The Success of Hong Kong’s Clock and Watch Industry

The Success of Hong Kong’s Clock and Watch Industry

 

INTRODUCTION    

The Hong Kong clock and watch industry has experience steady growth for the last three years. It is widely recognized as the best sourcing hub and a premier networking venue for the clock and watch industry because since 2001, Hong Kong is the world’s second largest exporter of complete watches in terms of both value and quality, as well as in the complete clocks in 2001. Despite the short-term hindrance of the SARS outbreak and the problems encountered at the Basel Fair, Hong Kong’s export of watches and clocks still reached US.5 billion in the first six months of 2003. It increased to 14% over the same time the year before. Looking into the future, Hong Kong’s clock and watch industry is positive. The economy is destined to prosper with the Closer Economic Partnership Arrangement with the Mainland that was signed last year. With this, a large variety of Hong Kong goods, including the clock and watch industry now enjoy zero tariffs to Mainland China. In addition, Hong Kong plans to further strengthen its economic relations with Switzerland with the agreement between Hong Kong Trade Development Council (TDC) and MCH Swiss Exhibition Limited. The agreement provides certainty for Hong Kong’s future participation, and in a new hall, at the jewelry and watch fair BASELWORLD in Switzerland, the world’s premier business platform and launch pad for companies in the timepiece industry.

 

            These are the positive experiences and assumptions in the Hong Kong clock and watch industry today. As the second largest clock and watch industry in the world next to Switzerland and ahead of Japan, it has become apparent that self-motivations and a forthright attitude are needed to maintain industry leadership and finally become equal to the Swiss. Tools and techniques of strategic analysis would help to examine the current trends and issues that occur in Hong Kong’s clock and watch industry business environment. The P.E.S.T. analysis will be used to analyze the external environment of the industry. Then,

Porter’s Diamond will be used, because at this stage, Hong Kong’s clock and watches industry is in the advantage if based with Porter’s theory. The main points of Porter’s Diamond will be explained later.

 

IMPACT ANALYSIS

            The external forces in an organization’s environment are those factors that an organization has no control over. The external environment of an organization can be analyzed by conducting a P.E.S.T analysis. This is a simple analysis of an organization Political, Economical Social and Technological environment. The factors to be considered are the political factors, the economical factors, the social, and the technological factors.

 

Political Factor

The political factor is important because it can have a direct impact on the way business operates. Decisions made by government affect our every day lives and can come in the form of policy or legislation.  The government’s introduction of a statutory minimum wage affects all businesses, as do consumer and health and safety laws and so on.

 

Economic Factor

On the other hand, the economical factor is vital because all businesses are affected by economical factors nationally and globally. Interest rate policy and fiscal policy will have to be set accordingly.

 

Social-Culture Factor

The social factor is equally significant due to the fact that within society forces such as family, friends, and media affect our attitude, interest and opinions. These forces shape who we are as people and the way we behave and what we ultimately purchase.

 

Technological Factor

Finally, the importance of the technological factor is stressed simply because changes in technology is changing the way business operates. The Internet is having a profound impact on the marketing mix strategy of organizations. Consumers can now shop 24 hours a day comfortably from their homes. The challenge these organization faces is to ensure that they can deliver on their promise. Those businesses, which are slow to react, will fall at the first few hurdles. This technological revolution means a faster exchange of information beneficial for businesses as they can react quickly to changes within their operating environment.

 

These factors are the factors that an industry should consider to look at. A successful industry is one, which understands and can anticipate and take advantage off changes within their environment (Kotler, 1980). So far, the Hong Kong clock and watch industry have been successful in analyzing all the factors, especially in the technological factor, obviously because the industry is in pace with the Swiss industry. But still, most parts used in manufacturing of clocks and watches are still imported from Switzerland and Japan. This can be a disadvantage to the industry. The reason will be discussed later with the help of Porter’s Diamond.

 

PORTER’S “DIAMOND” ANALYSIS

            Lenway and Murtha (1994) state that Porter’s (1990) researchers concluded: “competitive advantage is created and sustained through a highly localized process. Differences in national economic structures, values, cultures, institutions, and histories contribute profoundly to competitive success.” The two further explains that the graphic visualization of the theory (see appendix 1) presents four principal determinants of country competitiveness as the points of a diamond. “These determinants include factor conditions, demand conditions, related and supporting industries, and industrial organization as defined by firm strategy, industry structure and rivalry. The study refers to two additional determinants – government and chance – as outside forces.” (Lenway and Murtha, 1994) The new paradigm stands as a significant, empirically grounded critique that rejects monocausal explanations of competitiveness, among them government policy, in a world knit together by multinational corporations rather than by trade among unaffiliated parties. The study pointed out that government targeting, created meaningful global competitive positions for only a few countries in a few industries. Even successful ones also experienced failures. Government influence lacked any systematic pattern. Public policy appeared capable to affect the elements of the diamond, but not a part of it (Lenway and Murtha, 1994)

 

Factor Condition

            Head (1997) explains the Diamond even further. He cited Porter on “Factor-driven” competitive advantage. Porter believes that technological difference is much more important than differences in factor abundance, as it might actually undermine competitive advantage. The reason for this is because limitability and substitutability make it very difficult to obtain sustained advantage based on abundant general-use factors. Another reason is that abundance generates waste as scarcity generates innovative mindset. In addition, Porter also proposed that technological advantage (greater output per unit of input), not relative factor abundance, was the key to obtaining competitive advantage. To obtain this is through innovation. Porter (1990) quotes that “Innovation usually requires pressure, necessity, and even adversity: the fear of loss often proves more powerful than the hope of gain.”

 

            Head (1997) explains that general-use factors do not generate sustained competitive advantage. Specialized factors are harder to imitate and therefore more valuable. The distinction being made clearly states that basic factors or endowed factors has its difference with advanced or created factors. General factors are has multiple use and mobile geography while specific ones are dedicated to only particular industries and are often immobile. The general factor is the central focus of classical factor proportions theory and is useful in multiple industries, endowed by nature. The specific factors are the central focus of Porter. This factor is useful to a particular industry only, created by human activity. Porter explains that specialized factors are hard to imitate because they are unavailable locally since the industry is to small to justify investments in factor creation. But the local industry is small because of poor local factor conditions. Hong Kong’s clock and watch industry earns more from exports because of unavailability or mediocrity of clocks and watches industries in other countries though engages in stiff competition. Hong Kong’s closest rival is Switzerland, which is the leader in the clock and watch industry worldwide. It has been known that Hong Kong clock and watch industry innovate, and imitate as well.

 

 

Demand Condition

            Demand condition is important in a sense that it determines the condition of the local and foreign demand on whether it will foster innovation or low costs products. Factors in demand also include the parts needed for the product. Local demand fosters innovation because of the communication factors among local related industries. In the case of the Hong Kong clock and watch industry, products are being made with low cost labor, which results in a low cost product. Unsophisticated local demand and attracts attention instead of fostering innovations through strong focus on low cost watches.

 

Related and Support Industry   

Another factor that Head (1997) cited from Porter is that competitiveness in related industries is mutually reinforcing. The two types of relation are components and complement. Examples of components relation are the computer’s semi-conductors and software. Complement relation example is the leather shoes, which can be harmonized with leather tanneries and leather jackets. In clocks and watches, it is safe to say that components include leather, glass and plastic materials. Complements are batteries, leather straps, and other innovative designs to make a watch or a clock more interesting. Competitiveness in related industries provide information exchange, specialized investment, transportation costs.

 

Firm Strategy, Structure, and Rivalry

Aside from competitiveness in related industries, Head (1997) cites from Porter that domestic rivalry is the single most important contributor to international competitiveness. Porter (1990) states, “The more localized the rivalry, the more intense. And the more intense, the better.” One example of this is the Japanese electronics and automobile. The same can be said with clocks and watches in Hong Kong. The existence of rivalry may have indirect benefits by stimulating specific factor supply, input makers, complementary industries, and user industries. In addition, most parts used in clocks and watches are still imported from Switzerland and Japan.

 

COMPETITORS ANALYSIS Strategic Group Analysis

Innovation is an advantage as to what we have learned from the point of view of a specific industry’s competitive advantage, innovations in unrelated industries are actually bad because they tend to drive up the prices of general use factors in your country. This has been the factor that the Swiss clock and watch industry had applied, which literally puts them in the driver’s seat of the industry. Hong Kong follows slightly with innovations of its own. Sweda Ltd. is one prime example when it comes to clocks and watches in Hong Kong. Pawlyna (2000) wrote an article for TDCtrade.com about the company’s profile. She stated that Paul So’s (the founder of the company), “zeal for innovation is reflected in the company’s six designers and 20-member R&D department. The team has devised such novelties as a watch outfitted with a tiny, TV remote control. No need to turn a room upside down looking for that misplaced handset.” In addition, another innovation is the anadigit model, allowing wearers to check time in both analog and digital numbers. Sweda also provides three-in-one interchangeable watches. A single pop-out watch module comes with three sets of casings and straps (Pawlyna, 2000)

 

This innovation and other examples is one of the prime factors of Hong Kong’s clock and watch industry competitiveness. According to Porter and van der Linde’s (2001) evaluation and as aforementioned earlier, the industry’s competitiveness is among the world’s top three. Hong Kong’s clock and watch industry is the world’s number 1 in terms of unit output, and number 2 in terms of value of exports. They are behind Switzerland and above Japan. The evaluation was conducted last 2001, and Porter and van der Linde commented then that the advantage might be short lived as it was based to a large extent on cost advantages, which may quickly evaporate. This assumption had occurred prior to the SARS outbreak last year. As Hong Kong’s change in competitive position modestly gains from the shortfall it encountered due to the SARS outbreak, particularly the failure to participate in the BaselWorld clock and watch fair in Switzerland, innovation might have been one of the factors that contributed to the success of the industry. Despite this setback, exports of clocks and watches in Hong Kong rebounded last year. But other evaluations, like Porter and van der Linde’s (2001) states that Hong Kong’s watch and clock competitiveness might have come from its low cost and diamonds.

 

The clock and watch industry in is the third largest industry in Hong Kong. It is considered dominant in the national economic importance of the country. It ranks behind the clothing/textiles and electronics. Porter and van der Linde (2001) states that the industry’s annual cluster growth ranges to 10% and above. The export growth of the country is in a rapid pace. It achieved a 20% export growth last year despite of the SARS outbreak and is expected to grow into 25% in the succeeding years. Its world export share of core industry in cluster is unclear but the industry is the world’s second largest exporter. While innovation could have been a factor, Porter and van der Linde’s (2001) study states that local firms not just pioneer new products, but also imitates. Local firms compete primarily on cost, as they provide low-cost due to innovation. They provide the fiercest price competitions with the world’s lowest watch prices. Foreign direct investments by local firms is below 20% which means that companies are slowly beginning to manufacture in Mainland China, while only a small amount of foreign firms has located in Hong Kong to manufacture watches.    

 

The Strategic and Managerial Implications

Porter and van der Linde (2001) continue that in the Diamond model, Hong Kong’s clock and watch industry competitiveness stems from its factor conditions and its approach to firm strategy and rivalry. Its general factors have a strong advantage because of low labor cost. Their costs of production inputs are very low and constitute are comparative advantage. In addition, the industry’s government macro-economic conditions such as exchange rates are moderately positive, as government-subsidized housing has contributed to low wage demands. The industry’s geographic location is a weak advantage though due to proximity to China has been key for Hong Kong’s trade base development. The general physical infrastructure (roads, ports, airports, telecom) is the world’s best. 

 

 Based on Porter’s Diamond, firm strategy and rivalry is also a strong advantage to Hong Kong’s clock and watch industry. (Porter and van der Linde, 2001) Rivalry is a cutthroat but almost exclusively based on price. Porter and van der Linde states that because of low labor cost, this is the industry’s primary advantage. Vigorous competition among local companies is based primarily on price though slowly moving to differentiation. Another plus factor is that the government almost opens the cluster’s economy to import competition, as many companies invest in Hong Kong. On other matters, cooperation plays only little advantage. Local industry association has been trying to upgrade as it sets up the Patent Depository for logging designs in order to overcome the problem of Hong Kong firms copying foreign designs. The industry also discourages investments in physical assets as it allows minimal tax rates to facilitate high rates of business earnings reinvestments. Porter and van der Linde (2001) also concluded that the economic stability of the industry is below average as uncertainty about Hong Kong future contributed to low capital investment rates. Finally, government intellectual property protection is seldom enforced. Foreign competitors frequently accuse Hong Kong watch manufacturers of patent infringement.  

 

The specialized factor of Hong Kong’s clock and watch industry has no effect to its success. The cluster-specific human resources or the industry’s labor only possess general skills. Porter and van der Linde (2001) states that lack of labor skills is cited as a disadvantage because it slows the upgrade of an industry. The number of cluster-specific knowledge transfer resources is only in the minimum. Two educational schools are cited as inadequate to serve the entire industry. On the other hand, the industry lacks research institutes and university testing labs that would serve as the cluster-specific scientific infrastructure for the improvement and further research of the industry. When it comes to information, the industry is below world average as producers rarely listen to retail market information. There is little coordination between producers and consumers. The government never gives subsidies to the industry because it treats the latter as a “laisser fair,” as Porter and van der Linde describes it. They finally state that given the potential political instability, quick returns are required. Hence, manufacturers minimize capital investments and focus on labor-intensive activities, which has contributed to the focus of low cost competition. 

 

Another weak disadvantage to the industry is its demand conditions. Its local demand size is neutral – greater than 95% export rates indicate that local demands is insubstantial. Its local demand qualities is a weak disadvantage as it has unsophisticated local demand and attracts attention instead of fostering innovations through strong focus on low cost watches. There aren’t also enough related and supporting industries to the Hong Kong clock and watch industry as most parts of the products are imported primarily from Switzerland and Japan. In contrast, other selected parts such as watch glasses, dials, and button-cell-batteries are locally available, which make these parts nationally competitive. “Hong Kong is internationally the leading suppliers of wristbands and watchcases. In addition, Hong Kong jewelry industry has begun to be an important supplier leading to increasing segment focus on jewelry watches where Hong Kong has become world leading.” (Porter and van der Linde, 2001) When it comes to local services suppliers, many are present specifically on electroplating services. Government economy is very open to importing supplies because the majority of watch parts are still imported. The related industry also serves as a weak factor as the only industries that share common input, skills, and technologies with the clock and watch industry are the electronic component and toy industry.

 

The strategies that Hong Kong clock and watch companies imply are simply the reasons, which keep the industry among the leading top three in the world. It is possible that the advantages explained by Porter and van der Linde of the industry using the Diamond model is practiced but unnoticed. In other words, these advantages are acquired by the industry only because it is the reality in Hong Kong or already endowed to them as explained to the general factors that influences an industry. The low labor cost that industry implements is already given, because it is the standard labor cost in Hong Kong. Bing (1996) states that employee compensation and benefits, for most businesses, constitute a substantial expense that is burdensome but not crushing. What more for the labor cost in Hong Kong? Obviously, this point stresses the competitiveness of Hong Kong’s clock and watch industry, for what they lack in skills and research, they make it up in cost saving, thus focusing on general factor abundance. The immigrants from China have been the source of sufficient labor power with low labor cost; a factor has caused the industry to prosper. Porter and van der Linde (2001) stressed that most of these immigrants are China’s brightest. 

 

THE SCENARIOS FOR THE INDUSTRY IN 10 YEARS

 

The Optimistic Scenario

 

In the next ten years, it can be predicted that Hong Kong’s time industry will invest in skills through knowledge resource training centers and scientific infrastructures that would produce labors among the worlds best. In addition, Hong Kong’s infrastructure poses a stance of attraction for investors and traders. It was built intensely for trade. Ted Hagelin (1997) states that Hong Kong has invested in its physical infrastructure to support its service economy. Hong Kong has developed a state-of-the-art telecommunications system and boasts of more cellular phones and more miles of fiber optic cable per capita than any other nation. Hong Kong also has modern sea, road, rail, and air transportation systems, which are continually improved. This infrastructure investment will allow for more efficient market transactions in Hong Kong over the next decade by facilitating the exchange of business information, enabling the provision of new professional services, and speeding up the transportation of goods. This is one of the general factors that lead the success of Hong Kong’s time industry.

 

If Hong Kong maintains its stance in the clock and watch industry, most local firms might shift into producing their own brands. As was stated earlier, Hong Kong’s small firms seldom have their own brands although larger firms are already moving towards producing such. Having no trademark brands leads to imitation, and worst – infringement. The possibility that all clock and watch manufacturers in Hong Kong would increase local competition, and also promotes a certain identity to the regions industry. This will also eliminate imitation and puts the Hong Kong industry in the position to be imitated. Porter stated that scarcity leads to innovative mindset, which means that that mindset has already been set to Hong Kong manufacturers because of lack of identity. The Sweda Ltd. is one of the few who dares to be different and original, and has been a fine example of innovative mindset in the industry’s scarcity of such. This would be a huge step-forward of the industry knowing that it would unlikely survive with imitation.

 

The majority of watch parts that the industry uses are still imports from other countries. In the near future, it is most likely that Hong Kong can already produce quality parts that can only be only be obtained from Switzerland and Japan. Hong Kong’s jewelry industry is already the leading supplier of jewelry for watches all over the world. To be able to produce the parts being imported will enforce more economic growth for the region, as supplies will come from within the economic scope of the country.

 

The Pessimistic Stance

There is a possibility is that Hong Kong will continue to exploit this advantage and pursue the competition through cost for the next ten years. This will make the industry stagnant as would result in lower probability of technological innovations because of lack of research and lack of skills of the labors. Hong Kong’s clock and watch industry might fall to the third place, or worst, below the top three, because it can be assumed that technology in that time would be highly advanced, and knowing Switzerland and Japan, both will highly invest on it and would leave Hong Kong behind.

 

Another point that should be considered is the industry’s poor local demand condition. The locals are unsophisticated toward the industry and provide little support. Porter and van der Linde (2001) also points out that this includes tourists who buys cheap watches in Hong Kong. This attitude possibly arises from the concentration of the industry on providing cheap watches from costly-innovative ones. It is true that this attracts attention, but it does not promote innovation in any way. Changing this disproportion in demand can be linked with the purveyance of brand originality, which would also promote quality and proportions the local demand. Ten years from now, the industry can either improve the quality of the watches or leave it the way it is – cheap and economical.

 

The industry also has the option to maintain its transaction with Switzerland and Japan to acquire the necessary parts for the products for the next ten years. But this will only cause the industry to be left behind and weakened by the demands that these parts manufacturer might employ in the future. Investing in research, as was already mentioned, will be beneficial to the industry because its market could also focus on the international scene, which someday might make Japan and Swiss prefer Hong Kong parts instead theirs. It could be a major overhaul in the technological environment of the industry.

 

The Scenario That Will Occur in This Practice

The scenario that will probably occur in this practice is that the Hong Kong Clock and Watch industry would continue to use the advantage of low cost labor. With Hong Kong’s return to the Mainland, migrants from the latter will continue to arise, and most industry will take advantage of it. This was stated as a pessimistic possibility but it can also be considered as a positive factor because it has the low labor cost approach that led the industry to the world’s second best. Hong Kong might not be able to match the standards of the Swiss clocks and watches, but they can provide products that are slightly innovative and cheap at the same time, within the reach of the general public. This scenario can either be positive or negative depending on the person’s perspective. The right attitude would have to be the right approach to this possibility. Although it can lead to imitation, it won’t count out the fact that many investors invest in Hong Kong because of its state-of-the-arts infrastructures. On the other hand, the possibility that most of the industries firm will provide their own brands would also be most likely to occur. Some firms have been slowly working on their original brand. This would promote original, low costs watches and clocks.

 

Conclusion

The low labor cost has provided Hong Kong clock and watch industry the competitiveness even with the SARS outbreak. Trade Media Holdings (2004) reported that China Customs statistics show exports of complete watches for January to August 2003 amounted to 5.9 million. Quartz and mechanical watches are the top exports, shipped mostly to Hong Kong, Japan and the United States. Wang Wenyi, vice director of China Horological Research Institute of Light Industry, said China’s exports of watches can hit 1.5 billion pieces–worth .2 billion–in 2004. Hong Kong’s watch exports increased 20 percent during H1 2003. Figures from the department of Statistics and Census show exports amounted to .618 billion.  Basically, innovation and low labor cost is the weapon that Hong Kong’s clock and watch industry possesses. In Hong Kong, makers are divided between going up market and focusing on the low end. Makers in Mainland China dominate the lower end of the market, but this has not deterred some Hong Kong makers from producing basic, low-priced watches. Others however, have started offering upscale models such as automatic watches priced ,800 each. As to what Porter has depicted, the industry has a healthy number of competition, based especially on price. As for demands, increased demand for mechanical watches from buyers in Europe, Japan and the United States has convinced more makers to start manufacturing such products. Both automatics and manual-wind versions are offered, in basic and complicated designs. It is successful in the international scene as usual, but negative in local demands. Of 329 surveyed exhibitors, 45 percent said they would be developing their own branded designs for promotion to international markets. Forty-five percent said they would broaden product range and 41 percent said they would be developing high-end, higher quality products. Only 11 percent said they would focus on the low-end. (Trade Media Holdings, Ltd., 2004) Possibly in the next ten years, Hong Kong clock and watch industry would surpass the Swiss industry. It is no doubt that this is the most positive assumption that anyone can hope for the industry. The industry’s strength has already been demonstrated by increasing its exports despite the SARS epidemic and the failure to participate into the BaselWorld in Switzerland. As the industry’s strength lies on low labor cost, innovation, and local competition, it is most likely that this industry can someday take the glory from Switzerland. Though some weaknesses have been showed by the industry, it mostly showed strengths that are theoretically positive in Porter’s Diamond. The Hong Kong clock and watch industry is one force to be reckoned with.

 

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APPENDIX 1

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