Ditching the crystals for tech

10th October 2016
Anna Flockett

Nestled in the Austrian Alps is a small village, a space that sits in the original 19th-century manufacturing compound of a decidedly old-school manufacturer. This is the Swarovski crystal company, who as a part of a project are trying to refashion, into a tech company.

Fearful of cheap Chinese competition and wary of a profitable complacency that has felled giants in the past — Eastman Kodak, destroyed by digital cameras, is often cited — the company is developing new crystals that double as solar panels or that change colour when tapped with a finger. It has revamped how it sells online, invested millions in high-tech machinery and signed partnerships with smartwatches makers like Misfit.

Swarovski has also hired Silicon Valley advisers and sent executives to the West Coast of the United States to meet venture capitalists and others, trying to add a little tech pizazz to a business whose roots date to the days of buggy whips.

Markus Langes-Swarovski, 42, Chairman of the board of the Swarovski Group and a great-great-grandson of the founder, said: “Tech companies can disrupt whole industries within a couple of months. We need to do that to ourselves before it happens to us.”

To many, Swarovski’s tech dream seems an odd strategy for a 121-year-old crystal maker better known for its (sometimes ostentatious) figurines, designer jewellery and even a $2,000 Cinderella slipper. It also raises questions about whether it is an industry suited to embracing the hoodies, start-up incubators and other trappings that have given Silicon Valley global cachet.

Julian Birkinshaw, Professor Entrepreneurship at the London Business School said: “Big legacy companies want to reinvent themselves for the digital era. Few, if any, have been successful at it.”

Within Swarovski, which is owned by members of the extended Swarovski family, the revamp was not a slam dunk. Family shareholders were concerned that Mr. Langes-Swarovski and his executives were merely jumping on the Silicon Valley bandwagon, forgoing the company’s heritage for the chance to mingle with West Coast Technorati. Some were sceptical that the company, which employs more than 31,000 people and owns retail stores from New York to New Delhi, would benefit from shifting toward sensors and start-ups rather than focusing on making shiny crystal.

The reluctance was compounded by the fact that Swarovski was far from facing ruin. The company’s annual revenue reached $3.8bn in 2015, up 10% from the previous year. Swarovski does not disclose its profit.

Langes-Swarovski in 2002 at the age of 28 took over the company from his father said: “Of course [I] still am. It was hard to get the family on board.”

The crystal maker, which has avidly guarded its trade secrets for over a century, rarely gives a glimpse into its inner workings. The company’s manufacturing centre is usually off-limits even to most Swarovski employees. One enters via a high-security revolving door that would not seem out of place in a spy movie.

More industrially functional than catwalk chic, the campus was dotted with people driving forklifts, shuttling boxes of crystal and other raw materials between buildings. At one new production line, two robotic arms, painted bright yellow, spun in a mid-air ballet as workers checked the gauges while Kings of Leon, the rock group, played on the radio.

In another building, several 3-D printers whirred away, producing spare parts and prototypes of jewellery designs. Engineers kept watch over machines that were originally built for the semiconductor industry but have since been modified to pump out minuscule crystals, some barely visible when held on a fingertip. Only a disused, shabby warehouse — one of the company’s original buildings — harked to the company’s past.

Founded in 1895 by Daniel Swarovski, his brother-in-law Franz Weis and a business partner, Armand Kosmann, the company has roots in Victorian-era disruptive technologies. That year, Mr. Swarovski, the moustachioed epitome of a 19th-century businessman, moved his nascent crystal-cutting business from Bohemia (now in the Czech Republic) to this small village in Austria. He wanted to avoid having rivals copy his new machinery — the equivalent of high tech in its day — that allowed him to cut crystal more cheaply and quickly than they could.

Crystal is almost identical to glass, but it includes another ingredient — lead — that adds extra sparkle. It is notoriously difficult to shape into small fragments. Mr. Swarovski’s machines set his crystal apart because of their ability to create tiny, uniform cuts, which give off more light than rivals’ products.

 “One hundred and twenty years ago, we were the Google of the age,” said Taro Nordheider, a Swarovski executive vice president who was hired five years ago from McKinsey & Company to help with the company’s transformation.

Over the decades, the company shifted with the times. After World War I, Swarovski branched out into precision drilling tools. After World War II, it added binoculars and telescopes. And when sales to fashion designers and other companies flagged in the 1980s, the company opened retail stores to sell jewellery and figurines directly to shoppers worldwide.

Eventually, Swarovski became complacent, Mr. Nordheider said. It was unprepared in 2008 when the global financial crisis hit and the company was suddenly confronted with a wave of Chinese competitors selling high-end crystals at a fraction of the usual cost, thanks mostly to cheap labour. By 2010, Swarovski had laid off almost 2,000 workers and begun rethinking how to operate in a world where price, not pedigree, was the name of the game.

In 2012, Mr. Langes-Swarovski started outlining a new strategy to the company’s 79 family shareholders. At dinners, board meetings and social gatherings, he told them that despite Swarovski’s decades of success, things had to change. The company, Mr. Langes-Swarovski said, needed to channel his great-great-grandfather’s engineering roots to cut costs, respond faster to new ideas and, most important, embrace technology that had become part of people’s everyday lives.

The 2012 bankruptcy filing of Kodak, which was founded in 1888 (just seven years before Swarovski), underlined his point, several Swarovski executives said. “Established companies tend to lose over time, especially when they’re successful,” Mr. Langes-Swarovski said.

Resistance came mostly from older family shareholders who had benefited from profits produced by the company’s traditional crystal business, according to several family shareholders and executives who spoke on the condition of anonymity because the deliberations were private. Yet because Mr. Langes-Swarovski’s generation now dominated daily management of the company, and his father, Gernot Langes-Swarovski, remained the largest shareholder, he was able to push ahead.

The revamp began with small steps. Starting in 2013, a team of engineers spent a combined 50,000 hours and almost $5 million to build a production line that made smaller batches of crystals, at a cheaper price, to compete better with Chinese rivals and to meet demand for smaller orders.

Swarovski’s tech development, marketing and sales teams also were given more independence to try new ideas. In 2014, one engineer — part of an 80-person research-and-development team in Wattens — stumbled onto a way to turn a Swarovski crystal into a solar cell. After some tweaks, including making the crystal round and thinner to meet jewellery standards, Swarovski signed a deal with Misfit, which sells smartwatches and other wearable gadgets, to build the world’s first solar-powered fitness tracker. It went on sale in early 2015.

Taking the concept further, Swarovski’s scientists, spurred by the Misfit deal, created another crystal this year that changed colour when touched, using sensors built into the crystal. The technique was on display at the Met Gala in May when the actress Freida Pinto wore a crystal-studded gown designed by Tory Burch, the first time Swarovski’s colour-changing technology had been used in a fashion design.

“We created a solar cell that isn’t boring,” said Michael Hutter, head of the applied research group behind the technology. “We want to be the missing link between the tech and fashion industries.”

The new devices are a tech-tinged extension of Swarovski’s longstanding marketing strategy for the fashion world. In the past, it has worked with design houses such as Christian Dior to affix crystals to dresses and jewellery. In the company’s corporate archive, Swarovski earrings worn by Marilyn Monroe in “Gentlemen Prefer Blondes” sit side by side with an oversize necklace once worn by Beyoncé.

Last summer, Mr. Langes-Swarovski and a dozen members of his management team flew to Silicon Valley for a weeklong field trip. They met with Google and start-ups including Diamond Foundry, which is building man-made, diamonds, as well as with the San Francisco 49ers.

At Levi’s Stadium, they saw how Wi-Fi hot spots and beacon technology — devices that sent custom smartphone messages to fans, including directions to the nearest concession stand or bathroom — had been built throughout the 75,000-seat arena. Such lessons, executives said, could be handy at Swarovski’s over-the-top corporate museum (complete with the world’s largest crystal and a huge waterfall designed to look like a giant) in Wattens.

The building, basically an all-singing, all-dancing amusement park to sell Swarovski merchandise to visitors, included avant-garde artworks and an outdoor lake with artificial clouds dotted with crystals floating above on almost invisible wires.

“When I heard about their visit, I was a bit confused,” said Brian Hoffman at StartX, a Silicon Valley tech incubator linked to Stanford University, who met with Swarovski’s team for about an hour. “Their industry is not one you typically associate with technology or innovation.” Swarovski’s executives peppered him with questions; he said, about how best to work with outside developers and to adapt to the latest online shopping habits.

Emanuel Riccabona, a Swarovski executive who took part in the West Coast visit, said the management team members left California with their heads spinning — and a plan to build a wider digital community with Swarovski sitting at the centre. That included creating a new e-commerce service aimed at making the company an online hub for third-party jewellers — a relatively cheap way to sell more jewellery, bags and other fashion items without having to invest in costly new retail stores.

Using a 3-D printer at Swarovski’s co-working space, which it opened in a production plant dating to about 1900.

In part, that new endeavour competes with the likes of Etsy, where a community of fashion-conscious buyers already can find an almost limitless supply of custom jewellery. But Swarovski hopes to use its global brand, and significant financial resources, to entice high-end designers and retailers (and high-end shoppers) onto its own site.

“Now we think about online platforms, not just products,” said Roland Harste, who runs Swarovski’s e-commerce division. The online service, which began in May, currently receives fewer than a million visitors a month, a relatively small number compared with online giants like Amazon.

Design houses including Oscar de la Renta already use the site, though people are still sent to third-party websites to complete transactions. Now, Swarovski takes a cut of each purchase, but it plans to move all digital sales onto its own platform soon.

Another lesson from the Silicon Valley trip, which was arranged by a former senior executive at Apple who is now advising Swarovski, was to focus more on partnerships that could give the company access to new tech ideas and trends. Such collaborations were not previously part of the company’s DNA.

That led to an investment of roughly $5m to refurbish Swarovski’s original manufacturing plant into the co-working office for start-ups, Destination Wattens, named after the village of 8,000 people. The 19th-century building also houses a Fab Lab, or high-tech D.I.Y. space including 3-D printers, robotic arms and other equipment used by local schools, Swarovski apprentices and anyone else who wants to tinker.

In its first year, the space has focused mostly on building a community of 20-something programmers and other digital natives willing to move to this village. Swarovski plans to invest eventually in some of the start-ups, as well as to run its own tech programs. Such so-called corporate incubators have become popular during the recent tech boom, as traditional companies have looked for ways to tap into new ideas before they upend their industries.

So far, few partnerships have resulted. The Fraunhofer Society, a German foundation that has turned scientific projects into business ideas, opened a three-person office here in September, but much of the refurbished factory remains empty.

For Lukas Kinigadner, a Wattens native who once worked at the Swarovski factory, the company’s willingness to be more collaborative is a change from his childhood, when there were few job opportunities beyond crystal making. Today, Mr. Kinigadner, 32, is running his own text-recognition start-up, Anyline, which he began in 2013 and which now employs 23 people in the Swarovski co-working space and in Vienna.

He decided to set up shop here, he said, partly because of his local roots — but also because the rent is so much more affordable than in the city. “When we started out, it would have been impossible to do it from here,” he said.

In February, his start-up received more than $200,000 in investments from a separate Swarovski family fund.  He said: “People now recognize that something is going on here with technology.”

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