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The Hong Kong connection
Economy

The Hong Kong connection

Friday, 24 October 2008
By Louis Nardin
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Louis Nardin
Journalist and consultant

“Audacity, more audacity, always audacity.”

Georges Jacques Danton

“A quality watch is a concentration of creativity, rare technical and scientific skills, and age-old gestures. It appeals to the desire for uniqueness and distinction; it is a badge of knowledge, power and taste. A watch has many stories to tell; the details and secrets provide the relish”.

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4 min read

Hong Kong is the bridgehead from which brands distribute their products in Asia, as this autonomous region’s top export ranking clearly shows. Logistics and financial considerations are the two main reasons behind this success.

Hong Kong may only have an area of 1,067 square kilometres for some seven million inhabitants, it is still the largest importer of Swiss watches in the world. Several factors explain this unusual state of affairs. With financial advantages, the presence of reliable partners in the region and its position at the centre of Asian tourism, Hong Kong clearly has much to offer. But the situation is changing. Until very recently it was almost unthinkable for brands to export to Asia other than via Hong Kong; now they are increasingly inclined to set up distribution networks directly in mainland China.

Centralised stocks

Swiss watch exports to Hong Kong came to a total value of CHF 176.5 million for August 2008 alone. This is 42.1% more than for the same month 2006. The figure for the period since January amounts to CHF 1.746 billion: a 48.8% leap in two years. Substantially more than 10% of Swiss watches sold to export find their way to Hong Kong. So what’s the draw?

First of all, Hong Kong offers an extremely attractive tax and duty package, a consequence of its special status as an autonomous region. “In addition to low import duties, Hong Kong has a duty-free logistics platform,” explains Clément Brunet-Moret, CEO of Favre-Leuba and former Far East travel retail manager for Cartier. “A specificity that has led several watch groups to choose Hong Kong as their stock base for Asia.” This saves money but also time, as well-oiled administrative procedures speed up the flow of goods.

And this is not the only advantage. Brands can work with experienced partners in the region. Retailers with a flair for business have opened their own points of sale in China and, over time, made themselves virtually indispensable, in particular for smaller brands that lack the financial resources to set up their own distribution network.

Exchanges between Hong Kong and mainland China include a high level of re-export, for which Hong Kong is clearly a major hub. According to Hong Kong Trade Development Council figures for 2007, Hong Kong re-exported CHF 992 million in watches of all origins to China. This is 12.4% up on the previous year.

This figure should nonetheless be viewed with caution, as not all transactions are taken into account. As certain players have confirmed, surplus stocks of original watches are channelled into a grey market to be sold off at discounted prices. Unofficial but at the same time unavoidable, these circuits escape control.

Asian tourists arrive in droves to spend their money.
An eldorado for tourists

Hong Kong is also ideally located as the epicentre of Asian tourism. “The region has become a giant shopping mall for this part of the world,” observes Jean-Daniel Pasche, Chairman of the Federation of the Swiss Watch Industry. “Asian tourists arrive in droves to spend their money, and watches feature high on their list. Informed buyers also know they will find a particularly wide selection there.” As well as being spoiled for choice, these tourists benefit from the region’s liberal tax-free policy, whereas in China taxes can account for up to 23% of the retail price.

The final reason behind Hong Kong’s top export ranking is the often long-standing presence of brands which, when first developing their sales in Asia, chose Hong Kong as a launch pad for distribution. The same scenario applies to Chinese groups such as the now defunct Peace Mark, which was founded in Hong Kong before extending its activities across China, and even beyond after taking over the distribution network of the Singapore-based luxury goods retailer Sincere.

As their wealth increases, the Chinese are buying more and more luxury watches.
Clément Brunet-Moret
Demand takes off in China

While Hong Kong continues to lead the field for exports, China is developing its appetite for Swiss timepieces, with exports gaining 117% between August 2006 and August 2008. For the period January to August for the same years, the figure reaches 134%. “As their wealth increases, the Chinese are buying more and more luxury watches,” comments Clément Brunet-Moret. “For brands to rapidly meet this demand, the trend is to bypass Hong Kong and set up distribution networks directly on the mainland.” Still, despite rocketing demand from its colossal neighbour, Hong Kong has enough aces in its hand to remain one of the major export destinations for Swiss watches for a good few years to come.

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