When France sneezes, Europe catches a cold. So said Klemens von Metternich on the occasion of the year of 1848 where revolution rocked Europe. Old Klemens was exaggerating a little – there were a lot of factors behind the 50 democratic revolutions across the Continent. Still, I was reminded of this phrase when reading about the $70b knocked off the market capitalization of four of Europe’s biggest luxury retailers – mooting the prospect of Swiss watchmakers’ China Syndrome. All because of a speech by one man. Not just any man . . .
Arguably the most powerful man in the world: Chinese President Xi Jinping. And he said it with *feeling*.
It’s no secret: the Chinese love their luxury goods. In fact, mainland Chinese spending has been propping up luxury goods makers over the last decade. Forty-five percent of all luxury goods sold in 2021 will be in China. Some 50 percent of all Swiss watchmakers’ products go to the PRC. It’s a trend that’s become even more pronounced coming out of the COVID-19 pandemic.
Think about that for a second. Nearly half of everything made by foreign luxury goods manufacturers go to one country. So when the leader of the only country that matters to Swiss watchmakers and the like says something about their economic policies, investors listen. And what he said was a doozy.
Basically, his remarks amounted to “people shouldn’t make so much money.” Which is a reasonable thing to expect from a politician, even one who isn’t exactly elected in the most traditional sense, a man who’s just a sash away from El Presidente por vida.
But this pronouncement has teeth. Unlike most politicians, Xi can make his reality your reality. Today.
In June, Xi made a fairly innocuous comment around private K12 tutoring (somewhat of a national pastime in China). He remarked, to a bunch of elementary schoolers “We must not have out-of-school tutors doing things in place of teachers,” he said. “Now, the education departments are rectifying this.”
What a nice sentiment! I’m sure those schoolchildren’s parents appreciated that the highest official in the CCP is worried about how much they are paying so their children can get into good schools. Everyone went home happy, the children can say they met the President, and business as usual goes on.
A few days later, every private tutoring company in China was ordered to become a nonprofit. New Oriental Education and Tech Group lost 70 percent of its value in two days.
It’s almost impossible for an American or European to understand the swiftness and scale at which the Chinese government kneecapped a $100b market. It basically snapped its fingers and every single education company in China collapsed.
The greater tech industry – which has had its share of governmental problems with data privacy, competition and other, more technical factors – has lost a trillion (and counting) dollars in market capitalization.
The thing is, this isn’t about data privacy, or equality or financial games. This is about power pure and simple. Xi has it, and he is making sure that nobody else does. Why did China just pass an incredibly strict data privacy law? Governments hate competition. Now only the CCP will have access to its citizens’ lives, making everyone more dependent on it.
And the best part is that these are domestic companies that the Chinese government is targeting! If you’re a foreign luxury good manufacturer, as are Swiss watchmakers, why on earth would you think they would be easier on you?
What next? Maybe it’s a 100 percent tariff in the name of “economic equality.” Or maybe it’s a dictat targeting people who spend a lot via a name-and-shame campaign. There’s precedent in the last decade for this. Or maybe it will be something else. Because again, this isn’t about anything but power.
Right now, nobody knows. I guarantee there are a lot of hastily arranged video conferences happening at LVMH. Swiss watchmakers are trying to think of a plan if Xi gives them the same rough treatment as he gave the tutoring companies.
Simply put, there is no other market that matters more to Swiss watchmakers than China. If Xi sneezes, Swiss watchmakers will catch one hell of a cold.
What is really amusing is that the Swiss (known for hiding things) try to hide their dependence on China by treating Hong Kong as a separate country in industry statistics. When Beijing has left no doubt who controls Hong Kong. Taiwan is arguably a separate country, regardless of what John Cena says. But not Hong Kong.
The power of China is even greater if one takes into consideration that the US watch imports are in large part purchased with vote buying “stimulus” money funded by China.
I am a strong believer that democracy is the worst form of government, except for all the others. But to the credit of China it did not spend well over $2 trillion in a country it does not belong in, that is historically unmanageable, after being attacked by Saudi nationals. The upside of being a totalitarian country is not having to provide constant bail-outs to geographically dispersed defense contractors and a Hunger Games-esque way for the poor to get government funded college.
The big threat to the Swiss watch makers in my view is that nationalism pressures the wealthy and upper-middle-class in China to buy fancy Chinese watches. In 20 years watch incels will be bragging about the finishing on their Grand Sea-Gulls. I’ll defer to someone with a stronger understanding of Mandarin than myself with regard to how the Chinese will pronounce the names of German polishing machines. It will be something other than Zaratsu for sure.
Yes, this drove me batty when I was researching the piece. Some mfr just use “Asia”, some are “Asia ex Japan”, and some are even weirder. It’s 100% hiding their dependence on China, which also gets worse when you include Chinese travelers buying things outside the borders of Mainland+HK.
The Truth is that for almost all mfrs (Tiffany might be an exception since it is traditionally American; in their last published 10K they did 45% of sales in the Americas) that China is really the only market that matters anymore.
For almost all traditional luxury manufacturers, you mean? I think part of the problem here is the astounding percentage of younger Western persons who don’t have the time of day for notions of luxury they associate with their parents. The real Silicon Valley masters of the universe wear Apple Watches and drive Teslas and the fact that his upper middle class is relentlessly aspiring to an Anglicised take on Old Money aesthetic that expired in 1998 has got to drive the Chairman positively batty.
There is no shortage of great, vintage furniture (from the 60s and 70s at dirt cheap prices) because Gen X parents were polishing and buffing the living room and dining room sets every week convinced that they were going to be a cherished by the family and passed down from generation to generation. Some watches are going to hold their value, but other watches…not so much. I get that watches are prone to failure and breakage in a way that furniture isn’t, and that will always keep vintage Rolex dealers in business, but I’m not so sure little Johnny is going to be interested in maintaining, let alone wearing Dad’s Oris or Benrus.
Correct. I’m mostly identifying traditional luxury watch, jewelry and leathergoods manufacturers here; there are a lot of ways of displaying ability to spend without stepping in an Hermes store. Another reason I would be (very) long-term pessimistic about most of these manufacturers value props – they’re going to get squeezed by the next generation, as you pointed out (and as RF here has said about the Apple watch killing most of the Swiss midtier industry)
The Swiss have put all their eggs in one basket, and now those eggs are starting to crack
The last photo in the post is the Myeong-dong shopping district in Seoul; that’s Korean text all over the street and signage.
People tend to forget that what applies to Europe, also applies to Asia. Japan and Korea can get on quite nicely without the rest of the world. If Rolex disappeared, Japan would have Seiko. People will buy and appreciate foreign luxury goods, but what they can buy that is manufactured domestically is competitive with what they would import from overseas.
This is a point that I don’t think gets enough play; luxury consumption is largely performative and it doesn’t really matter if the label is European, or Japanese, or Chinese as long as other people can clock it as “you spent a lot on this.” The simplest way to kneecap the industry would be to just slap a huge tariff on imported goods and develop an internal set of brands. It won’t be easy for acceptance but China is probably the absolute best place in the world to do something like that.
There is an “I make my own luxury items at home (country)” gag to be made here, complete with truthiness.
I may be missing whichever link goes to the pronouncement, but a news search brought up him talking about “common prosperity” which I take to be an income equality or boost the middle class type thing. If another rapid societal/governmental change brings a cap on the top rung of wealth/income, that will obviously be bad for luxury makers. Unless it just leads to cat and mouse evasion, of course.
I’m at the lower end of the price pool for watch guys. I don’t know if domestic Chinese manufacturers are going to be competing with Rolex soon, but just a couple of years ago, I would have seen a “Sharkey” or “Steeldive” logo as undesirable on a watch. I still buy homage watches with sterile dials from OEMs in China, but if no sterile dials were on offer, I’d have no problems with those names or logos now. The prices for “starter” or entry level automatic watches made by Chinese manufacturers are as good as or better than Orient or Seiko (before they went more upscale), and no complaints about the quality. My biggest complaint is that Chinese OEMs don’t lean into being from China (Sharkey, Steeldive, Parnis, Corgeut, or San Martin), the way that Tokyo Flash, Casio, Seiko, Kuoe, or Frank Miura lean into being made in Japan.
That’s honestly probably next; first step is making something, next step is building acceptance, third is making something identifiably Chinese. Small problem is that Mao basically destroyed millennia of Chinese heritage, and while some pre-Cultural Revolution history has been allowed (cf the huge prices paid for Chinese antiquities), there’s a much weaker tradition of manufacturing / artisan work between say, the First Opium War and Deng Xiaping, where a lot of watchmaking would have happened.
What does one thing have to do with the other? You guys do love taking leaps (Rolex = you’re getting mugged!) but this is a new reach even for this non-profit blog.
Domestic tutoring company. Swiss watch company. How …. ?
Good thing we’re not paying you for these.
The Henry II “Will no one rid me of this troublesome priest?” potential seemed clear to me, but Mr. Adams elaborates below.
The point is that if the Chinese government has no problem killing off a huge *homegrown* industry or clamping down on *Chinese* tech companies (which are far larger and more important than any watch mfr), they will have no problem doing the same to foreign companies operating on Chinese soil.
And in both the tech and education cases, the clampdown began with some mild words from Xi, which was then followed by pretty brutal action. We just had the mild words (and then repeated several times). We likely know where this is going.
As always, thank you for reading.
Bingo! Well said
(Rubbing his hands and grinning)… Let’s watch Rolex prices PLUMMET. It would be SO delicious.
Very interesting article!