Watchmaking in China


China: what is at stake for luxury watchmaking in Hainan?

MARKETS

February 2021


China: what is at stake for luxury watchmaking in Hainan?

The rise of Hainan, the tropical island in the South China Sea, as a hub for Chinese mainlanders’ luxury offshore shopping – in the works since 2011 – has been boosted by new tax rules and the hiatus in international travel. International brands are rushing to stake their claim in this important destination. Martin Moodie, an expert in duty free trade and author of the famous Moodie Davitt Report, helps us understand this crucial development for the future of luxury, including for watchmakers.

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here is little doubt that the future of the Swiss watchmaking industry will continue to be written in Chinese, as has been the case since the opening of the country to globalisation at the turn of the millennium. Last year, it was the only major market to record growth (+20%), as exports of Swiss watches were hit by a record contraction.

But the pattern of Chinese consumption, which used to be defined by big spenders abroad, is changing, with the prolonged hiatus in international travel and the broader plan of the central government to repatriate domestic consumption. In this wider context – added to the spectacular downfall of Hong Kong – a new name has emerged onto the horological map: the tropical island of Hainan, with its vacation resorts of Sanya and Haikou.

The plan to establish the island (incidentally also a strategic military outpost in the South China Sea) as a new duty free shopping paradise, first mooted in 2011, was given a boost last year, and is poised to continue as new infrastructures are being built at an impressive speed. Luxury brands and duty free specialists are rushing to gain a foothold, while those that have been present for years already have a head start.

The Year of the Ox begins on 12 February 2021 in China, symbolising “appeasement, dialogue and soil fertility”. That's exactly what Swiss watchmakers are hoping for. And after being hit hard in 2020, they're looking to the new developments in Hainan.
The Year of the Ox begins on 12 February 2021 in China, symbolising “appeasement, dialogue and soil fertility”. That’s exactly what Swiss watchmakers are hoping for. And after being hit hard in 2020, they’re looking to the new developments in Hainan.

For instance, as Chinese shoppers deserted the boutiques of Lucerne and Interlaken, Swiss retailer Kirchhofer made the strategic move last year to establish its new Chinese headquarters in Hainan, entering into an agreement with the authorities. It is neither the first nor the last horological player to do so. Expect Hainan to be a new golden buzzword for Swiss watchmakers in the years to come.

We wanted to better understand how the island was developed as a new trading hub, in the context of a long-term strategy by the Chinese authorities with geopolitical consequences that go far beyond watchmaking, but which will have a strong impact on the industry. Hence we reached out to Martin Moodie, founder of The Moodie Davitt Report, an authoritative source of business intelligence on the global travel retail sector. He kindly replied to our questions.

China: what is at stake for luxury watchmaking in Hainan?

Europa Star: How do you explain the rapid rise of Hainan as an essential destination for luxury purchases for mainland Chinese buyers?

Martin Moodie: Make no mistake, there is an unstoppable momentum underpinning Hainan’s emergence as a luxury and duty-free shopping stronghold. Hainan’s growth as a popular destination for Chinese shoppers has gained tremendous traction since the Hainanese and central authorities ushered in the offshore duty-free shopping policy in 2011. That policy allowed mainlanders to visit the island and shop duty free, even though they had not left the country. The combination of that unique shopping privilege, generous duty-free allowances and Hainan’s many natural attractions and pristine environment propelled the offshore business to giddy heights, reaching US$1.98 billion by 2019.

“The key intention of the original policy from 2011 was to repatriate Chinese travel-related shopping from overseas, in line with Beijing’s mission to maximise domestic consumption.”

On January 31 2021, DFS Group and Shenzhen Duty Free Group inaugurated the first phase of the new Haikou Mission Hills Duty Free Complex.
On January 31 2021, DFS Group and Shenzhen Duty Free Group inaugurated the first phase of the new Haikou Mission Hills Duty Free Complex.

What strategy lies behind the imposition of new tax rules in July 2020?

The key intention of the original policy was to repatriate Chinese travel-related shopping from overseas, in line with Beijing’s mission to maximise domestic consumption. But it was the July 1, 2020 enhancement of the original policy that served as the real game changer. The annual duty-free allowance was more than tripled to CNY100,000 (US$15,500), the range of duty-free categories increased from 38 to 45, while – crucially for watches and other luxury items – the previous CNY8,000 (US$1,250) single-item purchase limit was scrapped. That drove an extraordinary second-half sales boom in 2020, with sales reaching around US$5 billion, a rise of more than 130 per cent over 2019. Watches and jewellery each accounted for around 12% of the total.

“It was the July 1, 2020 enhancement of the original policy in Hainan that served as the real game changer. Among other measures, the previous CNY8,000 (US$1,250) single-item purchase limit was scrapped.”

Concretely, what are the tax rules in effect today in Hainan for buyers of luxury products (rates and quota systems)?

Luxury buyers are only constrained by the CNY100,000 (US$15,500) annual allowance. They can shop downtown and collect at the airport, and even – as a result of a January 2021 policy adjustment – have the goods posted back to the mainland. Additionally, during the height of the Covid-19 crisis in China, a new scheme was introduced that allowed mainland visitors to use any of their unspent annual allowance by buying goods online upon their return from Hainan, and have them couriered home.

A local edition of Watches & Wonders took place last October in the CFD Mall on Hainan.
A local edition of Watches & Wonders took place last October in the CFD Mall on Hainan.

Is the development of this new duty-free paradise in China partly or mainly a consequence of Covid-19 lockdowns around the world, or has it just been accelerated by the global lockdowns?

Hainan’s status as a duty-free shopping haven was planned long before the Covid-19 crisis. It is a critical component of the hugely ambitious Hainan Free Trade Port plan unveiled by Chinese leader Xi Jinping in 2018. However, the pandemic accelerated the success of the shopping policy as Chinese travellers – and shoppers – were unable to visit traditional duty-free shopping heartlands such as South Korea, Thailand, Singapore and Vietnam. With the Covid-free holiday island of Hainan still open, mainlanders made a beeline there instead.

“We witnessed an extraordinary second-half sales boom in 2020 with sales reaching around US$5 billion, a rise of more than 130 percent over 2019. Watches and jewellery collectively accounted for around 24% of the total.”

Watches and jewellery at Shenzhen DF/DFS.

Has the decision by the public authorities to promote Hainan as a new luxury hub also been affected by the political tensions with Hong Kong?

Not in my view – the Hainan masterplan was in place long before the current tensions. But its comparative weighting has been accelerated by Hong Kong’s troubles of recent times and the pandemic’s impact on tourism into Hong Kong.

Is Hainan therefore set to overtake Hong Kong as the main duty free destination for watch purchases by mainland Chinese buyers?

Much depends on what happens with the pandemic and when the mainland/Hong Kong borders are reopened. We expect Hong Kong to rise again as a shopping destination for upscale mainland purchasers, but there is no doubt that Hainan is here to stay – particularly given the planned rapid development of tourism infrastructure on the island, including a boom in luxury hotel and leisure facilities.

China Duty Free Group (CDFG) plans to open the world's biggest duty free shopping complex in Haikou by 2022.
China Duty Free Group (CDFG) plans to open the world’s biggest duty free shopping complex in Haikou by 2022.

Could you map out the key players and drivers in this development?

As a result of the recent liberalisation of offshore duty free licences, there are now multiple retailers on the island. China Duty Free Group remains the overwhelmingly dominant force, thanks to its world-renowned Sanya International Duty Free Shopping Complex (incorporating CDF Mall) in Haitang Bay. It also operates at Sanya (including a new store that opened in late 2020) and Haikou airports, and downtown in Haikou and Bo’ao. And in 2022 it will open the extraordinary Haikou International Duty Free City, which will rank as the world’s biggest duty-free shopping complex.

“There is no doubt that Hainan is here to stay – particularly given the planned rapid development of tourism infrastructure on the island, including a boom in luxury hotel and leisure facilities.”

What have been the latest developments on the island?

There has been a flurry of activity in recent weeks. CNSC, controlled by state enterprise Sinopharm, opened in Sanya on 30 December, the same day as another store was inaugurated in the city by Hainan Tourism Investment Development Co. and its international partner Lagardère Travel Retail of France.

The action moved to Haikou in late January when Chinese travel retailer Shenzhen Duty Free, supported by DFS Group (LVMH and Robert Miller), opened phase one of their new retail complex in luxury resort Haikou Mission Hills. The emphasis there will be on high-end experiential shopping, and a particular focus on luxury watches (a long-time DFS strength) and other upscale items will be core to the development. On the same day, Hainan Development Holdings opened the Global Duty Free Plaza in the Mova Mall in the heart of Haikou, supported by international travel retail giant Dufry.

So now you’ve got a combination of Chinese giants, Hainan government-backed bodies, and international retailers all vying for a big and growing prize. Things are really heating up, and as a result the authorities are projecting that the market will grow to US$9 billion in 2021 and US$15 billion by end-2022.

“A combination of Chinese giants, Hainan government-backed bodies, and international retailers are all vying for a big and growing prize. The authorities are projecting that the market will grow to US$9 billion in 2021 and US$15 billion by end-2022.”

What are the implications of the agreement between Dufry and Hainan Development Holdings regarding the development of duty free on the island?

Until 2020, Dufry was the dominant global duty-free retailer, though it was surpassed last year by China Duty Free Group (previously number five) in the Moodie Davitt Top 25 Travel Retailers annual rankings, due to the global pandemic and the Hainan boom. Dufry will bring its buying clout and international merchandising skills to play while its Hainan partner provides critical local expertise and resources.

An edition of Watches & Wonders was held in Sanya last year. Has this first luxury watch festival on the island enhanced the Richemont brands’ local presence?

Indeed, the hosting of the Watches & Wonders event was a big play by Richemont and the Fondation de la Haute Horlogerie, a major statement of belief in the island’s future as a luxury centre. It was also a coup for China Duty Free Group, which saw the event as a critical reinforcement of its luxury credentials.

You will also see the interest in Hainan among watch houses manifested at the China International Consumer Products Expo in Hainan being organised by the Hainan Provincial Bureau of International Economic Development (IEDB) on 7-10 May. Space is already 90% sold out and it is understood that several of the world’s leading luxury houses – including watch companies – will participate as exhibitors or visitors. Notably, Switzerland is Guest Country of Honor at the Expo.

Sanya's CDF Mall is currently the world's number one duty-free store.
Sanya’s CDF Mall is currently the world’s number one duty-free store.

We have already seen a general switch in China from “buy abroad” to “buy in China”. How soon are we likely to see a shift from “buy in China” to “buy Chinese”? Are Chinese luxury products (Fiyta is one example for watchmaking) also being actively promoted by the public authorities?

Chinese luxury products such as Fiyta are emerging gradually, but don’t expect the same sort of dramatic shift as you are seeing with the buy at home vs buy abroad dynamic. Chinese consumers have an enormous appetite for – and comfort with – international luxury brands, and that will only increase in future. Remember, China’s luxury industry is still in its infancy, but we do expect more Chinese high-end products to emerge in the future, and that is a good thing.