By Laurie Burkitt
Swatch Group AG, the world's largest watchmaker by revenue, is going head-to-head with Apple Inc. to develop the next generation of watches in China.
The Swiss watchmaker launched its answer to the smartwatch in China on Wednesday, with a 580 yuan (US$91) analog timepiece called the Swatch Bellamy, which will start selling in January next year. While the new watch doesn't connect to the Internet, it includes a built-in chip that allows consumers to pay for purchases while shopping, Swatch Chief Executive Nick Hayek said in a news briefing.
Swatch said it has struck deals with state-run China UnionPay Co., which holds a virtual monopoly on bank-card payment processing in China, and state-controlled lender Bank of Communications Co.
China is one of the world's largest watch markets by sales. Chinese consumers, at home and abroad, typically buy more than 50% of the world's watches by value, according to Luca Solca, head of luxury goods at investment firm Exane BNP Paribas.
While many people around the world use their phones to keep track of time, Chinese consumers still buy traditional watches. "Watches are still absolutely a status symbol in China," said Ben Cavender, a senior analyst at Shanghai-based consultancy China Market Research Group.
Consumers in the country are also quick to adapt to new technology, said Mr. Hayek, explaining why the company opted to launch in China ahead of other countries. "People here are open and they change their habits," he said.
As a result, China is critical turf for Swatch. Greater China, which includes Hong Kong, is the company's biggest market, generating nearly 40% of its 9.22 billion Swiss franc (US$9.63 billion) sales in 2014. In China alone, the company gets about 20% of its sales, according to analysts.
However, in recent months, the Chinese market has presented some challenges for watchmakers, with the economic slowdown, the decline in the Chinese stock market, and the government's anticorruption campaign affecting some luxury consumption. Swiss watchmakers' total exports to China have fallen nearly 9% so far this year through August.
Swatch will also launch the watch in the U.S. and Switzerland between January and March next year, as those two countries are rolling out near-field communication technology, or NFC, which lets devices placed close to each other exchange data, he said. He declined to disclose potential future banking partners for Swatch.
Mr. Hayek said Swatch doesn't yet have plans to expand partnerships with other banks in China. Consumers will be able to activate the watches at Bank of Communications, which has 2,785 branches in the country, and use the watch globally, he said.
Retailers are rapidly expanding access to NFC with the spread of wearable devices and mobile payment.
The Chinese market is already heating up for payment devices and smartwatches. Apple, which sells its watches for about $550 to $1,200, is gaining traction in the market, analysts say. Apple hasn't disclosed its watch sales and didn't immediately respond to requests for comment on the new Swatch Bellamy.
Big Chinese tech companies Alibaba Group Holding Ltd. and Baidu Inc. are creating tie-ups with other watchmakers to ensure that they can attract users to their payment systems. Some analysts estimate that smartwatch makers have sold 1 million pieces to date in the country.
Analysts say that Biel-based Swatch is one of the companies that is most vulnerable to the smartwatch competition, because some of Swatch's cheaper brands, such as Tissot, Hamilton and Certina, compete in the sub-$1,000 price bracket where the smartwatch is expected to make the biggest impact.
Mr. Hayek said the company won't expand the payment technology to its Tissot, Omega and other brands, and it won't create a watch that continuously connects to the Web, as the Apple Watch does. "We don't want to connect to a cloud," said Mr. Hayek, noting that Swatch aims to protect consumer data and doesn't want its watches to be reliant on electricity or the Internet.
Concerns about the rise of smartwatches have weighed on Swatch's stock price, which has shed nearly 12% this year, analysts say. As recently as last year, Mr. Hayek dismissed smartwatches in interviews in Swiss media. The son of Swatch's founder grumbled the screens were too small, batteries too weak, and designs inelegant.
If demand does improve in China, it could help boost Swatch's bottom line. The company, in its most recent results, reported an almost 20% decline in first-half net income compared with the same period in 2014, which it blamed on exchange-rate effects of the strong Swiss franc. Negative interest rates in Switzerland also bit into its profit. "The Swiss franc is our biggest problem," Mr. Hayek said.
Write to Laurie Burkitt at firstname.lastname@example.org and John Revill at email@example.com
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