China has the world in its sights and Switzerland is one of the countries on its radar. Once specialists in goods with low added value, Chinese companies are moving production upmarket. Meanwhile, they are investing in Swiss and European firms, sometimes taking 100% of the capital along with their portfolio of clients and in-house technology. Nor has the Swiss watch segment escaped Chinese investors’ appetite. This isn’t a new phenomenon, but one that now extends to Fine Watch firms, as illustrated by the takeover, at end April, of Corum by the China Haidian group. What if watchmaking were to follow the same route as vineyards in Bordeaux twenty years ago or, more recently, Burgundy? Is there cause for concern? Will results be on a par with expectations?
According to Jean-Claude Biver, president of Hublot, China isn’t the threat it’s made out to be. In a recent interview, he observed that the quality of these French crus hadn’t suffered, and that customers were still buying, regardless of who owns the estate or what nationality they are. “Given the choice, I would have preferred that Corum, a Swiss brand, stay Swiss. Having said that, as far as I’m aware the shareholders in Nestlé and UBS are no longer primarily Swiss. We need to adapt to the fact that China has an increasingly important place in today’s economic reality, although I would personally have welcomed a buyer for Corum that had both its feet in watchmaking.”
Preserving brand identity
China, which provides luxury companies and therefore watchmakers with major growth opportunities, has notched up some enviable mergers and acquisitions. In 2001, Lanvin was bought by the Taiwanese billionaire Shaw-Lan Wang. In 2005, the Chinese AS Watson group, owned by Hong-Kong billionaire Li Ka-Shing, launched a successful takeover bid for the cosmetics retailer Marionnaud. Chinese business magnate Dickson Poon has control of ST Dupont, a specialist in writing instruments and lighters. Fashion house Sonia Rykiel was bought by brothers William and Victor Fung. And the list goes on. For example, Fosun International is looking for a minority shareholding in luxury groups via an investment fund. Not to mention watchmakers such as Eterna, Codex, Universal, Technotime and Milus, all now flying the Chinese flag.
Certain industry insiders take a dim view of China’s rapid incursion into the watch segment. They fear a loss of substance for the branch, as well as the risk of knowledge transfer. Doubts are also raised over whether the brands in question can hold on to their core values, the sine qua non of their success. Certain experts note that new Asian investors sometimes fail to respect the continuity of their target’s history and identity.
A dangerous vicious circle
These takeovers can be motivated by any of several factors. Much of the time, “predator” companies are interested in feeding their own market, but don’t always adopt the right strategy. Particularly multibrand retailers. “Often, so as to recuperate margins, they will buy a brand they want to distribute in their stores, except the buyer is then in direct competition with other retailers that are also likely to carry the brand it just acquired. It’s typically Chinese to want to control both brand and distribution rather than working with partners who can contribute to its development, each focusing on what they do best,” comments Olivier Müller, chief executive of Laurent Ferrier.
The Chinese or, more generally, Asian owner of a newly-acquired company is often inclined to tailor marketing to the specificities of its domestic market. Even if this market effectively accounts for a large proportion of turnover, it inevitably paints the brand with an Asian brush, which undermines sales in the other countries where its products are distributed. This, says Olivier Müller, is where a vicious circle can kick in. A brand that fails to develop in mature markets will appear less desirable to Chinese luxury-goods consumers who seek the authenticity of western goods and will suspect the owner of wanting to “westernise” the brand. Not that we should lose sight of China’s importance for the luxury business. The country accounts for 27% of global consumption of high-end products compared with just 1% in 1995.
Obsessed by the short-term
It’s no secret that the watch segment has a lot to thank China for. Without the country’s insatiable appetite for Swiss timepieces, probably the picture wouldn’t be quite as rosy. Hence the need to “cross the river by feeling the stones”, that is to allow as much time as it takes for buyer and bought to find a common ground. The only blot on the horizon, according to Olivier Müller, is that the Chinese often expect a fast return on investment and benefits gained through optimised costs, hence volumes. Their logic, often derived from an entry-level or mid-range positioning, meaning mass production, is that increasing volumes will give them a competitive advantage by having a positive effect on cost structure when in fact “the higher a brand is positioned, the more this reasoning contradicts the very principles that govern the luxury industry. Of course, a product isn’t necessarily credible because it’s expensive, but there has to be some coherency between rarity and price.”
Similarly, a management team or board of directors with its eye fixed on the short term has every chance of clashing with how Swiss and, more widely, western firms do business. Decisions that look no further than the next corner will blur the brand message, anticipates Olivier Müller. The distinction should, however, be made between Chinese companies and those based in Hong Kong, which come from a completely different environment. As a general rule, they operate independently of Chinese political diktats while their managers have more experience of market forces.
Not everyone rises to the many challenges involved. Chinese construction conglomerate Covec won the bid to build the Polish stretch of the Warsaw-Berlin motorway, but pulled out of the contract early. Hopefully Chinese-Swiss brands won’t go down the same road, although a question mark hangs over the Geneva-based watchmaker Universal, in hibernation for the past three years, and whether its Chinese buyers can restore to its former glory this once prestigious Swiss brand.