The lockdown enacted almost worldwide over the course of the coronavirus pandemic is having a monumental impact on the Swiss MEM industries. In the second quarter of 2020, new orders fell on average by 19.5% compared with the prior-year period. Over the entire first six months of the year, new orders declined by 10.2%. A similar picture is becoming apparent for sales, which nosedived by 19.7% year-on-year in the second quarter of 2020. Over the entire first half of the year they fell by 12.9%. On average, large companies and SMEs experienced the same slump. Having said that, the impact on individual firms is varying considerably depending on market segment.
The negative business trend is also affecting companies' capacity utilization; at 80.9% in the second quarter of 2020, it was significantly below the long-term average of 86.4%. According to the latest KOF business tendency survey, it was down to 77% in July, taking capacity utilization back to the level of the 2009 financial crisis.
In the second quarter of 2020, 319,600 people were employed in the MEM industries. This was 3,200 fewer than in the first quarter. The main reason, however, was that the situation at MEM companies was already tense even before the lockdown, with the result that they had started eliminating jobs. In the next few months, the pandemic will undoubtedly have further repercussions on the size of the MEM industry workforce.
In the first half of 2020, goods exports by the MEM industries reached a value of CHF 28.9 billion, 16.4% below the figure for the first half of 2019. In the second quarter alone, exports fell by 24.6% compared with the prior-year period. In regional terms, exports to the EU declined by 18.5% in the first half of the year, those to the USA by 15.4%, and those to Asia by 10.6%. All key groups were affected by the downturn, though to very different degrees. Exports in the mechanical engineering sector fell by 17.0% (and by no less than 34.2% in the machine tools sector alone), metals were down 16.4%, precision instruments by 13.7%, and electrical engineering and electronics by 11.9%.
Stabilization at a low level
Even before the coronavirus pandemic, the situation in the MEM industries was tense. The repercussions of the lockdown have massively amplified the negative trend. Since the trend reversal in 2018, new orders in the MEM industries have now already deteriorated in eight consecutive quarters. How dramatic the slump is turning out to be overall is shown by the index level for new orders: Since mid-2018, the industry has lost 35.1% of its order volume. With regard to foreign orders, which currently make up 75% of the total, the volume is currently a full 42.6% lower than in mid-2018. Further compounding the situation, the euro remains significantly undervalued against the Swiss franc. Recently – in the last three months – the US dollar has also taken a tumble against the franc. Both of these situations are putting heavy pressure on company margins.
The short-term outlook leaves little room for optimism and is characterized by great uncertainty. True, the proportion of MEM business owners expecting rising orders from abroad in the next 12 months has increased from 10% in the first quarter to, most recently, 22%. On the other hand, 51% of business owners still fear a further deterioration in the order situation (Q1/2020: 70%).
One glimmer of hope is offered by the purchasing manager index (PMI), which has somewhat recovered across the industry worldwide. After the dramatic collapse in spring, the current PMI values primarily signify a stabilization at a low level. As yet, they do not promise any great growth momentum. Swissmem Director Stefan Brupbacher is deeply concerned: “The situation in the Swiss MEM industries looks bleak, and there is great uncertainty in many of its target markets. A gradual recovery for the majority of businesses is expected to come only next year. What form the recovery will take is likely to differ significantly depending on baseline situation, target markets and segments. Businesses are thus being forced to adjust their cost base to the new realities. Consequently, we fear significant job losses over the next 12 months.”
As the coronavirus pandemic unfolds, the resilience of supply chains is gaining additional importance. Industrial companies are currently reviewing this worldwide. Here, the Swiss MEM industries have an important ace up their sleeves. They have demonstrated that they can apply the coronavirus protection concepts consistently. This knowledge must be taken into account in any discussions on countermeasures in the event of rising case numbers. Stefan Brupbacher comments: “A clear commitment from the Swiss Confederation and cantons that industrial companies here can continue to operate even in the event of a renewed escalation of the coronavirus pandemic will be heard internationally. This strengthens both our businesses and the Swiss economy in the ongoing review of international supply chains.”
The solution: openness and new free trade agreements
The Swiss MEM companies have ridden out a number of crises in the past few years. To allow them to do so once again, trade policy – among other things – must be set to the right course. The current frequent demands for reshoring of production activities relocated abroad and for preferential treatment for domestic products would be the wrong way to go for the export-oriented Swiss industries and various other sectors. The Swiss domestic market is far too small to secure a future and an income for the MEM companies with more than 320,000 employees. Swissmem President Hans Hess is convinced: “The only way to ensure prosperity and jobs in Switzerland is sustainable success on the world markets. Switzerland must therefore remain open and globally networked.”
With free trade agreements (FTAs), additional market opportunities can be created for the MEM industries. A study by BAK Economics, commissioned by Swissmem, on all FTAs negotiated by Switzerland concludes that four years after an FTA comes into effect, cumulative MEM exports are 19% higher than they would if no agreement were in place. This proves that FTAs contribute substantially to generating added value and jobs in the MEM industries.
With Indonesia and Mercosur, we have two fully negotiated FTAs on the table. Moreover, negotiations are open with India and other Southeast Asian countries. Here we need to make a special effort to bring deals within reach as soon as possible. Subsequent to this, everything possible should be done to allow us to enter into negotiations with the USA. Sadly, the agreement with Indonesia will now be subject to a referendum, with another being announced in opposition to the FTA with Mercosur. Swissmem will be fighting vehemently in favour of these agreements in the referendum campaigns.