Patek Philippe Poised to Unwind as Swiss Franc Breaks Out of Euro’s Orbit
Silvy Gillhausen, a saleswoman at the Zett Meyer watch store on Zurich’s Bahnhofstrasse, senses trouble when clients from abroad pull out their phones.
“Some customers come in with prices saved in their cell phones to compare them with ours,” she said standing next to a display of IWC and Tag Heuer watches costing as much as 10,900 Swiss francs ($12,500). “Even when we give them 10 percent off, it’s still cheaper in their home country.”
The franc’s 24 percent surge against the euro in the past two years is giving Swiss companies an unprecedented headache as higher prices for products from watches to chocolate make consumers look for better deals in Germany or the U.S. The Swiss National Bank abandoned attempts to stop the currency’s appreciation that led to a 19.2 billion-franc loss in 2010.
Almost half of the corporate executives surveyed by the SNB said in January and February that they “experienced negative effects” from the franc. Machinery makers are most at risk because of “greatly reduced profit margins,” according to the SNB. While global leaders such as Nestle SA (NESN), the world’s biggest food conglomerate, can mitigate losses by moving production abroad, smaller concerns are running out of options to cut costs and maintain margins.
“It’s a dangerous situation because there’s really nothing we can do,” said Peter Widmer, president of Swiss Export, the Zurich-based lobbying group that represents exporting companies.
Thierry Stern, the chairman of watchmaker Patek Philippe SA, said in March that his home nation may be better off adopting the euro as the franc’s appreciation hurts earnings.
“It’s a nightmare for everybody,” Stern said in an interview. “We have to adapt.”
The franc is the best-performing major currency this year relative to the dollar and euro as it’s perceived by investors as a safe haven from debt-laden nations such as Greece, Ireland and Portugal, which required emergency financial rescues from the European Union in the past year. The franc rose 2.8 percent against the euro in 2011 and 9.8 percent against the dollar.
History shows the strong currency may hurt the Swiss economy as a 10 percent increase in the real exchange rate is “usually linked to a 15 percent plunge in exports,” said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich. The franc’s appreciation has thus far had minimal effect on the nation’s gross domestic product as “most Swiss products are so specialized that there is little impact on exports,” he said.
Economists at UBS AG, Credit Suisse Group AG and the KOF research institute in Zurich agree with Poser.
Exports account for more than 50 percent of the Swiss economy, compared with 46 percent for Germany. The Alpine nation’s current-account surplus -- the broadest measure of trade because it includes investment -- may shrink to 11 percent of the economy this year from 14 percent in 2010, according to the median of nine estimates in a Bloomberg survey.
“If the franc appreciates by 10 percent, GDP growth is lowered by about 2 percentage points if one doesn’t factor in the positive effects,” said Urs Mueller, the chief economist at the BAKBasel institute in Basel. “The current impact though is lower because of the positive effects from lower interest rates and reduced import prices.”
Mopac AG, which makes packaging material for food companies, cut wages by about 10 percent for its 260 workers in February because of the franc. Salaries may be adjusted every three months depending on the exchange rate, said Hans Hartmann of the Unia trade union, which is representing employees in a complaint against the Wasen-based company in central Switzerland near Bern.
“Exchange-rate fluctuations are a risk that should be taken on by the company’s owner,” Hartmann said. “Companies should have reserves to bridge them in such phases.”
Mopac is offering to pay its pre-February wages if the euro-franc rate returns to 1.50, a level last seen in 2009, Chief Executive Officer Rainer Fuechslin said in an interview.
“If we hadn’t cut wages, we would have had to move our production to the euro zone,” Fuechslin said, adding that Mopac is the biggest employer in the Emmental region. “We did this for our employees.”
The franc traded at 1.2151 against the euro yesterday after touching a record 1.2102 on May 27. The currency reached a high of 84.65 centimes against the dollar the same day.
Cie. Financiere Richemont SA, the maker of Baume & Mercier, IWC and Cartier watches and jewelry, said May 19 that the rising franc reduced its profit margin. The company still plans to add as many as 1,800 jobs to satisfy demand from emerging markets, including China.
Sonova Holding AG, a Staefa-based maker of hearing aids, will put its earnings at risk rather than lower the wages of its research and production staff, said interim Chief Financial Officer Paul Thompson in an interview. The company’s “long-term view” will keep it in Switzerland, he said, adding that Sonova’s profit will be reduced by 60 million francs in fiscal 2012 unless exchange rates improve.
“If you have loads of euro sales and lots of Swiss franc costs, you’re getting killed,” Jon Cox, head of Swiss research at Kepler Capital Markets in Zurich, said in an interview.
While companies such as Nestle or chocolate producer Lindt & Spruengli AG (LISN) are able to offset pressure on margins because they have plants in the euro zone, converting euro sales reduces revenue in francs, he said.
OC Oerlikon Corp. AG, a textile machinery maker, gets about 65 percent of its revenue in euros, while the European currency accounts for about 60 percent of sales for Straumann Holding AG, a dental implant maker, Cox said.
Despite the strong franc, Swiss unemployment is at 3.1 percent, the lowest since February 2009, and leading economic indicators from the KOF research institute stayed at the highest in almost five years this month. In the euro zone, the jobless rate was 9.9 percent at the end of March.
The Swiss economy may expand 2.7 percent this year and 2.5 percent in 2012, the Organization for Economic Cooperation and Development said May 25. The euro-region economy may grow 2 percent this year and next, the Paris-based group said.
While concerns abound about “the negative consequences” of the franc, orders for machines and electrical equipment advanced 27 percent in the first quarter from a year earlier, industry association Swissmem said May 24.
“We concentrate our marketing on Switzerland rather than the European market,” said Juerg Zuercher, managing director of the Sunstar Parkhotel in Davos, which is operating with about 5 percent fewer employees.
Swiss overnight stays may drop 1.1 percent this year after increasing 1.8 percent in 2010, with the number of bookings by foreign guests declining 2.5 percent, the BAK Basel Economics research institute forecast.
When visitors do come, they often spend less. Architect Mauro Portela, 43, and lawyer Fred Ferreira, 25, from Brazil said they were surprised by the high prices in Switzerland.
“We didn’t know the differences between the prices in different countries in Europe,” said Portela, who traveled through Spain before coming to Switzerland. He may reconsider his original plan to buy a Cartier watch here.
“All of Europe is expensive, but especially Switzerland,” Portela said.
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