Recipe for success:
innovation, focus & diversification
Swiss MEM capital
goods industry
looks to East

Although competitive pressures and the relocation of production to growth markets are on the rise, the importance of the capital goods industry in Switzerland is still considerable, according to a study by UBS. The capital goods industry's success turns largely on its innovative capacity, customer focus and increasing orientation towards global growth regions, the study says.

Despite growing competitive pressures, Swiss capital goods companies still account for a substantial portion of global capital goods output today. They specialize mainly in high-value products that require considerable research and development as well as special premier-quality solutions manufactured in single and small series and are renowned for the superior customer service they provide. In the field of standardized products and mass market solutions, however, Swiss manufacturers are no longer competitive.



Important sector of the Swiss economy
For the Swiss economy itself the importance of the sector in terms of exports, employment and value added remains significant. In 2005, the machinery, electrical engineering and metals industry (MEM) employed some 331,300 people and contributed CHF 39.1 billion in value added. Its share of total nominal value added for all sectors in Switzerland was 8.5 percent. By comparison, the capital goods industry contributes a slightly lower share than the banks (9.4 percent), but a substantially larger share than the chemical-pharmaceutical industry (3.4 percent). Its export performance too is impressive: Switzerland is currently the eighth largest exporter of machinery worldwide, although it was recently overtaken by China.



Tougher business environment for corporates
Employment in the MEM sector in Switzerland has declined by 18 percent since the beginning of the 90s, however. Much of this has migrated to emerging markets. With the spread of globalization, the industry is facing tougher competition, and the pressure on Swiss companies is growing continuously. Besides competitors from industrialized countries, more and more manufacturers from emerging markets are appearing as serious contenders. They are not only gaining increasing know-how but are focusing very deliberately on more sophisticated technologies and higher-precision instruments and equipment. Another problematic factor is that the industry's traditional main markets in the western European economies frequently offer only limited potential for growth. A consistent global business focus, greater technological specialization and an expansion of the customer service effort are just some of the strategies with which Swiss companies are responding to this challenge.



New technologies and client service are the drivers
In view of their high salary and cost levels Swiss capital goods companies will have to rely on their adaptability and innovative strengths if they are to achieve profitable growth over the long term. Advanced technologies offer protection against imitation by cheaper producers from emerging markets where there is often no adequate protection of intellectual property or the legal situation makes it difficult to enforce. At the same time they create added value for the customer, thereby stimulating the need to invest. In order to keep their edge over cheaper producers, many Swiss MEM companies are also currently investing more intensively in product-related service strategies. In this context customer service is no longer regarded primarily as a cost driver but has become in itself an important contributor to sales revenue. As a central instrument for managing customer loyalty, it can significantly enhance a company's success. Service staff generally have a clear understanding of the needs and problems that customers face. More often than not the contact with the customer can trigger innovation initiatives or better product solutions.

Opening up new areas for growth
The MEM sector regularly receives new impulses from the growing range of applications in fields such as medicine, or from stricter legislation on environmental protection or safety in the workplace. Medical technology is a prime example of an especially dynamic growth segment in which Switzerland is currently one of the global leaders. Both the aging of the population and the cost pressures evident in today's health systems are rapidly driving demand for medical technology all over the world. As a result, this subsegment is one of Switzerland's star export performers, with exports growing five-fold in the last 15 years, whereas industrial exports as a whole have only doubled. Measured in terms of export volume the production of medical instruments has thus advanced to become the MEM industry's most important sub-segment.
Micro and nanotechnology also offer varied and in some cases undreamt-of possibilities. The increasing use of micro-components in medicine, in miniaturization and enhancing computer performance, but also in the biochemistry and pharmaceutical industry, are just a few areas where they play a role. Although the segment is still in its infancy, certain areas such as medical diagnostics have made enormous progress. Thanks to nanotechnology, today's textiles boast such novel properties as being dirt-repellent and UV resistant and new robust but light-weight materials have been developed that substantially reduce a car's petrol consumption.

Companies far advanced on the globalization path
Internationalization is an important growth driver. The Swiss MEM sector has traditionally exported its products successfully worldwide and foreign markets account for 79 percent of its overall sales, according to the industry association. In addition, Swiss companies acted early to optimize their value chain by moving outside their national boundaries.
Pay levels in Switzerland are simply too high when it comes to basic, repetitive production processes. Apart from straight cost considerations, proximity to customers is an equally important reason to establish a local presence with sales and service offices or even own production facilities abroad. Local presence is a must as consumers demand service and advice worldwide. Some 60 percent of Swiss capital goods companies have set up locations outside Switzerland and the trend is accelerating. As a survey conducted by Swissmem, the association of the machinery and electrical engineering industries, among its members reveals, this does not necessarily reduce the importance of Switzerland as a value adding location. An expansion abroad often not only strengthens the Swiss company's competitiveness but in many cases also appears to benefit production at the parent company. The advantages of producing in Switzerland such as the availability of a high-level skills base, a good infrastructure, a relatively liberal economic policy framework and the high standard of living should ensure that important activities such as research and development and engineering will stay in Switzerland. The country's trade surplus provides strong evidence of the comparative advantages of Switzerland as a business location. Over the last four years exports of capital goods have exceeded imports by a total of CHF 5.7 billion.

Focus of international expansion shifting towards the east
In terms of both export destination and production location the first choice for Swiss manufacturers is generally Switzerland's European neighbours. Some 42 percent of Swiss goods exports go to this region, although there are considerable differences from one sub-segment to another. Germany is the main recipient, ahead of the US and France. Asia now accounts for 15 percent of Swiss exports, with China one of the most promising markets. In the textiles industry, the three main export destinations are India, Turkey and China. Looking at production we see an ongoing shift in the direction of eastern Europe and China. With such diversification and momentum, Switzerland's MEM sector looks set to continue making its contribution to the economy through many a business cycle to come.