e can all bring to mind recent images of crowds of protesters gathered in Hong Kong’s streets, with giant Breitling or Omega advertisements in the background. However, when we arrive at the international airport one Monday in September, everything is calm.

Things were clearly not so quiet the day before, when demonstrators against the extradition law (which has since been repealed) decided to occupy the area. Some fellow journalists, also in the city for the annual HKTDC exhibition, took five hours to reach the city centre.

Everything is calm when we arrive at Hong Kong’s international airport one Monday in September. It’s in the evening that things begin to heat up. As soon as people leave the office, sit-ins and other forms of protest are organised all around town.

In 1963, Europa Star was already travelling to Hong Kong for a report, dedicated at the time to the (still current) problem of counterfeiting.

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This week in Central, the historic heart of the island, the streets are quieter than usual... during the day. It is in the evening that things start to heat up. As soon as people leave the office, sit-ins and other forms of protest are organised all around town. Unlike what we saw in France last year, when the “yellow vests” staged their anti-power demonstrations, no shop windows are broken during the protests in Hong Kong, and working hours are generally respected.

In Hong Kong, the demonstrators know that maintaining their economic dynamism will directly determine their special status in the People’s Republic of China (on the basis of the “one country, two systems” principle, officially in force until 2047).

The people of Hong Kong are well aware that their economic weight has already lost some relevance since the handover to China. In 1997, the former colony alone accounted for 16% of China’s GDP. Today, that figure is just 3%. China has changed at high speed, and new metropolises have surpassed Hong Kong in size, infrastructure and dynamism, starting with Shanghai.

The demonstrators know that maintaining their economic dynamism will directly determine their special status in the People’s Republic of China.

As a “gateway to China”, and with its special legal and political system, the island remains nevertheless an important hub for finance, services, and, of course, watchmaking. But for how long?

Hong Kong, the “open door” on China, as we wrote in 1994.

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Trend: business repatriation to the mainland

The watch industry itself reflects the rise of mainland China compared with Hong Kong. In 2000, the Chinese domestic market imported 45 million francs’ worth of Swiss watches, compared with 1.4 billion francs for Hong Kong. Last year, China was the third largest export market for Swiss watches (at 1.7 billion francs). At the same time, Hong Kong has doubled its share to 3 billion francs... but mainly thanks to purchases by mainlanders.

The repatriation of watch purchases to mainland China continues to accelerate. Admittedly, Hong Kong remains a tax free area, and retains some advantage on this account. But the government has made no secret of its desire to repatriate consumption locally, using either the carrot – prices coming into line with the rest of the world – or the stick – tighter border controls and the anti-gifting campaign.

The watch industry itself reflects the rise of mainland China compared with Hong Kong

The long-term trend thus hints at an increase in home shopping, facilitated by the powerful logistics of the main Chinese e-commerce sites Tmall and JD (see our feature on China in our Fall issue).

Swiss brands, which would generally have only one subsidiary in Hong Kong, covering the Greater China zone, are increasingly opening offices in mainland China and building local teams. There are also the traditional players such as Swatch Group or Titoni, which have already been there for decades. Similarly, watch brands are rushing to open WeChat accounts, the number one communication tool in the country.

“It’s going to last longer than a few months”

Jean-Christophe Babin, CEO of Bulgari, who is very familiar with the situation on the Chinese market, recently gave us his analysis of the impact of the demonstrations in Hong Kong: “We are seeing a sharp drop in air traffic. For most luxury brands, the decline in sales is proportional to the decline in air traffic, since this is an extremely touristic area. Ticket reservations are a good predictor of sell-out levels.”

“This is a new situation that affects everyone. We are entering an unpredictable era, which is likely to last longer than a few months,” says Davide Cerrato, head of watchmaking at Montblanc.

“The decline in sales is proportional to the decline in air traffic, since this is an extremely touristic area.”

Figures for Hong Kong from the Swiss Watch Federation (which calculates exports) show a significant decline from June 2019, even if a complete meltdown is not on the agenda. Calculating watch sell-out using figures provided by the Hong Kong’s Census and Statistics Department, consultant Thierry Huron (Mercury Project) gives an even less rosy picture of the situation: in annual comparison, watch sales in Hong Kong were down by 16.9% in June and 24.3% in July. The market has lost 8.9% since January.

Les statistiques de 1993 de la place horlogère de Hong Kong dans Europa Star.

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This interview with analyst Jon Cox of Kepler Cheuvreux on CNN Money is enlightening. He forecasts a 20% drop in exports of Swiss watches to Hong Kong over the year.

How much exposure?

The situation is naturally more delicate for the watch brands most exposed to Chinese customers, for whom Hong Kong remains the hub, and which have not yet migrated their exposure to mainland China.

At Bulgari, Jean-Christophe Babin is keen to play down his brand’s exposure: “We are not among those brands that have a majority of Chinese customers. These represent about a quarter of our customers. And Hong Kong’s share may be 5% of total sales. We sell many more watches to Chinese people on the domestic market, but also in Paris or other major luxury capitals. And in the coming months, we will pursue an aggressive policy on Chinese tourist destinations because there will be more growth in China itself than abroad – although, it must be stressed, the trade dispute between China and the United States remains a concern because of the climate of unpredictability it creates.”

Demonstrations, an accelerator of change

This year, the political events in Hong Kong will naturally have an impact on the watch industry’s balance sheet. The consulting firm Bain points to the “hesitant” recovery of the watchmaking sector, an effect largely of the very tense situation in Hong Kong, which is the main export market for Swiss companies. For its part, RBC Europe Limited estimates that Hong Kong represents 13% of Swatch Group’s total sales and 11% of Richemont’s total sales.

Nevertheless, it is important to analyse the long-term situation for the future of Hong Kong as a watch hub, beyond the current volatile situation.

RBC Europe Limited estimates that Hong Kong represents 13% of Swatch Group’s total sales and 11% of Richemont’s total sales.

Although a great deal of attention has been focused on the demonstrations of recent months, this eruption seems to be accelerating the more systemic fundamental risks that are already impacting Hong Kong’s dynamism: the repatriation of purchases to mainland China, the rise of Chinese cities as decision-making centres and, not to be overlooked, the uncertainty surrounding the impact of trade negotiations with the United States, given that Hong Kong is at the heart of trade between the two countries.

The “moveable feast” of Hong Kong highlighted in this 1995 article.

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INTERVIEW

“We are concerned by the trade dispute between China and the USA”

Dennis Yeung, Managing Director of Oriental Watch Company

Founded in 1961, Oriental Watch Company was the first watch retailer listed on the Hong Kong Stock Exchange. Over the years, the company has developed a retail network in mainland China, Hong Kong, Macau and Taiwan, and has become one of the largest watch retailers in the region. The company now represents a hundred luxury brands, including Rolex, Tudor, Piaget, Vacheron Constantin, Audemars Piguet, IWC, Jaeger-LeCoultre, Girard Perregaux, Longines and Omega.

“We operate 61 points of sale (including monobrand stores) throughout the Greater China region,” says Managing Director Dennis Yeung. “Our network is constantly evolving. In May, we moved our flagship store from 100 Queens Road Central to 50 Queens Road Central, a prime location in the heart of the luxury sector. This change will increase our sales."

Dennis Yeung, Managing Director of Oriental Watch Company

Even more than the demonstrations that have taken place in recent months, it is the impact of trade tensions between the United States and China that worries Dennis Yeung. Three years ago, Hong Kong’s retail sector entered a phase of stagnation: “All segments of the retail trade suffered, including watchmaking and jewellery. Compared to this difficult phase, the general environment had been improving since the beginning of this year. But the uncertainty created by the trade dispute between China and the USA has become increasingly worrisome. We are concerned about its impact on Hong Kong’s economy, and the outlook has shifted from positive to cautious.”

“The outlook has shifted from positive to cautious.”

Another major challenge for the retailer is that the price of renting commercial space in Hong Kong remains very high. “Some retailers tend to expand even in times of market downturn, but we are relatively cautious on our side,” says Dennis Yeung. “Thanks to this strategy, the impact of high rents in times of difficulty is less pronounced for us. In response to the challenge of high rents, we have also implemented a series of measures such as reducing inventories, negotiating lower rents with landlords, closing loss-making stores or subletting stores."

As far as the company’s financial performance is concerned, weak market sentiment led to a decline in Oriental Watch Company’s annual results in 2016, which resulted in losses. The following year, the company returned to profit and continued its momentum with an annual profit of $139 million in 2018.

INTERVIEW

“Hong Kong must preserve its strong legal framework”

Carson Chan, Head of FHH Asia

Carson Chan, an avid Hong Kong-based collector, first made a name for himself by helping to introduce Richard Mille to the Asian watchmaking metropolis, back in 2004. Since then, he has held a number of positions in the watch world: he is currently Vice-President of the Swiss Chamber of Commerce of Hong Kong, a member of the jury of the Grand Prix d’Horlogerie de Genève, and head of the Foundation for Fine Watchmaking in Asia. Within the framework of the FHH Academy, he has set up several high-quality watchmaking training courses in Hong Kong.

“I studied in the United States, where my passion for mechanics was born… but in the automotive industry first. Back in Hong Kong, there wasn’t an interesting playground for cars on such a small territory,” he explains. The collector therefore “miniaturised” his mechanical passion by discovering watchmaking: "The language is similar, it is mechanical art on a microscopic scale.”

Carson Chan, Head of FHH Asia

If Hong Kong succeeds in maintaining its strong legal framework as well as its import logistics efficiency, it will remain the leading watchmaking centre in Asia, according to the expert, who lists other advantages for the island city: “Watches are more affordable than in mainland China thanks to its duty free status, and there is much more choice.”

For him, the major risk is now that of a global recession caused by the trade dispute between China and the United States, with the chain effect of setting up tariff barriers. “We must look at the watch market from a long-term perspective, not month to month. In a time of global recession, everyone would suffer. It is therefore important to anticipate by determining how the industry as a whole could adapt to this situation.”

“If Hong Kong succeeds in maintaining its strong legal framework as well as its import logistics efficiency, it will remain the leading watchmaking centre in Asia.”

Carson Chan believes in the virtues of education in particular to increase the size of the watch market on a global scale: “The watch is probably the only category of object that has gone from absolute necessity to total uselessness. The problem is that too many salespeople continue to present tourbillons as functional parts. And too many managers consider watchmaking as just a job. How can we talk about the mechanical watch in a more artistic way, about the beauty of mechanics? Crisis or no crisis, riots or no riots, that’s where the future of the industry will play out.”

As such, there is a lot of educational work to be done in mainland China, which will also benefit the Hong Kong watchmaking business. Carson Chan continues: “Demand is high but it is still a market focused on marketing and not education. Most aficionados do not speak English and only identify the big names like Rolex or Patek Philippe. We must go further. Watchmaking must be more accessible to the public, not by price but by information. Today, the way watches are sold is not emotional enough. By comparison, it is not necessary to have a degree in art to appreciate a painting, and you don’t sell a painting by describing its setting, but by explaining how the artist created it.”