Managing the volatility of raw material prices, changing the manufacturing footprint, lack of qualified engineers, accessing China and India. In Switzerland, the strength and volatility of the Swiss franc drive a number of other issues such as: lack of competitively-priced products, need for increased innovation and increased productivity of the work force.
The industry sector must continue to invest in innovation, not only in products, but also in work practices, processes and systems. That’s why many Swiss companies are moving their manufacturing base outside of Switzerland. The large global groups have already done this to a great extent, the mid-size Swiss players will continue this trend.
Procurement can also play a key role. By investing in deeper relationships with a limited number of suppliers, industrial companies can negotiate better terms and increase quality. There is a flip side, however. By limiting the number of suppliers, industrial companies run a greater risk should one of the suppliers suddenly no longer be able to deliver. This could drive companies to maintain larger inventories as a kind of insurance against this risk, which, in turn, ties up valuable liquidity and reduces the level of investments which Swiss companies can make. Managing this balancing act is critical.
All low value-add production processes are slowly being shifted outside of Switzerland. But this does not necessarily mean moving to India or China – which are culturally very challenging. There is enough arbitrage available by “near-sourcing” production to Germany, Poland or the like. Near-sourcing is much less risky and arguably more sustainable than outsourcing to far away regions of the world.
Swiss companies will also need to consider outsourcing the production of lower value-added components. At present, they consider control over the production process as a core skill which needs to be maintained in-house. Finding ways to work with outsource providers, while still maintaining quality and timeliness of delivery, will be key for success in the future.
Using financial engineering e.g. forward contracts can only help temporarily, i.e. for projects where the margin needs to be guaranteed. In the long run, the only way to manage this risk is by passing it on to customers one to one. At present, many Swiss companies do this; however, the time lag for adjusting the input price fluctuations to end customers reflects out-dated market conditions. Ideally, contracts need to be revised to allow movements in raw material prices to be passed through on a real-time basis. This will require investments in technology, systems and processes, which can be interlinked with suppliers and customers, which will allow companies to handle this kind of information on a real-time basis.
Switzerland can only survive if it continues to invest heavily in innovation. “Swiss-made“ is key to maintaining margins. Innovation only happens if the work force continues to be at the top of its game internationally. Coming back to what I’ve said before regarding outsourcing of lower value-added components, it is clear that what we must concentrate on areas which deliver a very high value add and new disruptive technologies, which translates into higher sustainable margins. Schools like the ETH Zurich are key and we cannot afford to cut off the funding of these schools. This would be a disaster for Switzerland in 10 – 15 years.
Right now, Swiss companies can be proud of the amount that they invest in R&D. However, the pressure is growing very strongly to begin to cut back on these budgets. This would be a disaster for Swiss industrial companies, which must continue to innovate in order to remain competitive.
One way to support such innovation would be with tax incentives. The direct subventions by the «Kommission für Technologie und Innovation (KTI)» are helpful in the very short term. But they also represent a type of industrial policy which may not be sustainable in the long-term. Therefore, it would be better to allow Swiss companies to deduct the cost of R&D from their tax bases. We recently conducted a joint study with the University of St. Gallen which demonstrates that tax incentives, if properly designed, would be particularly beneficial for small and medium sized companies which are struggling to achieve break-even due to the strong Swiss franc.
The free circulation of people into the country. Switzerland must be able to continue to bring in talent from outside of the country. Any limitations on this will be a real problem for Switzerland as the Swiss education system does not generate enough engineers and scientists. And – as past years have proven – a more foreign workforce has increased, not decreased, the number of new jobs.
Interview: Simone Glarner, Marketing & Communications