Luxury watchmakers see clouds on China 'Eldorado'

Luxury watchmakers are hoping a stronger-than-expected recovery in the United States and global exposure will help them sail through a more challenging market in China, where the days of unstoppable growth are ticking by.

Asia is the market which everybody is more concerned about. People are concerned because they know that if Asia is going down there will be big problems, Thierry Stern, chairman of Geneva-based watchmaker Patek Philippe, told Reuters at the world's biggest watch and jewels fair in Basel on Wednesday.

China is the single biggest growth driver for the watch industry, according to an analyst at Kepler Capital Markets.

He estimates Asia will account for two-thirds of the luxury watch market by 2016, up from little more than 50 percent last year.

However, Chinese Premier Wen Jiabao cut on Monday the nation's growth target by half a point to 7.5 percent for 2012, which would be the slowest pace in decades.

Established brands such as Patek Philippe, Omega and Longines are confident that their deep knowledge of the markets will give them a tailwind against risks of a slowdown in China.

I don't think we have to be alarmed because all of a sudden the Eldorado has a little bit of cloud over it, Omega Chairman Stephen Urqhart told Reuters in Basel, where 2,000 exhibitors spread over floor space the size of Buckingham Palace.

Omega and Longines, both owned by the world's biggest watchmaker Swatch Group SA (UHR.VX: Quote, Profile, Research, Stock Buzz), are the two most preferred brands by Chinese Internet users, according to a report by Digital Luxury Group released on Wednesday.

They are also a major driver of revenue growth for Swatch Group, Bank Vontobel said in a report.

Head of Longines Walter von Kaenel said the company's decade-long business in Asia gives it an advantage. I am not worried about China, von Kaenel said at his stand in the Basel fair, tapping on a calculator and looking into research data.

Swatch Group Chief Executive Nick Hayek said on Monday sales of very-high-end products had started to decelerate in China, but expressed confidence that mid-tier brands such as Longines would grow double-digit in the region.

Hayek also said that the company was targeting 8 billion Swiss francs of gross sales in 2012.

Urqhart said a slowdown in China would more likely affect brands which have only recently entered the region and are less prepared to handle its competitive business.

For many people, China is a new market. So obviously for them China is boom, boom, boom, he said. We are going to be more fine-tuned, be more qualitative,

Omega, which has nearly 100 monobrand stores in China, is expected to benefit from the London Games, which will start on July 27.

A stronger-than-expected recovery in the United States is, however, giving new hope to the luxury industry, which is expected to grow by 8 percent this year after enjoying double-digit growth in 2011.

Kepler Research has raised its growth forecast for the watch industry to 7 percent in 2012 from a previous 5 percent, citing a stronger-than-expected comeback in Japan and in the U.S.

A recovery in the U.S. will also help brands offset weaker domestic consumption in Europe, which accounts for 35 percent of global luxury goods sales, and where consumers are cutting back on discretionary goods and trading down to cheaper brands.

U.S. is improving and it is nearly back as it was before the crisis, Patek Philippe's Stern said, adding that the U.S. represents 15 percent of sales, while Asia is 33 percent and Europe 44 percent.

The U.S. luxury goods market is still the largest in the world ahead of Japan and China, but it grew at about a third of China's rate last year, according to U.S. consultancy Bain & Co.

I don't like to depend on one market. This is also why I didn't want to open 40 stores in China, said Stern, who represents the fourth generation of the Stern family which controls the brand since 1932. Patek Philippe has two stores in China.

However, China could continue to be a friendlier market than India and Brazil, where high import duties are a barrier.

Renewed talks that China could agree to cut its import taxes on a number of products to boost consumption lifted shares in luxury goods makers on Wednesday. If confirmed, this is positive for the sector, a trader said.