Expect less bang for your buck as Swiss watchmakers are hit by franc price surge after Swiss National Bank unpegs the currency from the Euro.
by Wen-xi Chen
The Buzz-kill at SIHH 2015
The first big watch and jewellery show of the year, the Salon International de la Haute Horlogerie (SIHH), opens today in Geneva. Despite brand executives putting on a cheerful front for the world for the event’s 25th anniversary, the mood will undoubtedly be dampened by news of the Swiss National Bank’s (SNB) announcement to end the minimum exchange rate between the Swiss franc and the euro. This is certainly bad news for Swiss watchmakers who depend almost entirely on a robust export market; shares of Richemont Group dropped 16% in Zurich on the day of the announcement as the franc surged more than 15% against the euro. It looks like SIHH show organizers will be watching tensely as the bill of their glamourous star-studded event suddenly got a lot bigger.
Shocking and Unexpected
Watchmakers including Rolex, TAG Heuer, Richemont and Swatch Group are now facing skyrocketing prices. For an industry that already has a substantial cost base, watchmakers will now have to face either cutting costs or increasing prices in order to maintain their profit margin. And unlike many other industries that can readily move their production offshore, Swiss watchmaking relies heavily on their “Swiss-Made” stamp of geographical origin. Swatch Group AG CEO Nick Hayek likens SNB’s decision to setting off a “tsunami”. Jean-Claude Biver, head of LVMH Moet Hennessy Louis Vuitton SA (MC)’s timepiece unit, also weighed in on the SNB’s decision, saying, “I’m shocked, it was unexpected.”
Pundits had expected the market for Swiss-made watches to grow in 2015 after a slow 2014. Richemont reported that revenue in the quarter through December stagnated for the first time in six years as Hong Kong protests disrupted sales in its largest and most important market. Surging costs will certainly not help their sales, even if the Swiss bank UBS has already brushed off their complaints, noting that these brands should be able to pass off the increased costs to customers.
Easier said than done UBS! While Swiss watch exports to China saw a bumper growth of 49% from July 2013 to July 2014, an impressive turn-around after a 12% drop in 2013 from 2012 when sales at this level were hit by President Xi Jinping’s anti-graft measures, it’s too early to say if China is enough to pull the industry back into shape in 2015.
Why Unpeg Now?
Swiss watchmakers weren’t the only ones with the question on their mind of “Why now?” In a world where slow and steady decisions from central banks are the norm, the SNB’s decision last week came totally out of the blue and sparked a chaotic aftermath. After the unpegging, the franc soared from 1 euro : 1.2 franc on Wednesday to 1 euro : 0.85 francs on Thursday. A number of hedge funds across the world suffered big losses, the Swiss stock-market collapsed… so why did they do it?
When the peg to the euro was first introduced in 2011, investors saw budget-balanced Switzerland as a safe-haven in a financially unstable world. However, as more and more investors rushed to the franc, they pushed up its value and in an export driven economy such as Switzerland, it’s the last thing you need. So the SNB created more francs to buy in euros, ultimately resulting in amassing foreign currency equivalent to about 70% of Swiss GDP.
Printing such large number of francs became a political hot topic; citizens were worried that it would lead to hyperinflation. Many also expect the European Central Bank to introduce Quantitive Easing soon in order to buy up the debt of EU countries, ultimately devaluing Switzerland’s enormous stash of euros and simultaneously forcing them to print more francs. Thirdly, the euro has devalued against other major currencies in the past year, which caused the franc to follow suit. The SNB argues that since the franc is already undervalued in the world, there is no need to artificially devalue the franc further through its own peg.
Some analysts have argued that while the SNB’s decision should be criticized for the chaos it has caused the Swiss economy, the bigger fault lay with it adopting the peg in the first place which has set up the conditions for this shock.