A Car, a Watch? Swatchmobile!

By THOMAS A. SANCTON/BIEL

Most Americans think of the Swatch as a trendy timepiece that was embraced by everyone from K Mart shoppers to the owners of SoHo galleries. But in its country of origin, Switzerland, the Swatch represents nothing less than an amazing instrument of industrial rejuvenation. Before it came along, the Japanese had more or less usurped the Swiss as the heavyweight champions of the watch business by substituting their cheap and reliable digital technology for Switzerland's legendary craftsmanship. The question now is whether that industrial formula can work for -- of all things -- automobiles.

Make way for the Swatchmobile, a sassy two-seater that looks like a cross between a Volkswagen Beetle and a Rambler. In fact, it is the product of an odd corporate marriage sealed last week between Mercedes-Benz, the maker of luxury cars, and Nicolas Hayek, the man who put almost 150 million Swatches on wrists all over the world. So far, the two companies have worked on separate prototypes, which they plan to merge into a single model produced by a joint company (Hayek's stake is 49%, Mercedes' 51%) for the 1997 market.

The car still exists mostly in the minds of several dozen young engineers in jeans and sweatshirts who have spent three years working around the clock inside a secret garage in the Jura Mountain town of Biel. If the team realizes its vision, the Swatchmobile will combine the crash resistance of a Mercedes with the spunkiness of the famous wristwatch. Plans call for the Swatchmobile to be 20% smaller than a typical subcompact, able to wheel into a parking space sideways, cost about $10,000 and reach 90 miles an hour. The car's designers hope it will travel at least 80 miles on a gallon of fuel, thanks to an engine one-tenth the weight of any existing engine with equal power. Models will run on gasoline, electric power or a combination of both.

For Mercedes and Hayek's company, the Swiss Corp. for Microelectronics and Watchmaking Industries (SMH), the project is not just a technological challenge but also a huge marketing risk. After all, business-school casebooks are full of stories about fashionable companies that, in search of diversification, stretched their brand names past the breaking point. Swatch tried to extend its name to telephones, pager watches and sunglasses without great success. But Mercedes, whose sales have fallen 11% in the past three years, is eager to reach out to buyers who cannot afford its traditional cars. Already the company has unveiled plans to produce in 1997 the compact four- seat Vision A with a sale price of about $18,000.

Hayek may overestimate his reach -- "I am the creator of products, kingdoms and empires," he says -- but he does have expertise at taking a luxury product downscale while preserving its cachet. It was he who came up with the strategy that saved the prestigious Swiss watchmaking industry from succumbing to the Japanese hegemony in the quartz-watch business. In 1983, when he was approached for advice by a group of Swiss banks, the country had seen its share of the global watch market drop from 43% in 1974 to less than 15%. More than half the Swiss manufacturers had gone under, and creditor banks had taken over the country's two largest watchmaking groups. "They were ready to close them down and sell the brand names off to the Japanese," Hayek recalls. "I proved to the banks that we could revive the industry, then I went on national television and told the Swiss people, 'We can be No. 1 again.' Nobody dared believe it."

Hayek put up $102 million -- mostly his own money -- and led a group of investors in buying the two companies from the banks. He then merged them, effectively taking control of one-third of the Swiss watch industry, including such famous brands as Omega, Longines, Blancpain, Tissot, Rado and Hamilton. But his big coup was figuring out that a product invented before his arrival could be the high-quality, low-price, plastic quartz watch that would challenge the Japanese at the lower end of the market. The $35-to-$40 Swatch, which reduced by half the usual number of parts by building them directly into the casing on automated assembly lines, was an instant success, enabling the Swiss watchmaking industry to command 53% of the world market. The company has kept demand for the watches high by staying on the cutting edge of new designs, turning out some 140 new models each year plus limited-edition designer collections.

But the neatest trick is the company's ability to keep labor costs low in one of the world's most high-priced countries -- proving that moving the factory to cheap markets abroad is not always the best cost-saving solution. Thanks to an extremely high degree of automation, SMH keeps direct labor charges under 10% of total manufacturing expenses, in contrast to about 30% for most watchmaking operations.

Hayek, 66, was born in Beirut of a Lebanese mother and an American father. The family moved to Switzerland when he was seven. With a degree in mathematics and $3,400 in borrowed money, Hayek started a one-man consulting firm in 1957 that developed a reputation for finding waste and mismanagement in everything from the Swiss army to the state radio. Today Hayek Engineering is a $1 billion business whose clients range from U.S. Steel and Dow Chemical to Krupp, Siemens and the Chinese government.

Though he claims to chafe when his competitors make cracks about his "rug merchant" bargaining methods and his "Mediterranean" temperament, Hayek nonetheless displays what he describes as "an exaggerated amount of self- confidence. I want to look in my mirror every morning and say, 'You're great.' " His strength as a businessman, Hayek says, is that he has retained "the fantasy of a six-year-old child. If you can keep and use the curiosity of a child, you can only improve everything around you." He describes his talent as being able to spot new ways of selling "emotional" products. "An emotional product is something you can love," says Hayek, "something you are involved with -- the watch on your wrist, the telephone in your hand, the car you drive. It's not the same with washing machines."

Hayek, who is personally worth more than $1 billion, is passionate about his playtime too. He is a fervent tennis player and skier, owns two vacation homes in southern France, collects art (a Dali melted-watch sculpture graces his office), adores classical music, Cuban cigars and good food. "I'm a sensual kind of guy. I drink life fully," he says.

But some say his hunger for life has an unattractive side; it makes him unreasonable or just plain self-aggrandizing. "He has the qualities and defects of a child," says SMH engineer Jacques Muller, who actually designed the Swatch. "He thinks everything is possible. Unfortunately, everything is | not always possible." Says Hayek's rival and ex-deputy Dr. Ernst Thomke, who claims to have originated the Swatch concept in 1979: "He has to be the big boss, alone, and can never share opinions. He was a consultant all his life, and he wanted to become a marketer and product developer. But he never learned that job. That's why he's so keen on promoting this ridiculous idea of a car."

So far, SMH has sunk about $18.9 million into the project, betting that advanced microtechnologies developed in the watch industry can be translated into innovative designs for a car's propulsion and electrical systems. "We're not trying to build some little gadget here," Hayek said on a private tour of the garage last December. "We want to have a consumer product that you can produce and use in the millions."

Although Hayek has landed a blue-chip partner, he continues to inspire skepticism. A short-lived joint venture with Volkswagen broke down last year. "I have trouble believing in this project," says Paris-based market analyst Antoine Nodet. "Jumping from watches to cars lacks credibility." Jean-Marc Buchet, who follows the auto industry for the French brokerage firm Leven, says that "there is clearly a market for a small city car" but wonders if people will pay $10,000 for "a two-seater with no trunk space."

Others are more sanguine. General Motors president Jack Smith, who had lunch with Hayek in Biel in December, calls the Swatchmobile "interesting" and says of Hayek: "He's for real." Roland Leutenegger, an analyst at the Zurich-based Bank Julius Maer, argues that Mercedes' automaking know-how and Hayek's marketing genius will make a winning combination. "The right partners have found each other," he says. For Hayek, predictably, the future of the Swatchmobile is assured. "I'm not a dreamer. I've proved all my life that I'm a down-to-earth guy. We can make this car. Believe me." Some people apparently do: he has already received 35,000 orders.

With reporting by Margaret Studer/Zurich