Economy

Industry has proven itself to be one of the strengths of the Swiss economy, along with the banking and watchmaking sectors Keystone

Introduction

In global terms Switzerland is a political lightweight, but as a trading nation the country is among the ranks of the medium-sized economies.

With no natural resources – except water from glaciers, lakes, and rivers – the Swiss economy is almost totally dependent on exports.

The abundance of water was at first used to drive textile mills. An immense quantity of water was also a prerequisite for the dyestuffs industry that was a forerunner of today’s pharmaceutical sector in Basel.

Apart from a few city states, there are probably no other countries whose prosperity depends so much on export industries.

The largest Swiss firms, for example in the pharmaceutical industry, can at best hope to sell two per cent of their output within Switzerland.

Pharmaceuticals are one of the major drivers of the Swiss economy. A study carried out in 2006 shows the direct economic impact of this industry, which is still combined with the chemical industry in most official statistics.

Pharmaceuticals are a major source of employment, productivity and value creation for Switzerland. At the time the study was performed, over 118,000 people were employed by companies active in the pharmaceutical companies. That represents an increase of 77 percent in 15 years.

The study also showed that employees in the pharmaceutical industry created an average value of SFr171 per hour – roughly three times the Swiss average.

Novartis is one of Switzerland’s largest exporters, accounting for about 11 per cent of total national net exports.

In 2008, Swiss exports totalled SFr206.7 billion, of which Novartis accounted for SFr23.6 billion.

Manufacturing

Technological advances in hydro-power generation led Swiss heavy engineering firms to build power stations, ships’ diesels and electric locomotives that were exported all over the world.

And it was the heavy snowfalls in the slack winter months that gave farmers the impulse to try their hand at making timepieces.

A watch is a good example of the added value concept that governs the Swiss economy. Mass production of cheap consumer goods is not an option for Swiss firms because it would call for massive imports of expensive raw materials whose net worth would not be significantly increased on export to competitive world markets.

The raw material cost of a watch sold for SFr100 or SFr3,000 does not vary very much. But the work that goes into designing, producing, and marketing the watch makes a huge difference.

The same applies to a tiny Swiss firm that produces lubrication fluid for watch movements. The raw material – oil – is refined to such an extent that the final product, which is sold at most by the glassful, is worth its weight in gold or caviar.

Although Switzerland has numerous major corporations – food giant Nestle, pharmaceutical companies Novartis and Roche, banks Credit Suisse and UBS, and insurers AXA Winterthur and Zurich Financial Services – these firms are not really representative of the country as a manufacturing nation.

SMEs or small and medium-sized enterprises employ 1.45 million people, around 70 per cent of all employees not working for state-run enterprises. Only about 750 companies have a workforce exceeding 300 people, but they account for 30 per cent of the total workforce.

It may come as a surprise to some but the State Secretariat for Economic Affairs in Bern reports that 99.6 per cent of all businesses in Switzerland are SMEs.

Engineering

Many of these firms are engaged in the electrical and mechanical engineering field, the number one manufacturing sector in Switzerland. The majority are extremely specialised and export orientated and usually produce goods such as precision machine tools or electronic apparatus which are not household names, but which are exported to mass-producing industries all over the world.

Swiss engineering factories account for over 40 per cent of the value of all exports. Their origins can be found in the mechanisation of textile production.

Swiss weaving and spinning machinery captured a large part of the world market, and even though textile production in Switzerland is in quantity terms negligible, specialised machinery – including electrical control apparatus – still has a major share of the world market. Swiss-designed machinery is also produced under licence in many parts of the world.

Until fairly recently, factories in Switzerland produced much heavy engineering equipment, ranging from Sulzer ships’ diesels to complete power stations, as well as some of the most powerful electric locomotives in the world. Even earlier, this country produced top-of-the range motorcars and trucks, which were widely exported.

The heaviest machinery has given way to even more specialised investment goods. Industries where Swiss companies are in the top five of world exporters include textile machines, paper and printing machinery, packaging, machine tools, and weighing and measuring equipment.

Many Swiss products are used in the motor industry around the world: for instance the small pyrotechnic detonators that inflate airbags after a collision, or sophisticated soundproofing sets.

Labour

Working hours in contrast to surrounding countries are long, with people working about 1,800 hours per person per year.

Public holidays are relatively sparse. The old age pension (AHV) begins at 64 for women and 65 for men.

When the federal constitution was introduced in revised form in 2000 it contained, explicitly for the first time, the right to strike. Pessimists feared this would open the floodgates to a wave of strikes, in particular because of the less than rosy employment picture.

However, strikes in Switzerland are rare events.

Pharmaceuticals and chemicals

The Swiss pharmaceutical industry is active worldwide, with production facilities and research establishments on many continents. The headquarters, and also the roots of the companies are usually to be found in Basel. Companies like Novartis originally started life as suppliers, for instance of dyestuffs, to the domestic textile industry.

Common to all the Swiss pharmaceutical companies is that the Swiss market accounts for a minute part of their total output, but up to a fifth of total turnover is spent on research and development – the only way to keep enough profitable drugs in the pipeline, especially in light of the fact that patent protection lasts no much over a decade.

Dyes, lacquers, and varnishes are also produced in Switzerland, and a close relation of the pharmaceutical sector is the flourishing business in fragrances and flavours, of which Givaudan, which is just outside Geneva, is a world leader. Another Geneva company, Firmenich, is the largest privately-owned company in the perfume and flavour business.

Switzerland’s small size means the talent pool for research staff is limited. While free movement of labour is now assured in Europe, the pressure to find top scientists has led to more and more Swiss pharmaceutical firms shifting research activities to North America and Asia.

Watches

An instant poll on most streets of the world as to what is associated with Switzerland would no doubt yield “cheese” or “watches”. Most Swiss would probably be happy with either response, although watches are by far the more profitable product for the Swiss.

The worst answer would be “cuckoo clocks”. Despite Orson Welles and the “Third Man” Switzerland did not invent the cuckoo clock, which hails from the German Black Forest, and most models sold here are poor imitations for the souvenir trade.

Welles wrote: “You know what the fellow said – in Italy, for thirty years under the Borgias, they had warfare, terror, murder and bloodshed, bu tthey produed Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland, they had brotherly love, they had five hundred years of democracy and peace – and what did that produce? The cuckoo clock.”

Swiss timepieces are generally made in small factories in the watchmaking “arc jurassien” that starts in Geneva, extends through the rolling Jura hills of northwestern Switzerland, and ends in the town of Schaffhausen on the river Rhine. Major watchmaking centres apart from Geneva are Neuchâtel, Biel, and Grenchen.

The end of the Second World War was the heyday for Swiss watchmaking, as most watch firms in Europe were war-damaged, and Japan and the United States were not yet competitive. For many decades, Swiss watches accounted for practically half of world production.

Although the quartz watch was actually invented in Neuchâtel, cheap Asian quartz watches almost destroyed the Swiss industry in the early 1970s.

But restructuring of the industry with amalgamation of the two biggest producers (ASUAG and SSIH)helped lead to the production (if not the invention) of the Swatch. This is a high-tech quartz watch, not a cheap timepiece, and eventually gave its name to the Swatch Group, which includes such prestigious brand names as Breguet, Blancpain, Omega and Longines.

Hand in hand with the boom in the mass market, the top-end mechanical watch has against all predictions made a successful comeback.

There is now an overlap in ownership of everyday and top brand names in Switzerland. But “haute horlogerie” is a Swiss domain.

Exports of mechanical watches accounted for 16.5 per cent of the total number of timepieces in 2008 but generated more than 70 per cent of the value. Total exports in the industry were just over SFr 17 billion.

Service industries

While Switzerland maintains a strong manufacturing base, nowadays well over half the active population is engaged in service industries such as banking, insurance, and tourism.

Swiss banks and insurance companies have worldwide activities and in specific sectors, such as reinsurance, are leaders in their field.

The Swiss themselves are great savers – there are almost three savings accounts per inhabitant – and they shun risk-taking as much as possible.

These are two explanations for the disproportionate size of the Swiss banking and insurance sector. And they go some way to explaining why Swiss firms have accumulated much experience and know-how in the banking and insurance field. It has been turned into profit outside Switzerland too.

There is clearly also a correlation between Switzerland’s role as trading nation, exporter, banker and insurer.

While there are some 330 banks with over 3,100 bank branches in Switzerland employing approximately 110,000 people, one cannot say that retail banking is a main aim.

Asset management

Asset and wealth management in all their forms are the keynote of Swiss banking. That goes not only for the “big two” – Credit Suisse and UBS – but also for a wide variety of other banks specialising in private banking. Security, stability, competence, top quality service and advice, generations of experience, access to the best financial products and respect for privacy are the traditional hallmarks of Swiss private banking and these qualities have long attracted international clients from all over the world.

More nonsense has probably been written in thrillers about Swiss banks than any other subject. Swiss banks in fact have some of the strictest “know your customer” rules in the world. They must verify the identity of anyone – Swiss or foreign – opening an account and they must also establish the identity of the beneficial owner of the assets. “Anonymous” accounts are therefore a myth and a bank is obliged by law to seek clarification if a customer makes an unusual or suspicious financial transaction. Swiss bank-client confidentiality has alwalys had very clear limits and it has never been an obstacle to a criminal investigation. Switzerland is also a very reliable partner in the international fight again money laundering and the financing of terrorism.

Switzerland has a very well-regulated financial centre and the Swiss Financial Market Supervisory Authority (Finma) keeps a very close watch on banks to make sure they are complying fully with all laws and regulations, not only with regard to capital and liquidity requirements but also with regard to their due diligence obligations.

However, it is no secret that the subprime mortgage problem in the United States and illegal practices by UBS rocked what was then Switzerland’s leading bank, and UBS had to rely on huge support from the Swiss taxpayer to stay afloat.

Switzerland also pioneered rules concerning the treatment of clients who are “politically-exposed persons”, for example a head of state or minister. Very often it is only because of a Swiss investigation into suspicious banking activity that other countries discover that their banks also accepted a dictator’s funds. The case of Sani Abacha of Nigeria in the 1990s revealed that a substantial proportion of Abacha funds had been sent to Switzerland from banks in the US and Britain. Switzerland, however, remains the only country to have returned Abacha funds to Nigeria.

Banking secrecy

Switzerland’s tradition of banking secrecy underwent a significant change in 2009. On March 13 the government announced that Switzerland would drop its long-standing reservation to the Organisation for Economic Co-operation and Development’s Model Tax Convention, in particular Article 26 governing the exchange of information in tax matters.

This means that Switzerland will extend international administrative assistance to cover all tax offences, including tax evasion, and not just cases of criminal tax fraud as had been the case.

The decision made in March is to be implemented within bilateral double taxation agreements.

The government said it was convinced that its decision to adopt the OECD standard would help Switzerland as a financial centre.

It should be noted that neither the OECD’s Model Tax Convention nor Swiss law permits so-called “fishing expeditions” i.e. unwarranted and unjustified trawling through bank accounts.

And the privacy of clients innocent of any wrongdoing remains protected.

The adoption of the OECD standard on administrative assistance in taxation matters has no impact on the situation for taxpayers resident in Switzerland.

Insurance

Most Swiss insurers – AXA Winterthur, Zurich Bâloise, Vaudoise, etc. – carry the name of the city or canton in which they were founded. At one time and even to a large extent now “Winterthur” remains a synonym for insurance in Spanish.

Most Swiss insurers offer life and other policies, but others are specialised in the reinsurance field, that is they insure risks held by other insurance companies.

The Swiss Insurance Association says that at the beginning of 2009 its member companies employed around 49,000 in Switzerland. The eight Swiss insurance multinationals employed an additional 80,000 staff abroad.

Investments

While Switzerland imports more goods than it exports, in value terms Switzerland has large net investments abroad.

The 2008 balance of trade was SFr18.3 billion, corresponding to 3.44% of GDP (Switzerland is ranked 16th out of the 57 countries analysed in the IMD’s World Competitiveness Yearbook).

Present statistics reflect the turbulence of recent years on world stock markets, and also the drop in the value of the dollar. Nevertheless, Swiss direct investments abroad at the end of 2007 were SFr724 billion, while foreign investment in Switzerland reached SFr334 billion.

Estimates by researchers at IMD say direct investment flows abroad were SFr92.16 billion. This is the seventh-highest level of investment worldwide(in 2008)as a proportion of gross domestic product.

A third of these investments abroad are in the US, and there are increasing flows into newly emerging eastern and central European economies including Poland, the Czech Republic and Hungary.

Traditionally, investments have flowed outwards, but Switzerland does attract foreign capital.

Based on IMD estimates, Switzerland attracted SFr20.2billion in foreign investments in 2008, placing it in 20th position, ahead of Turkey, Chile and Austria.

Food

While Swiss farmers are best known for their dairy produce, early industrialisation in this country also prompted the beginnings of food processing. Strictly speaking, cheesemakers could be called the first food processors.

A classical Swiss product, instant soup or stock cubes dates back to the first industries in the Winterthur area in the early 19th century. At that time factory owners noticed the poor condition of workers due to bad nutrition, and they also disliked time off work for lengthy meal breaks.

Thus a certain Julius Maggi from Italian-speaking Switzerland was inspired to develop soluble stock cubes, forerunner to today’s broad range of instant soups made under the Maggi and Knorr names. Both companies are now part of multinational corporations.

Another Swiss first was instant coffee, invented by a firm near Bern in the 1930s, but only launched on an international career by US GIs after the Second World War. By that time it was a Nestlé product, which was later produced by freeze-drying, a process now used for many other foodstuffs.

A Swiss pioneer whose efforts were not rewarded at the time was Dr Maximilian Oskar Bircher-Benner who ran an exclusive health clinic in Zurich in the early 20th century. To pep up his frail patients, Bircher invented his eponymous muesli made up of grated apple, a few oatflakes, and a drop of condensed milk.

Today there are countless copies of this muesli on the market as breakfast foods – most far heavier than Bircher intended.

Other factory-made products exported from Switzerland include vegetarian and liver-based sandwich spreads, and not least chocolate in all shapes and sizes.