Firms warn worst franc effects “yet to come”

Manufacturers are searching for light at the end of the tunnel Keystone

The Swiss engineering industry believes companies will suffer the worst effects of the strong franc in the next two years, with some firms expected to go bankrupt.

The Swiss franc appreciated by 17 per cent against the euro during 2010 and reached parity with the dollar. While orders and productivity increased last year, margins were dangerously eroded as Swiss goods became more expensive abroad.

The umbrella group for the mechanical and electrical engineering industries, Swissmem, reported some good news at its annual news conference in Zurich on Thursday.

Orders were up more than 16 per cent on 2009 and revenues increased 6.5 per cent to SFr67.5 billion ($73 billion) – although still some way off the record high of SFr80 billion in 2008.

However, the strength of the safe haven franc ate into margins, reducing profits by a percentage point.

“The negative effects of the strong franc will hit the industry harder this year than in 2010,” said Swissmem president Hans Hess.

“Many companies, in particular SMEs [small and medium-sized enterprises], face great challenges. The long-term survival of many firms is in danger.”

Unsustainable pressures

A Swissmem survey showed that nearly half of the 290 companies suffered a reduction in margins of at least six per cent. The average margin for firms in the industry is between six and eight per cent.

Paul Oertli, chief executive of precision tools company Oertli, said such pressures would prove unsustainable for some companies.

“It is possible to survive for two or three years by breaking even and having few investments. But there is a fine line between zero and negative profit. Some companies will not survive,” he told swissinfo.ch.

A total of 6,204 companies vanished in Switzerland last year, according to market research company Dunn & Bradstreet. Of these, 4,331 failed due to insolvency.

However, the research also predicted that the machine building, precision instruments and chemicals sectors – included under the Swissmem umbrella – will be among the most secure companies in Switzerland this year.

Price increases

The firms involved in these industries do not entirely share Dunn & Bradstreet’s confidence. The most devastating effects of the strong franc will come with a time lag effect and will only start to hit home this year and next, according to Oetli.

He is particularly worried that the company’s planned price hikes could destabilise its performance, while many firms are also unable to invest in the innovation necessary to pull them out of their present plight.

“The effects of the exchange rate will really start to arrive from now,” Oertli told swissinfo.ch. “Our planned price increases will make us less competitive and we will feel that this year and next.”

Nearly two thirds of the companies surveyed by Swissmem said price increases of their goods were necessary to win back profits. However, this comes at the risk of making their products even more expensive in foreign markets – especially the euro zone where 42 per cent of them export more than half their goods.

Other measures to reduce costs and improve efficiency presently include sourcing more materials in the euro zone, using financial derivatives to reduce the effects of currency exchange fluctuations and – to a lesser extent – reducing wages.

In the long term, nearly half the respondents hope to enter new markets, particularly Asia, while 28 per cent of firms predict job cuts. The number of employees in the sector fell further in 2010 to just under 330,000, compared with 356,000 in 2008.

Move production abroad

Another move being practised by some firms is relocating some production outside Switzerland. About 41 per cent of survey respondents said they would have to do this if adverse currency conditions remained.

But Jean-Philippe Kohl, the Swissmem economist who conducted the survey, said most relocation would involve increasing existing foreign-based production as opposed to moving out of Switzerland wholesale.

“Companies are not moving all their production out of Switzerland, just specific parts,” he told swissinfo.ch. “This is not just to escape the effects of the strong franc but is also a normal part of the globalisation process.”

Swissmem has called on the government to help alleviate the problems of its members with a series of demands.

These include making a further SFr50 million available to help fund innovation projects, opening up Swiss borders to non European Union workers and speeding up free trade agreements, particularly with China and India.

In addition, the government should put pressure on importers to reduce prices of goods entering Switzerland and oppose popular measures to restrict pay and bonuses in Switzerland.

Swissmem

Swissmem encompasses 290 companies in the electrical, metallurgical and machinery industries. Most members have fewer than 250 employees, but big names include ABB, Sulzer and Siemens Switzerland.

These industries employ about 330,000 people and generate around 35% of all Swiss exports with a value of SFr68 billion (SFr80 billion in 2008).

Swissmem industries generate 48% of all Swiss manufacturing output and contributed more than 19% to the economic output of the country in 2009.

Besides machinery, precision tools and electronic goods, companies also work in the textiles, chemicals, auto parts, watchmaking, medical, energy and food industries.

Two thirds of exports end up in the EU, with Germany buying 26% of Swiss goods. The United States is the second biggest single market at 9.1%.

Exports to Asia are climbing rapidly and took up 19% of the industry’s goods last year. China saw the largest growth (up 46%) with Japan (10%) and South Korea (15%) also ordering more goods in 2010 compared with the previous year.

All Swissmem sectors reported higher exports last year. The 21% growth in exports experienced by the metal industry in part reflected a particularly dismal year in 2009.