Stay Gold

I'll admit it: I had a negative initial reaction to Rolex' recent release of a "Rolesor" Explorer (aka two-tone in steel and gold). I wasn't alone. As I type this, I think to myself "they really ought to change that term. It rhymes with eyesore."

A memeified version of Sir Edmund Hilary and Tenzing Norgay

On the day of the release, I created a meme which I posted to IG, also offered here. It reflected my assessment at the time, which was that the adventure / mountaineering legacy of the Explorer really does not require precious metals, especially gold. It is soft. Climbing Everest requires hardness, so all we need is 904L steel. Not very sophisticated thinking, I'll admit, but I'm pretty certain that's what the "reptilian complex" portion of my brain was up to.

It seems that certain novel watch releases kick off an emotional grief response in the watch community.

Photo credit Wikimedia and Bertrand Grondin

There are different models of the grieving process, but I think the Kübler-Ross model is most apt. It involves five stages: shock, refusal to understand, resistance, catharsis, resignation and then reintigration (acceptance). During the shock stage I made the meme. I've reached the reintigration part. I accept this new design. I became resigned to it because I think it will be a success. Two-tone Submariners are established members of the Rolex pantheon. I've heard podcast commentary suggesting that, in certain cultures and age groups (generally older), two-tone Rolex designs are met with "yeet!" That term probably isn't used, but you know what I mean.

In order to move past the "refusal to understand" stage of grief, though, it helps to understand why this kind of design update happened. We all know that there is a shortage of steel sports references. The wait lists stretch forever, flipping is rampant, and collectors attempt everything short of giving up their firstborn to somehow get to the head of the queue (full disclosure: I can't state, with complete confidence, that no collector has attempted this). Businesses aren't supposed to work this way. If you're in the gaslamp industry (ie precious metal watch production) and buyers are flocking to electric lighting (steel sports watches) you don't doggedly stick to gaslamp production or you might soon find yourself out of business. Resources are supposed to flow towards production of things in greater demand. That's the beauty of the profit motive. Instead, Rolex has introduced gold to a steel sports model instead of simply producing more of the steel sports models. Why?

A must-read on this topic is Tony Traina's assessment over on Rescapement. Importantly, he reminds us that the 1940s-50s was an era in which Rolex excelled at "sports elegance," that is, sports watches rendered in a variety of precious metal. From this perspective, the new two-tone Explorer is well within the brand's tradition and heritage.

After doing a bit of research, though, and thinking about things from an economist's perspective, I've concluded there are probably additional factors at play.

John Stuart Mill's exploration of resource responses to profit.

As I mentioned earlier, the textbook version of supply (one that I usually teach) implies that a business will reallocate its capacity (workers and machinery) towards products with the greatest profit opportunity. We simply are not seeing this behavior when it comes to steel sports references in the watch industry. In some ways, we're seeing the opposite. In addition to the aforementioned addition of gold to the Explorer model, Patek recently discontinued its hugely popular Nautilus reference 5711.

This is a puzzle: why are brands leaving so much money on the table? Why are they not supplying more of what buyers so clearly want? Every explanation I've read seems to leave unanswered questions. In such situations, where businesses are not following the precepts of Econ 101, I've found it helpful to explore how reality may differ from the simplifications we rely upon in textbooks.

Child with Schmoo balloon. Credit: Wikimedia Commons

In a lot of economic analysis of business decisions, we make a "Schmoo" assumption. The Schmoo was a 1940s cartoon animal species which could be used to produce almost anything: meat, eggs, milk, butter, suspender buttons and toothpicks were some of the examples. The textbook version of a company is similar in that we typically assume that any employee or piece of equipment can be used to produce any of the goods or services in the company's portfolio.

This, of course, does not match reality. Chemistry professors are not equally adept at teaching history. A shovel can not be used to cut timber. The list goes on. Reality is more similar to something we call a "specific factors" model. A worker or a piece of equipment has a narrow domain over which they can be productively employed. In many settings, this model is effective at explaining why businesses don't "obey" the suggestions of textbooks.

Let's return to the subject of Rolex' two-tone Explorer. In the 1940-50s "sport ellegance" era, and for decades after, Rolex was a very different company. Specifically, it sub-contracted a lot of its production from other businesses in Switzerland. A prominent example is the use of Zenith movements in the Daytona. Beginning in the 1990s, Rolex' then-CEO Patrick Heinniger began to acquire these parts suppliers. Ultimately, Rolex was transformed into the vertically integrated manufacturer we see today, in which almost everything is produced "in house."

This includes at least one precious metal.

The Rolex factory in Plan-les-Oates, where the foundry is located. Photo credit Google Maps.

Although Rolex is sometimes secretive, the company does publicly acknowledge that it operates its own gold foundry in a factory in Plan-les-Oates (just southwest of Geneva). It goes without saying that a gold foundry is as non-Schmoo as you can get when it comes to watchmaking. It can't be used to regulate a movement or guilloche a dial. It can pretty much do only one thing: cast metal. "Foundrymen" specialize in this process.

It is here, I believe, that we find the financial reason for the Rolesor Explorer. An under-discussed dimension of the Swiss watchmaking industry is the fact that the workforce has a union named Unia. The same union negotiates on behalf of the "forging industry." Unionized workforces have contracts with employers which specify a variety of employment terms and conditions. As a result, workers likely have very specific tasks for which they are contractually responsible, implying that they are closer to a "specific factor." For example, if management needs more workers machining steel and fewer workers casting gold, it can't simply tell the foundryman to go work at a lathe. According to Unia's page describing the foundry industry collective bargaining agreement, foundrymen are entitled to a minimum amount of pay. It is a little hard to suss out how much this is (due to language translation), but it is somewhere in the neighborhood of CHF 40 - 50,000 for early-career employees.

Now the stage is set. Rolex has a costly precious metal foundry whose machinery and employees can't be reallocated to other activities. Suppose the company decided to "fix" their wait-list problem by stopping the production of precious metal, or two-tone, references and going all-in on steel sports watch manufacturing. It would then face a situation where the foundry, and its employees, were idle but still generating costs. This harms the bottom line. Foundry workers can't be reallocated or dismissed due to the collective bargaining agreement.

Instead, incorporating gold with previously steel references, such as the Explorer, is almost the perfect solution. It kills two birds with one stone. Provided some collectors on the steel sports waiting list are willing to accept the new two-tone design, Rolex (at least partially) addresses the shortage problem. From this perspective, it is a completely brilliant and worthwhile strategy since the company is using foundry capacity usually, and immovably, dedicated to precious metal references (like the Day-Date) in order to address a shortage in another part of its catalogue. For all we know, the volume of precious metal reference production in recent years has been so low that the idle foundry problem was already harming Rolex' bottom line. A Rolesor Explorer goes some way towards addressing such a problem.

It is worth exploring the extent to which this dynamic can explain similar patterns in other brands.

The Patek Philippe facility in Plan-les-Oates (left) neighboring Rolex (right). Photo credit: Google Maps

I noticed that Patek Philippe also has a facility in Plan-les-Oates. It is next door to Rolex' foundry. This got me wondering: does Patek source its precious metal from Rolex? Such arrangements are not unheard of. For example, at around the 35 minute mark in the video here, Audemars Piguet's CEO reveals that his company manufactures cases for A. Lange & Söhne. If Patek has a contract with Rolex to source precious metals, we would reasonably expect that Rolex' inflexibility with respect to gold production costs would translate into inflexbility for Patek with respect to gold purchases. In this (admittedly speculative) setup, Patek could not scale back on precious metal production without harming its bottom line (Rolex would be unwilling to adjust contracted volumes and Patek would have to take regular costly delivery of gold).

It remains to be seen whether there is any evidence supporting this hypothesis. Regardless, the central point of this discussion is that the introduction of a Rolesor Explorer is likely the consequence of numerous factors. It is more likely than not that one of these factors is financial.