PARIS — Swiss watch exports plunged 7.9 percent in September on the back of weakness in Asia, which accounts for more than 50 percent of total exports in terms of value.
Exports of Swiss timepieces totaled 1.8 billion Swiss francs, or $1.85 billion at average exchange rate for the period, according to the Federation of the Swiss Watch Industry.
Hong Kong showed no signs of improvement, falling 18.2 percent, while China posted a 13 percent decline. “Singapore, the United Arab Emirates, South Korea and Taiwan also recorded steep declines,” the federation said, adding that the United States, down 17.6 percent, logged “its worst monthly downturn in five years.”
“This negative change has spread to other, hitherto more robust Asian markets, and casts something of a shadow over prospects for the year 2015,” the federation acknowledged.
According to RBC Capital Markets analyst Rogerio Fujimori, Singapore and South Korea contracted by as much as 15 percent and 35 percent respectively, though “a key change versus 2015 year-to-date is the significant contraction in North America, likely driven by financial market volatility.” In a research note, he characterized the difficult trading conditions in North America as “an incremental negative in our view.”
Europe, which grew for the tenth consecutive month, could not offset the poor results in other markets.
Japan grew moderately, up 3.6 percent compared to September 2014.
By category, the downturn affected mostly steel timepieces, which dropped 17 percent in volume terms, while those in precious metals slipped 12.7 percent. Although bi-metallic watches reported an upturn of 28.3 percent in the gold-steel category, they had practically no impact on the results.
All price segments logged declines in September. Most affected were timepieces priced between 200 francs, or $209 at current exchange, and 500 francs, or $532. They fell 18.3 percent in volume.
“Given September represents the sixth consecutive month of decline for Swiss watch exports suggests very little positive takeaways,” said Fujimori, calling the September results disappointing. “Today’s Swiss watch data points are unlikely to support either Richemont or Swatch in the short-term in our view,” he added.
Citi’s Thomas Chauvet noted that the September results were in line with broader industry trends.
“The September data is not a complete surprise given the broad-based miss in third-quarter luxury sales [this year], marked by deteriorating trends in Asia, excluding Japan, and the U.S., two important watch markets,” he said. “We remain concerned about continued disruption in the Swiss watch industry’s largest market Hong Kong, adverse China-related news flow, [including] poor economic indicators, yuan devaluation and Shanghai stock market correction, the recent industry slowdown in the U.S., potential impact of a lower oil price on Russian and Middle Eastern demand and the Swiss franc’s strength.”
He noted these trends are “partly offset by solid growth in most European markets, reflecting parallel markets and tourist demand on a weak euro, and in Japan, [driven by] local demand and Chinese tourism.”
A positive in the long-term is also the 2013 agreement between the Swiss Competition Commission and Swatch Group regarding the organization of future supply, according to Citi.
“From 2020 onwards, Swatch will be free to decide whom and how much to sell movements to, [making it possible] to better utilize its manufacturing capacity for the benefit of its own brands, in particular when demand recovers,” Chauvet said.
“These changes should also continue to encourage large watch players such as Richemont and LVMH to further invest in in-house manufacturing. Smaller players in the industry could face greater pressure if they are unable to deploy enough capital to build the necessary industrial base, potentially leading to tactical industry consolidation,” he observed.
The 2013 free trade agreement between China and Switzerland, meanwhile, which foresees import duties for 90 percent of Swiss watches imported by China to fall between 4.4 percent and 5 percent over the next 5 to 10 years, is expected to have “marginally positive implications…depending on whether the brands will pass on these lower duties to the end-consumer,” Chauvet noted, suggesting that this would also be “limited to some repatriation of tourist demand into the domestic Chinese market.”
“Europe, Hong Kong and Macau are likely to remain Chinese consumers’ preferred places of purchase for Swiss watches, in our view, due to a significant pricing differential with Mainland China, even after the cut in Chinese duties. We also believe that there are risks of an increase in sales tax and VAT on Swiss watches and luxury goods,” he noted.