December 2, 2016 / 2:37 PM / 8 months ago

Swiss industry still being squeezed by currency shock

5 Min Read

ZURICH, Dec 2 (Reuters) - Two years after the Swiss franc shock brought Switzerland to the brink of recession, Roland Goethe is still fighting for the future of the sheet metal company his grandfather set up 86 years ago.

Goethe AG is one of many manufacturers coping with the aftermath of the Swiss National Bank's decision in January 2015 to scrap a long-standing limit on the franc against the euro.

The decision rocked currency markets and sent the franc rocketing against the euro, the currency of Switzerland's main export market. Swiss economic growth slowed to 0.8 percent in 2015, its lowest since the financial crisis year of 2009.

While Switzerland's overall economy has in some parts started to recover, many small and mid-sized manufacturers are still struggling with falling sales and profit margins.

"We've been battling the strong franc for years," said Goethe, whose company makes metal components for air conditioning units, lighting installations and machine tools.

"But it was really was a shock when it went to 1-1 versus the euro last year. We can struggle through at the moment ... but the situation is bitterly difficult."

The strong franc not only hurts companies now but also reduces their ability to invest in technology to improve competitiveness.

"We are not earning enough to invest in the future," Goethe added. "Trends like digitalisation, robotics, intelligent manufacturing are passing us by nearly untouched."

Swiss companies have lost sales as customers chose to buy products from the cheaper euro zone, while some have shifted operations abroad.

Margins tumbled when they cut prices to remain competitive, while the franc's rise has meant they earn less in francs from euro-denominated sales.

Goethe's sales fell by a fifth last year as it cut prices to limit lost orders, while its profit margin has shrivelled to 3 percent.

"This year hasn't improved," said Goethe. "If it stays like this, there will be major problems for not just us, but for many companies across Switzerland."

A study by industry association SwissMechanic revealed half of the companies surveyed said earnings were unsatisfactory, while a third said they were not making enough sales.

Swissmem, another trade association, reported that sales in the first nine months of 2016 were down 3.4 percent from last year's already low figures.

"Many businesses - particularly SMEs - are having to contend with heavy pressure on their prices and margins," said Swissmem head Peter Dietrich. "A number of these companies are fighting for survival."

Although the Swiss economy is forecast to grow 1.6 percent this year, double last year's rate, industry has lagged behind.

"Much of the growth has been driven by pharmaceutical exports and improvements in the consumer-orientated services like education and health," said Jan-Egbert Sturm, director of the KOF research institute at the Federal Institute of Technology.

"Many parts of manufacturing will continue to struggle."

KOF forecasts that industry will contribute 0.6 percentage points to GDP growth in 2016, falling to 0.2 percentage points in both 2017 and 2018.

Traditional manufacturing companies are among the last to recover because unlike the pharmaceuticals and medical technology sectors, their products are often highly price-sensitive, said Credit Suisse economist Oliver Adler.

"There is a restructuring under way in the Swiss economy, with small manufacturers the ones most damaged by the franc's increase in value," he said.

Companies are responding by developing new products and seeking new markets so they depend less on the euro zone.

Maprox, a maker of specialised "chuck" clamps used in the watch, medical, optical and automotive industry, said there are only two ways to survive - globalisation and innovation.

It is seeking new clients in China, Russia and Iran, and trying to increase orders in the medical and aerospace sectors.

"Making a chuck may not be rocket science, but we can develop them and make better and more individual ones," said managing director Adrian Zwirner.

It can now make an 800mm diameter chuck from aluminium, weighing less than a third of the 50 kg steel version and thus easier to use.

Tecnopinz, which makes components for machine tools, has increased its emphasis on smaller production volumes and advising clients on projects.

"You have to compensate with new projects - doing smaller batches of more complex projects, which need more know-how and development," said co-owner Nicola Tettamanti. "You can't afford to stand still."

Editing by Catherine Evans

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