The watch industry is the workhorse of Switzerland's export economy. Between 2010 and 2012, it chalked up average export growth of 17% per year, by far outstripping all the country's other industrial sectors. Watch exports soared to an all-time record volume of over CHF 21 billion in 2012 despite the strong Swiss franc and the euro crisis. They now account for almost 11% of total goods exports, so the watch industry is Switzerland's third largest export sector after the pharmaceutical and mechanical engineering industries.

Success Factors: Geographical Diversification and Focus on the Luxury Segment
The Credit Suisse economists identify two factors in particular as key to the success of the Swiss watch industry: its sales markets show broad geographical diversification, and it was quick to focus on the luxury segment. The chemical/pharmaceutical industry and the food industry are the only Swiss export sectors with better diversification regarding countries. Swiss watchmakers developed the rapidly growing emerging markets earlier and more intensively than manufacturers in other sectors. Between 2000 and 2012, Asian countries accounted for some 70% of the increase in Swiss watch exports, with the strongest growth impetus emanating from Hong Kong and China. In 2012, these two destinations accounted for a total of about 28% of Switzerland's watch exports, as compared to a mere 14% in 2000.

Political Measures in China Curb Demand
To some extent, however, the Chinese market now represents a risk concentration for the Swiss watch industry. The latest slowdown in growth is mainly due to weaker demand from China. The first eight months of 2013 saw nominal watch exports to mainland China plummeting by 17% year-on-year – yet over the same period, the number of watches exported rose by 9%. This suggests that larger quantities of cheaper Swiss timepieces are being exported to China. Demand for Swiss watches is being curbed not only by the slowdown in China's economic growth, but also by policy measures to combat corruption and advertising restrictions on luxury goods. Seen in the context of skyrocketing growth over recent years, however, the decline in exports to China should be assessed as a normalization rather than a slump. The economists at Credit Suisse anticipate that the rapid increase in the affluence of the Chinese population over the longer term will more than compensate for the short-term impact of these policy measures. China is likely to become even more important as the main export market for Swiss watches in the coming years. The Free Trade Agreement negotiated between Switzerland and China is also set to play its part here.

Major Potential in Emerging Markets; High Customs Duties and Taxes Are Barriers
Based on forecasts of income development in individual countries, the authors of the study developed a model to identify export markets that are likely to grow or contract in the future. After China, the strongest growth can be expected from the US, which is already the second most important sales market – and one that harbors vast potential. According to the model, mature European markets such as Italy, Germany and the UK are especially likely to lose relative importance. On the other hand, many emerging markets offer alluring prospects of growth for the Swiss watch industry. Vietnam, India, Russia, Ukraine, Malaysia and Mexico are singled out as the export markets likely to post the strongest growth in the future, and the greatest potential is ascribed to India and Russia. Brazil, Argentina, South Africa, Thailand and Turkey are also flagged to move up in the export rankings. However, most of the emerging markets are starting out from very low levels. High import duties and taxes on watches create barriers to entry in many markets. Consequently, the Swiss watch industry has a major interest in concluding Free Trade Agreements with such countries.

Concentration Process Accelerated by Verticalization and Worsening Supply Situation
Even during a period when it is enjoying success, the watch industry is undergoing major structural change. The concentration process that has long been under way in the sector has accelerated in the last three years. Employment rose by 14% between 2009 and 2012, whereas the number of companies fell by 7%. This trend is mainly driven by the vertical integration of production that can be observed. The "Swissness" bill will also contribute to structural change. In future, at least 60% of the manufacturing costs for a "Swiss Made" product must be incurred in Switzerland. In 2012, the Swiss watch industry imported components worth a total of CHF 2.1 billion from abroad, corresponding to about one tenth of watch exports. But the import-export ratio for Swiss watches in lower price segments is considerably higher, so these suppliers will be hit hardest by the new regulations. Distribution often poses an additional challenge for smaller producers. Financial reasons make it difficult for them to follow the trend towards verticalized distribution set by large watch and luxury goods corporations, as evidenced most clearly by the many monobrand boutiques that have opened across the globe.

Positive Outlook for the Watch Industry – Small Independent Producers under Pressure
In overall terms, the Credit Suisse economists rate medium-term prospects for the Swiss watch industry as positive. Major watch and luxury goods corporations together with independent traditional brands in the top price segment are best positioned to benefit from the ongoing growth in global demand for luxury goods that is forecast. Smaller independent suppliers are coming under greater pressure due to the structural challenges mentioned above. Against this backdrop, the authors of the study expect the concentration process in the Swiss watch industry to continue over the coming years.