Asia focus: Signs of a bubble in China cause concern

In 2005 a report by Ernst & Young predicted that in 2015 Chinese luxury spending would exceed USD 11.5 billion. In fact, China cantered past that figure five years ahead of time and, last year, its consumers spent an estimated USD 15.6 billion on luxury goods, with Asia accounting for over half of global high-end watch sales.

According to some estimates, by 2016 that slice will have risen to two- thirds. Small wonder, then, that the industry in 2012 seems increasingly shaped by the Asian spending spree. Decorative "Year of the Dragon" watches are 10-a-penny at the high-end, while across the board new slimline, classical pieces with plenty of rose gold play to mainstream China's conservative tastes. More News From Financial Times
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Chinese banks defy expectations On the retail front, colossal investment is not just seeing brand boutiques proliferate across China, but it is also changing the retail landscape in traditional markets, with 40 per cent of Chinese luxury purchases made outside the country's heavy import taxation system. No boutique worth its salt in London, Paris, New York or Geneva is without a bevy of Mandarin-speaking staff and, later this year, Richemont, owner of Cartier, IWC, Piaget and others, will open a watch department store in Paris specifically aimed at Chinese and emerging market buyers. David Coleridge, chairman of DM London, which manages Selfridges' sales of luxury watches, names Piaget and Vacheron Constantin as brands that sell best to Chinese customers. "These are dead on market for the Chinese - they're slimline, classic, and they're gorgeous watches at a high price point," he says. "These brands have dramatically improved sales in the past two years as a direct consequence of the Chinese." But just how secure is this market, and how wise are watch companies to invest so heavily in it? James Lawson, director of luxury spending monitor Ledbury Research, says the industry should be wary. In the mid-Nineties, the growth of countries such as Singapore, Indonesia and Malaysia saw the "Asian miracle" heralded as a model for economic development, with South East Asia producing more than a third of the world's 100 wealthiest individuals. "In 1997-1998 the markets failed, the economies sank, and by 2005 less than 10 per cent of the 100 wealthiest were from that region," he says. "The west gets excited about a new, different market place, and inevitably certain cracks get papered over." He adds: "Whether this is a bubble and it will burst is hard to say, but it does have some of the signs." There are a few faint clouds gathering. In March, Wen Jiabao, Chinese premiere, announced a cut in the country's growth target from 8 per cent to 7.5, the lowest in decades, prompting a fall in stock markets. The Federation of the Swiss Watch Industry also says that China and Hong Kong recorded below average growth in the first quarter of 2012. Erwan Rambourg, head of consumer and retail global research at HSBC in Hong Kong, says that a slowdown in the top-end is being reported among retailers in mainland China thanks to a possible cultural shift in the wake of political scandals. "Gift-giving - or what you might call corruption in the west - has been a big driver of the market for years," Mr Rambbourg says. "A lot of it is for giving to government officials. Ahead of administration changes, and with many politicians putting out anti-corruption messages, there's now a wait-and-see attitude among buyers." Should China's new leadership show a reforming attitude towards bribery and corruption the effects for the top level of the market may be noticeable. While the tourist shopping market is less likely to be affected by this, Mr Rambourg says the fact rich Chinese are travelling more has its own consequences for consumer confidence. "The more travelled they are, the more they're influenced by headlines in Greece and the eurozone, for instance, and they think there might be better things to do with their money." Even if the naturally more volatile top-end wobbles, Mr Rambourg says more affordable categories - led by Longines, the biggest Swiss brand in China, followed by Rolex and Omega - will continue showing rapid growth thanks to wage inflation and middle class expansion. But brands should be wary of underestimating the developing savoir-faire of Chinese buyers. Su Jia Xian, a journalist writing about watches for a variety of publications in the region, is unimpressed by the proliferation of Asian-themed pieces. He says: "It's not very interesting just to make thin watches with dragons engraved or enamelled, it's just a convenient way of trying to appeal to East Asian clients. "Most sophisticated buyers won't bother with them because they don't offer anything new or different." Philippe Leopold-Metzger, chief executive of Piaget, a brand sometimes accused of a too heavy reliance on its Asian consumer base, says maintaining strong desirability in home markets remains key. "Chinese customers are only interested in buying a product that has a global appeal - they buy the expertise but also the culture and tradition of the company. "This is not a country that's coming from nowhere, they were very sophisticated customers before, and they're recovering." Jean-Marc Jacot, CEO of Parmigiani Fleurier, agrees. "You create a luxury brand in Europe, and you create the volume outside Europe. "The evolution is so fast in China, and they don't like it when we do things specifically for them - we just have to be careful about this."