Swiss firms are scrambling to cut costs following the surprise decision by the Swiss National Bank to de-peg the nation’s currency from the euro made exports 15 percent more expensive overnight.
The currency dilemma is likely to be a hot topic at the SIHH watch show in Geneva that begins its five-day run today.
The Swiss stock market lost close to 9 percent on the day of the announcement, while the franc jumped 15 percent against the euro in a single session, also logging sizeable gains against the U.S. dollar, British pound and yen.
The stronger Swiss franc is likely to weigh on earnings for export-driven industries like watches, pharmaceuticals and financial services, but could also dampen the country’s tourism industry and penalize retailers located close to its borders with Germany, France and Italy.
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Swiss Textiles, an organization that represents around 200 local companies in the textile and apparel industry, called the decision “incomprehensible.” The sector, which employs some 12,500 people, exports 75 percent of its production to the European Union.
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“With the decision to abolish the minimum currency rate and the resulting reaction of currency markets, our export prospects deteriorated by 15 to 20 percent in the space of a few minutes,” said Andreas Sallmann, the group’s president.
The organization warned that if the Swiss franc remained at current levels, many exporting firms would close and the unemployment rate would rise.
The Swiss Business Federation said cheaper imports could also result in further deflation. Europe already is experiencing negative price inflation with the World Bank warning Friday that the Continent could face the prospect of prolonged deflation.
“Given the tensions on financial markets and the uncertainties surrounding the future of the euro zone, the franc is set to remain lastingly overvalued,” the Swiss Business Federation predicted.
Jean-Claude Biver, head of the watch division at LVMH Moët Hennessy Louis Vuitton, said his teams were already working on a plan to slash operating expenses in Swiss francs. He said “cosmetic” measures could include purchasing screws in Germany and leather bracelets in France or Italy, so they would be billed in euros.
“We are creative, reactive and attentive,” said the watch industry veteran, who oversees the Tag Heuer, Hublot and Zenith brands.
He agreed with Swatch Group chief executive officer Nick Hayek, who called the move by the Swiss National Bank a “tsunami” for the export industry and tourism, in particular.
“I see today that the Swiss franc continues to strengthen and that this strengthening is across the board,” Biver said. “If that isn’t a tsunami, then what is?”
He predicted that watch firms would hold off on raising prices in the hope that foreign currencies will gain back some ground against the franc in coming months.
“If we remain down 15 percent or 20 percent, and if that situation continues for more than six months or a year, I don’t think anyone will be able to hold off from raising prices. Naturally, no one will raise prices by 15 percent, but there will be one-off increases of 3 percent or 5 percent, that’s obvious,” Biver said.
Peter Kriemler, ceo of fashion firm Akris, bemoaned that the uncoupling of the Swiss and euro currencies came without warning or transparency, leaving business leaders questioning the long-term consequences of operating in the Alpine nation.
“I still have about 40 percent of my costs in Switzerland,” he said. “This is something I can’t sustain in these conditions.”
Prized for its luxurious sportswear and double-face cashmeres, the St. Gallen, Switzerland-based firm also manufactures in Italy.
Kriemler noted the currency action would not have been so destabilizing had it been done even six months ago, when the euro was strong. “Every company [that] does an industrial work now needs to think and take a decision,” he said.
The currency turmoil comes about six weeks away from the Akris fall-winter 2015 show in Paris, and Kriemler said he doesn’t expect any “big impact” for the selling season, while allowing that margins will be squeezed.
“I can’t react short-term on prices, and I can’t behave differently than my European competitors,” he explained.
Jean-Daniel Pasche, president of the Swiss Watch Federation, said watchmakers would be heavily impacted by the bank’s move as they export around 95 percent of their output. “We are surprised by this decision, but also very worried about its consequences on our industry,” he said.
He said Swiss brands were faced with a dilemma: Keep prices stable and watch their margins shrink, or raise prices and become less competitive.
Prior to the SNB’s announcement, the federation expected watch exports would grow around 2 percent in 2015, broadly on a par with the previous year, though final figures for 2014 will only be published on Feb. 3. It is now revising its 2015 forecast in light of the currency swings.
Jon Cox, head of Swiss equities at broker Kepler Cheuvreux in Zurich, was slightly more upbeat, forecasting demand for timepieces will grow in the mid-single-digits in local currency terms.
“From a demand perspective, I’m pretty confident, but obviously from a business perspective, it’s going to be very tough,” he said. “They’re going to look for cost savings. Maybe they’ll try and squeeze more productivity out of workers.”
Swatch Group shares closed down 7.9 percent on Friday, following a 16.4 percent drop the previous session, as investors readjusted their earnings forecasts for the firm, which makes prestigious mechanical timepieces such as Breguet and Blancpain as well as the ubiquitous Swatch.
Shares in Compagnie Financière Richemont, parent of watch firms including IWC, Baume & Mercier, Jaeger-LeCoultre and Vacheron Constantin, fell 15.5 percent on Thursday and 6.7 percent on Friday.
Cox at Kepler Chevreux said the declines were justified. “All of the stocks should have fallen at least 15 percent yesterday,” he said.
However, Exane BNP Paribas said the immediate drops in the Swatch Group and Richemont share prices appeared “overdone” by 2 percent to 3 percent.
It calculated that Swatch Group earnings would be 13 percent lower in 2015 as a result of the currency swing, all else being equal, while Richemont’s revenues would be down 3 percent, resulting in a 13 percent drop in the group’s Swiss franc-denominated share price.
The Biel, Switzerland-based Swatch Group reports its results in Swiss francs, while Richemont reports in euros.
“All this is calculated before remedial actions,” Exane said, noting that hedges would not protect either firm from swings in the Swiss franc’s rate against the euro, as the market had been relying on the SNB peg.
“Price increases could in theory come to the rescue, but subdued demand conditions would likely limit pricing flexibility in FY15E. Cost efficiency measures could be taken. We haven’t factored them in in this ‘back of the envelope’ calculation,” it added.
The bank’s decision had an immediate impact on retail.
“It’s extremely quiet in the shop at the moment and even outside. No one knows what to do,” said René Beyer, one of Switzerland’s best-known watch retailers.
The family-owned business, now in its eighth generation, traditionally makes roughly half its sales to foreigners and the remainder to Swiss clients.
“Obviously the watch brands are going to have a tougher time selling abroad. But Swiss exporters have been under a form of artificial protection for the past three years. We’ve had three great years. Now we’ve got to get used to tougher competition again,” Beyer said.
“But there have been sufficient increases in productivity, and quality has, if anything, improved. The industry has learned some really important lessons and is better prepared for this,” he added.
Lars Hannibal, owner and manager of Hannibal Uhren in the northern Swiss city of Schaffhausen, said he now faces even tougher competition from rival watch sellers in neighboring Germany, notably the city of Stuttgart, where clients paying in euros may be able to obtain the same items more cheaply than in Swiss francs.
“We don’t know yet how the watchmakers are going to react in terms of price changes, but expect further news at the big SIHH watch show in Geneva,” he noted, referring to the trade show.
“What’s particularly important will be the development of the Swiss franc against China’s [yuan] and there’s no real clear sign of that yet,” Hannibal added. “Foreign buyers are very important for us and count for up to 40 percent of our sales.”
Anne Gorgerat Kall, spokeswoman for Gübelin, a leading Swiss jewelry and watch retailer with eight stores in Switzerland and representation in Hong Kong and Kuala Lumpur, was sanguine.
“We sell products that are luxurious and long lasting, so our customers are not that price sensitive. We don’t expect demand to react so sharply,” she said.
Foreigners account for about half of Gübelin’s sales, regularly visiting prominently located stores, such as in Zurich’s glitzy Bahnhofstrasse.
“Obviously products will become more expensive for our foreign customers, though of course we have plenty of Swiss clients too. But no one’s panicking. Let’s wait and see,” Gorgerat Kall added.
The Swiss central bank’s decision to discontinue the minimum exchange rate floor of 1.20 Swiss francs per euro, introduced in 2011, came as a surprise even to Christine Lagarde. The director of the International Monetary Fund admitted in an interview with CNBC that she had not been given prior warning by Thomas Jordan, chairman of the governing board of the SNB.
The SNB’s move is thought to have been prompted by expectations that the European Central Bank will unveil a program of quantitative easing at its next meeting on Thursday to counter deflationary forces in the euro zone.
This would involve massive purchases of sovereign debt that are expected to further weaken the euro against the dollar, increasing the Swiss franc’s “safe haven” status and making it increasingly costly for the SNB to keep a lid on the currency.
Swiss bank UBS estimated that the Swiss currency’s uncoupling would have a direct impact on Swiss exporters of around 5 billion Swiss francs, or $5 billion at current exchange, equivalent to 0.7 percent of the country’s gross domestic product.
It has lowered its forecast for Swiss economic growth to 0.5 percent in 2015 and 1.1 percent in 2016, versus 1.8 percent and 1.7 percent previously.