Home News MEM industries: pressure on margins persists
Contact Person  Ivo Zimmermann Ivo Zimmermann
Head of Unit
+41 44 384 48 50 +41 44 384 48 50 i.zimmermannnoSpam@swissmem.ch

MEM industries: pressure on margins persists

The Swiss mechanical and electrical engineering industries (MEM industries) grew new orders and exports during the first quarter of 2011. However, sales lagged behind by a considerable amount. The strong Swiss franc is exerting pressure on export prices – sometimes hugely so – thereby squeezing companies’ margins. Swissmem fears that the negative effects of the strong franc on Switzerland as a centre of industry and research will intensify during the year.

Demand for the products manufactured by the MEM industries progressed very well during the first quarter. In the first three months of 2011, new orders for Swissmem's 290 reporting members were up 27.3% on the year-back period (domestic +39.5%, foreign 24.1%). However, this leap forwards reflects a very low baseline, as new orders in the prior-year quarter were more than 30% below pre-crisis levels.

Compared to new orders, however, sales rose by a perceptibly more modest amount,increasing just 2.7% on the first quarter of 2010, and still languishing 18% below pre-crisis levels. According to figures published by the Swiss Directorate General of Customs, exports by the MEM industries rose 11.1% in the first quarter of 2011. Once again Asia (+27.3%) and particularly China (+73.5%) stand out. Exports to the EU, the destination for over 60% of the products manufactured by the MEM industries, were up a modest 6% by comparison.

This trend has also impacted on capacity utilization, which rose to 91.4%, significantly ahead of the previous year (76.6%) and the long-term average (86.1%).

Strong franc exerting pressure on margins
The positive global business environment continued to stimulate the recovery in demand for the MEM industries’ products. Nevertheless, the strong Swiss franc weighed heavily on sentiment. Swissmem has found extensive evidence that pressure on export prices and thus on companies’ margins is high. The Swiss Directorate General of Customs’ most recent statistics confirm the substantial price reductions that have been made over the last three quarters. The decline in the value of the US dollar since the beginning of the year has further depressed earnings. Moreover, the current uncertainties in the euro zone raise little prospect of an improvement in the exchange rate situation over the next few months. This will not reduce pressure on margins.

Current measures no longer adequate
The MEM industries responded to the strength of the franc last year, purchasing more inputs in the euro zone and employing various currency hedging instruments. Rigorous product cost management and efficiency enhancements are further measures that are often adopted to soften the negative impact of the franc’s strength. However, all these measures are not always adequate to safeguard competitiveness in the long term.

To remain internationally competitive our companies have to use innovation to differentiate themselves from rival suppliers. But innovation does not just happen overnight, and Swissmem is worried that companies will be forced to adopt drastic measures such as relocating production abroad and reducing headcount in Switzerland. For several months now Swissmem has been noticing that investments in new or replacement equipment are increasingly being made abroad. This is a trend that the government should take into account.

Groundbreaking political discussions in election year
The MEM industries generate 9% of GDP and employ around 330,000 people. As such they are a cornerstone of the Swiss economy. Swissmem is following current political debates with great concern.

1.    Under no circumstances must freedom of movement be restricted. Innovation is only possible with outstanding, skilled staff members at all levels. Skilled staff are becoming increasingly scarce. If companies are no longer able to find the people they need in Switzerland, they must have the option of recruiting them abroad.

2.    Industry is reliant on a dependable, uninterrupted electricity supply. A thorough review needs to be undertaken to assess the options for safeguarding power supplies in the long term. This means avoiding hasty energy-policy decisions.

3.    Switzerland holds top positions in the pertinent global innovation rankings. However, it is too seldom successful in transforming this huge potential into marketable products. Knowledge and technology transfer from the Swiss Federal Institutes of Technology, universities of applied science and research institutes to companies must be intensified. The Commission for Technology and Innovation (CTI) should therefore be awarded 50 million francs in extra resources in 2012.

Zurich, 24 May 2011

For further information, please contact:
Ivo Zimmermann, Head of Communications
Tel.: +41 (0)44 384 48 50 / mobile: +41 (0)79 580 04 84
E-mail: i.zimmermannnoSpam@swissmem.ch