Breaking China: in depth look at cut import duties

The Swiss watchmaking industry welcomed news hitting the headlines in May that under a free trade agreement, China is set to cut import duties on Swiss watches by 60% over the next 10 years, which it is hoped will help boost the sale of Swiss watches in mainland China.

With the well documented growth of wealth among the Chinese population, the Asian country represents a key market for the sales of Swiss watches so the conditions around selling there are of extreme significance and any restrictions can take their toll on the bouyancy of Swiss watches.

“There is an import tariff on all Swiss goods going into China,” explains Jon Cox, head of Swiss equities and head of European consumer equities at Kepler Cheuvreux. “In the case of watches it was typically around 11%. To be honest, the import tariff wasn’t such a big deal – because it has always been there but China has also levied a luxury goods tax on luxury items in the last few years that also included Swiss watches.”

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The impact of the luxury goods tax, which imposed legislation around expensive gifts for favours, as well as a general slowing down of economic growth, came as a blow, causing demand in mainland China for luxury timepieces to slow down.

Since autumn 2012, when Xi Jinxing took over as Chinese president, the Chinese government has cracked down on corruption and obvious displays of wealth among party officials. As gifts often given by those seeking favour with significant Chinese individuals, such as politicians and businessmen, expensive watches have been targeted by the Chinese leadership’s measures. As a result, Swiss watch exports to China experienced a slowdown. According to the Federation of the Swiss Watch Industry, in the first three months of 2013, the value of Swiss watch exports to China dropped by 26% compared to the same period a year ago. Meanwhile, Chinese exports were down 22% in April 2013 compared to April 2012.

However, this latest development, which will see China cut import duties on Swiss watches, is hoped to boost the Swiss watch market and was confirmed at a press conference in May when China’s minister of commerce was quoted in media reports as stating: “In the first year, we will cut import duties on [Swiss watches] by 18% and then by around 5% annually in the following years.
“They will be cut by 60% in 10 years.”

PLAYING FAIR
The fair trade agreement , which will cut the import tariffs placed on Swiss watches and luxury goods, could help to revive the sales of Swiss watches in China after the decline caused by the crackdown on luxury gifting and the high taxes paid on imported luxury goods.
The lower duties should help reduce the price of Swiss watches in China. The agreement means that Switzerland will offer zero tariffs on 99.7% of the value of goods from China, while China will allow 84% of Swiss exports to be duty free.

Although the details have yet to be verified, the president of the Federation of the Swiss Watch Industry Jean-Daniel Pasche told WatchPro: “We are not allowed by the Swiss Minister for economy to comment on the content of the agreement until it has been signed by the both parties. It should happen next July. Of course we expect a reduction of the duties and we will see to what extent we get what we hope.”

He added : “We do not only expect reduction of taxes but also a better protection of the intellectual property. It is important for us to improve the fight against fake watches and the protection of the label ‘Swiss made’ in China. It should be the case according to what we already know.”

The changes are expected to be benefit Swiss watch powerhouses such as the Richemont Group and the Swatch Group.

“A reduction of taxes would facilitate access for Swiss watches to the Chinese market, for instance in term of prices,” says Pasche. “However, it will depend on the policies of the brands and on the timing of the enforcement. The agreement will also facilitate the contacts with the Chinese authorities to discuss bilateral issues. We hope that Switzerland can go on to conclude similar agreements with Russia and India.”

For Cox, one issue of interest will be to see whether the watchmakers keep the savings made from the reduction in the import tariff or use it to deliver lower prices at a retail level.

“I presume that the watchmakers will rather keep the import tariff savings,” says Cox. “Generally China is not a particularly profitable market for the luxury goods sector – although it is fast growing. Rents are just as high as developed world cities, staff costs are rising, there are lots of different taxes and most of the luxury goods sector has been rushing to open retail outlets. As a result the watchmakers are likely to keep the import tariff savings themselves. Keep in mind that an import tariff of 11% at the entry point is probably only equivalent to 5% by the time you get to the retail level and so an 18% from say 11% to 9% would only lead to price cuts of around 1% at the retail level – typically luxury goods companies don’t cut prices.”

He adds: “I presume the deal will come into force in 2014 – the plan is then the import tariff will be gradually cut annually over next few years.”

Meanwhile, the Swiss watch industry may be in line for another boost. In June, Switzerland’s government moved closer to agreeing on tighter rules that could mean that only watches with 60% of the value originating in Switzerland will be permitted to use the “Swiss made” label. According to a Reuter’s report, Switzerland’s upper house agreed, by a slim majority, with the lower house’s position on a draft bill that proposes only allowing the Swiss-made tag to be attached to products where 60% of the item value originates in Switzerland, which could be extremely beneficial to the Swiss watch industry, where the label can potentially double product prices.

Currently the watch industry complies with a 40-year-old directive that says that at least 50% of the value of the watch movement, not including the strap, case, glass and dial, must be Swiss. “Our federation fully supports this decision,” confirms Pasche. “For our federation it is absolutely necessary to ensure to the consumers that a Swiss watch contains a clear majority of Swiss value content in order to maintain the credibility of the label Swiss made and its reputation.”

Like most industries, Swiss watch manufacturers are having to adapt to the challenges that a tough economy, stiff competition and reduced consumer spending bring. However, these latest legislative developments are likely to work in the industry’s favour and give it a welcome boost.

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