September 2003 | Manjula Narayan
Watch and wait
Titan looks at new strategies to face the global market in face of WTO
Did you know that India is one of only four countries in the world with the capability of making all the components of watch analogue movements? Did you know that watch, clock and timepiece manufacturers, and makers of ancillary products such as cases, dials, bracelets and components have, over the last four decades, created an industrial base that employs an estimated 50,000 people and supports nearly 2 lakh others? That is not counting over 10,000 horological watch and clock dealers across the country. Today, the overall investment in watch manufacturing plants, machinery and infrastructure in the country is estimated at over Rs1,000 crore.
Watching the clock?
But the times they are a-changing and, with the impending WTO norms, a tad uncertain too. "Quantitative restriction on watch imports has been withdrawn since April 2000. The basic customs duty applicable on imported watches has been lowered to the extent of 35 per cent, which depends upon maximum retail price [MRP]," says Bhaskar Bhat, the managing director of Titan, while explaining the implications of the new WTO norms.
"This freeing of imports has caused foreign manufacturers to woo retailers and distributors with generous terms and consignment sales. As the availability of brands and the number of goods that a distributor or retailer might wish to stock increases, pressures on the deployment of available funds of a wider range of goods will also increase, causing a thinning of stock levels for individual brands," he says, adding that Titan is fully prepared to capitalise on the opportunities likely to emerge post-WTO.
"The entry of new players in the watch trade will fuel increased advertising and sales promotion, which, in turn, will increase visibility and interest in the watch product category," says Mr Bhat. "This will benefit Titan. Currently, sales in India stand at an abysmal low of 25 watches per 1,000 people, compared with 250 watches per 1,000 people in a developed society. With more brands promoting the category, demand will significantly increase."
Until now investments in manufacturing or assembly facilities have had to precede the introduction of new products. Obviously, things are set to change. "Liberalised imports will enable us to evaluate and exploit the potential for new product offerings through the direct imports route. This will help us identify where the competitive advantage lies, and, thus, also identify the most appropriate form of investment."
Clearly, despite a dismal domestic environment where lower-priced, even spurious, products, have been flooding the burgeoning grey market more than half of the approximately 25 million watches sold in India are smuggled or made out of smuggled parts, especially movements things aren't all downhill.
"The world demand for watches is around 600 million," says Mr Bhat. "Indian producers currently make about 12 million watches. India can make watches of a quality comparable to that of the Swiss and the Japanese. Hence, overtures are likely to be made to Indian manufacturers who can supply parts and components to foreign manufacturers. With India being granted most-favoured-nation status and European and Japanese brands increasingly turning to various Asian sources to contain production costs, a huge opportunity lies ahead for Titan."
Time for a change
The WTO norms are ushering in a new world. Lifting restrictions on the import of complete watches will enable Indian manufacturers to globally source watches and, thereby, reduce lead times for the introduction of new products. This should deal a severe blow to the grey market, which has been flourishing in an atmosphere made conducive by governmental levies and the depredations of rampant smuggling and counterfeiting.
"Watches from Hong Kong and China already populate the low end of the watch market," explains Mr Bhat. "These watches have entered India in a clandestine fashion, in much the same manner in which cheap quartz analogue clocks, which dominate the low end of that market, entered through land routes."
Significantly lower effective costs of smuggled components means that this sector enjoys the advantage of zero taxes, no promotional costs and lower input costs. Smuggled watches account for between 50 and 75 per cent of annual sales in the country.
Time after time
In contrast, legitimate manufacturers have borne historically high customs duties on the import of machinery to set up their plants. Now they also have to deal with an excise duty of 16 per cent on watches whose MRP is higher than Rs500. This has caused smaller manufacturers to wind up their businesses.
Advice to the Indian government to have tighter controls along the grey markets' favoured entry points has not resulted in meaningful action. To make matters worse, exim policy changes, which lifted all quantitative restrictions on the import of watches, were introduced a full three years ahead of industry expectations. Naturally, the imports came in before manufacturers could implement programmes to confront them, and much before the liberalisation timetable agreed with other trading countries and the WTO.
This happened even as the industry was seeking relief from high excise duties and sales taxes (both of which are in many multiples of the taxes prevailing a decade ago). Domestic producers have been unable even to pass on excise increases to customers, and this has adversely affected the health of the industry.
The clock really is ticking for the Indian watch industry. As has been the experience in parts of the world where quantitative restrictions were removed years ago, most brands are now likely to use the legitimacy of imports to shield a much higher level of smuggling. There are also serious concerns about the likelihood of dumping and of remainders being disposed of in the Indian market at deep discounts.
The legitimate presence of foreign brands could encourage grey-market players who have legitimate cover to explain the otherwise embarrassing presence of imported goods. This market could become more active and the foreign brands that have been aiding and abetting this market could now nurture the channels through which such goods have entered. This could affect bigger brands.
"The Swiss have not had great success nor have the Japanese, who are yet to get their act together with Citizen and Casio. Seiko had to abort its entry," says Mr Bhat.
Things are so bad for the watch industry that Titan, HMT, Timex and Maxima are the only significant surviving Indian watch manufacturers. Of these, Timex and the state-owned HMT have been making losses.
Titan, having hung on to its leading position in the market with aggressive marketing, is upbeat about the future. Mr Bhat expects WTO to work in the company's favour.
"The choices available to the customer will widen considerably," he says. "This will impact the strategies and policies of the business community. The brands that have customer-focused marketing strategies will do well. Titan has chosen to place itself in the mid- and upper-middle segments through brand Titan, and the growing mass market through Sonata. In both these segments the opened economy will be used to our advantage."
The sales, marketing and services sections have already been restructured. "The object of this exercise is to significantly improve our revenue streams, build two distinct brands (Titan and Sonata), utilise our manufacturing facilities better, pursue new business opportunities by leveraging the power of our brands and our expertise in micro-precision engineering, and exploit our strengths in marketing, retailing and customer service. A separate supply chain and logistics function has been founded to leverage emerging opportunities in this field.
"We have been preparing for some time and have been measuring our performance very carefully in terms of market share, which has, in fact, increased. Recently, the organisation has been restructured, focusing on our thrust areas. Several cost-reduction initiatives are at an advanced stage. Titans extensive retail network is progressing with a planned expansion in un-represented areas. This will make our strongholds an impregnable fortress."
This is already happening with Time Zone, Titan's chain of multi-brand outlets. Currently with a presence in 89 cities, these outlets could, in future, stock foreign watch brands, a move that is bound to increase traffic in these outlets, improve their profitability and, in the process, increase Titan sales. The company is also looking at licensing and distribution arrangements.
Several new products are being introduced. Advertising and promotional plans have been realigned to enhance customer expectations. Titan has tied up with suppliers in Hong Kong, China and South Korea for sourcing low-cost components.
No more Chinese torture
"We have already strengthened our lower-end Sonata brand, and aggressive marketing strategies have been adopted to counter cheap Chinese products," says Mr Bhat. "From the customers' point of view, we will fully exploit the potential of the power of one of India's most admired brands Titan. The Chinese have no known strengths in brand building. As long as we offer an unbeatable value proposition, our customers will remain loyal."
The company also intends to lobby the government to levy anti-dumping duties and strengthen the revenue intelligence machinery. This should check smuggling and detect under-invoicing and bring some much- needed relief to the watch industry.
WTO or no WTO, Titan is set to maintain India's position as one of the foremost watch-making countries in the world.