Taxing times for Swiss watchmakers in China

If you’re a Swiss watchmaker, China is no longer the promised land. After the subprime crisis and a disastrous 2009, watch brands continued to surf a wave of growth, largely thanks to the Chinese dragon’s roar. China was the new eldorado and not a single brand could resist its lure. Now, in the wake of the anti-graft campaign and with an economy that is running out of steam, the sweet siren song has become a wail.

Flagging exports

A look at Swiss watch export figures shows the extent of the damage. In 2015, shipments to China dropped by 4.7% while exports to Hong Kong plummeted 22.9%. And this was just a taste of things to come, as the situation went from bad to worse. Over the first four months of 2016, sales of Swiss timepieces to China tumbled 15.8%, and by 28.2% to Hong Kong. By way of comparison, exports across all markets fell 9.5% over the same January to April period. Asia, and the Far East in particular (-16.1%), is clearly a burden on Swiss watch exports, with other markets providing little solace. April figures reveal that Europe is beginning to weaken, with exports slipping 15% in the EU: Italy (-12.3%), Germany (-11.1%) and France in particular (-31.4%) have been hardest hit.

The prime destination for Swiss watches, with a 15% share of the market in 2015, Hong Kong has been facing major difficulties for more than a year now. A special customs regime means it was long considered the most obvious gateway into the Chinese market. The situation, however, is evolving as this Special Administrative Region is caught up in the fallout from the changes taking place on its doorstep.

These include import duties, a hot topic since the introduction by the Chinese authorities, in early April, of a new tax on luxury goods brought into the country by Chinese nationals returning from trips abroad. Under the new rules, a watch purchased in Switzerland for the equivalent of 5,000 yuans (CHF 750) will be taxed CHF 450 on entering the country; that’s 60% of its value compared with 30% previously. Needless to say, anyone who “forgets” the souvenirs tucked inside their case faces severe penalties. Whether or not this new measure will fulfil its main objective to redirect spending to retailers in mainland China is open to debate.

“We need to see if China steps up border controls,” comments René Weber, an analyst specialising in the watch market at Bank Vontobel. “It’s still hard to predict what consequences these new measures will have in any kind of detail, although there is no guarantee that increased sales in China will make up for Chinese tourists’ loss of appetite when shopping abroad, given the anti-corruption campaign.”

What of the free trade agreement?

Latest observations paint a less than rosy picture. According to Global Blue, a shopping tax refund service, spending on luxury goods by Chinese tourists to Switzerland decreased by 7.8% in April, year-on-year. This comes on the heels of a 19.6% drop in March.

This fall in trade is even more marked in France, at 29.3% in March and 23% in April. It’s hard to say which factors are most to blame, from the new requirement for biometric visas in the Schengen area to terrorist attacks in Paris and Brussels, the economic slowdown in China, or the new tax on luxury goods whose hoped-for effect on domestic consumption appears to be slow in coming: Swiss watch exports to China plunged 36% in April as the market still has a glut of inventory.

Jean-Daniel Pasche, President of the Federation of the Swiss Watch Industry, has declared the new tax contrary to the spirit of the free trade agreement between Switzerland and China, which entered into force in July 2014. While not strictly speaking a customs duty, the tax will be on the table when the Swiss State Secretariat for Economic Affairs meets with its Chinese counterparts to discuss revisions to the terms of the agreement, which take place every two years. The first revision is scheduled for autumn. Until then, there could be little respite for Swiss watch brands.