End Times for Swiss Watchmakers?
After Swiss leader Karin Keller-Sutter's last-minute dash to Washington failed to sway the American administration, President Trump's tariff on Switzerland came into effect this week, landing levies of 39 percent on every Rolex, Omega and Patek Philippe the country exports to the US.
Just how bad is it?
There's little nuance here: For some Swiss watchmakers, the chiming of the bells that ushered in new trading conditions with the US at 6am Geneva time on Thursday morning could prove a death knell.
The US is by far the Swiss watch industry's largest export market, accounting for around 17 percent of its total exports by value. In real terms, in the first six months of this year that equated to exports worth 2.6 billion Swiss francs ($3.2 billion), around three times more than Japan, currently the industry's second largest export market.
And let's not forget that 17 percent is effectively an average. For many watchmakers, big and small, the percentage of their business done in the US is much higher.
So this is going to sting.
The big question is who coughs up. The maker? The seller? The buyer? In April, when the initial threat of a 31 percent tariff was temporarily reduced to 10 percent, most brands said they would spread the cost between the three. Average retail prices jumped between 3 and 5 percent.
That might not sound like much, but over the past few years, the industry has applied those kinds of hikes every few months, pushing retail prices rapidly up and consumer demand even more rapidly down.
Some rises were due to macroeconomic factors, such as the strong Swiss franc (up 8 percent against the US dollar this year), soaring gold prices and continued uncertainty in global markets. Some, however, were opportunistic.
Now, with a tariff almost four times what has so far been applied, the question becomes even more pertinent. Sidebar predictions that the full levy will be added to the price of a watch are surely off the mark, but brands across the spectrum have said they cannot simply absorb this in their margin.
Nicholas Hayek Jr, chairman of Omega, Longines and Tissot's parent company Swatch Group, has been the most vocal. His business is already faltering, having reported a sales slump of 11.2 percent in the first half of this year. Richemont, LVMH and the rest — perhaps bar Rolex, although it doesn't publish results — are all recording similar struggles. For all, it's bad news at a bad moment.
Prices will have to go up again — and by a chunk. And if prices go up in the US, they will likely go up everywhere else, as brands aim to balance out global pricing to prevent cross-market cannibalisation.
Will the customer stomach it? The current trajectory suggests not. Swiss watch export figures released by the Federation of the Swiss Watch Industry indicate global appetite is still on the wane, following two years of decline.
In May, Swiss watch export values dropped 9.5 percent. In June, they fell a further 5.6 percent. Exports to the US were particularly hard hit, down 25.3 percent in May and 17.6 percent in June, although those figures are warped by the effects of April's rush that saw makers increase exports to the US by 150 percent in a bid to front-load inventories before the tariff kicked in.
Is any of it fair? While Trump will claim his so-called 'reciprocal tariffs' are entirely justified, it's hard to see it. There is no American high-end watch manufacturing industry or haute horlogerie culture to 'make great again.' Instead, there are hundreds of watch businesses in the US that depend on the flow of Swiss watches that will suffer because of this, quickly off-setting the uptick in import tax revenues. And as per a deal signed in January last year, 99 percent of US goods enter Switzerland duty-free.
If there are any winners, they're likely to be in the pre-owned space, where sellers can expect interest to increase and an influx of bargain-hunters. But that will be no consolation to watchmakers.
Swiss watch brands are up in arms, not least because the mighty Swiss pharmaceutical industry is exempt from the tariffs for now, despite accounting for more than half Swiss exports to the US, and despite the fact drugs can be produced practically anywhere in the world.
To qualify as 'Swiss Made,' as Swiss luxury watches surely must, at least 60 percent of their value has to be added in Switzerland, according to law. Watchmakers cannot just bump production over the border and carry on as before.
What happens next is unclear. Though the Swiss delegation to Washington this week failed to get the country out of Trump's headlock, the US president may yet change his mind. Then again, he may not, and if things stay as they are, for many Swiss watch companies this could spell end times.
The clock is ticking.
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