OEM v. ODM
Approximately 75% to 80% of Hong Kong’s exports are produced on the OEM (Original Equipment Manufacturing) or private label system, whereby watches are made to order and supplied to importers and distributors in the major markets – USA, EU and Japan. A number of OEM specialists also sell directly to chain stores and fashion labels, outlets that require watches and clocks of a specific design.
ODM companies (Original Design Manufacturing) are proprietors of their own designs and, in general, sell to the various markets through similar sales channels as OEM. However, sales quantities are always smaller, making them popular with importers and distributors because of a lower outlay. Nevertheless, ODM products can and do also find their way into companies that use watches in promotional campaigns.
In the midst of all this OEM and ODM business, we are seeing an important number of new Hong Kong manufacturers introducing brand name watches. Few and far between five years ago, branding has now become an emerging trend, with many having now either purchased an existing watch brand name (sometimes from Switzerland as a means to expand their distribution network and/or to gain access to better technology and designs) or having created their own. These new brands tend to exhibit as a group with the Hong Kong Trade Development Council (HKTDC) at the major trade shows such as BaselWorld, or individually at the all-important Hong Kong Watch & Clock Fair organized by the HKTDC.
Many Hong Kong companies have developed their retail business on the Chinese mainland using shop-in-shops within department stores and smaller outlets in shopping malls, or in specially organized promotional campaigns in specific cities. For the moment, these ‘new brands’ do very little actual marketing, relying almost entirely on being seen or discovered at the trade shows or during a promotional event.
Nevertheless, many maintain their OEM businesses as their major activity and dabble with the idea of being a brand. The basic problem is that they are not prepared to invest in the marketing and advertising required to establish a brand name in the watchmaking community, since they are used to making what they term as ‘the quick buck’ with a large quantity sale with a small profit per watch in the private label business. There are very few companies that have totally abandoned their OEM business to concentrate entirely on developing their own brand name.
The Hong Kong Trade Development Council (HKTDC) is the statutory organization promoting the SAR’s external trade in goods and services. Its mission is to develop Hong Kong’s business in internat-ional trade and increase the critical mass of international firms using Hong Kong’s trade platform. The Council creates opportunities for Hong Kong-based businesses and their international partners, most of which are small and medium-sized enterprises (SMEs) through marketing activities, business matching, market intelligence and SME development programmes. Many of its services are free.
HKTDC provides three marketplaces: a physical marketplace, the Hong Kong Convention and Exhibition Centre, where it organizes many of Asia’s leading trade fairs; a cyber marketplace, through its Internet portal, tdctrade.com and an ideas marketplace, where SMEs from around the world network and energize each other at our international conferences.
It also offers practical services and business promotion activities, as well as coordinating opportunities among entrepreneurs from around the world - including those who belong to the 31 Hong Kong Business Associations in 28 countries.
The HKTDC promotes a positive image of Hong Kong as a platform and partner for international businesses. It supports bilateral committees with Hong Kong’s major economic partners and a global network of Hong Kong Business Associations. It also produces Hong Kong Trader, a monthly e-newsletter highlighting Hong Kong business opportunities which is mailed to more than 300,000 recipients around the world.
The Watch Associations
The Federation of Hong Kong Watch Trades & Industries, was founded in 1947 and has nearly 2000 members. It is supported by companies from across the industry comprising retailing (large and small watch and clock retailers), wholesaling (world famous brand representatives) and manufacturing (manufacturers of completed watches and clocks as well as parts, such as cases and bracelets, electroplating, packaging and related periodicals).
Since its founding, the Federation has obligated to undertake the development and coordination for industrial and commercial trading of the entire industry. Due to the request of different policy advisory departments of the Government in recent years, the Federation has assigned a number of representatives as the member in various committees to strive for greater benefits for the industry.
In addition the Federation has organized different industrial activities for development within the industry such as the China Horology Federation and the Asian Horological Trade & Industry Promotion Conference which has been held every second year for the last 34 years.
The Hong Kong Watch Manufacturers Association (HKWMAL) was established in 1968 and has around 700 members all of which are registered companies in Hong Kong. It aims to upgrade and consolidate the local watch industry, to promote the local watch manufacturers’ interests, trade and contacts with overseas counterparts, and to liaise with the Hong Kong Government for the formulation of appropriate policies and regulations.
The Association makes known the industry’s problems to the Hong Kong Government and external parties and promotes the interest of its members. The Association also strives to strengthen the relationship with China (including Taiwan), Japan and other Asian and European countries to help its members explore investment opportunities as well as strengthen the development of the local watch and clock industry.
HKWMAL also engages in various activities and services: organize, co-organize and sponsor major local/overseas exhibitions; to apply the SME Fund granted by the Government to ‘assist small and medium watch and clock manufacturers to develop their own brands for entry into the China market; seminars and training courses in management, quality control and technology; a ‘Watch & Clock Design Depositary Centre’ where members can store product designs to help members establish and protect their copyrights in legal proceedings; liaise with governmental and industrial departments and associations; training for the industry, including grants and sending students on courses at the Hong Kong Institute of Vocational Education; information up-dates via an annual publication and ‘Time Talk on Website’; strengthening the cooperation among Hong Kong China and Taiwan via the China Horology Federation.
The Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) came into effect on 1 January 2004. By meeting the CEPA rules of origin, a total of 11 timepiece items made in Hong Kong, including certain wristwatches, alarm clocks and parts and components, are eligible to enjoy duty-free access to the Chinese mainland. In the main, the CEPA origin criteria for watches, clocks and movements include assembly of component parts and accessories into the products, testing, time adjustment and quality control, as well as the requirement on value-added content, under which at least 30% of the FOB value of the products, and that the final manufacturing or processing operations should be completed in Hong Kong. Product development costs incurred in Hong Kong, in addition to material costs and labour costs, can be taken into account in calculating the value-added percentage.
Regarding distribution, the new ‘Management of Commercial Enterprises with Foreign Investment’, which is to remove virtually all barriers to setting up retail and wholesale businesses in the mainland by all foreign firms irrespective of CEPA, should be welcome by Hong Kong’s watch and clock companies, although its real benefits have yet to be ascertained. In another development, the Chinese mainland has removed its quota restrictions on watch imports since 1 January 2003, on the back its WTO accession commitment.
Hong Kong’s present origin rule stipulates that the origin of watches and clocks should be determined by the origin of movements. This is to align Hong Kong’s practice with those of the major producing countries and markets, including the US, Japan and Switzerland. However, there have been discussions in the Committee on Rules of Origin of the WTO in a bid to reach a consensus of harmonization of the rule of origin.
TO BE CONTINUED...
In the forthcoming days, the rest of this lenghty survey will be added to our europastar website.
Market Focus Hong Kong: Part 1
Market Focus Hong Kong: Part 2
MMarket Focus Hong Kong: Part 3
Source: October - November 2005 Issue
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