Tariffs and the Watch Industry: How the US-China Trade War Impacts US-Based Watch Companies

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The current trade war between the United States and China has been characterized by increasing tariffs since March 2018. Commercial goods were not initially a tariff target, with Chinese made aircraft parts, medical devices, and satellites bearing the initial brunt of the trade war. In a tit-for-tat back and forth that has lasted more than one year, products of all kinds now carry tariffs upon import from China, and consumer anxiety over the impact of the trade war on day-to-day purchases has become more severe.

The worldwide watch industry has thus far been largely unaffected by the growing trade war, and Reginald Brack, the Watch Industry Analyst for the NPD Group, doesn’t see that changing. “The proposed tariffs on Chinese imports should have minimal impact in the short term, and not much of a ripple effect on the Swiss watch industry.”

But the Swiss watch industry is only one part of a much larger story. China is a major player in the global watch industry, and is currently the world’s largest manufacturer and exporter of watches. Many of China’s watch exports are produced for large fashion brands. However, China is also a go-to resource for smaller enthusiast-focused brands based in the United States, who have employed Chinese manufacturing and supply over the last several years, some with great success. These largely independent watchmaking firms have varying degrees of exposure to the current trade war.

Reginald Brack, Watch Industry Analyst for the NPD Group.

The List 4 tariffs proposed by the Trump administration have been the focus of media scrutiny and public debate since they were first announced. While the implementation of tariffs on consumer products such as apparel, toys, and cell phones has been delayed until December 15, some tariffs impacting the watch industry have just gone into effect. These include tariffs on completed watches, as well as a variety of components including watch crystals and piezoelectric quartz. For many small watch brands who rely on Chinese manufacturing and supply chains, these tariffs will have a substantial impact on their business in the short and long term.

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Anna Ashton, the Director of Business Advisory Services and Government Affairs with the US-China Business Council, says that although to date American consumers have been shielded from the effects of tariffs that have impacted business-to-business items, the tariffs that went into effect this September and the remainder that will go into effect later this year will be different. “List 4 tariffs are much more broadly consumer-facing and will be felt by consumers eventually, regardless of the decision to delay some of them,” Ashton tells us.

The impact on the watch industry, at least that part of it that is connected to Chinese trade, will be felt much more strongly by this initial series of tariffs that began earlier this month. While the United States Trade Representative’s (USTR) decision to implement the List 4 tariffs in two phases was largely seen as an attempt to minimize the impact of the tariffs on the American consumer during the upcoming holiday shopping season, because of the component-by-component nature of the way watches are made when sourced from overseas, and the simple fact that there is virtually no large scale American infrastructure for watchmaking, companies that produce mechanical watches using a Chinese supply chain have few options available to them.

Just some of the tariffs on watches and watch-related components. These have gone into effect starting September 1, 2019.

According to Ashton, it is the understanding of the US-China Business Council that List 4 was split in two according to the extent to which the US market depends on China for that product’s supply. “If China is the source of 75% or more of a particular product category sold in the US, tariffs on that item will go into effect on December 15. If China accounts for less than 75% of the US supply of a particular item, tariffs will take effect on September 1,” says Ashton.

Anna Ashton, Director of Business Advisory Services and Government Affairs with the US-China Business Council.

The bottom line is that the greater dependence an industry has on trade with China, the greater the impact of the tariffs. Ashton is very clear: “For any industry where China is a significant part of the supply chain for goods or even intermediate products bound for the US, tariffs are damaging.”

Brands in the enthusiast space that do business with China are finding that the issues posed by these new tariffs are exacerbated by their tighter margins, which are necessary for them to remain competitive in an already crowded market.

Bradley Price is the founder of Autodromo, an American brand that produces both quartz and higher-end mechanical watches inspired by an enthusiasm for the history of motorsport. Price has been making watches using a Chinese supply chain since 2011, and his catalog currently includes watches that retail between $695 and $1,800.

“Either [brands] absorb the costs in terms of decreased profitability, or they increase prices and hope consumers will accept the new price levels.” – Bradley Price

“In the long term one can design and plan around the cost increase or even shift assembly elsewhere, but every brand owner I know is probably expecting a new shipment after September 1, whether it be parts or completed watches, both of which are being taxed at 10%,” says Price.

“If a brand had allocated a certain amount of cash for paying for their run of watches that was ordered months ago, now they suddenly have to come up with more cash than they had planned to spend,” he says.

Autodromo is an American watch brand that produces both quartz and higher-end mechanical watches inspired by an enthusiasm for the history of motorsport.

These tariffs, in theory meant to incentivize American manufacturing, have the unintended effect of leaving American companies in a financial bind as they manage manufacturing orders against a calendar that has been filled out months in advance. In a typical deal, according to Price, “The sales contract with the factory was signed months ago,” meaning American companies are locked into using their Chinese suppliers to fulfill orders that have already been placed. A US watch brand using a Chinese supply chain has a lesser-of-two-evils choice, says Price. “Either they absorb the costs in terms of decreased profitability, or they increase prices and hope consumers will accept the new price levels.”

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Tariffs will impact independent watch brands in different ways, depending on the extent to which Chinese manufacturing is used and the way the brand is run. As the watch industry has grown in recent years, and the enthusiast market has developed worldwide, some brand owners see larger challenges than the proposed tariffs ahead.

“In many ways the watch business is very dynamic,” says Vishal Tolani, Managing Director for Solar Time Ltd. and Dartmouth Brand Ltd, which includes brands like AVI-8, Spinnaker, and DuFa, all of which manufacture in China. The average retail price for a watch across Tolani’s brands is around $250. “New brands are emerging, some of which have frankly rewritten the book on marketing and sales,” he says. While Tolani’s businesses will be impacted by the tariffs, he’s not currently making day-to-day operational decisions based on their implementation. “The business model that traditional retail is built upon,” he says, “is already being massively disrupted well outside of anything to do with tariffs.”

AVI-8 is one of Tolani’s brands under Dartmouth Brand Ltd.

Tolani takes a more holistic approach to the watch business, with the understanding that a great many factors outside of tariffs, including and most importantly the ways in which watches are sold to the end user, have a greater impact on his bottom line than the current trade war.

“I think there are more pressing concerns and issues for us as a manufacturer,” he says. “The seismic changes in retail are clearly having an impact on some mainstay brands that depended upon brick and mortar to do their business.”

“Competing with the likes of the Foxconns and contract electronic manufacturers vying for labor, talent, land, and management seems a bit daunting for the watch business.” – Vishal Tolani

His philosophy seems to be that it’s largely out of his control, and for the watches in his segment, there’s no way around Chinese manufacturing anyway.

“If you talk about assembly, there is some logic to perhaps re-working the supply chain to incorporate other countries which have lower labor costs for bulk assembly, such as Cambodia, India, or Vietnam,” Tolani tells me. “Competing with the likes of the Foxconns and contract electronic manufacturers vying for labor, talent, land, and management seems a bit daunting for the watch business.”

Tolani does, however, cite at least one pain point that the impending tariffs have highlighted. “There has been a rush on freight,” he says. “I can anecdotally point to price increases there,” he explains, as other importers and exporters scramble to secure as much shipping prior to September as possible.

At the end of the day, there’s a certain amount of uncertainty when it comes to the long-term viability of the Chinese supply chain as it relates to small brand watch manufacturing. The current environment is rapidly changing, and the political whims of decision makers at the highest levels are unpredictable at best. Reginald Brack, while confident that the Swiss industry is safe for now, concedes that anything is possible the longer tensions continue to mount. “Of course,” he says, “a prolonged trade war with China may have more of an impact, but at this point it’s a wait and see game.”

Zach is a native of New Hampshire, and he has been interested in watches since the age of 13, when he walked into Macy’s and bought a gaudy, quartz, two-tone Citizen chronograph with his hard earned Bar Mitzvah money. It was lost in a move years ago, but he continues to hunt for a similar piece on eBay. Zach loves a wide variety of watches, but leans toward classic designs and proportions that have stood the test of time. He is currently obsessed with Grand Seiko.
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