A report released by the Federation of the Swiss Watch Industry shows that Swiss luxury exports are experiencing their best growth in more than 5 years. Global shipments were up 13% year of year in February of 2018 - good news that comes just in time for Baselwork, a luxury watch showcase. The effects of the 2012 corruption crackdown in China seem to be ebbing, with China and Hong Kong once again constituting the two top markets for luxury Swiss watches. Popular brands in China include Longines (owned by Swatch Group (VTX: UHR)), Patek Philippe, Omega, Piaget, and Rolex.

This increases hope for the luxury watch industry, which has been plagued by a variety of problems. There are many factors contributing to a trend of general decline in Swiss watch sales, not least of which is that the market faces stiff competition from new, disruptive technologies. Apple (AAPL  ), for instance, sold more watches in the last quarter than all Swiss watch industry sales combined.

Some argue, however, that the problems are more complex than simple competition and modernization, and that the Swiss watch industry has engaged in unsustainable growth practices for many years.

Most Swiss luxury brands, for example, have produced more watches than can be sold to end-customers, instead focusing on retailers.

© nadtochiy / bigstockphoto.com

The industry has also shifting away from relying on watch parts suppliers to investment in their own production facilities, which has pressured brands to up production to justify the investment - even in the absence of clear evidence of demand. Retailers then must offer steep discounts to customers in order to sell them. This becomes a compounding problem, as consumers realize that products introduced to market at significant markup will be available for cheaper within a year. Watch brands also sell their products to wholesalers with high margins, allowing too much leeway for the wholesalers to discount.

Aside from the competition from smartwatches, watchmakers have also failed to keep apace of other changes that they could potentially have used to improve their distribution networks, including globalization and the internet. Attempts to appeal to developing markets like Brazil, Russia, India, and China have encountered difficulties due to political turbulence, sanctions, and a crackdown against a Chinese culture of corruption that used to make giving gifts like luxury watches routine. A culture of inflexibility at the management level has created further problems in markets where Switzerland might have been able to make inroads, like the U.S. Employee morale is also exceedingly low, again in part due rigid management that limits innovation. Watchmakers have also failed to innovate when it comes to marketing, with watches relying on brand cults, while failing to capitalize fully on this interest or tailor their advertising to specific markets.

© TPAP8228 / bigstockphoto.com

This is not the first time the market has hit trouble. Sales tanked after the financial crisis of 2007 to 2008, which drove consumers to more modestly-priced products. And in the 70s and 80s, the so-called "quartz crisis" prompted speculation that the industry would collapse as old-school mechanical luxury watchmaking gave way to new, quartz-based technology.

While Swiss watches will likely retain a niche, heirloom appeal in the long-term, if they wish to consistently grow, they will need to drastically change their business plan.