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Swatch Value Chain

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The global watch Industry is dominated by only a handful of countries, the clear leaders being Switzerland and China. China is the world's biggest watch producer in volume terms. However, Chinese watches are mainly geared toward the lower end of the price range. In the luxury segment, on the other hand, Switzerland enjoys a near-monopoly position. Although the Swiss watch industry accounts for only around 2.5% of global production in terms of unit numbers, it is by far the leading exporter of watches in value terms. The industry is now Switzerland's third largest export sector. At 95%, almost its entire production is exported. The majority of the PESTEL analysis will focus on these two countries.
Political:
Introduction of anti-corruption measures and restrictions on advertising has resulted in economic slowdown in the watch industry. It resulted in Swiss exports of small watches to china falling abruptly in the middle of 2012. However given the rapid pace at which the Chinese market has developed in proceeding years, the decline in Swiss watches exports should be seen as normalization rather than a slump. Watch exports underwent an abrupt trend reversal in June 2012. This negative trend reversal and shift in demand to more economically priced watches were partly due to political measures.
In July 2012, the Chinese administration announced that government officials would in future no longer receive public funds for luxury goods. These measures are primarily aimed at combating corruption and curbing the practice of giving gifts to officials. This was compounded by the fact that advertising for luxury goods in certain cities such as Beijing became subject to partial restrictions in April 2011. Thus foreign "cult" products, for example, can no longer be advertised. Also, terms such as "upmarket", "luxurious", "luxury", "royal" and "must-have" are no longer allowed in adverts. One of the reasons for this measure is likely to be the widening income gap, which conflicts with the political objective of a harmonious society. June 2013 saw the new government restate these key political objectives.9 The Chinese economy's below-average growth since the end of 2011 is also likely to have a dampening effect on demand for Swiss watches.
Political developments in China are seen as a big risk. The fall in watch exports since the introduction of anti-corruption measures shows that political measures play an important role for the watch market. Although the administration currently levies taxes of around 20% on luxury watches, it intends to tax luxury goods at an even higher rate as part of its tax reform. This is to inhibit the previous penchant for purchasing luxury goods in China. In contrast with the reduction in customs tariffs, the higher sales tax is expected to dampen domestic purchasing by Chinese consumers and prompt them to shop abroad instead However, the extent to which a simultaneous reduction in customs tariffs and increase in sales tax will impact on domestic purchases, and therefore exports of watches to China, remains unclear. The risk due to political developments in China should nevertheless be seen in the context of the country's overall development. The expectation is that in the longer term the effect of political measures will be more than offset by the rapidly growing prosperity of China's population.
Economics:
Over the last 10 years, watch exports have grown at an average annual rate of 7.2% – significantly faster than Swiss industrial exports as a whole. The 2010-2012 periods were particularly impressive, with growth rates in double-digit territory. Although business has slowed markedly in recent quarters, exports remain at record levels by long-term standards. In particular, the Swiss watch industry owes its success to its foresight in actively targeting growth in the emerging markets. By far the biggest contribution to the growth of Swiss watch exports over the past decade has come from Asia. In overall terms, the Asian countries were responsible for around 70% of the rise in exports during the 2000-2012 periods. Of these, Hong Kong and China provided the biggest fillip to growth. Around 28% of total watch exports went to these two countries in 2012; this compares with a figure of only 14% in 2000.
The global watch industry is dominated by only a handful of countries. Ten countries – Switzerland, Hong Kong, China, Germany, France, Singapore, Italy, Japan, the US, and the UK – account for more than 90% of global exports of watches and watch parts, the first three being way ahead of the others. The fact that these 10 countries are simultaneously the most significant importing countries is evidence of the high degree of interdependence between their watch industries. The individual countries are to some extent specialized in different watchmaking products and steps in the production process.
The correlation between export prices and the exchange rate in these sectors showed another significant increase between 2010 and the middle of 2013. The watch industry was able to keep the average price of exports at a relatively stable level even during the period of currency appreciation in 2010-2011. One reason why the sharp rise in the value of the Swiss franc in 2010-2011 (in particular versus the euro) had virtually no impact on the Swiss watch industry was the industry's leading position.
Travel by China's population has increased sharply in recent years. Whereas Chinese tourists made 10 million trips abroad in 2000, the number had risen as high as 83 million in 2012. With USD 102 billion spent on travel in 2012, China became the world's biggest country of origin for tourism.12 Key reasons for the increase in the Chinese propensity to travel include the growing prosperity of the population, simplified procedures for obtaining visas, as well as the rise in the value of the renminbi versus various currencies such as the US dollar and euro.13 As tariffs and sales taxes increase sharply in China, many Chinese tourists are taking advantage of the opportunity to buy watches abroad at a lower price. In 2012, 37% of Chinese tourists purchased a watch while on their travels. Around half of them bought a watch in Taiwan, Macao, or Hong Kong, the biggest market for the Swiss watch industry. Europe, with its hot spots of Switzerland and Paris, accounted for 25% of watch purchases.
Credit Suisse global research. (n.d) Web. 11 Sept. 2015. Retrieved from https://www.credit-suisse.com/media/production/pb/docs/unternehmen/kmugrossunternehmen/uhrenstudie-en.pdf

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