HONG KONG'S watch industry has suffered a drastic reduction in profits owing to keen competition among local and overseas manufacturers and slackening overseas demand, which have forced prices down. The Hong Kong Manufacturing Industry report for 1994 said that the market for liquid crystal display (LCD) watches had suffered the most. 'To remain competitive, manufacturers need to produce products of better quality and designs which may require investment in higher technology and more modern production processes,' the report stated. 'Small establishments with uncertain market share may find it difficult to survive and respond to these changes,' it said. The report concluded there was insufficient long-term investment and research and development effort to make innovative products. The industry also faced a shortage of experienced professional designers, it said. While Hong Kong was among the world's leading manufacturers of watch bands, watch cases and watch dials, it relied heavily on imports for parts such as chips, quartz crystals, LCDs and watch and clock movements. This made the industry vulnerable to price fluctuations or delays in the supply of parts and semi-manufactures, the report said. To enhance their product image, some manufacturers preferred to invest in watch movement plants in Japan and Switzerland rather than in Hong Kong. The report warned that Hong Kong would face keen competition in traditional markets such as the United States and Europe as those markets became more demanding. They were placing greater importance on strong supplier relationships and long-term commitments. 'Customers there now require more tailored designs and more local after-sales services,' it said. 'These markets demand prompt delivery time. That apart, the life cycle of designs in these markets is getting shorter. 'In order to remain competitive in these traditional markets, manufacturers should take note of the changing demand and new design trend and react promptly to the market changes,' the report stated. While a growing number of manufacturers had increased investment in modern production technology and improved designs to move upmarket, the industry was likely to remain fairly labour-intensive and assembly-orientated in nature, the report said. 'Large-scale automation is unlikely due to the heavy capital investment involved and the lack of standard components. 'Local manufacturers also consider that the success of Hong Kong's timepiece industry lies in its flexibility, which might be restricted by full automation,' it said. In 1993, the leading source of external investment in the industry was Japan, which accounted for $1.16 billion or 91.8 per cent of the total external investment in the industry. Other major sources of external investment included Germany with $41 million or 3.2 per cent of the total external investment, followed by Switzerland, with $22 million or 1.8 per cent.