But compared to suppliers in other segments of China's fashion industry, watchmakers have been slower in taking the step to upmarket production. This is mainly because the watch industry suffers from a shortage of skilled R&D technicians and designers. As a result, most watch suppliers still focus on low-end, OEM production.

The shortage was not a problem before, with most China suppliers concentrating on low prices and high volume. But even as global consumption of fashion watches
the largest product line at most factories in the country
grew 4.5 percent in each of the past two years, overall watch exports from China have started to decline.

Exports in the first seven months of the year totaled US$460.9 million, down 7.7 percent from the same period in 2004. The number of pieces shipped fell 13.7 percent to 418.6million.

Last year, China exported 956.9million watches worth US$977.4 million. Although export sales increased 2.5 percent, the growth rate was significantly lower than the 22.4 percent registered in 2003. Even volume growth has slowed. Where total outbound shipments increased 10 percent in 2003, they rose only 5.4 percent in 2004.

Export growth rates have been declining due to decreasing demand for low-cost models. The low-end watch segment has become saturated with a large number of suppliers offering similar models. This has prompted many suppliers to move up the value chain in order to remain competitive and attract more orders.

Many companies, however, cannot take this step easily due to the lack of skilled designers and skilled R&D technicians. Most fashion watch designs have a one-year shelf life. While seasoned designers can come up with fresh, innovative styles every month, less-experienced ones mostly do slight modifications on existing models.

Production of tech watches and high-end sports watches, on the other hand, requires a higher level of technology which most China makers still do not have.

To attract skilled technicians and designers, some companies are offering them salaries up to 30 percent higher than that paid to assemblers. But to do this, they have had to freeze pay levels for the rest of their workers.

Developing and marketing their own brands internationally is not an option for most China suppliers, as it requires large sums of investment and few makers have the marketing expertise to effectively position their products.

For these reasons, those companies that are producing more upscale designs, moving to OBM or both, are usually large companies with an established local brand. Apart from being able to export all or the majority of output under their own brands, a number of these suppliers have been able to develop tourbillon watches, which until very recently only watchmakers in Switzerland were capable of making.

Some of the smaller China companies are also taking steps to move upmarket, but they are offering high-end watches on a limited scale and in low volumes.

Although more suppliers are improving their models, low price is still seen as the main competitive advantage of China. Even though exports of watches have slowed down, the country remains a top choice for buyers from around the world, particularly for low-end and mid range designs.

Industry composition
China is the world's largest export manufacturer of watches, producing almost the entire output of low-end watches. Among the estimated 1,000registered makers in the country, more than 70 percent export watches either directly or through traders. On average, makers export about 65percent of their output, mostly to the US, Europe and Asia.

About 60 percent of watchmakers in the country are locally owned and one-fifth are Hong Kong-owned or invested. There are also several Taiwan-owned or invested watchmakers in China. Supported by the island's long history in IC, PCB and electronic component production, most Taiwan-owned or invested

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