Well, almost scratch. The designer starts off with the basic shapes but, from there, you'll see it go from shaded blobs to coherent blocks, then to polygons before finally being finished off with all the small details. I can say, from experience, it's pretty much exactly how artists go about creating in-game 3D assets.
It's a time-lapse video and amounts to almost four minutes; it'd be nice to know how long the total process took. Still, this inside peek is a great move on Sony Online Entertainment's part, if only to help fans understand the work that goes into making any large-scale title. Heck, as a publicity move, it beats the hell out of a forgettable press release.