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CONTENT 'FC7PM

2013 China Yacht Report

2013 China Watch Report

2013 China Fine Wine Report

2013 China Duty-Free Report

2013 China Second-hand Luxury Market Report

2013 Human Resources Report to China Luxury Industry

119

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2013 China Luxury Report

Luxury market continues to expand, but consumption enters an era that is more driven by cost-effectiveness.

Chinese consumers spend over hundred billion dollars on luxury products annually, holding up more than half of global luxury market.

Differing from previous years, this time around,

FCIs 2013 China Luxury Report emphasized

less on data, but made unprecedented

projections on developing trends in luxury

industry, painting a dim picture of global and

Chinese luxury markets. Many controversial

views had prompted heated debates within the

industry.

The research by FCI showed that, in 2013,

despite abundant pressures, the global luxury

market will reach a record-breaking $217 billion,

a 11% annual growth rate. Chinese domestic

luxury consumption will surpass $28 billion at

Graph a: The Venn Diagram for Luxury Brand Consumers

Graph b: Game Theory of Luxury Brand Value and Visibility of Luxury Product

The trends for luxury brands to become more popularized and fashionable will continue to intensify,

FRXSOHGE\DJURZLQJFRQVXPHUERG\PDNLQJXOWUDKLJKSULFHLQFUHDVLQJO\KDUGWREHMXVWLHG7KHtaboo over cost-effectiveness had been lifted and replaced by a refreshed embracement of cost-

effectiveness by luxury brands in marketing strategy. This new thinking will appear on more luxury

EUDQGVQDQFLDOVWDWHPHQWV$WWKHVDPHWLPHWKHORVVRIGHVLJQFKDUDFWHULVWLFVFUHDWHVDVFDOLQJopportunity for customized luxury industry. Experience-oriented and individual-eccentric products

will receive favorable following, whereas logo-driven consumption will dip. FCI projects that by the

end of 2013, there will be more than 4,000 customizable luxury brands.

Chinese indigenous luxury brands will embark on a continuous growth. Those with the best

potentials already start off with sizable markets and competitiveness. More Chinese companies and

entrepreneurs become equity investors in foreign luxury brands or even conduct acquisition. NOW

LVWKHJROGHQWLPHWRVHOOOX[XU\EUDQGV$OWKRXJKLWLVQRWUHFRPPHQGHGWRDFTXLUHOX[XU\EUDQGVoverseas, it is advisable to acquire raw material manufacturing companies, since this segment

adds more value to the industry value chain. In the future, Chinese entrepreneurs will make a larger

footprint in global luxury industry.

a 3% growth rate; consumption overseas will

grow further to reach $74 billion. Together in

2013 Chinese consume $102 billion worth of

luxury goods, equals to about RMB 600 billion.

It also means that Chinese purchased 47%

of the world total luxury goods, becoming the

undisputable world number one luxury goods

consumer market.

Despite the evident fast growth of luxury

market, there are lingering risks and hidden

troubles concerning luxury brands and luxury

industry. FCI discovered that the major drivers

of luxury product growth were the growing

body of consumers in emerging market and the

SURJUHVVLYHQHZEUDQFKRSHQLQJV$OWKRXJKmajor luxury brands are putting a break on the

speed of opening new branches, in 2013, the

average rate will still reach 9%. Essentially, the

increase in luxury good sales was derived from

new shop openings in new markets, meanwhile,

these branches became frontier marketing sites,

attracting more traffic to the places of origin,

in other words increasing the consumptions in

European regions. On the contrary, European

buyers have diminishing interests in buying

luxury goods.

$FFRUGLQJ WR)&,VVXUYH\RQKLJKQHWworth individuals, many Chinese consumers

had abandoned top l ine luxury brands,

especially among those ultra-wealthy, the cohort

RI OX[XU\EX\HUV)&, IRU WKHUVW WLPHVWDUWHGto use core consumer, marginal consumer

and potential consumer to classify luxury

consumption groups. FCI projects that the trend

of high net worth individual consuming outside

of China will intensify, and the increase of mid-

class, marginal consumers will slow down.

In the next three to five years, the escape of

core consumers will negatively impact the

consumption enthusiasm of marginal and

SRWHQWLDOFRQVXPHUV$VDFRQVHTXHQFH WKHluxury brands will witness a large-scale decline.

Counterfeit is the last force that heightens

the degradation. For a long time, although

counterfeit creates a major headache for most

luxury brands, not enough efforts were devoted

to fix it. However, based on FCIs survey, the

visibility of counterfeit has surpassed authentic

SURGXFW,QRWKHUZRUGVWKHRRGRIFRXQWHUIHLWmade luxury brands very accessible to the

mass; the demystification makes the products

less appealing. FCI firstly proposed Game

Theory of Luxury Brand Value and Visibility of

Luxury Product, made bold projections that

luxury brands led by Louis Vuitton, Gucci and

Cartier, because the visibility of luxury goods

had surpassed a reasonable threshold, the

brand value will continue to decrease and

market potential will be further restricted.

Fortune Character Institute

The Venn Diagram For Luxury Brand Consumers

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20132013

CHAPTER 6

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CHAPTER 1

China Yacht Report2013501

The China Yacht Report by The Fortune Character Institute is the first of its kind to illustrate the yacht appetite of high net worth Chinese individuals. It is the premier professional report done by a third party media group, which comprehensively analyses the accelerated growth of yacht business in China. The report also includes the China Yacht Industry City-by-City Index which offers an essential reference for organizations interested in understanding the yacht market potential in China.

The China Yacht Report highlights the critical fact that the China yacht market is under-developed in spite of a striking growth rate. In 2012, the overall China yacht market was valued at RMB1.75 billion, of which RMB 0.78 billion was spent on luxury yachts. Italy and Great Britain are the dominant yacht-builders in the market.

Interview results with 341 wealthy Chinese revealed that yacht brand recognition is SHFXOLDUO\ ORZ6XIFHWRVD\ WRGDWHQREUDQGFKDPSLRQKDVEHHQHVWDEOLVKHG LQ WKHChina yacht market therefore the position is up for grabs. Business use is currently the predominant reason for purchase. This situation, however, is expected to change over the next few years. RMB 20 million is the benchmark price point for a yacht to be considered luxury-class. As far as size is concerned, the jumbo yacht is unarguably IDYRXUHGE\WKHPRVWDIXHQW

Grounded in statistical evidence and unbiased analysis, the China Yacht Report presents an outlook for the development of the China yacht sector, projects an exponential growth in yacht service and elucidates the most lucrative investment opportunity in wharf/dock management. Such an assessment has already prompted investment zeal in the Chinese real estate community.

PREFACE

A. Overview of China Yacht Market

*O JOUFSOBUJPOBMQSBDUJDFB64%(%1QFSDBQJUBNBSLT UIF UISFTIPME GPSBZBDIUFDPOPNZ8IFO(%1QFSDBQJUB SFBDIFT64% UIFZBDIUFDPOPNZXJMMCPPNBOEFOUFSB GBTUHSPXJOHQIBTF 5IFNPSFEFWFMPQFE$IJOFTFDPBTUBM SFHJPOTTVDIBT UIF1FBSM3JWFS%FMUB:BOHU[F3JWFS%FMUBBOE#PIBJ&DPOPNJD$JSDMFIBWF SFBDIFEB(%1QFSDBQJUBPG64%8JUIBOVQHSBEFEDPOTVNQUJPOQBUUFSO UIF$IJOBZBDIU JOEVTUSZ JTQPJTFE GPS SBQJEHSPXUI

Graph 1-1 China Yacht Import Volume and Annual Growth Rate (2001-2012) Graph 1-2 China Yacht Import Value and Annual Growth Rate (2001-2012)

1.Increasing Demands and Evident Future Growth Trend

Import is a key measure of the growth of the

yacht industry. Over the years, Chinas imported

yacht market has kept a trend of steady growth,

from USD 3.7 million in 2001 to USD 236.37

million, a 63.9 times expansion within 12 years,

achieving a 432.4% CAGR (Compound Annual

Growth Rate).

These key drivers contribute to the dynamic

growth: 1) real estate development many

waterfront luxury houses base their value

proposition on yachts and services to yacht

owners; 2) elevated consumption appetite

among wealthy Chinese, a progression from

luxury cars toward luxury yachts; 3) foreign

yacht markets are fast approaching saturation,

thereby making China naturally become an

appealing destination for international yacht

brands. After years of development, the Chinese

yacht market is ready to step up its growth

trajectory and usher in a quantitative increase in

the next decade.

Based on the Fortune Character Institutes

study, the size of the overall China yacht market

has reached RMB1.75 billion, with luxury yachts

accounting for RMB0.78 billion or 44.6%. The

percentage is likely to grow and luxury models

will become the mainstream. Moving out of

the economic downturn in 2012, the forecast

for 2013 is a modest 20% growth, which

nevertheless equals a RMB1 billion market

value. From 2014 onward, the annual growth

rate will be no less than 40%, reaching a RMB 4

ELOOLRQPDUNHWVL]HLQWKHQH[WYH\HDUV

$IJOB:BDIU3FQPSU

Graph1-3 The Unit Price of Chinese Imported Yacht (2001-2012)

Graph 1-4 A Country Breakdown of Yacht Export Volumes to China (2010-2012) Graph 1-5 A Country Breakdown of Yacht Export Value to China (2010-2012)

2.Vigorous Demand for Luxury Models is the Market Trendsetter

Against the backdrop of a global macro-

economic slowdown, 2012 recorded a decrease

in yacht import quantity. Even so, trade value

increased 47% and the unit price rallied to

a historical high of USD 753,000 per unit. It

illustrates a stable appetite for luxury yachts and

reflects the low elasticity of yacht consumers,

who are less likely to make purchase decisions

based on the overall macro economy.

3.Italy Captures the Largest Share of Luxury Yacht Market While UK Leads Chinese High-end Yacht Market

By country of origin, Italy, UK and France are the major yacht exporters to China, among which

Italy is the uncontestable market leader. Its export volume and value continued to rise in three

consecutive years. Following closely is the UK, a quick mover since 2012 which recorded the

highest unit price at USD$1.17 million. Some more advanced yacht manufacturers and service

providers from USA, Canada and Australia have been focusing on middle to low end models, such

DVVDLOLQJERDWVDQGVKLQJERDWV&RPSDUHGWR,WDO\8.DQG)UDQFHWKH\ODFNREYLRXVDGYDQWDJHin luxury yacht market and unit price.

4. China Yacht Industry City-by-City Index

7KH\DFKWPDUNHWLVFRQVLGHUHGDJROGHQEXVLQHVVRDWLQJDERYHWKHZDWHU7RGDWHPDMRUFRDVWDOSURYLQFHVLQ(DVWHUQ&KLQDKHDGHGE\6KDQJKDLShandong, Fujian, Liaoning, Zhejiang and Guangdong, have promulgated industrial plans that will open up large water bodies, propel government

spending on supporting facilities and yacht infrastructures resulting in a favourable investment environment. The positive correlation between the yacht

and real estate industries motivates local governments to spare no effort in promoting the yacht industry.

In the meanwhile, nation-wide yacht clubs and annual yacht expos provide platforms for yachting enthusiasts, further facilitating the development of the

China yacht industry. Despite rapid growth the China yacht industry remains embryonic and on a relatively small industrial base, which leaves room for

urban yacht market development, a key component of high-end service industry.

In order to shed light on the reality and trends of the Chinese urban yacht market, the Fortune Character Institute established the following index to

highlight development status and future potentials in key cities.

Graph 1-6 China Yacht Industry City Development Index

$IJOB:BDIU3FQPSU

Being a strategic port in the northern part of

China, Dalian is the hometown to the majority

of wealthy Chinese populations in the North

Eastern region, although it is also known for its

cold weather. A frontier city for consumer goods,

many luxury brands have recorded remarkable

sales records in this city. In line with other

cities, and driven by real estate industry and

tourism, the governments endorsement has

sealed the deal for the fast development of

yacht tourism. Thanks to the consumption

habits of rich individuals from the North Eastern

region, Dalian is ideally suited as a location of

yacht clubs.

Qingdao has a very bright future for services

aff i l iated with luxury products. Driver of

Shandong Peninsulas economic development

and blessed with geographic advantages and

oceanic resources, Qingdao is poised to be the

fastest growing yacht location. During the 11th

Five Year Plan, Qingdao invested more than

RMB30 billion in high-end tourism projects on

the sea, including 30 piers designed for yacht

clubs with over 5,000 berths. According to

incomplete data, currently there are 50 yacht

companies in Qingdao with total revenue of

RMB3 billion in 2009. 90% of the production in

Qingdao sells to Europe and North America,

and this makes Qingdao the most important

industrial hub for yacht industry.

Sanyas potential not only derives from its

unique geographic location, i.e. unparalleled

ocean resources and climate, but also from

its strong economic performance. Every year,

the Hainan Rendez-Vous attracts over 20

international brands including the top five

to participate and showcase their newest

yacht models. Without a doubt, Sanya is best

positioned to be the fastest growing industry

base for yacht tourism in the coming years.

Several leading yacht manufacturers are

located in Xiamen, including Hansheng,

Tangrong, Xinxiang, Honglong and Feipeng.

Their shared characteristics include large

production volume, good brand awareness,

and export-orientation. The output for 2007 was

RMB3.5 billion which marked a 60% increase

year-on-year. Yacht export in the same year

was RMB24.23 million, a 78% growth year-on-

year and accounts for 18% of the national total.

In the wake of yacht economic zones locally,

Wuyuanwan, XIangshan and Dongkengwan,

Xiamen appeal to be well-known to domestic

and foreign yacht manufacturers, distributors

and club managements. An accelerated phase

of growth is anticipated as Xiamen becomes the

incubator for domestic yacht brands.

Shanghai:

The Largest Yacht City

in China

Qingdao:

A City of Strategic Importance

for Yacht Industry Development

Xiamen:

7KH0RVW,QXHQWLDO,QFXEDWRUIRU

Domestic China Yacht Brands

Sanya:

The Fastest Growing Yacht

Tourism Industry Base

Shanghai is the most developed yacht market

with the highest number of yacht clubs in the

mainland, where top international brands

hurried to set up representative offices, such

as AZIMUT and FERRETTI from Italy, and

SUNSEEKER from the UK. Shanghai has

abundant wharf resources and houses the most

yacht docks. Every year the splendid Chinese

International Yacht Expo delivers the highest

transaction volume. With such advantages,

Shanghai is second to none as Chinas largest

yacht city.

Qingdao:

A City of Strategic Importance

for Yacht Industry Development

Dalian:

0RVW6XLWDEOH&LW\

IRU

7. 63% of Wealthy Chinese Showed Strong Willingness to Own Yachts in the Future

The appetite for luxury yachts is genuine. When asked about purchasing intentions for luxury

yachts, 63% responded positively. Some of the respondents live in land-locked cities and have no

access to yacht docks. To them, yachting is a symbol of a fashionable, modern lifestyle. There were

still 28% that responded negatively, and the remaining 9% were unsure. The principal constraint to

purchasing relates to docking and its associated high costs.

Graph 1-8 Threshold Price for Luxury Yacht in the Hearts of Wealthy Chinese

Graph 1-9 Luxury Yacht Purchase Plan among Wealthy Chinese Graph 1-10 Most Favoured Luxury Yacht Price Bracket among Wealthy Chinese

Graph 1-11 Consumption Purpose of Luxury Yacht among wealthy Chinese

Graph 1-12 Yacht Purchase Criteria among wealthy Chinese

$IJOB:BDIU3FQPSU

8.Wealthy Chinese Favour 2-5 Million RMB Luxury Yacht

As far as price is concerned, 64% of wealthy

Chinese picked the RMB 2-5 million price

bracket, compared with 19% who went for the

RMB 5-20 million range. 12% preferred the

range of RMB 2 million and below, and 4%

chose RMB 20 million and above. Only 1% went

for RMB 100 million and above.

9.From Business to Personal Use

Business and personal lives are inter-connected

for wealthy Chinese. Most purchased luxury

yachts, especially those which cost more than

RMB 20 million, are used for business social

purposes. Apart from showing social status of

the owners, yachts provide business venues for

private parties and river cruising experiences

WKDWDGGDDYRURIHOHJDQFHDQGDGYHQWXUHWRbusiness occasions. The pattern is destined

to change, in step with the wealthy Chinese

growing emphasis on an enjoyment-driven

lifestyle.

51% of interviewees would buy a yacht for a

higher quality of life, whereas 36% would buy

for business, and only 2% wanted to buy for

investment reasons based on the fact that the

majority of this group owns yacht real estate

business or yacht clubs. Similar to cars, yachts

can be considered as consumer goods with

little or zero investment value or appreciation

potential. The remaining 11% have no explicit

purpose for buying yachts, which can be seen

as copying the behavior of their rich peers.

10.Brand Consciousness

Without sophisticated knowledge of the yacht industry, wealthy Chinese are neveretheless brand

conscious. The Fortune Character Institute survey revealed that 45% of the wealthy are inclined

to choose well-known brands. Meanwhile, some wealthy Chinese pay close attention to customer

support services offered, particularly the one-stop style that save them from hassles in purchase

and maintenance. Those service-sensitive buyers account for 31% of the total. In reality, most yacht

clubs lack the technical talent required to provide support services and maintain the facility. This

results in endless trouble for yacht owners, which to a great extend deters others from owning a

yacht. Customization is another major criteria, 17% deem it important to add personalized features

on their yachts. It explains why yacht orders from China always demand more customized features.

Only 7% of wealthy Chinese make decisions based on price and other considerations.

11.Very Limited Brand Awareness

In the survey, Fortune Character Institute uncovered low brand awareness among wealthy Chinese

who are embarking on their yacht education: only 1% can name more than 10 yacht brands, 5%

can count 5, and 57% know of 1 to 5. The remaining 37% have zero yacht knowledge, which is

typical for a mid-westerner. So international yacht brands have a long way to go in China, and it

should be perceived as a golden market opportunity. Whichever brand gets their marketing right and

therefore resonates in the hearts of wealthy Chinese, will quickly build up a brand advantage over

LWVFRPSHWLWRUV+RZHYHUVXFKDZLQQHUFDQQRWEHLGHQWLHGDWWKHPRPHQW

12.Customization is a Rising Trend

Over the past decade, the China yacht market has matured and so have the customers. Although

brand awareness is yet to be established, China yacht buyers are fond of customization that

demonstrates individualism. 90% of purchase orders are submitted with customization items,

especially top-end luxury yachts. Commonly seen is engraving a personal or company name on the

yacht.

Graph 1-13 Yacht Brand Awareness among wealthy Chinese

$IJOB:BDIU3FQPSU

C. Yacht Marketing

1.Lack of Market Promotion Efforts

Fueled by strong market demand, international

yacht brands sell to China at a satisfactorily high

growth rate, therefore the inclination to adopt a

robust and proactive brand building strategy is

very low. Most brands currently only conduct sales

in China.

Generally speaking, it is a result of one or a

combination of the following reasons:

1) Market uncertainty: Policies and regulations

interfere with the healthy development of

the China yacht market. High uncertainty

discourages international brands from putting

money into marketing campaigns or related

activities;

2) A relatively small market size: although

growing exponentially, the limited sales volume

cannot just i fy high marketing expenses.

Many yacht brands are under the impression

that good sales results will harbinger brand

awareness. As a matter of fact, volume cannot

go up until a strong brand is established.

Hampered by this false perception, many yacht

brands suffer from a loss of momentum.

3) Weak industrial base, talent deficit and

incomplete infrastructure support: All together it

creates a bottleneck for the holistic development

of the yacht industry. Many brand managers

express concern about wasted marketing dollars

in these circumstances. The situation, however

slowly, is improving. When surveyed, 75% of

yacht industry insiders believe the golden era for

the China yacht market is dawning.

In all, 58% of interviewees admitted an increase

in marketing budget for 2013, 15% reported

budget cutting plans and 27% were uncertain.

2.Yacht Expo as the Predominant Promotion Measure

Attending yacht Expos is a widely-adopted

practice for market promotion, eating up the

majority of marketing budget. Any yacht brand

doing business in China makes frequent

appearances at yacht expos; brands that

havent yet entered China are also exhibitors

at the shows. Correspondingly, yacht expos

in China have become highly popular and

lucrative. There are more than 50 yacht-themed

exhibitions in China each year, front and

centered by Shanghai International Yacht Expo

and Sanya Rendez-Vous.

Another standard practice is hosting yacht

events, commonly at a yacht marina or on

a yacht. Some brands prefer to showcase

miniature models in an exhibition hall, those

tend to be brands with some level of brand

recognition in the marketplace.

Compared to more portable and displayable

luxury products, yacht brands execute many

fewer PR events. 57% of brands host or

participate in more than 10 events per year,

and the means of engagement is largely asset

exchange or brand partnership, not so much

monetary spending.

Graph 1-14 2013 Media Budget Projection for Yacht Brands in ChinaGraph1-15 Rate of PR Event for Yacht Brands in China

D. China Yacht Industry Trends

3.Misunderstanding in Market Promotion

Advertising is under-regarded. One contributing factor is the budget constraint for marketing

activities, the other is the disproportionate rate of return on advertising money, given that yachts are

by nature a luxury, available only to a very wealthy few. Yacht brands would rather target potential

clients directly via PR events.

In fact, spending most of the marketing budget on PR events does not seem to be the cost-effective

communication approach as it may take lots of time and effort for customers to make purchasing

decisions. Rarely is the case that a consumer would immediately make purchasing actions.

However, such PR events would be a lot more impactful if the brand had already built certain

levels of awareness. Without pre-installed brand recognition, the effect of an event is similar to that

of an advertisement, but with 10 times more costs, if not hundreds or thousands of times, more.

+HQFHIRUWK)RUWXQH&KDUDFWHU,QVWLWXWHUPO\EHOLHYHVWKDWWKHPRVWHIIHFWLYHPDUNHWLQJDSSURDFKLVthe natural yet effective integration of advertising and PR events.

Another common mistake in marketing is the sole focus on professional media. With well-

established brand mapping in the industry, consumer perceptions around product quality, and brand

value, the pricing propositions of various brands are all well set. Therefore, the professional media

KDVOLPLWHGLQXHQFHRQFRQVXPHUSHUFHSWLRQVRIEUDQGVQRWWRPHQWLRQLQXHQFLQJWKHLUSXUFKDVLQJdecisions. Based on such observation, The Fortune Character Institute encourages yacht brands to

expand to luxury magazines that focus on wealthy lifestyle to bring subtle but more powerful impact

to the target consumers.

1.Growing Popularity Will Create a Brilliant Market for Yacht Brands

When the yacht industry picks up its growing

pace and reaches a certain size, it will go

through a de-mystifying phase where prices

will start to drop sharply. The market will be

mature enough to serve more buyers, whose

purchasing decisions will be made to personal

needs rather than business purposes. By then,

luxury yachts will become more commonly

possessed by yacht owners.

Brand loyalty to luxury yacht brands is a lot

less than that to luxury car brands. Moreover,

local Chinese brands take more advantage of

local resources and are competing well with

overseas brands.

2.Yacht Related Services Obtain Endless Business Opportunities

The yacht market is an important part of the

high-end service sector. It is closely associated

with lifestyles such as high-end, luxury, private

and tasteful. Alongside it is the spillover effect

on supporting and related services. Yacht club

memberships, in particular, will soon overtake

golf club memberships thus providing the

highest and most long-term investment value.

3.Marina/Dock Investment will Yield the Highest Return

Yacht docks are currently holding back growth.

Although China is rich in port resources,

the current capacity by no means meets

the strong demand for yacht marinas and

docks. As a result, investing in marina/dock

development will yield a higher return than in

real estate.

China Watch ReportChina Watch Report2013

CHAPTER 2

1.The Market Continuously Expands therefore the Sales Volume Bounces Back

Today, the watch industry in China is a RMB 40 Billion business, where high-end brands make up

50%%LOOLRQRUDVKDUHRIWKHPDUNHW+LJKHQGZDWFKHVDUHGHQHGDVSURGXFWVWKDWDUHRMB 3,000 and above. The rest of the market is shared by 10% of watches that are cheaper than

RMB 1,000, and another 15% that are between RMB 1,000 to RMB 3,000. In general, high-end

watches dominate the China watch market.

6LQFH WKH&KLQDZDWFKPDUNHWKDVH[SHULHQFHGDVLJQLFDQWVORZGRZQDVWKHWLPHNHHSLQJfunction was replaced by many others products, such as mobile phone. In turn, emphasis was

shifted to decorative and other functions. In 2012, watch imports bounced back, and watches were

seen more as a fashion accessory rather than a timekeeping device. It therefore marked a new era

of the China watch market in which non timekeeping features are highly valued by consumers.

A. Market Analysis of High-End Watches in China

Graph 2-1 Annual Import Volume of Watches and the Growth Rate (2002-1st Quarter, 2013)

Graph 2-2 Swiss Watch Export to China, Value and the Growth Rate (2002-1st Quarter, 2013)

Switzerland is the major exporter of high-end watches to China and serves as a

wind vane for China watch import. In recent years, Swiss watch export to China

stayed at a stable rate, indicating domestic watch market development. In 2012,

however, due to political and industrial restructuring, the gift market was under

stringent government scrutiny. Although export in 2012 was almost the same as

LWZDVODUJHO\GUDZQXSRQLQYHQWRU\WKHUHIRUHFRQFHDOHGWKHVLJQLFDQWGURSin sales. The slowdown in 2012 not only impacted import volume, it also spilled

RYHUWRSDUWLFXODUO\LQWKHUVWTXDUWHU6DOHVJUHZE\LQWKHUVWTXDUWHU

Graph 2-3 the Average Price of Chinese Imported High-end Watches (2002-1st Quarter, 2013)

Table 2-1 The Export Destination of Swiss Watches in 1st Quarter, 2013

$IJOB8BUDI3FQPSU

of 2013, but did not achieve any further increase throughout the

rest of the year.

Concurrent with the growth in import volume, the average price for

high-end watches was also ascending. In the recent 10 years, the

average price jumped almost tenfold. In a way, it demonstrates

that even though the Chinese high-end watch market was heatedly

competitive, top brands still have a strong influence on market

price. There is a huge demand for limited edition and customized

products especially those from top brand ranges. However, the

forecast indicates that the price increase of high-end watches will

slow down, and fashion brands will become very competitive in

the China watch market for its much lower price ranges and trendy

designs.

In 2012, the China high-end watch market experienced some

setbacks but it did not hinder fast global growth. Germany, UK,

Italy, United Arab Emirates, as major overseas watch markets for

Chinese consumers, had witnessed an equitably quick growth

phase. The off-shoring of Chinese watch purchasing activities was

the key reason for such growth, in the meanwhile, the domestic

watch buying power from locals was also on the rise.

Despite a short-term slow-down of watch import to and

consumption outflow, in a longer time horizon, the future

acceleration is still obvious and strong. The current market

reality is not a result of diminishing purchase power but a lack

of consumer confidence. Along with changes in societys wealth

VWUXFWXUHDQGWKHULVHRIDIXHQWQHZULFKWKHSRWHQWLDORIKLJKHQGwatch consumption will continue to be unleashed.

Ordinary consumers have also joined the consumer club for high-

end watches. For the richer urban middle-class and white collar

sector, spending a couple of thousand RMB on a watch is no

longer an impossible luxury dream. Based on these trends, the

market chill over imported watches is only a temporary reaction to

short-term market changes. Chinese consumers purchasing zeal

should never be underestimated. Moreover, with changes on tariff,

WKHOLNHOLKRRGRIFRQVXPSWLRQRXWRZVZLOOEHHDVHG

practices in advertising, forcing these noble

brands to give consideration to popular

PHGLDRXWOHWVSULQFLSDOO\QDQFLDOPHGLDDQGnew media, and reaching out to 2nd tier, 3rd

tier, and even 4th tier cities.

Ordinary People as Consumers

Luxury watches have good investment

value and demonstrate certain social status.

With more reasonable pricing and ever-

growing purchasing power, consumers are

likely to spend a few thousand on medium

level watches. As a result, mass consumers

are becoming part of the high-end watch

consumer group. On average, this consumer

group owns less than three watches per

capita and seldom buys from the same

brand. Currently, the contribution from this

group to the overall market is very limited,

but the sheer size renders it a target group

for potential purchases.

More Accessible Sales Channels

The cost of retailing remains high, and most

of the premium locations had been taken by

dominating fashion brands. Such a situation

imposes challenges for high-end watch

brands to carve out physical space. At a

time when operating a sizable network of

retail stores is a necessity, high-end watch

brands build into mid-sized cities. A more

direct cause for popularized sales channels

is the fast development of Ecommerce.

Many high-end watch brands have set

up online stores, a more interactive and

effective means to engage consumers.

2.Chinese High-end Watch Market is More Fashionable and More Popularized. Well-known Brands Will Define the Market Landscape

1) Fashionization

Traditionally being male-oriented consumer

products that display solemn, prudent,

and self-restrained characteristics, high-

end watches are now undergoing a major

fashionization revolution for the following

reasons.

The clocking/time keeping function was

rendered obsolete by the trend of wearing

watches as accessories. Different outfits

requ i re d i f fe rent match ing watches.

Therefore high-end watch brands have been

induced to reconsider customers needs

in formulating a new market strategy. As a

result, the decorative value of watches is

becoming more important and is being more

closely attended to by manufacturers.

Fashion brands entering into the watch market

gives a big push for its fashionization. Arriving

in China early, fashion brands have better

established brand recognition, sales channels

and consumer loyalty. Once production of

fashion watches starts, they can quickly

achieve economy of scale, and rapidly carve

out an expansive fashion-brand watch market.

The third fashionization driver is the

fast growth of the female high-end watch

consumer market. Naturally, females tend

to wear watches as accessories and are

keen for styles with precious stones such as

jewels and diamonds.

'$**OTJHIUT1PQVMBS GBTIJPO CSBOET XJMMEFGJOFUIFMBOETDBQFPG$IJOFTFIJHIFOEXBUDINBSLFU

Fashion brands have entered into the watch-making business and will be the dominating force in the China high-end watch market. Traditional professional watch makers will respond by gearing towards the watch investment and collection areas and making super-deluxe watches. Undoubtedly its market share will be significantly impacted on by fashion brands.

2) Popularization

High-end watches as luxury goods have long

been perceived as an article of wealth and

status, possessed only by a handful. This

norm has been revolutionized. With watches

becoming an embodiment of quality of life, it

is going through an unprecedented wave of

popularization.

Media Targeting the Mass

Many high-end watch brands had little

recognition in the market. Such mysterious

character greatly hindered the enlargement

of their market base and the attraction of

new consumers. Especially in the face of

heated competition from popular fashion

brands, many high-end watches desire

to become widely known yet only owned

by few in building a larger market base.

Such shift in market strategy compels new

3. Chinese Import Watches are Under Systematic Restructuring; Tier-2 and Tier-3 Cities Become Major Drivers

Table 2-2 Chinese Mainland High-end Watch Markets by Import Volume

Graph 2-4 Hong Kong Watch Import from Switzerland, Value and Growth Rate (2006 - 1st Quarter, 2013)

$IJOB8BUDI3FQPSU

Hong KongThe Hub for World Watches

As the worlds largest watch exporter Switzerlands major export destination, Hong Kong sits on top of the total export value chart, followed by the United

States, Mainland China, France, etc. Since 2009, the trend has been quite noticeable. In 2009, Swiss watches exported to Hong Kong reached CHF 0.2

ELOOLRQDQGLWZHQWXSH[SRQHQWLDOO\WR&+)ELOOLRQE\DOPRVWGRXEOLQJZKDWLWZDVWKUHH\HDUVDJR,QWKHUVWTXDUWHURIXQGHUWKHFKLOOLQJHIIHFWRIWKHPDLQODQGVWLJKWHQLQJVSHQGLQJ+RQJ.RQJPDLQWDLQHGUVWSODFHDW&+)PLOOLRQDOWKRXJKLWH[SHULHQFHGDGHFUHDVH\HDURQyear.

Shanghai: Highest Demand Center for High-end Watches in Mainland China

In Mainland China, it is still the tier-1 cities dominating high-end watch imports. Shanghai, Beijing and Guangdong enveloped almost all the market

share. Among the Top 3, Shanghai championed import volume six years in a row. This is due on one hand to many watch brands having set up corporate

headquarters in Shanghai; on the other, to the strong consumption circle for Southern China that is centered upon Shanghai. In 2011, Shanghais

LPSRUWHGKLJKHQGZDWFKHVUHDFKHGSLHFHVDUHFRUGVLQFHWKHQDQFLDOFULVLV,QXHQFHGE\H[WHUQDOPDFURHFRQRPLFHOHPHQWVLPSRUWVRIhigh-end watches dropped 10.5% year-on-year. Yet still, it is 37 times larger than the Beijing market.

Guangdong: Traditional Gateway of Watch Import

,QWKHSDVWYH\HDUV*XDQJGRQJKDGPDLQWDLQHGLWVWRSSRVLWLRQLQWHUPVRIZDWFKLPSRUW,Q*XDQJGRQJLPSRUWHGSLHFHVDQGDFFRXQWHGfor 86.7% of the market share. In 2012, 1,725 high-end watches went through customs and recorded a 4% increase. In the first quarter of 2013,

Guangdong surpassed Beijing and achieved the second position with 390 imports. The reason for this could be explained as Shanghai and Beijing

targeting high-end watches whereas Guangdong focuses on mid to low end ones, therefore it is much less impacted by externality and sales cycles.

Beijing: High-end Watches as Gifts

$VWKHQH[XVIRUSROLWLFVQDQFHDQGFXOWXUH%HLMLQJLVKRPHWRQXPHURXVZDWFKEUDQGVDQGLVRQO\VHFRQGWR6KDQJKDLDVWKHPRVWGHYHORSHGPDUNHWIRUZDWFKHV%HLMLQJVSRVLWLRQLQWKHSDVWYH\HDUVKDVEHHQFRQVLVWHQWO\LQWKH7RSOLVW0HDVXUHGE\WKHUHDVRQIRUSXUFKDVH%HLMLQJZDWFKVDOHVDUHODUJHO\GULYHQE\EXVLQHVVJLIWV6LQFHGLIIHUHQWSROLWLFDOG\QDPLFVZHUHDWSOD\LQZDWFKVDOHVGURSSHGVLJQLFDQWO\DQGPDQ\ZDWFKEUDQGVsuffered a sales loss. Nevertheless, Beijing owns an irreplaceable role of leading watch consumption and as the strategic leverage to entry into the

Northern China market.

Up-and-coming Tier-2, Tier-3 Cities Expansion of Direct Retailers for Imported Watches

We also take note of another fact that more and more tier-2 and tier-3 city trading companies have started to participate in the circulation of high-end

watches. The companies develop direct import channels with foreign high-end watch brands and grow rapidly. Liaoning, Hebei, Zhejiang are champions

in this category. In the past two years these regions have observed sharp growth some have even achieved 10% annual growth rate, rendering them

the most popular locations for high-end watches.

The Fortune Character Institute studied 50 watch brands owning retail

stores in China. As of April 30, 2013, there were about 6,693 stores,

LQFOXGLQJURXJKO\GLVWULEXWRUVDQGGLUHFWVDOHVWRUHVDJVKLSboutique and experience stores). Beijing, Shanghai, Liaoning, Guangdong

and Zhejiang have the highest saturation rate. In terms of location, Beijing

sits on top of the list with 627 stores, followed by Shanghai with 579.

Southern China is losing its advantage to the North in recent years as

more and more brands prefer to have Beijing to locate flagship stores

customer experience centers and after-sale product care shops. The

goal is to cover the vast landmass of Central East and Northeast China.

Noticeably, Shenyang is positioned number 3 with 253 stores, revealing

the maturity of the city as a luxury goods consumption center, and local

consumers special enthusiasm towards watches.

1. Chinese High-end Watch Retail Stores

B. City Index for Chinese Watch Market Development

Graph 2-5 The Saturation of Watch Retail Stores by Chinese Cities

$IJOB8BUDI3FQPSU

The City Development Index for the Chinese Watch Market was concluded

based on meeting various criteria, and it is considered a comprehensive

summery of the development of the China watch market, indicating consumer

purchasing power by location.

1) The North-South Split

It is evident in Table 2-3 that Northern China has higher demand for high-end

watches, and reasons can be drawn from the following:

Northern Chinese have a higher tendency to make consumption decisions

based on peer pressure and influence of other consumers, especially for

products with a higher unit price.

Northern Chinese are more straightforward than Southern Chinese, and the

accumulation of wealth often comes from natural resources such as mineral

PLQLQJRUHQHUJ\7KHUHODWLYHHDVLQHVVLQZHDOWKDFFXPXODWLRQMXVWLHVKLJKspending.

Beijing, as the center for politics and culture, cultivates a well-developed

gift market, which in turn drives up luxury consumption in Beijing and its

neighboring areas. A luxury watch is one of the most well regarded gift

options.

In comparison with Southern cities, Northern cities have more abundant real

estate development projects. Their favourable business attraction conditions

encourage famous watch brands to proceed with expansion in the North,

therefore stimulating the development of the watch market.

6RPHRIWKHPRVWUHVRXUFHIXOGLVWULEXWRUVRFNHGWRWKH1RUWKHUQFLWLHVDVDthe channels faciliating watch market development have widened.

2) Regional Discrepancies for High-end Watch Consumption

As China is so vast, customers in different regions exhibit diverse educational

backgrounds and economic development degrees, therefore have different

consumption behaviors.

The wealthy populations from the North and Northeast of China favour

watches with a higher unit price and are made of unique material. Demand

2. City Development Index for Watches

Table 2-3 City Development Index for Chinese Watch Market

for brand reputation is particularly high.

Some of the most popular brands include

Rolex, Patek Philippe, Piaget and Omega.

It is common to own multiple extremely

expensive watches in these two regions

and the per capita watch ownership is also

noticeably high.

In Eastern China, customers desire watches

with higher investment value and special

design features. Other than the usual

popular brands such as Patek Philippe

and Vacheron Constantin, fashion brands

including Cartier and Chanel are keenly

sought after. Customers in Eastern China

have a high average education backgroud,

and show the highest watch ownership

across the country.

In Southern China, especially Guangdong

region, consumers are not as brand

FRQVFLRXV3ULFHLVWKHNH\LQXHQFLQJIDFWRUto high-end watch consumption, and people

only mention prices when showing off their

newly purchased watch. In addition to some

vastly expensive watches, customers in

the South also tend to own a few cheaper

watches.

Southwest regions exhibi t low watch

consuming zeal and have very l imited

brand consciousness. Most purchasing

decisions are based upon word of mouth,

consequently people tend to pay for second

and third tier watches and have a much

lower watch ownership.

Central and Northwest China have the least

enthusiasm for high-end watches. A lot

has to do with the scarcity of retail stores

in these areas. Consumers tend to have

extreme purchasing behavivours they

either dont buy any or they buy watches in

big quantities under impluse but rarely wear

them.

3) The Development of Chinese Watch

Market in Different Cities

Beijing: as the political, financial and cultural

capital, Beijing is home to ample watch brands

and surpasses Shanghai as the most developed

watch city. In recent years, watch brands have

been competing head to head in Beijing central

business districs. Most premium retail locations

have been occupied and the market saturation

is conspicuously high. Moreover, watch

purchasing is more for business gifting than

self-usage.

Shanghai: headquarter to many watch brands,

Shanghai owns the most mature market

environment and consumer consumption

behavior. Naturally, it becomes the heated

EDWWOHHOGIRUPDUNHWLQJZLWKLQDZHOOGHYHORSHGhigh-end media base. But in recent years,

a slowing-down is observed due to ashift in

marketing strategy, and more brands have

started to use Shanghai as a location to

maintain brand image as well as to provide

post-sale customer service.

Shenyang: the historical capital of heavy

industry and transportation hub, consumers here

WHQGWREHHDVLO\LQXHQFHGE\SHHUVDQGPDNHlavish spending to gain face. Consequently,

watches with higher unit prices and made of

special material draw more interest. Brand

is a big deal Rolex, Patek Philippe, Piaget

and Omega are all top-ranking choices. Stable

watch consumption places Shenyang number 3

on the China watch city list.

Dalian: Dalian has the highest percentage of

wealthy individuals from the Northeast among

whom many own properties in the city and are

attuned to new consumption trends. As a result,

watch brands choose Dalian as a hot retail

location.

Chengdu: as the economic center of the West,

Chengdu has a burgeoning consumer group

DQGDGHHSFXOWXUDOLQXHQFH0RUHLPSRUWDQWO\as the leisure capital, Chengdu residents

value happiness in life and see luxury goods

as a source of leisure. Such values have been

translated into their watch consumption as well.

Chongqing: being the economic center of

the Southwest, Chongqing has a vibrant

consumption culture. The local rich have an

unquenchable high demand for watches. The

future for market expansion is bright.

Tianjin: being nextdoor to Beij ing, local

government in Tianjin does not much effort

into promoting high-end service industry and

luxury goods consumption, as a restult, a large

amount of Tianjians consumption power flows

out to Beijing. However, with the establishmenet

of Florence Town Outlets and its related service

facilities, Tianjin generates evergrowing interest

from watch brands and remains a top 10

location for watchmakers.

Harbin: fewer retail stores than Shenyang and

a relatively smaller consumer base, Harbin is a

strong contender for the next watch capital.

Kunming: a city where tourism makes up the

highest percentage in GDP, watch stores in

$IJOB8BUDI3FQPSU

Kunming target mainly tourists. Besides watch

sales, brand exhibition is also a central function,

more so than any other city. The local buying

power pales in comparison.

Guangzhou: one of the most populous frontline

cities in mainland China, Guangzhou has a

disproportionately underdeveloped high-end

watch market. The consumption in prosperous

neighboring areas such as Foshan, Dongguan,

Shunde, and Zhongshan is lost to Hong Kong

and Shenzhen, making much less contribution

to local watch sales.

Hangzhou: DGMDFHQWWR6KDQJKDLDRXULVKLQJeconomy, capital of e-commerce, and one of the

most fast-growing commercial cities in China.

Hangzhou relies on its geographic convenience

to Shanghai and Zhejiang and has become the

backyard of wealthy classes from East China;

tourism consumption fuels sales of high-end

watches.

Shenzhen: a big portion of consumption power

crosses the strait to Hong Kong, but its unique

geographic location and economic power

position Shenzhen as one of the targeted cities

for its strong local consumption.

XiAn: the acient Chinese capital for six dynasties

is rich in history and culture. XiAn has been

off the radar for watch brands. In fact, XiAn is

viewed by the wealthy from Inner Mongolia and

Yulin District as an ideal location for real estate

investment, the potential of its consumption

power is yet to be explored.

Zhengzhou: located in Central China, Zhengzhou

has a low-profile and humble values shared

among the wealthy class. Zhengzhous watch

consumption is higher compared with other

goods, and usage is more personal than

business gifting. It is in fact one of the most

focused markets for watch brands.

Taiyuan: Shanxi merchants are fond of buying

watches, however purchasing patterns are

unpredictable. Watches are not considered a

social status symbol, and other factors such

as price and design hold more attention from

consumers.

Wuhan: a transportation hub connecting

nine provinces, Wuhan is going through an

urban transformation. Due to its geographic

advantage, watch brands will choose to open

stores even in the face of low consumer

awareness and an under-developed business

environment and supporting services.

Suzhou: being one of the most economically

developed c i t ies, Suzhou has the most

sophisticated consumer group. Comparing

to other tier-2 cities Suzhou is favored by

foreigners and business people. All together

it adds commercial dymanics to the city. The

effect of sphere marketing is not as obvious

and advertising is how local consumers obtain

luxury goods information. The population tend

to be very receptive to new and fashion brands.

Nanjing: another acient capital for six dynasties,

as the capital city for highly developed Jiangsu

Province, the tourism economy ushers in

sizable tourist consumption. However, the

consumers are more conservative and there

lacks a business environment for luxury goods.

Many buyers travel to Shanghai to shop.

Nanning: a key city of the Southwest, Nannings

SUROHLVRQWKHULVHLQWKHH\HVRIOX[XU\EUDQGV(YHQso, local economic development and consumer

awareness are fairly low, cheaper fashion

brands dominate the market.

Changsha: recently the rising number of

bil l ionaires from Changsha have become

the target for luxury watch brands. They

demonstrate superior purchasing power and

thrive to match peers in Shanghai and Hong

Kong.

Changchun: culture capital with a relatively

less-developed economy. The buying power

for watches is however high, especially among

middle and low classes. Consumption is driven

by the symbolic value of watches in local

culture.

Jinan: deeply influenced by Confucianism, the

local purchasing behavior is pragmatic and low-

key, presents low zeal and sensitivity toward luxury

brands and yields to a basic brand recognition.

Based on the measurement of material and cost-

effectiveness, watches priced between RMB 40,000

and 60,000 are the most popular.

Urumqi: as an important bridge to Europe, the

abundant natural resources breed Urumqis

wealthy class. Therefore it expected that watch

brands become aggressive in this area and

have seen some sales records exceeding those

in tier-1 cities.

Ningbo: lack of watch retail stores, Ningbo

wealthy populations choose to shop in Shanghai

or Hong Kong.

Wenzhou: there is average high purchasing

power across the population. Consumers are

open to novel products and ideas, which makes

this a popular location for watch brands.

Qingdao: vibrant local consumer group, Qingdao

leads the fashion trends of Shandong Penninsula.

Qingdao people see purchasing as part of lifestyle

and their openness encourages them to go with

new watch brands and cutting-edge designs.

4) Tier-2 and Tier-3 Cities Will Be Where Marketing Wars Are Fought; Tier-4 Cities Also Present Opportunity

Graph 2-6 The Geographic Breakdown of Watch Retail Stores

From a geographic perspective, watch brands

are penetrating into tier-2 cities and compete in

these markets ferociously. It makes great sense

because tier-1 cities have gone through years of

development and thus consumption behaviors

have matured and the market saturation rate

is high. In tier-2 cities, the room for economic

growth is enormous, and consumers have

limited exposure to high-end watches. Marketing

channels are yet to be built. Therefore, tier-2 cities

are logically the priority markets for watch brands.

Luxury brands start off as non-professional watch

brands but are making big strides in the industry.

Unlike professional watchmakers, luxury brands

have a weaker network in tier-3 as well as tier-4

cities, therefore rely predominantly on tier-1 cities.

Leveraging existing advantages in media relations

and channels, luxury brands tread the watch

business with ease.

Fuzhou: as the capital city of Fujian, Fuzhou

consolidates business groups of numerous cities.

Business gifting is the major purchasing purpose

and as a result, jewellery, watches and precious

metal watches become top picks.

Xiamen: Xiamen is a burgeoning economy with

fewer high-end watch retail stores. Consumers are

more rational and knowledgeable about brands.

Therefore it amasses a sizable number of serious

collectors and watch fans. Consumers tend to go

to easily-accessible Hong Kong to get their luxury

watches.

Hefei: as the capital of Anhui, Hefei economy is

not as well off as other mining business driven

cities. Luxury goods are not as recognized, but

business people from surrounding cities tend to

buy them for gifts. Watch fits in almost as cash

equivalent in terms of business gifting.

Hohhot: as the center of Inner Mongolia, Hohhot

does not generate high consumption power for

luxury goods. Entrepreneurs made their fortune

through local natural resources and would choose

to go to Beijing and Hong Kong for shopping.

Spliting purchasing purposes between personal

use and business gifting, consumers in general

pay less attention to the investment and collection

value of watches.

$IJOB8BUDI3FQPSU

C. Watch Consumption in the Minds of Wealthy Chinese

To professionals, a high-end watch means technique, craftsmanship, history and cultural heritage.

Among ordinary consumers however, high-end watches are judged by brand awareness, price,

style, material and technique.

Ordinary consumers begin by comparing brand names and prices. As a result, some popular top

brands release cheaper models as high-end yet affordable options for consumers. When price

becomes the defining factor for high-end watch purchasing, 11% of Chinese consumers feel

comfortable having 10,000 RMB as their budget for watch purchasing, compared with the 41% of

wealthy Chinese who set their budgets at 30,000 RMB, 31% at 100,000 RMB, 14% at 200,000

RMB and 3% at 500,000 RMB. Although the psychological threshold is 300,000 RMB, most Chinese

consumers pay between 3,000 and 30,000 RMB for watches, creating an obvious gap between

expectation and actual spending.

Advertising plays a major role in creating brand value. Many tier-2 brands benefit tremendously

from big advertising spending and broad advertisement coverage, and have created high customer

perception values, which help them win market share. On the other hand, several reputable high-

end brands are faced with falling popularity.

1. Wealthy Chinese Believe High-end Watches Should Cost 30,000 RMB and Above

Graph 2-7 Price Point for High-end Watch in the Opinion of Wealthy Chinese Table 2-4 Watch Brands Most Favoured by Wealthy Chinese As revealed by Fortune Character Institute, wealthy Chinese on average own six watches 52%

KDYHDERXWYHDQGRZQPRUHWKDQWHQDQGRZQPRUHWKDQWZHQW\

2. Wealthy Chinese on Average Own 6 Watches

Graph 2-8 Number of Watches among Wealthy Chinese

$IJOB8BUDI3FQPSU

Graph 2-10 Wealthy Chinese Watch Desire Curve

Although the per capita watch ownership is already high, the room for further growth remains

huge. 64% of wealthy Chinese express continuous interest in buying more watches when they

see new models; 27% think it depends on the circumstance, and only 9% indicated that they

would not buy any more. Geographically, tier-2 and tier-3 cities have the highest potential to

EHQHWIURPSXUFKDVH

Based on demand from consumers with various asset values, The Fortune Character Institute

developed Watch Desire Curve, which fully exhibits watch consumption inclination for each

different wealth class. Graph 2-10 demonstrates that consumers with 10 million RMB assets

have the strongest desire to buy luxury watches. Being a rising group in society, they have a

VWURQJGHPDQGIRUOX[XU\SURGXFWVWRFRQUPWKHLUVRFLDOVWDWXV$VWKHLUSHUVRQDODVVHWVJRXSthe need for high-end watches drops, until assets reach the RMB 100 million benchmark when

the collection and investment purposes bring buying levels back up high.

Consumers of both genders emphasize brand awareness; 41% male and 31% female take brand

name as primary concern for purchasing. Brand popularity, however, is ironically built on shallow

understanding of brand values. Most rich populations cannot tell the differences between brands.

)RUPDOHFRQVXPHUVWKHLQXHQFLQJIDFWRUVDUHSULFHPDWHULDODQGVW\OHIHPDOHconsumers consider factors such as style (27%) and material (19%). It therefore follows that female

consumers favour watches with artistic designs as well as appealing brand names, especially those

from fashion brands such as stylish quartz watches.

4. Brand as Defining Factors in Watch Purchase

Graph 2-11 Influencers for Watch Purchase Decisions

Graph 2-12 Defining Factors for Watch Buying

Graph 2-9 Willingness to Buy More Watches

3. Strong Desire to Continue to Purchase

$IJOB8BUDI3FQPSU

Matching outfit: as an essential element

representing personal success, watches are

worn for decorative purpose more than for

time keeping and collecting.

Time- keeping:the watchs role as time-

keeper has been replaced by many other

devices. Although it might not be the sole

reason to motivate watch purchase, watch

users still value the conventional time-

keeping function of a watch.

Collection: the material,craftsmanship and

heritage of high-end watches embody great

aesthetic and artistic values. Therefore they

attract lots of collectors. Those buyers tend

to source from a diversity of channels to

collect single designs, and are not so much

motivated by high price.

Investment: on average, high-end watches

have room for a 20-30% value increment, and

therefore have a high return on investment.

For that reason, many consumers see watch

buying as a way to preserve and increase

value. As a result, they focus especially on

high value brands and limited edition models.

These consumers are open to high price

watches as long as they have proportionate

growth value.

Watches as an investment vehicle depend on

the following factors:

Preserve Value and Appreciation: high-end

watches normally appreciate overtime at a

20-30% annual rate.

Light Size with Huge Value: a portable article

with values as much as millions, easy to

store and inherent.

Practical Function: to keep time and match

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Techniques and Heritage: craftsmanship

adds aesthetic value and collection value to

watches.

Business Gift: China has an enormous gift

consumption market. At the high-end, watch

is a top choice. Portable in size but with

huge embedded value, a watch displays

taste and status, hence it is affectionately

adopted as a cash equivalent.

Addit ional Functions: with technology

breakthroughs, high-end watches are often

equipped with high-tech gadgets suited

for navigation, aviation, and nighttime use,

ability of accommodating extreme conditions

such as underwater, high pressure, and

extreme temperature.

The Fortune Character Institute survey indicates that wealthy consumers favour limited edition

watches, and see investment and business gifting as the main purposes. The more expensive the

watch, the more likely it is purchased for business gifting. Less wealthy consumers, on the other

hand, want to make every penny count. To show off wealth on a limited budget, they go for watches

at lower prices and use them predominantly to ensure wealth status.

5. Matching Outfit as Major Reason to Wear Watch

Graph 2-13 Watch Purchase Purposes Graph 2-14 Watch Wearing Purposes

Table 2-5 Watch Consumption Criteria by Different Wealth Class

Watches engineer new functions to carve out a unique selling point and a niche market. Although brands emphasize special techniques, rare materials and special memorial meanings, as a matter of fact, a crocodile watch strap is not be that comfortable, and not many consumers would use moon phase watches to differentiate days and nights. In terms of brand history and values, sometimes it is simply a marketing tactic.

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With the accumulation of wealth, Chinese show different watch brand consumption patterns toward. Individuals with a net worth below 10 million RMB

favour fashion brands and cheaper models of popular brands, especially Omega, Les Longines, and Radar. Consumers with personal assets between

10 million and 50 million are more brand sensitive, and they usually prefer watches made of special material, especially from Rolex, Cartier, and Chanel.

For those who own more than 50 million RMB personal assets, Patek Phillippe, Rolex and Jaeger Le Coultre are most popular and customization is

desired. Professional watches with high collection value are the target for this consumer group.

6. Watch Consumption Pattern Differs by Wealth Level and Brand Appetite is Crystalized

$IJOB8BUDI3FQPSU

Wealth LevelConsumption Mindset Favored BrandsUnit:RMB

Below 10 millionFavor fashion brands and cheaper

models of popular brandsOmega, Les Longines, and Radar

10-50 million Brand rules, favor special material Rolex, Cartier, and Chanel

50-100 millionBrand rules, favor investment

valuePatek Phillippe, Rolex and Jaeger

Le Coulter

Above 100 million Brand rules, favor customization Customized Professional Watches

Chinese Richs Watch Consumption Mindset

Data Source: Fortune Character Institute

7. Most Purchase Takes Place Overseas

Domestic

Fashion brands retail stores in China re-set

the market as in the past, high-end watches

were only available in oversea markets. Many

customers became aware of the high-end

watches from this channel. Consequently retail

store in China has become the predominant

channels for purchasing and its impact is ever

growing

Overseas

Overseas purchasing is conventionally the

primary channel for buying high-end watches,

especially super-expensive ones. Even though

access is made easy via retail stores in China,

the vast price difference draws many customers

to oversea markets.

E-Commerce

E-Commerce entered the luxury industry

at an unprecedented pace. However, due

to problems such as counterfeiting and poor

customer service, it has not yet taken over

conventional sales channels. But there is great

potential. Many famous brands have tested

selling high-end watches online and achieved

promising results. Such e-commerce trialing is

still in the piloting phase, but has a long way

to go.

Professional Purchase Agency

Due to price differences and different product

launch times on each market, professional

purchase agency emerged several years ago

and developed rapidly. But with retail stores

opening and many brands releasing new

models in different markets at the same time,

purchase agencies are losing their advantage.

Tariff reduction that leads to a narrowing price

difference will also negatively impact the

agencys business, even its existence.

Second-hand Market or Barter with Friends

The appreciation of high-end watches makes it

possible to trade used watches on second-hand

luxury goods markets, particularly the special

edition and special material designs. Luggage

and watches occupy the major traffic on the

second-hand market.

Graph 2-15 Chinese Consumers Purchase Channels

Most High-end Watch Purchase Happen Overseas

Retails store in mainland china,

37%

Buying overseas, 59%

Purchase agency, 1%

Second-hand market or swap between friends

2% E-commerce 1%

Data Source: Fortune Character Institute

Customer service of high-end watch brands

is one of the areas that puts off the wealthy

Chinese consumer. So what makes wealthy

Chinese unsatisfied? From The Fortune

Character Institute survey results, complaints

are summarized in three major areas: long

repair time (32%), high repair cost (23%)

and intransient parts cost (20%). In a way it

accentuates the gap to achieve better customer

relations management.

Notably, the wealthier the consumer, the fewer

complaints he/she holds against service quality,

but the more about repair time. By and large

time means money to those highly wealthy

individuals and waiting time can lead to breaking

loyalty with a brand. In additional, regardless

8. Unsatisfied Customer with High-end Watch Services

RIDVVHWVFODVV WKHFRQVHQVXVRQDZHGFRVWdisclosure is across the board. As some parts

require replacement from overseas, some high-

end brands fail to explain to consumers the

detail of the replacing procedure.

As for gender, females have a natural tendency

to be more sensitive about details, therefore

are prone to delicate attitude differences when

service is delivered, which in turn increases

the chance of satisfaction. On the other hand,

males are less patient and therefore complain

more about long waiting time for repair.

Tier-2 and Tier-3 cities have fewer retail stores

and consequently many fewer customer service

centers. Given the reality that high-end brands

in practice only have maintenance centers in

tier-1 cities, customers in these regions tend

to be more patient therefore grumble less. The

fact that they have very inconvenient access

to repair facility sometimes can become a

contending issue.

With 10 years of operation in the Chinese

market and a growing consumption power, high-

end watches need to penetrate into lower tier

cities together with their customer services.

Service is key to maintaining brand loyalty after

all. Once removed, loyalty is virtually impossible

to regain. Apparently, high-end watch brands

have a long way to go in managing service and

customer relations.

Graph 2-16 Wealthy Chinese Complaints about High-end Watch Services Graph 2-17 Watch Owners Complaints by Asset Level

Graph 2-19 A City Analysis of Consumer Complaints Graph 2-18 A Gender Analysis of Consumer Complaint

$IJOB8BUDI3FQPSU

D. Media Relations for High-end Watches in China

1. High-end Watch Media Channels and Percentage Analysis

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Graph 2-20 High-end Watch Media Channels

Due to s ize l imi tat ions, the major i ty of

professional watch brands have very limited

media spending and are strictly confined to

only a handful high-end magazines. In contrast,

fashion brands tend to be more generous

with marketing expenditure, and opt for multi-

dimensional platforms, including outdoor media,

newspaper and TV commercials.

Magazines are the principal media vehicle,

accounting for 37% of the overall budget,

down from 39% in 2011, it is still firmly

leading the marketing effort.

Outdoor media comes second as a brand

marketing tool, accounting for 28% of the

budget, a slight decrease from 2011. At

airport and department stores, these outdoor

interfaces are still keenly adopted by watch

brands.

In 2012, newspapers lost attractiveness

and accounted for only 11%. The creation

of supplements and special issues didnt

effectively meet the goal. Most mainstream

newspapers specializing in disseminating

timely information are now under severe

threat from internet and new media.

TV as the predominant conventional media

has been boosted to 13% through watch

brands innovational efforts. TV commercials

and media sponsorship are common

practices. Some brands push for brand

micro-movies in order to spread the brand

culture.

Internet and new media witnessed the

biggest increase in watch advertising, at 6%

and 5% respectively. Although it is still not at

the same level as conventional media, the

trend is unmistakable. Many brands express

willingness to continue adding more internet

and new media commercials, while mobile

media is also in consideration.

Table 2-6 Top 10 Watch Brands with Most Media Popularity

Table 2-7 Top 10 Watch Brands with Most Active Weibo Account

$IJOB8BUDI3FQPSU

Currently, magazines on the market can

be categorized as popular, high-end and

professional.

Popular magazines include public magazines

and channel magazines; subject-wise, they

encompass news and lifestyle information.

Fashion magazines attract substantial

numbers of young readers, therefore

have been the top-pick for high-end watch

advertising. As sophistication grows, high-

end watch brands hope to have more

targeted and effective advertising plans.

High-end magazines are normally distributed

to upper-class population directly via

channels, by invitation or as a gift. High-end

channel magazines enjoy the most publicity

2. The Value of Magazines for Watches

Table 2-8 An Analysis of Magazine Value for Watches

and readership, thereby attracting the most

competition and thus have a fragmented

brand representation.

Magazines target ing the r ich rely on

databases for distr ibut ion, which can

be broken down to two categories: one

for internal circulation at banks, brands,

associations and clubs. The data accuracy

is an extremely valuable feature, although

the lack of professional operations know-

how needs to be tackled to unleash its

real impact. The other is invitation-only

subscriptions that magazines have for

readers and wealthy individuals. Not many

magazines like this exist in China, since

consolidating advantages of both a DM

magazine and a luxury magazine requires

enormous upfront capital and resources.

One major measure for resource quality is

the ability to host high-end events, in other

words, to attract high wealth individuals to

attend events.

Professional watch magazines are fewer in

number and have smaller circulations. And

yet, they are favourable to watch brands.

Whilst appealing to the maturity of dedicated

watch fans and professionals, they send out

a ripple effect to impact more consumers.

Therefore, high-end watch magazines tend

to be an essential target for high-end watch

brands.

3. Criteria for Choosing Magazines

When high-end watch brands make advertising

decisions, the overall look of magazines is

H[DPLQHGUVW5HDGHUVKLSDQGDELOLW\WRVXSSRUWPR events are also influencing factors. Few

common misunderstandings are as follows.

0DJD]LQH%UDQGV

When deciding which magazines to choose for

advertisement placement, watch brands often

first consider the popularity of the magazine.

To catch the attention of advertisers, many

magazines choose to collaborate with foreign

media partners or pay huge fees to broadcast

their own brands. That way, the magazine

can improve its brand image and attract more

advertisers.

Many high-end watch brands have established

global partnerships with world renowned

magazines. Regardless of their success in

China, watch brands are often keen to establish

such partnerships. Working with international

magazines is also an effective way to avoid

running into professional misconduct and other

problems.

0DJD]LQH&KDUDFWHULVWLFVDQG$GYHUWLVLQJEnvironment

Like all luxury goods, high-end watches pay

special attention to a magazines characteristics

and advert ising environment, especial ly

content and design, as well as to competitors

advertising strategies. Magazines in return

overlook the quality of the content and in putting

so much emphasis on visual effect, render

themselves a product catalogue.

Due to this emphasis on magazine characteristics,

many Chinese magazines mistakenly think

a good overal l look is the guarantee of

more advertising revenue. Following this

understanding magazines keep issuing

advertising, further squeezing the space for

high-end magazines to exist and grow.

Another down side of this over-emphasis on

overall look is homogeneity. The next contending

point will be to create a differentiating reading

experience for high-end readers. Based

on analysis above, it can be concluded that

magazines with feature content and unique

features have more competitive edge to grow.

5HDGHUVKLSDQG&LUFXODWLRQ

High-end watches are definitely luxury and

can only be afforded by affluent consumers.

Therefore high-end watch brands tend to target

this group of consumers through its magazine

advertising strategy. The irony is only a handful

of magazines had made their way onto the

reading table of this high-end population, and

the gap between actual circulation and the

FODLPHGFLUFXODWLRQLVGLIFXOWWRHYDOXDWH7KHVH

factors make it hard for watch brands to decide

their advertising choices.

Many third-party research agencies conduct

analysis on those media data. However, strong

personal preference has compromised the

objectiveness of the reports. Similarly, PR

agencies tend to rely on publicly available

empi r i ca l da ta to measure pub l ica t ion

circulation size. Unfortunately, these numbers

are not accurate, and the number of invitation

only subscriptions is estimated based on a

FRQGHQWLDOGDWDEDVH

0DJD]LQHVLQ7LHUDQG7LHU&LWLHV

Tier-2 and tier-3 cities are undoubtedly the most

attractive markets for high-end watch brands,

both in terms of marketing and for sales. The

SRSXODULW\DQGLQXHQFHVRIPDJD]LQHVLQ ORFDOregions therefore become an important criterion

in advertisement placement. As a result,

magazines thrive to increase their circulations in

tier-2 and tier-3 cities. The constraints stemming

from professional teams and client resources

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Magazine circulation is also combined with

PR events. Watch brands tend to combine

magazine advertising and PR events to ensure

marketing communications in tier-2 and tier-3

cities.

4. Misunderstanding of Magazine Advertising

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Fashion magazines target the urban white

collar sector who follow fashion and trends,

however, they are not necessarily the wealthy

group. To that extent, fashion magazines are

not considered high-end magazines, and their

readers may not be luxury goods shoppers.

+LJKHQGFRQWHQWPDNHVDPDJD]LQHKLJKend

To determine the class of a magazine, one

foremost indicator is the readership. There is

a recent tendency for all magazines to try to

claim that they cover wealthy populations, but

as a matter of fact, their ability to deliver to the

ULFK LVYHU\TXHVWLRQDEOH7KLVFDQEH WHVWLHGby their interview features and PR events.

Whether the magazine is able to access to

wealthy icons and conduct quality interviews,

and whether they have the capacity to organize

exclusive events for a large group of wealthy

individuals would indicate their influence

among wealthy consumers. The interview test

might be achieved in short-time by leveraging

the magazine network, but the latter can only

happen when a solid readership of wealthy

populations is established.

5. Shifting Trends in High-end Watch Advertising

)DVKLRQL]DWLRQKDVOHGWRPRUHJUDVVURRWVadvertising campaigns

Since fashion brands entered the watch

industry, watch brands had adopted a more

grassroots facing advertising campaign, in

the hope of covering more consumers and

educating potential clients and young buyers.

0RUHPDUNHWLQJEXGJHW IORZWR WLHUDQGtier-3 cities

In recognizing the sales contributions made

by tier-2 and tier-3 cities and their growing

potentials, many forward-looking brands have

$IJOB8BUDI3FQPSU

spared a large chunk of advertising budget

to invest in tier-2 and tier-3 markets and had

received some returns. However, there are

other challenges.

1) Tier-2 and tier-3 cities lack quality media

platforms. Chinese media in tier-2 and tier-

3 cities are much less developed than those

in tier-1 cities, especially high-end media

such as luxury magazines. The lack of a high-

end advertising arena means that high-end

watches and other luxury goods are taking their

time entering tier-2 and tier-3 markets. Their

choices are either going without advertising

or compromising their requirement of a quality

advertising environment.

2) Major high-end media from tier-1 cities have

difficulty pushing circulation in tier-2 and tier-

3 cities. A basic rule of thumb is favourability

toward foreign media, first and foremost in

luxury goods and fashion media sphere.

Consumers in tier-2 and tier-3 cities tend to

trust nationwide media with international news.

This calibre of media does not normally go to

tier-2 and tier-3 cities, and hence is less seen

by consumers with cash power. The Fortune

Character Institute survey revealed only 3%

of billionaires would visit a post stand to buy

magazines, so it is a bit unrealistic to assume

increased circulation would result in bigger

readerships among the rich.

/X[XU\PHGLDDQXQPLVWDNHQWUHQG

Currently, high-end watch brands focus on the

advertising influence of fashion magazines.

But the readers are young and less affluent.

Although high-end watch brands set aside more

budget for fashion magazine advertising, the

return hasnt been good. Accordingly, high-end

watch brands turn to luxury media, especially

print publications. Magazines are stil l an

important information source among wealthy

populations. As a result of this trend, magazines

obtaining access to wealthy consumers has

becoming quite important, and they tend to keep

their wealthy readers close via massive PR

events. In summary, magazines effectiveness

in reader engagement and outreach is more

advanced than other media forms.

E. High-end Watches PR Practices in China

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1. The Characteristics of Event Goers

One o f t he mos t impor tan t p romo t ion

approaches, the PR event hasnt unleashed

its full potential. In fact, given the consumer

behavior of high-end watch buyers, the

importance of PR events cannot be stressed

enough. These consumer behaviors are also

seen in other luxury products.

7UXVW:RUGRI0RXWK

Greatly influenced by social circles, on many

occasions a purchase decision is made

simply because consumers make a referral or

recommendation.

7UXVW6HHLQJLV%HOLHYLQJ

In the digital age, consumers are faced with

more information and options therefore it

is harder for them to make decisions. With

an increasing opportunity cost, they hope

to have more direct interaction with product

manufacturers and service providers.

,PSXOVH&RQVXPSWLRQ'XHWR/DFNRI3ULFHSensitivity

Most high-end watch buyers are less sensitive

to prices. They tend to make spot purchase due

to desire and impulse, falling prey at PR events.

2. The Value of PR Events for High-end

Watches

PR events are a common brand promotion

approach amongst luxury watch brands and

they also help to enhance product sales and

customer service.

1) Brand Promotion

PR events help promote a brand in one way or