Patek: Service, Production, Values and the Company

[texex91]

Originally Posted by aayates

(sorry, A lange & son, .

Just to make sure you don't buy a eBay knock off, it's A. Lange & Söhne

[slashd0t]

Originally Posted by Stuxnet

I disagree with your statements about "overproduction", "oversupply" and "price discounting", "residual values", "protecting the collector", "upsizing" and "templates for movements".

Let's not take a naive view on things.

Patek Philippe is a privately owned company that has one sole objective. To generate profits for its owners. They don't exist so that I can buy a watch, get that warm and fuzzy feeling of Patek ownership, call myself a collector and sell the watch at a profit no matter what. They are in business to sell as many watches as possible, at the highest prices possible, while minimizing costs as much as possible. Let's not fantasize about who or what they are.

Like any business, you need to assess the short term outlook with the long term outlook. At some point in the last 10 - 15 years, the Board looked at global GDP growth, consumption trends, the growing middle class as well as burgeoning High Net Worth segment in the emerging markets. Demand for then current production pieces, and the values of vintage pieces was rising. It made sense to invest in CapEx to grow the fixed asset production footprint. At the same time, the company began consolidating the supply chain, becoming more vertically integrated and also invested in personnel. It takes time to train a watchmaker and they can't be viewed as variable cost as one would view the guy who sells you shoes at Footlocker.

While Patek was spending heavily so supply could match demand and marginal profit exceeded marginal cost, they also had to assess changing trends, a lot of which are fickle fads. As much as I hate it, big watches are/were a trend. I throw up when I see those big 44mm watches on people's wrists. In fact half the Rolex Forum is about people waxing eloquent about their bigger datejusts etc and people wanting a 42mm Daytona. If people with bigger wallets want bigger watches...then any self respecting for profit watchmaker is going to make bigger watches. Volume, price, share. As long as you can keep lifting all three, life is good.

So, because Patek sucked it up 10 years ago and invested to expand production, they are now making more pieces that they historically did. Now they have no choice but to keep production at certain levels in order to absorb the fixed costs. And the shift in taste and consumption patterns has led to the production of watches that many of us find abhorrent. Patek needs to attract new customers and widen their net. You and I are going to grow old and die. They need new consumers. As they say "start your own tradition". Patek needs "customer conversions" to grow their base clientele.

Which takes me to movements and templates. Profitability is also about lowering Cost of Goods Sold and Selling, General and Administrative expenses. Developing new movements for cases that are 2mm bigger are not of paramount importance when its the exact same watch, except bigger. Yes, they managed to mess up the dial of the 5140 vs the 3940. But functionally, they are the same watch. Why redesign an entire movement and invest in tooling technology so that rotors, bridges, escapements are all a fraction of a millimeter bigger so as to fill the case? As a manufacturer, your profit margins only start to rise after x amount of pieces have been sold. Going through the entire process again would be like giving birth to an elephant. It takes 5 - 6 years to develop a clean sheet watch. And they probably don't break even until the 100th watch is sold.

Which brings us to things Patek cannot control. Demand. Patek has no responsibility to the "collectors". Patek makes watches. Patek sells watches through their distribution arrangements. The price of a watch may be dependent on the aesthetics, the functionality, competitor products, global trends in consumption, or the general economic condition. Demand is really how many of us are fighting for the same watch. There are fads. There are changes in styles. There are changes in conspicuous consumption. There are changes in status symbols.

If Patek produces 55,000 watches, of which 15,000 - 18,000 are Ladies and Quartz watches, the margin of error is very slim for complicated watches and for grand complications. Something as simple as 25 prospective buyers of a watch globally not pulling the trigger, may affect the demand/supply characteristics of that watch, and the global price weakness of the watch with knock on effects on other references.

And finally service. Everybody complains about long lead times. They said they have invested in service. More watchmakers and technicians. But this problem is simply a result of the sudden growth in their installed base. Higher production over the last 20 years, especially the last 5. When this happens, you suddenly begin to anniversary certain years of production increases, which means you get more watches coming into the shop. Don't believe me...look at shop visits of the CFM56 engine for the Boeing 737 and Airbus 320. Look at the rise in 737 and 320 production rates and then tie that in with the mandatory C checks at 7 - 9 years and 12 - 17 years, and then D Checks at 20 years. Same thing for Patek. And consider the fact that Patek will service any Patek watch, and you have a potential installed base of 4m+ watches.

I'm not defending Patek Philippe here. I'm just looking at things objectively. I don't like the big watches, and I don't like the current collection. I think I understand the mistakes made (catering to big watch fad), and I'm sympathetic to investment in expanded production without the corollary pick up in demand that was forecast. But that's because I'm an outsider with 20/20 hindsight. Could they operate more efficiently? I don't know. I don't get to see the books. Can they do more to support higher prices at ADs so that the sleazy Trusted Seller Grey market doesn't discount as much? I don't know. But I understand what's going on, and there are no easy fixes.

[KarlS]

Stuxnet pretty much hits the nail on the head...

as for the JLC movements question we are almost entering whose bigger than whose territory...JLC was always not as the movement providor to the wtachmakers and supplied PP for 30 years and Vacheron etc etc...so I would expect them to have a number of movements to have fitted many models at many watchmakers.

Patek has perhaps too many models at 211 and I dont think its realistic to expect 125 different movements for the entire range....

[Socal to az]

As someone who is 6'4", about 220 pounds- I couldn't be happier with the 42 mm watches from Patek. I used to drool at all these great pieces and try them on and needed a microscope to see them on my wrist.

IMHO - the 42 mm size is just about the perfect size. However I hope Patek makes no more "larger" watches. My wallet can't afford it anymore.m :)

[aayates]

Originally Posted by texex91

Just to make sure you don't buy a eBay knock off, it's A. Lange & Söhne

should have had that right; guess you can tell I don't own one.

[DTMwatch]

I'm new to owning a Patek Philippe. However, it seems to ne that the supply and demand principle is followed by Patek Philippe just like any other good company. If necessary a correction will occur by the PP. As for me, I like their smaller dress watches, which are understated and classically designed and proportioned in my opinion. I find larger dress watches (38-40mm) too big on my seven inch wrist, but it is all a matter of personal taste. Currently it seems most people prefer larger watches, regardless purpose. I prefer small dress watches and larger sports watches, e.g., 38-42. Lastly, in my little rant, patek's services times are way too long. If other companies can service, repair and restore a watch in far much less time, Patek should be able to as well. In closing, I still enjoy admiring Patek Philippe watches and wearing my 3520D-J.

[Oscarpapa]

Originally Posted by martinr

Service times are too long and need to improve, I agree. But when you say long service times are due to overproduction I don't agree. What is overproduction? You want to go back to "the good old days" of little watches and no grey market and AD's selling at full price to protect your "investment". I like being able to "waltz" in to an AD and see the actual watch in person that I may or may not want to buy. I like choices and I don't find the attitude of having to be special or privileged enough to buy something like a watch appealing. I don't have unlimited funds so I make my choice based on what I can spend and whether I feel it's worth it to me at the time. I think the idea of Patek protecting the value of something or of them owing it to the buyer to make fewer watches to protect them from what the future may hold to be unrealistic. Why would they shoot themselves in the foot that way? When you say it spells trouble for them long term it's possible but in my opinion they will continue to grow and make great watches like they've always done. Your biggest complaint is that the watches are getting too big and it's upset many collectors, I recently bought a 42mm Patek and it's just right for me, I also bought a 39mm Patek and that's just right too. So I like choices, if the watches were like the pieces they made in the 50's and 60' s I wouldn't be a customer.

x2. Completely agree with your sentiments and eloquently expressed.

[Oscarpapa]

Originally Posted by murcielago_boy

It seems to me that there are quite a few threads in them with themes about where Patek stands today with respect to;
- production quality and qc
- service quality and times
- the products
- what collectors feel about direction of the company under Thierry
- the PP seal
- volumes of manufacture
- investment/residuals/depreciation
... and so on and so on.

I resolutely feel that all these themes are interrelated and for this reason I wanted to start a consolidated thread on this forum where we could all give our two cents about the state of the company.
I don't believe that this has been done yet hence my attempt at this thread and with that being said, I I'll go first.

I'll start by saying that I will not consider ANY other watch manufacturer for any product over $25,000. No chance. I consider Patek today the pre-eminent watch maker with an unmatched brand and in the vast majority of cases, an unmatched product.

But I have a problem and this problem is OVERPRODUCTION. I believe that PP are producing too many pieces at all levels. I've stated this in another thread, and I wanted to link this theme to the rest of the items up for discussion. I think overproduction is negatively impacting PP on all sorts of levels. I believe the PP seal was an attempt to conceal true production numbers and has nothing to do with quality. It's a way of facilitating secrecy.

For a start, we are seeing that no PP models bar the 5131 and Nautilus are now exclusive in the way that they once were. Previously, you had to "wait" to get your PP. Now, you can waltz into an AD and purchase a Diamond PCC 5271 which will be in the window!!!- unthinkable when the previous 5971 was released.
Why does this matter?
Well because it means the collector is no longer being protected! Exclusivity, lengthy lead times and low production, protect the collector because they preserve VALUE and maintain pricing. If something is oversupplied, market forces ensure that a lower market clearing price becomes the equilibrium point of sale.
And this lack of value then causes other problems.....

...namely the glut of pieces appearing heavy discounts in grey market and non AD's. These pieces serve to drive prices lower still and a previously-committed collector now faces the impact of his $100,000 watch losing 40% of it's value almost immediately on purchase which causes him to defer the purchase... leading to more oversupply.

Now related to this are "tastes" and products. PP in the past produced watches which were aimed squarely at their collectors. They didn't pander to fads. This recent "upsizing" of their pieces which has upset a huge amount of collectors is a direct attempt to broaden PP's appeal to wider (read: more numerous) customer base.
Firstly it's very disingenuous to be putting the same movements from the past into ever larger cases. This is happening across the board. Yes, it happened before, but the move from 3970 to 5970 worked. The move from 3940 to 5140 and 5327 is less satisfactory. On quite a few pieces it looks as if the case is too big for the movement and it also appears that PP are using a homogeneous "templated" cases across quite a few models: 5170, 5496, and 5396 and even up to 5217. The second problem that this "fad" is in direct contradiction of their previously sacred production values of discretion and timelessness. So with the collectors balking at hitherto unheard-of depreciation, they're also buying something which doesn't square with the brand values....

The exception of course is the Nautilus/Aquanaut which goes from strength to strength... for now. Why? Because these collections squarely pander to the current tastes for more ostensibly conspicuous consumption and "big watches". "Fads" don't last forever though. And while the 5711 commands a premium to list used, their iconic split second 5204 is losing money at auction double sealed. Based on this strategy as I said, like AP, Patek risks becoming a one-watch company in future years trashing their brand equity irretrievably....

Meanwhile, as Mr Stern mis-allocates more resources to hugely overproducing more pieces that now shed tens of thousands of dollars on purchase, essential resources are being taken away from Service and QC. This has been discussed to death, so I'll be brief - practical examples only - a loyal collector is waiting one year to get his Worldtime back from service, 7 months for case valet on his 5170 and has had a date stick on his $200,000 perpetual calendar which is 3 weeks old...
... This last point takes us to QC problems which didn't exist with the company before. Production is beyond capacity, service is stretched, something has to give... QC. Meanwhile Lange, objectively, putting design aside (I find them "overstyled") are closing the gap and easily have a product of equal manufacturing finesse with everything but the name and much more exclusivity and lower production.

It all spells trouble long term.

This sounds like a rant. Perhaps it is. But I don't think so - I think PP has just one problem. It's producing too many pieces. They need to stop. And stop quickly.

Will it stop me buying their new products? I don't know.

You know, I don't think I could bring myself to put more than $30,000 into any other brand.
What does that tell you?

I think that Murcielago boy lives in a parallel universe and I would echo the sentiments of martinr and Karis. Watchmakers exist to be as profitable as possible and not to protect any collectors investment. I am a sports watch guy and am not into the look of dress watches, so i would never have considered buying a PP but fell in love with the 5167 Aquanaut, so PP would never have had me as a customer had they not changed /broadened their line-up. As to over production, I would have been cheesed off if I had to wait an excessive time to purchase the timepiece because PP were curtailing production to protect collectors investments! As to service times, yes these do need to improve but I think PP are aware of this and it is in their pending box.