WSJ article at http://online.wsj.com/article/SB11667432128875716
Swiss Watches Strike Export Record
Surging Demand for Luxury Lines Has Makers
Like Richemont Thinking About Capacity
By MARTIN GELNAR
December 22, 2006; Page B2
ZURICH -- Swiss watch exports hit a record in November, suggesting that big watchmakers such as Swatch Group AG, Compagnie Financière Richemont SA and Rolex SA will see strong Christmas sales that will carry into the new year.
Switzerland's watchmakers exported 1.52 billion Swiss francs ($1.25 billion) of goods in November, the Swiss watchmaking association said Thursday, up 13% from the same month last year. The biggest gains were seen for luxury watches selling for more than $6,000 each.
Sales growth is so strong for Swiss watches that the country's watchmakers are facing a new problem: a lack of spare capacity, and especially of the highly skilled craftsmen that make each watch. Last month, Richemont said surging demand for luxury watches may lead to capacity constraints in some product areas over the next few years.
Swiss companies are leaders in the global watch market, which has annual sales of about $23 billion.
The country is by far the world's biggest watch exporter in value terms.
In 2005, Swiss watchmakers exported goods valued at about $10 billion, and accounted for about 9% of Switzerland's total exports. While Hong Kong and China export more watches than Switzerland, they lag far behind in terms of value. Last year, Hong Kong exported watches worth $6 billion and China exported $2 billion, respectively.
The concentration of the watch industry in Switzerland limits growth because production can't easily be shifted outside the country for branding reasons. And within the country, there are only so many people with the training needed to make a watch by hand.
In a recent interview with Swiss daily Le Temps, Swatch Group Chief Executive Nick Hayek said the growth rates of as much as 40% in certain segments aren't sustainable. He noted his company is looking for 140 qualified watchmakers for its high-end Breguet brand, and 200 workers for its watch-movements maker ETA.
But analysts say they don't anticipate serious capacity issues in the short term, and some suggest a shortage of watches may even benefit the industry.
"Production capacity may get tight in some areas, also on the components side, but I don't think this will be a major issue next year," says Zuercher Kantonalbank analyst Patrik Schwendimann. "In a way, scarcity value may also be a positive for the image."
Jon Cox of Kepler Equities expects the "supercycle" in luxury goods to continue. Global demand for expensive jewelry and watches has been boosted by new customers in emerging markets, he says, but he also notes a surge in demand from previously sluggish markets such as France.
"So long as financial markets continue to move up, demand for luxury items will likely remain high," he says.
Any capacity problems may have an impact on the number of watches sold but shouldn't hurt revenue, he says. "To offset any shortage, the companies could simply hike prices," Mr. Cox says.
Write to Martin Gelnar at firstname.lastname@example.org