Hong Kong is inevitably affected by the blow of the Asian economic crisis. The total export amounted of watches and clocks dropped by 6 percent in 1998, and manufacturers are not only facing stringent competition among themselves but also against makers from mainland China.

Fortunately, production is ruled by innovative designs, high-quality standards, advanced technology and good information dissemination. Makers can cope with the changing market demand easily.

The development for the first half of 1998 and 1999 can be elaborated in two categories: Clocks and Watches.

Clocks

Most clocks manufacturers from Hong Kong set up their production line in mainland China in order to save on freight charges. The trend is for them to directly export finished products from the mainland. The relevant data is not included in the export statistics in Hong Kong, so there is a reflected decline in Hong Kong's clock export. By 1998, the total amount dropped by about 7 percent. The market environment is weak, comparatively speaking, and only exports to the United States could be maintained.

(See Hong Kong's total export amount of complete clocks and total export quantity of complete clocks)

Keen competition in the low-end line

According to some experienced clock manufacturers in Hong Kong, business and quality in the low-end line is suffering, especially for clocks with simple designs. Makers from the mainland are coming up with low-quality, low-priced premiums and wall clocks, and these have posed as a problem for Hong Kong makers who have incurred high production costs.

To cope with the current competition, the way to survive is to speed up product development, adopt high-tech production and come up with value-added items. Investments in R&D have proven to be costly, but makers have resorted to it to attain an edge over their mainland counterparts.

For manufacturers of low-end products, brand name is not as important, so more effort has been put into the design, function and materials used. Among the materials favored are zinc, copper, alloy or even crystal in high-priced products.

Radio Control Clock

According to one maker, radio control clocks production is one of the best examples of production shared by more and more Hong Kong makers. Before, the technology was exclusive to German manufacturers.

Japan is now intensively studying and developing the technology. It has increased the receiver signal by 10 times, which means that the signal can be received clearly even in highly remote areas. It is also trying to come up with a Receiver IC that only Germany now has the technology to produce. Makers from the Unite States have increased the transmission signal from 10kH to 30kH, which would ensure coverage throughout the continent. In other markets, the Basel Fair-made order turned out unsatisfactorily as most manufacturers want to recover their R&D costs and prices ended up being too steep.

The development of radio control clocks is faced with the unsteady signal reception since there are different frequencies and signals in different countries. However, trends are looking toward its development once a huge sum for capital has been invested in solving technical problems.

Trend of category, design and function

The United States, being the largest clock export market of Hong Kong, with premium clocks occupying the largest share. The average price range is US$5 to US$40, but for some promotional items, the unit cost can reached as low as a few HK dollars.

The premiums market marks a flourishing turnover for local manufacturers. In Europe, analog quartz clocks have the largest market share compared with LCD, LED, and travelling alarm clocks. Clock designs that match with household interiors have a direct effect on the product's value. Multifunction clocks are joining in the trendy fray as these are added with such functiions as a thermometer, calendar, world time and alarm functions, which are popular in Europe.

Watches

In 1998, the total export amount of finished watches dropped by 3 percent.

(See Hong Kong's total export amount and total export quantity of complete watches)

Complete watch manufacturing

According to low-end watch makers, the sales boom in the United States in 1998 and the first half of 1999 was just enough to compensate for the sales decline in South America and the Middle East. Since local manufacturers moved production lines to mainland China, production capacity has increased and has become bigger than the market demand. Thus, clients from the United States pushed prices down. In order to maintain the market share in the low-end watches line, most local manufacturers reduced prices which resulted in a 20 to 30 percent unit price drop.

According to estimates, low- to mid-priced watches have the largest percentage exports at 60 percent. Most makers said that no matter how long and how good relations are with the clients, they leave at the slight indication of a twenty- to thirty-cent difference in unit prices.

In order to pull down production costs in the low-end watch market, makers use the mainland's production resources or provide parts for mainland China's individual manufacturers. Hong Kong makers will keep from owning production facilities but will concentrate on innovating design and constructing marketing and customer-related strategies.

(See the comparison of levels of Hong Kong-made watches by quantity)

Watch parts manufacturing

The production of low-end watch parts such as cases, bracelets, dials, hands, and metal plating are all produced by mainland China's individual manufacturers. It has proven to be difficult for Hong Kong makers to partake of the share.

Hong Kong firms invest a large amount of capital in upgrading production facilities to be able to concentrate on producing difficult and high-end value-added parts.

The trend leans toward low-priced Swiss-made brands such as CK, Swatch, Gucci and Alfex. Prices of these products have also been reduced. Swiss brands welcome the technological improvement in the production of mid-range to high-end watch parts, including cases and straps.

Middle- to high-end complete watches

As most parts manufacturers have moved their production lines into the mainland, production is larger than the market demand. In order to cope with the market demand, most makers accept low-volume orders for more varieties. This tactic requires a more complicated internal management system and design. Because of this, Hong Kong firms could keep a distance from the mainland makers of middle- to high-end watches.

Direction of development

The industry is currently faced with the shortage of technically-trained workers. This can be traced to the government's lack of support in providing professional training.

The development and competition in the high-end watch industry should not pose as a threat. Rather, such activity should serve as a springboard to widen business relations to the world market. Although most are implying that Hong Kong should shift from the production of low-end watches to high-end items, one has to consider the advantages, strength and capital before making a move from the established to the high-end market. Developing equilibrium is still priority.

Branded watches

In facing the keen competition, many local makers try to set up their own brand names. One firm who has successfully developed its own brand shares three different strategies:

1. Self-created brand name: The advantage here is that there is no brand history and established environment. One can freely develop his own marketing strategy and product positioning. The disadvantage is that the brand is totally new in the market and large investments on human resources, capital and time are needed to increase product awareness. Rewards may not be reaped immediately. The market should be developed one by one and the firm should not jump to a new market before the previous has become established.

2. Licensed brand: Brand awareness has already been established and too much attention to brand development can be saved. The disadvantage is that you a fixed amount of royalties should be paid. Also, the up and down situations of other products with the same brand name would also be felt.

3. Purchasing existing Swiss brand: The advantage is that this kind of brand will have a longer product life compared to those of fashions. These are original watch brands.

Is the development of ones' own brand name a good step? According to one successful brand-owning firm, a company that develops a new brand name cannot be successful in one or two days. The initial stage takes time to cultivate. The early stages of setting up one's own brand goes hand-in-hand with the development of he company's image and its confidence in its market. A good suggestion is to continue in the development of OEM and ODM.

The comeback of the LCD watch

LCD watches first appeared 20 years ago. Its popularity declined in the 80s. The recent releases of Casio, Baby G and Nike-made LCD watches are slowly becoming a hit. More electronic functions are added to the products such as games, timer, diary, calculator and pressure gauge.

Trend development of Hong Kong-made watches

A specialized LCD watch manufacturer said that the peak of high-quality LCD watches was in 1994, and a renewed interest in them is foreseen in about two years. Currently, makers are focusing on analog and functional LCD watches. In order to stand out, many makers are intensively relying on new functions and designs that would not be easily copied by other makers. Firms are advised to register designs to protect rights.

(See charts on trend development of Hong Kong-made watches) and Hong Kong's total export unit price of re-export quantity of complete watches)

Innovated technology

The Hong Kong government is now emphasizing technology development, according to the July 1999 Second Report of Commission on the Innovation & Technology. What benefits can be gained from such a policy? Some suggest that Hong Kong could produce its own watch movement so that it would not be affected by price fluctuations of movements from Japan or Switzerland. Others suggest that it should discontinue its production of existing movements and go further in producing new movements.

Makers feel that only a strong support from the government can aid in developing new movements that can compete with the technically advanced Japanese movements. The industry's image can also be boosted by value addition. The setting up of the Hong Kong Watch and Clock Technology Centre has boosted the image and position and increased the makers' bargaining power.

Hong Kong's technology is behind its neighbor, South Korea, which is ably supported by government in the development of new watch materials, such as ceramic and tungsten.

(See Hong Kong's total amount and total quantity of import of watch movements)

Watch movement

The suppliers hiked prices of movements in December 1998. Makers of finished watches and agents stocked up on movements, afraid that prices would go up again.

According to a large agent of watch movements, orders received from manufacturers were not satisfactory in the first quarter of 1999. Purchases in the first quarter dropped. On the other hand, the market was not able to absorb the sudden price increase in the first quarter of 1999, leading to a drop in sales, which prompted a sudden price drop from April to May.

The sudden price increase of 50 percent from January to March shifted most premium watches buyers to other products. Another movement agent said that apart from the few movement agents that reduced their prices, they have also embarked on a price war intensified by smaller brokers. On top of the hike in price of movements, it has become difficult to set a standard price for movements.

Recently, Seiko — one of the two large Japanese movement suppliers — announced that they will reduce the production of 6x8 movement by 25 to 30 percent. Another maker, Citizen, will reduce production by 20 percent in the first half-year. It will reduce production by 10 in the second half of 1999 in its aim to steady the price and resume the balance of demand and supply. However, most watch manufacturers are afraid that this will lead to another increase on movement price.

In recent years, the popularity of LCD watches has eaten up the market share of analog watches. This led to a temporary decline in analog watches.

Japanese movements are supplied for about 70 percent of analog watches.

Makers of Japanese movements are confident that the continuing development of new functions, keep them ahead of competitors from the mainland. Mainland China, on the other hand, needs to invest heavily on production lines if they want to compete with Japan. Current demand for complete watches from the mainland is 80 million pieces. Once the mainland joins WTO, it will be the largest buyer of watch movements in the long run.

(See the chart on the distribution of Japan movements in Hong Kong)

Conclusion

Although the industry is facing a great difficulty of producing more than the demand and staving off competition, it has become apparent that self motivations and a forthright attitude are needed to maintain industry leadership. Hong Kong is only next to Switzerland as a watch manufacturing company. The watches and clocks line is one of the region's four largest export product line.

(See the comparison of complete watches of Hong Kong and other countries)

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