UBS outlook
Business management in focus
2014
Foreign trade
Opportunities, risks and prospects for the future
Analysis
The emerging
future
Outlook
Innovate or
emigrate?
Solutions
Risks and
side-effects
Contents
Editorial �������������������������������������������������������������������������������������������������������������������������3
At a glance���������������������������������������������������������������������������������������������������������������������4
Part 1 – Analysis
The emerging future
Emerging economies are increasingly important �������������������������������������������������������������6
Part 2 – Outlook
Innovate or emigrate?
The trend toward globalization continues ��������������������������������������������������������������������14
The destination markets in Asia are becoming more important ������������������������������������20
Innovation and flexibility remain key ����������������������������������������������������������������������������22
Exchange rate risks: the focus of discussion������������������������������������������������������������������24
Part 3 – Solutions
Risks and side-effects
Financial solutions along the value chain ����������������������������������������������������������������������28
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2
UBS outlook
Editorial
Is there a future for
“Made in Switzerland”?
Dear Reader,
With an export ratio of nearly 52 percent, the Swiss economy is extremely reliant on international
trade. Despite a steady fall in exports to Europe, over 56 percent of Swiss exports in 2012
went to EU countries, with the EU accounting for as much as 75 percent of imports in the
same year.
To offset the impact of the strong Swiss franc and the weak Eurozone economy, companies that
export strive to achieve competitive advantages through innovation and by continuously and consistently optimizing their productivity. At the same time, for many Swiss SMEs and large
companies, shifting production abroad is no longer a taboo, as a survey of our clients reveals
(more on page 16).
Will Swiss companies continue to have unrestricted access to the EU internal market in future –
or will they have to move their production wholly or partly to the Eurozone to do so? And if
Swiss exporters decide instead to turn to the growth markets of the emerging economies in Asia
and South America, what will it take for these companies to succeed?
We have supported Swiss businesses in their operations abroad since our foundation, which is
why, as a global bank, we focus intensively on such scenarios. The central issue for us is how to
continue to provide our clients with the best possible support for their cross-border activities
in future, regardless of whether these are in Europe or elsewhere in the world. With this in mind,
we hope that this publication will provide you with valuable help for your decision-making.
We wish you an interesting read.
Christine Novakovic, Head of Corporate & Institutional Clients
UBS outlook
3
At a glance
Part 1 – Analysis:
The emerging future
Part 2 – Outlook:
Innovate or emigrate?
Part 3 – Solutions:
Risks and side-effects
Emerging economies are
increasingly important
Global trade in goods and services
has increased enormously in recent
years. This can be attributed to a
sharp rise in personal wealth in
developing and emerging economies on the one hand, and to
the dismantling of trade barriers on
the other. Despite this, the euro
and the US dollar remain the most
important currencies for Swiss
exporters, with all the opportunities and risks this entails.
Page 6
The trend toward
globalization continues
In order to compensate for the
ongoing gradual narrowing of their
margins, Swiss exporters are
turning their attention to new,
high-growth markets. Chief
among these are the emerging
economies of China and India.
Page 14
Financial solutions along
the value chain
In order to take advantage of the
opportunities for growth offered
by the booming emerging economies of Asia, the value chains
of Swiss companies with a focus
on exports are increasingly developing into international networks.
These are a source of risk as well
as of significant opportunities, and
can be optimized and sustainably
strengthened with the help of
financial solutions.
Page 28
The destination markets
in Asia are becoming more
important
An interview with Erwin
Freiburghaus, Head of UBS
Trade & Export Finance
Consulting Swiss Bank (TEF).
Page 20
Innovation and flexibility
remain key
Thanks to their innovation
and improved productivity, many
Swiss companies are able to
achieve prices that cover their
costs, despite the disadvantages of their location. Nonetheless, some are considering
relocating parts of their operations to other countries.
Page 22
Exchange rate risks: the focus
of discussion
The ongoing debt crisis has raised
companies’ awareness of the risks
associated with cross-border trade
in goods and services.
Page 24
4
UBS outlook
Analysis
The emerging
future
With an export ratio of nearly
52 percent, the Swiss economy
is extremely reliant on international trade. This is unlikely
to change in the short- to
medium-term, although Europe
will become less important
as a destination for exports. At
the same time, the emerging
economies offer new potential
for Swiss exports. Less price­
sensitive, high-quality goods that
are immune to fluctuations
in the economy offer the greatest promise.
UBS outlook
5
Analysis The emerging future
Emerging economies
are increasingly important
Global trade in goods and services has
increased enormously in recent years.
This can be mainly attributed to a sharp
rise in personal wealth in developing
and emerging economies, as well as the
dismantling of trade barriers around
the world. However, the currencies of
industrialized nations remain important despite the increasing integration
of emerging economies.
Increase in trade within
and between regions
Global trade in goods has changed rapidly over
the past 60 years. It started to pick up around
1970, and then exploded around the turn of
the millennium (figure 1). In 2012, 30 percent
of global economic output was traded across
international borders, compared with just 12 percent in 1961. Although international trade
did drop sharply during the financial crisis of
6
UBS outlook
2007/2008, it quickly recovered and went
on to hit new highs. The situation is similar
with respect to global trade in services.
There are several factors behind this trend,
including the increasing fragmentation of the
value chain as well as rising levels of prosperity
around the world. The increase in trade has
also been facilitated by technological progress
in the fields of transportation and communication, and by institutional improvements in
areas such as legal certainty. The ratification of
the General Agreement on Tariffs and Trade
(GATT) and later the General Agreement on
Trade in Services (GATS) by many countries
has reduced global barriers to trade still further.
Rising international integration is reflected
not only in the increased volume of goods and
services being exported, but also in the growing membership of the World Trade Organization (WTO), which has enlarged its membership from 78 founding member states in 1995
to its current 160 members.
Sibille Duss
Economist, UBS AG
The emerging future Analysis
The largest GDP growth will likely be in the BRIC states
and other Asian countries.
Different regions of the world account for very
different shares of global trade. European
countries exported the most in 2012, followed
by the Asian countries. Asia overtook North
America as the world’s second-largest region
for commerce based on the value of exported
goods back in 1977. Since the year 2000, however, the biggest increase in global exports
has not been from the Asian countries, but from
the countries of the former Soviet Union,
followed by the Middle East and Africa. The
strong growth of the African countries should
be put into perspective, however, by their low
starting point. Growth in a particular region
is often driven by the strong development of
individual countries. China, for example, saw
its global goods exports rise by 720 percent
during the period in question, India’s rose
by almost 600 percent, and Russia’s grew by
400 percent. Global goods exports from Europe and North America, on the other hand,
have only experienced slow growth rates
of 150 percent and almost 100 percent respectively since the year 2000. Europe remained
the undisputed leader in terms of global service
exports in 2012, followed by Asia. Between
them, these two continents accounted for almost 70 percent of global service exports.
Different economic trends in export
destination countries
A shift in export destinations is due in part
to different economic trends in the various
destination countries. While the economies
of Japan and Europe have witnessed slow
growth for years, the economic output of
the BRIC countries (Brazil, Russia, India and
China) has risen sharply. The US tends to
experience stronger trend growth than Europe,
but has also been struggling with lower rates
of economic growth since the financial crisis of
2007/08. The BRIC states and other Asian
countries are expected to continue growing
faster than the US in terms of GDP in future,
while growth in Europe and Japan is expected
to fall even further. The BRIC countries are
therefore set to become even more important
Figure 1
Global trade in goods exploded following the Asian crisis of 1997–98
Global trade in goods and services based on exports, in USD trillions
20
18
16
14
12
10
8
6
4
2
0
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013
Goods exports
Service exports
Source: WTO, UBS
as sales destinations for international trade
in future, at the expense of the industrialized
countries.
Of all the regions of the world, Europe is where
intra-regional trade is most important. European countries export 70 percent of their goods
to other European countries. Asia, where trade
within the region is a very strong factor behind
economic growth, has a similarly high percentage of 54 percent. On the other hand, intraregional trade is relatively weak in Africa
(13 percent) and the Middle East (10 percent).
Shifts in global trade affect
the currency markets
Trade between two countries consists of more
than just the exchange of goods. Trade transactions often also entail transactions on the
currency market. If a Swiss exporter sells goods
to China and the transaction is conducted in
renminbi, the exporter may either hold on
to the proceeds as a foreign currency reserve
UBS outlook
7
Analysis The emerging future
or exchange them for Swiss francs. Exchanging
currency boosts demand for Swiss francs, which
bolsters the value of the franc over the long
term. However, central banks can counteract
the appreciation of their currency by increasing
the money supply. The People’s Bank of China,
for example, only allows the renminbi to
gain value gradually relative to the US dollar;
the Danish krone is linked to the euro; and
the Swiss National Bank actively prevents the
franc from appreciating relative to the euro
through a minimum exchange rate of 1.20 francs
to the euro set in September 2011.
Emerging economies, and those of Asia in particular, have accounted for a steadily growing
share of global trade in recent years. This has
been accompanied by a continuous rise in
demand for their currencies. The proportion of
global currency transactions conducted in
renminbi, for example, has risen by almost 400
percent over the last six years. However, it
is still the currencies of the industrialized countries that are traded the most. In 2013, the
US dollar accounted for 87 percent of global
foreign exchange trading. The Swiss franc
was in sixth place, with a share of only 5.2 percent of total trading volume. But two currencies are required for foreign exchange transactions, which is why the percentage shares
accounted for by all currencies add up to
200 percent.
The implications of sovereign debt
and political stability
Factors other than trade also affect a currency’s
long-term value. Solid economic growth,
political stability and the rule of law, as well
as healthy state finances and current account
surpluses, bolster national currencies in the
long term.
• Current account balance
and investment
A country’s current account balance, which
includes its balance of trade, has a significant influence on the value of its currency.
8
UBS outlook
The currencies of countries with long-term
current account surpluses (such as China,
Japan and Switzerland) tend to appreciate
in the long run, while those of countries
with continuous current account deficits
(such as the US, the UK, Turkey and South
Africa) tend to lose value.
• Relative economic growth
and central bank policy
Countries with stronger economic growth
offer a wider range of opportunities for investment, which attracts inflows of capital
from other countries. If the ratio between
the increase in productivity and the increase
in the money supply rises faster in country
A than in country B, this will strengthen
the value of country A’s currency in relation
to country B’s in the long term.
• Political stability and the rule of law
Investors are more willing to invest their
assets in the currencies of politically stable
countries. A lack of confidence in stability,
justice and the law, on the other hand, raises
the specter of capital flight and its associated negative consequences for the currency and the economy.
• Manageability of debt
Public finances are another important factor.
Sustainable financial conduct promotes
demand for government bonds denominated
in the local currency and therefore demand
for the currency itself. In addition to the
current debt ratio, a country’s track record
of surpluses/deficits is also important. Countries that constantly generate a substantial
surplus are able to pay down their debts
over the long term provided the interest
owed on the debt does not exceed the primary surpluses generated. It is much easier
for a country with strong economic growth
to generate a primary surplus because
the state coffers are filled with tax revenues.
The emerging future Analysis
The downward trend in the economic growth of emerging
economies has probably bottomed out.
It is not unknown, however, for currencies
to experience short-term deviations from the
long-term trend. Political uncertainty in countries such as Turkey, Thailand and Ukraine has
weakened these countries’ currencies in recent
months. In order to mitigate this trend and make
the currency more attractive to investors outside Turkey, the Turkish central bank recently
raised its base interest rates. Countries that
have generated substantial current account
deficits in past years, including Brazil, India
and Indonesia, and also South Africa and Turkey,
have benefited from the relaxed monetary
policies of the developed world, as it has been
relatively easy for them to plug these “gaps”
using capital from the developing world. But
since the Federal Reserve started tapering the
volume of bonds it buys, these countries are
now finding it difficult to attract foreign capital
or even hold on to their existing capital. Both
these effects are weakening the currencies of
the emerging economies. Conversely, countries
with a strong focus on exports such as China,
Poland and South Korea are benefiting from the
improved prospects for growth in the US
and Eurozone. We believe that the downward
trend in the economic growth of emerging
economies has bottomed out, and expect these
economies to recover slightly in 2014.
US dollar and euro currently the most
important currencies for Swiss exporters
Although the emerging economies now account
for a greater share of global trade, the Eurozone and the US are still the main trading partners for Swiss exporters. We expect the Swiss
franc to remain stable relative to the euro over
the next twelve months. However, we think
it will tend to weaken against the US dollar over
the same period, since the Federal Reserve
is expected to tighten its monetary policy and
scale back its bond-buying program. Never­
theless, we expect the Swiss franc to remain
fundamentally strong relative to these two
currencies in the long run.
UBS outlook
9
Analysis The emerging future
Another important factor for exports, alongside the trend in the exchange rate between
the currencies of the exporting country and the
destination country, are changes in the difference between the two countries’ interest rates.
Let us assume, for example, that a Swiss exporter sells goods with a value of 1 million US
dollars to a company in the US over the next
year, and these goods are paid for a year later
in US dollar upon the completion of the entire
de­livery. If the Swiss franc gains value in relation to the US dollar during this time, the payment received by the Swiss exporter will be
lower in Swiss francs. If the currency forward
(the current exchange rate plus the interest rate
differential) is higher than the anticipated exchange rate in a year’s time, the exporter will
hedge its transaction (see box).
We expect the structural parameters discussed
above to improve in most emerging economies
in the long term. The stability and transparency
of their political structures and institutions
are likely to improve, the average difference in
inflation relative to industrialized countries is
expected to narrow, and public finances should
remain largely solid. It is reasonable to assume,
however, that the long-term trend toward
stronger currencies in the emerging economies
will sometimes be punctuated by periods of
uncertainty and instability. The Swiss franc is also
likely to count among the strong currencies
in the long term, which will continue to cause
problems for exporters in the future.
Example
Assuming a current exchange rate of USD 1 = CHF 0.88 and a one-year interest rate
of 3 percent for USD and 1.5 percent for CHF, the same return would be achieved in both
USD and CHF (interest rate parity) if:
1 USD * (1+0.03) = 0.88 CHF * (1+0.015)
Or, after one year: 1 USD = 0.87 CHF
The one-year forward rate in this instance is therefore USD 1 = CHF 0.87.
If the Swiss exporter expects the Swiss franc to gain even more value relative to the
US dollar than suggested by the currency forward, it will hedge the transaction
using the currency forward and conclude the transaction in a year’s time at an exchange
rate of USD 1 = CHF 0.87.
If the Swiss franc strengthens to USD 1 = CHF 0.84 as anticipated by the exporter,
the hedge will have earned the exporter (not incuding hedging costs) CHF 30,000
(USD 1 million at an exchange rate of USD 1 = CHF 0.87 instead of CHF 0.84).
If, however, the Swiss franc does not appreciate as strongly as anticipated by the exporter,
or even loses value, the exporter will have suffered a loss as a result of the hedge.
10
UBS outlook
The emerging future Analysis
Just 6 percent of all Swiss watch exports are to Germany,
compared with 38 percent of metal exports.
Germany still the most
important trading partner
for Swiss companies
Switzerland is often described as a small, open
economy with a high proportion of exports.
In reality, Switzerland has been overtaken in this
respect by other countries in recent years.
Nevertheless, the Swiss economy, with an export ratio of 52 percent, is highly reliant on
international trade, although the Swiss industries that export goods to other countries
differ significantly from one another. More than
two thirds of the country’s exports stem from
the chemical, pharmaceutical, mechanical engineering, and watch industries. Switzerland
thus exports products that are largely unaffected
by economic trends (such as medicines and
food), but also highly cyclical capital goods in
the fields of metals and machinery. The sales
markets are also very varied. While the metal,
electronics and mechanical engineering industries have a strong focus on Europe, the watch
industry is benefiting significantly from growth
in Asia. Not only do the various sales markets
exhibit different economic trends, their currencies also vary in strength. Both factors influence
exports to these countries.
The importance of the different export destinations varies according to the exporting industry. Just 4 percent of the metal industry’s exports went to China in 2013, while for the watch
industry the figure was 26 percent (table 1).
The difference by industry is even starker for
Germany, Switzerland’s most important
trading partner overall. Just 6 percent of watches
were exported to Germany, compared to
38 percent of metal exports.
The sales markets have also changed significantly over time. Although Europe is still the main
destination for Swiss exports, its share is steadily
dwindling. Recent years have seen a sharp rise
in the share of exports to the BRIC countries and
other Asian countries (figure 2). China overtook
the UK as Switzerland’s fifth-biggest trading
partner in 2011, and exports to the US are
at a high level and growing. It is remarkable that
Switzerland’s nominal exports to Japan have
remained stable for some time. The major devaluation of the Japanese yen in 2013 and
the financial crisis of 2007/08 had only a marginal impact on exports.
Table 1
Percentage of exports to different destinations, by industry (2013)
Metal Electronics Machinery
Germany
Precision Chemicals
instruments
Pharmaceuticals
Food
Watches
38
27
24
23
22
14
15
6
France
7
6
5
5
10
5
13
5
Italy
8
3
4
3
4
8
6
6
UK
4
3
4
4
5
5
6
4
USA
7
8
9
18
10
15
11
10
China
4
8
8
6
3
3
2
26
India
1
1
2
1
2
1
0
1
Russia
1
1
2
1
1
2
2
1
Brazil
1
1
2
1
4
1
1
0
Source: Swiss Federal Customs Administration (EZV), UBS
UBS outlook
11
Analysis The emerging future
Less price-sensitive goods are
the top Swiss exports
Swiss companies mainly export less price-sensitive, high-quality goods that are less depen­
dent on the state of the economy in destination
countries. It is therefore unsurprising that
Switzerland has a revealed comparative advantage1 with respect to goods such as precision
instruments, pharmaceutical products and
watches in particular. A great many people
in Asia will rise above the income threshold
of 30,000 US dollars over the next few years to
join the ranks of the middle class. Since health
is a luxury good, demand for medical equipment grows disproportionately as income rises.
Life expectancy has also risen throughout
the world in recent years, which also feeds the
demand for medical equipment. This is why
we see significant potential for precision instruments (around 60 percent of which are medical instruments or devices) and the pharmaceutical industry, especially in emerging economies.
Companies operating in more price-sensitive
industries, such as the textile, paper and graphics industries, but also the metal industry,
are more likely to encounter difficulties in the
long run. The metal industry’s share of Swiss
exports has shrunk steadily in recent years, from
just under 10 percent in 1990 to its current
level of around 6 percent. This is a decline that
can be observed throughout the world and
not just in Switzerland. However, these industries can also produce the occasional niche
product that performs well and is able to
compete at an international level.
1
The revealed comparative advantage is a measurement
used to calculate a country’s relative advantage in the
production of particular goods. It measures the proportion
of an industry’s exports as a share of Switzerland’s total
exports in relation to the same industry’s share of exports
within the OECD.
12
UBS outlook
Figure 2
The declining importance of Europe as an export destination
Exports of goods by destination, moving average over 12 months, in CHF millions/month
2500
11500
2000
9000
1500
7500
1000
5000
500
2500
0
0
1988
1993
1998
2003
2008
2013
BRIC
UK
Asia excluding Japan, including China
USA
Japan
EU (right scale)
Source: Reuters Ecowin, UBS
Outlook
Innovate
or emigrate?
Many Swiss companies have
an above-average ability to
innovate that will ensure their
survival in the long term. And
yet many are no longer ruling
out the idea of relocating their
production to other countries.
The pressure resulting from
the continued strength of the
Swiss franc is simply too great,
particularly for exporters with
a focus on Europe.
UBS outlook
13
Outlook Innovate or emigrate?
The trend toward
globalization continues
Shifting patterns of global trade and the
strength of the Swiss franc are causing
problems for Switzerland’s export industries. Companies are responding to the
ongoing gradual narrowing of their margins by optimizing their processes in a
targeted manner, and by turning their attention to new markets with high growth
rates, chief among which are the emerging
Asian economies of China and India.
Global trade in goods and services has undergone tempestuous expansion in recent years,
with the total value of cross-border movements
of goods almost tripling in the last 50 years.
This marked increase can be attri­buted to an
upturn in many developing and emerging
economies, accompanied by their stronger
integration into international trade.
14
UBS outlook
It is true that economic growth rates around
the world experienced a temporary meltdown
as a result of the financial and economic crisis
triggered by the collapse of the New York
investment bank Lehman Brothers in the fall
of 2008. However, trade recovered relatively
quickly and has now gone on to hit new heights.
As globalization progresses, the relative importance of the various export destinations is
also changing. This represents a challenge
that should not be underestimated for a country like Switzerland, which has such a strong
focus on external trade and earns half its income
from exports. On the one hand, Swiss exporters are benefiting from the uninterrupted growth
of the emerging economies; but on the other,
they are also being hit hard by the structural
economic slump across much of the European
Innovate or emigrate? Outlook
“Anything we do in the export business now costs
one fifth more.”
– SME owner
Union (EU), which is still the destination for just
under 60 percent of their exports. With the
debt problem still unresolved in most EU member states, it is above all the strength of the
Swiss franc in relation to the euro that is causing problems for Swiss exporters. The Swiss
franc has gained around 20 percent relative to
the euro since the outbreak of the crisis. This
shift in the exchange rate is problematic for
Swiss exporters because it makes the goods
and services they supply to the Eurozone that
much more expensive.
or sales partners. There is therefore a monetary
incentive for companies to specialize. In an
attempt to mitigate exchange rate losses, they
are renewing their efforts to penetrate specialized markets and high-tech, less price-sensitive
niches. Simpler, standardized products, on the
other hand, are coming under increasing pressure or even disappearing entirely from companies’ ranges.
Firms are switching to other countries
Geographic diversification is another way to
circumvent the chronic slow growth experienced by most industrialized countries since
The strong franc is putting pressure
the financial crisis. Many emerging economies,
on operating margins
including China and India with their huge popFor Swiss companies with a strong focus on
ulations, continue to exhibit significantly
exports, the appreciation of the franc has
stronger economic growth and faster rising
had the uncomfortable side effect that “anyincomes than the aging and debt-ridden
thing we do in the export business now costs
one fifth more”, as one manager of an affected economies of the West. Today, emerging economies such as China, Russia and Indonesia,
SME put it. In other words, Swiss exporters’
ability to compete on a price basis has deterio- as well as Poland, Mexico, Thailand and India,
boast solider state finances and lower rates
rated by about 20 percent, which has hit the
operating margins of many companies. In the- of debt than the faltering core Eurozone countries.
It is therefore not surprising that the number
ory, exchange rate losses can be offset by raising sales prices accordingly. In the real world, of households in the emerging economies
with significant purchasing power is set to exhowever, the options for passing on increased
prices are generally very limited and most pro- plode in the future. In China, India and Latin
America alone, experts expect the creation of a
viders find that breaking free of the established
pricing structure on the markets is extremely
difficult. Only very few Swiss exporters have
any significant potential to increase their prices. Figure 1
This is something that can only be done by
Middle class’ share of global consumption, 2000 – 2050
companies that dominate their market in some
(in %)
way, for example by offering products for
which there is no competition, or if they enjoy
100
a leading position at least in their own market
90
80
if not on the global market. Generally, the cur70
rent exchange rate situation most severely
60
affects companies with a strong focus on ex50
ports that incur most of their costs in Switzer40
30
land but are forced to invoice in a relatively weak
20
currency like the euro.
Exporters who are fortunate enough to be
paid for their goods and services in Swiss francs,
on the other hand, are able to pass on increased manufacturing costs to their customers
10
0
2000
Others
2010
EU
2020
US
2030
Japan
Other Asia
2040
2050
India
China
Source: OECD Economic Outlook 92 database
UBS outlook
15
Outlook Innovate or emigrate?
Half the companies generate less than 50 percent of their entire
value-added in Switzerland.
new “middle class” of around two billion consumers with annual incomes of between
30,000 US dollars and 120,000 US dollars by
the year 2030 (figure 1).
Figure 2
What are your most important countries
to which you export?
Germany
In order to be able to closely monitor the impact
China
of macro-economic conditions on domestic
US
industry, UBS makes use (among other things)
of the most recent surveys of Swiss industrial
France
companies conducted by the Swiss Federal
Italy
Institute of Technology’s economic research
India
office (KOF). However, this data is only collected
Other
for individual industries and therefore provides
little information about the specific situation of United Kingdom
particular companies. In order to understand
Saudi Arabia
their needs better and tailor our products and
Taiwan
services accordingly, UBS conducted an online
Singapore
survey of our corporate clients.
Russia
61%
43%
37%
31%
31%
28%
25%
23%
22%
10%
9%
8%
Only a few have no cross-border activities
Turkey 7%
Some 85 percent of the companies that participated in the survey were small or medium-sized
enterprises (SMEs) with fewer than 500 employ- Base: Respondents working in a company predominantly active in the
sector “Exports” or “Import and Export” (n = 239), multiple responses.
ees, while the other 15 percent consisted of
large corporations with workforces of over 500 Source: UBS
people. When asked about their geographic
focus, 83 percent of companies claimed to operate internationally (exports, imports, wholesale, etc.). This contrasts with the just 17 percent
of respondents who limit themselves to the
Swiss companies to procure the production
domestic Swiss market and have no cross-borinputs they require, such as commodities, comder activities.
ponents and semi-finished goods, is currently
In terms of the most important sales markets for Switzerland’s southern neighbor, Italy, followed
Swiss SMEs, Germany (traditionally Switzerland’s by the US, France, the UK and India (figure 3).
main destination for exports) is clearly out in
front with 61 percent of responses (figure 2). Value creation is being shifted
to other countries
China, with which 43 percent of domestic
companies maintain sales relationships according The question regarding the percentage of the
entire value chain currently generated within
to the survey, is now in second place. The US
comes third on the list of most popular export Switzerland’s borders is particularly revealing
with respect to the increasing globalization of
destinations, putting it ahead of France, Italy,
India, the UK and Saudi Arabia. The most com- Swiss industry. While about half the surveyed
companies said that Switzerland accounts for
mon procurement markets reveal a similar pattern, with Germany and China once again at the over 50 percent of the entire value added,
the other half put the figure today at less than
top, with shares of 51 percent and 36 percent
50 percent (figure 4).
respectively. The third most popular source for
16
UBS outlook
Innovate or emigrate? Outlook
Figure 3
What countries do your main suppliers
deliver from?
Germany
51%
China
36%
Italy
27%
Other
21%
US
20%
France
United Kingdom
India
14%
12%
10%
Taiwan
8%
Saudi Arabia
2%
Singapore
1%
Base: Respondents working in a company predominantly active in the
sector “Exports” or “Import and Export” (n = 97), multiple responses.
Source: UBS
It gets interesting when we compare the current
situation regarding the international division
of labor with companies’ expectations for the
future. Only a third of companies expect to
remain generating more than 50 percent of their
total output in Switzerland in five years’ time.
One in four expect Switzerland to account for
between 30 percent and 50 percent of value
added, while another third expect the share of
value added generated within Switzerland to
amount to less than 30 percent five years from
now (figure 5).
A survey of members of the Swiss Export association paints a similar picture: almost two thirds
of the SMEs surveyed said that they were planning to, or had already relocated operations to
other countries. Operations had already been
relocated in 17 percent of cases. “There have
indeed been many cases of production facilities
being relocated”, confirms Claudia Moerker,
Director of swiss export, adding that competi-
UBS outlook
17
Outlook Innovate or emigrate?
“There have indeed been many cases of production facilities
being relocated.”
– Claudia Moerker, swiss export
Figure 4
If you consider your company’s entire
value chain, what proportion thereof
is generated in Switzerland?
4%
29%
48%
51–100%
30–50%
Less than 30%
Don’t know
Base: total respondents
(n = 339)
19%
Source: UBS
Figure 5
What proportion of your output do you
expect to be generated in Switzerland
in five years’ time?
5%
34%
35%
25%
Source: UBS
18
UBS outlook
51–100%
30–50%
Less than 30%
n. A.
Base: total respondents
(n = 339)
tion has become tougher on the whole for many
SMEs. “So the situation reflected in the results
of the survey has in fact come to pass. The trend
for offshoring continues.”
Emerging Asian economies are targets
for expansion
But where do exporters see the greatest market opportunities? And in which countries do
they expect to see growth in the years ahead?
Unsurprisingly, the list of top countries for expansion for Swiss exporters is topped by the
booming Asian emerging economies, with China
and India leading the pack. Switzerland comes
in third as a domestic market which, while limited in terms of volume, remains interesting
in terms of purchasing power. Russia is in fourth
place, ahead of Asia as a whole, the US and
Turkey. Germany, the driving force within the
EU, comes in lower, in eighth place. While
our neighbor to the north is not expected to
exhibit above-average growth rates when
compared with the boom markets of Asia, it
will remain by far the most important destination for Swiss products for the time being in
terms of volume (figure 6).
When doing business with new countries that
have not yet become fully established as export
destinations, a country like Switzerland, which
has little political influence but punches above
its weight on the international markets, depends
on generally accepted and reliable rules, for
example in the fields of tariff reduction or patent protection. Swiss exporters should therefore welcome the fact that in December 2013,
having been at an impasse for years, progress
was made again on talks within the World Trade
Organization (WTO) following tough negotiations. “Customs administration will be made
simpler for our industry, and we will enjoy
greater legal certainty. Above all, this will benefit our small- and medium-sized enterprises”,
said Swiss Commerce Minister Johann SchneiderAmmann, in praise of the Bali Package negotiated by the WTO to promote free trade.
In addition to multi-lateral regulations under the
auspices of the WTO, Switzerland has conclud-
Innovate or emigrate? Outlook
“A significant number of Swiss SMEs have withdrawn from China
after several years there in favor of Eastern or Southern Europe.”
– Claudia Moerker, swiss export
ed bilateral agreements with its most imporFigure 6
tant trading partners.1 While Swiss trade diploWhat countries does your company
macy recently succeeded in concluding a
primarily seek to grow in the future?
bilateral free trade agreement with China, negotiations with India are dragging on due to
China
differing stances regarding the protection of
India
35
intellectual property.
Switzerland
43*
24
European periphery countries
Russia
18
are attractive again
The importance of the BRIC countries (Brazil,
Asia
18
Russia, India and China) for small- and medium-sized exporters is often overestimated anyUSA
14
way, according to Claudia Moerker of swiss
Turkey
13
export. This is firstly because wages have now
also risen noticeably in some of these loca13
Germany
tions, and secondly because many bosses now
Brazil
11
take a more optimistic view of the opportunities presented by the European periphery coun7
Africa
tries. Hungary, Poland, Portugal and Turkey
in particular have recently come to the fore as
Base: All respondents (n=339) / Multiple responses possible
potential production locations. Claudia Moerker *number of mentions
adds that a significant number of SMEs (for
Source: UBS
example in the field of precision instruments
and machines) are withdrawing from China
after several years there in favor of Eastern or
Southern Europe. “The BRIC countries are
generally very challenging for SMEs. Since it takes
substantial amounts of capital and expertise
to get involved in these markets, they are really
only suitable for larger companies. And when
a foreign SME does enter a mass market like
China, for example, it is not given priority and
is seen as an ’also-ran’.”
1
A list of Switzerland’s free trade agreements can
be found at www.seco.admin.ch (> Topics > Foreign trade
> Free Trade Agreements).
UBS outlook
19
Outlook Innovate or emigrate?
“The destination markets in Asia are
becoming more important.”
evidenced by the many interesting comments and suggestions we received. And thirdly, this client survey helped
us to clarify a string of open questions, and confirmed
that we’re heading in the right direction with our products
and services.
Erwin Freiburghaus, Head of UBS Trade & Export
Finance Consulting Swiss Bank
How is the Swiss export industry currently
positioned?
The majority of our clients have adapted amazingly quickly and well to the prevailing market conditions. In terms
of the weak euro, there has been criticism that an exchange rate of under 1.30 Swiss francs per euro would
mean the end for many Swiss export firms. This pessimism has turned out to be overblown. Compared to the
situation in other countries, the Swiss economy is still
doing very well.
But there are still those who warn of a creeping
de-industrialization in Switzerland. Do you think
this fear is justified?
Switzerland is a country of high prices. But at the same
time it has a highly trained workforce and delivers aboveaverage quality. It is mainly companies that work on
narrow margins that will have a problem with high prices
in the long run. Our survey also clearly indicates that
even more Swiss export companies will relocate their production abroad in future, or at least parts of it.
UBS outlook: What prompted UBS to conduct
a client survey on the subject of international trade?
Erwin Freiburghaus: As a bank we make it our business
to know exactly what our clients’ needs are – especially
when it comes to launching new products and services.
In order to do this in a professional manner, it was important to let our clients have their say. Of course, we continuously keep an eye on developments and analyze the
What did UBS learn from this survey?
latest research on export trends. But this time we wanted to get more precise information directly from our clients What was particularly revealing were the responses on
the quality of our services. While the majority of survey
about the challenges they face in the export business.
participants judged our service quality to be significantly
higher than that of our competitors, they also stated
What were the main questions?
clearly that this above-average quality has its price: in other
First, we were interested in getting a current snapshot of
the Swiss export industry: what are its strengths and where words, that you generally pay a bit more at UBS.
are there weaknesses or problems? Then we wanted to
Will UBS adjust its prices accordingly?
determine which export markets will become more imporInternational business is becoming noticeably more comtant for our clients in the future. And, last but not least,
plex and there are a wide range of financial aspects to
which banking products and services do our clients use
consider. So it will be increasingly important for compamost often, and how will their needs change over time?
nies to receive advice that can address their changing
needs. That’s why UBS is doing everything we can to stay
Are you satisfied with the results of the survey?
on top when it comes to expertise, reliability, speed of
Yes, the survey was a success for three reasons: First, the
response rate of around 21.5 percent showed that a grati- response, and efficiency. We are continually investing in
the quality of our advice and in expanding our range of
fyingly large number of UBS clients took part. Secondly,
products and services. The destination markets in Asia are
the quality of the answers was well above average, as
20
UBS outlook
Innovate or emigrate? Outlook
becoming more important. As a result, we
are adapting the products and services we
offer as well as our network of correspondent
banks. At the moment we have no plans to
make systematic price adjustments, and we
are focusing on supporting the Swiss export
industry with the same, renowned quality of
service in the emerging markets.
UBS outlook
21
Outlook Innovate or emigrate?
Innovation and flexibility
remain key
Swiss exporters are seeking to compensate
for exchange rate losses by improving
productivity and using “natural hedging”.
Where this is not sufficient, one option
is to relocate parts of the value chain to
other countries.
In order to succeed in the long term, companies
must constantly assess the products they offer
and adapt them to changing market conditions.
Against this background, the professionalism
and prudence with which the majority of Swiss
companies handle the increase in competition
is a constant source of amazement. They optimize their internal production workflows and
processes, bring out innovative new products
and get them to market faster, or turn their
attention to more promising markets outside
the Eurozone.
The above-average capacity for innovation
of many Swiss companies is particularly vital,
because at the end of the day, it is a company’s ability to reinvent itself that will ensure its
long-term survival. At the same time, there
are also sectors and industries that seem to
have no future in our country. The paper industry, for example, is in the process of disappearing from Switzerland entirely, due to its
generally poor prospects in our small country
with few natural resources.
A significant number of Swiss SMEs have used
the strength of the franc as an opportunity
to look for more cost-effective suppliers within
the EU. This strategy of “natural hedging”
is aimed at offsetting increased costs at home
through lower procurement prices for the
required production inputs (for example, commodities or semi-finished goods). A Swiss
provider could theoretically achieve the same
result by paying its domestic suppliers in
euros, although this is only likely to happen
in very rare cases due to the euro’s lack of
acceptance among Swiss suppliers. Other companies go the other route, in a manner of
speaking, by increasingly looking to tackle as
many work processes as they can themselves.
This renewed focus on companies’ own abilities
is aimed at returning parts of the value chain
that were previously handled by suppliers back
to the company. Targeted productivity measures can also be helpful, such as the accelerated
automation of processes, the elimination of
small-run series or individual parts, or the setting
up of a state-of-the-art central warehouse.
Probably the most drastic option for improving
a company’s ability to compete is to relocate
part or all of its production to another country.
Due to the progress of globalization and the
increase in economic links across national borders, even SMEs now have a wide range of
Figure 1
Import
Export
Commercial branch
Import
Export
Producer
Foreign
supplier
Company in
Switzerland
Foreign
production
subsidiary
Buyer in other country
Licensing
Franchising
Cooperation / joint venture
Procurement
22
UBS outlook
Production
Sales
Innovate or emigrate? Outlook
options available to them when moving into
foreign markets. Essentially, they can now
choose from a whole menu of potential international structures, from a simple export
business, to forms of cooperation including
franchising, licensing or entering into joint
ventures, to setting up their own sales organization, relocating individual functions or, as
the ultimate step, establishing a subsidiary in
another country (figure 1).
According to the UBS client survey already
mentioned, companies in the machinery, equipment- and automotive manufacturing industries
in particular see increased expansion in other
countries as the answer. However, providers
in the chemical and pharmaceutical industries,
in the trading business and in the metal industry, also expect to increase their growth
in other countries in the future (figure 2).
Figure 2
What branches expect “growth” in their foreign core market
over the next two years?
Machinery, equipment- and automotive manufacturing
Other
Chemicals and pharmaceuticals
Trading (retail and wholesale)
Metal industry
Corporate and business services
Textile industry
Construction and architecture
Energy (supply and disposal)
Traffic and transport
Waste disposal, recycling and recovery
Other services
Food and beverage production
Non-food production
IT and telecoms services
Wood and paper processing industry
Materials and construction supplies
Plastics industry
Agriculture and forestry
Publishing and printed products, media
Financial services
42%
13%
10%
10%
7%
7%
4%
4%
4%
3%
2%
2%
2%
2%
2%
1%
1%
1%
1%
1%
0%
Base: Total respondents selling products “only abroad” or “in Switzerland and abroad” and expecting
“growth” in foreigen markets over the next two years.
Source: UBS
UBS outlook
23
Outlook Innovate or emigrate?
Exchange rate risks:
the focus of discussion
The persistence of the debt crisis means
that businesses are becoming more aware
of the risks involved in trading goods
across borders. This means that banks will
continue to play an important role as
sources of suitable hedging and financing
instruments.
Companies trading merchandise from one industrialized country to another, especially
between neighboring countries, can often rely
on solid business relationships dating back
many years. They know their trading partners
and trust them from experience. If the economy is also in a good state, one trend that has
become evident over recent years is that many
companies are prepared to supply goods on
open account. However, the opening up of
new markets in emerging economies and developing countries that are enjoying disproportionately strong growth – China, South-East
Asia and India, for example – is making it
essential to enter into business relationships with
previously unknown partners. Wherever lucrative opportunities arise, there are usually risks
and unexpected difficulties lurking. Setbacks
are inevitable when companies try to gain a foothold too quickly or without taking a sufficiently
systematic approach in markets they are unfamiliar with. Before embarking on a process
of internationalization, it is therefore worth
analyzing both the risks and the opportunities
in as much detail as possible, in order to assess
the possible impact on the company.
Figure 1
Reasons for failure
Wrong partner/untrustworthy partner
Prices/costs too high
Broken contracts/failed contract negotiations
Customs formalities
Insufficient knowledge of the market in the target country
Wrong product
Crisis in the export country
Insufficient legal knowledge
Transport/logistical problems
Culture misunderstood
Poor preparation
Wrong export strategy
Excessive waiting times
Language difficulties
Too little commitment
Too few resources in company
Insufficient knowledge of export
Not enough personnel
Other
Not specified
Source: Switzerland Global Enterprise
24
UBS outlook
32%
11%
7%
6%
6%
6%
6%
5%
4%
4%
3%
2%
2%
2%
2%
1%
1%
0%
11%
7%
Innovate or emigrate? Outlook
The smoldering financial crisis accentuates the need for external
hedging and financing.
To determine the financial risks involved in an
international commitment, it makes sense to
work with various scenarios. In addition to regular financial planning and investment appraisals, worst-case and best-case scenarios should
be drawn up. These can help to identify the
maximum risks, quantify financial lower limits,
and realistically illustrate possible consequences.
Growing demand for hedging
What can cause internationalization plans to
fail? A survey by Osec (since 2013: Switzerland
Global Enterprise or S-GE) of Swiss SMEs painted the following picture: By far the most common reason cited for failure was ”the wrong or
untrustworthy partner”. This view was shared
by 32 percent of the businesspeople who had
experienced failure. For 11 percent of those
surveyed, the costs were too high, and for
7 percent, broken contracts or failed contract
negotiations meant an early end to planned
internationalization. Other reasons for failure
were the wrong product, a lack of preparation,
insufficient expertise, and cultural and linguistic barriers. But entrepreneurs should not
be put off by the list of potential stumbling
blocks; in reality the final assessment shows
that there were many more successful instances
of internationalization than failed adventures
abroad (figure 1).
Uncertainty gives rise to a greater need for
external hedging and financing. This trend has
been further accentuated by the smoldering
financial crisis. Since 2008, the conditions for
business relationships in some regions have
taken a clear turn for the worse. Banks have had
a mutual mistrust of one another, leading to
a shortage of credit facilities. Countries ran into
massive difficulties in paying their bills because
of their debts, and were shored up by international bridging loans. Political upheaval in
North Africa and the Middle East (the Arab
Spring) added to the mix.
As a result of all these events, confidence has
seriously waned in the ability and willingness
of contractual partners in international business
to pay up. Swiss exporters have also had to
adapt to the new circumstances. All of a sudden,
certain clients could no longer easily obtain
financing for their purchases. Demand for confirmed documentary credits when dealing with
markets such as Spain and Italy, which had
previously been supplied by many exporters on
open account, shot back up markedly in the
past few years. Goods destined for the Gulf
States are also increasingly supplied today on a
secured basis.
There is a growing awareness among companies of the risks involved in trading goods across
borders – another result of the financial crisis.
At the same time, they are generally becoming
less able and less willing to bear these risks
themselves. This means that banks will also have
an important role to play in the future as sources
of hedging and financing instruments. The
continuously expanding global market with
more and more new players coming into it fundamentally increases the need for hedging
and financing. The debt problem in the industrialized world will also likely remain critical for
many years, which will keep demand high for
the corresponding solutions.
Exchange rates as a source of concern
When asked about the greatest dangers in international business, 94 percent of UBS corporate clients described exchange rate risk as “significant” or “very significant”. Nearly as many
survey participants, or 92 percent to be exact,
believe political risks to be similarly significant.
Also high up on the list of worries for Swiss
bosses and entrepreneurs were credit risks
(88 percent) and transfer risks, such as government trade barriers or restrictions on foreign
exchange (84 percent). Meanwhile, somewhat
less common concerns appear to be a fear of
production risks, performance risks and technical risks (figure 2). Responses to the followup question (“Which of these risks will become
more significant in the next few years?”)
produced a surprisingly similar picture, with
UBS outlook
25
Outlook Innovate or emigrate?
94 percent of respondents expecting the risk of
erratic exchange rate fluctuations to be as high
as they are now or even higher in the future.
Figure 2
What risks are likely to become more significant or less significant
for your company over the next two to three years?
Should the fears of entrepreneurs prove wellCurrency risks
founded, political risks and credit risks will rise
Political risks
significantly in the future (figure 3). Taking
Credit risks
a look at credit risks shows that these survey
Transfer
risks
results should, however, be put into perspecManufacturing
risks
tive: according to the Trade Finance Loss RegisTechnical risks
ter of the International Chamber of Commerce
(ICC), the average default rate among short-term Performance risks
trade loans is a mere 0.2 percent. In other
words: in cross-border business, only two cases
out of a thousand lead to the unwelcome
Source: UBS
situation where a foreign client is unable or
unwilling to pay.
in %
49
45
46
2 4
47
31
4 4
60
21
5
66
5
7
6
10
71
12
7
10
71
14
5
9
73
11
7
Rising significance
Same significance
Declining significance
Don’t know
Figure 3
Which of these risks will become more significant
in the next few years?
in %
71
Currency risks
Political risks
Transfer risks
5
10
43
33
51
12
2
4
Manufacturing risks
19
53
Technical risks
19
48
28
5
53
25
6
Performance risks
16
Rising significance
Same significance
Source: UBS
UBS outlook
4
27
45
Credit risks
26
23
65
Declining significance
Don’t know
26
3
Solutions
Risks and
side-effects
Taking a step over the border
opens up interesting prospects
for Swiss companies, and allows
them to tap into new sales
or production markets. But the
risks are numerous. To support
Swiss companies’ international
activities, UBS offers a broad
range of solutions to secure payment, exchange rate, performance or transfer risks, and also
provides suitable financing.
UBS outlook
27
Solutions Risks and side-effects
Financial solutions
along the value chain
Positive growth rates in the traditional
industrialized countries, and the strong
growth of emerging Asian economies,
present new market opportunities for
Swiss companies, whose value chains
are developing into international networks
that can be optimized and sustainably
strengthened with the help of financial
solutions.
The continued rapid growth of the emerging
and developing economies, led by China,
South-East Asia and India, presents new sales
opportunities for Swiss companies. But pur­
chasing power is not the only thing growing in
these markets. Progress in terms of technical
capabilities and manufacturing quality is also
creating new sources for procurement. Companies in high-price countries like Switzerland are
increasingly offshoring parts of their value
chain in order to remain internationally competitive. This is referred to as “decreased vertical
integration”.
Switzerland is becoming more integrated internationally, as its companies increasingly procure commodities and semi-finished products
in other countries, process them to create
consumer or capital goods, and then export
them all over the world. On the one hand,
this rising international division of labor and
specialization benefits everyone involved:
Swiss companies can produce at reduced cost,
consumers enjoy lower prices, and suppliers
gain access to a share of the profits. On the
other hand, tapping into new markets also
has its drawbacks, because new business relationships with previously unknown partners
mean increased risks. Companies are often unfamiliar with local business practices. New
markets often also prove more complex due to
different legal systems and a lack of transparency.
28
UBS outlook
International business activities generally entail
additional and greater risks in many areas,
which include:
Types of risk
Description of risk
Credit risk
Non-payment, insolvency of buyer
Currency risk
Exchange rate fluctuations
Contingent currency risk
The risk of having to terminate a forward transaction
(following negative exchange rate developments
for the exporter) in the event of a claim
Manufacturing risk
Delivery may become impossible or cannot be reasonably
executed, including inopportune unilateral cancellations
or amendments of orders
Performance risk
The producer is unable to meet contractual obligations
(due to production problems, financial difficulties,
or transport problems)
Transport risk
Damage to or loss of goods in transit
Political risk
The loss, damage or seizure of goods due to political
events or war
Transfer risk
Transfer difficulties, state-imposed payment blocks
Most risks can be hedged and minimized, although this requires them to be promptly identified and correctly assessed. Ultimately, however,
it is up to individual companies to decide how
much risk they can and wish to bear.
From a business perspective, companies can
only succeed internationally on a sustainable
basis if they are constantly improving and optimizing their entire value chain, from the procurement of goods to the sale of their products (supply chain management). The key is
establishing a close working relationship based
on trust between the company and all its upstream and downstream business partners
(suppliers, subcontractors, intermediaries and
end customers). If the company can create
benefits and win-win situations for all its part-
Risks and side-effects Solutions
The value chains of Swiss companies are developing into
increasingly broad and more international networks.
ners, it will have put the right conditions in
place for long-term and sustainable success on
the market.
that he can make payment in an established
trading currency. The more international the
value chain, the more varied the transaction,
securing and financing requirements of the
Rising globalization is causing the value chains business partners involved.
of Swiss companies to develop into increasingly broad and more international networks.
As a result, companies are confronted not
only with a changed risk structure, but in order
to remain successful in the long run, they
also need to take into account the individual,
business-related hedging and financing reFinancial requirements along the value chain
quirements of their network partners. And
these can be very different, depending on
Procurement
Transformation
Sales
each particular partner’s position within the
Payment transactions Overview and transparency of transactions and liquidity
value chain. A Swiss exporter, for example,
and cash management
Outgoing payments Liquidity management Payments received
hopes that the goods will arrive safely, that
and optimization
its foreign client pays promptly and reliably,
and that payment is made in a currency that
Trade and export
Financing
finance
is favorable from its own perspective. The
Securing of performance and payment
buyer/importer, on the other hand, hopes that
Additional services
Risk management; managing and hedging currencies
there are no delays in delivery, that it is grantand securities
ed as long a payment deadline as possible, and
UBS outlook
29
Solutions Risks and side-effects
Local banks can cover specific individual needs
along the value chain. However, such a service
is becoming increasingly inadequate for meeting the needs of internationally networked
Swiss companies. In such cases, it is prudent
to work with an equally internationally networked universal bank that can support its
partners across international borders with
expertise and services along the entire value
chain. If liquidity is called for at short notice,
if there is a need for more long-term financing,
if payments have to be made in a particular
currency, or if risks must be hedged – there are
corresponding instruments available for the
vast range of challenges faced in connection
with foreign trade from Trade & Export Finance
(TEF), Foreign Exchange (FX), and Cash Management Services.
Trade & Export Finance solutions
to meet the challenges of foreign trade
Purchase
Contract
Tender
Supplier
Delivery
Signage
contract
Advance
payment
Exporter/Seller
Securing payment
for the supplier
Securing performance/payment
for the exporter/seller
Documentary credit
import
Tender bond/Bid bond
Payment
Buyer
Securing performance/
payment for the buyer
Payment guarantee
Performance bond
Supply chain finance
Advance payment
guarantee
Guarantee for warranty
obligations
Receivables finance
Documentary credit export/
BPO/Documentary collection
Financing production
30
UBS outlook
Buyer credit
Documentary credit/
BPO with deferred payment
Export finance
Risks and side-effects Solutions
Numerous different instruments are available for the wide range
of requirements and challenges in connection with foreign trade.
Documentary credit
A documentary credit is a written assurance by
the bank that it will pay a specific amount in
an agreed currency to the beneficiary (seller)
Bank guarantees and standby letter of
on behalf of the buyer provided the beneficiary
credit
With a guarantee, the bank undertakes to pay submits the documents stipulated by the documentary credit within the specified deadlines.
a certain sum to the beneficiary should the
With a confirmation from the seller’s bank it is
contracting partner fail to make a payment or
a service as agreed. The contract of guarantee also possible to secure the credit risk for the
foreign bank as well as the transfer risk. Concontains an abstract promise to perform and
is a separate obligation that is completely inde- firmed documentary credits can generally be
pendent of the underlying transaction. Guaran- discounted or paid in advance, and are therefore
a favorable financing option for the exporter.
tees are used to hedge a wide range of performance and payment obligations. The standby
letter of credit originates from former US bank- Receivables finance
Companies can use factoring to monetize
ing law and is used like a guarantee.
their trade receivables for deliveries of goods
Counter guarantee issued by Swiss Export and services. The company sells or assigns
all its receivables from its clients.
Risk Insurance (SERV)
On behalf of the exporter, SERV covers the bank
Payment guarantee
issuing the guarantee against non-payment by
the exporter in the event that a contract bond is This secures the seller’s claims against the buyer,
in other words: the payment of the purchase
invoked. The SERV bond guarantee allows the
bank to issue a guarantee for the exporter with- price by the agreed date. A payment guarantee
offers greater security for deliveries to Switzerout requiring additional collateral.
land and abroad made on open-account terms.
It can be used instead of a documentary
Securing performance and payment
credit, and is frequently employed for recurring
for the exporter/seller
transactions.
Documentary collection
BPO (Bank Payment Obligation)
This instrument is suitable for trade transactions where the contracting parties do without A BPO is much the same as a documentary
credit without the requirement to present and
the security of a documentary credit but are
still reluctant to make a delivery on open account. check documentation. Instead, the buyer’s
and the seller’s banks compare data electronically
With a documentary collection, the exporter
instructs its bank to debit a certain amount from via a standardized data exchange platform.
Like the confirmation of a documentary credit,
the importer upon presentation of the consignment papers. Payment may be made in cash the seller’s bank can assume the payment risk
associated with the buyer (or its bank) abroad
or upon acceptance of a bill of exchange.
from the seller, against an appropriate fee.
Securing performance and payment for
the buyer
UBS outlook
31
Solutions Risks and side-effects
Buyer credit/Export financing
Export financing helps with the medium- to
long-term financing of capital goods. The way
this is implemented depends on the structure of
the particular export transaction.
Credits with SERV cover
SERV (Swiss Export Risk Insurance) offers instruments that make it easier for exporters to
do business in countries where political or
economic instability could jeopardize receipt
of payment.
In the case of buyer’s credit, the exporter’s
bank issues the buyer a loan, which is paid out
to the exporter in order to settle the purchase
price, and repaid by the buyer at a later date.
Due to the large amount of work involved
in documenting the loan, buyer’s credit is only
worth considering for high-value export loans.
The Swiss government uses mixed credits to
allow the governments of developing economies
or government organizations to take out loans
in Swiss francs in order to finance Swiss goods
and services for high-priority development projects. Mixed financing consists of a federal government portion and a bank portion. The federal government portion is gifted to the borrower.
Swiss banks provide the bank portion to the
borrower on behalf of the federal government,
with insurance from SERV, in the form of buyer’s credit. It is important for exporters to be
aware that the project cycle leading up to the
conclusion of a contract and delivery takes much
longer than for transactions financed on a
purely commercial basis, with or without SERV.
In the case of multi-source financing, internationally networked universal banks help both
suppliers and buyers put together complex financing packages. The advisory and financing
services offered cover short-, medium- and longterm loans, with or without export credit
The exporter can, however, finance the purchase price for the delivered goods in advance insurance.
and in its own name. This is referred to as
Credits without SERV cover
supplier’s credit. In this case, the exporter
Forfaiting is the non-recourse sale of receivables
sells its goods with financing included. This
gives it more freedom to specify the financing from the export of goods and services by the
exporter. For suppliers, this is a simple and attracconditions, because its costs, profit margin
and financing costs are an integral part of the tive way of export financing.
terms of payment in the delivery contract.
If the exporter sells its receivable in connection Finally, the exporter also has the option to
finance advances and interim payments as well
with the supplier’s credit to its bank, this is
as local costs by taking out an export
referred to as purchase of receivables.
finance credit from its bank.
UBS has framework credit agreements with
a large number of banks in the key export
markets, which enable the financing of individual
transactions at standard, predetermined
terms and conditions. The advantage for the exporter is that this makes negotiating with the
buyer on the financing of the supply transaction
significantly simpler and quicker.
32
UBS outlook
Risks and side-effects Solutions
Securing payment for suppliers
Supply chain finance is a modern financing
solution for the procurement of goods by
companies. Suppliers reduce their credit risk
and receive earlier access to liquidity on favorable conditions, which they can then use
to secure production and the provision of
goods and services on an ongoing basis.
Import documentary credits are a good way
for suppliers to secure their payments. The
supplier is paid provided it meets the delivery
deadlines stipulated by the documentary
credit and presents the specified documents on
time.
Financing production
In the case of a working capital loan, the
bank grants the exporter a transaction-related
credit to finance production at cost for an
export transaction generally insured by SERV.
UBS outlook
33
Solutions Risks and side-effects
Systematic hedging offers companies planning certainty
and protection against currency risks.
Protecting profits against
currency losses
Once a company starts doing business
abroad, it has the ups and downs of the
currency markets to cope with.
Even minor changes in exchange rates can
have a major impact on Swiss companies that
export or import. For example: let’s say a
product costs 9,000 Swiss francs to make and
sells for 10,000 Swiss francs. This means the
margin is 1,000 Swiss francs. The company
receives an order from the US and invoices
the delivery at the current rate of 1.00 franc
to the dollar. Before the goods are delivered
and the invoice paid, the dollar/franc rate falls to
0.9. The 10,000 US dollar return on the sale
is now worth only 9,000 Swiss francs and instead
of a profit on the deal, the company is looking
at a big fat zero.
Hedging protects the fruits of our labor. Even
small changes in exchange rates can affect
a company’s financial position and make it more
difficult to calculate the margins. Systematic
hedging offers companies planning certainty
and protection against exchange rate risks – in
much the same way that hedges have always
protected the harvests of English farmers.
A brief explanation of instruments used to hedge foreign currency risks
34
FX forward
A forward transaction is a commitment to exchange
one currency for another on a specific date. The difference between the spot price and the forward rate is the
cost of the hedge. Forward currency purchases are
conduct­ed in the expectation that exchange rates will
rise by the settlement date, and sales in the expectation
that exchange rates will fall.
Exotic FX options are barrier options and, unlike the
conventional options described above, include addition­
al terms or agreements, as well as specific payment
and risk structures depending on the individual case.
Alternatives to forward transactions: options,
structured products and spot transactions
Unlike unconditional forward transactions, FX options
give the buyer the right, but not the obligation, to
trade a currency pair at a particular rate. A premium
is paid for the option, in the form of the option price.
This facilitates complete hedging against disadvantageous currency movements. At the same time, you still
have the choice not to exercise the option if exchange
rates move in your favor.
FX spot transactions
This is the buying or selling of foreign currencies with
the contract concluded and fulfilled “at the same time”.
Thus it allows you to hedge against the settlement of
receivables in future at an unfavorable movement in
exchange rate. If exchange rates move in your favor, however, you also lose out on potential earnings and your
cash is tied up.
UBS outlook
There are a large number of structured products avail­
able, consisting of a combination of money market investments, currency options, and option products, etc.
Risks and side-effects Solutions
Systematic management of exchange
rate risks
Handling currency risks is a (rolling) process
involving five steps. Time and again,
experience has shown that what matters is
not so much the hedging of individual
transactions, but having a clear hedging strategy and sticking to it.
Abrupt swings in exchange rates hit companies
harder than long-term trends that can be prepared for. In any case, the crucial thing is that
a clear hedging concept more securely hedges
imminent cash flows than those further in the
future. This preserves flexibility should conditions on the market change in the meantime.
1. Identify risks
Exchange rate risks can arise in connection
with a) cash flow from trading goods
in foreign currencies, b) offers in foreign
currencies, and c) currency reserves in
accounts. It is vital to spot these risks at
an early stage.
2. Measure risks
Identified risks must be quantified. It is
particularly important to gauge which
way the currency markets will move over
a particular period of time.
3. Reduce risks
Companies can eliminate many exchange
rate risks naturally − by intelligently coordinating their international purchases and
sales. This is known as “natural hedging”.
4. Transfer residual risks or hold on
to them
Where residual risks are concerned, it is
necessary to decide how far it makes
sense to hedge them. After all, a residual
risk can still lead to currency-related profits.
Only when these questions have been
cleared up should a hedging instrument
be chosen.
5. Measure performance
Systematic evaluation of both the impact
of foreign currencies and of the hedging
measures taken will provide valuable information for future decision-making.
UBS outlook
35
Solutions Risks and side-effects
Cash management and
international payments
When dealing with business partners either in
your own country or elsewhere, it is absolutely
essential that payments can be made reliably,
quickly and simply. Buying and selling in a
number of different currencies, and the costs
for production and infrastructure in the currency of a company’s domestic market, tie up
liquidity and make it difficult to keep an
overview. The better a company can make use
of its working capital and thus keep costs to
a minimum, the stronger its income statement
will be.
Global payments from Switzerland
in over 130 currencies
UBS offers corporate and institutional clients with
international activities an innovative new way to
make payments all over the world in 130 different
currencies – Pay Worldwide. Alongside all the major
currencies, a host of exotics are available.
Clients use their normal access channel to issue a
payment instruction directly in the beneficiary’s
local currency. UBS has the amount converted into
the target currency before the payment is forwarded
to the receiving bank. Since the payment arrives
in the local currency, no conversion charges are owed
to the beneficiary bank.
Securing liquidity
Regardless of whether a company operates
locally or internationally, it is essential that
Both the instructing party and the beneficiary enjoy
its customers pay as quickly and fully as posattractive conditions and transaction prices. The only
sible for goods delivered and services prorequirement is a UBS account in CHF, EUR, USD or GBP,
vided. To achieve this, the company’s own
and the relevant agreement.
accounts receivable function must send
out invoices promptly, and issue reminders
to those in default. Even simple measures,
such as paying-in slips with reference numbers, Therefore: systematic cash management
is the lifeblood of any company and should
allow steps in the process to be automated,
and can bring about sustainable improvements ideally include the following elements:
in debtor management.
UBS Cash Management approach at a glance
Keeping an overview
Liquidity should be planned in advance in
order to avoid bottlenecks. Both outstanding
payments and ongoing or planned expenditure have a strong impact on the liquidity
required by a company. This is a particular
concern for companies whose business is
cyclical. Basing liquidity simply on the maximum amount of working capital required
cannot be the aim, as unused, this results
in costs. The interim investment of surplus
liq­uidity using maturities and forms tailored
to the company’s capital requirements will
prevent bottlenecks and unnecessary costs.
36
UBS outlook
Cash overview
Cash movement
Cash investment
Comprehensive reporting
provides a full overview
of all your cash movements
and how much cash you
have, in which accounts,
and at any time.
A wide range of payment
solutions enable you to
move your money efficiently
both within and outside
Switzerland.
Depending on the cash you
have available, you can invest
your capital where you need
it in line with your particular
liquidity requirements –
drawing on the targeted
advice and support of our
specialists, as needed.
System integration
With our support, you can link your accounting
and treasury management systems simply and
securely to UBS.
Risks and side-effects Solutions
Systematic cash management is the lifeblood of any company.
Selected solutions for international
transactions
Switzerland/Europe
SEPA1 payments:
The single euro payments area currently comprises 34 countries, including Switzerland.
Gateway accounts:
These are maintained in Switzerland as a main
account, and offer direct access to selected
European markets, allowing incoming and
outgoing international payments to and from
these countries to be processed subject to
the same terms and charges as local payments.
They make it easier to sell goods and services
from Switzerland, since many customers in the
EU have difficulty making cross-border transfers to Switzerland and are wary of the charges
imposed by foreign banks.
The advantages of SEPA
Thanks to SEPA, domestic companies can transfer euros to participat­
ing financial institutions in the EU, EEA, Monaco and Switzerland,
more easily, transparently, securely, quickly and inexpensively.
• More easily, because details such as the IBAN (International
Bank Account Number) and BIC (Business Identifier Code) allow
the fully automated processing of transactions.
• More transparently, because the break-down of fees is clearly
defined and recipients receive the entire transfer amount.
However, some recipient banks charge their clients (recipients)
a price for payments received from Switzerland, which they
communicate in advance.
• More securely, because all banks apply the same review criteria.
• More quickly, because UBS passes on payment orders submitted
in good time on the same day, even with a currency conversion.
• More inexpensively, because with SEPA, international payments
cost the same as domestic payments in euros.
Switzerland/global
International payments:
The better a company’s financial partner is
networked internationally, the easier it is for
the amount being transferred to reach the
recipient efficiently, whatever country they are
in. Possible alternatives include selected payment systems or partner banks in other countries. Payments to other countries are either
processed electronically and cost-effectively, or
by traditional, paper-based means, depending
on the options available and the client’s individual requirements.
Multibanking solutions:
These are suitable for all companies that hold
accounts with other banks in addition to their
main bank. Special software and corresponding
interfaces can be used to include all the company’s banking relationships in its accounts
receivable system.
1
Single Euro Payments Area.
UBS outlook
37
Solutions Risks and side-effects
Example: renminbi payment options
available to the Lucerne-based company
“Elektronik AG”
Elektronik AG regularly procures goods from
various Chinese manufacturers. Contracts
were always negotiated in US dollars in the
past, which incurred substantial costs for currency conversion and payment transactions.
The Chinese manufacturers also regularly took
the opportunity to renegotiate prices on account of “currency problems”.
It therefore made sense for Elektronik AG to
open a renminbi account from which it could
settle the Chinese suppliers’ invoices directly.
Payments are charged directly to the account
and sent to the suppliers in “mainland China”
via UBS Hong Kong. Before being credited, the
offshore currency (CNH) is converted to the
onshore currency (CNY) at a rate of 1:1 using
the local clearing system (CHATS).
Thanks to this solution, Elektronik AG enjoys
attractive exchange rates, and simpler and
faster processing of payments. It also makes
negotiations with Chinese partners easier. In
addition, Elektronik AG can consider other
suppliers who could not be used before because they only invoice in CNY.
The new account has enabled Elektronik AG to
expand its collaboration with its Chinese
partners within a short space of time. The
company also saves money because it no
longer has to go through the US dollar as
an interim currency.
The renminbi and the yuan − more
than one currency in China?
RMB is the abbreviation of renminbi
(“people’s currency”), and is mainly used
in China to refer to the physical currency.
CNY is the official ISO code for the Chinese
currency, and the market term for the RMB.
It is also the abbreviation for the Chinese
yuan that can be traded on the domestic spot
market (but is not available outside China).
CNH is the technical market term for the
tradable and deliverable offshore renminbi
used exclusively outside the Chinese
mainland.
CHATS refers to a local clearing system.
Payment to China (CNH)
UBS
Hong Kong
operating
in CNH
Bank
of China
operating
in CNH/CNY
Crediting
1:1
No Fees
Payment from China (CNH)
Outside China (offshore)
Additional information on the solutions
www.ubs.com/sme-international
www.ubs.com/tef
www.ubs.com/cashmanagement
Brochures on Trade & Export Finance,
Foreign trade, Foreign currencies and
Cash Management
38
UBS outlook
Payment to China (CNY)
Client in China
has a CNY account
Payment from China (CNY)
In China (onshore)
Also published in the UBS outlook series:
Alpine tourism*
SAP order number 83418D-1302, 83418F-1302
Energy**
SAP order number 83418D-1301, 83418F-1301, 83418I-1301
Information technology*
SAP order number 83418D-1201, 83418F-1201
Mechanical Engineering, Electrical and Metal Industry*
SAP order number 83418D-1001, 83418F-1001
Wholesaling*
SAP order number 80711D, 80711F
Company succession*
SAP order number 81976D, 81976F
Reports on the world economy, the Swiss economy, the Swiss
franc and the real estate market in Switzerland are available
in the quarterly publication UBS outlook Switzerland.
* in German and French only
** in German, French and Italian only
Publisher
UBS AG, Marketing Switzerland
P.O. Box, 8098 Zurich
In cooperation with
UBS AG, Chief Investment Office WM
P.O. Box, 8098 Zurich
Editorial staff
Kathrin Wolff Schmandt
Authors
Sibille Duss, Jörg Becher, Christian Rintelen,
Michèle Debrunner, Heiner Lang
Layout
Margrit Oppliger
Contact address
[email protected]
Printing
galledia ag, Flawil
Ordering address
UBS AG
Printed and Branded Products
P.O. Box, 8098 Zurich
Production management
Barbara Litschi
Photo credits
UBS Photo Database
iStockphoto
gettyimages
Tom Haller
[email protected]
www.ubs.com/outlook
SAP order numbers
83418D-1401
83418F-1401
83418E-1401
Printed in June 2014
The facts in this publication have been carefully researched, however, no warranty is given as to their accuracy. The views and opinions
expressed herein may deviate from the official opinion of UBS AG. For better readability we have always used the masculine form.
Published in English, German and French. Printed in Switzerland in June 2014.
© UBS 2014. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.
UBS AG
P.O. Box, 8098 Zurich
www.ubs.com

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