Watch Industry Overview

Secondly, they buy for technical features such as being precise to the last second. In most instances, watches are expensive, but people still buy them. Watchmakers make beautiful watches because of their complexity and the increasing demand for luxury watches. Over the past years, there has been increasing demand for watches and this has led to increased economic growth. The global economy has been projected to increase by 3. The increased demand for watches in Japan and Swiss led to increased net sales and market growth is expected to exceed 7. The watch industry is characterized by few eminent brands in the market, however, each of the brands have a large market share. According to Ariel Adam, the watch industry is veritably small.

Despite the fact the watch industry is small it is profitable is a profitable business venture with few stakeholders to control the business. In the global watch market, there are few well-known merchants including LVMH, Rolex. Research suggests that the shipments of global smart-watches grew by 48 percent in 2017 compared to 2016. Analysts and researchers argue that Apple watches have dominated in the global market with a market share of almost 60%. It has become the largest watch brand followed by Rolex. Despite the fact that the two brands are not comparable, this clearly indicates that Apple brand has strategically positioned itself in the global market in order to emerge as the market leader within a period of fewer than 3 years. In addition, the economy is growing rapidly and individual disposable incomes are increasing as well, hence increasing consumer purchasing power.

This growth trend has been attributed to the increasing consumer propensity for luxury products and rising number of high net worth individuals demanding luxury watches. Additionally, development of new products and wider product portfolio will also drive market growth in years to come. Potential Risks in the Watch Industry The risk is inevitable in any industry and it is an important part of the business. The watch industry is growing dramatically, thus the need for risk management in the industry. There a number of potential risks in the watch industry some of which can be controlled while others cannot. Some of the top priority risks in the watch industries may include; weaker demand, innovation failures, threats due to intense competition from emerging Asian market, the launch of smartwatches, and pricing pressure.

These risks should be highly considered since they can reduce industry-specific profit. For example, intense pricing competition in the Asian market has led to the emergence of different styles of watches which are of low prices unlike in the Swiss market. Additionally, Asian market has higher supply powers due to intense pricing competition. The Asian market continues to gain a greater market share in the global watch industry as time goes by. Competition theories argue that competition in the watch industry fuels growth and encourages innovation. However, there is a rising issue of concern that vertical integration may have detrimental effects on the global watch market including elimination or reduction of economies of scale and companies potential to innovate. A luxury watch is durable goods with producing quality at the highest level and most customers can afford few numbers of watches in their lives.

Therefore, quality issues become a risk to cause lower demand in luxury watch industry. Luxury watches brands pose a threat to the global market. Recommendation There are various strategies that can be adopted and implemented in watch industries in order to increase growth and development. Some of these strategies include; expansion to new markets, development of new products, reduction of costs, strong focus on research and development, and development of online channels. The most important business strategy is the creation of new products in the market. These products should be unique, thus watch industries need to be creative. By introducing new products in the market, watch industries will gain a large market share. Literature Review Throughout history, the most significant risks that have been realized in the watch industry are operational risk failures that occurred during quartz crisis in Swiss industry in 1970’s.

During this time of crisis, mechanical watches replaced quartz watches. The crisis led to the decline of the Swiss industry productivity and profitability. The company focused on the production of traditional watches and many industries transformed to Asian companies and adopted modern technology. Before the crisis, Swiss industry dominated the global market with 50%market shares and later after the crisis, mechanical watches still dominated in the world market. The 3 main watch group companies to be discussed in the analysis of risks and risk management include; Swatch group, Citizen, and Casio. These groups are well-known and have vast experience in the global watch industry. Since they operate globally, they are subject to similar risks. However, they all have different techniques for managing and eradicating such risks.

Risk Management Risk management involves identifying, analyzing and evaluating risks in order to identify strategies that can be used to prevent and mitigate risks in organizations. While managing risks, it is important for the company to identify crucial risks, analyze and record them at their earlier stages during business operations. This helps the company to plan and implement adequate measures that aim at preventing such incident from reoccurring. Citizen Group in Risk Management The Citizen Group Company is the main of Japanese global corporation. It is based in Tokyo and superior in watchmaking since 1918. The company utilizes innovative technology in order to gain a competitive advantage in the market. It also has a list of measures taken to comply with each law.

This is aimed at building and strengthening the risk management system at Casio. The risks are prioritized based on their possibilities of the risk occurring and how it is more likely to impact on the company’s operations and management. At Casio, risk management process is conducted in a planned manner in order to prevent and minimize possible risks. The company has a department responsible for risk management that monitors the company’s operations to identify risks. The differences are described below in each respective group. Swatch Group Swatch risks are thought to be less severe than before because of the improved attitude for the Swiss watch industry. Research suggests that the biggest risk the company faces is weaker foreign demand.

Majority of the people expects this risk to pose a threat to their business operations. Watch companies have learned numerous ways of coping with the strong Swiss franc after the Swiss national bank surprisingly removed the CHEF/EUR floor. Free trade agreements with Switzerland solitary allows a reduction in watch-sector tariffs to occur in stages, thus giving Chinese watch manufacturers additional time to strategically position themselves. In addition, consumer tastes and preferences might play a significant role for the Chinese population who are expected to show passion and interest in luxury watches. Shifts in consumer purchasing behavior will be more expected as a result of greater wealth experience with luxury shoppers. This clearly indicates that there is an increasing demand for less flashy and smaller rare luxury brands in China.

There is a probability that this latest trend can influence Swiss watch exports and change in the structure of their exports. Casio Group has established its own rules and guidelines to mitigate and prevent risks. The group faces multifarious risk factors such as technology development, outsourcing, global economy, foreign exchange risks, interest rates risks, new products, and price changes. These are the main risks Casio group is subjected to and have a significant impact on management performance, share price, and financial position. The company derives huge profits from watch sales. In order to remain strong in the market, the company should quickly and consistently develop popular new products. Watchmakers need to evaluate material price volatility in order to identify commodity price risks.

As a result of current and future trends in the prices of different commodities, watch companies are becoming constrained by the increasing commodity prices since they cannot entirely be passed to the consumer. Watch companies use analytics and modeling tools to analyze commodity risk profiles in order to implement holistic commodity risk management programs. By developing a holistic commodity risk profile, the company is in a position to assess individual and net exposure to individual risks to commodity prices within customer and business segments. The senior management team is able to understand and evaluate the efficacy of current risk-alleviation and risk management strategies. Citizen Group Commodity Risk Management The company faces tough price competitions as a result of material price volatility and increasing uncertainties within the supply chain.

The company aims at adopting and implementing new initiatives for controlling commodity price risks. Citizen watch products are mainly made of stainless steel. Watches account for the largest part of the company sales and their raw material prices are highly volatile. Additionally, the supply of raw materials may delay given the rejuvenated circumstances. In Japan, Casio is the only strong company in a timepiece, thus the company has gained a competitive advantage. The group derives most of its sales and profits from timepiece business. The timepiece leads to increased profit margins. For instance, the rate of watch shipments propagated by 0. 5 million resulting in a total of 8. Watches at Casio are mainly manufactured using glass, plastics, and stainless steel. The prices of these raw materials are too cheap to be safeguarded.

The prices of stainless steel prices have been continuously decreasing, thus the company does not hedge commodity price risks. Additionally, few expensive watches at Casio are made from diamonds and precious metals. Casio focuses on the production of affordable prices for the mid-level customers. The two main subsidiaries of Swatch group include; DYB Germs and Nivarox. They have supported the development of many industries production equipment that is specific and indispensable to the processing of precious metal crap, the transformation of precious metals, and creation of alloys. It will lead to the development of great products in the market. With dedicated lines for Longines and Omega, are used in other branches. Due to the fact that Swatch group has a high degree of independence from suppliers, the company demonstrates a great deal of leadership in the global watch mark market.

Therefore, the company mainly focuses on assessing, identifying, and analyzing, and evaluating foreign exchange rate risks in order to reduce their effects on the company’s net income. US dollar, Euro, Japanese Yen and Chinese Renminbi are main foreign currencies in the global watch market. Some of these currencies with high volatility include; CHF vs. USD and CNY vs. CHF. For instance, Swiss exports may fall due to the introduction of anti-corruption measures. Tax policies also impact on the quantity demanded watches. High tax rates and low customer tariffs on luxurious watches lower consumer purchasing power. As a result of increased uncertainties, exports remain unclear. Therefore, foreign exchange rates risks associated with political uncertainties impact greatly on Swatch Group earnings. The company is expanding its operations as well as consolidating in order to increases sales revenues, but foreign exchange rate fluctuations are constantly affecting their balance sheets and income statements.

Nearly half of total watches produced have affected by uncertainties evident in US and UK market. Casio Group The company faces various exchanges rates fluctuations that affect its sales revenues and profitability. EUR, USD, CNY, and British Pound are the most significant exchange rate currencies impacting greatly on the company’s sales revenues. The company’s profits and losses and those from overseas subsidiaries have high risks of enduring foreign exchange rate fluctuations. This is to ensure that they protect liquidity and cash deposit from losses. When these companies invest in long-term, they may incur risks such as credit risk. This is because they need to sacrifice a great amount of capital. Because of the risks associated with interest’s rate fluctuations, the three watch companies operating in global market should adopt and implement interest rates risk management strategies in order to reduce the negative effect.

They need to develop solid management departments responsible for analyzing and monitoring risks. 1 percent compared to the previous years that is from 1010 million to 1264 million. Through analyzing the company’s financial instruments, 2017 financial reports indicate that there is a 0. 1 percent change in domestic currency interest rates. 4 percent of Swatch group interest costs were associated with total income. Negative interest rates have a detrimental impact on the company’s sales revenues and profitability. The company does not guard against short-term loans since their average yields match with the average interest rate on investments in the money market. In 2016, there was a short-term loan of CHF 102 million and an interest rate of 1. 0 %, however, by the end of 2017, there was no short-term bank loan open.

By the end of 2017, long-term financial debts included mortgages of CHF 24 million while last year was CHF 29 million and 2. 4percent interest rates. 0 billion, a decrease in long-term debt accounted for ¥2. 8 billion. Furthermore, the group’s fund employed in financing group activities decreased from ¥ 29 billion to ¥20. 6 billion. Some of the contributing factors to the decreased in funds used in financing activities include; short-term loans decreased by ¥14. Citizen group interest rate risk management strategies include; interest rate swap, forward contract, options and any other derivative to guard against volatile interest rates. Interest rate swap method is used in modifying risk exposures by converting variable interest rates to fixed interest rates in order to improve their business operations. The group encounters interest rate risks associated with long-term borrowings.

Violations of financial contracts and agreements affect greatly the group’s financial position. Short-term loans are negligible and do not affect the group financial position. The company interest rate risks affect the value of financial assets, operating costs, and procurement costs. For instance, in 2017 the group total liability decreased from ¥166,343 to ¥155,120. This was due to a decrease in short-term and long-term payables. The loan liability decreased by ¥11,223 million whereby the main contributing factors include; lease obligations, decreased in short-term payables, and decrease in long-term payable. The group’s long-term debt comprises of both non-current and current portions. Therefore prices primarily determine the values of interest rate swap transactions. Long-term debts associated with floating interest rates mirror the market interest rates in short term.

The fair values of long-term loans payable are subject to special treatment interest rate swap. They are measured by taking up the sum of interest rate and principal associated with the interest rate swap. Casio interest rate risk management can be is achieved through interest rate swap. 5 percent. Swatch group management team is responsible for reviewing equity of its branches, and its capital structure in order to ensure that the debt ratios in relation to equity are at reasonable level. The Swatch group pays more attention to its counterparty’s credits risks than its own risks. Research suggests that Swatch credit risks emanate from customers inability to settle their own loans and debt obligations. Swatch credit policy is occasionally assessed and revised at group levels.

The group’s cash equivalents include; cash at bank, short-term deposits, and petty cash. These cash equivalents have a higher liquidity. Swatch Group guards against some risks of default by implementing directives that enact on minimum credit ratings for investments in tradable securities. The group minimizes risks by buying securities which are investment rated. The group also minimizes counterparty risks by ensuring that all derivative financial instruments current account deposits and money market investments are placed with financial institutions credit ratings are at least investment grade. Doubtful accounts are evaluated based on past credit loss experiences. Doubtful accounts impact greatly on the group’s net investment activities. The company has experienced past credit losses, the need for risk management which is carried out by risk management teams to evaluate potential losses for some of its financial loses.