← Openwork: Inside the Watch Industry
Openwork: Inside the Watch Industry
39% Swiss Tariffs – Implications for the Watch Industry, Plus What Happens Next – Episode 46
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- [00:00]
A
You mentioned that the Swiss president she posted maybe was on Facebook. I saw it on X. She posted on Twitter that she actually spoke directly by phone with President Trump that day. She confirmed that this is fundamentally about the trade deficit. She said, like the key driver of this is the trade deficit. And there's nothing we've been able to figure out about that yet. The other interesting thing is she has a direct line to President Trump, which tells me she is very interested, that very motivated in figuring this out and does have a direct line to President Trump, which I think is an encouraging sign. So it tells us the Swiss are motivated to figure this out and have the access to figure this out. This is a special episode of openwork, a look inside the watch industry, a podcast from Collective Horology. I'm Gabe Riley, co founder of Collective.
- [00:53]
B
And I'm Asherapkin, co founder of Collective. Collective Horology is an independent watch retailer based in Southern California. We carry a wide range of independent brands, including the latest brands to join our shop Atelier, Wen, Gaga, Laboratorio and Renault tca.
- [01:07]
A
Yeah, Renault tca. I'm really excited about this one. I'm excited about all brands, but they're these brands you encounter every once in a while that are just a total revelation. And we were at Watches and Wonders back in April. That will figure into today's episode on tariffs. But when we were at Watches and Wonders, a friend of ours in the industry recommended we check out the this new independent brand, Renault tca. And I, I didn't know much about the brand, honestly, I, I knew nothing. And then I found out that the, the Renault in Renault TCA was Dominique Renault, who is a legendary, not just watchmaker, but sort of engineer, engineer, inventor, most widely known probably for being one of the founders of Renault Papi, who supplied movements, complicated movements to some of the biggest and most impressive brands in watchmaking. And he's invented many things around movements. Regardless, the brand is Dominique renault and Julien Tca, who's a younger watchmaker. He's about 31 years old and the two of them have teamed up. So they bring Dominic Renault's kind of mad science approach to watchmaking with Julien TCA's handmade approach to fine watchmaking and make some really impressive watches. This is haute horology stuff. But what I find most interesting is a lot of times when we discover these new haute horology watches, they're always these really beautiful, classically done, impeccably finished watches that usually have an interesting complication, like a tourbillon. But this just goes way further. It does all of those things and it competes in that space. But then it introduces a fundamentally new innovation to watchmaking, which is a totally new approach to the micro rotor. And it's extremely cool. It's really impressive. It's one of those inventions around winding efficiency where you learn about and you're like, why hasn't anyone done this before?
- [02:54]
B
And just an added thought to that. One of the things that I found remarkable in our first meeting with them was how clear a vision they had for the work that they were doing. The whole concept of Renault OTCA is to solve horological problems. The first one, as Gabe mentioned, being the inefficiency of micro rotors. And this watch is called the Monday. Presumably the Tuesday, Wednesday, Thursday, Friday, Saturday and Sunday will solve other horological problems in the future. And having that level of purpose as a brand that exceeds just fine finishing or aesthetics is very unusual and incredibly interesting and attractive.
- [03:29]
A
And we've done a whole in depth article@collective horology.com blog about the brand about this micro rotor innovation with live photos and tons of information on the watch and the watchmakers. So I'd suggest you guys check it out.
- [03:43]
B
A really impressive brand, 100%. But Gabe, that's not what we're here to talk about.
- [03:48]
A
Let's talk about the other thing that happened at Watches and Wonders, or one of the other things that happened at Watches and Wonders, which is the. Which was sort of the opening shots around tariffs. And of course, the. This week, the reason we're doing this special episode, there is big news around tariffs. Specifically, the Trump administration announced that starting August 7, there will be a 39% reciprocal tariff that goes into effect for Swiss goods, including watches. Now, a bit of background here, of course, when at Watches and Wonders, this was on April 2, the administration initially announced reciprocal tariffs. It was going to be 31% for Switzerland at that point in time, a little. A little bit lower. Then we went into this period of sort of negotiations where the administration said, all right, we're going to bring back tariffs to everyone to 10% till July and then obviously now till August, and we'll get to some trade deals and we'll move forward then. So it looks like essentially the US Was unable to reach a trade deal with Switzerland or vice versa. And the reciprocal rate on Switzerland, at least starting the seventh, is going to be 39%, which for context is, I believe, after 40 and 41% on countries like Cambodia, Syria and Laos, it is the highest rate, certainly the highest Rate
- [05:09]
B
higher than China right now, Higher than
- [05:10]
A
China, higher than any other sort of industrialized country or major trading partner to the U.S. so this, this rate sticks out like a sore thumb because of, because it's so high.
- [05:22]
B
Yeah. And I think before we get into the implications of on the watch industry, it's to have a little bit of an understanding of what the good faith argument here is or what the, what the rationale is behind this, as well as how the business community is reacting. So presumably, and this is the, the logic that's put forward by the Trump administration, the rationale for these tariffs being quote, unquote reciprocal, is that there is a trade deficit between the country of Switzerland and the United States. Trade deficit meaning that Switzerland purchases fewer goods from the US Than we purchased from them now. Yeah.
- [05:57]
A
And just to give the numbers. Yeah, we sell in or we export to Switzerland about 25 billion worth of goods, and we buy From Switzerland about 63 billion worth of goods. So it's a very lopsided relationship. If you just look at trade of, of physical goods now reflected in that number. Watches are in there, but they are not the driver of, of that, of that trade discrepancy. It's, it's fueled by two things. One of them is pharmaceuticals. The Swiss have a huge pharmaceutical industry, so that's about 35 billion in trade. So 35 billion worth of pharmaceuticals go to the US every year. And then precious metals, gold bullion, in particular, about 16 billion. And I've seen other numbers on this. There is some reporting from the New York Times that actually said the single largest export, two thirds of the value of the exports was gold bullion. We've seen the 16 billion elsewhere. But suffice it to say these drivers watches is actually relatively modest. It's about 5 billion. So it's a fraction of even the pharmaceutical industry. And that's, that's really what's driving this. Switzerland is a small country that has a big export business.
- [07:11]
B
Yeah. But they also buy a lot. And to put that into context, there are 9 million, just slightly over 9 million citizens of Switzerland. There are 340 million citizens in the United States. So if you, if you were to break that all down and look at a like per person spend, so to speak, in Switzerland of American goods versus per person spend on Swiss goods by America, you'll see very rapidly that that trade deficit argument, it doesn't really hold up. Asking a country of 9 million people to buy as much as a country of 340 million people is a quizzical Logic to apply.
- [07:46]
A
Yeah. And one other thing worth noting here is that the argument for the tariffs, whether it's a trade deficit or whatever it is, that's one of them. The two other arguments that the government has made are restrict restrictive trade practices. So some countries do have, for instance, their own tariffs on U.S. goods or goods from other countries. Switzerland does not. And other countries have been accused of currency manipulation, which plays into, which creates restrictive trade environments. Switzerland does neither of those things. So this is really fundamentally, in the case of Switzerland about this, about this trade deficit.
- [08:16]
B
Yeah. And there's one other thing I want to touch on before we get into the watch component of this, which is the justification, the legal justification that the Trump administration has used for the imposition of these tariff. The Trump administration has claimed that a specific law called ipa, the International Emergency Economic Powers act, grants the President the unilateral ability to imply tariffs as he so wishes. Now, there have been significant legal challenges to this logic that have moved forward in the United States, and there's a multitude of cases, many of whom have either been folded into this one case, which I'll mention in a moment, or have been put on hold pending the decision of this case. So a, a group of small businesses have essentially sued the Trump administration. They did so in a very specific court. This was back in April. It's called the Court of International Trade. This is, by the way, something I didn't even know existed up until. This Court of International Trade is a specific federal court in the United States that handles disputes related to things like tariffs, trade inconsistencies, et cetera. It had a three panel judge which was bipartisan, I believe it was one Obama appointee and two Trump appointees actually from the previous term. And they unilaterally ruled that the tariffs that were imposed under the justification of IEEPA were illegal and that Trump does not actually have, or the Trump administration does not actually have the right to impose that. That is a power vested in Congress. And there's a few reasons why they made that argument. The first was one, tariffs are not a remedy against these international economic tariffs and a remedy that IEEPA provides the President in terms of being able to sanction other countries in a state of emergency. Which leads to the second point, which is it is unclear that there is an actual emergency here in the United States that requires the imposition of such
- [10:10]
A
an economic regardless of how you feel about trade deficits. And again, we understand the good faith argument about this. It's these are circumstances that are decades in the Making.
- [10:20]
B
Yes.
- [10:21]
A
Not something that has popped up overnight as a emergency.
- [10:25]
B
Correct. And that moved forward. So essentially, the court vacated and permanently enjoined enforcement of those tariffs. So what that means is they basically said, sorry, this is not legal. You cannot do this. And not only can you not do this, you actually have to refund all of the tariffs that were paid. However, the Trump administration immediately appealed, and in going to the Court of Appeals, they received what is called an administrative stay. And that administrative stay effectively did not change the outcome. So as it stands right now, these tariffs are still literally illegal. However, the enforcement of them is still permissible because the administrative stay is in place while the Court of Appeals hears the case. Now, they just heard the case yesterday on July 31, and the general read from people in that room was that the Trump administration was met with extreme skepticism, criticism by the entire Court of Appeals. So, interestingly, this was what was called an en banc review. So this was the full Court of Appeals, not just a three judge panel that is hearing this. And the general consensus is that they tend to. The implication is that they're probably going to uphold the. Sure. Now we never know.
- [11:36]
A
Obviously, you're reading tea leaves.
- [11:39]
B
I'm far from a legal expert. I'm just, you know, this is what, this is what the reporting coming out of this from people who are far more knowledgeable than I am saying. So here's what's going on. Essentially, we have the Trump administration imposing these tariffs, while the legality of the ability to impose them is currently being challenged. Should the Court of Appeals decide to keep the decision that the CIT made, it will almost certainly be appealed to
- [12:04]
A
the Supreme Court, and I guess the administration could request another stay at that point to continue the election.
- [12:09]
B
So I think it's fair to assume that this will continue on for months. So we have this really interesting situation here where these tariffs, as they are imposed and the method by which they are imposed is not legal according to the CIT and is being and is currently being litigated. So it's going through the proper legal process. But in the meantime, people importing from Switzerland are staring down a 39% tariff which will go into effect next Thursday.
- [12:37]
A
Now, look, let's say, for argument's sake, let's say goes all the way to the Supreme Court, we get a final ruling on this, and perhaps this is one hypothetical. Maybe the Supreme Court says, yep, these are illegal. They can't, you know, this can't continue. That doesn't mean the Trump administration, one can't find other avenues to pursue to justify tariffs or impose other kinds of tariffs that effectively have the same purpose. I've read some reporting on this in, in the New York Times. There are other options and avenues they could pursue.
- [13:08]
B
Yeah.
- [13:08]
A
Different executive authorities they could invoke and, or it's also plausible that Congress could say, well, we give the President the, the authority. You know, we, we hold the power of the purse and taxation, but we give the, the President the authority.
- [13:24]
B
Arguably.
- [13:24]
A
Yeah. So just because it may get overturned doesn't mean, you know, this has a long way to, to, to play out. But it's, it's fascinating. Sounds like you've really done your, your research on this stuff.
- [13:39]
B
I have and that leads us to where we are today. So what, what we want to talk about is how this is ultimately going to affect on this day one, the, the Swiss watch industry and of course all of us here in the United States who are collectors as well as retailers because it's a significant change to what we're used to.
- [13:58]
A
Yeah, I think we'll, let's talk about what the implications are and then I want to talk a little bit about like what, what now, what next heading? What should people be looking for? So there's certainly that, that court decision, but in terms of implications, I think they're basic, it's pretty straightforward. But they're basically kind of these like primary implications which are obvious, which is the cost of importing Swiss goods into the US goes up, including watches, and that could have an impact on, on pricing. We should talk a little bit about that because it's probably not as bad as anyone would imagine. But there's also a second order consequence here which is it's not just about goods coming from Switzerland to the US it's about goods that have any amount of Swiss origin in them coming to the US and the Swiss not only sell their movements in, sorry, the Swiss not only sell their watches into the US but they sell their movements and components into the global watch industry. So you may receive good example of this. There are a number of brands that we carry that aren't made in Switzerland. Archinaut would be an example, Fierce would be an example. So they're from Denmark and the UK respectively, but they use Swiss made movements. And what matters, as we pointed out on the last episode we did on tariffs, is not the country from which they last ship, so let's say Denmark or England, but the country of origin of the components and the movement in particular. So a Swiss movement shipping from Denmark or the UK or anywhere else in the world would be subject to that, that tariff. And that's significant because movements are the most high value component of a watch. They're the most complicated, they're the most hard to make. There's a ton of intellectual property in them which increases their value. And generally when a watch is imported, the thing, the component of the watch that is declared for the most value is the movement. And so a watch cased up anywhere else, or with components from anywhere else, the movement of the watch and the origin of that movement is still going to be the singest, single biggest driver of any import duties that are assessed on it. So that is a huge secondary consequence because presumably a large market for all of those brands is the us, even if they're not Swiss brands.
- [16:09]
B
Let me get a little bit more into the weeds on that because I think this is an interesting change that's happened over the last few months that if you don't import watches regularly, you may not realize if you ever bought a watch from abroad, you've probably seen the watch worksheet, which used to be a pretty straightforward, you know, look like someone ran it off on their, you know, on like, you know, Ms. Paint in 2018 or 2008, probably did. And it was really basic. It was like, how many jewels are in this movement? Is it automatic? Is it quartz? You know, what's the material of the case? What's the material? The strap. All right, cool. And then that was the breakdown. But that's.
- [16:38]
A
This worksheet is used by FedEx or DHL or whomever's operating as the customs broker for your import. It's usually the shipper. And you're giving them this information so that they can then, as your customs broker, enter all of that information into the customs system on your behalf, find out what duties are owed, collect them from you and deliver your watch.
- [16:59]
B
But what's changed in the last four months is the level of detail that you have to provide to Customs and Border Protection through this form. Now we're being asked levels of specificity. In one case, I think we even got asked where the steel was smelted for a particular watch.
- [17:16]
A
Yeah. So they ask the things that go into the calculation of duties and tariffs on a watch are the movements, the case and the strap or bracelet. And they want to know.
- [17:30]
B
And the material thereof.
- [17:31]
A
Yeah, and the material thereof. And they want to know not only what the value of those different components are, and they are assessed duties differently, but they also want to know the country of origin for those things. Even the strap, what country of. What's the country of origin for your goatskin leather strap or your rubber strap or whatever it is. And yes, they even want to know not just what the country of origin is for, let's say your steel case, but they want to make sure they know which country the steel in the case was smelted in, because that is what defines the current the country of origin in the case of steel.
- [18:05]
B
But what that effectively means is if you take that watch worksheet and let's say it's a case from Germany, a strap from Germany, but a movement from Switzerland, that means the case and the strap are going to be dutied at, I'm sorry, tariffed at 15%.
- [18:19]
A
That's the prevailing duty or prevailing tariff rather for the EU now.
- [18:24]
B
Correct. And then the movement would be tariffed at 39%. So you'd have to add those up and average them out to determine what the actual tariff due on the watch would be. So if you're buying a watch, you know, from one country or another, there's a lot to consider now as that comes together.
- [18:41]
A
So the challenge this creates for the Swiss, again, it's not just about the movements and the watches they're shipping into the, into the U.S. and by the way, there are U.S. watch brands, American watch brands, that buy Swiss movements. That's not just the issue, it's a broader industrial issue. Because now the brands, even if I'm a Swiss movement maker, let's say I'm Solita, and I'm sending watches over to a company in Germany or wherever they may be, ordering fewer movements now. So this is because of the size and scale of the US Market, which we'll talk about in a second. This is an issue that really cascades across the entire Swiss industry.
- [19:20]
B
Now you might say to yourself, okay, you know what, let's look on the bright side of this. This is going to help the American watch industry. Well, there's a couple of challenges in that assumption. I'm going to make the absolute straight man, good faith argument for it, which Josh Shapiro did on our podcast a couple of weeks ago. And then I have some thoughts on the other side, which is, yeah, all right, you know what? If, if, if these tariffs were targeted in a very specific way to protect a nascent industry that didn't have the economic power of the Swiss watch industry. And it was accompanied by grants and tax relief and all sorts of things that could help people build factories here, train people here, do all the things that are necessary to really cradle and ultimately grow an industry. There is an argument to be made for the value of a protectionist tariff. And we do this all the time. We do this in automotive industries. We do this in other industries where we want to try to level the playing field in a way that keeps fair trade equitable and fair. So that. So to be clear, like, there is
- [20:18]
A
a good, maybe not equitable and fair, but protects a strategic industry.
- [20:22]
B
Absolutely. And so there are arguments to be made for that. But the flip side of that is if you were to build that industry now, it's actually even more expensive to make an American watch than it ever was before.
- [20:32]
A
Well, the Josh Shapiro Infinity series, the Infinity Pure, which just came out, that uses a Swiss movement.
- [20:39]
B
Correct.
- [20:39]
A
So his cost of goods on that. So it now costs him 39% more to buy that movement and to put it in the watch than it would have before.
- [20:48]
B
But that's not all. Should, should someone like Josh or anyone else buy a Kern CNC machine? That CNC machine will now be 15% more expensive. And that is a cost that gets built into the financing for the machine, which increases the overhead for a business, which ultimately inflates the price of the product.
- [21:06]
A
Let me give you another argument about this, which is if we. There is a watchmaking industry or watch industry in the United States, and it's not just about distributors and retailers and, you know, selling to the end consumer. There's a. There are hundreds, if not thousands of watchmakers in the US who are employed by the Swiss. You know, the Swiss, the Rolex Swatch group, Richemont. They have large service centers.
- [21:31]
B
That's it, Philippe. The Henry Stern agency in New York,
- [21:33]
A
large service centers, whether it's in New York or Dallas or in Clearwater, Florida or New Jersey, wherever it may be. LVMH groups in New Jersey, Jersey, there are watchmakers in this country. They are working for the Swiss brands and they are servicing Swiss products. So if we hurt the Swiss watch industry, we actually do hurt watchmaking in America. It's not just about the movements being sold into Oak and Oscar or to Josh Shapiro, literally the vast majority of watchmakers and watchmaking talent in this country, which is a good thing to have and will encourage homegrown talent. And Josh is a great example. A number of the watchmakers he has hired have worked for those large and been trained by those large Swiss companies. So they are, they're. They're sort of a teaching hospital for watchmakers in America. So hurting the Swiss watch industry doesn't necessarily help the American watch industry. It may actually have the second order effect.
- [22:30]
B
Yeah. So, you know, that's the first thing to bear in mind that like the fundamental cost basis of everything increases now, now if the cost basis increases to the Swiss and, or to Americans as well in the context of what we pay, because again, just to be clear, tariffs are paid by the importer, not by the exporter. So it is American companies and American consumers that pay a tariff. So when we say, or we hear people saying funds were raised from a tariff, those were raised from Americans.
- [23:02]
A
In this context, generally speaking, the vast majority of time that's true. Sometimes brands or these outside companies, but that's a choice. We'll cover the tariffs. Yes. But 90 plus percent of the time, if not more than that. The tariffs are being borne by U.S. businesses and ultimately the U.S. consumer.
- [23:24]
B
Right. So tariffs, and we discussed this a little bit on our episode a few months ago, but tariffs are charged on the price of the product at import. So what that means is for someone like Collective, for example, or any other retailer, we are buying product at a price that is lower than what we sell it at. Right. That's how anybody makes money in an industry. We buy it wholesale and we sell it retail and the tariff is imposed on the wholesale price. So the price that I am paying as the importer on the product. So when Gabe says, you know, it may not be as bad as you think, that's what he's kind of getting at, which is that the absolute cost of the tariff to the end user who buys through an authorized retailer retailer won't ever be 39% because. Or at least won't ever be 39% on the MSRP because we don't import anything at MSRP.
- [24:11]
A
Right, right.
- [24:12]
B
So that is one thing to note. However, it's still a significant portion of any retailer's margin. And for context on this, you can look at the public reporting from watches of Switzerland or just general, any sort of public retailer of watches, and they're, they're very clear on what their profit margins are. In many cases, they vacillate between a net profit margin of 6 to 10%.
- [24:36]
A
And that's consistent with the major Swiss holding companies as well. Yeah.
- [24:40]
B
So the first thing I think is important to point out, and we see this in comments sometimes or conversations, is like, oh, well, there's plenty of money in that banana stand for either retailers or importers or the watch companies themselves to just eat it. And I think it's important for us to understand and talk through what that would mean. So let's start at the end of the chain and we'll work our way back. So for retailers, for example, if a retailer is operating, let's say on a 10% net profit margin and the cost of their goods sold inflates by 39%, I think even a theater major like me can tell you that that business will no longer be profitable.
- [25:20]
A
Yeah, I think, you know, one of the arguments I often have seen made is like, oh, well, yeah, of course, Asher, you're right about that. But there's so much extravagance and waste in the Swiss watch industry.
- [25:31]
B
We're going to keep going down the chain. I just want to start at the end of the chain.
- [25:34]
A
Okay.
- [25:34]
B
All right, all right. So that's the retailer. So when we talk about, when we talk about, you know, how much money a retailer makes, remember it's not the gross percentage on the margin because that's just the gross revenue that's coming in.
- [25:47]
A
Oh, sure. The retailer has all sorts of costs. They have to keep the lights on. They've got payroll, they have insurance, rent. Rent. I mean, the, the, the costs of the product itself. Yeah, the depreciation of it. I mean, there's, there's, Anyone who's ever run a business knows there's so many hidden costs. In other words, costs that are invisible to the outside world that you just wouldn't know about or wouldn't occur to you until you're inside that industry.
- [26:13]
B
So, you know, and again, this assumes no change in fundamental pricing. This is the argument of like, someone should eat it. That's really challenging for any retailer to do at this level of tariff that it's, has been threatened for next week.
- [26:26]
A
All right, let's move down the chain.
- [26:28]
B
Now we get to distributors. Okay. Distributors essentially take a percentage of the total MSRP for themselves, but it's very small relative to the retailer. So no distributor can handle the full absorption of this tariff by any stretch of the imagination.
- [26:47]
A
They're probably the least likely place to be able to do it. And to be clear, like some brands use distributors. So distributors are people who wholesale the watches from the brands bring into the country, then re. Resell them on to the, to the retailers. And you know, they make a, a very small margin on, on, on doing that because their, their role, it's important, but it's very operational. So there's, there's really even less margin on their side than there is from a retailer to do it. And by the way, most, and most of, most brands we work with don't have distributors. It's oftentimes the retailers who are importing directly and, and managing all those costs
- [27:23]
B
or they have an agent. An agent being somebody who represents the brand but isn't actually wholesaling. Sure. Maybe facilitating the entry and they get a commission on sale. But remember, a lot of these people don't get paid until the retailer pays. So as a result, the watch has to make it all the way to the bottom of the chain for that person to recognize a revenue. Which means that if fewer watches are sold in, their total gross revenue for the year decreases. All right, now we get to the watch brands.
- [27:48]
A
Yeah. See if they just stop wasting all this money on marketing and trade shows.
- [27:52]
B
Yeah. So putting on our old marketing hats, most of these companies, especially independents. Especially independents spend a minuscule amount of their total money.
- [28:04]
A
Well, well, before we even go there, I think it's worth just saying, like we've mentioned this before, this is an industry and the brands in particular really do portray prestige, wealth, success, largesse. Right. That's part of in most cases the, the marketing and the imagery of the Swiss watch industry. If you dig into the financial reports of these large companies, the story is, is quite sobering. Oftentimes when we look at the reports, I was just looking at the report, the, the quarterly report that just came out from, from Swatch Group and you know, their, their business is down year on year, quarter on quarter and their profit margins are in the single digits. They're, they're not much better than, than the retailers who are at the end of, end of the chain themselves. So these aren't businesses that are, that are printing money. They don't have the margin in their own business to absorb this. But of course I think that because of the largesse, as you point out, oftentimes what we'll hear and we'll read in comments is, oh, well, you just find that money by not doing fancy trade shows and spending so much on brand ambassadors.
- [29:11]
B
Right. So if you amortize then what 39% looks like across that entire chain. There is no 39% there.
- [29:23]
A
Well, it's also worth noting in the, just to finish the thought on the brand and the marketing stuff, like first of all, I'd say two things there. First of all, in the case of the brands that rely on it, and not all of them do, when we think about the independent brands that we work with, they have very modest marketing budgets. They don't spend much money on marketing.
- [29:41]
B
No, they rely on their retailers, quite frankly. Yeah.
- [29:44]
A
As one of our brands likes to say, that's what the Margin is for, in other words, like that's the expectation of the retailer for a large part. In the case of brands, of course there are brands that really do a lot of marketing and rely on marketing. But that's the point. They rely on marketing, marketing and branding. And those things are key to the business of those brands and the success of those brands. And we could argue does one sponsorship or ambassador versus another make sense? Is this one marketing event a waste of money? But maybe that one is good? We could of course debate that. But like the brand is fundamental, fundamentally part of the appeal of those watches. You know, if you compare a lot of these watches, especially in the sub $5,000 price range, it's a very commoditized space. And oftentimes the brands that command a pricing premium have to do with the strength and the equity of their brand. So it's their strategic advantage that, that these companies need to continue to invest in. And when you look at the grand scheme of things, they're not, to your point, going to come up with 39 percentage points of margin by cutting marketing. That's just not going to happen.
- [30:57]
B
No.
- [30:57]
A
Even if they eliminated it fully.
- [30:59]
B
All right, so where, where does this take us?
- [31:01]
A
Yeah, let's talk about what's now and I think there's a lot of good news here and a lot of helpful information here. So the first thing that's worth pointing out is no. 1, people may be a bit blindsided by the 39% figure, but no one is blindsided about tariffs increasing on watches. In fact, this is something that brands, distributors, we retailers have been planning for for quite a while. There's a lot of in inventory that has been front loaded into this, into this country. We talked about this in our state of the industry looking at the first half of the year, but all told, in the first half of this year, so January through June, there was a, a 20.4% increase in the value of watches imported into this country. And a lot of that happened in April when the tariffs were first announced that month alone year over year. So April 2025 versus April 2024, there was a 150% increase in the value of watches imported into this country. That basically represented the brands, the distributors and the retailers pulling up a bunch of inventory into the country ahead of tariffs. So there's a bunch of inventory staged here. Just the other week we placed a big order for stock with a couple of different brands in anticipation that something could change with, with tariffs. So we planned for this. We know other retailers have, we Know that the holding companies have, they've staged a bunch of inventory. So there is a fair amount of front loaded inventory here that is going to help help absorb a lot of this or at least mitigate this in, in the near term. And I think that's good news. It's not like you're going to walk into a retailer tomorrow and see that prices have gone up, certainly not 39% as we discussed, but have gone up meaningfully. So that, that's some, some good news. The other good news is about the timing of August. Asher, what happens in the Swiss watch industry in August?
- [32:59]
B
So ironically, this is the best time for the worst kind of news in this regard. So let me explain. In August, at various times throughout the month, sometimes for the entirety of the month, there is the Swiss watchmaking holiday in which most, most, sometimes operations stay open. But, but most of the Swiss watch industry basically shuts down and goes on vacation, which is awesome and I'm jealous. But that's a, that's the things. Now what's interesting about that is that there's very few watch shipments that leave Switzerland in the month of August coming into the United States because so many people are checked out.
- [33:34]
A
A flurry in July.
- [33:36]
B
Yeah. So this is where things are actually kind of bizarrely interesting. The original deadline that the Trump administration set for the reimposition of these tariff rates was 9 July. Had the 39% kicked in, in on 9 July, I think it actually would have had a significantly larger financial impact on the industry than it kicking in potentially on the 7th of August.
- [34:00]
A
Yes, because the dynamic in July is always hilarious because, because of that watchmakers holiday in, in August, all of a sudden all these watches we've placed orders on are suddenly ready to ship at
- [34:14]
B
the same time as most customers are out on vacation and not really buying.
- [34:18]
A
Yeah, you know, it's like I think we spent hundreds of thousands of dollars on inventory in, in July. I mean it is, it is a big, big, big month. So, and then August, the delivery of inventory falls off a cliff. So a couple things. One, we have till August 7 now when, when this 39% rate goes into effect or supposed to go into effect. So that gives the brand some time to get some final inventory out in the, in this week and then they weren't going to send anything in August anyway. So this is a good time. There's no such thing as a good time for this, of course, but it's
- [34:52]
B
the best time for, for whatever to happen.
- [34:54]
A
The best time possible for be in the situation we're in now.
- [34:58]
B
Yeah. So, you know, that, that actually, and I think this is the important thing, ends up buying everybody who is attempting to mitigate this a little bit more time, a couple of weeks, and that's what we're seeing. It's pretty clear from reporting in the New York Times today and Al Jazeera today, and just directly from the Swiss president's Facebook account that they were just caught as off guard as this, as all of us were. Like, this was not expected and most people hadn't done any calculations for a 39% tariff. The concept of a 31% tariff was so ridiculous that nobody ever imagined it would get worse. They just thought it might get, you know, lower.
- [35:37]
A
That having been said, you mentioned that the Swiss president, she posted, maybe it was on Facebook, I saw it on X. But she, she posted what was very interesting yesterday when this, on the 31st, when this was announced, she posted on Twitter that she actually spoke directly by phone with President Trump. Trump that day. And there was nothing they could figure out that day with regard to the. They. Apparently there is a framework for a trade agreement between the two countries. Apparently it was finalized July 4th or on, on Trump's desk as of July 4th. And it sounds like he's decided he doesn't want to move forward with it or he's rejecting it. So there's some sort of framework that was negotiated in place. He's rejected it. And the Swiss president spoke with him by phone yesterday and there's a few things, things that are interesting about that. First, she confirmed that this is fundamentally about the trade deficit. She said, like the key driver of this is the trade deficit and there's nothing we've been able to figure out about that yet. The other interesting thing is she has a direct line to President Trump, which tells me she is very interested, very motivated in figuring this out and does have a direct line to President Trump, which I think is, is an encouraging sign. So it tells us the Swiss are motivated to figure this out and have the access to figure this out.
- [36:58]
B
Yeah. So I think when we think of, when we look at like, what are the near term implications of this, another sort of, I hesitate to use the word good, but I suppose quasi reassuring component is we all went through the shock of these initial tariffs in April and everybody worked together to figure out how to make it viable. With the announcement of the 39% tariffs, I think there's a lot of, you know, let's all take a deep breath. Let's all take a Moment, let's not be reactive to something right now and let's be optimistic that the reason that these tariffs are not going into effect on Today, on the 1st, as they were presumed to be, that they're going into effect next week is a little bit of a wink, wink, that maybe this is a way of extending the deadline with, without, you know, saying you're extending the deadline. So, two things. What are the potential outcomes here? I think one potential outcome, like the best case scenario is that the Swiss president and her trade representatives are able to find some common ground with the Trump administration. And we see the tariff on Switzerland come down to their European colleagues like 15%. Maybe somehow they get to the best rate that we've seen, which is, which is the UK down to 10%, who knows? But that's the best case scenario, I would argue at this point, since I don't believe there's any countries in the world that the Trump administration has a zero percent tariff on, even though prior to the Trump administration free trade was of course a core tenant of general Republican administrations. But clearly there's some dissonance there. The other thing that we're seeing if that moves on other potential is that, well, maybe it comes down but doesn't come down to 15%. Maybe it comes down to something somewhere in the middle there and that will have to be metabolized by the brands as we all think about what the implication is. And then of course, the other situation that is possible is that 39% is just the tariff rate. So what happens in these scenarios? Realistically, I think if things come down or stay at somewhere between 10 and 15%, my guess is that we'll see a relative status quo. I think think, you know, there's a little bit of hedging, maybe a couple things adjust in price on some moderate ways. I think we probably stay in like the general zone that we're in if tariffs go up 25% or stay at 39, based on everything we just described, the simple reality is that the cost basis for importing goods into the United States will grow significantly, which just means that the price will increase now. Well, but I want to explain what that's going to mean because it to be clear, it will not be 39% to the consumer through a retailer. That won't happen ever because the math won't let that happen.
- [39:52]
A
Well, the math and it hasn't happened. So we've already had a 10% tariff for the last 90 plus days and there have been increases in retail prices. Watch charts of course tracks this. And I think the last time we looked at it, it was back in, in June. The last time we looked at at retail price increases, no brand had raised their prices 10%. There were price increases from a number number of brands, but they were all in the, in the single digit range.
- [40:19]
B
Well, there were two reasons for that, right. One was the fact that obviously the cost of the good coming into the country is a lower cost basis, so the percentage won't work out to, you know, the total cost of the percentage of msrp. But there's another reason for that and that's because on the 10% especially, and I can only speak for independent retailers, but as independent retailers of independent brands, we all kind of looked into our pocket pockets and said, okay, this is gonna be really hard, but what can we each do to contribute to this and to mitigate this as far as we possibly can? And in the instance of most brands that we work with, that's what happens. So some, so there is a low percentage, a couple of points that's being passed on to consumers, but the majority is being either absorbed across that long tail of the, of the chain that I mentioned earlier, mitigated also by the lower cost basis on the imported code. Good.
- [41:09]
A
Sure. But the other complicating factor, well, the one but to that is just as, as drastic as the increase in tariffs was going from no tariffs to a 10% tariff, even if temporarily. The other, the other issue was currency and the currency value of the dollar relative to the Frank fell about 10%. And so that compounded the pricing pressure and it still stayed in the single digits when it was raised.
- [41:39]
B
Yes, but there's one other which is there is no more money in the banana stand for brands, retailers and distributors to find beyond this 10%. So essentially if we find ourselves in a situation where we're at 25% or 39% or whatever it is somewhere in between there, that will cause inflation. It's just mathematically impossible for it not to to. So here's where we're at today. On August 1st, I don't anticipate anyone changing prices. And when I say anyone, I'm referring to the Swiss brands sending us new price sheets anytime in like the next five days because everyone is hoping and praying that a more metabolizable, more easily metabolized rate will come down the pipe. And just as happened, you know, 15 days, 10 days after watches and wonders that the administration will find some more reasonable position, take that and hopefully make it permanent so we don't keep Ending up in these 90 day cycles and just end up in a place where it's like okay, here's a trade deal like the EU has like the UK has where it's like this is, this is the terms of doing business with the country, you know, know take it or leave it and at least is in a sustainable long term stretch. If we end up in that middle ground or we end up in that worst case scenario. Worst case scenario, I think we're going to see price increases but those price increases will not be to the tune of 39%.
- [43:17]
A
No. And can I give you a little bit more hopeful thinking?
- [43:19]
B
Absolutely.
- [43:20]
A
Or constructive thinking. A couple things. So we already spoke about the, the math of it. Prices aren't going to increase even in a worst case scenario. 39%. Sure. The other thing that I think is worth noting is businesses are nothing if not resilient, resourceful and creative. And just like you said over the last few months we the distributors, the agents, the brands looked under every single couch cushion and did everything we possibly could to help the market absorb the 90 day terror tariffs. And we did everything. I mean Asher was on the phone with like with our shipping provider negotiating our, our two day FedEx rates and these kinds of things. I mean we looked, we've, we've looked everywhere. You would, you wouldn't believe but that's because businesses are resilient and resourceful. We figure things out. We've also seen a number of, of brands, smaller brands. Take a page from the large holding companies which is to establish business entities in the US and that reduces the basis at which their goods are, are. For instance, we all know, we'll take the example of Rolex, but this is true of lvmh. This is true of Swatch Group, Richemont and other companies. They have business entities, they have companies that are their subsidiaries in the United States who handle their import. So Rolex SA in Switzerland will send Rolex USA or whatever the business entity is called, watches to import. But it's an internal transfer of goods. It's going from one division of the company to another. So they're, they're essentially importing those watches at their own internal cost. So a fraction of what the retail cost wholesalers and a fraction of what they even wholesale it for to their retailers and that helps greatly diminish their exposure on duties. And we're starting to see even some very small brands. I mean there's one brand we carry that makes less than 100 watches a year that's decided to take this approach of creating a US business entity to land the goods here at an internal cost, this has other financial and tax implications for them. Of course it does. But it's a sign of the resiliency and the creativity and the willingness of this, of the industry to figure this out and do everything we can to mitigate this for the end customer.
- [45:45]
B
Could not agree with that more. But I do want to put an asterisk on this because it does speak to something that I do see bubbling up in conversation often, which is. Well, hang on a second, second. If you have a US entity, why don't you just make the watches here, man? Like you could ship in the watchmakers, right? Well, that's another topic because that's about how easy it is to bring foreign talent into United States.
- [46:05]
A
There goes your Swiss made watch. I mean, fundamentally.
- [46:07]
B
Well, there's that. However, I mean, I guess you could make an argument that like, well, maybe having it made in the United States, kind of an interesting thing that there's some pro, you know, like Mexican coke, right. Like maybe there's a, maybe there's like a specific desire to have, you know, a specific formulation, if you will, of a watch being made in America, et cetera. But here's the thing. This goes back to the earlier point. In order for a company like let's say Rolex to decide and say, you know what, we're going to start making datejusts in Utah.
- [46:37]
A
The freedom datejust.
- [46:39]
B
Yeah, exactly. In order for them to start doing that, that would mean that they would need to erect a building import machine which is highly tariffed. They'd have to train people here because at the moment bringing talent from abroad is very challenging in the United States. So you'd have to train people. So that's a long, that's a few years of looking for talent, training the talent, getting the talent like brought up to speed, probably flying them to Switzerland and spending time out there and then bring them back here. There's importing the raw costs because remember there's a 50% steel tax tariff here in the United States. So you got to have American steel. And those are not IPA tariffs. So that's an expensive raw goods being brought in with expensive talent in an expensive.
- [47:23]
A
You still have to wonder, even if you're selling into the U.S. is it even cheaper to manufacture here?
- [47:27]
B
Yeah, so.
- [47:28]
A
And this is different from the car industry where there is a car industry in America. So when Nissan or Toyota or Volkswagen Group or whomever decide, all right, well we'll open a plant in the United States or North America to address this. The there, there's a talent base, there's an industrial base, there's know how to do that and to scale that.
- [47:48]
B
Well, there's another part of it too which is generally, and this goes to the earlier point that Sh. Josh Shapiro made on, on our other podcast, like in order for that to work, there have to be tax incentives, grants and other things that help make it a little bit more rational to make such massive capital investments in the United States to grow a nascent business. But, but if the cash flow to the Swiss is being choked out by a 39% tariff while they're also being told to make significant investment in the United States where the costs of doing business here have inflated because of the business environment or the import and tariff environment we operate in, It's a catch 22.
- [48:26]
A
Yeah.
- [48:27]
B
So to go back to the earlier point, no.
- [48:30]
A
Is anyone really making this argument though that brands will just definitely watch?
- [48:34]
B
I definitely see collectors making this argument if like, well, why don't you just do it here? And I get where that sentiment comes from, especially if you're like, well, you already have business operation here. But when you really get into the nitty gritty and the weeds of it, it's not a plausible solution and it's certainly not a near term solution because and this is the final point, the other thing that has to be true about that is that the tariff must stay because if you're going to invest all of that, the tariff is, is the bulwark work preventing the more affordable production abroad. But if the production abroad is what is funding the production domestically, it all collapses. And then if you go one step further and you say, well, shouldn't some enterprising American entrepreneur stand that up? Same argument applies.
- [49:19]
A
It just got more expensive to do that.
- [49:21]
B
Exactly. And the ultimate output of that would still be non competitive to the Swiss because of course, while we are one of the largest markets for the Swiss Swiss, we're not the only market for the Swiss.
- [49:32]
A
Yeah, well look, the industry is nothing but resilient. Consumers are nothing but resilient. I mean the final thought I'll end on Here is it's August 1st here in Ventura, California. We just wrapped up the month of July. It was our single biggest retail month ever. And that's remarkable on a couple of levels. One, it's remarkable, it shows the resilience of the consumer, the strength of the watch market, particularly around independents, which are a growing part of the watch industry and a vital part of the watch industry. And that they have vitality. It's performing well. You know, gosh, when you read some of the annual reports of the big holding companies, you see red. But independent watchmaking is doing exceptionally well. What's also particularly shocking about that is July is typically one of the slowest months in watch retail. It's the summer doldrums. Summer. So we've seen tremendous resilience, not just from the industry and figuring all this out and navigating it and doing everything we can. And of course we're going to keep doing that stuff, but we have seen no less enthusiasm from customers and we've seen strong sales. So those are all good signs. And those things bode well for the future.
- [50:49]
B
Yeah. I'll also add one final point, too, because I've been playing the counterpoint here
- [50:53]
A
to a lot of this. Yeah, final point.
- [50:54]
B
I have a final point for your final point, which is, is what Gabe is saying about resiliency. I believe wholeheartedly, and I see it every day in our colleagues and in our work. And I would also just say there is. And I see this sometimes in the comments on, like, online articles. There is a really strong desire to just like, make, you know, big declarative statements about, like, what's going to happen and the rest. And the truth is, is even though I just did a whole podcast on this. Exactly. So my, you know, what I'm trying to do for myself as well is just remind myself that this is just another turn on the road of this industry, of our business and the rest. And yeah, it's, you know, it's a pretty aggressive turn, but I'm still just as enthusiastic to go to Geneva next month and see the novelties. I'm just as enthusiastic about what we're doing here.
- [51:53]
A
And no terror if our business environment is going to keep people from loving watches.
- [51:58]
B
Exactly. And I think that's the key here, which is while we figure out what exactly is going on here, it's not going to stop us from being as excited about the stuff that we're doing. Because in the end, the whole reason Gabe and I started this whole company is because we love watches. Not because we were trying to find, like, definitely not because we're trying to find the most profitable way to make a living. So that doesn't change here.
- [52:21]
A
Yeah. It reminds me of a moment in our business back in 2020. It was spring of 2020. We were working on our second ever collaboration, which was our Infinity Series P01 with Josh Shapiro. Really cool watch an Infinity series with a guilloched meteorite dial. And this was a watch that we had planned to launch with Josh in April of 2020. And you can imagine we had been working on it with him long before then. And then something called Coke Covid happened.
- [52:52]
B
What was that?
- [52:53]
A
I'm not sure. I. Yeah, some. I heard something about it this morning, but I remember I was on the phone with you and Josh. I was in the backyard of my house because of, you know, we were all isolated, and the three of us were trying to figure out this was in March of 2020, right in the shutdown, what to do. And we had no idea. We assumed, you know, the prevailing. God, what a. What a time. But I think the. Understandably, the prevailing wisdom was like, this is going to be a terrible business environment. And. And who is going to buy. Want to buy a watch when there's a pandemic ravaging the world? And keep in mind, in March of 2020, I mean, the market lost, like,
- [53:30]
B
half of its value. I mean, it was crazy. Yeah.
- [53:32]
A
But forget about the business environment for a second. Like, just from. On a human level, like, hundreds of thousands of people were dying from this pandemic. You know, you can remember the images out of those hospitals in Italy or New York City. It was a. It was an interesting time. And I remember we were like, is anyone going to want to buy a watch in a moment like this? Forget the business environment. Like, is anyone just going to have the interest, the emotional bandwidth, the state of mind to buy a watch? And I think it would have been reasonable then to say, like, well, it's over or not it's over, but, like, we're taking a break for. For a while from this, and obviously we all know what happens with watch in Covid. And if you told us on April 2nd when we were in Geneva, you know, forget the biggest July ever, we would have had the biggest first half of any year ever. From a retail standpoint, I probably wouldn't have believed it in terms of, like, the climate and the reaction to the initial tariff announcement. So expect the unexpected. You've. You've listened to. What is this now? Almost an hour on a podcast about tariffs. And really all we have to tell you is, who really knows?
- [54:45]
B
I think we did a little better than that, but we'll. We'll leave it there.
- [54:48]
A
Fair enough. Well, thank you so much for listening. And this, of course, is open work. It's a production of collective horology. You can find us online and check out that article on Renaud tca@collectiveherology.com and of course, please get in touch with your questions, your suggestions, your feedback, your show topics. And a show topics. We like those. Do that at podcastollective Horology.