Understated.

Photographer: Fabrice Coffrini/AFP/Getty Images

Is Graft Crackdown Hurting Swiss Watchmakers?

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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It's almost a knee-jerk reaction to say that the 8.9 percent drop in Swiss watch exports in May was connected to the introduction of Apple Watch. Yet the Chinese attack on corruption may be more to blame.

Early indications are that Apple Watch isn't one of the company's runaway successes. The research firm Slice Intelligence says the company has sold about 2.8 million of the devices since April. If that's true, they are going at the rate of about 1.5 million a month. That's not many compared with the iPhone -- 61.2 million smartphones were sold in the first three months of this year -- and even with the iPad (12.6 million units sold in January through March). Of course, it's still a lot compared to the Swiss watch industry, which exports a little more than 2 million timepieces a month, but then China makes 175 million watches a month, and Swiss factories are still humming.

The underperformance of the industry is just as easy to explain by pointing out that May 2015 had two fewer working days than May 2014, and the shortfall is roughly equivalent to two days' exports. In Europe, despite the calendar factor, Swiss watch exports grew 3 percent in May and 9 percent in the year to date as a weakening euro boosted tourist numbers. That growth hasn't been hampered by the Apple Watch or even the strong Swiss franc. 

Yet globally, the Swiss watch business isn't growing. That's due to a steep drop in sales in Hong Kong, its biggest export market. Exports to the Special Administrative Region dropped 33.6 percent in May, after a 30 percent decline in April. That kind of catastrophe can't be explained by exchange rate vagaries or even the general slump in Hong Kong retail, caused by the declining number of tourists from mainland China. 

The best explanation probably has to do with the role Swiss watches play in corruption. 

In 2013, Xiaohuan Lan and Wei Li, of China's Cheung Kong Graduate School of Business, discovered that luxury watch imports have increased dramatically every time China had its regular, once-in-five years power transition:

"During leadership transitions," Xiaohuan and Wei wrote, "officials who are eligible for promotions have incentives to send gifts or money to officials who have influence over official appointments. When a new leadership team is expected to be installed, business people and officials also need to establish new connections and to form new official-business ventures." There's even a Chinese expression for this transition-related corruption: huan jie fu bai.

Watches play a big role in these exchanges because they are small (and therefore easy to hand over inconspicuously) but expensive -- the median price of a luxury watch in China is $5,000 -- and easy to resell if necessary. 

Xiaohuan and Wei wrote about the Swiss timepieces:

Because of their brand cachet, they are often counterfeited. While it may be counterintuitive, the apparent availability of counterfeits may actually increase the desirability of the genuine watches as a medium of corruption exchanges. One scheme discussed on internet forums is to give two watches, one genuine and one counterfeit, as gifts. If such an exchange were ever investigated, the receiver can hand over the counterfeit, which usually costs less than 200 yuan.

Under President Xi Jinping, a relentless anti-corruption campaign -- which even includes a ban on advertising watches as gifts to leaders -- has hurt sales of many luxury items. Luxury watch sellers, however, are suffering more than anyone else. Earlier this month, John Idol, the chief executive officer of Michael Kors, said the iPhone and other smartphones, not Apple Watch, were driving down watch sales in the U.S.: "There's clearly a younger customer, in particular, in America who is wearing watches less because they view the iPhone as something that they tell time with." 

Swiss watchmakers should worry about corruption fighters at least as much as they worry about Apple. Crackdowns on graft in some of the industry's big markets, such as Italy, Spain or the United Arab Emirates, could be painful. In fact, Apple itself may be suffering: Think of all the $17,000 gold smartwatches it's not selling.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Max Berley at mberley@bloomberg.net