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One More Heavyweight Factor Leading to the Decline of the Watch Industry in Hong Kong: China’s New Cross Border Consumption Legislation

The Hong Kong watch market has been in decline due to a decrease in demand for high mechanical watches. Due to the higher unit price of high mechanical watches, they account for 68% of the market value of watches in Hong Kong.

HK-retail-value-sales-breakdown-of-watches-in-2015

Source: Euromonitor International

The watch market in Hong Kong is facing tough times with four key problems plaguing the industry: The clampdown by the Chinese government on gift-giving; appreciation of the Swiss Franc; rising rental rates, and the impending exodus of Chinese tourists from Hong Kong. These have all contributed to the decline in demand for high mechanical watches which is a driving force behind the growth rate of the Hong Kong watch industry. Moreover, with China’s new cross border consumption legislation that was announced recently, the decline of Hong Kong’s watch industry is expected to deteriorate further.

Four key problems plaguing the Hong Kong Watch industry

The first key problem was the clampdown by the Chinese government on gift-giving back in 2015 which has impacted the Hong Kong watch industry, especially within high mechanical watches. High mechanical watches saw a decline of 7% in retail sales value from 2014-2015. In comparison, high mechanical watches fell by just 1.4% in retail sales value worldwide from 2014-2015

Secondly, the condition of the watch industry in Hong Kong was further exacerbated with the appreciation of the Swiss Franc. The appreciation of the Swiss Franc led to a rise in prices of imports from Switzerland, which impacted the import prices of high mechanical watches in particular, given that a majority of high mechanical watches are manufactured in Switzerland. Swiss Watch exports to Hong Kong, which is ranked the number one country based on the value of Swiss Watch exports (in CHF in millions), saw a decline of 31.6% in value from 2015-2016, according to the Federation of Swiss Watch Industry. The appreciation of the Swiss Franc places downward pressure on the profit margins for watch retailers in Hong Kong as it is drives their costs higher.

Moreover, watch retailers in Hong Kong have already been facing the problem of high rental rates. High rental rates caused prominent watch brand Tag Heuer, under the parent company LVMH Moët Hennessy Louis Vuitton, to close one of its outlets along Russell Street in Causeway Bay back in 2015. Not only are luxury watch brands affected, mid-priced watch retailer, City Chain, was also not spared from slipping margins driven by high rental costs.

Lastly, mainland Chinese tourists are exploring other destinations like Japan for their shopping extravaganzas, which explains the exodus of Chinese tourist spending from Hong Kong. For Chinese tourists who are looking for luxury shopping destinations, Japan has become an alternative choice due to the increase in political uncertainty in Hong Kong following the protests in February 2016, coined the Fishball Revolution.

Year-on-year growth rates of number of tourist arrivals from China to Hong Kong and Japan

Japan-Hong-Kong-Tourists

Source: Euromonitor International
Note: Dotted lines represent forecasted data

A further blow to Hong Kong’s declining Watch Industry

With four key problems plaguing Hong Kong’s watch industry, growth is expected to decline even further with the enactment of China’s new cross border consumption legislation. Recently, the Chinese government announced a rule to curb cross-border purchases. This was a bid to curb the “daigou” phenomenon that is fuelling the grey market in China. The daigou phenomenon involves companies facilitating the purchase of goods overseas for local consumers in order to escape the taxes that overseas products imported through the local distribution network are subjected to. Literally, the meaning of “daigou” translated from Chinese to English means “helping to buy”. Additionally, due to the taxes imposed on luxury goods in China, most goods that consumers opt to purchase through the daigou channel are luxury products due to the high savings they are able to enjoy as compared to purchasing these goods from local boutiques.

However, under this new cross border consumption legislation, daigou companies would no longer be able to disguise their bulk purchases as personal overseas purchases. Under this rule, personal overseas purchases would be subjected to the same tax rates as imported products. Personal postal articles would be subjected to a 10% tax rate. Additionally, there is a maximum capacity of RMB 2,000 (approximately US$322) for every cross-border transaction and a maximum capacity of RMB 20,000 (US$3226) per person per year for cross-border transactions. This not only prevents excessive cross-border transactions by individuals, it also cripples the function that daigou companies serve.

Daigou companies that used to bring overseas products in to China, bypassing the import tax, would no longer be exempted from taxation. Therefore, this eradicates the value proposition of these companies. Therefore, with this new cross border consumption legislation, the watch industry in Hong Kong is expected to deteriorate even further, given that Hong Kong is the closest luxury market where the Chinese flock to for their shopping extravaganzas.

A pivotal point for the Hong Kong watch industry

In 2016, exports of Swiss mechanical watches in volume have been in decline from January to March, according to the Federation of the Swiss Watch Industry. Exports of Swiss mechanical watches fell from 606,000 in January to 569,000 in February and 527,000 in March. With a majority of the watch industry in Hong Kong driven by high mechanical watches, herein lies the crux of the situation as to whether the increase in cost should be passed on to consumers. Should the retailers pass on the increase in cost to the consumers, this would further drive demand down south, and ultimately force retailers to implement price promotions or risk shutting their doors. 2016 is a pivotal point for the Hong Kong watch industry and should there be more legislation implemented by China to curb the grey market, the Hong Kong watch industry may not have seen the worst just yet.

Note:
Basic Watches are defined as watches priced less than US$150
Mid Watches are defined as watches priced between US$150-1,000
High Watches are defined as watches priced more than US$1,000

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