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Crisis-Proof Swiss Export Industry – Ready to Meet Future Challenges?

New Credit Suisse Study on Swiss Export Industry

Although the Swiss export industry suffered badly during the recent recession, it has recovered fast when compared to its international peers. The relatively low cyclical nature of the sector portfolio proved to be a success factor. The majority of the exporting companies are well-positioned in the medium term, as shown by the economists of Credit Suisse in their latest study on the Swiss export industry. The central sectors in Swiss foreign trade such as the pharmaceutical, machine, and watch industries follow a strategy focusing heavily on quality, which assures them of success against their international competitors. The current strength of the Swiss franc hardly affects these goods, and it is also clear that demand for Swiss exports will depend much more strongly in the short term on the global economy than on the exchange rate. The growing trend from a tripolar to a multipolar world will increasingly determine the agenda of Swiss exporters in the future.

As Switzerland nowadays earns more than one in two Swiss francs abroad, foreign trade plays a central role in our prosperity. In-depth knowledge of the Swiss export industry therefore provides us with important and valuable insights. The latest study by Credit Suisse analyzes the importance of Swiss exports for the national economy and examines the structure of the sector portfolio, the focus on quality by most of the Swiss producers, and the geographic diversification applied by the different sectors. The study also looks at the medium- to long-term opportunities and risks facing the Swiss export industry.

Key Importance of Swiss Exports for National Prosperity
In the past 20 years, the export of goods and services has played a key role in the prosperity enjoyed by Switzerland. Without exports, the gross domestic product would have shrunk between 1990 and 2010, but foreign demand supported economic growth of 1.5% per year on average. More than half of Switzerland's goods are exported to the EU-15 countries, i.e. the member countries of the European Union prior to its eastward expansion. Accounting for almost 20 percent of Swiss exports, Germany is Switzerland's most important trading partner. In recent years, the BRIC countries (Brazil, Russia, India, and China) have also gained in importance, and nowadays every tenth export franc is earned in one of these four newly industrialized countries, making the BRIC countries slightly more important than even the US.

Low Volatility of Swiss Exports
The Swiss export sector's portfolio is less volatile than those of Germany, France, Italy, the UK, and the US, and this helped Swiss goods exports to weather the turbulence of the recent recession better than most. This below-average volatility is mainly the result of the high weighting of the weakly cyclical pharmaceutical industry and the small share of vehicle manufacturing in the Swiss export industry.

Focus on High Quality Is a Recipe for Success in Most Swiss Export Sectors
The Credit Suisse economists reveal in their study that most Swiss exporters compete on quality rather than price. The analysis of competitive strength shows that the focus on quality is the right strategy. Swiss products are generally more expensive, but their quality justifies the higher price. Swiss producers trying to compete on price are seldom successful. Quality leadership, however, must be constantly defended and reinvented.

Lagging Behind in Geographical Diversification
Swiss exporters still have room for improvement as regards geographical diversification. Although the latest study shows that all Swiss sectors are better diversified than the average for the OECD countries, they are still lagging behind our big neighbors, as well as the UK and the US. The need to catch up is particularly great in the medical engineering and metal industries, while the pharma and watch industries boast better geographical diversification. Broad geographic diversification allows exporters to benefit from growth impulses in as many countries as possible and helps them to absorb currency fluctuations.

Multipolar World Leads to Changes in Swiss Export Portfolio
Riding the coattails of growing globalization, the emerging market economies are fast gaining in economic and political importance. The Credit Suisse analysts identify above-average growth potential for Swiss goods exports to the BRIC countries in particular. Apart from these countries, Southeast Asia and the Gulf countries also offer very attractive opportunites for Swiss exports. Although they report slower growth than the BRIC countries, the greater affluence in these countries is driving above-average growth in demand for Swiss products. Western Europe will become relatively less important in the future, but high export volumes mean that it will remain the backbone of the Swiss export industry.

Limited Impact of Strong Swiss Franc
In the recent past, many pundits warned of the negative consequences of a strong Swiss franc in the form of shrinking profit margins or contracting sales figures. However, as goods competing on quality are less elastic in price and the exchange rate plays a correspondingly subordinate role, the impact of the strong Swiss franc is likely to be low. In addition, short-term demand for Swiss export goods is substantially more dependent on the global economy than on the exchange rate. Price competitiveness, which is of immediate relevance for exporters competing on price, only becomes important in the medium to long term for companies competing on quality. Exporters are also far from helpless in the face of the strong franc, and are implementing measures to improve output or reduce costs which are likely to take effect in the medium to long term. According to a survey by Credit Suisse, most companies react by making their purchases in foreign currencies, investing in opening up new markets, and applying natural hedging practices.