Watch Economic Observatory/Will the "free city" of Hong Kong fall from its position as the world's largest watch market?

Hong Kong has long held the title of the world's largest watch market. As a financial center in Asia, it has attracted many investors, wealthy individuals, and shopping-loving travelers. However, in 2020, that position began to waver. How will the global watch market evolve in the future? Leading economic journalist Tomoyuki Isoyama examines the latest statistical data.

Will the "free city" of Hong Kong fall from its position as the world's largest watch market?

　The global luxury watch market has been hit hard by lockdowns and travel restrictions caused by the spread of the new coronavirus.

　According to export statistics for Swiss watches published monthly by the Federation of the Swiss Watch Industry (FH), global exports have recorded unprecedented declines, starting with a 9.4% increase in January compared to the same month last year, followed by a 9.2% decrease in February, and further declines of 21.9% in March, 81.3% in April, and 67.9% in May. Cumulatively from January to May, exports decreased in 28 out of 30 countries and regions, resulting in a total decrease of 35.8%.

Restraint of business at retailers

　One factor behind this is the sharp decline in the number of tourists who support demand for luxury watches, but the biggest factor has been the lockdown that has forced retailers to suspend operations.

　The Swatch Group, the largest watch manufacturing group in Switzerland, announced its financial results for the first half of 2020 (January to June) showing sales of 2.197 billion Swiss francs (approximately 250 billion yen), a decrease of 46.1%. The final profit and loss was a loss of 308 million Swiss francs (approximately 35 billion yen), its first half-yearly loss. At its worst, the company said that 80% of its directly operated stores and affiliated retailers worldwide were unable to operate.

　The company expects a rapid recovery in the second half of the year and says it will remain in the black for the full year, but the spread of COVID-19 shows no signs of abating, casting a shadow over the outlook for watch sales.

　The impact of COVID-19 is being felt worldwide, causing a dramatic change that is redrawing the map of the global luxury watch market.

Changing positions of each country

　One of the most symbolic examples is the decline of Hong Kong, which had long reigned as the world's largest watch market.

　Looking at the value of Swiss watch exports, exports to Hong Kong in 2019 totaled 2,659.3 million Swiss francs (approximately 304 billion yen). The anti-democracy protests in Hong Kong over the proposed amendments to the Fugitive Offenders Ordinance led to a sharp decline in tourist numbers in 2019, which also affected the watch market. While exports to the United States, in second place, increased by 8.6%, mainland China in third place increased by 16.1%, and Japan in fourth place increased by 19.9%, Hong Kong, the top export destination, saw a decrease of 11.4%. Still, Hong Kong barely held on to its lead, but the second-placed United States caught up with it, reaching 2,409.1 million Swiss francs.

　Added to this was the spread of the COVID-19 virus. As the virus first emerged in Wuhan, China, the country was first to lock down cities. Hong Kong was also put on high alert. As a result, in January alone, Hong Kong was overtaken by the United States and fell to second place, with mainland China catching up.

　Furthermore, as China's move toward a "National Security Law" accelerated, exports of watches to Hong Kong came to a complete halt.Until now, under the "One Country, Two Systems" policy, Hong Kong has developed as a "free city" thanks to its unique position in which it is part of the Chinese economic sphere but is subject to Western-style rules.

　The Hong Kong dollar is pegged to the US dollar, allowing Hong Kong businesses to trade with Western countries without incurring significant exchange rate risk. This unique position could now be dramatically altered.

　In terms of total Swiss watch exports from January to May, exports to Hong Kong fell 52.5%, dropping the country to third place behind the United States and mainland China. Depending on the situation after the National Security Law came into effect at the end of June, there is a possibility that the ranking could fall even further.

Global watch market trends

　However, it remains to be seen whether the United States will easily become the world's largest watch market. The rush to reopen the economy has led to a resurgence of the COVID-14 pandemic, with the country suffering the worst damage in the world, with the death toll now exceeding 5. Looking at the value of Swiss watch exports in May alone, exports to the United States fell 79.2%, the largest decline among major export destinations. Meanwhile, China is said to have contained the spread of the infection and is moving forward with reopening its economy.

　As a result, even though all markets were in the red in May, China was in first place, Hong Kong in second place, Germany in third place, and the US fell to fourth place. The situation is chaotic and it is difficult to predict which market will be the world's largest watch market in 2020.

　If the spread of COVID-19 continues for a long time and the sharp decline in cross-border travel continues, the watch market could suffer a devastating impact. The market faces the dilemma of rushing to reopen the economy and increasing people's movements, which could lead to a further spread of infection. The dramatic changes to people's lives have also led to major changes in consumption styles, which could potentially lead to a decline in demand for luxury goods. Of course, if the global economy contracts and the economy worsens, global consumption of luxury goods itself could decline.

Tomoyuki Isoyama
Economic journalist. Born in Tokyo in 1962. Graduated from the School of Political Science and Economics at Waseda University. Served at the Nikkei Inc. as a securities reporter, deputy chief of the same department, Zurich bureau chief, Frankfurt bureau chief, and deputy editor-in-chief and editorial committee member for Nikkei Business, before going independent at the end of March 2011. His books include Between Reason and Emotion: Thinking About Corporate Governance from the Perspective of Otsuka Furniture and The Secrets of Switzerland, the Brand Kingdom (both published by Nikkei BP). He is currently covering a wide range of topics in politics, business, and government, with a focus on economic policy.
http://www.hatena.ne.jp/isoyant/