Coping with the franc: work more or earn less?

Like many other businesses, hearing aid manufacturer Sonova Zurich relocated part of its production, namely to the United Kingdom and China Keystone

Since the dramatic strengthening of the Swiss franc, thousands of industrial jobs have been outsourced to other countries. As a consequence, unions are calling for a weaker exchange rate for the Swiss franc in order to protect Switzerland’s viability as a manufacturing location.

This content was published on November 17, 2015

Many companies are responding by increasing working hours. Some believe that lower wages should no longer be off-limits and even CEOs should have to tighten their belts.

The list of industrial firms in Switzerland that have cut jobs in recent months continues to grow. However, the public has hardly noticed the reduction in positions at the numerous small- and mid-sized firms that make up much of the Swiss workplace.

Within the engineering, electrical and metal industries, the number of jobs declined by 7,000 alone in the first half of 2015.

Most companies cited the unexpected change in the exchange rate at the beginning of this year as the reason for their downsizing. On January 15, the Swiss National Bank (SNB) lifted its floor on its euro exchange rate of 1.20 Swiss francs. The euro swiftly dropped to an exchange rate of 1.05 Swiss francs.

“As a result, the prices for products of Swiss companies in the European market rose 20% from one minute to the next,” says Ivo Zimmerman, head of communications at the industry association Swissmem. The branch exports nearly 80% of its products, of which 60% are exported within the eurozone. The lower costs for imported materials only partially compensate for the currency-related price increases.

“Companies had to react and they have done so,” says Zimmermann. More than three-quarters of the member companies surveyed by Swissmem in July have had to reduce their prices in order to avoid being driven out of the market. Margins have collapsed so strongly that every third firm faces a loss for the current year. 

‘Empty workshops’

“The current situation in medium-sized industrial companies is not yet showing up in the statistics,” warns Michael Girsberger. The CEO of Bernese furniture producer Girsberger Holding talks about an “upheaval with far-reaching consequences” and he expects a clear increase in the number of unemployed.

In order to restore profitability once more, the outsourcing of labour-intensive production steps to foreign markets has become unavoidable for many industrial companies. “Those with production sites abroad are expanding them, and those who don’t are building them.” Girsberger itself recently transferred 12 positions to its German subsidiary.

Nine months following the exchange rate decision, more and more workshops stand empty as entire departments are outsourced to Germany, France, Eastern Europe or Asia, according to discussions that Girsberger has had with executives of other companies. “Once these positions are eliminated, they will not return."

The industry association has also noted the outsourcing of jobs abroad. Switzerland’s engineering, electrical and metal industry has expanded its ranks of employees abroad continually in recent years, reaching up to 560,000 positions. This development is not new, according to Swissmem. The SNB’s decision, however, accelerated the structural change.

“Increasingly, companies must ask themselves which industrial activities they can afford to operate economically in Switzerland. Some activities have thereby fallen off the grid,” says Zimmermann.

How can the loss of industrial jobs be stopped? If Swiss products want to be competitive, the costs must decline, says Girsberger. Plainly put: longer working hours or lower wages. “An increase in the working week to up to 45 hours at the same pay is unavoidable.”  In 2015, at least 70 companies in the sector temporarily introduced longer working hours at the same wage, in consultation with internal employee representatives, Zimmermann says.

In the view of furniture producer Girsberger, temporary wage declines should no longer be off-limits. “It would have to be 5% in order to have a positive impact,” he believes.

Corrado Pardini, a member of management at the Unia union and a Social Democrat parliamentarian is having none of it. “Wage decreases will only make the problem bigger. As a consequence, domestic demand, which is helping stabilise the economy today, would sink.”

Pardini also believes that unemployment would increase along with “irreversible economic damage because the value-creating jobs are thoughtlessly being put at risk and outsourced”. He holds the SNB responsible and calls for it to correct the “major error” from last January 15 in order to remove the “unfair competitive conditions for the export industry”.

“All the other central banks take into account the interests of their economy: only the SNB currently fails to do so,” he criticises.

While employers are not demanding a new minimum exchange rate, they nevertheless expect the SNB to “remain active and use their instruments to weaken the franc”, says Zimmermann.

The SNB is aware of the challenging international situation, according to its responses to questions from The SNB implies that it is ready to intervene in the foreign exchange market in order to weaken the franc.

“The two pillars of the present monetary policy – namely negative rates and a willingness to be active in the foreign exchange markets – serve to reduce the clear overvaluation of the Swiss franc and to ensure price stability in the long term.”

‘Business results on the table’

Hoping for more favourable conditions on the foreign exchange front will offer the affected companies no relief from today’s difficult situation. “A healthy company can deal with losses for a limited time, but not forever,” says Girsberger.

He understands that the unions can’t agree in general to a temporary reduction in wages or increase in working hours. He is convinced, however, that common solutions must be sought at a company level and he invites both sides to join a “transparent, entrepreneurial social partnership.”

“The business owners must also adapt their views and do everything in their power to ensure that the employees and their representatives trust them. The business results must be put on the table – and not only in difficult times, but in good times as well.”

Business owners and upper management must act by example and be the first to make sacrifices.

Although negotiations are obviously challenging and intense at times, he personally has only had “very good experiences” with the Unia union. “But we do a lot to ensure this, and grant the union representatives unlimited insight into our business numbers.”

Such transparency requirements at the furniture production company are understandable for Zimmermann. “I can imagine that in a company in which unpopular measures must be adopted such as increased working hours or lower wages, they are more easily accepted when the cards are on the table.” Companies that are already subject to the collective bargaining agreement of the engineering, electrical and metal industry must already meet certain transparency criteria so that employee representatives can judge whether the measures are indeed justified.

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