“Everything’s coming up roses” could have been the Swatch Group’s message to the financial community at the last presentation of its 2007 results and outlook for the coming months. And the message is clear: as far as Swatch is concerned, there are no clouds gathering on any of its horizons. Quite the contrary in fact. The number-one watch group in the world forecasts double-digit growth for the current year, contrary to analysts’ recent predictions. The same analysts who are casting a negative eye over the sector as a whole. So riled were Swatch’s bosses by this contradiction in views that they chose not to convene analysts to the traditional annual press conference, accusing them of taking a short-term view of the economy, and of nurturing a purely financial and therefore incomplete vision of the watch industry.
A downturn in the main markets
The latest figures published by the Federation of the Swiss Watch Industry nonetheless show a definite slowdown in Swiss watch exports, which in March only managed 0.5% growth year-on-year. This is a significant contraction after growth of 23.4% and 18.3% in January and February respectively. Closer analysis shows that there were three fewer working days in March 2008 than the same month 2007, and that the base effect was largely negative with growth of around 20% over the same period for the two previous financial years. However, these two factors alone cannot explain why sales of Swiss watches have tailed off in the export markets. In this light, the analysts at Landsbanki Kepler in Zurich left no doubt as to their forecast for the current year.
According to a report published by the investment bank shortly before the Basel and Geneva fairs, the sector is expected to grow in the region of 3% for the twelve months of 2008 to reach some CHF 16 billion. A figure that falls well short of the 16.2% increase recorded in 2007 or even the 11.2% and 12.8% growth of the previous two years. Landsbanki explains this cooling-off by recession in the United States and by the global financial crisis sparked by the American subprime fiasco, alongside negative exchange effects due to the continued weakness of the dollar. Indeed, figures for March show that two of the sector’s main export markets, the United States and Japan, were significantly down, losing 14.7% and 22.2% respectively.
Emerging markets step into the breach
Not that we should paint too bleak a picture, again according to Landsbanki: “Many of the factors that bolstered the watch sector’s exceptional growth cycle over recent years are still in place, in particular demand for high-end mechanical watches, a consumer tendency to prefer ostentatious luxury, the boom in raw materials and the emergence of new markets. While we do not expect the Asia-Pacific region alone to maintain growth, this does not mean that growth has reached an end.” Indeed, wealth creation in emerging countries makes for a non-negligible safety net, as figures for March again show with sales booming in markets such as China (+39.4%), Singapore (+33%) and the United Arab Emirates (+37.8%). As for the high-end segment, it continues to forge ahead with export sales gaining 11.4% in value and 17% in volume over the same month.
Given weighted annual average growth of 6% in Swiss Francs (9% in Dollars) for Swiss watch exports since 1980, we can reasonably expect to see exports back on course over the next few months. And ultimately, the industry stands to gain as a year of consolidation would give it time to absorb the exceptional growth of recent years, and get both its workforce and production back on track.