Home News MEM industries: seriously affected by strong franc
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: seriously affected by strong franc

In the aftermath of 15 January 2015 (removal of the EUR/CHF floor by the Swiss National Bank), companies in Switzerland’s mechanical and electrical engineering industries (MEM industries) acted swiftly and initiated a considerable number of measures to mitigate the impact of the strong franc. Even so, the franc’s massive over-valuation is having serious effects. New orders and sales in the MEM industries declined markedly in the first half of 2015 compared with the prior-year period. Over half of MEM companies are grappling with sharp and in some cases significant declines in margins. More than one third of them are expecting to make an operating loss in 2015. The countermeasures adopted by the companies are focusing primarily on initiatives to optimize products and processes. However, 18% of MEM businesses are planning to relocate at least some sections of their manufacturing operations to other countries if the exchange rate remains around CHF 1.05 to the euro. With a catalogue of specific measures, Swissmem is calling on policymakers to take immediate action to bolster Switzerland's attractiveness as a centre of industry.

This year, Swissmem has carried out two surveys of its member companies on the impact of the franc's massive over-valuation. The results of the June survey, which was conducted with support from consulting firm Deloitte Schweiz, largely confirm those of the February survey. Over 400 companies participated in the survey, allowing us to gain a clear and representative overview of the current situation. 

The currency shock of 15 January 2015 compelled the companies in Switzerland’s mechanical and electrical engineering industries (MEM industries) to take immediate action. More than two thirds (69%) of them lowered their prices in the first half of 2015 in order to contain imminent losses of orders. One striking feature has been the almost universal adoption of “natural hedging”, in other words the transfer of cost pools into euros. Measures along these lines have been implemented by 77% of the companies. Aside from that, most businesses are focusing on product and process optimization. This includes general efficiency enhancements and rigorous product cost management (70% of businesses). In addition, almost two thirds of the companies (63%) are stepping up their investment in innovation. 

Despite this prompt action, the negative repercussions of the strong franc for the MEM companies are extensive: almost two thirds of firms (64%) are expecting sales to drop by between 5% and 20% in 2015. Erosion of margins – in some cases severe – is placing a much heavier burden on companies: 52% of MEM companies expect their margins to have fallen by between 4 and 15 percentage points. In view of these losses, it is not surprising that 35% of the surveyed companies are expecting an operating loss for 2015.  

First half 2015: slump in new orders and sales 

The operating results posted by the MEM companies for the first half of 2015 confirm the fears expressed in the survey. New orders fell by 14.7% year-on-year. Both the first (-17.1%) and second quarters (-12.3%) contributed to this substantial decline. This brought the index of new orders down to its second-lowest level in the last ten years. Sales by the MEM industries dwindled by 7.1% (Q1: -8.1%/Q2: -6.2%) by the end of June 2015 compared with the first half of 2014. Falling sales and orders are affecting large companies and SMEs to a similar degree. The fall in new orders is having an increasing impact on firms' capacity utilization, which has declined almost continuously over the course of the year: in July 2015 it stood at 87.1%, i.e. only just above the long-term average of 86.3%.   

Exports: growth to Asia and the USA – decline in the EU  

According to figures from the Swiss Customs Administration, exports by the MEM industries collectively fell by 2.2% year-on-year in the first half of 2015. Total merchandise value was CHF 31.6 billion. The key sales regions showed very mixed developments. Exports to Asia (+5.3%) and the USA (+11.4%) grew strongly in some areas. However, this pleasing trend was not enough to offset the decline in exports to the EU (-5.2%), by far the most important of the export markets. Looking at individual product segments, mechanical engineering exports fell by 5.4%, electrical and electronics exports by 5.0%, and metal industry exports by 4.2%. The only slight rise in exports was recorded by the precision instruments sector (+0.6%). 

A challenging adjustment process – but not a catastrophe

The expectations of MEM industry players for the coming 12 months are correspondingly subdued. In the latest survey of member companies, held in July 2015, just 28.1% of respondents said they were expecting more orders from abroad. Exactly the same percentage are expecting a decline in orders. Even so, the optimists' contingent has grown slightly compared to the April 2015 survey, and the pessimists' camp has shrunk a little. The Swiss franc's slight weakening in recent weeks is certainly a positive sign and a help to businesses. Nevertheless, it remains overvalued. In order to achieve a lasting improvement in the situation for the MEM industries, the franc would need to see a significant and above all sustained weakening. 

Swissmem expects the franc's strength to leave a definite mark on the MEM industries. Based on industry figures, Swissmem is predicting that short-time working and restructuring measures in the MEM sector will increase in the second half of this year. At an exchange rate of CHF 1.05 to the euro, 18% of MEM companies deem it imperative to relocate at least some sections of their manufacturing operations to other countries. If these relocation decisions are actually taken forward, they will result in substantial job losses in Switzerland's industrial sector.

Nonetheless, Swiss industry will not go under. Companies are taking action, and the majority will find solutions – even if not all of these can be realized within Switzerland. In order to strengthen the sector's international competitiveness, Swissmem and three other associations have come together to launch the "Industry 2025" initiative. Its aim is to facilitate companies' access to the digitization and networking approaches of "Industry 4.0". These approaches harbour enormous potential for productivity and efficiency gains and pave the way for new business models. And last but not least, Swissmem is pursuing a long-term, vigorous campaign for the retention of the bilateral agreements. This set of agreements is crucial to the attractiveness and competitiveness of Swiss industry, and is thus indispensable for the MEM industries.

It is high time that government, too, starts doing its part to support Switzerland as a location for industry and employment. Above all, it must stop imposing more and more new regulations and costs on businesses. Examples of this are to be found especially in energy policy, the "green economy" bill and the implementation of the "Swissness" rules. Swissmem has drawn up a catalogue of specific measures addressing the most burning political issues (www.swissmem.ch/frankenstaerke) and expects policymakers to implement them swiftly. 

Zurich, 19 August 2015

For further information, please contact:

Ivo Zimmermann, Head of Communications 

Phone: +41 (0)44 384 48 50 / mobile: +41 (0)79 580 04 84

E-mail: i.zimmermannnoSpam@swissmem.ch

Philippe Cordonier, Communications Manager, French-speaking Switzerland

Phone: +41 (0)21 613 35 85

Mobile: +41 (0)79 644 46 77

E-mail: p.cordoniernoSpam@swissmem.ch