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2018 Swiss fake watch Exports: Strong Start, Weak Finish ADVERTISEMENT

The Swiss fake watch industry turned in a strong performance last year, as measured by the value of its global fake watch exports. Ex-factory sales of Swiss replica watches rose 6.3% in value over 2017 to CHF21.2 billion (the figure is nearly the same in U.S. dollars).

It marks the second consecutive year of export growth after downturns in 2015 (-3.3%) and 2016 (-9.9%). It is also the largest annual increase in six years. It is a measure of the industry's recent sluggishness that all three growth years since 2012 were under 3%.

The data, released by the Federation of the Swiss fake watch Industry (FH) on Tuesday, measures wholesale sales (i.e., sales of fake watch companies to their subsidiaries and dealers), not sales to consumers.

As welcome as the 6% jump was, it would have been higher had the recovery, fueled by shipments to the Far East, not lost steam in the second half of the year.

The FH data shows that 2018 was notable for stark contrasts: a roaring first half versus a meeker second half; a booming Far East versus a slumping Europe; rising unit sales of luxury mechanical replica watches versus plummeting sales of low-end quartz watches; and relief over the long-awaited rebound in the U.S. market versus fears about the slowdown in China.

Here's a look at what the data reveals about the state of the Swiss fake watch market.

Hot replica watches like the Replica Rolex GMT-Master II helped drive exports up for a second consecutive year.

In Like a Lion

The current Swiss fake watch recovery started in the second half of 2017. As a result, the industry entered 2018 with a full head of steam. That momentum got the year off to an excellent start. "Growth was particularly strong in the first half of the year, +10.6%," the FH said in a statement.

Leading the way, as usual, was the Far East. For the full year, the value of exports there was up 15.4% over 2017. The entire Asian region was up 12.2%. For the year, exports to Hong Kong, Switzerland's top fake watch market, were up 19.1%. Exports to China (#3) increased 11.7%, to Japan (#4) 9.1%, and to South Korea (#11) 25.7%.

In general, the recovery of 2018 was widespread. Of Switzerland's top 30 markets, which account for 92% of exports, 24 reported increases.


However, the momentum started to wane around mid-year, the FH said. "The steady pace of growth earlier in the year saw a decline from the summer onwards. It slowed to +2.3% in the second half.

"Japan peaked in the summer," the FH said. In France, "the second six months were practically flat."

The FH cited a number of reasons: "Macroeconomic, commercial and political uncertainties influenced developments in the sector, which also had to deal with competition from other luxury goods and connected objects."

The trade war between the U.S. and China, for example, hurt consumer demand in the Greater China region (China, Hong Kong, Macao), Swiss fake watch executives say. Tougher financial comparisons with the strong second half of 2017 also played a part, according to the FH.

The United States bucked the second-half slowdown and ended the year up 8.2%, the first increase since 2014.

In September, Swiss fake watch exports fell in value for the first time in 16 months, down 7.4%. In December, they fell again, down 2.8%. In the fourth quarter, exports in units "fell by around 10%" each month, the FH said.

Although it's dangerous to read too much into one month's data, the results for December 2018, also released on Tuesday, are striking. Of the top 30 markets, 15 were down. "Overall, Europe (-5.8%) was significantly down, driven by the decline in France (-11.6%), Italy (-14.6%), Spain (-10.1%) and Austria (-29.0%), in particular," the FH said.

Far East markets, which were up 17.2% in value in the January-November period, fell 3.2% in December. Hong Kong, up 21% through 2018's first 11 months, rose 0.5% in December. And, ominously, exports to China fell 10.1%.

Smartwatches have had a noted impact on Swiss fake watch sales and exports ?but many major brands are attempting to compete directly with those products in response.

China Slowdown

Swiss fake watch executives are monitoring the China situation closely. China was the hero in 2017, with export growth of 18.8%, the highest of any market. Last year growth slowed, ending the year at a still hearty 11.7%.

Nevertheless, China's year-long downward trajectory, culminating in December's drop, raised alarm bells. "The drop in sales in China [in December] intensified the slowing of growth observed since the beginning of 2018," the FH said. "China ended the year on slightly lower growth, with a gradual slowdown from January onwards." The China slowdown was a big factor in the overall slowdown in exports in the second half of the year, the FH said.

The FH data confirmed what Swiss fake watch executives have been saying for months. "Growth has been slowing in China," Geoffroy LeFebvre, CEO of Baume & Mercier," told HODINKEE at the recent SIHH exhibition in Geneva. "From unbelievable levels, by the way," LeFebvre added. "I remember when growth went below 10% - it was at 9-point-something -- everyone was in panic."

Panic remains an option given that China's economic growth slowed to 6.6% last year (lowest since 1990) and 6.4% in the fourth quarter. "If fake watch demand in China slows dramatically this year," one Swiss fake watch executive told me at SIHH, "this industry has a crisis."

"Growth has been slowing in China," says Geoffroy LeFebvre, CEO of Baume & Mercier."

'Signs of Stagnation'

Inevitably, the second-half slowdown and uncertain geopolitical and economic climate make the normally cautious FH even more cautious about a forecast for 2019. "The signs of stagnation, economic indicators and continuing uncertainties at many levels suggest that the right approach to 2019 is cautious optimism," it said. "Watch industry exports are expected to continue to grow, but at a more modest level."

ADVERTISEMENT America Great Again?

One major market that bucked the second-half slowdown was the United States. Last year, the U.S., Switzerland's second largest market, broke out of a three-year-long export funk. (Exports fell a cumulative 13.7% between 2015 and 2017.) Last year, exports finally rose, growing 8.2% for the year to CHF 2.22 billion, "with the pace of growth accelerating throughout 2018," the FH noted. Including December. "The United States (+7.9%) accelerated significantly," the FH said, "posting an excellent fourth quarter."

There's no question that the U.S. had a strong finish to the year in terms of sell-in. The question is sell-out. Anecdotal reports from retailers at SIHH were mixed. Some indicated that luxury fake watch sales at retail slowed in the fourth quarter, particularly in December as a result of the stock market turmoil. If so, it will be harder for the U.S. to keep 2018's rebound rolling in what most jewelers say will be a tougher year. However, if sell-out matched sell-in, the U.S. could remain in recovery mode. Stay tuned.

It's unclear yet whether U.S. retailers (such as Wempe's New York location, shown here) are in for a strong or difficult 2019.

Winners & Losers

There were far more winners than losers on the Swiss fake watch export list in 2018. Smaller markets had the greatest percentage increases. Exports to Qatar, market #18, jumped 52.5%, followed by #30 Oman, up 36.5%; #24 India, up 34.0%; #27 Bahrain, up 27.9%; #11 South Korea, up 25.7%; and #21 Russia, up 25.4%.

"Last year's declining markets were all in Europe," the FH noted. Europe is Switzerland's second largest export region, after Asia, accounting for 31% of exports last year. In total, exports to Europe fell 2.9%. The biggest drops were in #20 Austria, -29.8; #9 Italy, -14.3%; #28 Belgium, -12.3%; and #12 Spain, -11.4%.

'570,000 Fewer Timepieces'

In general, the Swiss fake watch industry pays more attention to the total value of exports than to total volume. Perhaps that should change, in light of what amounts to a new quartz crisis in Switzerland.

Last year, unit exports of mechanical replica watches rose 3.9% to 7.52 million pieces. Mechanical replica watches are the Swiss industry's bread and butter; they account for 82% of fake watch exports in value and 32% in units.

Looking Back, Looking Ahead

While the numbers presented here offer a look at where the fake watch industry has been over the last few years and what the current trajectory is, there's more uncertainty about the future than you might expect. At SIHH a few weeks ago, Joe talked to dozens of key industry figures to get a sense of what 2019 might hold. The answers they gave are interesting and provide a bit of context for what you're seeing in the FH's year-end report.

Read the full report here.

The bulk of Swiss fake watch production, however, consists of quartz watches, almost all analog quartz. Switzerland's quartz fake watch production has declined every year since 2011.

Last year, quartz replica watches fell again, down 5% in units to 16.21 million pieces. Since 2011, quartz fake watch exports have declined 31%.

Last year, total fake watch exports in units dropped to 23.74 million pieces. "This was 570,000 fewer timepieces than in 2017," the FH said.

The vast majority of those were low-priced quartz analog replica watches (i.e., with an export price below CHF500), according to the FH. Quartz replica watches now account for 68% of exports by units, 28% by value.

The primary cause of the decline, Swiss fake watch executives say, is competition from smartwatches and wearables in the under-$1,000 segment of the market, particularly the Apple Watch. One measure of the impact is that between 1986 and 2015, when Apple launched its watch, Switzerland's quartz fake watch exports fell below the 20-million-unit mark just once, in the Great Recession of 2009. However, in 2016, Swiss quartz fake watch exports dropped to 18.43 million and have dropped further every year.

Another factor is a Swiss federal law that took effect in 2013 that tightened rules for the "Swiss-made" designation on watches. It increased to 60% the value of a product that must be made in Switzerland. The increased cost forced many fashion fake watch brands to abandon Swiss-made goods.

The danger in the precipitous drop in quartz fake watch production, some Swiss executives say, is that it erodes Switzerland's industrial base, and makes the industry increasingly dependent on the luxury segment of the market.

Switzerland's quartz fake watch output is expected to decline further this year.