China calls time on expensive watches in face of crackdown

May 3, 2013 5:30 pm

China calls time on expensive watches in face of crackdown

By James Shotter in Zurich

Before accompanying the Chinese premier, Li Keqiang, on a visit to a neighbourhood ravaged by the earthquake in Sichuan two weeks ago, Fan Jiyue, a county party chief, took an important precaution: he removed his wristwatch.

His concern was understandable. China’s new leadership is cracking down hard on ostentatious displays of wealth by party officials and corruption. As a result, expensive watches – a popular gift given by those seeking to win favour with Chinese businessmen and politicians – have become a source of unwanted attention.

Unfortunately for Mr Fan, unwanted attention is precisely what his move brought him: the watch-shaped tan lines on his wrist were spotted by China’s eagle-eyed netizens, and pictures of the local official’s unadorned arm went viral on the Chinese internet. With predictable alacrity, the country’s censors had soon blocked searches for Mr Fan.

This sudden hostility to extravagance, which set in last autumn after Xi Jinping took over as Chinese president, has led to a big slowdown in Swiss watch exports to China – which over the past 10 years has been the fastest growing market for the Alpine nation’s timepieces.In 2002, China’s Swiss watch imports were worth SFr94.2m. By 2012 that figure had surged to SFr1.65bn ($1.77bn), and China had become the world’s third-biggest buyer of Swiss watches.

Just as significantly, over the same period the value of Swiss watch exports to Hong Kong – where many mainland Chinese buy watches to take advantage of favourable tax rates – has almost tripled to SFr4.4bn, making it by far the world’s largest Swiss watch market.

However in recent months, the trend has gone into reverse. In the first three months of this year, the value of Swiss watch exports to China is down 26 per cent compared with the same period a year ago. Exports to Hong Kong are 9 per cent lower.

March was particularly disappointing, with sales to China down 31 per cent and Hong Kong down 8 per cent. “This is one of the worst monthly performances in Greater China for over three years,” wrote Thomas Chauvet, an analyst at Citi, in a note to clients.

At the glitzy annual Baselworld watch and jewellery fair this week in Switzerland, however, watch executives were putting on a brave face.

“Of course business in China is slowing down. The whole luxury business is slowing down,” says Jean-Frédéric Dufour, chief executive of Zenith, one of LVMH’s stable of brands.

“But it will start up again. China is moving forward.”

François Thiébaud, head of the Swiss exhibitors’ committee at Baselworld, and also president of Tissot, one of the many marques owned by the Swatch Group, takes a similar line.

“In the US you have a slowdown every four years because of the [presidential] elections. But then things pick up again,” he says. “It is the same in China. They have had a change of leadership and spending has slowed down because people are uncertain. When they are more certain, they will spend again. We have already seen more Chinese at Basel this year.”

Just how soon the recovery will come, though, is moot. “I suspect [the crackdown] will last through most of the year if not longer,” says Jon Cox, head of Swiss research at Kepler Capital Markets.

However, not all watchmakers have been equally affected by Mr Xi’s war on extravagance. Mr Thiébaud says Tissot has been spared, suggesting that its watches – the bulk of which sell for between SFr300 and SFr1,000 – are not in the expensive segment preferred by those seeking to win favours from Chinese officials and businessmen.

Analysts agree. “[The crackdown] will mainly impact the high end – watches retailing for $10,000,” says Mr Cox.

Yet even within the high end, some watchmakers have managed to dodge the slowdown. Thierry Stern, head of Patek Philippe, one of the most exclusive watch brands, says his company’s strategy of limiting production to a maximum of 53,000 pieces per year, even in the face of much higher demand, means that a fall in Chinese buying is not a problem.

One big reason why the executives milling around the watch stalls in Basel remain relatively optimistic is that although Chinese may now think twice about buying at home, they still seem to be buying abroad, particularly in Europe. “At the high end, people often want to buy an object in the place it was made,” says Mr Thiébaud.

A further reason for watchmakers’ equanimity is that previous anti-corruption initiatives in China have been more notable for their initial severity than their durability.

Yet even if Mr Xi’s crackdown proves more enduring than those of his predecessors, China’s inexorable economic growth and the emergence of its middle class will eventually offset its chilling effect on illegitimate gift-giving, says Mr Cox.

“Ultimately the rising wealth of private sector will fill the gap,” he says. “In the medium term I am optimistic on the prospects.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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