Hong Kong Watch Industry: Moving Upmarket?

Hong Kong’s vast watch and clock industry is at a crossroads, just like the territory itself. While it continues to hum as a business mecca, Hong Kong’s official transfer from Great Britain to China in mid-1997 raises questions about what lies ahead. But its watch and clock industry, the largest exporter of watch units to the world, is confident it can retain its standing by creating added value.

Through a variety of local and global initiatives, the industry has set ambitious goals to become more than the production center for lower- to medium-priced quartz watches. Projects are underway to create laboratory-documented quality, greater control of component parts, a trained labor force, more use of technology and, in the years ahead, genuine Hong Kong-based brand names.

Many of Hong Kong’s watch and clock industry officials discussed these efforts during the 14th Hong Kong Watch & Clock Fair (see related story for a report on the fair). They spoke of a solid, expanding industry that nonetheless must prepare to meet challenges from within and from competitors around the world.

Exports and experts: Much is at stake. The watch and clock industry comprises Hong Kong’s fourth largest export after clothing, textiles and computers. The industry accounts for 6% of the territory’s total export dollars and employs more than 13,000 workers.

And business is very good. Exports increased 9% in 1994 and were up an eye-popping 14% in the first half of 1995. (Exports to the U.S. alone were up 7% to $1.2 billion in 1994 and grew 15% in the first four months of this year, the most recent statistics available.) This occurred despite generally slower markets in Europe and the U.S.

Most of Hong Kong’s watches end up in the U.S. (32%), Japan (10%), Germany (7%), Singapore (4%) and the Middle East (4%). They carry well-known Swiss and U.S. brand names, not to mention private-label brands, fashion house brands and even a few born and nurtured in Hong Kong in recent years. When clocks are included, the U.S. remains on top, taking 23% of the exports. China moves into a strong second place with 20%, Japan is third with 9% and Germany is fourth with 6%.

Hong Kong’s watch and clock industry didn’t always have such a strong success story. In the 1980s, it suffered from the LCD bust, staggering inflation and labor shortages, wide-spread copyright infringement suits (most were dismissed) and the much-discussed “brain drain” that created high turnover among management and technical staff.

Some of these problems still influence business (inflation remains about 10% annually and skilled technicians and designers are in short supply), but there are more pressing concerns.

China: It tops many lists of worries, for several reasons.

Just a few years ago, China’s proximity and low labor costs seemed a panacea to the rising labor and real estate costs in Hong Kong. By five years ago, about half of Hong Kong’s watch and clock companies had moved manufacturing to China; this year, nearly every company does all or most of its manufacturing in China.

Overall, the move to China was less pain than gain. Led by larger companies such as Stelux and Asia Commercial, it helped to sustain profits and even expanded the market by attracting new customers. Costs were controlled and production increased as labor and new technology were combined in new factories in areas such as the Pearl River Delta, about 20 miles north of Hong Kong. New investors also received special incentives for development.

Still, such a wholesale move in a short period would create growing pains for any industry. These pains were minimal at first; most involved start-up costs and building the factories. But as more and more companies set up factories, other economic dynamics emerged.

“With the en masse movement of production occurring so rapidly, operating and labor costs in China are rising sharply,” says Dr. Kenneth Ng, president of the Hong Kong Watch Manufacturers Association and managing director of Silcon Electronics, a Hong Kong watch and clock manufacturer. Labor costs alone are rising an estimated 10%-20% annually. That cuts into profit margins at many small and medium-sized companies that rely on volume sales and mass-produced parts or assembled pieces.

There’s also concern about Hong Kong’s ability to compete with rapidly growing industrial economies in neighboring Thailand, Malaysia and the Philippines. Low wages there have drawn a number of high-volume manufacturers.

Ng adds that relocation of much of the industry to China increased competition among Hong Kong companies. In their efforts to gain new business and fill production capacity, he says, companies too often undercut each other’s prices. Profit margins once again suffer.

Hong Kong manufacturers also face a growing China-based watch and clock industry spawned by their own forays into the country. Catherine Lam, founder of Silcon Electronics (and Ng’s wife), says that employees who gain skill in a particular area often leave to start their own companies.

Hong Kong responds: The migration to China in the past five years addressed immediate concerns about labor and production costs. But the Hong Kong industry is looking beyond the short term.

The primary goal of industry leaders is to increase use of new technology and production methods that yield watches of higher quality than much of the world now associates with Hong Kong. Instead of competing at the low to middle part of the price and quality spectrum, Hong Kong’s timepiece industry now seeks to compete at the middle and high end.

“Our industry must move upmarket by adding higher value to our products,” says Ng.

It faces many obstacles. One is the fact that it already makes watches under contract to some of the most prestigious Japanese and Swiss brands. But competing against these brand names is a long-term goal that even Hong Kong industry leaders admit is decades or longer away. Today’s goals are to improve productivity, design, engineering quality and technology.

International standards: As one step, the Hong Kong Watch Manufacturers Association (HKWMA) joined forces with the Hong Kong Productivity Council in May 1992 to help local companies comply with the internationally recognized ISO 9000 series of management standards. Companies in the U.S., Europe and Japan use these standards to assess management quality. The standards must be maintained and are audited regularly by a government organization comprised of members of different industries.

Interest in ISO standards was fairly strong among Hong Kong companies, despite a one- to two-year certification process and the costs incurred. HKWMA felt that most larger companies would have the resources to become certified. But it created a Quality Club that pooled money to help smaller companies work toward certification, developed a guidance manual and held several workshops. With this sort of assistance, more companies have expressed interest in the program.

By last September, Renley Watch Mfg., a large Hong Kong watch company that still manufactures locally, had become the first Hong Kong watch firm to earn an ISO 9001 certificate for production and design. Early this year, well-known Vogue Electronics Co. Ltd. and Dailywin Watch Products Mfg. Ltd. received ISO 9002 (production) certificates. Sweda Ltd. and the Hong Kong divisions of Seiko and Epson also have received ISO certification.

Stanley Lau, managing director of Renley Watch Mfg., expects many of the 85 companies now in the Quality Club to be certified within a few years. Industry observers expect up to 10% of the Hong Kong industry to be ISO-certified in the next decade.

Productivity and techniques: Also aimed at creating an upmarket image was the 1994 establishment of a Watch and Clock Technology Center, funded by an initial government grant of US$1.2 million.

HKWMA proposed the center after a government study pinpointed the watch and clock industry as one that needed to improve and extend its production capabilities to remain competitive. Like industry representatives, the government also noted the urgency caused by increased pressure from low-labor-cost regions and recognized a need to improve quality and compete on a level with the Japanese and Swiss.

The center is located within the high-tech confines of the Hong Kong Productivity Council, a government-funded facility with 600 employees who help a wide variety of local businesses with technical advice, testing and research. With funding approved last year, research specific to the watch and clock industry went into full operation this year.

“We are a one-stop office to serve the watch and clock industry,” says Dr. W.C. Keung, manager of the center’s Chemical & Metallurgical Division and the person in charge of organizing the center.

One of the center’s primary goals is to develop a system for testing and grading watches and clocks on specific standards not unlike those created at private and government labs in Europe. The purpose is to give buyers of Hong Kong timepieces reliable points of reference for judging the quality of such characteristics as water resistance, plating materials and thickness, case material content, energy usage and shock resistance.

The center is considered critical in helping watch companies meet international demands as they move upmarket. For instance, most Hong Kong companies &endash; even those with sport or diver watches &endash; are limited to testing for water resistance at 330 feet. Most dials boast only 99-ft. resistance, with some marked only “water resistant.” These standards are far too low to compete in most watch markets today. The center plans to offer tests to certify resistance at 660 and 990 feet.

Movements: Other research involves technologies the Hong Kong Productivity Council already uses for other industries. These include improvements in brass and stainless steel for watch cases and the use of advanced computer-aided design and manufacture to rapidly make plastic watch prototypes that can be redesigned as needed.

But the center’s most daunting &endash; even controversial &endash; goal may be to test and grade movements. This is important, says W.C. Keung, because Hong Kong companies rely on movements imported primarily from Switzerland and Japan.

An in-depth study is underway. But until the results are analyzed and additional testing equipment purchased, basic instruments will be used to test basic movement functions and help watch manufacturers measure the ability of their movement suppliers to meet the standards requested.

Keung says the research will produce different standards for different price and quality ranges. “We will publish our standards so the watch firms can then show their customers how the watch is graded and what the grade means,” he says.

To what extent such a system would upgrade the image of Hong Kong’s watch and clock manufacturers will depend on its acceptance and use within the industry. But because local industry leaders will help Hong Kong Productivity Center engineers create the format for the standards, acceptance is likely to be high. A full marketing program to explain the standards and their use is planned.

The center also is creating research libraries and plans to keep watch companies up to date on technological advances. For a fee, it also will allow manufacturers to use its labs to make molds, do research and conduct technical tests for their own projects.

Brand names: Many Hong Kong watchmakers hope to create genuine brand names to build consumer interest and demand. “The Hong Kong watch industry has a very short history when compared to Switzerland or Japan,” says Ng. No long-term plan for moving upmarket can ignore the need for brand-name recognition.

Competing with well-established European and Japanese brands certainly is one major hurdle.

Another is the enormous cost associated with a long-term marketing campaign in any major market. A few companies have sidestepped this issue by buying brand names known in local markets.

Thus, Crystal Electronics bought the Bossini brand and now sells Bossini watches worldwide and in the Bossini clothing stores that are well known in Hong Kong. The Ka Da Watch Co.’s Calinda watch brand has become well-known in Hong Kong. And World Jewellery Co., one of the few Hong Kong jewelers and watchmakers working in 18k gold and platinum, operates jewelry stores and sells watches with Swiss movements under the name Ricco Ricco, which is well known in Hong Kong and the Middle East.

Some Hong Kong companies have bought another company outright to acquire its brand name. Renley Watch Manufacturing bought Buler Swiss Watch, Sultana and Jean d’Eve in 1992 and now manufactures these and other watches at a facility in Switzerland. Several Hong Kong companies, including Stelux and Asia Commercial, have invested in Swiss companies. But Stanley Lau, managing director of Renley, expects these purchases to be fairly rare in the near term. “They are time-consuming and expensive,” he says. “In addition, sometimes the cultures of the two firms clash.”

Lau is a strong supporter of projects geared toward improving Hong Kong’s manufacturing image. “We need time to change our image,” he says. “Upgrading quality is the best route to create change and offers the surest way to open up the ability to create brand names.”

Today, consumers ask for Swiss or Japanese brands, he says. “We need to let the world know that our quality is high. If all these projects to improve Hong Kong manufacturing succeed, maybe then consumers will recognize that quality.” One of Lau’s personal goals mirrors one held by much of Hong Kong’s watch and clock industry: to see “Hong Kong” printed on dials.

BUYING AT THE SOURCE

Growth was the topic of the week at the 14th Hong Kong Watch & Clock Fair, held Sept. 9-13. That growth involves the watch and clock industry, the show and even the site of the show, the Hong Kong Convention and Exhibition Centre.

The number of exhibitors increased from 668 to 690, including 154 from overseas. Overseas buyers increased 4.1% to 5,761, though this represents a leveling off from the 11% growth seen at last year’s show. Still, show officials were encouraged with the increase. “With such encouraging results, we believe the global watch and clock market is recovering,” says Bob Chong, president of Chung Nam Watches Co. and chairman of the Hong Kong Trade Development Council’s Watch and Clock Trades Advisory Committee. Slightly fewer local buyers caused overall attendance to drop slightly to 14,500. Local public attendance, limited to one floor of the hall, totaled 37,303 vs. 41,724 last year. Local concern about unemployment (which is up past 3%, considered high by Hong Kong standards) and an important election the same week may have kept these figures down.

Confirmed orders at the show increased 7.4% to about $141.7 million, say organizers. An additional $175.8 million in orders were under negotiation.