Swiss Watchmakers Court China’s Young and Trendy Buyers

New York Times, September 29, 2014

BASEL, Switzerland — In March this year, as the Baselworld luxury watch and jewelry fair opened at this city’s sprawling convention center, the Digital Luxury Group, a Geneva-based market research firm that focuses on the watch industry, issued a media alert touting its collaboration with the prominent Chinese fashion blogger Peter Xu.

Mr. Xu, 27, a former English tutor turned social media star, has more than 1.3 million followers on Sina Weibo, China’s answer to Twitter. He is a frequent guest at the Milan and Paris couture shows. Yet prior to March, the watch world was, for him, uncharted territory.

The Digital Luxury Group saw an opportunity. “We asked ourselves, ‘Who are the trendsetters?”’ said David Sadigh, its founder and chief executive. “One of them is Peter Xu. He was talking a lot about fashion and not enough about watches, so we said we’d bring him to Basel as our guest — to connect some of the novelties of our clients with an audience of highly influential Chinese.”

While Mr. Xu is among a new breed of gatekeeper in China — providing access to young, fashionable, digital-savvy consumers — the effort to endear Chinese taste makers to fine timepieces has been the defining narrative of the Swiss watch industry for the past 15 years. That is when China emerged as the only market capable of absorbing its ambitious production increases.

“We saw little growth in Russia, not so much in the Middle East and very little in Latin America, which was supposed to be a big market,” said Julien Schaerer, managing director of Antiquorum, a leading watch auction house. “So the growth of the watch market almost exclusively pooled into China.”

That expansion has now slowed — to single-digit growth today from 20 percent to 30 percent annual increases at the height of the global economy in 2007 — and watchmakers are re-evaluating their China strategies.

This is not the first time the Swiss have had to do some soul-searching over their relationship with buyers in the Far East.

Chinese connoisseurship in the realm of timekeeping dates back centuries. Historians cite the elaborate water clocks of the 11th century Song Dynasty as examples of the Middle Kingdom’s age-old fascination with horology. Besotted with automatons and enameled pocket watches from makers such as Jaquet Droz and Piguet & Meylan, the Chinese upper crust enjoyed a steady diet of Swiss-made specialties starting as early as the 16th century.

In 1818, Edouard Bovet, a watchmaker from the Swiss village of Fleurier, led a bold incursion into the Chinese market when he arrived in Canton on a ship operated by the East India Company.

“He sold watches directly to the Chinese, completely undercutting any agent system set up by other firms,” said Michael Friedman, a historian with the Swiss brand Audemars Piguet.

The appetite for rarefied timepieces among the Chinese elite remained robust until Mao Zedong’s Cultural Revolution. But in the 1970s, when the avant-garde watchmaker Richard Mille made his first trip to China as part of a French delegation selling watches to government officials in Beijing, he found a market distinguished by its simplicity.

“They were choosing one model for gents and one model for ladies — big units, very cheap,” Mr. Mille said. “It was very basic. They had to wear watches to read the time.”

It wasn’t until the early years of the new millennium that China, with its legions of newly minted millionaires, again began to show interest in the Swiss watch industry’s most elaborate and expensive products.

In 2000, Swiss watch exports to China amounted to 45 million Swiss francs, or $48 million, but China’s entry into the World Trade Organization a year later kicked off a decade of what Jean-Daniel Pasche, president of the Federation of the Swiss Watch Industry, described as “endless increases.”

By 2005, annual exports to China had grown to 351 million francs. By 2010, that figure jumped to 1.1 billion francs. That is not counting the impressive growth clocked by Hong Kong, an important shopping destination for mainland Chinese and the world’s No. 1 market for Swiss timepieces since it overtook the United States in 2008.

Intoxicated by the prospect of double-digit year-over-year increases, Swiss watchmakers found themselves engaged in a spirited battle to woo China’s biggest spenders. From wristwatches featuring enameled dials painted with Chinese zodiac symbols, to complicated timepieces in limited editions of 88 — to signify the good fortune associated with the number eight in Chinese culture — a slew of products created specifically for consumers in the Far East seemed to reach a crescendo every January, when brands such as Cartier, Jaeger-LeCoultre and Vacheron Constantin presented their newest models in Geneva at the Salon International de la Haute Horlogerie, a high-end trade fair.

The Swiss, however, weren’t satisfied with merely selling products to China. They dreamed of colonizing the country’s retail scene as well. Virtually every major brand rushed into the country’s two most obvious retail centers, Beijing and Shanghai, to break ground on extravagant boutiques. Those with an early-mover advantage on the mainland, like Omega, which made a big push into the market in the 1990s, quickly expanded to the country’s second- and third-tier cities, too.

“Northeast of Beijing was where the brand really started to thrive: Shenyang, Dalian, Anshan,” said Stephen Urquhart, president of Omega, which further bolstered its position when it served as the official timekeeper of the 2008 Olympics in Beijing. “It’s not a federalized country; it’s got a central government. But in terms of business and distribution of wealth, it’s like the U.S. — there are pockets everywhere.”

In the heady years at the dawn of the new millennium, tapping into those seemingly bottomless pockets of wealth was not exactly difficult. “Things evolved very rapidly,” said Stephen Forsey, whose Greubel Forsey brand opened the Time Art Gallery in Shanghai in 2011 to appeal to collectors of high-end timepieces and modern art. “People who we met who were in a price bracket that’s quite high, up to $20,000 — those people in one year moved more to $50,000 and the next year to $100,000.”

Although Swiss watch exports to China slipped 15.2 percent in 2009, at the nadir of the financial crisis, they quickly rebounded. Much of this resilience of demand for Swiss watches was linked, however, to the country’s endemic problem with government graft. “Watches were thrown around as gifts and bribes so often in China it was almost a joke,” said Ariel Adams, founder of aBlogtoWatch.

When President Xi Jinping took office last year, that began to change. His much-publicized campaign against corruption hit many Swiss watch brands hard — particularly those that had placed all their eggs in the China basket and were already feeling the pinch of the country’s economic slowdown. Swiss watchmakers saw their exports to China fall in 2012, and again in 2013.

So far, 2014 figures appear to be steadier, but Mr. Pasche of the industry federation remains cautious. “July was a positive month for exports to China, but we have to see if this evolution is concrete or not,” he said in a recent interview.

The Swiss predilection for discretion means that few watchmakers are willing to say if they’re hurting. In fact, many prefer to minimize the effects of the slowdown.

“It’s all relative,” said Omega’s Mr. Urquhart. “China’s such a big market, obviously. If we sell one watch less, it’s not going to affect the market overall.”

Meanwhile, industry observers note that, slowdown or no, China still represents a sizable chunk of business.

“The China market is extremely strong, but maybe the buyer is not as outlandish as they were a couple years ago,” said Anish Bhatt, founder of Watch Anish, an Instagram feed that has amassed more than 700,000 followers since 2012 and five months ago spawned a China-specific feed, Watch Anish Asia. “It was only a matter of time before things leveled off.”

The most prevalent response to the China question, however, has been to shift attention to Chinese travelers, who, by all accounts, are still spending lavishly. According to the World Tourism Organization, Chinese travelers were the world’s top spenders in 2013, with $129 billion in expenditures, a 26 percent increase over the prior year.

“The Chinese luxury watch business is primarily a business operated outside China — in Macau or Hong Kong, or Switzerland, Paris, Italy, Germany and U.S., where you have the major flows of Chinese tourists,” said Jean-Marc Pontroué, chief executive of the Geneva watchmaker Roger Dubuis. “The luxury industry is faced with a new development — that it’s selling more to tourists abroad than on the mainland.”

Mr. Pontroué said he still considered brand boutiques in China an important tool — but more as after-sales centers than as direct revenue generators.

The focus on boutiques extends well beyond China’s borders. “We’re opening a big store on Rodeo Drive,” Philippe Léopold-Metzger, chief executive of Piaget, said of the 2,600-square-foot Piaget boutique scheduled to celebrate its grand opening in Beverly Hills, Calif., on Oct. 9. “Opening stores at the right place and the right time, you kill two birds with one stone: the local population and the traveling mainland Chinese.”

To people familiar with the inner workings of the Swiss watch business, there is some irony in that.

What Chinese tourists may not know is that some of the “Swiss” timepieces they purchase abroad originate in China, where factories contracted by Swiss firms handle a portion of production. It’s an open secret in the trade, widely known yet rarely discussed, because it undermines that most valuable marketing tool: the Made-in-Switzerland label.

A new standard, however, is poised to bolster that mark. Under current laws, watches can be called Swiss-made if they meet just three conditions: the movement must be Swiss, and the watch must be assembled and controlled in Switzerland. Last year, the Swiss Parliament issued a new law tightening the rules by requiring that a minimum of 60 percent of production, by value, must be done in Switzerland to earn the Swiss-made label. The new law is expected to go into effect at the end of 2015.

The changes are taking place against a backdrop of intense political and economic cooperation between Switzerland and China. Last year, the countries signed a free-trade agreement that went into effect on July 1. In addition to cutting or dismantling tariffs “on the vast majority of bilateral trade,” according to Switzerland’s economic office, the agreement — which several watchmakers, including Hublot and F.P. Journe, have celebrated with limited-edition timepieces — includes a chapter on intellectual property, a nod to the ongoing problem of counterfeiting.

“It’s quite difficult to give a figure because counterfeiters work in the dark, but we think, based on statistics, that the loss is about 1 billion Swiss francs per year,” said Yves Bugmann, head of the legal division at the Federation of the Swiss Watch Industry. “Almost all of them are made in China. The phenomenon is too big to eradicate.”

Yet, despite the tide of Swiss fakes emanating from China, counterfeiting is not the industry’s biggest worry. Rather, the dip in exports to China has brought into plain view a more fundamental, even existential, problem: How does an industry addicted to growth adjust to a more constrained global reality?

“Switzerland for the past 30 years has been able to find new markets where they can really thrive,” said Pierre Halimi Lacharlotte, general manager of F.P. Journe. “First was the Middle East, then Russia and Ukraine,” he said, “and then China. The problem with Switzerland: When you have shareholders, investors want dividends. They’re not always looking at the long-term picture.”

One solution may lie in shifting the industry’s focus away from high-priced mechanical wonders to more attainable fashion watches, a market sector that Mr. Xu, the Shanghai-based blogger, both represents and promotes.

On a YouTube clip from Baselworld posted by TheWATCHES.tv, Mr. Xu — looking sassy in a camouflage print sport coat, a fedora and blue mirrored aviator sunglasses — waxes poetic about watches from fashion brands like Fendi and Chanel, whose catwalk-inspired products captured his eye at the show.

“Traditionally speaking, my parents’ generation — they still like safe watches, the classic watches that have a heritage,” Mr. Xu said on the video. “But I believe that in 10 to 20 years when I’ve reached my 40s or 50s, it’s definitely going to be more fashion-driven and design-oriented.”