Low margins as a mortgage for the future of the MEM industries :: Swissmem - Switzerland's Work Place and Think Tank

Low margins as a mortgage for the future of the MEM industries

28.02.17

Following a very difficult previous year, the Swiss mechanical and electrical engineering industries (MEM industries) embarked on a recovery in 2016. New orders rose by 9.5 percent compared to 2015. Although sales fell once more over the year as a whole by 1.8 percent, the fourth quarter of 2016 did see the beginning of a trend reversal. Goods exports remained on a par with the previous year (+0.1%), thereby halting the negative trend. In contrast to these positive developments, earnings are becoming a concern at company level. Almost a quarter (23%) of MEM businesses ended 2016 with a loss at EBIT level. In 2014, this figure stood at just 7 percent. This clearly indicates that the strong Swiss franc is still a challenge for a very large number of companies. The process of accelerated structural change therefore looks likely to continue, particularly given that 46 percent of industrial companies are contemplating relocating operations abroad within the next three years. How things will develop for the MEM industries going forward depends largely on exchange rates and business trends in the key markets

After the sharp year-on-year rise in new orders received by the Swiss MEM industries in the second and third quarters of 2016, they stagnated in the fourth quarter at the previous year’s level (+0.2%). Looking at 2016 as a whole, new orders increased by 9.5% compared with 2015. Sales also rose slightly in the fourth quarter of 2016 compared with the previous year (+2.7%). This was true of both large companies and SMEs. However, sales fell by 1.8 percent overall compared with 2015. Capacity utilization averaged 86 percent in 2016, matching the long-term average (86.3%).

 

Decline in exports halted

In 2016, goods exports by MEM industries kept pace with the previous year (+0.1%), totalling CHF 63.3 billion and halting the negative trend in exports. This trend is based on growing exports in precision instruments (+3.8%), metals (+2.7%) and electrical engineering/electronics (+1.6%). However, goods exports fell once again by 0.8% in the mechanical engineering segment, which is the largest segment in terms of volume. The key sales regions showed mixed developments. There was an encouraging 2.8% increase in exports to the EU which, accounting for 59.3% of all exports, is by far the largest market. Exports to the US grew for the seventh year in succession (+2.1%). By contrast, exports to Asia fell significantly by 5.4%.

 

Following a very difficult year in 2015, the MEM industries experienced an upturn in new orders and exports last year. The fourth quarter of 2016 saw the start of a turnaround in sales too. In terms of the future order pipeline, the expectations of large companies and SMEs alike improved steadily during the course of last year. According to the latest Swissmem survey, 49 percent of companies are anticipating an increase in orders from abroad in 2017. Just 14 percent fear a decline. This cautious optimism is shared by large companies and SMEs alike.

 

Worrying margin situation

The results of a Swissmem survey of the earnings situation conducted at the start of this year paint a different picture. Almost a quarter (23%) of businesses recorded losses at EBIT level in 2016. A third (34%) of companies achieved a positive but ultimately unsatisfactory EBIT margin of less than five percent in 2016. This contrasts with 2014, when only seven percent of companies were in the red and 23 percent achieved an EBIT margin of between zero and five percent. Smaller companies are being relatively harder hit, although the difference compared to medium-sized and large companies is not marked. «These figures are worrying,» says Swissmem President Hans Hess. «The bottom line is that two years after the euro peg was scrapped, 57% of companies generated either a zero margin or an unsatisfactory margin with which to invest in the future.» These findings clearly indicate that many companies, particularly SMEs, have still not overcome the shock of the strong franc. To make things even more difficult, the Swiss franc has been steadily appreciating against the euro over the last few months.

 

Structural change continues

The difficulties experienced by MEM businesses are also affecting employee levels. At the end of 2016, the MEM industries employed 317,600 people. Over the last two years, a total of 12,600 jobs has therefore been lost. Nevertheless, the number of job vacancies advertised by Swissmem member companies has been on the increase again since the start of 2016.

 

However, the process of accelerated structural change may well continue in 2017. According to the as yet unpublished «Swiss Manufacturing Survey» conducted by the Institute for Technology Management at the University of St Gallen, 46 percent of industrial companies are considering moving operations abroad within the next three years. The main reason for this is to reduce production costs. Apart from product and process innovation, this is the only way in which businesses can increase their profitability in Switzerland. This ties in with the assessment of those companies surveyed with regard to which jobs will be affected. They anticipate a decrease in production jobs and an increase in jobs in research, development and project management. 

 

Better conditions needed more desperately than ever

How things develop for the MEM sector going forward will depend largely on exchange rates – especially with the euro – and business trends in the key markets. In the short term, only a franc that is weaker against the euro will be able to ease the difficult earnings position being experienced by many companies. In the medium and long term, process and product innovations may well steer the sector towards a long-term growth trajectory. But to achieve this, companies will first have to generate sufficient margins once again.

 

Policymakers could support Swiss industry on a long-term basis if they actively improved the economic and political environment. Specifically companies need some of the pressure taking off their costs, but there is little sign of this happening at the moment.

  • Rejecting the third series of corporate tax reforms, which would have benefited innovative SMEs in the MEM sector in particular, was a lost opportunity. Swissmem welcomes the Federal Council’s move to submit a modified tax reform package quickly. However, the first priority of this new package must still be to strengthen Switzerland as a business location and to maintain corporate tax at an internationally competitive level.
  • «Energy Strategy 2050» is creating new costs while failing to guarantee supplies throughout the winter. Swissmem is therefore opposing the new energy law that is being put to the vote on 21 May 2017.
  • While the «Pension Provision 2020» package is important and essential as a way of overhauling old-age pensions, it is crucial for industry that parliament find a solution that does not entail substantial additional costs for companies.

Last but not least, continued uncertainty surrounding Switzerland’s future relationship with the EU is adversely affecting the country’s investment climate. It is now time for calm to return to domestic politics. This is why Swissmem is opposed to both the RASA («Get out of this blind alley. Don't reintroduce immigration quotas!») initiative and mass immigration initiative referendum. The authorities and business must ensure that the mass immigration measures adopted by parliament control immigration by suitable means and exploit the pool of skilled labour available in Switzerland to the full.

  

Attachements:

Press diagram

 

For further information please contact:

Ivo Zimmermann, Head of Communications

Tel. +41 44 384 48 50 / Mobile +41 79 580 04 84

E-mail i.zimmermannanti spam bot@swissmemanti spam bot.ch

 

Philippe Cordonier, Communications Manager, French-speaking Switzerland

Tel. +41 21 613 35 85 / Mobile +41 79 644 46 77

E-mail p.cordonieranti spam bot@swissmemanti spam bot.ch


Contact

Ivo Zimmermann

Head of Communications

 

Telephone +41 44 384 48 50

Mobile +41 79 580 04 84

i.zimmermannanti spam bot@swissmemanti spam bot.ch