After a strong run in 2019, the financial markets are beginning to take full measure of the impact of the coronavirus epidemic on global economic growth. And they don’t like what they see. Market indexes have suffered severe corrections since February 19, losing some 8% in three days of trading. Napoleon warned, “Let China sleep. For when she wakes, the world will tremble.” Now that China is in intensive care, the world is praying for a swift recovery. For over a month now, the second-largest economy is stalling. While there are no official figures, it’s estimated that between 30% and 50% of the country’s economic activity is at a standstill. With no workforce and no means of transporting goods, factories are forced to stay closed. Consumption has also plummeted, confirmed by the number of new car sales, down to 5,000 vehicles for the first two weeks of February compared with 60,000 for the same period one year earlier.
Under Swiss federal law, 40% of the value of a Swiss watch can come from components made outside Switzerland.
The risk of seeing Chinese production dry up raises the delicate question of imports, particularly from China, for watches labelled Swiss Made. Nothing wrong with that, you might say. Swiss legislation is sufficiently “lenient” to allow it. Swissness — the name given to the 2013 revised criteria for indications of origin — requires at least 60% Swiss value for industrial products, including watches. Or to look at it from another angle, 40% of the value of a “Swiss” watch can come from components made outside Switzerland. Given the difference in the hourly rates paid to a Swiss worker and to a Chinese worker, this 40% leaves Swiss manufacturers ample room for manoeuvre.
A closer look at importations of watches and watch parts to Switzerland shows a constant rise over the last two decades, from CHF 1.1 billion in 1990 to CHF 2.6 billion in 2010 then a further rise to CHF 3.8 billion in 2019, of which close to CHF 800 million from China. This makes China the main supplier for Swiss watch brands. “Of this amount, around CHF 200 million concerns finished watches,” comments Jean-Daniel Pasche, President of the Federation of the Swiss Watch Industry. “Consequently, importations of Chinese components for Swiss watches represented between CHF 500 and 600 million last year. So far there have been no indications of any shortage, which is entirely plausible in view of stocks and lower consumption since the start of the coronavirus epidemic. Whether any brand would dare to openly deplore such a situation is a different matter. Consequently, we cannot completely exclude problems of supply in the coming weeks. It’s all a question of how long this health crisis lasts.” As Jean-Daniel Pasche goes on to note, this could be the opportunity for Swiss brands to envisage home-grown alternatives to Chinese components. The Alpine nation has its own fabric of suppliers, although costs are not the same. A watch case that is made in China is priced at less than one-tenth the cost of a Swiss-made case. Over the past thirty years, globalisation has seen entire industries relocate to China and the situation is unlikely to change where Swiss watches are concerned without tougher legislation.
Swiss manufacturers face a potential double whammy of supply shortages and plummeting sales to South-East Asia.
This will inevitably be a disastrous first half-year for China, and potentially a double whammy for Swiss watch brands with a decline in sales to South-East Asia that could be hard to offset in a context of supply shortages. The Year of the Rat couldn’t have got off to a worse start.