Manufacturing Trends Quarterly
Q2 2016
Manufacturing Trends Quarterly | Q2 2016
Executive summary
Financial prospects
Manufacturing sector CFOs
are more divided than CFOs in
other sectors about the financial
prospects for their company over
the next 12 months.
Impact of Brexit
The UK’s departure from the
EU is likely to have economic
repercussions, but its impact on
Switzerland could be limited.
2
1
2
3
4
5
Deloitte CFO outlook
Manufacturing sector CFOs’
expectations for economic growth
in Switzerland have improved
slightly, but CFOs in other sectors
are much more optimistic for the
next 12 months.
Growth prospects
Revenue expectations of
manufacturing sector CFOs for the
next 12 months have decreased
compared to the previous quarter,
while expectations for operating
margins remain negative.
Business risks
Weaker domestic demand,
geopolitical risks and the strength
of the Swiss Franc are still seen as
the biggest threats, followed by
increasing regulation in Switzerland.
Manufacturing Trends Quarterly | Q2 2016
1. Deloitte CFO outlook
Manufacturing sector CFOs’ expectations for economic growth in Switzerland
have improved slightly, but CFOs in other sectors are much more optimistic for
the next 12 months.
Positive
Economic outlook (net balance) (Q1 2012 – Q2 2016)
Question: How do you judge the economic outlook for Switzerland over the next 12 months?
49% 55%
-10%
9%
-1% 4%
-6%
-14%
-32%
60%
80%83% 73%
76% 72% 48%
32%
56% 70%
42%
39%
20%
10%
29%
-18%
-46%
-29%
Negative
-58%
-5%
-4% -3%
-3%
-27%
-31%
-39%
18%
0%
42%
29%
•• 29% of manufacturing sector CFOs are now
optimistic (previous quarter 28%) and another 29%
remain pessimistic (previously 31%). The majority
of manufacturing sector CFOs (42%) remain neutral
(previously 41%).
•• The environment in which Swiss companies are
currently operating is not an easy one. After a
partial recovery from the shock waves caused by the
removal of the exchange rate floor against the euro
in 2015, this quarter has been dominated by growing
concern about risk (see Chart 5).
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
12 12 12 12 13 13 13 13 14 14 14 14 15 15 15 15 16 16
Manufacturing
•• The views of Swiss CFOs about the economic outlook
have improved this quarter. The confidence of
manufacturing sector CFOs is now neutral with the net
balance at 0%, compared to -3% in Q1. The net balance
of other sectors improved sharply from -5% to 18%.
Other sectors
•• The survey period was overshadowed by uncertainty
about the impact of a potential exit of the United
Kingdom from the European Union (Brexit). Concern
grew in the run-up to the referendum (see Chart 4),
and external uncertainty is likely to remain high now
that the UK has voted to leave.
2. Financial prospects
Manufacturing sector CFOs are more divided than CFOs in other sectors about
the financial prospects for their company over the next 12 months.
Positive
Companies’ financial prospects (Q2 2015 – Q2 2016)
Question: How do you rate your company’s financial prospects over the next 12 months?
30%
39%
Negative
-26%
33%
-33%
36%
-28%
27%
-21%
50%
-19%
-48%
41%
-28%
47%
-18%
50%
-33%
48%
-16%
Neutral
22%
35%
Q2 2015
Manufacturing
33%
36%
52%
Q3 2015
Other sectors
31%
Q4 2015
31%
36%
Q1 2016
17%
36%
Q2 2016
•• In Q2, 50% of manufacturing sector CFOs judge
their company’s financial prospects for the next
12 months as more positive compared to the last
four quarters.
•• However, 33% of manufacturing sector CFOs rate
them as negative, a slight increase from the previous
quarter (28%) and double that of other sectors (16%).
The number of manufacturing sector CFOs who
judge the financial outlook as neither positive nor
negative decreased from 31% to 17%.
•• The picture remains largely unchanged for CFOs
in other sectors, with 48% currently optimistic
(previously 47%) and 16% pessimistic
(previously 18%).
Notes: The net balance is the balance of positive (increase) and negative (decrease) assessments of the respondents.
Source: Deloitte CFO Survey.
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Manufacturing Trends Quarterly | Q2 2016
3. Growth prospects
Revenue expectations of manufacturing sector CFOs for the next 12 months
have decreased compared to the previous quarter, while expectations for
operating margins remain negative.
•• Revenue expectations of manufacturing sector CFOs
have decreased in Q2 2016 to a net balance of 23%
(previous quarter 38%). However, 55% still expect
an increase in revenue over the next 12 months and
only 23% a decrease. Revenue expectations of CFOs
of other sectors have also decreased (from a net
balance of 49% to 40%).
Positive
Key metrics (net balance) (Q1 2016 vs. Q2 2016)
Question: In your view, how are the following key metrics for Swiss corporates likely to
change over the next 12 months?
Manufacturing
38%
23%
Negative
6%
-16%
Revenues
Positive
Q1 2016
Q2 2016
-16%
-28%
Operating
margins
Capital
expenditure
Number of
employees
Other sectors
49%
40%
11%
Negative
3%
0%
14%
9%
7%
-8%
Revenues
Q1 2016
Q2 2016
-11%
Operating
margins
Capital
expenditure
Number of
employees
•• Expectations for operating margins among
manufacturing sector CFOs have slightly improved,
but remain negative (net balance of -16%). Only
29% of manufacturing sector CFOs expect margin
increases, with 45% expecting decreases. Margin
expectations of CFOs in other sectors remain on
a similar level compared to the previous quarter.
•• CFOs in other sectors still expect higher capital
expenditure than manufacturing sector CFOs. Capital
expenditure expectations of manufacturing sector
CFOs have dropped from a net balance of 6% to 0%.
•• The number of employees in all sectors has
decreased compared to the previous quarter.
4. Impact of Brexit
The UK’s departure from the EU is likely to have economic repercussions, but its
impact on Switzerland could be limited.
•• Worries about the consequences of the UK
leaving the EU (Brexit) had increased before the
referendum of 23 June 2016. In Q1 2016, only 17% of
all Swiss CFOs expected a negative impact for their
businesses if Brexit were to happen. In Q2 the figure
increased to 40% for manufacturing sector CFOs and
42% for other sectors.
Impact of Brexit (Q1 2016 vs Q2 2016)
Question: How would the exit of the UK from the EU (Brexit) impact your business?
Manufacturing
Positively
3%
3%
3%
No opinion/
prefer not to say 0%
Negatively
Other sectors
1%
14%
14%
•• Only 3% of manufacturing sector CFOs expect a
positive impact of Brexit while 57% see little or no
impact (the corresponding figures for CFOs of other
sectors are 1% and 52% respectively).
5%
17%
17%
40%
42%
66%
Little to no impact
66%
57%
Q1 2016
Q2 2016
52%
Q1 2016
Q2 2016
•• Brexit is likely to have economic repercussions, but
the impact on Switzerland could be limited. Indeed,
in the best case scenario it could actually promote
reform (for more details see: Deloitte Perspectives –
Brexit: Economic impact for Switzerland).
Notes: The net balance is the balance of positive (increase) and negative (decrease) assessments of the respondents.
Source: Deloitte CFO Survey.
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Manufacturing Trends Quarterly | Q2 2016
5. Business risks
Weaker domestic demand, geopolitical risks and the strength of the Swiss Franc
are still seen as the biggest threats, followed by increasing regulation in Switzerland.
Risk factors for the next 12 months (Q1 2016 vs Q2 2016)
Question: Which of the following factors are likely to pose a significant risk to your business over the next 12 months?
Low risk
High risk
Weaker domestic demand
69%
75%
Geopolitical risks
63%
Increasing regulation in Switzerland
53%
Shortage of skilled professionals
47%
Weaker foreign demand
47%
44%
Deterioration of cash flow
38%
Rising trade barriers/protectionism
28%
Rising input costs
Rising labour costs
16%
Cost of capital
6%
Shortage of capital
6%
75%
57%
48%
50%
44%
44%
39%
34%
Stress in the financial system
Q1 2016
67%
66%
Strength of the Swiss Franc
75%
38%
22%
11%
7%
9%
Q2 2016
Notes: The figures for business risks are for the manufacturing sector only. The percentages indicate the number of responses that rate the
respective risk as high.
Source: Deloitte CFO Survey.
Interview with Prof. Dr. Frank Brinken, Vice-Chairman, Starrag Group
Holding AG
Deloitte: A majority of manufacturing CFOs still expect an increase
in revenue over the next 12 months, however, expectations for
operating margins remain negative. After years of cost reduction
projects, what potential do you see for further operational
improvement in the Swiss manufacturing industry?
Frank Brinken: These expectations show that the current
exchange rate environment forces the manufacturing industry to
maintain volumes by sacrificing margins. Switzerland’s machinery
industry enjoys the benefit of a sound, local and highly flexible
supply chain for high precision components.
While comparable supply chains do exist in Southern Germany
and partially in Northern Italy, the change to a new supplier is
associated with significant costs and needs several quarters,
before any positive impact on the bottom line can be realised.
The same is true for the continuous efforts to introduce leaner and
more efficient manufacturing processes, which are still relentlessly
pursued in the Swiss manufacturing industry. Investments for
automation projects for 24/5 or 24/6 operations are facilitated
by the current low interest rates. These projects allow a revenue
increase without increasing labour costs.
5
It seems that the industry starts reaping the benefits of lean and
automation projects with a delay of 2-3 years. This means that the
Swiss manufacturing industry will again have a better competitive
position in the future, mitigating the effect of the current ~1.10
CHF/EUR exchange rate.
Another driver for these investments is the current insecurity
about the effects of the “mass immigration” initiative launched by
the right wing SVP party.
Deloitte: What do you think would be the impact of the UK leaving
the EU (Brexit) on the Swiss manufacturing industry?
Frank Brinken: The UK is currently the 6th most important
market for Swiss machinery exports. Switzerland exports about
4% of a total of 60 Mia CHF to the UK. UK also accounts for 4%
of machinery imports into Switzerland. We will observe how UK
industry deals with the fallout caused by Brexit. While there will be
no immediate negative impact for us, we will nevertheless continue
to monitor the situation.
Deloitte: What do you see as the main strategic priorities in the
current economic environment for your business over the next 12
months?
Deloitte: What do you see as the biggest growth opportunities for
the Swiss manufacturing industry over the next 12 months?
Frank Brinken: Switzerland’s manufacturing industry enjoys
a friendly business climate with a flexible, talented work force,
and a relatively young machine population. This is a competitive
advantage for the industry, positioning it more strongly to embrace
the megatrend towards the digitalization of manufacturing process
chains, (“Industry 4.0”), the fourth industrial revolution.
Profile
Prof. Dr. Frank Brinken has been a member of the Board of
Directors of Starrag Group Holding AG since 2014. He previously
served as CEO of Starrag Group since 2005. Prior to that he was
Chairman of the Board and delegate President of Maag Pump
Systems Textron AG. After holding a position in research and
industrial consulting at the Plastics Processing Institute (IKV)
in Aachen, he joined Georg Fischer as Product Manager and
then served as a Business Unit Head at Alusuisse-Lonza before
accepting the position of CEO at Maag Pump Systems AG in 1995.
Prof. Dr. Frank Brinken is also Vice-Chairman of Tornos Holding AG
in Switzerland, member of the Board of Directors of Fastems OY AB
in Finland and President of the Foundation Board of the foundation
Inspire/ETHZ in Switzerland.
Frank Brinken: The main priorities for the Swiss manufacturing
industry will still be automation and lean process investments,
alongside continued and in many cases increased R&D spending.
Preparations for a Plan B, should the EU cancel the bilateral
agreements with Switzerland, are also on the top of the strategic
priorities list for most manufacturing companies.
Key contacts
Konstantin von Radowitz
Industrial Products Leader, Deloitte AG
+41 (0)58 279 64 57
[email protected]
Dr. Michael Grampp
Chief Economist & Head of Research, Deloitte AG
+41 (0)58 279 68 17
[email protected]
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