"Swiss Made"

Editor's note - Since posting this, I've had to make several edits for clarity's sake, and it's spurred a lot of online discussion, so much so that it's clear I need to add some disclaimers...

1. The FHS could quickly end much of the debate by simplifying their rules for "Swiss Made", particularly by defining what is meant by "manufacturing costs" in an assembled part, like a movement, or a finished, assembled product, like a watch. Logically, in an assembled part or product, those costs would include the cost of assembly, not simply the cost of producing the parts, an area of ambiguity which is central to this debate. They could further clarify and simplify things by removing all language related to certifying parts made outside Switzerland, as well as the language which allows the associated assembly costs for those parts to be included in the calculation for Swiss value, both of which are also central to the debate. Or they could simply adopt a standard like "Made in America", whereby a product which says "Swiss Made" would mean all, or virtually all of the parts were made in Switzerland, and do away with the current "60%" calculations, where the murkiness involved leads to wide interpretation.

2. Even if my conclusions are entirely correct, and a "Swiss Made" watch could conceivably be 100% parts made outside Switzerland, I want to make clear that under that scenario, my interpretation of the Swiss Made rules would require all or virtually all of the assembly of the movement, and final assembly (i.e, adding dial and hands to movement, dropping the movement into the case, inserting the crown, and closing it all up) of the watch (or at the very least, casing of the movement), to be done in Switzerland. In fact, that is my essential conclusion when it comes to more affordable Swiss Made watches - they are very likely 100% parts made outside Switzerland, but all assembly done within Switzerland. In that scenario, there is still a component of Swiss "value" - it's all in the assembly.

3. In my limited observation, working as a manufacturer, but also from speaking with others in the industry, it's my belief - which I cannot prove - that many, if not most non-movement components (cases, crowns, crystals, etc) are now produced almost exclusively in China, for all watches, but as the prices rise, the likelihood of parts being made in Switzerland also rise, particularly in the case of more vertically-integrated brands, brands like Rolex, where the watches costs thousands, not hundreds of dollars. When we look at prevailing rates for skilled labor in Switzerland, which are comparable to the US, it's hard to fathom how a "Swiss Made" watch with 60% parts made in Switzerland could be 1/6 the cost of a watch from American brand RGM, where virtually everything is made in America, or 1/10 the cost of a Rolex, where everything is likely made in Switzerland."Economies of scale" doesn't really suffice as an explanation.

4. While much of the discussion has focused on finished watches and the brands which produce them, the real core of this issue centers around where the parts of the movement are made, and there are only a handful of companies engaged in producing affordable Swiss mechanical movements. As a manufacturer, who must answer to customers, the lack of transparency into the manufacturing processes involved with a "Swiss Made" watch concerns me. However, to be fair, there is also some doubt, and a lack of clarity involved in where Japanese movements are "made". The key difference here is that affordable Japanese movements do not have the same mystique of "Swiss" movements, which is perhaps why there doesn't seem to be any debate about them. Nor is Japan the major locus of production for non-Japanese brands, the way China and Hong Kong are for much of the industry, so "Made in Japan" doesn't seem to be as contentious an issue as "Swiss Made".

 

Those who know me from watch discussion forums or social media may have seen my statements that according to the FHS (Fédération de l'industrie horlogère suisse FH / Federation of the Swiss watch industry) rules governing the use of the term "Swiss Made", 100% of the parts could be made outside Switzerland.

This raises some hackles among many people, because as everyone knows, the rules require at least 60% of the "value" has to come from Switzerland, so, I must be wrong, and the truth must be that a "Swiss Made" watch is at least 60% Swiss.

Understand, I have no interest in this matter beyond wanting to see clarity within the industry. As an American, I'm neither pro- nor anti-Swiss. My company currently uses both Swiss and Japanese movements, our primary component, and like most of the industry, including the Swiss, many of our other components are made in China. We do final assembly in both China and the USA, with a long-term goal to bring more of our production costs back home to the US.

When people take issue with what I've said, they very often overlook something crucial. When I say 100% of the parts could come from outside Switzerland, I believe it's true according to the FHS rules - so long as final assembly, or at the very least, casing is done in Switzerland, and the parts which come from China are "certified" as equivalent in quality, then the labor costs (assembly of those parts), R&D, and "certification costs" (the cost of certifying those Chinese made parts as being equivalent in quality to Swiss-made parts) can be included in their calculations (three separate calculations involved, actually).

I'm not making any of this up - it all comes directly from the FHS! The new rules went into effect earlier this year. They added R&D and "certification costs" to the calculation of Swiss value.

Don't believe me?

http://www.fhs.swiss/eng/strengthening.html 

 

Why? I'll explain why.

Many people cite the "60% of value" rule for "Swiss Made" as if it were clear-cut, but it's really not. 

The "60%" applies to two different sections of the rules, article 1, which pertains to the total value of the assembled watch, and article 2, pertaining to the value of the movement, where there is an additional rule involving 50% of the parts value in the movement.

Each calculation has a set of stipulations, which I'll get into, but these are the basics:

1. Article 1 says 60% of the value of the assembled WATCH must be "Swiss", and it has to include a "Swiss" movement, as defined in article 2.

2. Article 2 says 60% of the value of the MOVEMENT must be "Swiss".

3. Article 2 also says 50% of the parts cost of the movement must be "Swiss", NOT including assembly costs, but it goes onto say UNLESS the parts are "certified', in which case, the cost of assembling those parts CAN be included as part of the Swiss component of value, so long as the assembly costs are no more than the total parts cost of the "certified" parts.

To understand my conclusions, you have to read more of the rules, rather tha stop there. You also have to be willing to do a bit of math, and make some reasonable, logical conclusions.

Below, I will cite the specific parts of the Swiss Made rules which make my point clear, and provide links to all of them.

This is a link to the FHS website, specifically the section dealing with the Swiss Made rules - http://www.fhs.swiss/eng/swissmade.html

At that page, near the bottom, there's a link for the current, in-force rules ("Ordinance"), downloadable as a PDF file. 

 

Here's that link - http://www.fhs.swiss/file/8/OSM_-_Ordinance.pdf

Article 1 and 1a deal with the definition of a Swiss Made "Watch" (read: a fully assembled piece, not just a pile of parts waiting to be assembled). 

But 1a is where you want to pay attention, specifically the last four lines, which say the "movement" has to be Swiss, and it has to be cased up in Switzerland. 

This is also where the 60% of value number is - specifically referring to the value of the WATCH, and the requirement for final inspection to be done in Switzerland, at the top of the following page.

 

Stop there. 

In order to be "Swiss Made", the MOVEMENT must be "Swiss" (as defined in the following section), the movement has to be cased in Switzerland, with final inspection in Switzerland, and at least 60% of the "manufacturing" costs FOR THE WATCH have to be generated in Switzerland.

Okay, fine. We'll get to the movement, but it's that 60% number everyone gets stuck on. 

We're talking about the value of the WATCH, here, the assembled product. When the FHS issues their industry report every year, they report the export value (read: wholesale value) of the watches they produce - finished, assembled units, which includes labor and assembly costs, and now, under the new rules, also potentially R&D and certification costs.

Assembly costs MUST be included in the manufacturing costs of an assembled part or product. Otherwise, it's just a pile of unassembled parts.

At this point, I can do a bit of math. If an assembled watch is $300 export value, and it has to be at least 60% "Swiss", that means the $180 "Swiss" portion could include some number of "Swiss" parts, including the "Swiss" movement, as well as assembly/labor, plus R&D and certification costs, and the remaining $120 could be parts from somewhere else.

Of course, that raises the question, what's a "Swiss" movement? Doesn't it also have to be 60% "Swiss"? 

Here's Article 2, definition of the movement (the part most people don't dig into):

See that section in yellow? Yep, it says right there - 60% of the "manufacturing" costs - FOR THE MOVEMENT ONLY - must be generated in Switzerland.

The next line goes on to say at least 50% of all "constituent" parts value (referring to the production cost of the parts of the movement) has to be Swiss, and you CAN'T include assembly in that 50% (or can you?).

Why the two numbers, 50% and 60%? 

My interpretation is that they want Swiss labor involved in the 60% of "manufacturing costs" calculation - again, with an assembled component, the manufacturing costs would include assembly costs, but under the new rules can also now include R&D and certification costs. 

Note that section a, immediately above, specifies that technical development had to be done in Switzerland, as well as prototyping, and "mechanical construction", which might mean "assembly", but could also conceivably mean the engineering of the movement. It also says the movement must be assembled in Switzerland.

They also want the parts to be at least 50% "Swiss", by value, but NOT including assembly costs.

So the 60% of the movement's "manufacturing" costs which must be "Swiss" can just be the assembly, R&D and certification costs, so long as the total cost of all the movement's component parts (the other 40%) is also at least 50% "Swiss", NOT including the cost of assembling those parts. 

Let me say that again - the 40% of the movement cost that ISN'T labor, R&D and certification costs, has to be at least 50% Swiss parts by value - we're down to a minimum of 20% parts being Swiss at this point.

But then they turn around and contradict themselves with a huge loophole right underneath, that section I've highlighted in pink, which allows assembly costs to be included in that 50% "Swiss" parts cost:

"...when a certification procedure stipulated by an international treaty guarantees that, by reason of close industrial cooperation, quality equivalence exists between the foreign constituent parts and the Swiss constituent parts."

What the hell does that mean? 

To me, it's clear they have a "certification procedure" which "guarantees" that parts made outside Switzerland are of the same quality, and when those parts are used, they're allowed to include Swiss assembly costs in that 50% parts costs calculation. 

It raises the question, with which country does Switzerland have a "close industrial cooperation"? Which country does that certification procedure apply to?

Welp, here you have it (I'm referring to the section at bottom, highlighted in yellow. I'll return to the pink highlighted section later): 

http://www.fhs.swiss/eng/certification.html 

Again, click that link (or this one), and it's a downloadable PDF. Read it all if you want, but the part that grabs me is the last page:

The document pertaining to the certification process for parts made outside Switzerland, which allows the use of the "Swiss Made" trademark, only references Hong Kong. There is no other document on the FHS website which specifically refers to any other location anywhere in the world with any connection to the FH certification process.

Hong Kong is the only other place in the world where the FHS maintains an office - the office we can assume oversees the certification process to ensure parts made in China are of equivalent quality to parts made in Switzerland.

At this point, I think it's reasonable for me to say that a "Swiss Made" watch can have parts made in China, but that leaves the question of "how much" is "Swiss" when it comes to that 60% number everyone loves to reference, but no one seems able to really quantify beyond simply, "60%".

We know the new rules allow R&D and certification costs, specifically, to be included along with assembly in the 60% of value in the assembled WATCH. As long as the total cost of any "Swiss" parts, along with labor, R&D and certification are at least 60%, they're good there.

We also know the MOVEMENT must also be "Swiss", which requires 60% of its manufacturing cost to be generated in Switzerland, but that can also include the R&D and assembly done in Switzerland, plus the certification costs for the parts of the movement made outside Switzerland.

This is getting complicated, which is why I've broken all the numbers down with a realistic example below, and made sure they conform to all of the rules.

According to Article 1, the definition of a Swiss Made watch, if the export value of the watch is $300, 40% of its value, or $120, could come from outside Switzerland. This could be the non-movement parts like case, crown and crystal. 60% of its value, or $180, could be the "Swiss" movement, plus final assembly, R&D, QC, etc.

That movement might be $80. No, really - that's about what a standard ETA 2824-2 or Sellita SW200 cost when you buy them in bulk. 

According to Article 2, the definition of a Swiss Made movement, of that $80, 40%, or $32 could be parts from outside Switzerland, but certified as equivalent in quality to Swiss Made parts. 

60% of it, or $48 has to be "Swiss", but that can include R&D, certification costs, and assembly, so long as the assembly costs aren't any more than the total costs of the certified parts. So the assembly could be $32, just like the parts, and the remaining $16 could be R&D, certification costs, etc.

In other words - we could have 0% parts made in Switzerland, and 100% parts made somewhere else, mostly China, and it would still qualify as "Swiss". 

I'm not saying every "Swiss Made" watch is 100% Chinese-made parts, I'm just saying, according to their own rules, which allow them to include assembly, R&D and certification costs in their calculations, it could very well be that all the parts are in fact made in China, especially in more affordable pieces.

Until the "Swiss Made" rules remove the loopholes, and prohibit assembly, R&D or certification costs from being included, especially related to certified Chinese-made parts, I don't see how my conclusions are unreasonable.

PS - When it comes to trustworthiness, consider the source. The FHS has this to say about the US rules regarding watch origins (section in pink):

That's simply not true. The FTC requires any product marked as "made in America" to be virtually 100% made in America:

https://www.ftc.gov/tips-advice/business-center/gu...

 

Chris Vail is the founder, majority owner and lead designer for NTH and Lew & Huey. He cares more about getting the most quality for the cost than "where it's made" labels.