While the luxury Swiss watch industry prospered from 2000 to 2014, when exports more than doubled to exceed $19 billion, the situation since 2015 has been strikingly different. The industry, which accounts for 10% of Swiss exports, faces a storm of negative factors. Export shipments fell only 3% in 2015 as a whole, but higher-end segments dropped more. One watchmaker at the annual Geneva trade show in January predicted that 2016 will be a “very, very difficult year.”
A key challenge is the exchange rate. The lifting of the Swiss central bank’s cap on the Swiss franc saw it appreciate almost 25% against the euro in just 10 days in January 2015. While the Swiss franc has subsequently weakened back towards parity with the US dollar, euro weakness and the descent of emerging-market currencies since then have restrained profits.
Another issue is deteriorating conditions in emerging markets. Swiss watch exports fell 23% in Hong Kong (where most demand is from mainland tourists), 29% in Russia, 12% in Malaysia, 7% in the Emirates, and 5% in China itself in 2015. Overall, CHF exports were down only 3% in 2015, thanks to resurgent sales in the UK and Italy, but the adjustment for the industry has arguably only just begun.
Meanwhile, the recession in Russia, slowdown and stock market crashes in China, and the collapsed oil price have decreased demand. These factors will continue into 2016 and possibly 2017. Many fortunes in emerging markets were made in resource and allied sectors that are now in shock.
Newer style and technology from other market segments are also impacting sales. In theory, the high-end market should not compete with the likes of Apple Watches and Fitbits, as most watches in the Swiss luxury market are priced over $500. However, in practice, pricey smart watches from Tag Heuer and the Union Horlogère brands, and H. Moser’s ironic, purely mechanical $25,000 Apple Watch “replica,” suggest the Swiss are beginning to feel some pressure from Silicon Valley.
Finally, the political climate in China is having an impact on the industry. China is in the third year of its anticorruption drive, with the number of ministries and state-owned companies under investigation due to double in 2016. Citizens posting photographs on social media of officials wearing luxury watches that state salaries could not have afforded, and fear of the Communist Party’s disciplinary unit, have put an end to the gift-giving “culture.” With 80% of Chinese luxury retail purchases made abroad, according to Bain & Co.’s luxury-market research, this has dragged on sales globally.
The industry’s pain points are part of a broader spectrum of phenomena. Wages in the developed markets are at last broadly rising, yet corporate profits are more unpredictable. As such, high levels of discretionary spending on luxury items are no longer a safe bet. Volatility in currencies is complicating luxury pricing decisions, as are growing e-commerce and tourism, both allowing buyers easier price comparisons.
In response to this coalescence of threatening factors, the industry may resort to consolidation, cost-cutting, and new marketing tactics. Smaller houses such as Parmigiani and Ulysse Nardin already cut staff in late 2015. Greubel Forsey has been forced to put out a cheaper, more accessible version of its entry-level series. Brands are looking at other various gambits: seeking out the US market outside New York (H. Moser), bringing in soccer legend Eric Cantona as a designer (Hautlence), and broadcasting their unique mechanical innovations (pretty much everyone).
This will not be as great an industry crisis as the “Quartz crisis,” which cut the number of Swiss watchmakers from 1,600 in 1970 to just 600 by 1984. However, there were six bankruptcies in the watchmaking and precision instrument sector in Switzerland in Q4 2015, and bankruptcy risk in the sector is already 9% above the Swiss national average, according to data from Bisnode, a Dun & Bradstreet Worldwide Network Partner in Switzerland.
Isaac Leung is a senior economist on D&B’s Global Data, Insight & Analytics team. Based in Marlow/United Kingdom, he covers China, India, and other parts of the Asia/Pacific region as a contributor to D&B Macro Market/Country Insight Products. His areas of interest include maritime economics. He has degrees from Cambridge University and the London School of Economics.