Textile and apparel in switzerland

Economic Research

Swiss Issues Industries

Sector Handbook 2013 Structures and Prospects

Credit Suisse Economic Research

Swiss Issues Industries

Publishing Details

Publisher Giles Keating Head of Research for Private Banking and Asset Management +41 44 332 22 33 [email protected] Oliver Adler Head Economic Research +41 44 333 09 61 [email protected]

Contact [email protected] Tel. +41 44 334 74 19

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Publication Deadline December 21, 2012

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Copyright The publication may be quoted providing the source is indicated. Copyright © 2013 Credit Suisse Group AG and/or affiliated companies. All rights reserved.

Authors

Marc Bill Nicole Brändle Schlegel Andreas Christen Loris Eichenberger Emilie Gachet Philippe Kaufmann Dr. Christian Kraft Damian Künzi Dr. Manuela Merki Jan Ruffner Niklaus Vontobel


Swiss Issues Industries 3

Contents

Editorial 5

Prospects for the Sectors 6

Medium-Term Analysis of the Sectors 9

Industry Food Products 12 Textile and Clothing 13 Wood 14 Printing and Publishing 15 Chemicals 16 Pharmaceuticals 17 Plastics 18 Metal Industry 19 Electronics 20 Measuring and Control Instruments 21 Watchmaking 22 Electrical Engineering 23 Machinery and Equipment 24 Furniture 25 Medical Technology 26 Energy Supply 27 Construction 28 Services Automotive Sector 29 Wholesale Trade 30 Retail Trade 31 Transport and Logistics 32 Hotels and Catering 33 Telecommunications 34 Information Technology Services 35 Banks 36 Insurance 37 Real Estate 38 Legal, Tax, and Corporate Consultancy Services 39 Architects and Engineers 40 Educational System 41 Healthcare and Nursing Services 42 Social Services and Care Homes 43





In 20 years' time, what would an economic historian write about Switzerland's development in 2012? The strongest in-fluencing factor on this country's economy was probably the exchange rate floor. The minimum rate established by the Swiss National Bank (SNB) was maintained throughout 2012, and its impact on Switzerland's economy was correspondingly great. Most sectors of the economy are dependent on the currency framework in one way or another, but the resultant pressure differs widely from sector to sector. The Swiss franc is still overvalued at its current level of CHF 1.20 per euro, so it pos-es challenges for the majority of sectors. Margins are under pressure. Rationalization processes, cost-cutting, offshoring and strategic realignments are just a few of the measures that companies have stepped up since the Swiss franc began to gain strength. Although quite a few companies are under ex-treme duress and some are even at risk of going under, 2012 could well be remembered – with hindsight – in a more positive light than current sentiment might suggest. It is unlikely that 20 years will pass before the benefits of the measures that were implemented can be reaped. In times of crisis, compa-nies trim off unnecessary fat, optimize their structures and rekindle their innovative spirit. Switzerland itself could therefore emerge stronger from this difficult situation, always provided that the Swiss franc does not become any stronger. The min-imum exchange rate brought great relief for companies and allowed them to plan reliably, so it is essential if the Swiss economy is to continue moving upwards. The pressure to ra-tionalize and innovate generated by exchange rate develop-ments is all well and good, but there are also certain limits to the ensuing positive effects. Were there to be a rapid and ma-jor increase in the value of the Swiss franc from its present level, talk of healthy adaptation processes would be replaced by concerns about emergency measures and cutbacks. How did Switzerland's economic sectors actually perform in 2012? In overall terms: not badly, given the difficult economic environment. The global economic slowdown and the overval-ued Swiss franc were counterbalanced by low interest rates, a stable labor market and brisk immigration. As is their nature, export-oriented sectors fared less well in an environment of this sort – especially those afflicted by structural problems such as the textile and metal industries. Hospitality and retail-ing also had to combat difficult conditions. The watch and pharmaceutical industries performed positively, as did domesti-cally-oriented corporate service providers. The strong Swiss franc will continue to have a noticeable im-pact on most sectors in 2013. The Swiss National Bank (SNB) is likely to continue successfully defending its exchange rate floor which – coupled with higher inflation abroad – should result in a slow but sure real depreciation of the Swiss franc. The result of these developments, together with the optimiza-tion measures implemented by companies, is that competitive pricing disadvantages will be eroded or over-compensated by newly developed advantages. Another factor is that the global economy will show marginally stronger growth in 2013 year-

on-year. Moreover, Switzerland's other structural advantages enable us to detach somewhat from the weak growth trend in Europe. However, a complete decoupling would be unrealistic in view of the close ties between the economic regions. "Stop-and-go" will continue to be the watchword. Expansion stages will alternate with resurgences of ongoing global uncertainty, preventing any outbreaks of euphoria. According to our fore-casts, Switzerland is set to post faster year-on-year growth in 2013 – at 1.5% – but growth will lag potential. As usual, this Sector Handbook provides portraits of the 32 most important Swiss economic sectors and outlines their pro-spects for the current year. For every sector, there is an op-portunity-risk profile which systematically assesses the medi-um-term outlook in each case. The second chapter explains the evaluation methodology in detail. The team of authors wishes you a pleasant read.

Editorial



2012 will be remembered as a mixed year. However, the dip in growth was not of our own making. The domestic economy proved to be in robust form overall. Nevertheless, the euro crisis, the strong Swiss franc and the global economic slow-down posed major challenges for exporters in particular, even though exports managed to post slight nominal growth. Switzerland: an Island in the Stormy Seas of the Euro Crisis? Domestic demand was strong again in 2012 thanks to low interest rates, a robust labor market and brisk immigration. Although consumer sentiment tended to be gloomy, the much-feared slowdown in consumer spending failed to materialize. The pressure was primarily on sectors that face international competition, because the global economic slowdown, the on-going strength of the Swiss franc and uncertainties surround-ing the European debt crisis triggered a negative impact on global demand for Swiss goods and services. Moreover, the structural problems in many European countries remain unre-solved, and the euro zone slid into a recession during 2012. Although the SNB made sure that the exchange rate floor celebrated its first anniversary, the Swiss franc continues to be overvalued and is curbing the ability of export-oriented sectors to compete on prices, as well as putting pressure on their margins. Another factor was the significant loss of growth momentum in China, an increasingly important export market. Against this backdrop, exports to the crisis-stricken countries of Europe were hardest hit; China-bound exports suffered too, but this was due in part to a correction of the prior year's mas-sive growth. By contrast, exports to North and South America showed extremely vigorous growth. When interpreting the export statistics, it must be remembered that the (sometimes very) negative annual growth rates for certain sectors were partially caused by a baseline effect. In the vast majority of cases, exports had already plummeted between the middle and end of 2011. This was the result of price effects in many instances: since many exporters bill in euros, the rapid appre-ciation in mid-2011 was reflected on a 1-1 basis by exports measured in Swiss francs – but this trend was halted thanks to the exchange rate floor. In some cases, therefore, 2012 ex-port momentum in these sectors was not as bad as the figures suggest. Nevertheless, conditions for exporters were difficult in most sectors during 2012. Major Differences between Industrial Sectors… 2012 saw Switzerland's industrial sectors trending in different directions. In the pharmaceutical/chemical industry, for exam-ple, foreign trade gathered pace in 2012. Thanks to the stabi-lization of the exchange rate, Switzerland's largest export sec-tor found its feet again following a period of stagnation for the chemical segment (in particular) at the end of 2011. Watch manufacturers boosted their exports substantially yet again, even managing to beat the previous year's record result. How-ever, growth momentum tailed off continuously – not least on account of the economic slowdown in China. Apart from these

two sectors, industry had very few success stories to report. The food industry was able to increase its exports, but the key domestic market was indirectly impacted by the strong Swiss franc through shopping tourism and greater price pressure. Other traditional industrial sectors such as the textile and metal industries saw both output and turnover trending significantly downwards year-on-year. Most of these sectors face fierce international price competition, so they were especially sensi-tive to the impact of the strong Swiss franc. The plastics sec-tor was also hit hard, as were the electrical engineering and machinery industries, even though they compete mainly on quality. Certain segments of the machinery and equipment sector even posted double-digit export downturns. In compari-son to many other industrial sectors, exports of machinery and equipment manufacturers took longer to bottom out. As well as the slowdown in their key European sales markets, they also had to cope with weak growth in several emerging mar-kets such as China, India and Turkey, with a baseline effect at play especially in the case of China. … And in the Service Sector International competition has an impact not only on industry but also on various service sectors. Hotels and caterers suf-fered particularly serious effects, as was already the case in the preceding year. Especially in the mountain regions, hotel-iers came under pressure due to the strength of the Swiss franc and the economic slowdown in European countries that traditionally send visitors to Switzerland. The picture for the various trading sectors was also mixed, despite robust domes-tic demand. Thanks to strong real growth, 2012 proved somewhat better for retailers than the exceptionally weak prior year, but nominal growth was insufficient for a return to the turnover level seen in 2010. Reasons for this poor turnover trend included ongoing price erosion and – yet again – shop-ping tourism, which increased despite the exchange rate floor, putting retailers in regions close to borders under particular pressure. The automobile sector suffered from tumbling prices for both new and second-hand vehicles, coupled with a slow-down in the pace of demand. Telecoms providers enjoyed growing demand for mobile internet services on the one hand, but were confronted with increasingly fierce price competition in various areas on the other. Unlike the rest of the economy, life insurers were severely challenged again by the low interest rate environment, which has a negative impact on investment earnings. On the other hand, performance by many domestically orient-ed service providers proved comparatively robust. Immigration provided particular support here. IT and corporate service pro-viders are also benefiting from the various rationalization and cost-cutting programs at their client companies, and from the introduction and implementation of new regulatory standards in the financial sector.

Prospects for the Sectors



Construction Industry Held Back Slightly by Weather Despite low interest rates and a significant rate of immigration, the high level of construction investments seen in 2012 could not be fully maintained. The cold wave in the first quarter led to a backlog which could not be cleared by the end of the year due to high capacity utilization. The second home initiative that was adopted in March 2012 triggered an explosive increase in planning applications in the Alpine region; for the time being, this mainly benefited the real estate sector and architectur-al/engineering practices. 2013: Economy to Pick up Somewhat… Although the global economy will only gain slight momentum in 2013, we expect the Swiss economy to post higher growth than other European countries, due to various structural ad-vantages of this country. Switzerland continues to be regarded as a "safe haven" and its national debt is low. Low interest rates support construction investment and relieve pressure at household, corporate and government level. A flexible labor market allows companies to recruit staff more quickly than elsewhere, thereby boosting demand for specialist labor from abroad and encouraging immigration – which in turn supports consumer spending and building activity. The Swiss National Bank is likely to be able to continue its successful defense of the exchange rate floor which – in combination with higher inflation abroad – should result in a slow but sure real depreci-ation of the Swiss franc. As in the prior year, however, global uncertainties could well trigger some volatility in business per-formance, especially for export sectors. … Prompting Easing or Recovery in Industry… The export industry is the prime beneficiary of the slow easing on the exchange rate front and the marginal upturn in global economic momentum. Exports of services and goods are set to rise more strongly than last year. Our assessment is that this upturn will affect most sectors, but the extent of the im-pact will vary widely from one sector to another (Figure 1). Food exports have thus far been relatively unscathed by the strength of the franc and the economic situation abroad. Ac-cordingly, the slight brightening of the overall picture in 2013 is likely to have only a moderate impact on this sector's total exports. The way shopping tourism reacts to the Swiss franc's slow gain in real value will be a more decisive factor for food manufacturers. The textile and clothing sector is hardly about to experience a boom, and the margin situation remains tense. However, turnover is likely to see only a minor downturn, or it could even stabilize. The machinery and equipment industry is likely to remain under pressure at the beginning of the year. We nevertheless anticipate that the omens here will gradually become positive during the year, thanks to a modest global economic upturn accompanied by rising demand for capital goods. The picture is similar for electrical engineering, elec-tronics and the measuring and control instruments sector. The mighty pharmaceutical industry is also set to increase output

and turnover thanks to growing demand, even though price pressure remains high. In addition, growth momentum will be critically dependent on successful research and approval activi-ty. We expect the watch industry to continue along its growth trajectory in 2013, although it will post lower growth rates than in the last three years due to the normalization of the pace of exports to China. … And For Internationally Exposed Service Providers 2013 is not going to be an easy year for the hospitality sector, which is battling structural problems. The slightly better global economic trend and the marginal easing of exchange rate problems should nevertheless curb the downtrend to some degree. 2013 is therefore likely to see the situation stabilizing somewhat. In retailing, we expect price erosion to decelerate, so turnover will probably grow again in line with previous years. The early-cyclical transport and logistics sector is also likely to benefit from the slight economic recovery in 2013, thanks to the concomitant increase in trade volume. In our assessment, however, the automobile sector will be an exception to this trend. Despite stable consumer sentiment, the current year will likely be mixed for this sector. Recent years brought an almost unprecedented expansion of the vehicle fleet, thereby reducing demand potential for 2013. No End to the Building Boom; Construction-Related Sec-tors Benefit Order books in the construction sector remain full, and strong demand is being sustained by low interest rates and immigra-tion. This applies to both residential and industrial/commercial building. In the residential segment, companies are busy work-ing through their record-high backlogs. However, capacity bottlenecks and low margins could prevent the sector's growth potential from being exploited in full. Given that economic momentum is picking up, industrial and commercial construc-tion should benefit from the start of work on new office and administrative buildings, while the civil engineering segment can expect turnover to rise as access routes to site develop-ments are built and road and rail bottlenecks are eliminated. We anticipate that sectors closely related to the construction industry will also benefit from these developments; these in-clude architectural and engineering practices, the real estate sector, wood construction and the metal and plastics indus-tries. Beneficiaries of Cost and Regulatory Pressure As was already the case in 2012, management consultants, legal advisors and IT service providers are set to benefit as the financial sector continues to adapt to new regulatory guide-lines. Another factor is that many companies exposed to inter-national competition have to optimize their processes in order to cut costs, in response to the sustained strength of the Swiss franc. This means that demand for outsourced IT ser-vices is set to remain high.



Figure 1

Sector performance in a stylized economic cycle: forecast for 2H 2013 Growth rates

Source: Credit Suisse Economic Research

Risks Continue to Affect Forecasts The European debt problem was a continuous source of crisis reports during 2012, fueling constant uncertainty. However, the decisions taken by the European Central Bank (ECB) in particular have sharply reduced the risk that the euro zone could disintegrate. Forecasts for 2013 are also subject to ma-jor uncertainties. The European (and US) debt problem has not yet been resolved. In an environment such as this, one tiny spark could be enough to re-ignite latent uncertainties, thereby killing off the delicate green shoots of economic recovery. There are plenty of flashpoints: various conflicts are raging in the Middle East which could push oil prices up. Italy will hold parliamentary elections in 2013 which could have a negative impact on that country's reformist intentions. The financial markets could start to lose patience with the US budget deficit and France's structural problems. Moreover, Switzerland is under pressure regarding foreign policy on various fronts. Keep Informed about Current Trends We analyze the performance of the Swiss economy on an ongoing basis and present our findings in the Sector Monitor and Business Cycle Monitor, which are produced each quarter by the Economic Research team at Credit Suisse. Both are available to download free of charge from www.credit-suisse.com/research.

How the Cycle Chart is Derived

We use the cycle chart (Figure 1) to determine the posi-tion of the various sectors in their own business cycles on the basis of the latest data and our own assess-ments. Growth is considered on a relative basis for this purpose. The extreme points of the curves thus mark the points of maximum growth and maximum contrac-tion. Since we only consider the relative positions of the sectors in their own cycles, a higher position for one sector as compared to another does not necessarily mean that the first sector is also showing higher growth. In textbook cases, sectors follow the cycles from left to right. However, the sectors often move through the cycles erratically due to exogenous shocks. The pace can also vary. In order to take account of the heteroge-neous nature of the sectors, they are broken down into four groups according to their characteristics, which we assess on the basis of real economic data from the last ten years. Sectors in the dark blue and dark red groups show relatively marked cyclical behavior, as can be seen from the sharp fluctuations in the curves. Sectors in the light and dark blue group display comparatively higher structural growth. This explains the higher level of these two curves as compared to the light and dark red curves.

Retailing

Chemicals and pharmaceuticals

Plastics

Paper products Textiles

Automotive sector

Insurance companies

BanksHotels and catering

Watch industry

Machinery

Corporate services

Telecom and ITConstruction

Food

Metals



Each sector is subject to both economic influences and struc-tural effects. Medium- to long-term social and economic trends such as demographic change, globalization and the growth in mobility drive demand up in certain sectors of the economy, but exert pressure on others. Changes to overall political conditions can also have a crucial impact on develop-ments in a particular sector. Sector-Based Comparison of Medium-Term Prospects Credit Suisse Economic Research compiles a yearly opportuni-ty-risk profile of the Swiss sectors to focus on these aspects. Its objective is to systematically measure the structural strengths and weaknesses of the individual economic sectors so that conclusions can be drawn about their medium-term growth potential – taking account of the pertinent risks (see the box on page 11). The results of this year's opportunity-risk profile for the 32 economic sectors covered in the Sector Handbook are shown in Figure 2.

The Health Trend is a Growth Driver Health is often viewed as the next great megatrend. This is why health-related sectors have the highest opportunity-risk profiles. As in previous years, the pharmaceutical industry heads the list, followed by healthcare and the social services sector. Medical technology is another health-related sector which our valuation model credits with good medium-term prospects. This positive assessment is based on steady growth in demand for health and care services, triggered not least by demographic change. This demand is driven by ongoing aging and the increased proliferation of chronic illnesses (such as diabetes, cardiovascular disease and cancer) in industrialized countries and, in general, by the higher priority accorded to health in today's society. Health is also becoming more im-portant in the emerging markets due higher living standards, and the export-oriented pharmaceutical and medical technolo-gy sectors stand to benefit from this trend.

Figure 2

Medium-Term Opportunity-Risk Profile Synthetic indicator, overall economy = 0; blue squares: Share of Swiss gross domestic product in %


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Industries with an above-average opportunity-risk profile

Industries with a below-average opportunity-risk profile

Medium-Term Analysis of the Sectors



Even so, health-related sectors also find themselves faced with challenges. Cost and regulatory pressure is on the in-crease in the healthcare sector across the globe. However, we consider that the opportunities arising from demographic change far outweigh these factors. Numerous Service Providers and Wholesalers Lead the Field As the economy and society itself become ever more complex and interlinked, many sectors are finding it more necessary to professionalize, optimize and outsource their processes. The economic sectors that we consider to have above-average opportunity-risk profiles therefore include several service sectors that are benefiting from this trend. They include the real estate sector, legal, tax and business advisors (corporate services) as well as IT services. Our opportunity-risk profiles for the wholesale trade and for architectural and engineering practices also emerge as positive. Diminished trade restrictions and growing trade volumes offer major potential for interna-tionally oriented wholesalers. The infrastructure expansion that is required in the medium term is opening up additional growth opportunities in Switzerland, especially for engineers. Positive Outlook for Other Industrial Sectors The pharmaceutical industry and medical technology are not the only industrial sectors with positive opportunity-risk pro-files. Rising income and better standards of living in the emerging markets should ensure that the watch industry con-tinues to enjoy dynamic demand for luxury goods in the future. Due to their enormous requirements for infrastructure and energy, the emerging markets are also set to generate positive medium-term demand impetus for high-tech industries such as the electrical and measurement technology sectors. Generally speaking, both these sectors have good future potential thanks to innovations in energy efficiency. They also benefit from Switzerland's strong position in research and innovation. By focusing on quality- and technology-intensive products, Swiss manufacturers are able to hold their own against global competition. However, foreign competitors are not letting up, and are setting more and more challenges for this country's providers, including those in the high-tech segment. Mid-Field: Very Mixed A wide variety of other industries make up the mid-field. In our assessment, opportunities and risks largely balance one another out in these sectors of the economy. Growth potential, for instance, is limited because the domestic market is satu-rated for many enterprises such as insurance companies, tele-com providers and food manufacturers. The same arguments apply to the automobile sector and to retailing. For construc-tion, the outlook for demand is thoroughly positive in view of the demographic trend and the development of interest rates, but these advantages are canceled out by the structural risks prevailing in many areas of the sector (including heavy pres-sure on prices and margins, and fiercer competition from for-eign as well as domestic companies). The assessment is also average for the wood industry, which has close ties with the construction sector. The sectors with average opportunity-risk profiles also include a number of industries such as electron-

ics, chemicals, plastics and machinery. Quality and niche strategies have enabled many Swiss companies in these areas to secure good international positions. However, there is a steady upturn in foreign competition and the price pressure that it generates. Rising price trends for commodities and the worsening shortage of specialist manpower also present risks for high-tech industries that are far from negligible. Political factors weigh especially heavily on certain other sectors. For some years, the Swiss banking industry (for example) has been exposed to growing regulatory pressure from authorities both at home and abroad in the wake of the financial crisis. The decision to reverse energy policy also creates a host of uncertainties for the power utilities. Traditional Industrial Sectors under Heavy Pressure Five sectors have opportunity-risk profiles that are below (or well below) average. For the Swiss hospitality industry, globali-zation presents an opportunity, because new markets are being tapped, but also a risk. Competition from foreign desti-nations is growing steadily. But the main pressure on this sector comes from supply-side structural problems. The salient features of the hotel and catering sector are overcapacity, strong competitive pressure and low profitability. For a long time now, traditional sectors such as the furniture, metal, tex-tile and clothing industries have had to cope with intense glob-al competition and price pressure. Pressure on imports is also high in these sectors. The advance of digitalization and the trend towards free information harbor particular risks for the printing and publishing industries. For more extensive information on the opportunity-risk profiles for the various sectors, please see the 32 sector profiles that follow.



The Credit Suisse Opportunity-Risk Profile

The Credit Suisse opportunity-risk profile compares the medium-term opportunities and risks for the various Swiss sectors. It is based on a model that was developed by us in 2006 and was thoroughly revised last year.1 Our assess-ment is a future-oriented view based on macroeconomic factors. Microeconomic and internal company factors are explicitly disregarded. The period considered is between three and five years.

The model examines two dimensions: "opportunities" and "risks" (Figure 3). The input for the assessment includes quantitative past-oriented factors as well as qualitative fu-ture-oriented components. The past-oriented components are based on sector data taken from official Swiss statistics, while assessments by the experts at Credit SuisseEconomic Research provide the basis for the future-oriented elements. The quantitative sector data used are known to have the drawback of only reflecting the past – and mostly with a significant time delay. By systematically integrating expert opinions, we can take account of structural influenc-ing factors and trends that are not (yet) represented in the statistics but which have a material impact on the future development of a sector.

The "opportunities" component maps the growth potential for each sector. Opportunities are assessed using data on growth in value added, productivity and employment, as well as wage developments and company start-ups ("growth"). This data is complemented by expert opinions on the poten-tial opportunities for growth that arise for the sectors from various long-term trends and political factors. The risk com-ponent reflects uncertainties that could have a lasting nega-tive effect on a sector's growth potential. It is based on quantitative indicators that measure the strength of the growth fluctuations (volatility) and the extent of structural change (structure) in the individual sectors, as well as ana-lysts' opinions on the risks arising from trends and the politi-cal environment.

Opportunities and risks are weighed against one another for all the sectors, and are summated to obtain one single val-ue. The results are standardized so that a value of zero is obtained for the economy as a whole. This means that the opportunity-risk profile offers a relative view: Industries with high scores are therefore those that we regard as likely to experience better growth in the medium term than those with low ones.The opportunity-risk profile explicitly omits any forecasts of absolute growth in the individual sectors.

1 For further information on opportunity-risk profiles, see: Swiss Issues Industries,

Sector Handbook 2012 – Structures and Prospects.

Figure 3

Structure of the Opportunity-Risk Rating Model


Information about the Key Figures for the Sectors The sectors on the following pages are defined according to the General Classification of Economic Activities (NOGA), revised in 2008.The 2011 employment figures are taken from the employment statistics (BESTA) issued by the Swiss Fed-eral Statistical Office (SFSO). They are stated as full-time equivalents and where necessary (for NOGA 3-digit and 4-digit classifications) are estimated by Credit Suisse Eco-nomic Research. The 2011 figures for nominal gross value added are estimated by Credit Suisse Economic Research on the basis of the production accounts published by the SFSO. Nominal labor productivity for each sector is calculated by di-viding the gross value added shown in the production account by the number of full-time equivalent employees published in the national accounts.2 The latter are available only for the market economy portion of each sector.

2 For reasons related to methodology, the employment figures taken from the

national accounts vary from the employment figures published by the Swiss Fe-deral Statistical Office (BESTA).

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Food Products

Medium-Term Opportunity-Risk Profile: −0.1 Average

Key Figures for 2011 Employees: 56,900 Gross value added CHF 9.2 bn Labor productivity: CHF 154,600

Primary Influences Private consumption, demographic growth, developing pros-perity in the emerging markets, politics

Industry Characteristics Split between domestic and export industry, trend towards deregulation

Favorites Technology leaders in the convenience/functional food seg-ment, manufacturers of premium products with a strong foot-hold in emerging markets Sector Profile

Demand for the food industry – which focuses largely on the home market – depends primarily on the domestic consump-tion trend, so it is less vulnerable to economic cycles than oth-er sectors. The domestic market is relatively saturated, and its growth mainly tracks the increase in population. Providers are able to achieve domestic growth through product innovations that create added value in the convenience, organic and func-tional food segments, but this often comes at the cost of exist-ing products. The export sector is estimated to contribute only about 15–30% of the sector's total turnover, although it developed more dynamically over the last ten years than the domestic market. About 70% of export growth in the last ten years was generated solely by exports of coffee and soft drinks. Coffee, soft drinks, chocolate, cheese and confectionery products accounted for almost 70% of exports in 2011. The major sub-sectors of meat, milk, canned goods, chilled and deep-frozen products generate a significantly smaller share of exports. Swiss exporters are benefiting from the increasing prosperity of the emerging markets and the good reputation of the Swiss brand. Compared to other Swiss sectors, the food industry is some-what concentrated. There were minor structural shifts between 1998 and 2008. Almost 4% of all milk processors disap-peared each year but in return, coffee producers created full-time posts totaling well over 4%. During this period, the food industry lost a total of 9% of its enterprises, but it created new jobs totaling 5%. Because of its close ties with agriculture, this sector has ex-tensive areas of friction with policymakers, and regulation here is relatively strict. Various commodities are made more expen-sive by high protective tariffs. These create cost disadvantages for Swiss food manufacturers as compared to their interna-tional competitors, but these are partially compensated on the basis of the Federal Act on the Import and Export of Agricul-

ture-Based Products, known as the "Chocolate Law." The implementation of the "Swissness bill" is going to be of great importance. Many producers fear that they will no longer be able to market their products with the coveted "Made in Swit-zerland" label or lose pricing power as a result of stricter brand protection. Free trade agreements have a major impact, which can be positive or negative depending on the competitiveness of the individual sub-sectors. Many manufacturers are hoping that possible agreements with the EU and China will trigger new impetus. The agricultural free trade agreement with the EU has currently been shelved due to resistance from the ag-ricultural sector. The Swiss food industry displays limited potential for growth at home, but benefits from its great resilience to crises and has good opportunities for growth in the up-and-coming emerging markets. Although certain sub-sectors continue to be in poor structural shape, we therefore assess the overall opportunity-risk profile as average. Current Situation and Outlook Sector trend 2013

Due to the impact of the strong Swiss franc and shopping tourism, turnover was stagnant in 2012 even though exports grew. Assuming that the recession in Europe will come to an end in 2013 and that economic momentum in the emerging markets will improve somewhat, exports should grow again in 2013. Shopping tourism is also likely to tail off, helping the domestic market to achieve moderate growth in step with the anticipated increase in the population.

Sector Structure

The sector includes the manufacture of processed foods and beverages (NOGA 10 and 11). The vast majority of companies are engaged in food manufacturing.

Exports by Selected Sub-Sectors CHF bn

The export picture has changed greatly over the last ten years. Cheese exports were more or less stagnant in spite of liberalization, whereas chocolate exports rose slightly and exports of coffee and soft drinks (Nespresso and Red Bull) soared.

Source: Federal Customs Administration; *2012 figures estimated by Credit Suisse Economic Research

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Textile and Clothing

Medium-Term Opportunity-Risk Profile: −2.2 Well below average

Key Figures for 2011 Employees: 13,100 Gross value added: CHF 1.1 bn Labor productivity: CHF 79,700

Primary Influences Private consumption, mainly abroad; fashion trends, techno-logical advances, investment cycles, exchange rates

Industry Characteristics Heavy international price pressure, export focus

Favorites Companies with high-quality products that have intensive advi-sory requirements in the premium segment, or with a major high-tech component Sector Profile

As one of Switzerland's oldest industrial sectors, the textile and clothing industry covers a wide spectrum of different products ranging from cotton yarns to highly complex function-al textiles. Demand for this extremely export-oriented sector is heavily influenced by the global trend of private consumption – including luxury goods – especially in Europe, its main sales market. Demand from certain emerging markets also plays an ever more important part. Fashion trends, most of which are relatively short-lived, constitute another key influencing factor. Demand for technical textiles depends on technological ad-vances and the investment cycles of the buyer companies. For this reason, textile manufacturers often notice economic fluc-tuations before clothing manufacturers, who are more closely linked to consumption. The entire sector has to cope with ex-tremely fierce international price competition and is therefore heavily dependent on exchange rate trends and location-related production costs such as salaries or energy prices. The extensive technical textiles segment holds out the most pro-spects of growth potential in the future. The sector exports more than 80% of its output, primarily to Europe, with Germany and Italy as the main sales markets. The Asian market gained importance over the last decade for clothing exporters in particular. Nevertheless, the clothing in-dustry has reported a substantial trade balance deficit for dec-ades; a similar situation prevailed in the textile industry from 2003 onwards. The growing trade balance deficit reflects the ongoing structural change that took place in several waves since the start of the 20th century. This process was induced by the emergence of low-cost competitors in developing and emerging markets. Labor-intensive process stages were in-creasingly outsourced in view of the high payroll costs in Swit-zerland. The number of employees within Switzerland dropped by almost two thirds between 1991 and 2011. Swiss compa-nies now employ 6.5 times more staff abroad than in Switzer-land. Various companies still manufacture at their sites in this

country, but domestic value added is increasingly restricted to activities such as research, design, marketing and service. Virtually the only companies that have chances of long-term survival are established premium brand providers or niche pro-ducers, who mostly manufacture technical and functional tex-tiles that require intensive research and are difficult to imitate. Even in the niches, competitive pressure is high. Exports of technical textiles fell by about 25% since 2008. Outsourcing will therefore continue to be on the agenda in the coming years. In view of its structural weaknesses, our opportunity-risk profile for this sector is well below average. Current Situation and Outlook Sector trend 2013

Turnover, output and exports were all well down year-on-year in 2012. This was due mainly to economic weakness in key sales markets and to the franc exchange rate. Despite the exchange rate floor, numerous companies suffered more than in almost any other sector from the overvaluation of the franc. The situation should pick up somewhat in 2013 because eco-nomic conditions abroad will improve slightly, and the franc will become less overvalued in real terms.

Sector Structure

The sector consists of the textile (NOGA 13) and clothing industries (NOGA 14). The larger of the two sub-sectors – with 64% of the total workforce – is the textile industry, which comprises spinning, weaving, textile finishing and the manu-facture of carpets and bedlinen.

Exports and Employees at Home and Abroad Index 2002 = 100; for employment abroad, 2004 = 100

A look at the trends for exports and employment provides convincing evidence of structural change. It is noticeable that Swiss companies mainly contracted at home in recent years, whereas they were just about able to maintain their employment levels in other countries.

Source: Federal Customs Administration, Swiss Federal Statistical Office, Swiss National Bank

60

70

80

90

100

110

120

130

140

150

160

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Textile exports Clothing exports

Employment in Switzerland Employment abroad



Wood

Medium-Term Opportunity-Risk Profile: 0.0 Average


Primary Influences Environmental awareness, construction activity, price of petro-leum, industrial output, natural catastrophes

Industry Characteristics Domestic focus, mainly small businesses

Favorites Innovative producers of components for ecological construc-tion (heat and sound insulation, ready-made components), joiners with expertise in ecological construction methods Sector Profile

As a supplier of CO2-neutral energy in an era marked by cli-mate change and a turnaround in energy policy, the wood industry has an ace up its sleeve. Fossil fuel shortages and political unrest in oil-exporting countries are making alternative forms of energy more attractive. However, wood is more than just a substitute for petroleum. Its use in the construction in-dustry is also on the increase. One in every nine new buildings erected since 2005 is made of wood, and use of this material for extensions and renovations has also been growing in re-cent years. Technological advances in adhesive technology and the manufacture of ready-made building components fa-vor this trend. Growing requirements for energy efficiency and comfortable living can be met with innovative heat and sound insulation solutions. More and more wood-fired heating sys-tems that use pellets and woodchips are being installed. This trend is also stimulating demand for wood as a fuel, which accounts for almost one half of Swiss wood consumption. Another quarter of the output is used to manufacture wood products. In this segment, demand is determined by the con-struction industry, industrial manufacturers and private house-holds. Clients and builder-owners decide on the quantity and origin of the wood to be used, which – for public-sector con-tracts – has to come exclusively from Swiss forests. The Swiss wood industry reports a large balance of trade defi-cit. The gap between imports and exports opened up in the mid-1990s, after which exports stagnated while imports dou-bled by the time the financial crisis erupted. The financial crisis weighed heavily on domestic and foreign producers. Although foreign competitors were able to return to growth as long ago as 2010, the Swiss wood industry has still not recovered, due not least to the strong franc. Wood of identical quality from neighboring countries is as much as 30% cheaper. Modern machinery, lower payroll costs and economies of scale are the factors behind this price difference. Natural catastrophes such as hurricane-force storms can abruptly increase the supply, thereby reducing prices.

The Swiss wood industry has a strong domestic focus. Well over half of the enterprises are joineries that operate solely on the national market. There is no border protection for sawn timber, so the sawmills are wide open to international competi-tion. Together with the high cost of investing in new machinery to maintain competitive edge, this is forcing a concentration process that is steadily reducing the number of sawmills. Greater environmental awareness means that wood is certainly a material with a future. However, growing international com-petition limits the medium-term opportunity-risk ratio for the wood industry to average. Current Situation and Outlook Sector trend 2013

Despite the subdued economic environment, a majority of wood manufacturers judged the business situation as satisfac-tory in 2012. Brisk building activity and a slightly improved economic environment are likely to help the wood industry to moderate growth in 2013.

Sector Structure

The wood industry (NOGA 16) comprises sawmills, planing mills and impregnation plants (NOGA 161), together with manufacturers of wood, cork, plaited products and basketware (NOGA 162), e.g. parquet flooring panels, ready-made com-ponents and packaging materials. About 80% of the employ-ees work in joineries that manufacture materials for interior fit-outs and construction, windows and doors.

Employment, Gross Value Added and Real GDP Year-on-year change in %

Increased productivity enabled this sector to boost its gross value added in the middle of the last decade. This upturn was brought to an abrupt halt by the financial crisis. Although circumstances have since become more favorable, the sector has not yet managed to recover. Reasons for this failure include the strong Swiss franc and the sharp decrease in import prices since the end of 2008.

Source: Swiss Federal Statistical Office; *2012 figures estimated by Credit Suisse Economic Research

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0%

5%

10%

15%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Gross value added, nominal Employment GDP, real

n.a.



Printing and Publishing

Medium-Term Opportunity-Risk Profile: −2.9 Well below average


Primary Influences Corporate advertising budgets, private spending on media, demographic growth, technological advances

Industry Characteristics Small enterprise structure with a few large companies, domes-tic focus

Favorites Publishing houses with established paid content in the digital segment, companies with a broad offering of services Sector Profile

The main drivers of demand in the printing and publishing sec-tor are corporate advertising budgets and private households' media budgets. Demographic growth therefore has a positive impact on turnover in this sector. The print media, which make up the lion's share of the publishing sector, account for about one half of Switzerland's total advertising expenditure. Income from newspaper sales is trending downwards, due mainly to the success of free newspapers. Since advertising expenditure is (relatively speaking) highly cyclical, this sector is exposed to major economic fluctuations. To some extent, cyclical fluctua-tions are cushioned by private media consumption which has the effect of stabilizing demand through subscriptions. Technological advances and the concomitant digitalization of content are gradually bringing about a permanent change in media consumption by private households. In Switzerland, one person in every three already owns a smartphone, and tablet sales are currently posting triple-digit growth. For publishers, the key success factor for the future is whether they can tap into consumers' readiness to pay for digital content in the mo-bile segment. This would also prompt a general increase in the value of digital information. At the same time, online offerings harbor a risk for the print industry. Growing demand for e-books and digital newspaper content is pushing turnover down for printers. The print industry in particular has a strong domestic focus due to demand from the daily and weekly press. Nevertheless, foreign competition combined with dwindling demand for print products is generating severe price pressure across the entire sector. Digitalization has unleashed a massive structural change. Off-set printing has largely been superseded by digital printing. User programs enable private individuals to execute print or-ders themselves, in whole or in part. As a result, employment in offset printing declined by an average of 3.6% per year between 1995 and 2008. The structure of the printing indus-try is still largely based on small enterprises. Newspaper print-

ing and publishing is the only segment to have undergone a concentration process. High investment costs and additional pressure generated by preparation of content for the digital world have forced regional newspapers to merge or integrate into larger publishing houses. In view of the advances in digitalization and given that con-sumers are unwilling to pay for online content, we assess the medium-term opportunity-risk ratio for the print and publishing sector as well below average. Current Situation and Outlook Sector trend 2013

2012 saw a further contraction of demand while pressure on prices remained high. In 2013, media consumption should grow thanks to immigration, and advertising turnover should increase due to the slight economic upturn; these factors will have a generally stabilizing impact on the printing and publish-ing industry, although it will be unable to compensate fully for the losses caused by structural changes.

Sector Structure

Printing and publishing consists on the one hand of the manu-facture of print products and the reproduction of audio, video and data carriers (64% full-time equivalents, NOGA 18), and on the other of publishing (36% full-time equivalents, NOGA 58).

Overall Turnover, Advertising Turnover (Press), Pri-vate Press Consumption and Real GDP Year-on-year change in %

Shortly before the start of the financial crisis, the first signs of a recovery emerged in this sector's turnover figures, which had been very weak for years. But during and after the financial crisis, corporate advertising budgets were slashed, causing turnover in the printing and publishing sector to plummet. After a brief period of stabilization in 2010, the 2011 figures dipped again due to the slow economic recovery.

Source: Swiss Federal Statistical Office, Swiss Foundation for Advertising Statistics, SwissMedia Association

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2003 2004 2005 2006 2007 2008 2009 2010 2011

Advertising turnover, press Private press spending

Turnover, printing and publishing GDP, real



Chemicals



Primary Influences Industrial output in Switzerland and abroad, exchange rates, commodity prices, technological advances

Industry Characteristics Cyclical, heavily export-oriented, concentrated

Favorites Innovative niche providers, diversified providers of customized solutions for clients, large research-intensive companies with emerging market exposure Sector Profile

The chemical industry, a typical supplier sector, depends heavily on its customers' performance. It therefore feels the impact of cyclical economic fluctuations and shifts in demand early and severely. Key customer sectors include the pharma-ceutical industry, the electronics and precision instruments industry, the plastics sector and (for specific sub-sectors) agri-culture (agrochemicals), the automobile, machinery and con-struction industries (dyes, paints and lacquers) and retailing (cosmetics and detergents). Most of the sector's output is sold abroad. The main export markets are Europe (Germany 19%, Italy 10%, France 9%), followed by the US (8%). Exchange rate trends are key for this sector, as is the progression of commodity prices. Many raw materials (such as petroleum and natural gas derivatives, minerals and metals) have to be im-ported. Swiss manufacturers are mainly able to establish successful positions in specialized segments. In fields that require intensive research and advisory services, they benefit from the availability of a highly-qualified workforce and from Switzerland's quality as a research location. Their geographic proximity to Swiss technology leaders in a wide range of cus-tomer sectors gives them another advantage. Pricing power is limited in many segments of the chemical industry because the goods are so homogeneous. The spe-cialization strategy enables Swiss companies to stand back somewhat from price competition. Competition has escalated continuously in recent years, especially from Eastern Europe and South-East Asia. At the same time, emerging markets offer new growth opportunities for Swiss providers. The quota of exports to the BRIC nations rose from 3.5% to 7.2% within ten years. The chemical industry is highly concentrated. As many as 60% of all employees work in large companies. The percentage of companies with headcounts of less than 50 is low. Intensive competition prompted a major structural streamlining and con-centration process in recent decades. Swiss chemical produc-ers can win through at international level in areas where they

are able to exploit their specialization in niches and know-how-intensive segments, automation and partial outsourcing. However, companies are forced to achieve high productivity and to implement strict cost management. There is scope for development in the field of complex molecules and in the application of new technologies such as biotech, nano-technology and genetic engineering. In view of the fierce com-petition this sector faces, its opportunity-risk profile is only average in spite of its specialization strategy. Current Situation and Outlook Sector trend 2013

The stabilization of the exchange rate put chemical exports back on their feet in 2012. Producer prices rose by more than 4% in the course of the year. Price pressure and intense competition have placed Switzerland's chemical sector under severe strain in recent years. Global economic growth is set to accelerate moderately in 2013 so, as an early-cyclical sector, the chemical industry should benefit from this development.

Sector Structure

Chemicals (NOGA 20) comprises the production of basic chemical substances (NOGA 201) and of intermediate and end products in several segments: agrochemicals (NOGA 202), paints, dyes and putties (NOGA 203), soaps, cleaning products and cosmetics (NOGA 204), other chemical products (NOGA 205) such as adhesives and pyrotechnic products, and chemical fibers (NOGA 206).

Employment and Exports Employment in full-time equivalents; nominal exports; year-on-year change in %

Employment in the Swiss chemical industry has been declining for many years. In some cases, former chemical companies turned into pharmaceutical, plastics or material technology enterprises as they became more specialized. A number of jobs have fallen victim to rationalization and outsourcing processes. Exports, by contrast, managed to show encouraging development until the economic crisis erupted. The sector was preoccupied in 2011 by the rapid increase in the value of the Swiss franc and by cost pressure on its customers.

Source: Swiss Federal Statistical Office, Federal Customs Administration; *2012 figures estimated by Credit Suisse Economic Research

-15%

-10%

-5%

0%

5%

10%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Employment Exports



Pharmaceuticals

Medium-Term Opportunity-Risk Profile: 1.9 Well above average


Primary Influences Global healthcare expenditure, approvals and price regulation, research and development environment

Industry Characteristics Strong export focus, research- and capital intensive, concen-trated

Favorites Producers of patent-protected blockbusters, financially solid companies with well-stocked research pipelines Sector Profile

Demand for medicines is relatively inelastic in relation to eco-nomic cycles. It is driven mainly by the trend of global expendi-ture on healthcare, which is rising in the industrialized nations due to demographic aging, the ongoing spread of lifestyle diseases and cancer, and in response to the high standing of healthcare. The higher standard of living In emerging markets is boosting demand there. Approvals and price regulation are crucial factors for this sec-tor. In many countries, prices are set by the government on the basis of comparisons with prices abroad for medicines that are already approved in the same therapeutic area. Growing pressure on national finances is also impacting drug prices. Approval procedures are complex, and they require extensive documentation on efficacy, quality, safety and additional bene-fits. For these reasons, opportunities for growth arise mainly from tapping new markets or discovering new active substanc-es or indicators. The sector has a strong export focus, given that the Swiss drugs market is small. The main buyer market is Europe (52%; Germany 14%), followed by the US (14%) and Japan (5%). The quotas exported to emerging and transition coun-tries are on the increase. At the same time, there is growing competition from these countries, especially those in Asia. In particular, they are entering the generic drugs segment. How-ever, local research is also becoming more significant. High payroll costs in Switzerland mean that production and research outsourcing is always an issue. Nevertheless, the pharmaceu-tical industry is continuing to create substantial numbers of new jobs in Switzerland. The research location and the availa-bility of a highly qualified workforce are key assets for this sector. Companies allocate most of their investments in this country to research and development. Innovative product de-velopment and clinical studies are costly activities that require large amounts of capital. There is a major risk that a substance will never reach the market. The pharmaceutical industry is therefore highly concentrated. Four out of five employees work

in large corporations. But apart from the major firms, almost half of the other companies are microenterprises with fewer than ten employees. Small businesses are key sources of in-novation. The entry rate is well above the average for all sec-tors, and the bankruptcy rate is low. Personalized medicine (tailored to each patient with the help of biomarkers) engen-ders high expectations. Although there are risks regarding the success of approval applications and regulatory interventions, this sector earns an opportunity-risk profile that is well above average on account of its major growth potential. Current Situation and Outlook Sector trend 2013

The Swiss pharmaceutical industry was able to boost turnover substantially again in 2012 because prices stabilized. This turnaround is due in no small measure to the stabilization of the exchange rate. Volumes exported continued to decline. Price pressure will continue in the future, but the sector will continue to grow on the back of rising demand. Growth mo-mentum will nevertheless be critically dependent on successful research and approval activity.

Sector Structure

The pharmaceutical industry (NOGA 21) comprises the manu-facture of basic pharmaceutical substances (20% of employ-ment in the sector) and specialties (80%). Basic pharmaceuti-cal substances (NOGA 211) are active substances (antibiotics, vitamins, salicylic and acetylsalicylic acid), blood derivatives and gland extracts. Pharmaceutical specialties (NOGA 212) comprise antiserums, medicines, hormone preparations, vac-cines, diagnostic and biotech products.

Producer Prices and Net Exports Producer prices: index Q1 2004 = 100; net exports in CHF bn

Pharmaceutical prices came under severe pressure in recent years. The rea-sons for this include the expiration of patents for high-selling products, the meager product pipeline and austerity measures in the healthcare sector. Even so, net exports were able to continue their virtually unbridled growth.

Source: Swiss Federal Statistical Office, Federal Customs Administration

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5

10

15

20

25

30

35

40

80

85

90

95

100

105

110

115

120

2004 2005 2006 2007 2008 2009 2010 2011 2012

Net exports of pharmaceutical products (right-hand axis)Producer prices, pharmaceutical industryProducer prices, total



Plastics



Primary Influences Industrial output, construction activity, prices of substitutes, growing environmental awareness, petroleum price

Industry Characteristics Research-intensive, dominated by medium-sized companies

Favorites Medium-sized to large companies with strong research, manu-facturers with know-how in carbon, renewable energy and nanotechnology Sector Profile

The plastics industry sells mainly to the construction sector, the packaging and automobile industries and to certain other industrial sectors. This makes it heavily dependent on the in-dustrial economy and on construction activity. Price trends for substitute materials such as wood or metal also impact the demand for plastics, which are basically cheaper and can gen-erally be customized at lower cost. The plastics industry can exploit society's growing environmental awareness by deliver-ing innovative, energy-efficient solutions to reduce the weight of cars and airplanes, or for thermal insulation. The energy saved by these applications is sometimes substantially more than the energy required to manufacture the plastics. For years now, and with some success, this sector has endeav-ored to project a green image. On this count, Switzerland heads the European nations with a rate of 97% for the re-use of plastics (through recycling and energy utilization). The sector's most important buyer countries are Germany, which takes around 39% of its exports, followed by Italy and France (8% each), Austria (5%) and the US (5%). The Swiss plastics industry reports a trade balance deficit. Exports of rubber goods, for instance, are three to four times higher than imports. Swiss rubber goods manufacturers are highly special-ized, especially in adhesives and seals. Very large quantities of energy are required for production in addition to petroleum, which is of course a fossil resource. The sector is therefore impacted by increases in petroleum and energy costs. Moves to bring about a turnaround in energy policy and the increase in electricity prices that this would en-tail could therefore pose major challenges for this sector in the future. There is strong international competition on standardized mass-produced products (such as pipes and valves). This is why more and more Swiss producers are switching to re-search-intensive niches that offer high value added. Sustained innovative activity is nevertheless required in these segments too in order to ward off growing competition from the Far East.

Although Switzerland is an excellent location for research, problems are emerging with the recruitment of highly qualified manpower. Apart from a few major international corporations, most of the companies operating in this sector are medium-sized enterprises. Given the uptrend in commodity prices and production costs, and strong competition from abroad, we assess this sector's medium-term opportunity-risk ratio as average. Current Situation and Outlook Sector trend 2013

The plastics industry reported sharp falls in output and turnover for 2012. The Euro crisis and the strong Swiss franc were the main sources of pressure on this sector. We expect the global economy to pick up somewhat in 2013, which should prompt a recovery in the buyer sectors for the plastics industry. Coupled with a continuation of brisk construction activity, this should mean that the plastics industry has bottomed out and will return to growth this year. However, an increase in the price of petroleum could curb this upturn.

Sector Structure

The plastics industry (NOGA 22) manufactures rubber goods (NOGA 221) and plastic goods (NOGA 222). Almost 95% of the employees work in plastic goods manufacture. One fifth of them are employed to manufacture packaging materials, and another fifth produce requisites for the building industry. A further fifth manufacture tiles, films and foils, hoses, tubes and profiles. The remaining 40% produce other plastic goods such as tableware and toiletries.

Imports and Exports In CHF mn, moving total (four quarters)

Rubber goods always post a balance of trade deficit due to the large volumes of imported tire products. The balance of trade for plastic goods was positive from 1996 onwards, but it slipped into negative territory in 2005. Since then, the deficit has continued to grow, especially in the wake of the financial crisis.

Source: Federal Customs Administration

0

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3'000

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5'000

6'000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Exports of rubber goods Exports of plastic goodsImports of rubber goods Imports of plastic goods



Metal Industry

Medium-Term Opportunity-Risk Profile: −1.5 Below average


Primary Influences Industrial output, construction activity, energy and commodity prices, trend towards energy efficiency, exchange rates

Industry Characteristics Concentrated (metal production), structure mainly based on small enterprises (metal products)

Favorites Providers of innovative energy-saving metal solutions Sector Profile

The metal sector is primarily an intermediate (upstream) indus-try. Its main customers comprise companies in other industrial sectors such as machinery and equipment and vehicle manu-facturing, as well as the electrical and precision instruments industries (including medical technology and the watch indus-try). Dependency on these highly cyclical sectors renders the metal industry itself relatively susceptible to economic cycles. Demand from the construction industry for steel and light-weight metal building products and for forged parts and lock-smithery products is somewhat more stable. Sales of weapons and munitions are determined by global armaments budgets. The metal industry (and metal production in particular) is a sector that makes intensive use of commodities and energy. Price trends for raw materials (unprocessed metal, scrap) and energy therefore impact production cost substantially. The trend towards energy efficiency is setting challenges for this sector. When properties such as weight, insulating capacity and recyclability are key, metal products are increasingly able to compete with alternative materials such as plastics or tex-tiles. This is why there is specific future potential for innovative metal applications that help save energy, such as lightweight metal solutions or friction-reducing surface coatings. The structure of the Swiss metal industry is heterogeneous. Metal production is dominated by medium-sized and large companies, whereas metal products are typically manufactured by SMEs. Given that transport costs for metal components can be high, physical proximity to customers plays a major part. Switzerland itself is therefore the sector's main sales market. Certain sub-sectors (aluminum, tools, weapons and munitions) focus more on exports. Over 80% of exports are destined for Europe, with more than 60% alone going to the surrounding countries of Germany, Italy, France and Austria. About 70% of imports come from the same countries, so the euro exchange rate has a significant influence. The global metal sector is generally typified by severe price pressure, exacerbated by the advent of new competitors from Asia. Swiss companies there-fore have the best opportunities by eschewing standard prod-

ucts to specialize in more complex niche products, although these call for major investments. Our opportunity-risk profile for this sector is below average overall. Current Situation and Outlook Sector trend 2013

The Swiss metal industry was under pressure for most of 2012. Switzerland's sound construction economy should have had a stabilizing influence in some areas, but most segments were hampered by poor performance in many customer sec-tors, the slump in Europe (the main export market) and import pressure caused by the strength of the Swiss franc. The early-cyclical metal sector is likely to benefit from the moderate eco-nomic recovery anticipated in 2013.

Sector Structure

The metal sector includes metal production and processing (NOGA 24) as well as the manufacture of metal products (NOGA 25). The latter accounts for 85% of employment. Metal production and processing comprises smelting and alloy-ing of metals, and processing them to manufacture semi-finished products. The manufacture of metal products is domi-nated by mechanical workshops, steel and lightweight metal construction, and tool production. This sector also includes items such as forged, pressed, deep-drawn and stamped parts, together with weapons and munitions.

Producer Prices and Global Market Prices for Metals Producer prices: index Dec. 2010 = 100; London Metal Exchange index: average monthly figures

Producer prices in the Swiss metal industry – including metal production in particular – are essentially affected by the trend of global market prices for metals, so they experience correspondingly major fluctuations. However, the sharp increase in commodity prices seen in 2010–2011 was largely cushioned by the strength of the Swiss franc.

Source: Swiss Federal Statistical Office, Bloomberg

1'000

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3'000

3'500

4'000

4'500

5'000

5'500

70

80

90

100

110

120

130

140

150

160

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Producer prices, metal productionProducer prices, metal productsLME base metals price index (right-hand axis)



Electronics



Primary Influences Industrial output, technological advances, commodity prices

Industry Characteristics Export focus, research- and capital intensive, concentrated

Favorites Technology leaders in the semiconductor and sensor segment, providers with mobile network technology know-how Sector Profile

The Swiss electronics sector is heavily focused on manufactur-ing electronic components. Semiconductors and sensor tech-nology are particularly important. On the demand side, there are companies that manufacture electronic and electrical equipment, the precision instruments industry, the building systems segment, machinery and vehicle construction. The Swiss semiconductor industry is a key supplier for the energy sector, especially as regards renewable energies. Given the sector's dependency on industrial output, business perfor-mance by electronic components reacts sharply to economic fluctuations. Performance in the second-largest sub-sector – the production of telecommunications equipment – is very closely related to its customers' investment activity, but this area fluctuates less because demand from the public sector (defense, transport) and telecoms companies is less cyclical. The electronics sector has a strong export focus. More than 60% of its sales revenue is earned abroad. The most im-portant customers are the EU (with Germany as the largest sales market), the US and China. Electronic components ac-count for about one half of exports. This sector is highly research- and capital-intensive. Major investments in research and development are necessary in order to keep up with the pace of innovation and international competition. In conjunction with investments in highly special-ized production plants, it is possible to achieve a technology lead of several years over foreign competitors. This sector is relatively concentrated. Medium-sized companies and large corporations employ over 80% of the workforce. Immense international price pressure made it essential to outsource labor-intensive production steps to low wage countries. This situation forced Swiss manufacturers into the production of high-quality, knowledge-intensive products for niche markets. The growing shortage of specialist manpower therefore poses a major risk for the electronics sector. Uncertainties about price and supply trends on commodity markets are bringing further pressure to bear on the sector. China, with a share of over 90% of the rare earths market, could again exploit its supremacy by restricting exports, as it did in 2010.

Prices will continue to rise and pressure from foreign competi-tion will hold up, so we assess the medium-term opportunity-risk ratio for the electronics sector as average. Current Situation and Outlook Sector trend 2013

The uncertain economic environment in most sales markets meant that demand for Swiss electronics products was muted in 2012. Nevertheless, the sector managed to halt the decline in exports that began in 2011; 2012 saw a generally stable trend for exports, albeit at a lower level. Turnover was again curbed by price pressure: Average producer prices for Swiss electronics manufacturers in 2012 were more than 3% down year-on-year. Electronics is regarded as an early-cyclical sec-tor. In 2013, it should be one of the first to benefit from the slight acceleration of the economy that is anticipated.

Sector Structure

The electronics sector (NOGA 261 to 264) comprises the manufacture of electronic components and printed circuit boards – which account for almost 80% of employment in the sector – together with data processing and telecommunica-tions equipment, and consumer electronics.

Exports In CHF mn, moving total (four quarters); year-on-year change in %

Exports by the Swiss electronics sector react very sharply to changes in the global economic environment. Double-digit percentage change rates are nor-mal. In 2008, strong growth for electronic componentry was counterbalanced by sharp losses for the other sub-sectors. The latest downturn in 2011 im-pacted the entire sector, but manufacturers of telecommunications equipment and electronic components were hit hardest.

Source: Federal Customs Administration; *2005–2007 figures distorted by re-export activities in connection with a VAT fraud

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0%

10%

20%

30%

40%

500

1'000

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2'000

2'500

3'000

3'500

4'000

4'500

2003 2004 2005* 2006* 2007* 2008 2009 2010 2011 2012

Year-on-year change (right-hand axis) Exports



Measuring and Control Instruments

Medium-Term Opportunity-Risk Profile: 0.5 Above average


Primary Influences Performance by customer sectors, technological advances, advancing automation, industrialization in the emerging mar-kets

Industry Characteristics Cyclical, export focus, concentrated, highly specialized, re-search-intensive

Favorites Providers of system solutions with outstanding IT expertise Sector Profile

Measuring and control instruments are used in numerous dif-ferent fields. Customer sectors range from industry and the energy sector to the healthcare sector. Measuring and control instruments represent investments, so demand is highly cycli-cal and depends on performance by the customer sectors. The market enjoys overall growth: On the one hand, ongoing in-dustrialization in the emerging markets is opening up news sales markets while on the other, technological advances and the growing automation of production processes are making new application areas possible. For example, the trend to-wards more decentralized power production (with the inclusion of renewable energies) is creating a need for new measuring and control processes. About two thirds of Swiss manufacturers' sales revenue is earned from exports. The figure for 2011 was almost CHF 5 bn. At 29%, Germany is by far the largest purchaser, so it constitutes something of a risk concentration. Exports to the BRIC nations (Brazil, Russia, India, China) more than tripled in the last ten years, representing a major cornerstone with a share that has now reached 13%. This sector is relatively concentrated. Half of the employees work in large corporations with over 250 employees, and an-other third are employed by medium-sized companies (with headcounts of 50 to 249). The high degree of concentration is due (among other factors) to the substantial outlay on re-search and development: large companies are able to take this on more easily, giving them an advantage over smaller market players. Between 5% and 10% of turnover is typically invested in research and development. Swiss companies are highly specialized, and they are often leaders in niche markets. This gives them a relatively high degree of pricing power, so they are able to distance themselves somewhat from growing global price competition. In addition to their products as such, com-panies are increasingly offering downstream installation, maintenance and training services as well as software. The trend is moving towards system solutions that include embed-

ding the instruments within IT environments. Companies who have added these services to their offering stand to benefit from this development. We assess the overall medium-term opportunity-risk profile for Swiss manufacturers of measuring and control instruments as above average. Technology leadership and a degree of pricing power enables them to derive above-average benefit from the long-term growth in demand. Current Situation and Outlook Sector trend 2013

The global economic slowdown diminished the propensity to invest in the key sales markets of Switzerland, Europe and China during 2012, prompting a slight contraction of turnover. The sector is set to benefit from a modest economic recovery in 2013. Economic and political uncertainties in Europe con-tinue to pose a risk. The ongoing strength of the Swiss franc also constitutes a challenge for this sector, although it will no longer have a negative impact on export figures due to the baseline effect.

Sector Structure

The collective term "Measuring and control instruments" (NOGA 2651) covers equipment to measure and control a wide variety of parameters such as temperature, weight, speed, current, pressure and light.

Exports of Swiss Measuring Instruments and Ger-man Capital Spending on Machinery and Equipment Nominal year-on-year change in %; main export countries by volume of ex-ports, 2011

The synchronicity between Swiss exports of measuring and control instruments and capital spending on machinery and equipment in Germany clearly illus-trates the sector's dependency on its most important buyer country. Other major export destinations are the US, China and France. Exports contracted slightly overall in 2012.

Source: Federal Customs Administration, Federal Statistical Office of Germany

-30%

-20%

-10%

0%

10%

20%

30%

40%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Exports of measuring and controlinstruments, SwitzerlandCapital spending on machinery andequipment, Germany

29%

12%

8%6%

45%

Export countries:

DE

USCNFR

Rest



Watchmaking



Primary Influences Consumer sentiment, global demand for luxury goods, pur-chasing power, tourist flows, fashion trends

Industry Characteristics Strong export focus, concentrated, increasing verticalization

Favorites Large watch and luxury goods groups; independent brands with good positioning in the high-price segment; suppliers with strategic know-how, especially regarding watch movements Sector Profile

Swiss watch industry is part of the global luxury goods indus-try. 95% of its output is sold outside Switzerland. Performance depends primarily on consumer sentiment in the individual sales markets, and is subject to relatively sharp fluctuations. Demand is driven in the long term by the worldwide increase in income and living standards. The development of global travel is another key factor in this sector, because tourists account for a large percentage of watch sales in Switzerland and throughout the world. Demand is also influenced by fashion trends, especially in the lower price segments. Swiss watch-makers are the international front runners in the high-price and luxury segment but in the lower segments, they find them-selves facing strong competition from other countries, and from Asia in particular. Intensive development of the up-and-coming emerging mar-kets at an early stage was a key success factor for the watch sector. In 2008, Hong Kong replaced the US as the main export market. Within ten years, exports to China have multi-plied by a factor of 45. Hong Kong and China together now account for almost 30% of Swiss watch exports. Major poten-tial is offered by other markets in Asia, Latin America, the Middle East and the former Soviet Union. The Swiss watch industry is dominated by four groups: Swatch Group, Richemont, Rolex and LVMH. The sector also includes numerous independent manufacturers and suppliers. Mechani-cal watches account for over 70% of export turnover. Access to mechanical movements and their components is therefore crucial. Many watch brands still depend heavily on the Swatch Group in this regard. The Swatch Group's announcement that it will stop supplying third parties is currently under examination by the Competition Commission (WEKO), but some reduction in supplies has already been approved. This puts competitors under more pressure to find alternative suppliers or to expand their own production capacities. The planned tightening of the criteria for the award of the "Swiss Made" label is also likely to step up pressure on smaller suppliers in the lower and middle

price segments who source most of their watch components abroad. There will probably be a continuation of the trend to-wards verticalizing production that emerged some years ago, evidenced (for example) by the growing number of supplier acquisitions. On the distribution side too, vertical integration is advancing due to the proliferation of single-brand boutiques. Thanks to its unique reputation, the Swiss watch industry is ideally positioned to benefit from the anticipated upturn in global demand for luxury goods. Our overall assessment of the sector's opportunity-risk ratio is above average. Current Situation and Outlook Sector trend 2013

In 2012, the Swiss watch industry managed to beat its record result for the prior year. Exports broke through the CHF 20 bn barrier for the first time. However, growth momentum tailed off gradually over the course of the year. Slowdowns were evident in the key Asian markets of Hong Kong and China in particu-lar. Given the high levels seen in preceding years, this slow-down equates to a certain degree of normalization. We expect further growth in 2013, but the double-digit growth rates of previous years will likely not be equaled.

Sector Structure

The watch industry (NOGA 2652) comprises the manufacture and assembly of watches, clocks, timing appliances and their components.

Exports by Continents CHF bn

Asians are now the main customers of the Swiss watch industry. Within one decade, exports to Asia have more than doubled to reach their present quota of 55%. Watches purchased by Asian tourists while traveling abroad must be added to this figure.

Source: Federal Customs Administration; Federation of the Swiss Watch Industry; *2012 figures estimated by Credit Suisse Economic Research

0

2

4

6

8

10

12

14

16

18

20

22

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Asia Europe Americas Oceania/Africa



Electrical Engineering



Primary Influences Global investment cycles, public sector budgets, growing re-quirements for energy and infrastructure, commodity prices, trend towards energy efficiency, technological advances

Industry Characteristics Strong export focus, research- and capital intensive, concen-trated

Favorites Providers of innovative, energy-efficient solutions such as low-loss power transmission systems Sector Profile

Most electrical engineering products are capital goods. De-mand is therefore driven primarily by global investment cycles, making this sector relatively susceptible to business cycles. The principal customers include industrial enterprises and the construction sector. The energy sector and the railways (where government influence is significant) are also major customers. Dependency on large public-sector contracts can prove both positive (as in the case of economic support programs) and negative (in periods of austerity measures). Demand for do-mestic appliances is determined by private consumption. The global increase in demand for energy and infrastructure represents an opportunity for the electrical engineering sector. Rapid growth and and advancing urbanization in the emerging markets are triggering massive new investments. The focus in the industrialized nations is on replacement and renewal in-vestments. Other energy sources such as petroleum are be-coming scarce as well as more expensive, so electricity looks more attractive. On the other hand, rising metal prices (e.g. for copper) are negatively impacting costs for manufacturers of electrical equipment. Unless energy efficiency is improved, it will be impossible to implement the turnaround in energy policy that various coun-tries are endeavoring to achieve. The trend towards energy-saving products and plant is driving innovation ahead in the electrical engineering sector. The sector as a whole earns up to 80% of its turnover abroad. The main export market is Germany (30%), followed by the US (7%), France (6%) and China (5%). Viewed overall, 30% of exports go to non-industrialized nations; ten years ago, this quota was 20%. Swiss companies' strong foreign ties mean that they are exposed to fierce global competition. Competition from Asian suppliers (especially those in China and South Ko-rea) has been on the increase since the mid-2000s. Automa-tion, a focus on high-quality niche products, a larger service component and constant innovation are potential strategies to

counteract price pressure. Increasing capital intensity triggered a concentration process in the Swiss electrical engineering sector during recent decades. Major concerns now account for about two thirds of the employed workforce. Capital- and knowledge-intensive work stages such as research and devel-opment are the main activities that remain in Switzerland. At the same time, the electrical engineering sector takes ad-vantage of cooperation alliances with this country's excellent technical universities. Nevertheless, the sector is challenged by a growing shortage of engineers. Even so, our medium-term opportunity-risk profile emerges as above average. Trends in the energy sector are likely to generate positive im-petus for demand. Current Situation and Outlook Sector trend 2013

The economic slowdown in the main customer markets brought pressure to bear on the 2012 results for the Swiss electrical engineering sector. In particular, the euro crisis made its mark: exports to most of the key European markets posted decreases, sometimes in the double-digit range. The Chinese market also experienced a significant downturn. Growth (sometimes strong) in other emerging markets (including the Middle East) was unable to compensate for these losses. With the global economy expected to pick up in 2013, capital spending on machinery and equipment is set to gather pace, and demand for electrical products should recover its momen-tum.

Sector Structure

Electrical engineering (NOGA 27) includes the manufacture of products for the generation (generators), storage (batteries), distribution (leads, cables) and use (electric motors, lamps, household appliances) of electric power.

Exports by Selected Sub-Sectors Index Jan. 2003 = 100, moving total (12 months)

In the aftermath of the recession, most sub-sectors saw exports recover in 2010. However, exporters have come under pressure again since mid-2011 due to the strong Swiss franc and the global economic slowdown. The dra-matic collapse of the battery segment was likely due to the disappearance of one major market player.

Source: Federal Customs Administration

60

100

140

180

220

260

300

340

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Electric motors, generators, transformers, electricity distribution

Batteries, accumulators

Cables and electrical installation materials

Household appliances

Other electrical equipment and devices



Machinery and Equipment



Primary Influences Global investment cycles, exchange rates, trend towards ener-gy efficiency, industrialization in the emerging markets

Industry Characteristics Export focus, concentrated, advancing tertiarization

Favorites Manufacturers of quality and niche products with a strong ser-vice focus, providers of energy-saving solutions Sector Profile

Machines are used in virtually all areas of the economy, rang-ing from industry, the construction sector and agriculture to private households. Demand depends on performance and investments in the individual customer sectors and is therefore relatively cyclical. After the pharmaceutical industry, machinery and equipment is the second largest Swiss export sector; over 60% of turnover is earned abroad. Due to this strong export focus, foreign economic trends and exchange rates are both critical. Energy and commodity prices are key cost drivers. The quest for greater efficiency and the advancing automation of production processes are stimulating demand for machin-ery. The trend towards energy efficiency is also generating potential as older plant is replaced by energy-saving alterna-tives. Moreover, ongoing industrialization in the emerging mar-kets is opening up enormous opportunities, so many machine manufacturers are shifting their focus more towards these growth markets. Germany continues to be the largest importer of Swiss machinery, although exports to China have more than tripled within ten years. At present, China and the US are placed second and third, followed by France and Italy. Other emerging countries such as South Korea, Russia, India, Tur-key and Brazil also number among the 15 main export mar-kets. The balance in the machinery sector is shifting eastwards, not only for demand but for production too. On the one hand, Swiss providers aim to increase their geographical proximity to their new customers by setting up local production facilities, acquiring companies or entering into joint ventures with local partners. On the other, Asian providers are further advancing into the premium segment, where they are stepping up com-petitive and price pressure. Structural change is already well advanced. The Swiss ma-chinery and equipment sector is dominated by medium-sized companies and large corporations. Manufacture of standard machinery has already been offshored to a large extent. The main activity still remaining in this country is the manufacture of quality and niche products with a large engineering compo-

nent. Many Swiss manufacturers also hope for growth from an expansion of the service business (by offering integrated sys-tem solutions and maintenance, etc.). In this regard, the short-age of specialist manpower poses a risk to the sector that cannot be neglected. Due not least to fiercer international competition, our opportunity-risk profile for the machinery and equipment sector is average. Current Situation and Outlook Sector trend 2013

During 2012, the machinery and equipment sector experi-enced downturns in turnover and exports, sometimes in the double-digit percentage range. Tool and textile machinery manufacturers turned in a particularly poor performance. Ma-chinery and equipment companies came under heavy pressure due to the sustained strength of the Swiss franc and – most of all – because of the economic slowdown in key sales markets such as Europe and China. We expect the global economy to revive somewhat in 2013, so capital spending on machinery and equipment should also pick up. Machinery and equipment should benefit from these developments, enabling it to bottom out.

Sector Structure

Machine tools (19% of employment), lifting gear and convey-ing equipment (10%) together with machinery for plastics pro-duction (8%) are the largest segments in the Swiss machinery sector (NOGA 28). Machinery for other sectors (such as the textile and food industries) together account for another 27%. Other machinery and equipment products include powertrain and drive elements, pumps, compressors and products for cooling, refrigeration and ventilation.

Employment and Exports Employment in full-time equivalents; exports: Q1 2003 = 100

The global boom in capital goods between 2005 and 2008 sent employment and exports soaring in Switzerland's machinery sector, but the 2009 economic crisis cancelled out these gains. Following a temporary upturn in 2010–2011, the figures plummeted again due to the strong Swiss franc and the euro crisis.

Source: Swiss Federal Statistical Office, Federal Customs Administration

40

60

80

100

120

140

160

180

80'000

82'000

84'000

86'000

88'000

90'000

92'000

94'000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Employment Exports (right-hand axis)



Furniture



Primary Influences Purchasing power, demographics, retail product line policy, consumer sentiment, construction and refurbishment activity

Industry Characteristics Domestic focus, dependent on retailing, import pressure

Favorites Quality-oriented providers with strong brands and good rela-tionships with retailers, providers of office and industrial fur-nishing systems Sector Profile

The manufacture of home furniture is the largest segment of the furniture industry, with about 40% of total employment in the sector. Purchasing power and demographic factors are the key demand drivers. Demographic growth and the long-term trend towards smaller households with more habitable floor area per person generate positive impetus, whereas demo-graphic aging tends to curb demand. Older people relocate far less frequently than younger persons, so they buy less new furniture. However, their awareness of quality and their high requirements for advisory support make them attractive as customer segment. Domestic furniture is purchased almost exclusively through retail outlets, making this sector very de-pendent on retailers' product line policy. Domestic furniture has a long lifetime, so it is more dependent than other con-sumer goods on the development of consumer sentiment and hence on labor market trends. The other two major segments of the furniture industry are kitchen manufacture and the production of office and industrial furniture. Each accounts for rather more than one quarter of total employment in the sector. These manufacturers rely heavily on construction and refurbishment activity, and on the investment climate in the industrial and office-based sectors. This sector has a strong domestic focus, with export quotas ranging from less than 5% (for kitchen furniture) to 15–20% (for domestic and office furniture). Individual design houses and quality manufacturers with a strong presence abroad are the exceptions to the rule. The main export customers are nearby European countries. Within Switzerland, the sector is faced with fierce competition from abroad: About three quar-ters of home furniture sold in Switzerland originates from other countries, although the percentage for kitchen furniture is sig-nificantly less. Lower labor costs give foreign manufacturers critical competitive edge. Exchange rate effects also play an important part: A strong Swiss franc makes imported furniture cheaper than Swiss products.

The structure of domestic and kitchen furniture production is based on small enterprises: about two thirds of all employees work in companies with headcounts of less than 50. Some degree of consolidation has taken place among manufacturers of office furniture over the last two decades. Over 70% of the employees in this segment now work in companies with more than 50 staff. High import pressure means that the Swiss furniture industry has a below-average medium-term oppor-tunity-risk profile. Quality-oriented providers with pricing power based on strong brands and good relations with retailers are in the best position. Current Situation and Outlook Sector trend 2013

Turnover for the furniture industry as a whole declined in 2012, although the situation picked up somewhat in the second half of the year after very negative performance in the first six months. In order to counteract margin pressure, manu-facturers bought in more semifinished and finished products from abroad, and carried out fewer production steps them-selves. In 2013, the continuing high level of construction activity and slightly stronger economic growth should generate positive impetus, but sustained price pressure will have a negative impact on this sector. We expect these countervailing effects to balance one another out, so we assume that turnover will be stagnant.

Sector Structure

Furniture manufacture (NOGA 31) comprises home furnish-ings, kitchen furniture, office and shop furniture, and the pro-duction of mattresses.

Consumer Spending and Foreign Trade Imports and exports: index 2003 = 100; spending on domestic furnishings: real year-on-year change in %

The strong Swiss franc and the economic downturn in other European coun-tries sent exports plummeting in 2009, since when they have failed to recover thus far. Imports lost far less ground during the economic crisis and they have recovered again in the meantime, assisted by stable spending on household furnishings.


-6%

-3%

0%

3%

6%

9%

12%

80

90

100

110

120

130

140

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Spending on home furnishings (right-hand axis)Furniture importsFurniture exports



Medical Technology



Primary Influences Demand for healthcare services, demographics, regulation, technological advances

Industry Characteristics Strong export focus, research-intensive, structure consists mostly of small enterprises with a few large corporations

Favorites Providers of innovative products that help boost quality and efficiency in the healthcare sector Sector Profile

Medical technology is an upstream industry serving the healthcare sector as such. Its main customers are hospitals and doctors. Demand for healthcare services is generally re-garded as not very cyclical. However, more sensitivity to eco-nomic cycles is evident in markets for products whose costs must largely be borne by patients themselves, or those where surgical interventions can be postponed (e.g. dental implants). Demographic trends such as the increase in aging and the ongoing spread of chronic diseases are key growth drivers. Population and income growth in emerging markets is also opening up new potential. As yet, however, the Swiss medical technology sector does not have a strong presence in these up-and-coming markets. About 60% of its exports go to Europe, with another 20% destined for the US. The non-industrialized countries account for about 15%. The sector earns more than four fifths of its total turnover abroad. Increasing pressure on healthcare expenditure in many coun-tries is proving to be a growing challenge for the medical tech-nology sector. More restrictive conditions on the reimburse-ment of charges for medical services and stronger savings incentives for service providers (e.g. through case-based lump sums) are making customers more sensitive to pricing. By professionalizing and coordinating their procurement opera-tions (e.g. by setting up customer aggregations), hospitals are gaining more bargaining power in negotiations with medical technology providers. The increase in price pressure is paral-leled by rising expectations of the safety and efficacy of medi-cal products. A global trend towards stricter approval condi-tions is emerging. The planned revision of the EU's legal framework for medical products, for instance, is also likely to mean that Swiss producers will have to spend more on clinical proof. Smooth and speedy integration of new technologies (such as nanotechnology and IT) is a key success factor for medical technology. On average, Swiss medical technology companies spend over 10% of their sales revenue on research and devel-

opment. Locations in Switzerland enable them to benefit from cooperation arrangements with universities and other external partners. However, innovative drive is at risk from the shortage of specialist manpower. Apart from two dozen large corporations (some of them domi-nated by foreign interests), the Swiss medical technology sec-tor consists mainly of SMEs. Rising cost and regulatory pres-sure is likely to prompt some degree of consolidation in the future. In view of the demographic trends mentioned at the outset, and despite the growing challenges, we continue to rate the medium-term opportunity-risk profile for this sector as above average. Current Situation and Outlook Sector trend 2013

Turnover progressed only moderatly in the medical technology sector during 2012. Real demand proved relatively dynamic, but nominal growth was limited as prices trended downwards. Sales to Europe posted particularly poor performance. We expect the situation to ease somewhat in 2013. General pres-sure on prices will continue to prevail, but should be offset by growth in real demand. However, the era of double-digit growth rates as seen in the early 2000s now appears to be over.

Sector Structure

Medical technology (NOGA 266 and 325) includes the manu-facture of radiation and electrotherapy equipment and other electromedical equipment, medical and dental equipment and materials, orthopedic and prosthetic products and spectacles. Dental laboratories are also included in the medical technology sector.

Exports, Imports and Unit Values Exports and imports in CHF bn; unit values in CHF/kg

The medical technology sector always reports a distinctly positive balance of trade. The main reason for this is that Switzerland exports medical products of high quality, measured by unit value (value per unit of weight). The unit value of imports is about 2.5 times lower.

Source: Federal Customs Administration; *2012 figures estimated by Credit Suisse Economic Research

0

100

200

300

400

500

600

700

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2

4

6

8

10

12

14

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

ExportsImportsUnit value of exports (right-hand axis)Unit value of imports (right-hand axis)



Energy Supply



Primary Influences Industrial output, private energy consumption, mobility, trend towards sustainability, international energy prices, energy policy

Industry Characteristics Capital-intensive, natural monopoly (power transmission), nominal capital held by public sector

Favorites Major providers with client service and high cost efficiency, providers of renewable energy sources Sector Profile

The lion's share of electrical power in Switzerland is consumed by industrial and service enterprises (33% and 27% respec-tively). Demand for energy therefore fluctuates in line with economic developments. Private households consume 31% of the country's power. Demographic growth and consumer trends (more electrical appliances in households, electromobili-ty) influence demand in this segment. Transport (especially by rail) accounts for another 8% of consumption. Demographic growth and increasing mobility are continuing to advance the expansion of public transport, thereby pushing up demand for power from the transport sector in the long term. Technologi-cal changes, the trend towards energy efficiency and (not least) regulation have a major long-term impact on the amount of power that is required. Since 2009, large corporations have been free to purchase power on the open market. Because European market prices were high, the regulated prices offered by regional power utili-ties were cheaper for a long time, so switching over to the market was not an attractive option. The massive development of fluctuating energy sources (wind and solar power) in the EU means that power is now supplied to the market regardless of demand, temporarily causing prices to plummet. Excess ca-pacity throughout Europe is also putting electricity prices under pressure, because demand is weak due to economic factors. Major consumers are therefore likely to make more use of access to the open market in 2013. Energy utilities are heavily dependent on political develop-ments. The outcome of the negotiations on the bilateral power agreement with the EU and the implementation of the turna-round in energy policy are very important for this sector. Poli-tics is also a key factor on account of the energy utilities' ownership structure. In 2011, the public sector held 87% of the nominal capital of the 225 electricity companies recorded in the Swiss electricity statistics, and its involvement in distri-bution is particularly heavy.

The price structure on the power market is undergoing major change. The existing midday price peak is gradually being diminished by production of solar energy. New peaks are emerging in the mornings and evenings – a development that will have far-reaching implications for pumped storage plants in particular. The energy supply sector is highly capital-intensive, and it enjoys a natural monopoly for power transmission. Ownership of the transmission grid was transferred in full to Swissgrid (the national grid company) at the start of 2013. Given the major political uncertainties surrounding the decision to reverse energy policy and in view of growing competition, we assess the medium-term opportunity-risk ratio for the energy supply sector as average. Current Situation and Outlook Sector trend 2013

Up until fall 2012, Swiss electricity consumption posted a year-on-year increase. Hydroelectric plants managed to boost their output, resulting in higher exports of power. Economic trends for 2013 suggest that power consumption will stagnate or grow slightly. Lower grid usage tariffs will push power prices down by about 1% in 2013. Low market prices are prompting many major consumers to switch to the open market, thereby fueling competition among power suppliers.

Sector Structure

The energy supply sector (NOGA 35) comprises suppliers of electricity (NOGA 351), gas (NOGA 352), heat and cooling (NOGA 353). About 92% of the workforce is employed in the electricity supply segment, principally in generation (32%) and distribution (47%).

Development of Renewable Energies and Power Mix Production: index 2001 = 100; percentage of total production

Electrical energy is still obtained mainly from hydroelectric and nuclear power plants. Although the development of new renewable energy sources is expand-ing, their share of output is infinitesimal.

Source: Federal Office of Energy, Swiss Federal Statistical Office

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70%

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100

300

500

700

900

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Hydroelectric power Photovoltaic energyWind BiomassShare of hydroelectric power (r.h. axis) Share of nuclear power (r.h. axis)Share of conv. thermal energy (r.h. axis) Share of various renewables (r.h. axis)

vv v



Construction



Primary Influences Interest rate developments and demographic trends, infra-structure requirements, public sector financial planning, in-vestment cycles, construction trends

Industry Characteristics Domestic focus, structure based mainly on small businesses

Favorites Innovative companies with clear business strategies that can stand back from the price war thanks to their reliability, good contacts with builder-owners and developers, and convincing quality Sector Profile

Due to the high proportion of borrowed capital employed in building projects, the construction sector reacts sensitively to interest rate trends. In the residential building segment, de-mand is driven by a combination of this effect and demogra-phic growth. The civil engineering segment is also impacted indirectly: infrastructure has to grow at the same pace so as to preclude bottlenecks or supply and traffic overloads. The state of public-sector budgets and financial planning determines whether infrastructure developments can be implemented. Industrial and commercial building is heavily dependent on economic cycles because it deals with the construction of in-dustrial and administrative premises, so it follows the invest-ment cycles of its customer sectors. Finally, an important part is played by trends such as sustainable building. Prices are under pressure, especially in the building construc-tion segment. The price for a new-build multi-family dwelling in 2012 was only 2% above the 2008 level. Despite high de-mand, it has proven impossible to implement price increases that would favor higher margins. Competition is becoming fiercer because growing numbers of companies are attempting to benefit from the large volume of construction and the low barriers to market entry. The entry rate for new companies soared over the last two years. In 2011 alone, 1,080 new building construction companies were entered in the commer-cial register, corresponding to 11% of all entries in the building construction segment. The number of registrations had already climbed to 670 in the first half of 2012. In many cases, these may well be microenterprises that kick-start their market entry with low prices that do not necessarily cover costs, thereby stepping up price pressure. Low growth in construction prices is balanced out by soaring property prices. By 2012, prices for new condominiums had risen by 26% since 2008, due pri-marily to rising prices for the construction land on which they were built. Building land at sought-after locations is in such

short supply that there is little scope for negotiation on high prices, in contrast to the situation for construction costs. To compensate at least in part for the price of land, builder-owners are induced to cut more corners on construction costs. As well as bringing pressure to bear on prices, these attempts to save also put the quality of construction at risk. These prob-lems are less marked in the civil engineering sector and in some areas of the finishing and engineering trades. Although prospects for demand are positive, the structural problems limit the opportunity-risk indicator for the construction sector to an average rating. Current Situation and Outlook Sector trend 2013

Due to the poor start to 2012 as a result of weather conditions and also on account of capacity problems, construction in-vestments declined slightly during the year (in real terms) from their already high level. However, low interest rates and demo-graphic growth are maintaining demand and, given that order books are full, 2013 should bring investment growth. This positive outlook holds true for all segments of the construction industry. Attempts are under way in the residential building segment to cope with the large number of planned projects. On the industrial and commercial front, the start of construc-tion on numerous office and administrative buildings is stimu-lating turnover.

Sector Structure

The construction sector comprises building construction and civil engineering (NOGA 41 and 42), which employ about one third of the total workforce. Roughly 30% work in construction installation and 18% in specialized construction activities (NOGA 43), with 18% employed in the rest of the construc-tion sector.

Order Situation: Housing Construction New orders less turnover; backlog of orders; CHF mn, moving average (four quarters)

Since the end of the 1990s, the residential construction segment has steadily accumulated an order surplus that should maintain the volume of turnover in 2013 even if demand dips.

Source: Swiss Contractors' Association

1'000

1'250

1'500

1'750

2'000

2'250

2'500

2'750

3'000

3'250

3'500

-60

-40

-20

0

20

40

60

80

100

120

140

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Balance of orders received minus turnover

Backlog of orders, residential construction (right-hand axis)



Automotive Sector



Primary Influences Demographic growth, mobility behavior of the population, manufacturers' model cycles

Industry Characteristics Labor-intensive, fixed location, vertical ties between car deal-ers and importers

Favorites Large multi-brand dealers in locations with good access; es-tablished regionally-based garages with regular customers Sector Profile

The average Swiss person spends 34 minutes of each day in a car or on a motorcycle, and uses these means of transport to cover two thirds of the distance he or she travels every day. Because mobility is a fundamental need, demand tracks de-mographic growth over the long term. However, motorized personal transport has to compete with other forms of transport – especially the railways, which have enlarged their slice of the ever-expanding mobility cake in recent years. Car ownership per household is stagnant. The market for new vehicles is therefore saturated, and is dependent on require-ments to replace existing cars and on manufacturers' model cycles. Consumer sentiment and anticipated price trends influ-ence purchasing decisions, which customers often find easy to delay. For these reasons, sales of new cars move in marked cycles. The workshop and spare parts business accounts for about 55% of gross profit, generating stable core demand that is the cornerstone of earnings for an average garage. The federal government intends to encourage the use of low-consumption vehicles so on July 1, 2012, it introduced fines for importers whose vehicles do not comply with the CO2 emission guidelines. Even without a bureaucratic system of fines, there is a clear trend towards energy efficiency. Well over one quarter of new cars were already in the top A to C efficiency categories (for the energy label) between 2000 and 2004, and this quota had risen to three quarters by 2011. Garage density is very high in Switzerland. In 2008, there was one garage for roughly every 500 registered automobiles. The automotive sector is labor-intensive, with small enterprises that have an average of six employees per garage, and it suffers from low labor productivity. The low entry barriers have pre-vented structural change from materializing, although it has often been predicted. This is a fixed-location sector: because closeness to clients is key, the catchment areas of individual garages are protected to some extent. There are strong verti-cal ties based on contracts between marque garages and im-porters. The Competition Commission's announcement on

motor vehicles prohibits certain clauses in contracts that im-pose excessive constraints on dealers' business activities and would therefore curtail competition. Although the EU is signifi-cantly relaxing its own similar regulations on the new vehicle trade in 2013, the Swiss Competition Commission decided in mid-2012 that it would retain the announcement on motor vehicles without changes until 2014. Despite structural supply-side weaknesses, the opportunity-risk profile for this sector is average because it enjoys stable basic demand. Current Situation and Outlook Sector trend 2013

Vehicle sales showed the first signs of a slowdown in 2012. Growth in new registrations was about 3% – a far less dynamic pace than in the two preceding boom years. The ratio of direct imports to new registrations also soared from about 6% (2011) to roughly 12% (2012). Turnover from vehicle sales was negatively impacted by severe price erosion on new and second-hand cars. 2013 is likely to be a mixed year for this sector. Potential for demand has tailed off due to the unprecedented renewal of vehicles in 2010 and 2011.

Sector Structure

The automotive sector (NOGA 45) is dominated by car dealers and workshops. Together with vehicle importers, they account for 86% of employees. The other two sub-sectors (spare parts and the accessories trade) and the motorcycle trade are considerably smaller.

New Vehicle Registrations Index Jan. 2002 = 100

Trends for the various vehicle categories were relatively synchronous in 2012. Rather more momentum was lost on the automobile market than by sales of utility vehicles. Numerous automobiles were registered ahead of time in June 2012 due to the CO2 fine system, causing new registrations to plummet year-on-year in the second six months.

Source: Swiss Federal Statistical Office

80

90

100

110

120

130

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Automobiles Utility vehicles Motorcycles



Wholesale Trade



Primary Influences Private consumption, economic cycles in construction and industry, foreign trade policy, logistics costs

Industry Characteristics Heterogeneous, volume business, low gross margins

Favorites Supra-regional service-oriented wholesalers, vertically inte-grated providers Sector Profile

The wholesale trade sells goods of every imaginable sort, making it an extremely heterogeneous sector. Wholesalers who supply the retail and catering sectors depend on the trend of private consumption, making them indirectly reliant on con-sumer sentiment. Economic cycles in construction and industry impact the performance of wholesalers dealing in industrial and commercial consumables and capital goods. Consequently, they are indirectly affected by interest rate trends (construc-tion) and companies' appetite for investment. Most wholesal-ers move goods across borders, so they are dependent on exchange rate trends and foreign trade policy (free trade agreements, customs duties, quotas, non-tariff barriers). Changes in transport costs triggered by regulation or fuel pric-es have a particular impact on distributors who focus on logis-tics. Goods purchasing accounts for well over 90% of expenditure. Purchasing power is crucial. Apart from a few niches, the wholesale trade is therefore a volume business with low gross margins; it is not very labor-intensive but is (relatively speaking) highly capital-intensive. Producer and import prices are key indicators of how costs are trending. When it comes to the trade-off between highly efficient deliveries (just-in-time) and low storage costs, modern IT and logistics systems are critical to business success. To preclude the risk of direct sales between manufacturers and end customers, most wholesalers offer a wide range of services. Examples include after-sales service, product training, product group management or inven-tory management and pay systems. The market for the domestically oriented cash-and-carry and delivery wholesaling segments is relatively saturated. Com-modities traders posted the highest growth in recent years. Income from the transit trade, as it is known, soared by a fac-tor of 15 within ten years to reach almost CHF 20 bn in 2011. Commodities trading generates high value added and requires only low staffing levels. This also explains why the productivity of the wholesale trade has grown at 3.3% per year since the turn of the millennium – significantly faster than the figure for

economy as a whole (1.8% p.a.). Switzerland is attractive to the commodities trade and also to other globally-oriented wholesalers such as the distribution companies of major cor-porations and international logistics centers. Low taxes, a flexible labor market and political stability are critical location factors. In view of the major potential for internationally oriented whole-salers, we assess this sector's opportunity-risk profile as above average. Current Situation and Outlook Sector trend 2013

The wholesale trade lost momentum during the course of 2012, in line with foreign trade and industrial output. The trend is set to turn around in 2013. We anticipate growth in foreign trade and a robust level of construction activity. Retailing, another major customer sector, ought to grow slightly but will generate little impetus on the whole.

Sector Structure

The main subsectors of the wholesale trade (NOGA 46) are wholesaling of machinery and equipment (25% of employ-ment), food and beverages (15%), other consumer goods (29%) and chemical products, building materials and commod-ities (21%).

Performance by Categories Index: Min. = −100 points, max. = 100 points, unchanged = 0

After two sound business years in 2010 and 2011, 2012 saw performance tailing off throughout the wholesale trade and also in the important sub-categories of food and machinery/equipment. For machinery and equipment, which are classical capital goods, the downturn was steeper than for food, which is relatively resilient to business cycles.

Source: Swiss Institute for Business Cycle Research (KOF) at the Swiss Fed-eral Institute of Technology (ETH), Zurich

-30

-20

-10

0

10

20

30

40

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Total Food Machinery and equipment



Retail Trade



Primary Influences Demographic growth, purchasing power, consumer sentiment, exchange rates

Industry Characteristics Individual providers with dominant market positions, domestic focus

Favorites Retailers with market power, retailers at good locations, pro-viders with convincing cross-channel strategies Sector Profile

Retailing satisfies a basic human need, so it enjoys stable demand. However, private consumption by households is increasingly shifting out of the sector for needs such as vaca-tions, home furnishings and mobility (in 2011, about 71% of consumer spending was outside the sector). Because of satu-ration, retailing tracks demographic growth and the increase in purchasing power. Retailers who sell goods other than basic consumables are particularly subject to quite large short-term fluctuations which are closely linked to consumer sentiment. 73% of the Swiss population can reach a foreign supermarket by car in 60 minutes. Exchange rate movements therefore impact retailing turnover indirectly – through shopping tourism – and regions close to the borders are hit particularly hard. Due to saturation, retailing is a cut-throat market. Conse-quently, retail space is often expanded at the cost of competi-tors and productivity per unit of area. Unlike the nonfood market, food retailing is heavily concentrated and is mostly in Swiss hands. Competition from the new discount stores and shopping tourism are generating fierce competition in spite of the concentration in this sector. After a boom that lasted for years, the fairytale expansion of Swiss retailing now seems to be petering out. Aldi and Lidl had well over 250 branches at the start of 2013. The discount stores will curtail their expan-sion significantly after the strong growth seen in previous years. Major shopping mall projects are in difficulties because tenants and investors are showing reluctance. Saturation is prompting Coop and Migros to push international business, together with those niches that still hold out prospects of growth (online trading, organic products and convenience food). The stationary trade is under increasing pressure due to the steady rise of online trading. However, providers should view online platforms as a complementary sales and communication channel rather than a threat to their survival. "Cross-channel retailing," as it is known, harbors great potential but is still in its

infancy in Switzerland as compared to the English-speaking world. Stable demand leads us to assess the opportunity-risk profile for this sector as average. Current Situation and Outlook Sector trend 2013

2012 saw retail sales recovering from their exceptionally nega-tive performance in 2011, and they just managed to move into positive territory. Prices fell by well over 2% – almost as sharp a drop as the record downturn seen in 2011. We expect prices to increase in line with the long-term average in 2013. Consumer sentiment is nevertheless likely to remain un-changed, as the labor market is expected to deteriorate somewhat. On the other hand, brisk immigration will generate core growth for the sector. Shopping tourism is likely to settle at a high level in response to the stabilization of the exchange rate. The reversal of the price trend that began in 2012 will continue, resulting in only a slight downturn in prices during 2013.

Sector Structure

Employees in the retail trade (NOGA 47) are spread across some 48,800 businesses. 35% of them work in food retailing, with 65% in the non-food segment.

Nominal Retail Sales by Product Category Index 2003 = 100

Food retailing posted robust growth for 2012 and – as the most important sub-sector – provided support for retailing as a whole. Turnover from the watch and jewelry trade grew by leaps and bounds, with an increase of 15% fueled by the boom in tourists from China and the Gulf States. As in 2011, the clothing trade lost ground again in 2012.


90

100

110

120

130

140

150

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

TotalFood, tobaccoApparel, footwearWatches, jewelryHealthcare, beauty, bodycareElectronicsFurnitureCulture



Transport and Logistics



Primary Influences Mobility, global trade flows, outsourcing, energy prices

Industry Characteristics Monopolistic character (passenger transport), concentrated (logistics), structure based on small enterprises (road freight transport)

Favorites Large companies with international networks, highly specia-lized niche providers Sector Profile

Demand for passenger transport by rail has shown virtually unbridled growth for years. In the absence of market prices and given the rapidly growing demand for mobility, the current economic situation plays virtually no part. On the other hand, Switzerland's mountain railways/ski lifts operate in a relatively saturated market during winter. Turnover is influenced by weather conditions, as well as consumer sentiment and the economic situation at home and abroad. Demand in the freight and logistics segments depends on the performance of down-stream sectors and on global trade flows, which will continue to outstrip GDP growth in the future. For many companies, outsourcing continues to be an option that would enable them to cut costs in a harsher environment, to the benefit of the transport and logistics sector. Rising energy prices are bringing more pressure to bear on margins for carriers in particular. The supply in the passenger transport segment is mostly pro-vided by the public sector. Public budgets therefore determine ongoing infrastructure development. The regulatory authority can influence relative demand for road and rail transport through capacity expansion and pricing policy. The mountain railways suffer from excess capacity and an investment back-log. It proved possible to implement price increases in recent years, but margin pressure remains high. The logistics sector is highly concentrated and is dominated by major international providers. Ingenious IT systems are gaining ground in this sector, so the availability of qualified employees is an increas-ingly critical factor. The sector is a significant emitter of CO2. Policy requirements and customers' needs make it essential to reduce the environmental impact at all stages of the value chain, posing a challenge for the sector. Suitably positioned logistics companies can benefit from this trend. The structure of freight transport is based on small enterprises. Mounting price pressure, environmental requirements and the trend towards offering all haulage and logistics service from one single source are building heavy pressure on micro-enterprises in particular.

The overall opportunity-risk profile for the sector is average. Thanks to favorable demand trends, logistics has considerably better potential than freight carriers and mountain railways, which have to combat overcapacity. Current Situation and Outlook Sector trend 2013

The global economic slowdown has made its presence clearly felt in this sector. The global air freight market contracted in 2012, while sea freight showed slight growth. Swiss goods exports were stagnant in 2012, and imports grew slower than in 2011. Rising petroleum prices were also a concern for this sector. Moreover, carriers operating cross-border transport services suffered at the hands of the strong Swiss franc. The early-cyclical logistics sector is likely to benefit from the slight global economic recovery in 2013, thanks to a concomitant increase in trade volume.

Sector Structure

Land transport (NOGA 49) mainly comprises passenger and freight transport by road and rail. The logistics sector (NOGA 5229) covers the organization of transportation capacity, freight consignments and other forwarding and logistics activities.

Freight and Passenger Transport Freight transport in tonne/kms, passenger transport in person/kms; index 2002 = 100

Passenger transport shows no dependency on economic cycles, whereas freight (and especially rail) transport is subject to greater fluctuations. Freight turnover is likely to react more sharply to economic developments than the volumes transported.

Source: Swiss Federal Statistical Office, *2008: Change in the data on which public road transport figures are based

95

100

105

110

115

120

125

130

135

140

2002 2003 2004 2005 2006 2007 2008* 2009 2010 2011

Goods (rail) Goods (road)

Passengers (rail) Passengers (road)*



Hotels and Catering



Primary Influences Consumer sentiment, purchasing power at home and abroad, weather conditions, consumer trends, exchange rates

Industry Characteristics Labor-intensive, low barriers to market entry, structure based on small enterprises

Favorites Large hotels with an international network, renowned hotels in the top price segment, restaurants at well-frequented locations Sector Profile

The hotel and catering business is largely dependent on spending by private households, so it generally lags economic cycles. Factors such as unemployment, salary trends and con-sumer sentiment have a correspondingly major impact on the sector. The weather is another important driver of spontaneous travel decisions. About half of all spending on meals away from home occurs during the lunchtime period. Long commuting distances make this spending virtually irreplaceable, so the catering segment meets certain fundamental needs. However, there is a tendency to eat more cheaply during periods of eco-nomic difficulty. Catering also depends on long-term trends such as the growing awareness of health and sustainability. As an export-oriented sector, the hotel industry is also heavily influenced by the economic situation abroad and by relative exchange rates. More than half of all overnight stays are generated by foreign visitors. In contrast to the traditional mar-kets such as Western Europe, the US and Japan, up-and-coming emerging markets such as China, India and the Gulf States hold out huge potential for Switzerland's hospitality industry. However, their quotas of overnight stays are still very modest at present. These guests often stay for short periods only, and they focus on the top destinations. Their readiness to pay for accommodation and food is often low. A decisive as-pect for the future will be how the hospitality industry can mo-tivate these guests to pay longer visits that create more value added. The downside of globalization of the tourism market is the growing abundance of competitor destinations. Competi-tion and quality pressure has been stepped up because the internet makes it easier to compare international destinations. Switzerland's opportunities stem from its reputation, its attrac-tive countryside and its outstanding public infrastructure. As compared to its foreign neighbors, this labor-intensive sector has a marked price disadvantage which was dramatical-ly worsened by the recent appreciation of the Swiss franc. More than half of the businesses are not profitable, if entre-preneurs' compensation and equity return are taken into ac-

count. The situation is particularly alarming for micro-enterprises, which account for a large percentage of the sector. The problems are due to excess capacity and high competitive pressure, coupled with obsolete infrastructure in some cases. It is difficult to assess the impact of the second home initiative on the hotel industry. This development offers some opportunities, especially for hybrid accommodation options. Supply-side problems mean that the opportunity-risk profile for the sector is below average. Current Situation and Outlook Sector trend 2013

2012 was another difficult year for the hotel and catering sector. The euro crisis and the strong Swiss franc pushed turnover down significantly. Regions with high percentages of vacation hotels and visitors from traditional markets were hit particularly hard. We expect economic conditions abroad to improve slightly during 2013. The exchange rate still gener-ates a constant negative impact, but the overvaluation of the Swiss franc is decreasing as it loses real value. For these reasons, stabilization of the situation in the hospitality industry is only likely to proceed hesitantly in 2013.

Sector Structure

The sector comprises accommodation on the one hand (i.e. hotels, vacation homes and campsites (NOGA 55)) and catering on the other (including restaurants, cafés, snack bars, bars, discotheques and caterers; NOGA 56).

Overnight Stays by Country of Origin Index 2002 = 100; index value for China, 2012: 451

The financial crisis and the strong Swiss franc widened the disparities in over-night stays by countries of origin. The emerging markets were almost the only source of growth. The trend in overnight stays by visitors from China is espe-cially impressive. There were substantial downturns for nations that are hit hard by the euro crisis such as Greece, and for highly price-sensitive nations such as Germany. Figures for domestic visitors remained relatively stable in the period under consideration.

Source: Swiss Federal Statistical Office, *no data available for 2004; **2012 figures estimated by Credit Suisse Economic Research

50

100

150

200

250

300

2002 2003 2004* 2005 2006 2007 2008 2009 2010 2011 2012**

Germany Switzerland EU 15China Gulf States Greece



Telecommunications



Primary Influences Technological advances, mobility, demographic growth

Industry Characteristics Heavily concentrated, network sector, limited competition in some areas, regulated

Favorites Large providers with their own network infrastructure, compa-nies that offer bundles of different communication services Sector Profile

Technological impetus is a powerful driver of demand for tele-communications. Innovation advanced at a considerable pace over the last two decades, with new technologies such as mobile telephony and broadband internet achieving high market penetration soon after they were launched. With (inter-national) division of labor and interconnectivity on the increase, there are growing requirements for mobile communication and information that are met by providers with innovative products and services. This sector is relatively independent of business cycles and like other consumer-related sectors, it benefited from strong demographic growth in recent years. At present, its greatest opportunities for growth are to be found in the mobile broadband technology segment. But apart from this area, the market is becoming increasingly saturated. Providers are therefore forcing the development of mobile and fixed networks. At the start of 2012, the three major mobile teleph-ony providers took part in an auction for concessions to use the high-performance LTE (Long Term Evolution) mobile tech-nology. Telecoms providers (often in cooperation with city power utilities) are also driving the expansion of high-speed fiber optic networks ahead now that most of the competition law problems have been resolved. Most large providers provide the network infrastructure them-selves. Expansion and maintenance of the infrastructure ne-cessitate considerable investments, often running into billions. The resultant high fixed costs coupled with network effects have led to a major concentration of providers, and the market is not particularly dynamic. However, resellers and internet telephony providers are making inroads. Competition is increasingly stimulated by the enhanced performance and convergence of networks and equipment. The emergence of free web-based services such as WhatsApp and Skype via Smartphone has started forcing providers to adapt their rate structures for mobile telephony: the trend is moving towards service bundling (mobile telephony, fixed network, internet and TV) and flat rates. Providers therefore complain of growing price pressure, even though the Swiss mobile network is still

rather expensive compared to its international counterparts. There are calls from various quarters for regulatory intervention to bring mobile telephony prices down even further. In general, the regulatory authority has the difficult task of enabling com-petition while allowing sufficient incentive for investment, in the form of profit. Although the sector benefits from technological advances and the need for location independent communication, prospects for growth are not as rosy as they once were. Because the new mobile telecommunication services are growing at such a breathtaking pace, the market for them is soon likely to be saturated, and price pressure is set to increase in response to competition among networks and platforms. We therefore assess the sector's medium-term opportunity-risk profile as average. Current Situation and Outlook Sector trend 2013

Although the major providers posted customer growth for mobile telephony and broadband internet in 2012, turnover was stagnant because prices tumbled. Demand for mobile internet will rise steeply again in 2013. In view of the competi-tion from free mobile services, however, there will likely be no let-up in pressure on prices. Overall turnover is therefore set to stagnate again in 2013.

Sector Structure

The telecommunications sector (NOGA 61) consists of provid-ers of fixed network, mobile telephony, and internet and TV access. A distinction is drawn between providers who have their own network infrastructure and those who use third party networks for their services.

Market Share: Mobile Telephony and Broadband Internet Market shares for mobile telephony in %; market shares for broadband internet in %

Measured by providers' market shares, momentum on the mobile telephony market is sluggish – the last ten years saw almost no changes. However, price pressure is rising due to factors such as the smartphone boom and free appli-cations. Measured by market share, Swisscom is dominant in the broadband segment.

Source: Swiss Federal Communications Commission

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Swisscom mobile Sunrise mobile Orange mobileCable modem Swisscom broadband Sunrise broadbandOther DSL providers



Information Technology Services



Primary Influences Technological advances, performance of customer sectors, virtualization of operating and working environments (cloud computing)

Industry Characteristics Structure based on small enterprises, growing international competition

Favorites Providers of cloud solutions, companies with specific sector know-how, small highly specialized consultants Sector Profile

As rapid technological progress enables automation to ad-vance, society is being penetrated by information and commu-nication technologies (ICT). These developments generate growing demand for IT services in all sectors. Key customers such as the financial and insurance sectors, manufacturing, and trade make use of software solutions and IT services to automate their business processes so as to cut costs, but also to drive innovation. IT service providers are correspondingly dependent on the performance of these sectors. One of the key trends is the creation of virtual operating systems and work environments that companies can access externally (cloud computing). Despite initial skepticism, companies are now launching complex transformation projects, and are trans-ferring business-critical applications such as customer relation-ship management, enterprise resource planning and supply chain management to the cloud. Data security requirements are becoming stricter in response to this development. Pressure is mounting on prices in the hardware and IT service segments. New technologies and higher data transfer capaci-ties mean that competition within the IT industry is increasingly globalized. It has proven possible to maintain margins thus far in the software segment because manufacturers benefit from their customer companies' dependency (vendor lock-in). Most of the leaders in the price competition are low-wage countries in Asia and Eastern Europe. Swiss providers rely mainly on innovation, closeness to clients and special solutions for the home market but in recent years, they have earned a growing reputation abroad thanks to the Switzerland brand. The supply structure is based on small enterprises, with only a few large corporations. In recent years, however, a limited number of major international corporations such Google and Yahoo have set up business in this country. The IT sector is faced with challenges when it comes to recruiting staff. By 2020, there is likely to be a shortfall of 25,000 specialists in Switzerland. Recruitment abroad or even outsourcing to

regions with a larger supply of qualified personnel can go some way towards countering this trend. As compared to other sectors, we assess the opportunity-risk profile for the IT sector as above average. Although more and more IT departments are being offshored, technological advances and the standardization of processes in customer sectors offer high growth potential in the medium term. Current Situation and Outlook Sector trend 2013

The IT sector posted robust growth in turnover for 2012. All three segments – hardware, software and IT services – moved upwards. In 2013, we expect that the strong Swiss franc and regulatory adjustments in the financial sector will again compel companies to standardize their processes. This should support demand for IT services. At the same time, software manufac-turers will benefit from heavy demand for cloud solutions.

Sector Structure

The two main components of the information technology services sector (NOGA 62) are programming activities (accounting for 46% of employment) and advisory services related to information technology (50%). The remaining 4% consists of operating data processing facilities for third parties and other IT services.

Employment and Real GDP Year-on-year change in %

After the dotcom bubble burst, there were numerous layoffs in the IT service segment. This scenario was not repeated in the 2009 recession, and jobs were actually created during that period. Ever since 2005, employment in IT has risen at a constantly higher rate than in the service sector as a whole.


-5%

0%

5%

10%

15%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Employees, IT services Employees, services overall GDP



Banks



Primary Influences Regulation, tax regime, transparency, investor confidence, income growth in emerging markets, financial markets, inter-est rates

Industry Characteristics Dualistic structure with banks specializing in the national retail business and institutes with an international reach, focusing mainly on private banking with support from investment banking units

Favorites Institutions with a solid private banking pillar and a strong presence in emerging markets Sector Profile

Demand for banking services is determined by several funda-mental trends. The new international regulatory regime intro-duced in the aftermath of the financial crisis is changing the framework conditions within which Switzerland competes against other leading financial centers. As regards taxation, Switzerland is increasingly faced with calls from abroad for greater transparency. Contraction of demand for customized products due to dwindling investor confidence is another influ-encing factor. Clients increasingly want simply structured, transparent products. The rise of the emerging markets in East Asia and South America, and their growing share of global assets, are prompting Swiss banks to seek out more growth opportunities in those regions. Amid all this change, Switzer-land's status as a safe haven remains constant, untouched by the crisis. This advantage enhances demand for Swiss banking services in foreign growth markets. Other key influencing factors include stock market trends together with global inter-est rate and investment cycles. These demand-side trends are likely to change supply-side structures in the long term. The banking sector began to undergo major structural change back in the early 1990s, and the number of institutes has fallen by more than 45% overall. Regulatory requirements have pushed costs up and created a need for greater transparency, so pressure to consolidate is set to remain high for smaller banks in particular. The Swiss banking industry currently has a dualistic structure. Banks with a global focus primarily offer various asset management services (private banking), sometimes with support from their own investment banking units. Alongside them, a large num-ber of smaller, mainly Swiss-oriented banks focus on the tradi-tional savings and lending business. We anticipate an average opportunity-risk profile in the medium term. The sound prospects held out by emerging

markets suggest sustained growth and a steady inflow of new funds, with a macroeconomic and political environment in Switzerland that remains stable amid the crisis. However, pressure on margins is set to hold up because the lending market continues to be highly competitive, and private banking clients are tending to opt for low-margin assets. Current Situation and Outlook Sector trend 2013

The enhanced status of Switzerland as a safe haven during the financial crisis and the comparatively good capitalization of its banks by international standards (the Swiss finish) strength-ened the Swiss center's position in the international competi-tion for new assets from Europe, the US and East Asia during fiscal 2012. The outlook for the banking business in 2013 is likely to be dominated by adaptation to the new regulatory environment and by customers reorienting towards simple, transparent products. One factor of uncertainty is the imple-mentation of the new regulations in international financial cen-ters.

Sector Structure

The Swiss banking sector (NOGA 64) can be broken down into eight groups of banks: big banks and cantonal banks, Raiffeisen banks and regional banks or savings banks, banks that specialize in stock exchange and private bankers, foreign banks, and other banks. The banking sector can also be con-sidered to include the Swiss National Bank, leasing institutions and the two Pfandbrief (mortgage bond) banks.

Gross Value Added – Lending Business and GDP Real, seasonally adjusted; index Q1 2003 = 100

Following the end of the dotcom crisis, banking sector growth significantly outstripped GDP for several years. However, the sector shed all of this added growth in the course of the financial crisis.


90

100

110

120

130

140

150

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

GDP Gross value added, lending business



Insurance



Primary Influences Need for security, major loss events, interest rates, regulation, healthcare costs, purchasing power, demographics

Industry Characteristics Concentrated (life and reinsurance business), fragmented (non-life business)

Favorites Large providers with a strong client focus and excellent risk and cost management, insurers with a foothold in emerging markets Sector Profile

Apart from providing capital formation products, the core busi-ness of the insurance sector is to collectivize risks so as to enable individuals and companies to bear them. The sector's success is therefore critically dependent on its clients' need for security. Indemnity insurers' and reinsurers' results are influ-enced heavily by major loss events such as natural catastro-phes. The investment results from the assets collected through premiums constitute a key factor for most of the sector. The difficult capital market environment over the last decade therefore posed a huge challenge. The life insurance business in particular suffered from all-time low interest rates. The sector's dependence on business cycles is relatively low: the need for protection against risks such as death, illness and accident is inherently acyclical and is often stipulated by law. Viewed over the long term, however, premium volume is closely correlated to purchasing power. Measured by per capita premium volume, the Swiss market has the highest penetration in the world. Nevertheless, the nonlife segment – especially legal expenses insurance and health insurance plans – also posted steady growth in recent years. However, price pressure is high in many areas, and the growing transparency resulting from online providers' comparison platforms is making clients even more sensitive to pricing. Demographic aging and structural change in pension funds are likely to continue making private insurance solutions more relevant. Some Swiss insurers generate substantial portions of their premium volume abroad. Conversely, various large foreign providers have penetrated the Swiss market in recent years. There is comparatively high concentration among life insurers and reinsurers, whereas property and indemnity insurers are more fragmented due to the larger number of business lines. The sector is influenced by regulatory requirements, which were generally tightened following the financial crisis. Regula-tory elements such as the Swiss Solvency Test or the forth-coming European Solvency II standard impact the sector's

cost structure, as well as its stability. Although most pension funds and health insurance plans are organized as private-law institutions, they repeatedly fuel political debate and are subject to ballot-box decisions that are difficult to predict. Growth potential is limited due to the high level of penetration on the home market. Future premium growth can be expected mainly from groups with subsidiaries in emerging markets. Life insurers will likely be forced to continue battling the low inter-est environment, and there is an increased risk of government bond failure. Despite its limited growth potential, the sector earns an average opportunity-risk profile in view of its high stability. Current Situation and Outlook Sector trend 2013

Life insurers were negatively impacted by the low interest rate environment again in 2012, while reinsurers were able to hoist their premiums after the large number of claims in 2011. The first half of 2012 saw relatively few natural catastrophes, but Hurricane Sandy had a negative impact on results for proper-ty/indemnity insurers and reinsurers in the second six months. There is likely to be a minimal improvement in the interest rate situation during 2013, and premium volumes will probably rise in line with the trend seen in prior years.

Sector Structure

The sector (NOGA 65) comprises property/indemnity and life insurers as well as reinsurers (including captives), together with pension funds and health insurance plans. 57% of employees work for property and indemnity insurers, 20% for health insurance plans, 8% for reinsurers and 7% for life insurers.

Premium Volume for the Swiss Life Business CHF bn

Premium volume for the Swiss life business contracted in the first half of the last decade, but growth set in from 2007 onwards. Full insurance solutions for pension funds in particular have posted substantial growth rates for years.

Source: Swiss Insurance Association (SIA); *2012 figure estimated by Credit Suisse Economic Research

0

5

10

15

20

25

30

35

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

AXA / Winterthur Swiss Life Helvetia / PatriaBasler Leben Allianz Suisse RestMarket overall



Real Estate



Primary Influences Growth of the real estate stock, outsourcing, major projects, rents, vacancies, rate of residential property

Industry Characteristics Diffuse market structure with both large and very small providers, domestic focus, strong regional roots

Favorites Real estate service providers offering a wide range of services (management, marketing, facility management), real estate companies with pronounced risk awareness, agencies with regional roots Sector Profile

The real estate sector is very heterogeneous, so different fac-tors of influence are at play in each sub-sector. One principle holds true for all areas: the potential market for real estate services grows in line with the stock of property. The labor-intensive real estate management and facility management sub-sectors benefit from companies' need to focus on their core business and to outsource property management to pro-fessional providers. Demand is strengthened by the accumula-tion of major projects in the current real estate cycle. Rising rents for residential space combined with low vacancy rates are impacting the sector's margins positively, because real estate administrators' fees are usually fixed in proportion to rental income. Real estate brokers are in demand when the available housing stock is large, because Swiss vendors call on the services of brokers in most cases. For their part, property developers derive benefit from the heavy demand for owner-occupied property and the trend towards large-scale development projects. The real estate industry consists of a few very large companies and many small ones. Entry barriers are low, particularly in the management and agency subsectors, leading to fiercer com-petition among brokers in particular. By contrast, entry barriers for property developers and traders are considerably higher due to capital requirements. The real estate sector has a domestic focus and strong regional roots. The evolution of the sector is increasingly shaped by new technologies as time goes on. On the one hand, social media platforms such as Facebook, Twitter and YouTube are gaining importance, especially for real estate trading, advertising and brokerage. On the other hand, communication channels such as forums are gaining ground among administrators and facility managers because they offer improved interaction. Growth opportunities for the real estate sector are proliferating as properties become more complex and the sector becomes

more professionalized. The percentage of owners who prefer to perform various property-related services themselves (administration, maintenance and trading) is likely to continue diminishing. We assess the overall opportunity-risk profile for the real estate sector as above average. Current Situation and Outlook Sector trend 2013

The success on the employment front seen in 2012 probably stemmed in part from a catch-up effect. Although the eco-nomic outlook has only improved slightly, business prospects for 2013 remain intact because the housing stock is expand-ing at an above-average pace. There is an increasing vacancy risk in certain specific areas of the rented accommodation segment outside of the major centers, so more assistance is likely to be required with marketing there. High price levels for condominiums and investment property will make the develop-ers' business profitable again this year.

Sector Structure

Real estate management and facilities management (NOGA 811 and 6832) dominate the sector, with 76% of all employees. The second strongest subsector by employment is brokerage and appraising (14%; NOGA 6831), while trading and leasing (NOGA 681 and 682) account for a fur-ther 8%. The developers sub-sector (NOGA 411) represents a mere 2%.

Employment Year-on-year change in %

Employment growth in the real estate sector was muted in 2010–2011 due to the prevailing economic uncertainties. However, a catch-up effect began to emerge in 2012.


-2%

0%

2%

4%

6%

8%

10%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Real estate sectorService sector overall



Legal, Tax, and Corporate Consul-tancy Services



Primary Influences Job sharing, globalization, regulation, compliance require-ments, attractiveness of Switzerland as a location, corporate consultancy budgets

Industry Characteristics Moderately cyclical, structure based primarily on small enter-prises, domestic focus, low market entry barriers

Favorites Providers with experienced staff and quality standards, large consulting companies, specialists with good networking Sector Profile

The constant need to standardize and optimize operations – coupled with the global uptrend in job sharing – is generating heavy demand for various corporate advisory services. Attor-neys at law in particular, as well as statutory auditors and accountants, are benefiting from increasing regulatory com-plexity and stricter compliance requirements. The attractive-ness of Switzerland as a business location favors a high densi-ty of corporate headquarters. These factors, the country's important financial sector and Switzerland's leading position as a generator of innovation foster demand for advice on patent law, tax and business management. Although demand is directly dependent on companies' con-sulting budgets in many cases, the sector as a whole is only moderately cyclical. This applies in particular to legal consult-ants and tax advisors, and to statutory auditors: financial statements still have to be drawn up and audited during reces-sions, and the growing number of bankruptcies generates additional demand for legal advice. Even business manage-ment and PR consultants, who are sensitive to economic cy-cles, can rely on a certain basic demand in periods of crisis when, for example, unpopular restructuring mandates are increasingly outsourced. A large portion of this sector is structured around small enter-prises, and it has a strong domestic focus. The handful of medium-sized and larger providers – headed by the Big Four auditors, the major management consultancy houses and commercial law firms – mainly serve listed companies and tend to export certain services. Even so, these entities also earn most of their turnover on the home market. The sector has low barriers to entry and therefore has to face strong competitive pressure, with high sector momentum. Clients increasingly regard many services as interchangeable standard products. This leads auditors and business consultants in particular to complain of rising price pressure.

Regulatory activity has expanded since the financial crisis, especially in the financial sector (which already made very intensive use of advisory services). As the global economy becomes increasingly interdependent, the level of complexity will remain high, generating heavy demand for legal and busi-ness advice in the future. Switzerland remains attractive as a location for multinationals. Despite growing price pressure, the sector therefore has an above-average opportunity-risk profile. Current Situation and Outlook Sector trend 2013

Due to the economic slowdown, the sector's turnover grew rather more slowly in 2012 than in previous years. On the one hand, regulatory adjustments in the financial sector stimulated demand for certain services from legal advisors, business con-sultants and statutory auditors while on the other, the M&A market performed only moderately. 2013 should see a slight improvement of the situation, given that the economy is set to pick up somewhat and that restructuring in the financial sector will continue apace.

Sector Structure

The sector comprises attorneys at law and patent attorneys, tax consultants, statutory auditors and accountants (NOGA 69) as well as principal corporate office activities, business and PR consultants (NOGA 70). The auditors, tax consultants and accountants (NOGA 692) constitute the largest sub-sector with 30% of the total headcount.

Legal Advice Drives Demand Number of pages of federal legislative enactments; other indicators: index 2002 = 100

The Official Compilation of Federal Laws and Ordinances grows each year by 5,000 to 7,000 pages (including amendments to existing legislation). Together with an uptrend in legal cases such as bankruptcies and criminal convictions, this development fuels demand for legal services.

Source: Federal Authorities of the Swiss Confederation, Swiss Federal Statisti-cal Office

90

110

130

150

170

190

210

0

2'000

4'000

6'000

8'000

10'000

12'000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

New pages in the Official Compilation of Federal Laws and Ordinances (l.h. axis)DivorcesCriminal convictionsBankruptcy proceedingsCompany incorporationsPremiums for legal expenses insurance



Architects and Engineers



Primary Influences New construction and renovation activity, construction trends, public financial planning

Industry Characteristics Low market entry barriers, many small businesses

Favorites Offices with total performance contracts and close contacts with real estate investors, general and sole contractors; engineers and architects specializing in energy efficiency and sustainable building Sector Profile

Architects and engineers are at the very top of the value chain for construction projects. The sector enjoys broad-based sup-port for new-build and renovation orders from all construction segments. High architectural standards, the desire for individ-ual designs and and contemporary architecture, coupled with high-quality construction methods, result in substantial plan-ning outlay and ensure a large volume of orders for architects. As well as planning new buildings, architects' practices earn about 40% of their income from renovations and extensions, according to the long-term average. Construction trends such as energy-efficient and sustainable building, additional storeys and sealing retrofits affect demand for planning. Engineering practices are more broadly diversified in their specialisms than the architects, but they are also more dependent on new build-ing projects. Apart from primary construction, engineering practices are heavily involved in infrastructure and transport-related construction. Performance is therefore dependent to some extent on infrastructure requirements and the public sector's ability to finance them. Public contracts make the sector generally less dependent on business cycles. Low entry barriers mean that competitive pressure is high, especially on architects. The providers have correspondingly little pricing power. In 2012, for example, architects anticipat-ed no overall change in fees despite their excellent business situation. Of the 30,000 people employed in the architecture sector, 65% work in architectural offices with fewer than ten employees, compared to less than one third in the services sector as a whole. The marked increases in real estate prices over recent years indicate a demand overhang that is stimulat-ing new project planning. Architects and engineers are react-ing to these signals by expanding their capacity significantly. But because bottlenecks impede the execution of the building work, many projects remain caught up in the construction phase after planning is completed. Excellent contacts with general and sole contractors, who often award planning as-

signments externally, are extremely important if practitioners are to hold their own against the competition in this growing sector. In their quest for diversification and new sources of income, planning practices often play parts in the development business or act as project supervisors on behalf of builder-owners. Opportunities and risks balance each other out in this sector. On the one hand, architects risk structural streamlining if demand tails off on the partially overheated real estate mar-ket. On the other, the medium-term requirement for infrastruc-ture expansion holds out opportunities for engineers in particu-lar. The overall opportunity-risk profile is therefore just above average. Current Situation and Outlook Sector trend 2013

Low interest rates, brisk immigration, infrastructure require-ments and balanced public-sector budgets – together with a flood of planning applications in the Alpine region triggered by the second home initiative – ensured brimful order books for this sector last year. Except for the last-mentioned factor, overall conditions are not set to change to an extent that would significantly curtail growth in 2013. However, any further rise in demand is hardly possible, despite the improved economic outlook.

Sector Structure

Almost half of all architectural and engineering office staff (NOGA 711) work in architecture and spatial planning. Anoth-er 40% work for engineering practices. The remaining employees work in other technical consulting and planning firms and geometers' offices.

Employment Year-on-year change (full-time equivalents)

Unlike primary construction, where structural problems mean that employment hardly benefits from the current construction boom, architects and engineers are managing to step up employment.


-1'000

-500

0

500

1'000

1'500

2'000

2'500

3'000

3'500

4'000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Architects' and engineering practicesPrimary construction



Educational System



Primary Influences Demographics, public education system, labor market, pur-chasing power, level of education, importance of knowledge

Industry Characteristics Highly regulated, government-dominated, structure based on small enterprises apart from the public educational institutions

Favorites Providers of preparatory and follow-up tuition for examinations, providers of recognized diplomas, providers of international diplomas Sector Profile

Demographics and politics are the key factors of influence for large parts of the educational sector. From pre-school to sec-ondary level, student numbers are dictated by the statistical trends for births and migration, and by the organization of the public educational system. At tertiary level and in the continu-ing education segment, the situation on the labor market also plays a crucial role. Lifelong learning has been gaining importance since the 1990s – both at work and during leisure time. The rise in purchasing power, the increasing level of education and the social importance of knowledge are raising interest in continuing education. The heaviest demand is for language and IT courses, together with federal qualifications and internationally recognized diplomas. Increasing importance also attaches to general interdisciplinary knowledge (e.g. working techniques and coaching). In Switzerland, education from pre-school to tertiary level is dominated by public-sector schools and institutes. Only about 5% of students complete their mandatory period of education at a private school. Private providers focus on special educa-tional concepts and specific groups of students, or offer inter-national training courses. A small group of elite Swiss boarding schools operate on the international market, where they are well positioned thanks to their multicultural approach, multilin-gual environment and good reputation. Otherwise, the relevant markets are local and are influenced by the federalistic struc-ture. Vocational training courses and those for bachelors and masters degrees are accredited by the federal government in order to ensure quality. The continuing education segment is dominated by private providers, although in some cases there is a fluid crossover with associations, federations or cultural and charitable organi-zations. The providers are very heterogeneous. The spectrum ranges from micro-enterprises (learning studios and trainers) and private schools to continuing education corporations. The range is completed by distance and e-learning courses. Larger

units offer advantages in terms of administration, professional-ism and reputation; while smaller operators win through thanks mainly to innovative and clearly focused niche offerings. Prices depend on staff-student ratios, teachers' salaries and the val-ue of the diplomas that are offered. The continuing education market also enjoys a degree of state sponsorship, although most of the costs are covered by course fees. 60% of private continuing education institutions (as opposed to 40% of their public counterparts) obtain less than 10% of their income from the federal government, the cantons and the communes. The education sector is growing slowly but surely. It is therefore given an average rating in our opportunity-risk profile. Current Situation and Outlook Sector trend 2013

Employment in the education sector is likely to have grown by over 3% in 2012 year-on-year. We expect the standing of continuing education to rise further. Student numbers in man-datory education are also on the increase, so another moder-ate upturn in growth can be expected for this sector in 2013.

Sector Structure

The education sector (NOGA 85) comprises education, basic and continuing training at all levels and for all vocations and skills. Distinctions are drawn according to the level and type of education (sports, culture, languages, IT, adult vocational training, examination preparation and follow-up tutoring).

Educational Qualifications Number of qualifications gained at secondary level II and tertiary level

The number of qualifications gained at secondary level II rose significantly over the last ten years, and the increase was even more marked at tertiary level. The strong growth in tertiary qualifications is statistically somewhat exaggerat-ed over time due to the changeover to the bachelors-masters system. Never-theless, the fact is that the level of education among the population is rising steadily, thereby generating higher demand on the continuing education mar-ket.

Source: Swiss Federal Statistical Office; *apprenticeship, vocational matura, high school matura, commercial high school, **higher vocational schools, fed-eral diplomas or certificates of proficiency

0

20'000

40'000

60'000

80'000

100'000

120'000

2003 2004 2005 2006 2007 2008 2009 2010 2011

Secondary level II* Higher vocational training**Universities of Applied Sciences Universities



Healthcare and Nursing Services

Medium-Term Opportunity-Risk Profile: 1.5 Well above average


Primary Influences Demographics, medical progress, patient expectations, financing system

Industry Characteristics Highly regulated, regional markets, limited competition

Favorites Well-networked providers in growth regions at easily accessi-ble locations, specialist providers with clear target groups, in-stitutions specializing in geriatric medicine, providers with geo-graphic monopoly positioning Sector Profile

The population is growing and aging – and its rising expecta-tions in terms of healthcare and wellbeing are boosting demand for care and healthcare services. Advances in diagno-sis and treatment are pushing up quality and productivity, but they often entail higher demand and costs as well. The infor-mation asymmetry between patient and service provider, the financing system (which offers few incentives to save) and various redistribution mechanisms are additional drivers of de-mand. Medical care for the population is accorded high priority, so it is strictly regulated. The cantons have the main responsibility for planning medical care. In the hospital segment, they can influence the offering directly through the cantonal hospital care planning system. The communes even share some of the responsibility for providing care. 65% of health expenditure is funded by the state or by mandatory social insurance. Conse-quently, prices for healthcare services are largely administered and market access is restricted by law. Anyone wishing to charge services to health insurance must be authorized or at least recognized by the insurer. Existing providers benefit from this; at the same time, however, scope for entrepreneurial action is limited and is largely focused on volume. As the burden of healthcare spending soars, there is growing political pressure to cut costs. Various reforms attempt to strengthen the competitive factors. In the hospital segment, a uniform compensation system has been in force throughout Switzerland since the start of 2012, based on case-based lump sums which have to finance not only operational expens-es but also investments. Voters rejected a proposal for doctors to take on more budget responsibility. Political pressure to cut costs is triggering concentration, specialization and coordina-tion processes throughout the supply chain. A trend towards larger units is evident in all healthcare sub-sectors. Driven as they are by the quest for synergies and economies of scale, and the need to improve interfaces, these processes are set to

accelerate even more as time goes on. Clear positioning cou-pled with good networking are gaining importance. High priori-ty is accorded to IT. Better electronic networking of service providers and telemedicine services enable productivity and quality gains. Due to the sector's robust demand drivers, we assess its opportunity-risk ratio as well above average. Current Situation and Outlook Sector trend 2013

Demand for healthcare services is trending stably. However, economic developments have a delayed impact on healthcare spending via government budgets and salary trends. Accord-ingly, growth in healthcare expenditure is likely to have dipped somewhat in 2012. Various austerity measures and incentives placed additional constraints on growth. Moderate growth (as compared to the long-term average) can again be anticipated in 2013 due to measures implemented and restraint regarding pay rises.

Sector Structure

The sector comprises the healthcare system (NOGA 86), i.e. hospitals, doctors and other healthcare service providers such as physiotherapists, home nursing services and medical laboratories, together with nursing homes (NOGA 871).

Healthcare Spending and GDP Growth in healthcare spending by age group, GDP growth

Demographic aging is boosting demand for healthcare services. The 60- to-80 age group contributes most to spending growth.

Source: Swiss Federal Statistical Office, State Secretariat for Economic Af-fairs; *health spending in 2011 and 2012, forecast by the Swiss Institute for Business Cycle Research (KOF) at the Swiss Federal Institute of Technology (ETH), Zurich, GDP 2012 estimated by Credit Suisse Economic Research

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012*

80+60-8040-6020-400-20

GesundheitsausgabenBIP (nominal)GDP (nominal)Spending on healthcare



Social Services and Care Homes



Primary Influences Demographics, social demographics, willingness to take part in voluntary work, public social welfare system, government spending

Industry Characteristics Highly regulated, labor-intensive, markets cover small areas

Favorites Childcare facilities at popular residential or business locations, institutions with a public sector service remit, established social welfare organizations Sector Profile

Demand for support, advisory and welfare services for individ-uals with psychosocial problems, addicts, the elderly, disabled persons, young people and infants is heavily influenced by demographics and by socio-demographic characteristics (e.g. education, income, migration background). Changes in family structure, individualization and increasing geographic mobility – coupled with increasing numbers of women in employment – are boosting demand for external support. Voluntary work– including explicit voluntary activities as well as those implicitly carried out by others in the individual's social environment – is a major factor in this sector; however, willingness to perform voluntary work is trending downwards, thereby pushing up demand for professional services. In addition, demand is influ-enced by the development of the public social services system, public funding contributions and the contributions to be paid by users themselves. Support provided for disabled persons, addicts, those with psychosocial problems and the elderly is financed mainly via social insurances (Federal Disability Insurance, Old Age and Survivors' Insurance, supplementary payments and health in-surance plans in some cases), as well as from operational subsidies for public service remits. Extrafamilial childcare is funded indirectly (e.g. via tax deductions) and by stimulus or knock-on financing. Parental contributions are nevertheless the most important source of income for childcare day centers. Many organizations in the social services and care homes sec-tor are nonprofits. Prices are geared to costs incurred, i.e. they are based primarily on the support required, and social insurance organizations also set prices on the same basis in the care home segment. All segments are labor-intensive, and scope for boosting productivity is limited. The quality of ser-vices provided is critically dependent on the client-staff ratio and the period of support. Providers in the care home and social services sector often perform social, healthcare, educa-tional and sociopolitical functions at the same time, so regula-

tion is strict. Most enterprises are small to medium-sized. Larger units offer limited advantages which sometimes cannot be exploited due to differing regulatory requirements. Approval, supervision, service planning and regulation are the responsi-bility of the cantons and in some cases even of the municipali-ties. The relevant markets often cover small areas. Differences among providers mainly relate to differing educational concepts, staff-client ratios or collaboration with relatives. However, competition is often minimal and demand not infre-quently outstrips supply. Due to the positive demand trends and low risks for this sector, its opportunity-risk profile is above average. Current Situation and Outlook Sector trend 2013

The economy has a largely indirect impact on the social ser-vices and care homes sector, through salary and government financing trends. Low inflation means that costs probably rose less sharply in 2012 than in the preceding year. Employment growth was stronger year-on-year. The stable labor market and positive demand trends will enable the sector to post strong growth again in 2013.

Sector Structure

The social services sector (NOGA 88) comprises social wel-fare, referral, advice and support, social welfare organizations, and day childcare. In addition, care homes (NOGA 87) mainly offer social support services, except for nursing homes. The various care homes account for about 45% of employment in the sector, with social services making up the other 55%.

Employment, Creche Places and GDP Employment (full-time equivalents), creche places for children in the canton of Zurich, real gross domestic product; year-on-year change in %

Demand for social services is growing steadily, and employment is keeping pace with this trend. The childcare segment shows particularly dynamic growth, even though this segment is less stable in relation to economic cycles.

Source: Swiss Federal Statistical Office, Canton of Zurich Statistical Office, State Secretariat for Economic Affairs; *2012 figures estimated by Credit Suisse Economic Research

-5%

0%

5%

10%

15%

20%

25%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Employment in care homesEmployment in social servicesChildren's creche places, canton of ZurichGDP, real

n.a.

n.a.



Notes

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