An interesting piece by MarkDMill on the strong cultural reaction in China to luxury watches:
The story goes back to August 30th, 2012, when an accident in Yan’an killed 36 people. A Work Safety official was photographed smiling while at the scene. Outraged, internet users searched online about this individual and uncovered pictures of him wearing eleven different luxury wristwatches.
Pictures of him, with his watches, went viral and earned him the nickname “Brother Wristwatch.” Internet users surmised that his salary was not sufficient to purchase these luxury watches and thus must have been obtained through corrupt means. He was arrested on charges of bribery and sentenced to 14 years in prison.
This goes against the practice of luxury gift giving:
Giving of luxury gifts–particularly watches–has long been a means of establishing one’s relationship and currying favor in China, but the anti-corruption drive has hit this market hard. In 2013, Swiss watch exports were down a shocking 26%, even though they had grown every year for the previous ten years. Gift-giving dropped 25% in 2013 and another 5% in 2014. The entire luxury goods market, which had grown at a rate of 43% as recently as 2011, dropped to 18% growth in 2013 and contracted in 2014 for the first since 2000. I have witnessed firsthand how private businesses have ended large parties and bonuses out of fear of appearing to be corrupt. The effect of the corruption crackdown has been dramatic, and it is still underway.
So what does this have to do with Apple Watch pricing? First, the Apple Watch will likely be a big gift in China this year. Given the current pricing model, the Apple Watch Edition will occupy one tier and all other models will occupy a more accessible tier. The Edition will be part of the high end luxury tier, the rest of the models, watches for the rest of us.
This is the political and social environment in which the gold Apple Watch Edition enters China. Luxury watches are worn in China as a display of one’s wealth, but right now displaying wealth on one’s wrist is dangerous and, legitimately or not, is taken as a sign of corruption. The gold Apple Watch will sell, but I would wager an Apple Watch Edition that it won’t be seen on the wrists of government officials or successful business people with political connections (which is most successful business people)–or, if it is seen, that person will quickly be sanctioned or even sacked.
This, then, is why Apple’s positioning of Apple Watch is so brilliant: by releasing Apple Watch Edition at the luxury price of RMB 74,800 ($12,062), the “normal” Apple Watch seems downright frugal at RMB 4,188 ($675). Even the most expensive Apple Watch (RMB 8,288; $1336) looks cheap in comparison to the most expensive Apple Watch Edition (RMB 112,800; $18,190). By pricing one collection so high, Apple has managed to make Apple Watch seem downright moderate–even though it costs 15-30% of the average Chinese annual salary!
Given the importance of the Chinese market to Apple, I can only imagine that this was part of the planning for Apple’s pricing strategy.
You cannot buy the amount of advertising value Apple has derived from Watch Edition. They don’t have to sell one unit to be successful in creating buzz around this product.
That last sentence reduces the credibility of the whole piece to me. The Apple watch at $1336 might be one third of the average Chinese person’s wages annually. But to put that in perspective, don’t forget there’s over a billion of them. And their middle class is larger than the population of the United States. So it may appear like China is a poor country, but they are not all poor, and then ones who aren’t are a vast army of purchasing power.
China consumes one third of all the world’s luxury goods. Their jewelry market is so big it distorts the prices of diamonds and colored stones around the world. They are the single largest consumer of rubies for example. And that has increased the cost of rubies worldwide. Especially the best, from Burma. It’s so big that there is no pressure on producers in Burma to improve. The remaining sanctions on purchase of Burmese rubies in the US has no impact China’s demand is so large.
I suspect the more accurate reason for the price of the Edition Watch is to keep demand low. Not make the Apple watch seem cheaper. They don’t really complete anywhere, let alone in China.
Swiss sell 2% by unit precious metal watches.
They only sell 23 billion worth of watches.
Apple will only match it.
gold cannot be sold at lower margin as it is not
a commodity metal but inflation/fear hedging currency.
Most of the gold is sitting in Central Banks.
There is nothing genius about the pricing.
High-end retailers have high margin too.
If I was an Apple employee stationed there, I would ask
for commission on each sale.
Except that people don’t give watches as gifts.