Currency Concerns Strong Franc Doesn't Dismay Swiss Business Leaders
The strong franc poses a serious threat to the export-driven Swiss economy. But the country's captains of industry remain bullish. How come they aren't more worried?
The odds were stacked against Peter Spuhler becoming a successful businessman. When he bought railway vehicle company Stadler Fahrzeuge AG from his mother-in-law in the late 1980s, the rail market had long been carved up between a couple of global players. Stadler was a tiny business with just 18 employees seeing annual revenue of some 2 million Swiss francs. The company's main factory was in Switzerland, which wasn't a low-cost production site even then.
These days, hourly wages are higher in the area between the cities of Basel and Chiasso than almost anywhere else in the world. Since the early 1990s, the value of the Swiss franc has soared by up to 73 percent against the dollar, deutsche mark and then the euro. Earlier this year, when the Swiss National Bank (SNB) caved in to pressure from the financial markets and gave up defending the exchange rate floor, the value of the franc jumped in minutes.
But Stadler Rail AG is withstanding the financial turbulence and enjoying unprecedented success: The company sells its railway vehicles manufactured in Bussnang, in eastern Switzerland, all over the world. Peter Spuhler has boosted turnover to 500 times what it was when he first took over and now has 6,000 employees.
He isn't wasting time worrying that the string Swiss franc means the good times could soon be over. "Obviously this steep rise wasn't something that I wanted," he says. "But we'll manage somehow." He pauses. "The world hasn't ended yet."
Similarities to West Germany
Spuhler might be optimistic but the collective mood that's been sweeping Switzerland in the last few months is a bleak one. Tourism has taken a hit, with even the Swiss opting to take their skiing vacations in neighboring Austria. Hiking tourists are likely to follow suit over the summer months. The retail sector in the country's border regions is no longer competitive given how much cheaper everything is in the euro zone. Exports are also down. With the Swiss economy shrinking in the first quarter, a recession can't be ruled out.
Clearly, the strong Swiss franc is doing lasting damage to the economy. Nevertheless, the wounds will most probably eventually heal. After all, Switzerland is used to dealing with a strong currency. Its resilience astonishes economists.
"The country has survived a soaring currency before, much better than anyone would have expected," says Jan-Egbert Sturm from the Swiss Federal Institute of Technology in ZÜrich (ETHZ). "The adaptability of the Swiss economy makes the country seem like an island of good fortune."
"The value of the franc has been rising steadily for decades," says Swiss-born Thomas Straubhaar, longstanding director of the Hamburg Institute of International Economics. It's forever being used to whip the economy into shape."
Anyone who delves into the mysteries of the Swiss economy will soon stumble across a number of similarities to West Germany. Back in the days of the deutsche mark, when German companies were constantly struggling with its rising value, they optimized domestic production, made sure to avoid too steep a hike in wages and shifted parts of the manufacturing process abroad. Stadler CEO Spuhler and his peers in Switzerland are employing exactly the same strategies.
Pragmatic, Flexible, Versatile
However, there are a few other reasons for Switzerland's invulnerability to the sharp rise in the value of its currency: Even though the country has four national languages, the glue that binds these communities is acute economic pragmatism. The labor market is therefore largely liberalized and the country has also long been benefiting from its hundreds of thousands of immigrants and commuters.
The Swiss economy is one of the most flexible and versatile in the world. Key to its success are not the banks but internationally competitive companies in sectors such as pharmaceuticals, luxury watches and precision machinery - sectors in which price plays only a secondary role. Then there are the many medium-sized companies specialized in good almost no one else is making -- at least, not as well. And definitely not as sweet-smelling. Who else produces screwdriver with handles that contains vanilla essence?
The trip to the manufacturing site of these fragrant screwdrivers leads through narrow lanes and snow-capped peaks to Wasen in the Canton of Bern. Eva Jaisli, who's been running the family business with her husband for nearly 20 years, offers her guests coffee and apologizes for the fact that they won't get to meet many employees on their tour of the factory. "Most of them live nearby so they go home for lunch," she says.
How does Jaisli do it? Her business sells mundane-seeming tools in over 70 countries but has them manufactured in a country where even unskilled workers earn over 4,000 francs ($4,300) a month and go home for lunch?
The answer is as simple as Jaisli's products. As CEO of PB Swiss Tools, she massively upped its productivity. She still employs the same number of staff as she did ten years ago, but revenue is up by 30 percent.
Machinery was updated and many steps in the manufacturing process were automated. Jaisli also scaled back administrative costs and invested in numerous new products. The PB Swiss Tools catalogue comprises 300 pages of tools, including highly-specialized instruments for operating theaters. The products come with a lifetime warranty on materials and manufacturing defects, which goes a long way toward justifying the price. And whenever military-look bicycling tools are all the rage in Japan, these hip designs are delivered there, too.
Jaisli is equally flexible faced with the strong Swiss franc. She's encouraging customers to keep paying for Swiss workmanship by offering a discount for those who pay in Swiss Francs -- which she calls the "Swiss Bonus." She's also looking to reduce costs. "We're always checking manufacturing processes to see how they can be optimized," says Jaisli. The staff at PB Swiss Tools now work 43-hour weeks -- 3 more than they used to. No one seems to mind. "Everyone immediately agreed that it was necessary," says the boss. And at least they still get to go home for lunch.
One of the peculiarities of Switzerland is that although political debate often revolves around the country's isolation on the international stage, the economy is traditionally fixated on export. With a population of just 8 million, the domestic market is a small one, given the wealth of production going on. The only way to achieve growth is to export.
Despite the sharp rise in the value of the Swiss franc, exports sales more than doubled between 1993 and 2013. Major companies in particular are reaping the benefits of globalization. While foreign companies now employ a mere 400,000 people in Switzerland, Swiss companies such as food and beverage company multinational Nestlé, pharmaceuticals giant Novartis and technology and engineering corporation ABB employ nearly 3 million employees outside Switzerland.
Less then 5 percent of the 140,000 people who work for ABB are based in Switzerland. In contrast to many German company headquarters, the ABB main office in Oerlikon, Zürich, is a modest operation. Indeed, everything about ABB's Swiss profile is what is called "lean management" in corporate speak.
No one embodies the principle better than Daniel Zeidler, friendly but so skinny that the pants of his suit are danger of slipping however tightly he fastens his belt. He's in charge of the production of generator switches, a department of 50. It used to take 20 days to make a generator switch. Now it takes two.
Is all this efficiency the result of hard work or are the employees just really eager beavers? Zeidler laughs. "Switzerland has never had any natural resources, it just has mountains and water," he says. A country is no different from a school kid who's smaller than everyone else, he says. "It has to go that extra mile." And be prepared to break with tradition.
ABB used to grapple with a problem facing many companies in Switzerland -- a general tendency to sweep things under the carpet; to avoid admitting there might be room for improvement. It amounts to conceding mistakes were made, says Zeidler. "You can't afford to be like that anymore," he says. Staff are now invited to suggest improvements by filling out forms available in the production halls, meticulously well-organized into boxes -- as befits Switzerland's reputation for orderliness. Footprint stickers on the floor are designed to demonstrate the best position for filling them out from.
But the truth is that while a company can gear everything toward maximum efficiency, Swiss wages are too high to make the manufacture of certain products viable. The company's traditional premises now house mainly offices and apartments. "We only make the absolute top products in Switzerland," says Zeidler.
Focusing on the high-end segment of a market only works because Switzerland's investment in research and development is almost unparalleled. Calculated according to economic performance, it amounts to over 3 percent, which is well over average investments in highly industrialized countries.
The state and businesses can afford this kind of generous spending because it doesn't pay for at least part of the training of their well-qualified workforce. Switzerland saves roughly I billion a year by importing thousands of doctors from abroad. Nine thousand Germans, for example, gained their qualification at home -- worth around I million of taxpayers' money -- but now work in the Swiss health system.
Every year sees about 100,000 people moving Switzerland. Many of them are German. Meanwhile, about 300,000 people commute to work in Switzerland every day from Italy, Austria, France and Germany.
Cardiologist and internist Jens Eckstein. Every day, he leaves his wife and three children and makes the half-hour train trip from Freiburg to Basel, along with hordes of other commuters. They know one another and say hello. The train's so crowded that not everyone gets a seat. Some 5,000 people from the Freiburg region alone cross the border to work in Switzerland every day.
Eckstein keeps a bike outside the station in Basel. It takes him ten minutes to reach his office on the sixth floor of the University Hospital, which boasts a view of the Rhine. It's an hour's journey, door-to-door.
What draws him across the border every day is not so much the attractive salary -- which got even more attractive since the Swiss franc jumped in value. What appeals to first and foremost is that "the terms are right." He has managerial responsibility and can research as much as he likes on everything from strokes to atrial fibrillation. He even has the time to develop apps and can decide himself what hours he wants to work.
"The added value here is the contented workers," says Eckstein. He looks out at the nearby Novartis grounds, including the sleek research campus which the pharmaceuticals giant built in the middle of Basel in recent years.
Well over half the workforce there hails from abroad and the company lavishes care and attention on them. Need an apartment? No problem. Looking for daycare for the kids? Done. Want to take a research project in a new direction? If it's viable, it's possible.
Attractive jobs, a creative atmosphere and plenty of freedom are all factors contributing to the popularity of Switzerland among international top talents. They combine to generate a unique economic dynamic: Switzerland has an unemployment rate of 3.5 percent, even though the population has risen by 25 percent in the last 30 years.
What the Public Wants
Even the unions are proud of the Swiss model. Corrado Pardini, the son of Italian immigrants, sits on the National Council and is the managing director of Unia, Switzerland's largest trade union. With his slicked-back hair, jaunty scarf and stylish suit, he's not your typical labor leader.
Pardini knows that economic success can be fleeting, regardless of the value of the Swiss franc.
But he believes that stagnation would be the death of the Swiss economy. "We're not trying to save the boilerman's job on an electric train," he says. "What will save us will be developing high-value products, come what may."
For this reason, Pardini doesn't put up knee-jerk protest when companies like Stadler and PB Swiss Tools introduce longer working weeks or other businesses start paying part of their workers' salaries in euros.
His brand of pragmatism might look suspiciously like neo-liberalism to some German labor leaders. But it's rooted in recognition of the fact that it's exactly what the Swiss public wants. A 2012 referendum on raising holiday entitlement from four to six weeks failed miserably.
This love of work makes Switzerland so competitive that even those fuelling the Swiss economic miracle are taken aback. Peter Spuhler, CEO of Stadler, recently calculated the unit labor costs in his companies sites in Switzerland and Germany, primarily in order to see how much more expensive the former is, given that wages are twice as high.
But what emerged was that Swiss workers aren't actually more expensive at all. They compensate for their higher wages by working 400 more hours a year than their German counterparts.