Quest for quality spares Swiss exports

Quality is still worth paying for Keystone

Swiss exporters were saved from the worst ravages of the global crisis and the strong franc thanks to the quality of their goods, a study concludes.

A rebound in export figures in 2010 and the start of this year has also raised questions about a lobbying campaign from exporters and the central bank’s intervention in the currency markets.

The financial crisis and subsequent recession certainly had a negative impact on Swiss exports, with volumes falling from SFr216 billion ($236 billion) in 2008 to SFr187 billion  the following year.

But 2010 saw exports rally to a value of SFr203 billion, while February of this year saw another rise of ten per cent, suggesting a sustainable return to health for the sector.

A study of Swiss exports by Credit Suisse bank has again identified the quality of goods as the primary reason for resisting the worst consequences of the recession.

Each kilogramme of Swiss products shipped abroad was worth about three times as much as goods produced in Germany or Italy and six times that of United States exports, Credit Suisse researchers have calculated.

No expense spared

The leading products are luxury watches (worth around SFr10,000 per kilo), medical technology (just under SFr500), pharmaceutical (SFr350) and precision instruments (around SFr280). The value of goods in most cases eclipses the same product manufactured in other countries.

The study concludes that only four per cent of Swiss exports compete on price in the international market, while 60 per cent can claim to be of the best quality in the world.

Credit Suisse chief economist Martin Neff endorsed the quest for quality as a better strategy than competing to offer the cheapest price, particularly given the growing strength and output of emerging economies.

“Competitors in China will always have a price advantage of ten or 15 per cent, so you have to persuade consumers to buy your goods with quality and not with price,” he told swissinfo.ch.

The findings come as no surprise, but many observers feel that the high-price, high-quality bias of Swiss exports have helped them weather the economic storm. Many people refuse to substitute cheaper copies for quality items even during tough times.

“For the short term, at least, it can be assumed that higher quality products are more difficult to substitute than relatively homogenous goods,” Swiss National Bank chairman Philipp Hildebrand said in a speech last year.

Return to health

Another saviour for Swiss exports has been the rapid rise of the pharmaceutical industry that now accounts for 28 per cent of all goods shipped abroad, compared with eight per cent in 1990. The continued production of crisis resistant drugs went some way to propping up export figures over the past two years.

The watch industry, above all others, benefited from the continued rise of emerging economies such as China that continued to buy luxury goods in increasing numbers while other markets were stalling.

Watch exports rose 22 per cent last year to a value of SFr16.2 billion and the trend looks set to continue with the industry predicting overseas sales this year will beat the record set in 2008.

The impressive returns from the export industry led Martin Neff to question the loud appeals from manufacturers in the past two years for help in dealing with the rising franc. Exporters feared they would be overwhelmed by the strong franc that was raising the price of their goods.

The Swiss National Bank (SNB) repeatedly intervened in the currency markets to prevent the franc from spiralling at an even faster rate, but the action cost tens of billions in losses. The SNB has always defended its actions, saying they were designed to combat deflation rather than help out exporters.

Scare stories?

But Neff remained sceptical about the strong lobbying and the subsequent action by the SNB.

“The debate became louder and louder as the franc went up and there was some exaggeration,” he said. “The debate concentrated on the disadvantages of a strong franc and nobody talked about the advantages [increased purchasing power of raw material].”

“The watch industry was one of the loudest complainers at the end of 2008, but I have never seen a more impressive rebound in terms of volumes and margins,” he added.

Manufacturers insist that the strong franc has hurt them by eating into margins, and claim the worst effects will only present themselves this year.

Companies have kept their heads above water by hedging in alternative currencies, breaking into new markets, reducing capacity and raising costs. But many firms warn that they are reaching breaking point as they enter a third year of unfavourable exchange rates.

Neff believes that it is only a matter of time before the pressure eases. “In the past 20 years we have never faced more than three consecutive years of Swiss franc appreciation,” he told swissinfo.ch.

Swiss exports

Swiss exports enjoyed a good February, rising 10% in value to SF16.5 billion. The machines and electronics sector recorded the strongest growth (20%), followed by watches (17.8%).

The strong start to 2011 followed on from an uptick in exports last year. Exports reached a value of SFr203 billion compared with SFr187 billion in 2009.

However, it remains to be seen whether exports can breach the high point of 2008 (SFr216 billion) in the coming months.

Credit Suisse research shows that the pharmaceutical industry comprised the lion’s share of exports last year (28%), followed by machinery (12%), chemicals (10%) and watches (9%).

Germany was once again the leading destination country, consuming around 20% of Swiss exports.

The US received 10% of Swiss goods, Italy 8% and France 7.8%. The BRIC countries increased their share from 5.4% in 1990 to 10.3% last year.

Credit Suisse calculates on current growth rates that China will become Switzerland’s most important export destination by 2020 with the BRIC nations due to surpass the EU as the single largest destination bloc.