From the year 2000 to 2012, Swiss watch companies enjoyed unprecedented growth in China, but the massive export surge ended with the introduction of China’s anti-corruption campaign and has been going down ever since. While exporters don’t predict a huge rebound anytime soon, they do expect Chinese consumers to make up for the decline in years to come.
According to a report by Credit Suisse, Swiss watch exports to China were worth CHF16.8 million (US$15.5 million) in 2000, but ballooned by a massive 97 percent to CHF1.6 billion in 2012 (US$1.8 billion). During these 12 years, the industry only saw a temporary halt in 2009, but for the most part, China’s hunger for luxury goods was a top source of growth for the industry.
This all came to a halt with China’s anti-graft campaign. Around the time that the Chinese government announced that officials would no longer receive public funds for luxury goods, the value of Swiss watch exports fell for the first time in two and a half years. Monthly export value has been on a downward trend ever since, with watches of cheaper price points being exported.
Although China’s slowing GDP growth, more Chinese luxury shoppers going abroad, and the crackdown have all contributed to the country’s slowing luxury sales, the Swiss watch industry is considered to be one of those most directly impacted by the crackdown. Luxury watches are a favored gift for government officials in China, and have even caused the downfall of some, such as an official nicknamed “Brother Watch” who was accused of corruption after his expensive wrist piece generated scrutiny on Sina Weibo. Estimations by Bank of America Merrill Lynch find that around 30 percent of luxury product sales in China are for gifting, with one third of these intended for government officials (although these statistics are notoriously difficult to track).
While the political climate certainly poses risks for the industry, there are still several causes for optimism. This summer, China and Switzerland signed a free-trade agreement, with a “watch memorandum” that stated China will reduce tariffs on watches in stages by 60 percent over 10 years, as well as offer more protection against fake goods. While this memorandum made watches an exception to goods that would be traded freely, it will still help to chip away at the 11 to 23 percent customs tariff and 20 percent sales tax on luxury products that make Swiss watches about one-third more expensive in China than at home. In addition, expansion of the Chinese market is expected to help the industry in the coming years, according to Credit Suisse. The firm predicts that the number of millionaires in China will double to two million by 2017, along with rising upper-middle-class incomes.
In the meantime, the Swiss watch industry is ramping up its efforts to court Chinese consumers through creative marketing efforts. In September, the Fondation de la Haute Horlogerie held the first ever Watches & Wonders exhibition in Hong Kong, which featured 13 Richemont brands. Companies are also striving to provide consumers with VIP treatment, such as Hublot’s special Beijing dinner with Kobe Bryant that was offered to top clients. In addition, expect many more special-edition China watches in the months to come as Chinese New Year approaches, such as Vacheron Constantin’s year of the horse watch series.
There are two main areas of competition that Swiss watchmakers need to watch out for in China. One is Chinese luxury watchmakers, who have “additional time and scope to position themselves” in the market thanks to the gradual lifting of tariffs, says Credit Suisse. This means Swiss companies will have to continue to strive to find creative ways to offer special services and maintain customer loyalty to keep up in the market. The second “competitor” is actually the brands’ own stores abroad, where prices are much cheaper. This may not be direct competition, but companies must ensure that they embrace the concept of the global Chinese consumer, especially in Switzerland, which is becoming increasingly popular with Chinese tourists.
According to Credit Suisse, “Given the rapid pace at which the China market has developed in preceding years, the decline in Swiss watch exports should be seen as a normalization rather than a slump,” and “China is likely to continue growing as an export destination.”