Overview

• The mainland granted all Hong Kong products tariff-free treatment under the third phase of the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA III), which took effect from 1 January 2006. In terms of the CEPA origin requirement, watches made in Hong Kong with a Hong Kong brand are no longer required to fulfill the 30% value-added content requirement in order to be eligible for zero tariff.
  
  
• According to the latest available statistics, Hong Kong was the world's second largest exporter of complete watches and complete clocks in terms of both value and quantity in 2006.
  
  
• Hong Kong's watches and clocks exports registered a 11% growth in 2008. The EU and the US were the largest markets, together accounted for 40% of the total exports. While sales to the EU rose by 7%, exports to the US also increased by 5% throughout 2008.
  

Industry Features *

	Manufacturing	Import/Export Trade
No. of Establishments	156 (Sep 2008)	1,820 (Dec2007)
Employment	1,439 (Sep 2008)	11,190 (Dec 2007)

* Industry statistics cover activities in Hong Kong only.

Hong Kong is a leading exporter of watches and clocks in the world. According to the latest available statistics, Hong Kong was the world's second largest exporter of complete watches and complete clocks in terms of both value and quantity in 2006.

The largest export item is battery-powered wrist watches, accounting for over 60% of the total exports. Wrist watches exports range from analogue to digital watches, metal to plastic watches, fashion to classic watches, standard to jewellery watches, and novelty to sport watches. Hong Kong also exports a variety of parts and components of watches and clocks, such as assembled movements, cases, watch straps, dials and parts for watch cases and brands. Complete clocks, including alarm clocks, wall clocks and traveller clocks, share a smaller portion of total exports.

Hong Kong has established strong ancillary and supporting industries for its watches and clocks manufacturing. Local watch assemblers are well served with a variety of high quality watch cases, dials, watch straps, hands, button cell batteries, crowns, electronic parts and other accessories. However, the industry relies heavily on imported watch and clock movements, and core components such as quartz, crystals and integrated circuits. Major sources of imports include Switzerland, the Chinese mainland and Japan.

Hong Kong's watches and clocks companies largely rely on OEM and ODM business. Because order quantity for each model is usually small, making it difficult for scale economy through automation, manufacture of complete watches and clocks remains fairly labour-intensive in Hong Kong.

In view of severe competition, especially in the low-end segment, an increasing number of manufacturers have relocated the labour intensive processes to the Chinese mainland to reduce costs. But a number of manufacturers still maintain their production bases for higher value products in Hong Kong. Meanwhile, as buyers are increasingly quality conscious, more and more watches manufacturers have acquired the ISO 9000 certification to strengthen their quality management systems. The Hong Kong Watch Manufacturers Associations Ltd. has also strengthened the industry's intellectual property rights by running a "Watch & Clock Design Depository Centre", where members can store their product designs there and the centre will provide a third-party certification services for the copyright.

Performance of Hong Kong's Exports of Watches and Clocks ^

	2006		2007		2008
	HK$Mn.	Growth%	HK$Mn.	Growth%	HK$Mn.	Growth%
Domestic Exports	562	-20	493	-12	444	-10
Re-exports	46,435	+2	49,465	+7	54,759	+11
...of Chinese Mainland Origin	26,485	+9	28,370	+7	32,656	+15
Total Exports	46,998	+2	49,958	+6	55,204	+11

Total Exports by Major Markets	2006		2007		2008
	Share%	Growth%	Share%	Growth%	Share%	Growth%
EU(27)	23	+4	23	+6	23	+7
...Germany	5	-4	5	+3	5	+11
...UK	4	+1	4	+3	4	+8
US	20	-2	18	-4	17	+5
Chinese Mainland	13	+8	14	+12	14	+13
Japan	9	+1	9	-3	9	+12
Switzerland	9	+10	11	+24	11	+16
ASEAN	6	+6	6	+12	6	+10
...Singapore	2	+12	2	+26	2	+3

Total Exports by Categories	2006		2007		2008
	Share%	Growth%	Share%	Growth%	Share%	Growth%
Complete Watches	68	+3	67	+6	68	+12
Parts & Components	20	+3	21	+12	21	+12
Complete Clocks	6	-12	5	-11	4	-6
Watch Straps & Parts	5	-4	6	+17	6	+12
Other Chronographic Apparatus	2	+7	2	-6	1	-19

^ Since offshore trade has not been recorded by ordinary trade figures, these numbers do not necessarily reflect the export business managed by Hong Kong companies.
* Insignificant

Hong Kong's watches and clocks exports registered a 11% growth in 2008. Exports of complete watches increased by 12%; straps increased by 12%; parts and components also surged by 12%. However, exports of complete clocks dropped by 6%.

Hong Kong exports to the EU, which is the largest market, increased by 7% in 2008. Among which sales to Germany and the UK, the major EU markets, edged up by 11% and 8% respectively. As regards Switzerland, another major European markets outside the EU, surged by 16% in the year. Hong Kong's exports to Switzerland comprised mainly parts and components.

In the meantime, Hong Kong's watches and clocks exports to other markets also recorded a significant growth. Exports to the US raised by 5%; the Chinese mainland rose by 13%; and Japan increased by 12%. The majority of exports to the mainland were being parts and components for outward processing production.

Sales Channels

It is estimated that over three-quarters of Hong Kong's timepiece exports are produced on an OEM basis. Major OEM customers include importers and distributors in the US, the EU and Japan. A small number of manufacturers have OEM arrangements directly with chain stores and fashion labels, which require unique designs to complement with their brand image.

With respect to ODM products that Hong Kong companies own the designs, though the sales channels are similar, they are especially preferred by smaller distributors, who are constrained by their financial strength in investment in design and tooling. Some low-priced products may also be sold to large companies directly as premium items for promotional campaigns. Market-wise, sales to the Chinese mainland, Southeast Asian countries and other emerging economies are usually on ODM arrangement.

There are a number of Hong Kong companies selling timepieces with their own brands. There are also some few examples that Hong Kong companies have acquired Swiss brand names or their Swiss counterparts as a means to extend marketing and distribution network, and/or to gain access to better technology and designs. In addition, some Hong Kong companies have begun specialty counter business in major cities in the Chinese mainland via co-operation arrangements with department stores and shopping malls, aiming at promoting their own-brand products there.

The Basel Watch, Clock and Jewellery Fair held in Switzerland is an important event for Hong Kong companies to promote their timepiece business. The Hong Kong International Watch & Clock Fair, organised by the Hong Kong Trade Development Council (HKTDC), is another major event for companies to exhibit their products to overseas buyers. Business missions organised by the HKTDC to the Chinese mainland, Russia, Poland, UAE, etc., also provide opportunities for Hong Kong companies to establish connections with buyers in emerging markets.

Industry Trends

Hong Kong's watches and clocks industry has become a significant player in the global timepiece market, alongside reputable suppliers like Switzerland and Japan. However, competition in the marketplace has intensified. For instance, timepiece exports from certain Asian countries like South Korea and Singapore grew robustly in recent years. But the intensified competition has not had a marked impact on Hong Kong's timepiece exports, as watches and clocks are not major exports of these Asian countries. This is also due in part to Hong Kong manufacturers' efforts to increase their competitiveness by moving up-market, improving quality, enhancing design and production capability, practising quick response, etc., further backed up by sophisticated supporting industries locally and across the boundary.

The biggest challenge for Hong Kong will increasingly come from local Chinese companies. The Chinese mainland has a long history of making low- to medium-range timepieces, particularly analogue watches and low- to medium-priced clocks. Mainland companies are taking advantage of the supporting industries established in the mainland to enhance their competitiveness, thus posing an increasing threat to Hong Kong companies.

Against this background, an increasing number of Hong Kong companies have put emphasis on the development of ODM businesses. Along this direction, manufacturers have paid more attention to patent issues, in order to protect their intellectual property rights with respect to cosmetic design. Technologies such as computer-aided design (CAD) have been applied to improve the design of complete watches and clocks, dial faces, watch cases and related components, while reducing time and costs involved. Applications such as the use of 3-dimension computer aided industrial design (CAID) and rapid prototyping also facilitate Hong Kong companies to enhance their design capabilities. Some companies have also invested in the research and development of movements to reduce their reliance on imports and overcome the constraints of standard movements to product design.

Besides, Hong Kong's watches and clocks manufacturers have increased investment in modern production technology to enhance quality and productivity. They have continued to develop better technologies in die-casting, mould making, plastic manufacturing, metal stamping, surface finishing and plating, etc. For example, metal injection moulding (MIM), which is especially suitable for production of stainless steel cases, bands and buckles of complex shapes, has been applied to enhance production capability for sophisticated designs.

Thanks to the growing popularity of information technology, getting on-line on the Internet has become a viable option for marketing watches and clocks. Indeed, there are a growing number of timepiece retailers and dealers setting up web pages not only for promotion and cataloguing, but also on-line sales. This is facilitated by the fact that timepiece sales in general do not involve much technical detail and bulky delivery, making them suitable for sales in the cyber world. For example, some Hong Kong watches and clocks manufacturers opined that they got email orders from some Eastern Europe countries, such as Russia. In all likelihood, overseas buyers will continue to demand more and more from their suppliers in terms of quick response and delivery. This means that Hong Kong exporters will increasingly be required to handle more orders of smaller quantities, along with shorter delivery lead times.

CEPA Provisions

Since the implementation of the third phase of the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA III) in January 2006, all products of Hong Kong origin can be imported into the mainland at zero tariffs. According to the stipulated procedures, products which have no existing CEPA rules of origin will enjoy tariff-free treatment upon applications by local manufacturers and upon the CEPA rule of origins being agreed and met.

The CEPA origin criteria for watches include either:

(1) Assembly of component parts and accessories into watch. The principal processes are assembling watch movement into the watch body, assembling of component parts and accessories (watch buckle, watch band, dial and battery, etc.) into watch, testing, time adjustment and quality control, and to fulfill the value-added content requirement, under which at least 30% of the FOB value of the products, and that the final manufacturing or processing operations should be completed in Hong Kong.

or

(2) Assembly of component parts and accessories into watch. The principal processes are assembling watch movement into the watch body, assembling of component parts and accessories (watch buckle, watch band, dial and battery, etc.) into watch, testing, time adjustment and quality control and the exterior design of the watch should be carried out in Hong Kong. The watch should belong to a "Hong Kong brand" jointly determined by Hong Kong and the Mainland authorities. There should be clear Hong Kong origin marking (e.g. "Manufactured in Hong Kong", "Made in Hong Kong" or "Hong Kong", etc.) on the shell of the "Hong Kong brand" watch.

Notably, certain watches made in Hong Kong with a Hong Kong brand, by fulfilling the CEPA origin rules, are no longer required to fulfill the 30% value-added content requirement in order to be eligible for zero tariff. Detailed information, as well as the origin rules for clocks and other timepiece items, are available from the following hyperlink:

http://www.tid.gov.hk/english/cepa/tradegoods/files/mainland_2008.pdf.

General Trade Measures Affecting Exports of Watches and Clocks

In another development, the Chinese mainland has removed its quota restrictions on watch imports since 1 January 2003, on the back of its WTO accession commitment.

On the other hand, Hong Kong's present origin rule stipulates that the origin of watches and clocks should be determined by the origin of movements. This is to align Hong Kong's practice with those of the major producing countries and markets, including the US, Japan and Switzerland. However, there have been discussions in the Committee on Rules of Origin of the WTO in a bid to reach a consensus on harmonisation of the rule of origin. Positions of representatives from different countries, in general, can be divided into two camps:

• the view originally put forward by Hong Kong that manufacture of the movement represents the last substantial process in the production of watches and clocks; and
  
  
• the view that the final assembly of the movement into its case and the subsequent finishing and checking processes should be the activities that confer origin.

These two positions clearly reflect the commercial interests of the countries manufacturing movements against those manufacturing completed watches and clocks from imported movements.

Separately, the US Customs requires that watches must be marked with the country of origin. But the rule stipulating watch straps/bands affixed to watches must be separately marked to indicate their country of origin has been removed, on condition that the straps/bands are assembled into complete watches at the same place as watch assembly.

In the EU, there is a Directive on the control of the use of nickel in objects intended to be in contact with the skin, including watches, for health reasons, and another Directive prohibiting the trading of textile products, including textile watch straps, containing prohibited azo dyestuffs. There are also Directives for environmental protection in relation to sales of watches and clocks in the market, including restrictions on batteries and accumulators that contain mercury, as well as the Directive on Waste Electrical and Electronic Equipment (WEEE) implemented since 13 August 2005, and the Directive on Restriction of Hazardous Substances (RoHS) that came into effect on 1 July 2006.

Product Trends

• Growing Fashion Consciousness

As noted, timepieces have emerged into a fashion item. In the US, consumers continue to buy inexpensive fashion watches with different designs to match their casual dressing. In Europe, although consumers are relatively more formal, they tend to buy watches with fashionable designs to cater for their formal as well as casual dressing for different occasions. As a result, accuracy and reliability are not by themselves sufficient to satisfy consumers. Design concepts and styling, along with reasonable prices, are far more important in tapping demand. Some of the successful timepiece companies and even boutiques are leveraging on this development, making wristwatches a fashion statement, which is especially appealing to youngsters. This has also become an important means for the timepiece industry to stimulate purchases, especially in mature markets like the US and the EU, in which the new generation is more willing to spend on technology products, such as computers and mobile phones, rather than conventional timepieces.

In line with this development, fashion timepieces with simple designs have become the mainstream. Different materials have been widely used for casing and housing, as well as wristbands. Apart from leather and metal, plastics and wooden materials with different finishing and colours are used in combination to cater for different styles. As for metal watches, there is a growing demand for stainless steel watches requiring no electroplating in the EU, where nickel is restricted. Amid growing health consciousness and the promotional campaigns of major sport-related companies, digital sports watches, as well as "sporty-look" watches, are among the star performers.

• Product Features

Cross-industry utilisation of electronic devices has enabled timepiece manufacturers to incorporate additional features to watches and clocks. Timepieces with functions like voice announcement, EL flashing and illumination, electronic compass, calendar, chronograph, incoming call alert for mobile phone and even global positioning system have been well received. Some companies have added game functions to their watches, so that the wearers could communicate and play interactive games with others wearing the same models nearby. Some other companies also introduce watches capable of connecting with computers and the Internet for data transmission and game playing.

As for other technology models, fad products such as digital watches carrying functions of digital cameras and mobile phones are not expected to become the mainstream in the near future, due mainly to their high prices. But there are a number of companies looking at the market potential of the digital watches with MP3 players, which could be used for voice recording and data storage at the same time. In addition, radio-controlled watches and clocks have started to grow steadily, thanks to the availability of necessary components at affordable costs. Pioneer markets include the US, Germany, the UK and Japan, where radio stations have been in operation to emit time signals for time adjustment, while the mainland has also built its stations.

Regarding clocks, models with novelty designs and special themes like cartoons and graphics would continue to enjoy steady demand. In addition, multi-functional alarm clocks and traveller clocks are gaining in popularity. Those with fancy designs and made of different materials, in particular, are increasingly targeted at the premium market, or marketed as give-away items for promotional purposes. Enhanced functions, such as digital diary, calculator, currency converter, thermometer and AM/FM radio, are incorporated into certain models in order to increase the value-added.