China's global watch trade exists in a paradox. Their total production defines China as the global watch industry's main parts vendor. At the same time, the Chinese have become the largest consumers of completed watches, but not necessarily their own. The people buy back the goods they produce at a higher price than the components they sold.
Why should this concern you? If the Chinese produce watches for $100 and Swiss sells them back to the Chinese, then you have an unfair trade balance.
A Chinese business person might pay the Swiss for its brand name. That prestigious and expensive watch you bought in a boutique lacks prestige. Doesn't it?
A metaphor might describe the situation. Perhaps "Swiss Made" refers only to the dial while the rest of the watch comes from China.
When a customer buys goods and services from a provider, then adds a profit and sells those same goods and services back, you have a paradox. It's an old imperialistic strategy for colonization and one we thought ceased to exist almost 75 years ago.
If you need a precedent, then look at the paradox, between the British Empire and India. For four hundred years, the British bought cotton from India, turned it into a fabric, produced clothing and sold it back to the Indians for a tidy sum. Each paradox, however, has its own unique characteristics.
Let's look at the components of China's paradox.
- The Chinese make and sell 98% of the world's watches and watch parts. That includes watchcases, dials, wristbands, movements, crowns and crystals. The Swiss buy and sell a significant amount of China's production.
- While the Chinese business accounts for 98% of all watches and parts sold in the world, they only reap 50% of the international income for their efforts.
- The Swiss sell 2% of the world's finished watches while remaining the largest customers of the Chinese.
- The Swiss reap 50% of the global watch income for their efforts.
- China is the largest market for Swiss watches. The Chinese purchase 51% of Switzerland's output.
That's quite a disparity in terms of dollars, Francs or Yuan and it has a swarm of consequences:
- People consider Swiss watch brands superior to Chinese.
- The world gets a false marketing message, that is, Chinese watches are lower quality.
- China cannot build a global watch brand that can compete with the Swiss.
- The paradox disguises the fact that China manufactures at least 50% of all Swiss watches and in many instances 100% of Swiss labeled watches.
- Finally, it affects China's industrial reputation
You might view this as a magician's sleight of hand, where the hand is faster than the eye. The tricks often end with a saying, "now you see it, now you don't." That's what has happened to China's money from the sale of watches.
The paradox contains a dilemma. Reciprocal trade of raw goods for finished goods with your largest customer creates a trade imbalance. How do you stop that? Ask the American consumer and he or she will say, "you can't stop it."
What's a Paradox?
A man and his son are on an errand and their car crashes into a tree. The father is in a coma. Paramedics rush the boy to the emergency room of a hospital where they prepare him for emergency surgery. On entering the surgery suite, the surgeon says, "I can't operate on this boy. He's my son."
How is that possible?
The apparent paradox is caused by a hasty or unwitting generalization. If the surgeon is the boy's father, the statement couldn't be true. You solve the paradox if the surgeon is the boy's mother.
In the case of Chinese timepieces, a generalization about poor quality exists. If the Swiss own 50% of the gross revenue from finished watches while selling only 2% of the world's watches, then the conclusion must mean they must make better watches. How can that be if you buy most of your components from Chinese watchmakers?
The paradox is solved when we discover China's watch industry does not sell 98% of the world's finished watches, but instead sells components that comprise finished watches. China keeps one set of books and the Swiss keep another and they don't match.
How Did This Come About?
The Swiss-Chinese watch relationship dates back to the 1970's, when the Japanese came close to destroying Europe's watch industry. Hong Kong (British at the time) helped the Swiss recover by providing low-cost alternatives to watch parts other than movements. Chinese labor and materials reduced the cost of making finished Swiss watches and in many situations improved the quality of watchcases, bands, dials, crystals and so forth.
As the Mainland became accessible to Hong Kong businessmen, a transfer of facilities occurred. Hong Kong lowered their costs and increased their production. The Swiss began to rely on Asia for product and as a customer.
A directive from the Swiss Trade Commission gave great latitude to their watchmakers. Even though Asian workers produced as much as 80% of a watch, if the movement (not the other parts of the watch) contained a value of 50% of Swiss parts, their industry could stamp "Swiss Made" on the watch.
In the mid-1970's, Japan became the world's largest watch producing country. Three companies, Seiko, Citizen and Ricoh pummeled the Swiss. The Japanese made better watches at a lower cost than the Swiss. Switzerland dominated the global watch industry as low-cost providers prior to 1975 when they entered a ten years crisis. It nearly destroyed them.
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With production and sales whittled down to 20%, the once dominant watchmakers did not regain volume or nudge Japan. What do you do in that situation? Answer: Charge more on less volume. And how do that?
The Swiss began a campaign to change their image. They promoted themselves as watchmakers with a "legend of history and tradition", which became their slogan. While they lacked product innovation, the Swiss went on a PR campaign using celebrity endorsements, advertising, special events and lobbying to make the world's low cost provider appear as the premier provider. It only took them one generation to transform their image and they started with young by creating a little kids watch known as the Swatch.
Meanwhile, the Chinese made progress as a producer of watches. Asia needed jobs and a long term strategy for a watch industry didn't exist. Unwittingly, the industry evolved into a production or manufacturing oriented one using low-cost labor as the bait.
Extending the Paradox to the West
If you give a population a consistent and persistent message, you can convince them of anything. One only needs to enlist opinion leaders to deliver the message. What do hired opinion leaders tell us? Swiss watches are treasures. Japanese cars are better. China has a terrible pollution problem. Of course, our paid opinion leaders will never say how Japan, Europe and the US moved their heavy manufacturing and its accompanying pollution to China, India and emerging nations in east Asia.
Think of this as a metaphor. It might compare to a magician's trick called sleight of hand, where the hand is quicker than the eye. The tricks often end with a saying, "now you see it, now you don't." Extend that to the great American watch industry, which the Swiss bought piece by piece after World War II and moved it to Europe.
Watches in Western Markets
Let's start this section with a short take on the term caveat emptor. It's Latin for "Buyer Beware". The principle offers a reminder that buyers often have less information about goods and, or services they buy than the seller. Defects may be hidden from the buyer, and only known to the seller. While than seems like cheating, the onus is on the buyer to find out - not the seller to disclose.
Let's say someone bought a $1275 watch with the stamp "Swiss Made" on the back of the case, "Swiss" on the dial and "Swiss Made" on accompanying literature and the box. One year later, he or she has the watch appraised for insurance (with other jewelry) and finds out that everything except the movement came from Thailand and China. Also, the movement's parts were manufactured in Tianjin and assembled in Biel, Switzerland. Do you think he or she would feel upset? Maybe not, because we lie to ourselves and say: "that it's not important - it's the name that matters. I don't care how it's made - I just use it to tell time, for prestige and to show others than I can afford this expensive item."
That's a situation for the doctrine of caveat emptor. In the United States, when we buy a product, our laws provide for implied warranties, so you and I wouldn't expect to encounter as situation as mentioned above.
The Swiss watch industry does not subscribe to the concept of implied warranties. According to their laws, only 50% of the movement's parts (money-wise) should be Swiss. The rest of the watch can come from anywhere. The "sleight of hand" will become even more apparent as you read the rest of this article.
In Europe, they have a tradition called Rules of Origin as opposed to US tradition requiring Disclosure of the Country of Origin. Try to keep this in mind - Origin: Rules vs Disclosure.
Europe includes a provision called non-preferential rules of origin that they use to determine the country of origin for certain purposes. One such rule includes "origin labeling".
This rule as it pertains to watches states that if a product is wholly obtained or produced completely within one country the product shall be deemed having origin in that country. For a product which has been produced in more than one country the product shall be determined to have origin in the country where the last substantial transformation took place.
Swiss law says that the last substantial act is casing the watch, that is putting the movement in the case. They claim country of original based on that rule. Since Switzerland is not part of the European Union, it doesn't face the scrutiny of other European countries. When a batch of watches completely made in China slips through, well, they use the rule: "that's just a mistake and we promise not to do it again".
Generic Watches
I'm not saying, implying or claiming counterfeit in the following section. I just want to consider the possibilities when the Federal Trade Commission doesn't even have our backs. That's the situation in the US with Swiss watches.
With that in mind, we can examine a specific "Swiss Watch" with a quartz movement. To add a tip, try to remember that quartz watches are the easiest to build with generic parts - especially when one company manufactures a raw movement, sells it to someone who produces a finish watch and claims they made it in another country.
The watch below provides a good example of why you should be on your toes. It's a nice watch and one I would normally wear. Several unauthorized on-line retailers offer this watch for sale. It's not available in any of the authorized Hamilton stores I could find including those in Asia.
The dial says Hamilton and looks like a Hamilton. The back says "Swiss-Made". The model number on the band is legitimate except that the company used it on other models. The Swatch Group, Ltd. makes Hamilton watches and yet their US Swatch Group representative wrote me an email saying they have no record of this model in their catalogs.
Hamilton Khaki Field Men's Quartz Watch H74451833:
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The Swatch Group makes cases, dials, crystals, bands and all of the ETA quartz movements in Asia, primarily China and Thailand. That's the company's manufacturing model. Yet, the back clearly states that the watch is "Swiss-Made". I bought three of these watches and I cannot tell you if Hamilton made them or not.
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I believe a group of distributors have these watches made by a third party in China and,or Thailand, import them, divide them up and sell them on-line with a nice disclaimer saying they bought them from authorized dealers and that the seller is responsible for warranties, not the manufacturer.
Here's the kicker. Swatch only sanctions Hamiltonshop.com and authorized jewelry store dealers to sell on-line They don't carry this model and they don't sell to unauthorized dealers. Hamilton watches are sold in Swatch Boutiques in Malls and high visibility shops in places like New York or high-end jewelry stores. You can find the on the Hamiltonwatch site's map.
The figures below indicate the number of stores and locations. Notice, New York has 76 outlets where you can buy Hamilton watches. We drilled down to show the location of an authorized seller: Neiman Marcus in Dallas. (Start at the map on the upper left, move to the right, then to the bottom left and finally to Neiman's on-line catalog.
Now, does common sense tell you that Neiman-Marcus or Macy's in Garden City will list Hamilton watches on eBay? It does make sense to me.
Several on-line dealers have a Hamilton H74451833 listed on eBay and Amazon with a tag line line this:
Item condition:
New with tags
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Anyone could have an Asian company assemble this watch for between $30 to $65. If you want to know why it sells for around $299, then you would have know the industry, how people make watches and many other details. If this Swiss made this watch, it would sell for approximately $450 - $600.
Here's the rub: buyers of watches have less information about what they purchase, than the seller.
An Informed Buyer's Criteria
I feel compelled to know the provenance or origin of many products, but especially watches. I wear watches, repair watches, restore watches and sell watches. I also have a personal collection with a broad range of styles that I use for different occasions such as attending a formal gathering, hiking or attending a kid's birthday party.
Why is the provenance of a watch important to me? Money.
Why watches? A couple of reasons come to mind. First, men don't wear jewelry. They wear watches. It's important to us. No one can say why, because it's a bit of mystery. Perhaps it projects our self-image, or our identity. Regardless, men seem fascinated with watches like women seem fascinated with jewelry items like earrings, necklaces and bracelets.
Brand Mesmerized
A few weeks ago, I gifted a watch to a friend who told me he didn't need one. He could tell time by looking at his phone or the dashboard of his car or his computer. He accepted the gift. I notice that he loves that watch. He wears it everywhere. He even sleeps with it. I can't explain it, but a watch can and often does becomes one our favorite things.
The other reason I want to know the origin of a watch is easier to explain. I detest people fleecing me. I don't want a salesman in a jewelry store to show me a $5500 "Swiss" watch when I know it came from China and cost $100. What am I getting for the $5400? A name; the services of an advertising company, an ad campaign during the Superbowl, a basketball player's photo, sponsorship dollars given to a movie star or some other celebrity.
Another way to say it, I'm paying for the company for the things they use to brainwash me into believing they have a superior product.
The Chinese Paradox
The Chinese make 98% of the world's watches and watch parts and not just cheap ones. They make some of the very best for the Swiss, for example.
Today, the largest market for Swiss watches: China. The Chinese buy approximately 51% of the watches sold by Swiss companies. As European and US market demand for luxury Swiss watches dwindled, the Alpine country's industry moved into emerging Asian markets. They use blitzkrieg ad campaigns to get their message across.
What do the Chinese get: A name; the services of an advertising company, an ad campaign during the Superbowl, sponsorship dollars given to a movie star or some other celebrity.
Think about this paradox and the effort involved. They've done a good job of it.
People really buy into it. A friend of mine in India called me before Christmas and asked my opinion about a Tissot watch. Her husband wanted one and she planned to give it to him. I asked her to browse over to an on-line store and pointed out the same watch with Bulova on the logo. It sold for $300 less than the Tissot.
You probably guessed that she bought the Tissot. If you did, then you're right. She's an addict. What's worse? She knows it. I asked her, "why?" She replied, "The name brand." She bought a watch made in Asia because of a Swiss name.
How Can They Label It "Swiss Made"?
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Anyone might call this one of the most baffling commercial heists in history, especially since we have mountains of regulations against it. A picture will give you a better idea.According to Swiss law, you are able to call a watch Swiss Made even if every part comes from outside of Switzerland as long as 50% of the cost of the movement is made of Swiss parts and the watch is cased in Switzerland.
This isn't a Swiss law, it's a trade directive.
"(The directive) means cost-conscious watchmakers in the lower-priced segment can import 100
percent of the cases, dials, hands and straps and still mark their watches "Swiss Made" as long as half of the parts of the watch movement are made at home.
"Thanks to current weak Swiss laws, watches produced almost entirely in China can be sold legally under the "Swiss Made" label," Jean-Daniel Pasche, chairman of the Swiss watch federation (FH), said in a telephone interview." - Reuters - Silke Koltrowitz
Other notable quotes:
1. If you import a lower price component...the Swiss percentage goes up ... Lower-quality products would qualify for 'Swiss Made'. It is paradoxical," said Bernheim, on behalf of some 25 watchmakers opposing stricter rules.
2. The trend is likely to be accelerated by a move by watch industry major Swatch Group to
get out of the business of selling movements and movement parts to other watchmakers,
which will compel (others) to source more parts from Asia...
3. LVMH's biggest watch brand TAG Heuer has been one of the few to publicly admit buying movement parts from Japan's Seiko while stressing this would not hurt its "Swiss Made" image.
The Magicians Sleight of Hand
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When you look at the first Other Notable Quotes above, you might miss something important. What does it mean?
"If you import a lower price component...the Swiss percentage goes up"The movement to the right above (made with high quality components) would cost you $50 and it's manufactured in China. The engraved rotor in the photo to the left costs about $25 made in Switzerland. The single part - the engraved rotor equals 50% of the parts of the watch movement.
Here's a bigger rub. The Swiss watchmaker can ship the rotor to China and have it installed at the movement factory. That's 50% of the cost of the movement. Labor doesn't figure into the equation.
What about the casing (adding the movement to the case)?
"Thanks to current weak Swiss laws, watches produced almost entirely in China can be sold legally under the "Swiss Made" label," Jean-Daniel Pasche, chairman of the Swiss watch federation."
Quoting Silki's article in Reuter one last time:
The directive (current law) also has little-to-no heft in international trade disputes, making it a blunt sword in the fight to protect the reputation of "Swiss Made", luxury watchmakers say.
One other problem, no one has explained how the Swiss actually enforce the law. One press release from the Swiss Trademark Division amended an earlier amendment and said essentially that if a part is made in Switzerland and shipped to a foreign manufacturer, the box could also be stamped "Swiss Made".
Here's the next rub. It's up to the consumer to find out what the manufacturer did. For example, the Hamilton Watch dial above shows "Case Hong Kong". That's a disclosure, but are you going to remove the back of the watch to see where someone made the case? I'm willing to bet that 99.9% of the population (I'm being generous) wouldn't know how to remove the back
An associate at Shenzhen Meigeer Watch Co., Ltd in China, not allowed to speak officially said that her company has made a turn-key watch for Swiss firms such as Glycine Watch, SA.
The Paradox Has More Tentacles
Since 2009, a sector of the Chinese watch industry has gained significant recognition for excellence. That sector includes manufacturing of cases, dials, watch bands, crystals, crowns, packaging and some movements. While the production side of the business has experienced quality improvement, the Chinese lack a global brand.
Citizen Watch Ltd of Japan has produced their watches in China since 1988. Few people think Citizen is a Chinese brand watch any more than people think of Toyota as an American car company. I doubt anyone considers Tissot a Chinese watch, but one could make a strong argument that Tissot is Chinese.
Now, in the material above, I attempted to established a case for Chinese watches as an alternative to Swiss on both a cost and quality basis. The paradox becomes more global when you start to look for an affordable luxury watch.
I believe Americans have an adverse opinion of Chinese watches. What other people think of certain products will influence your purchase decisions. Those opinions will also influence the merchandisers at department stores other than K-Mart and Walmart.
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Not Replicas
The watches above have some similarity in design. The Chinese watch is not a "replica". If it had an IWC label, it would be a "knock-off", but it isn't.
You may not notice the differences, but they're similar to a comparison between Seiko's SGEE91P1 and a Rolex Submariner. At first glance, the watches may look the same, but saying the Seiko is a copy would be a "hasty generalization".
The difference in cost between the two watches above include price: $250 for the Parnis with a Sea-Gull movement and $8000 for the IWC. The IWC is a chronograph, has a different case design, and a sweep second hand.
The Parnis is a simple automatic watch with day, second hand and a reserve indicator, which tells the wearer if he needs to wind the watch.
I'm not recommending either watch. They're both nice timepieces. I own similar watches.
The Parnis takes advantage of two facets of the Chinese watch industry: The maturity of their industry and no promotion of the brand. That's right, Parnis has no marketing budget. You won't find Parnis advertised in the finest wealth magazines. They don't appear in showcases at Neiman Marcus and they will not pay for celebrity endorsements from Tony Parker of the San Antonio Spurs.
The paradox extended means you will not find Parnis watches in your favorite shopping places.
Did you Drink the Swiss Kool Aid?
The purpose of this post is to pass information on. My interest in watches began a long time ago, when I would visit my grandfather in his shop. I didn't know what he did, but I saw many watches and clocks around.I picked up the bug and my curiosity got the best of me. When you've spent the majority of your life as an investigative reporter looking at political corruption, corporate wrongdoing and how cleverly people cover it up, then you need a hobby. I like horology, but like the scorpion in the "frog and the scorpion crossing the river" story, I wind-up investigating my hobby.
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The scorpion convinces the frog to let him cross the river on his back. He says, I wouldn't sting you because we would both die. Half way across the river, the scorpion stings the frog. The frog asks with his dying breath, "why did you do that". The scorpion replies, "it's my nature."伟大的中国悖论与瑞士手表