Catch Them if You Can: Fiat in Watchmaking

The movie Catch Me if You Can was released in 2002.  It is a dramatization of Frank Abagnale's early life, a counterfeiter who forged checks.  He posed as a Pan Am pilot to get away with his ruse.

Frank Abagnale's earliest known run-in with authorities in June, 1965.

Abagnale was eventually caught, prosecuted and imprisoned.  Eventually he worked for the FBI in order to help them catch counterfeiters.  Abagnale believes "the vast majority of fraudsters and criminals get caught, not because of good police work, but because they continue doing the same thing over and over again until someone notices.  Criminals are not as bright as people think and their greed motivates them totally." 

What does counterfeit and crime have to do with the watch industry?  Counterfeiting of watches is a well-known topic (and a subject of another post coming soon).  I'm not interested in that particular subject here.  Instead, I would like to discuss why currency counterfeit is criminally prosecuted.  The reason extends beyond the somewhat obvious reason that individuals are defrauded when someone passes fake bills and has more to do with maintaining credibility. More on that later.

My interest in this topic emerged as a consequence of two watch community phenomena on Instagram: macro photography and satire.  There are many collectors who post high detail macro photographs of timepieces and the quality of finishing.  Satire, or meme, accounts then spread around these details of finishing.  The gap between marketing claims regarding fine watch finishing and the reality is very clear in these photographs.  The second subject of this article is fiat, and how fiat drives the existence of currency in almost all economies around the world.  Interestingly, fiat can also explain the relatively high price tag which luxury watches carry.

Let's begin with the subject of macro photography on Instagram. 

Macro photography of a Habring watch. Used with permission from Horomariobro

I'm most familiar with the work of Horomariobro, who captures and shares incredible details of watch finishing at a scale of .5 mm or smaller.  In this first picture, of a Habring watch, you can see the reflection of very small numbering on the base of a watch hand.  These photos get a lot of attention.  This post received 1,471 likes and it reflects positively upon the brand.  

This second post is different, it offers a "compare and contrast" between two German manufacturers and their level of finishing. 

Macro photography of watches from two German brands. Used with permission from Horomariobro

On the left is A. Lange and Sohne, and on the right is a Lang & Dresden. You can see horizontal ribbing on the Lange and Sohne screw as well as what appear to be nicks on the screw slot.  The Lang &  Dresden doesn't have those marks, its black polish finishing is better executed and there don't appear to be nicks in the screw slot.

Lange & Sohne have a very well-established reputation. People love their references. They command five figure prices (in the case of some references, even higher).  The main point is that collectors may start wondering if there's a gap between the marketing about the level of finishing and the reality.   It is very risky for brands to lose credibility over what they claim when it comes to the quality of what they produce.  I think we can see this risk most clearly when we consider currency and what gives currency value in modern economies.

I've written elsewhere that watches share the properties of currency.   Watches are fairly liquid. You can get value out of them very quickly through pawn shops, for example, or expedited sales. I recently became aware of a luxury pawn shop in New York City called Borro which specializes in this practice for high value timepieces.  Watches are also very easy to move around.  In some ways it is easier to move around tens of thousands of dollars using a watch, rather than currency.  If you're moving $10,000 from a bank account in one country to another, there are all kinds of flags that can pop up and perhaps there is additional red tape you have to deal with.  If you just mail a $10,000 watch, or wear it into the new location, it may be a lot easier and less conspicuous.

 
Currency in modern economies follows a fiat system (not the car brand Fiat). The dictionary definition of the term fiat is "the giving of orders by someone who has complete authority."  In most countries or regions, the currency has value because the government says it has value.  The government can enforce that authority through the use of police, military, courts and that sort of thing. Fiat currency has value because people believe the authority when the authority says that it has a particular value.  But when governments start to collapse or their legitimacy starts to erode, one of the first things you can see is a flight from that country's currency into other currencies (issued by still stable governments) because the issuing government has lost authority and the public doesn't believe "the giving of orders" anymore. Similarly, macro Instagram accounts have the potential to erode the authority of brands.  

One of the more fascinating examples of fiat currency comes from the art of J. S. G. Boggs, who passed away in 2017. He worked in two mediums. He was a performance artist and I've also shared here a picture of his visual art. 

A J. S. G. Boggs "note." Source: Internet archive of Boggs' web page.

In many ways his art appears to be an attempt at counterfeiting currency.  In reality, if we look a little bit closer, we can see that there are some very explicit differences between Boggs' art and actual currency.  Pictured is a piece of art he did for a numismatics club in Florida. A glance suggests this art is US currency but a closer look reveals that it is definitely not.  "The United States of Florida" is written on the top of the work. We can also see "In US We Trust," in the drawing rather than "In God We Trust."   The most telling difference in Boggs' work is that it is rendered in an orange hue, a completely different color than a "greenback."

The performance part of Bogg's portfolio involved a commercial transaction.  In a diner or shop, he would talk to the manager or owner and explain his art.  He would then ask if he could get something worth the value which he created in the art. So if he brought in the 10 FUN (Florida United Numismatists) he would try to get $10 worth of product from the store. He did have run-ins with authorities, just as Frank Abagnale did.   

Boggs created a fiat of his own through art and convincing people  that his art was worth something. The point is that fiat can move around and it can shift between people, and it can be manipulated. Through his performance, which is similar in some ways to the marketing we see by luxury watch brands, Boggs created the belief that allowed a valuable transaction to take place. The authority and belief in that authority can be gained and lost.  

For watch brands, this is a very important observation because, just as Boggs' art may or may not be worth $10, luxury watches may or may not be inherently worth what is asked by way of price. Let's explore an example which involves some guesstimates. The research I did suggests that the maximum hourly pay for a master watchmaker in Switzerland was CHF 41 per hour. Let's assume that it takes one month to make the movement of a timepiece and assemble it.  So if we use a 40 hour week and four weeks at 41 francs an hour we obtain a labor cost of CHF 6,400 for a watch made by a top-tier watchmaker.

The evidence in the economics literature is that, typically, labor costs are approximately 70% of total costs (it does vary from industry to industry). If we use that 70% labor share, that means the cost of making this high level watch would be approximately CHF 9,146 Swiss francs. Let's assume that a top brand like Patek Philippe offers the top pay for watchmakers. The price of a Calatrava comes in around CHF 20,000.  The guestimate is probably not that bad, it suggests a markup of roughly twice the cost of manufacturing. According to my back-of-the envelope calculation, there is CHF 10,000 worth of profit in a Calatrava. What explains that profit? Why are people willing to pay much more than it takes to actually create this watch? Much of it has to do with fiat.  The authority, in this case the brand, has credibility and can convince buyers to pay that much.  As long as there is a consensus among collectors that Patek is correct, the watch will sell for that much.  History and a proven track record can help fortify a brand's fiat when it comes to pricing.

To conclude, the rise of macro photography on Instagram and satire accounts, which amplify information about poor finishing, can undermine fiat. It introduces doubt that a watch is worth four of five figures (or even more). This is risky because a brand might find itself in a position where buyers are only really interested in paying cost for references. What is the  best strategy by brands to respond to this risk? I think ignoring it is not advisable. When a government finds that its fiat is undermined due to counterfeit it will crack down on that counterfeit right away. The watch industry cracks down on counterfeit timepieces as well. But in the case of exposés on poor watch finishing, a crackdown is not an option.  In upcoming work I will discuss the best steps for addressing a crisis of confidence.