It Takes More Than a Century for Basel to Spoil

Reading news of Rolex, Patek, Cartier and then LVMH dropping out of Baselworld is, by itself, a shock to the system. More than a century has passed since Basel became an industry gathering. It has survived numerous recessions and shocks such as the quartz crisis. Ben Clymer arguably best summarizes how momentous this is in the "Is Baselworld Dead?" episode of Hodinkee Radio last week when he notes that he never imagined he would see Rolex release a public statement severing ties with the show organizers while leading the charge, seemingly, among other brands.

The question is why?

For enthusiasts this is a bit like being friends with both people in a romantic relationship and hearing completely different stories about why the breakup happened.

A breakup silhouette.

On the brands' side is the claim that Baselworld rescheduled the show for a date in early 2021 without consulting the participants. Baselworld claims the brands had signed off on the new date, that the brands had been "scheming" to depart for a good while, and that it was blindsided by the decision. Neither side got the receipts that reveal the truth.

My own sense is that a scoop published by WatchesBySJX contains the answer. In short, an emissary from Rolex, Hubert J. du Plessix, wrote to ask for a refund of exhibitors' money.

Hubert du Plessix

Mr. du Plessix is the Director of Finance and Logistics for Rolex (something like a joint CIO and COO) and he is also the president of the exhibitor's committee. Baselworld's organizer, MCH Group, did not respond well. At all. MCH stated that they were not legally obligated to refund anything. But MCH did extend a counter offer: Option A, in which MCH kept all the money but "credited" the exhibitors 85% of their payments towards a future show, and Option B in which exhibitors received a 30% refund now but they would have to pay 60% to MCH for a future show.

I believe this was the mother of all own goals, an act of tradeshow suicide. The key thing is that MCH did not extend watch manufacturers adequate liquidity in this offer. That is what the industry was really after. Liquidity is the key to this whole imbroglio. You can think of almost any business as a bathtub. As long as there is water in the tub the business is viable. Revenue represents the water flowing into the bathtub while expenses (or costs) are the water flowing out of the drain. Almost all of these brands are closely held with effectively zero public reporting of finances so much of this is educated guessing.

Circumstances tell us that revenue is likely drying up, or it will in the near future. Rolex and Patek have closed their manufacturing plants in order to keep their employees healthy and practice social distancing. The Swiss government has also banned public gatherings. This means there will be inadequate product to sell at some point in the future, if not already, thereby depriving the brands of revenue. This, in turn, means the bathtub faucet has been turned off. But the drain is still open.

No doubt many brands have taken out loans in order to operate and perhaps their creditors will not accept deferred payments. They face tax bills for their property. They have contracts in place to source materials which they might not be able to break. And they might even have to pay employees under prevailing collective bargaining agreements (or out of the goodness of their hearts). The bathtub is either emptying now or it will in the near future.

The brands need to open the spigot somehow and get the money flowing again. They wanted Baselworld to help by contributing a refund to their coffers. Brands would never reveal this publicly. Since their finances are not public, focusing on MCH's unwillingness to issue a refund could possibly hamper confidence in a brand's future. This would dig the hole deeper. For example, luxury watch buyers are typically aware of the fact that the brands run service centers which will offer high quality maintenance for their product.

A watchaker adjusting movements early in Hamilton's days.

 Warranties are an important part of new watch sales but a warranty is only valuable if the manufacturer does not go bankrupt. The list goes on. If a brand's future is in question that will scare away buyers. So the brands blame the whole thing on scheduling rather than money in order to avoid that impression.

Rolex effectively played the role of Hank Paulson in this saga. Paulson was the Secretary of the Treasury in the United State during the financial crisis of 2008. As the situation reached its nadir Paulson brought all the major commercial banks to his office and forced them all to take government funding. Many of them claimed they did not need it and did not want it. But Paulson knew that, by assembling a herd, the weaker banks would be safer. Collective action allows each participant to avoid a negative reputational effect since everyone engages in the action.

Similarly, it might be that only a few brands are desperately in need of a refund from MCH. But by acting together, under the coordination of Rolex, it is not possible to know which are in the most precarious state and thereby most alienated by the lack of a refund.

Early on in this process the geese that lay the golden eggs for Baselworld, the brands, sent a signal that they might die and needed a partner in MCH that would help them. In this case, though, the geese just flew away because Baselworld tendered offers that made it more likely they would die. It is a shame that the long tradition of Baselworld ended so quickly and unexpectedly, but this is one of many rapid changes marking the global pandemic. Something tells me more surprises are around the bend.