Photographer: Valentin Flauraud/Bloomberg

Strong Franc Chokes Swiss Manufacturers Fighting for Life

  • Economists see disappearance of one-third of industry jobs
  • Expiring foreign exchange hedges leave companies without cover

Nestled on the banks of Lake Zurich, humidifier-maker Condair AG’s factory provided a good living for its 41 workers. Then in November 2014, beset by high manufacturing costs, the company decided to transfer production to Germany. In seven months, Condair’s only Swiss plant will wind down for good.

When the Swiss National Bank a year ago Friday lifted the cap on the franc, allowing the currency to strengthen, it confirmed the company’s decision -- and its view that the Alpine nation can’t compete in manufacturing. In 2012, the most recent year available, Switzerland had the highest labor costs in Europe, at 51.25 euros ($56) per hour, government figures show. In neighbors Austria, Germany and France, the comparable cost was 29.75 euros, 30.50 euros and 34.25 euros respectively.

“The discussion now ought to be whether Switzerland can afford de-industrialization and sacrificing the real economy,” Condair Chief Executive Officer Oliver Zimmerman said from headquarters in the canton of Schwyz. With most sales in euro countries, it made sense to match production to currency, he said. About 95 percent of Condair’s goods manufactured locally are exported, with about two-thirds destined for the European Union.

A year after the SNB abandoned its limit, set at 1.20 francs per euro, the currency is 10 percent higher against the euro. It rose as much as 41 percent after the move. The SNB argued the risks in sustaining the cap were out of proportion to its benefit to the economy. A stronger franc raises the cost of Swiss-made products elsewhere.

Falling Orders

The effect is showing up in new orders received by the Swiss mechanical and electrical engineering industries. They fell 12.8 percent in the third quarter of 2015 compared with the same period the year before, according to industry group Swissmem. That marked the fourth consecutive quarter of declining new orders in the sector.

As profit margins are squeezed and production facilities close, many Swiss companies, such as textile-machinery maker Rieter Holding AG and chemical company Lonza Group AG, have cut jobs in the past year. That’s likely to continue, according to economists at Credit Suisse. They predict a loss of 140,000 industry jobs by 2040 -- about a third of the total industrial workforce in 2014.

“I don’t see any growth drivers on the horizon for the industry in Switzerland," Credit Suisse economist Claude Maurer said by phone. "That means jobs will have to go or to be transferred to other countries.”

Not all sectors are suffering, and the outlook for the whole economy is brighter. While the pace of economic growth halved in the aftermath of the SNB’s move, Switzerland dodged a recession. The SNB expects expansion of “just under” 1 percent in 2015 and an acceleration to 1.5 percent this year.

“It will not lead to the de-industrialization of Switzerland but it will be a painful structural change,” Hans Hess, president of Swissmem, said at an event for business school alumni in Zurich on Thursday.

The seasonally adjusted unemployment rate has risen to 3.4 percent from 3.2 percent since the cap was removed, according to official statistics. The Credit Suisse economists expect it to average 3.7 percent in 2016.

As other companies, such as machine-maker Schweiter Technologies AG, follow in the steps of Condair and move manufacturing abroad, business leaders in addition to Zimmerman have started raising concerns that the industrial landscape of Switzerland could disappear entirely. Swatch Group AG Chief Executive Officer Nick Hayekin May  described the Swiss central bank as weak and warned Switzerland was “losing the richness of this country to make products.”

Making matters worse this year will be the expiration of short-term currency hedging that may have helped some Swiss companies weather the strong franc so far.

Hedging End

“There is no hedge left that predates the SNB’s removal of the cap,” Rene Grieder, chief financial officer at radiator-maker Zehnder Group AG, said in a telephone interview. “You have to accept a different foreign-exchange environment compared with last year.”

Started more than a century ago by Swiss mechanic Jakob Zehnder, the company said in June it would reduce working hours, cut jobs by 10 percent and move production to the euro region to relieve pressure on margins.

“We have to learn to live with this situation and optimize our structure continuously to make sure we are competitive enough with companies abroad,” Grieder said.

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