3 Aug 2016
China’s Watch Market
I. Market overview
According to mainland market reports, spending on watches has obviously been dampened by political factors over recent years and the market is basically in a state of digesting inventory. The reasons are twofold: First, the difference in price between the domestic and overseas markets for imported high-end brands has caused some consumers of high-end watches to make their purchases abroad. Second, the implementation of institutional reforms has curbed the expansion of the sales of high-end luxury watches purchased as gifts since the second half of 2012. Nevertheless, according to Euromonitor International, overall sales of watches still managed a 2.3% gain to top RMB64.2 billion in 2015.
According to a survey of mainland middle-class consumers conducted by HKTDC Research in 2016, the main reasons that consumers wear watches are: “bring out one’s personal taste and image” (50%), “like watches” (49%), “as an accessory” (48%) and “time telling” (40%). A considerable number of respondents agreed that “wearing a watch would give an impression of maturity, stability and punctuality to others”, or that “wearing a watch would give a better image on business occasions”.
The HKTDC survey revealed that mainland consumers have three watches on average. Among males consumers, ownership of business watches was highest (69%), followed by casual fashionable watches (69%) and smartwatches (55%). For female consumers, ownership of casual fashionable watches was highest (83%), followed by smartwatches (55%) and business watches (51%). When buying watches, men are generally concerned with brands while women are concerned with style and design.
Distinctive style/design is a main factor luring consumers into buying a watch. The HKTDC survey showed that should a new watch brand be launched in the mainland market, 66% of the consumers said they would easily be attracted by “distinctive styles/designs”, 63% said they would give more weight to “novel technology/function designs”, while 56% said that “suitable prices” would be the most important factor after all.
A mainland website conducted an online poll on watch consumption of Chinese consumers in 2015. According to the findings, 62.3% of the consumers would spend less than RMB10,000 on buying a watch, 21.3% would spend RMB10,000-30,000, 8.5% would spend RMB30,000-50,000, 5.0% would spend RMB50,000-100,000, and 3.0% would spend upwards of RMB100,000.
As mainland consumers look for finer things in life and develop more discerning tastes, they are more demanding about their watches. From traditional timepieces with practical functions, watches have gradually evolved into special consumer goods that are trendy and ornamental and offer brand value. Watches sold in the market mainly fall into three categories: work/business watches, casual fashionable watches and sports watches.
Work/business watches: Consumers mainly wear these to work or to attend important functions, but may also wear them during leisure hours. They have become a kind of status symbol in the eyes of high-income male consumers.
Casual fashionable watches: Fashionable in design, these watches mainly serve ornamental purposes like necklaces and bracelets. They are welcomed by young female consumers and are mostly worn during leisure hours. Sometimes they are also worn to match business outfits.
Sports watches: These have students and sports enthusiasts as main consumers.
Other types of watches include antique watches, multi-function watches and cartoon watches.
From product developers to tech-savvy consumers, smartwatches have recently drawn much attention from the media and the fashion sectors. Some domestic and foreign makers have ventured into the smartwatch business. According to a survey on consumer preferences in the mainland wrist watch market, 26% of those polled said they are happy to buy a smartwatch and 33% said they are happy to try one. The main reason for the positive reception is that the smartwatch is a multi-function gadget for making phone calls, tracking health and recording schedules, etc.
Over 200 brands of domestic and imported watches are sold on the mainland. There are more than 60 imported brands, including Casio, Citizen, Rolex, Tissot, Longines, Omega, Rado, Tudor, Titoni and Seiko. Domestic brands include Fiyta, Ebohr, Rossini, Tian Wang, Poscer and Kingtis.
II. Market competition
According to a China Economic Weekly survey, China's watch market has always been divided into high-end, mid-range and low-end segments. The high-end category is dominated by Swiss products while the low-end segment is mostly made up of domestic brands. The market in between is the main battlefield for US, European, Japanese, South Korean, Hong Kong and local manufacturers.
In recent years, Chinese watch companies have gradually shifted their focus from competing for a relatively simple and homogenous market to independent innovation, protection of intellectual property rights and application of marketing strategies. More established domestic brands like Fiyta, Tian Wang and Seagull even have developed independent technology chains. These brands conduct thorough market research before launching new models each year.
Some domestic brands have done quite well in securing their market share in spite of strong competition from foreign rivals. Leaders of domestic brands include Rossini, Ebohr, Tian Wang and Fiyta. Tianjin Seagull has mastered the three most advanced technologies of Tourbillon, minute-repeater and moon phase perpetual calendar in watch-making in recent years and is now able to mass produce these types of watches. The company has proprietary intellectual property rights for over 90% of its products.
China has made a lot of headway in the development of watch movements, evolving from "made in China" to "created in China" and from self-sufficiency to the export of parts and components. Chinese watch movements now account for about 27% of global sales. Greater consumer demand for watches of different grades makes it imperative for watch movement manufacturers to upgrade their assembly techniques and promote the further segmentation of the sector.
Watches have become fashion accessories and changes in consumption concepts have also broadened the market for fashionable timepieces. This is as true for specialist brands as for comprehensive brands. The former include Casio, Swatch and Tissot while the latter include Armani, LV and Gucci. The marketing strategy of fashionable watches is to launch a few hundred new models each year as fashion accessories for different seasons.
It is reported that in Switzerland, the ratio of male and female consumers of high-end watches like Montblanc is 60:40. In China, the ratio is 75:25. The relatively small share of female consumers is, firstly, attributable to the limited choice of high-end watches targeted at female consumers in the domestic market. Secondly, fewer Chinese women have the habit of wearing watches. Yet the situation is changing and more women are buying luxury watches thanks to the growing opportunities for women to move up the corporate ladder. This shows that there seems to be considerable market potential for ladies' watches in China. Many brands have in fact strengthened their research, development and promotion of ladies' watches.
III. Sales channels
According to statistics compiled by Fortune Character Institute, there were 6,693 watch shops (including dealerships and directly-operated shops) in China in April 2013. Among these, 5,967 were dealerships and 726 were directly-operated shops (including flagship stores, boutique stores and image stores). There is a higher saturation of watch shops in Beijing, Shanghai, Liaoning, Guangdong and Zhejiang.
Another China watch industry report pointed out that as the pace of urbanisation quickens, people in places other than the big cities have quickly amassed wealth. Consumption of high-end watches is also seen to be expanding from first-tier cities to second- and third-tier cities. Meanwhile, the principal consumers of high-end watches in first-tier cities are no longer local people but are people coming from second- and third-tier cities. High-net-worth individuals in first-tier cities tend to make purchases outside the country.
Imported brands usually join hands with mainland companies to market their products. By setting up dedicated counters in department stores and high-end malls, they can make full use of existing sales channels to expand their market. This is the principal means adopted by most mid-range and high-end brands.
Opening specialty stores to attract new franchisees is another major sales channel for imported brands as well as a strategy for achieving diversification in marketing. This can also provide consumers with more products to choose from and with better after-sales service.
Low-end watches have basically been relegated to small shopping centres and wholesale markets. For example, there are many wholesale watch markets in the vicinity of the Guangzhou Railway Station West Road, Guangzhou Railway Station South Road and Huanshi West Road. The Shenzhen Watch and Clock Components Market is a major supply base for Chinese watch and clock enterprises.
The internet has become an important channel for the sales and marketing of watches. Consumers can buy watches that are great value for money through C2C online stores and B2C e-commerce platforms like flagship Tmall stores and official websites of famous brands. Merchants can establish and promote their brands using the B2C mode. Vertical (industry-specific) B2C websites have also gained popularity in recent years. Consumers can shop online at websites such as Wanbiaowang (wbiao.cn). As e-commerce platforms are becoming more mature on the mainland, industry experts addressing the 12th China Watch & Clock Summit Forum have called on mainland watch makers to capitalise on the internet to expand sales.
Physical stores (department stores, large shopping malls and specialty stores, etc) are the main watch buying channels for consumers. According to HKTDC’s survey, 84% of the consumers said they would buy watches in physical stores, the main reasons cited are “genuine products guaranteed”, “trying on in person” and “after-sales service guaranteed”. Of the respondents who have been buying watches via physical channels, 79% indicated that “if I come across a watch to my liking, I will shop online” and the price range they are willing to pay is RMB4,000-6,999. Only 21% of the respondents said “I have reservation about buying watches online and may not give it a try”. Of respondents who have shopped watches online, the main reasons are: “more choices in brand/style”, “low prices” and “convenient/delivery available”.
IV. Import and Trade Regulations
The import tariffs of selected watch products in 2016:
In principle, all goods of Hong Kong origin are eligible for zero tariff treatment on the mainland under CEPA and watch products are eligible for this treatment. This benefits Hong Kong manufacturers looking to enter the mainland market. Earlier, considering the actual situation of the manufacturing of watches in Hong Kong, the General Administration of Customs has revised the CEPA Rules of Origin for Watches by adopting the principles of "manufacturing procedures + value-added content requirement" and "manufacturing procedures + own brand". The new rules were intended to encourage Hong Kong manufacturers to export ODM watch products to the mainland under zero tariffs.
"Manufacturing procedures + value-added content requirement" principle:
Assembly of component parts and accessories into watch. The principal processes are assembling watch movement into the watch body, assembling of component parts and accessories (watch buckle, watch band, dial and battery, etc.) into watch, testing, time adjustment and quality control, as well as fulfilling the value-added content requirement.
"Manufacturing procedures + own brand" principle:
Assembly of component parts and accessories into watch. The principal processes are assembling watch movement into the watch body, assembling of component parts and accessories (watch buckle, watch band, dial and battery, etc.) into watch, testing, time adjustment and quality control. The exterior design of the watch should be carried out in Hong Kong. The watch should belong to a "Hong Kong brand" jointly determined by Hong Kong and the Mainland authorities. There should be clear Hong Kong origin marking (e.g. "Manufactured in Hong Kong", "Made in Hong Kong" or "Hong Kong", etc.) on the shell of the "Hong Kong brand" watch.
There are three criteria determining a CEPA "Hong Kong brand" applicable to watches:
i. owner of the brand must be a Hong Kong registered company with a valid business registration, and a valid factory registration for at least one year;
ii. owner of the brand must complete the trademark registration of their brand name goods under the Trade Marks Ordinance (Laws of Hong Kong Cap. 559), and be the registered owner of the brand; and
iii. the registered trademarks/brands mentioned above include Hong Kong original brands and foreign brands wholly acquired by a Hong Kong registered company.
According to the Circular on the Adjustment and Perfection of the Consumption Tax Policy jointly issued by China’s Ministry of Finance and State Administration of Taxation in 2006, a consumption tax of 20% is levied on watches selling at RMB10,000 or above (excluding VAT).
According to the National Technical Committee on Watches and Clocks of the Standardisation Administration of China, the working group responsible for drafting the Specifications for the Limitation of Harmful Substances Found in Watch Components Having Direct Contact with People's Skin has already completed and submitted the draft. The standard is now pending for review and accreditation. Since the harmful substances named in these specifications concern people's health, these rules will likely become mandatory standards for watch-making to protect the interests of consumers.
According to the China-Switzerland Free Trade Agreement which came into effect on 1 July 2014, China will ultimately apply zero tariffs on 84.2% of all imports from Switzerland. Among these imports, tariffs on Swiss watches will be reduced by 60% over the next 10 years and by 18% in the first year. Since the agreement does not cover import-related taxes, VAT and consumption tax, the price of Swiss watches is not likely to drop significantly.