watch to move in continuous circular motion, rather than in a series of small steps. Thus, Seiko claimed that the Spring Drive was the only watch to reflect the natural and continuous motion of time.

Each Spring Drive watch was assembled by a small team of watchmakers at Seiko Epsons Shiojiri factory. Only the companys most qualified watchmakers were enlisted to assemble the parts, with several among them having won awards at national and international watchmaking skill competitions.

About 80% of the Spring Drives 280 parts were identical to those used in Seikos production of Grand Seiko watches and the parts were assembled entirely by hand.46 The Spring Drive technology was expensive to manufacture and had only been sold in Japan in the first few years, where experience demonstrated that high prices were more accepted than in the international market. Nevertheless, Hattori and SWCs management team believed that the watch could play a central role in the global repositioning of the Seiko brand.

The company took the decision to market the Spring Drive technology internationally under the Seiko brand, rather than the Credor or Grand Seiko brands that were known in the domestic market. Two models of the Seiko Spring Drive were exhibited at the 2005 Basel

Watch Fair before the line was officially launched in September 2005 at a lavish function staged at the Muse dOrsay in Paris. The Seiko Spring Drive was a very low-production line, with only 1,000 pieces available in the first year of sales, at retail prices of US$3,295 and US$3,495. Only one high-end retailer was selected by SWC to carry the line in each market. To be selected, this retailer had to have good knowledge of the Spring Drive technology, share Seikos long-term strategy of moving upmarket and have the ability to deliver quality customer service.47 The Spring Drive movement provided a platform for Seiko to venture in the direction of fine watchmaking and had already won the admiration of watch enthusiasts, earning the award of 2005 Watch of the Year from the largest English-language watch information website, TimeZone.com.

Challenges Ahead

By 2006, Seikos watch business reported an increase in both sales and profits for the fiscal year ended March 31, 2006, with net sales of US$915.3 million, a 5.2% increase from the previous year, and an operating income of US$68 million, a 2.7% increase from the previous year [see Exhibit 11].48 The US was Seikos largest market by value, followed by Japan, South East Asia and Europe.

While the market for mass-produced watches had grown increasingly challenging, luxury watches had emerged in recent years as one of the fastest growing and most profitable sectors.49 In the US watch market, for instance, growth in dollar sales was concentrated on the upper end of the price spectrum.50 The highest growth was seen in the price range that exceeded US$5,000. However, dollar sales of middle to low-end timepieces saw sluggishMCMilitsa Chervenkova, growth [see Exhibits 12 to 15]. Many consumers were less inclined to buy low-end watches for telling time since such a function could be replaced by a mobile phone, a BlackBerry or other devices. There was a growing tendency for customers to buy middle to high-end watches because they served as a status symbol or a fashion accessory. It was anticipated that watch sales in 2007 would continue to tilt towards the upscale internationally.

SWCs management believed that Seiko must not try to compete at the low end of the market. After undertaking market research in the US and Europe, SWCs management felt confident that the Seiko brand could be durable for prices up to US$5,000. The new target audience would be watch enthusiasts and collectors who looked for originality, exclusivity and innovative mechanisms. Nevertheless, Seiko still had far to go before it could occupy a market position that rivalled Swiss brands in the luxury market. In 2004, SWC commissioned the Gallup Organization to conduct a survey on consumer perceptions of watch brands. The respondents placed the notional value of Seiko watches somewhat higher than mid-range brands like Bulova and Citizen but lower than all the Swiss brands on the survey.51 For high-end consumers and other luxury watch aficionadosMCMilitsa Chervenkova, the perceived value of a watch hingedMCMilitsa Chervenkova upon its quality, uniqueness, exclusivity and the ability to enhance social status or prestige. While precision and technology were valuable, they might not necessarily command significant price premiums in the luxury watch market. With a history associated with the easily accessible mass market, it was doubtful whether Seiko could rely on technology alone to enhance its brand power.

In 2006, the management at Seiko Instruments factory in Morioka were projecting a level of 100,000 high-end mechanical time pieces by 2013. The goal was fairly ambitious for Seiko, which produced only 15,000 high-end mechanical time pieces in 2005. Could Seiko rely on the Spring Drive technology to reach its sales target by 2013? Would it be a right decision to market the Spring Drive technology under the Seiko brand, which had traditionally been recognised as an inexpensive, mass market brand outside Japan? Given that Swiss-crafted timepieces had already established tremendous brand recognition in the luxury watch market, could Seiko find a way to lure customers away from the traditional luxury watch leaders

17507-110-1 CSVS/107CSeiko Watch Corporation: Moving Upmarket

EXHIBIT 1: SEIKO GROUP COMPANIES

Company

Key Product Lines

Annual Sales

Employees

Seiko Corporation52

Watches, Clocks, Electronic Devices (eg, camera shutters, system clocks), Optical Products, Consumer Electronics, Jewellery, Golf Clubs.

US$1.82 billion

(Consolidated; Year Ended 31 March 2006)

6,699

Seiko Epson Corporation53

Information-Related Equipment (printers, scanners and projectors, computers and peripherals), Electronic Devices (semiconductors, displays and quartz devices), Precision Products (watches, plastic corrective lenses and factory automation equipment).

US$13.19 billion

(Year Ended 31 March 2006)

90,701

Seiko Instruments Inc.54

Electronic Components (eg, CMOS ICs, LCD modules, quartz crystals, micro batteries), Scientific Instruments (eg, thermal analysis equipment, scanning probe microscope), Communication Products (eg, communications servers, high-speed data transmission cards), Machine Tools, Printer Modules, Information Systems.

US$2.4 billion

(Consolidated; Fiscal 2005)

14,841

30 April 2007).

507-110-1 CSVS/107CSeiko Watch Corporation: Moving Upmarket

EXHIBIT 2: SEIKO CORPORATION FORECASTED RESULTS BY BUSINESS SEGMENT FOR THE YEAR ENDING 31 MARCH 2007 (BILLIONS OF YEN)

Net SalesOperating Income

Watch BusinessPrecision Products Business Optical Products Business Clock BusinessOther BusinessTotal for all Business Segments Consolidated TotalMCMilitsa Chervenkovaconsolidate,cement,establish,knock home,fortify,harden

consolidate

2006 2005 108.0 107.6 42.0 38.5 30.0 28.2 13.0 12.9 29.0 32.7 222.0 220.2 215.0 213.7 2006 2005 8.0 8.0 1.0 (1.2) 0.6 0.4 0.4 0.3 0.3 (0.5) 10.3 7.0 11.0 9.3

Note: Consolidated total represents figures after consolidation adjustments such as the elimination of inter-segment sales.

EXHIBIT 3: SEIKO EPSON CORPORATION NET SALES BY BUSINESS SEGMENT

Millions of Yen

Year ended 31 March200420052006Information-Related Equipment: CustomersInter-segment Electronic Devices: CustomersInter-segment Precision Products: CustomersInter-segment Other: Customers Inter-segmentEliminations and Corporate Consolidated 917,116 3,264

413,540 27,613

77,736 3,366

4,851 24,606 (58,849) 1,413,243 942,401 3,628

454,616 27,995

76,827 4,316

5,906 28,604 (64,543) 1,479,750 973,690 2,753

489,460 37,507

81,463 4,315

4,955 28,022 (72,597) 1,549,568

19507-110-1 CSVS/107CSeiko Watch Corporation: Moving Upmarket

EXHIBIT 4: SEIKO INSTRUMENTS INC. (PRIVATELY HELD) SALES BY BUSINESS SEGMENT

Seiko Instruments Sales Breakdown (Fiscal 2005)

Micro-Othersmechatronics23%18%

Solutions 8%

Network Components 51%

Micromechatronics: Watch movements, Hard disk components, etc.

Network Components: CMOS ICs, LCD modules, Micro batteries, Quartz crystals, etc.

Solutions: Restaurant ordering system, Electronic dictionaries, Wireless card payment systems, etc.

Others: Thermal printers, Colour printers, Scientific instruments, etc.

20507-110-1 CSVS/107CSeiko Watch Corporation: Moving Upmarket

EXHIBIT 5: GEOGRAPHICAL BREAKDOWN OF LUXURY WATCH MARKET (2003)55

Geographical Breakdown of Luxury Market

The Americas 20% Oceania 1%

Africa 1%

Europe Asia28% 50%

Source: Montagnani, M. and Amoroso, J.R. (2003) The Watch Industry: What Makes it Tick? Pictet Company Research.

55 Defined as having a retail price greater than US$1,271.

21507-110-1 CSVS/107CSeiko Watch Corporation: Moving Upmarket

EXHIBIT 6: GLOBAL WATCH MARKET BY PRICE, TECHNOLOGY AND COUNTRY OF ORIGIN (2003)

Global Watch Market by Price, Technology, Origin

US$2370/ Mechanical (Swiss) 22%