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Foreign tradeOpportunities, risks and prospects for the future

UBS outlookBusiness management in focus 2014

AnalysisThe emerging future

OutlookInnovate or emigrate?

SolutionsRisks and side-effects

UBS outlook2

Contents

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SAP no.:

83418D-1401

83418F-1401

83418E-1401

This brochure is a marketing publication which is not subject to the legal requirements regarding

the independence of financial research.

Editorial .........................................................................................................................3At a glance .....................................................................................................................4

Part 1 – AnalysisThe emerging futureEmerging economies are increasingly important .............................................................6

Part 2 – OutlookInnovate or emigrate?The trend toward globalization continues ....................................................................14The destination markets in Asia are becoming more important ....................................20Innovation and flexibility remain key ............................................................................22Exchange rate risks: the focus of discussion...................................................................24

Part 3 – SolutionsRisks and side-effectsFinancial solutions along the value chain ......................................................................28

UBS outlook 3

Editorial

Is there a future for “Made in Switzerland”?

Dear Reader,

With an export ratio of nearly 52 percent, the Swiss economy is extremely reliant on international trade. Despite a steady fall in exports to Europe, over 56 percent of Swiss exports in 2012 went to EU countries, with the EU accounting for as much as 75 percent of imports in the same year.

To offset the impact of the strong Swiss franc and the weak Eurozone economy, companies that export strive to achieve competitive advantages through innovation and by continuously and con-sistently optimizing their productivity. At the same time, for many Swiss SMEs and large companies, shifting production abroad is no longer a taboo, as a survey of our clients reveals (more on page 16).

Will Swiss companies continue to have unrestricted access to the EU internal market in future – or will they have to move their production wholly or partly to the Eurozone to do so? And if Swiss exporters decide instead to turn to the growth markets of the emerging economies in Asia and South America, what will it take for these companies to succeed?

We have supported Swiss businesses in their operations abroad since our foundation, which is why, as a global bank, we focus intensively on such scenarios. The central issue for us is how to continue to provide our clients with the best possible support for their cross-border activities in future, regardless of whether these are in Europe or elsewhere in the world. With this in mind, we hope that this publication will provide you with valuable help for your decision-making.

We wish you an interesting read.

Christine Novakovic, Head of Corporate & Institutional Clients

UBS outlook4

At a glance

Part 1 – Analysis:The emerging future

Emerging economies are increasingly importantGlobal trade in goods and services has increased enormously in recent years. This can be attributed to a sharp rise in personal wealth in developing and emerging econo-mies on the one hand, and to the dismantling of trade barriers on the other. Despite this, the euro and the US dollar remain the most important currencies for Swiss exporters, with all the opportuni-ties and risks this entails.Page 6

Part 2 – Outlook:Innovate or emigrate?

The trend toward globalization continuesIn order to compensate for the ongoing gradual narrowing of their margins, Swiss exporters are turning their attention to new, high-growth markets. Chief among these are the emerging economies of China and India. Page 14

The destination markets in Asia are becoming more importantAn interview with Erwin Freiburghaus, Head of UBS Trade & Export Finance Consulting Swiss Bank (TEF).Page 20

Innovation and flexibility remain keyThanks to their innovation and improved productivity, many Swiss companies are able to achieve prices that cover their costs, despite the disadvan- tages of their location. None-theless, some are considering relocating parts of their oper-ations to other countries.Page 22

Exchange rate risks: the focus of discussionThe ongoing debt crisis has raised companies’ awareness of the risks associated with cross-border trade in goods and services. Page 24

Part 3 – Solutions:Risks and side-effects

Financial solutions along the value chainIn order to take advantage of the opportunities for growth offered by the booming emerging econo-mies of Asia, the value chains of Swiss companies with a focus on exports are increasingly devel-oping into international networks. These are a source of risk as well as of significant opportunities, and can be optimized and sustainably strengthened with the help of financial solutions. Page 28

UBS outlook 5

With an export ratio of nearly 52 percent, the Swiss economy is extremely reliant on inter-national trade. This is unlikely to change in the short- to medium-term, although Europe will become less important as a destination for exports. At the same time, the emerging economies offer new potential for Swiss exports. Less price-sensitive, high-quality goods that are immune to fluctuations in the economy offer the great-est promise.

Analysis

The emerging future

UBS outlook6

Emerging economies are increasingly importantGlobal trade in goods and services has increased enormously in recent years. This can be mainly attributed to a sharp rise in personal wealth in developing and emerging economies, as well as the dismantling of trade barriers around the world. However, the currencies of industrialized nations remain important despite the increasing integration of emerging economies.

Global trade in goods has changed rapidly over the past 60 years. It started to pick up around 1970, and then exploded around the turn of the millennium (figure 1). In 2012, 30 percent of global economic output was traded across international borders, compared with just 12 percent in 1961. Although international trade did drop sharply during the financial crisis of

2007/2008, it quickly recovered and went on to hit new highs. The situation is similar with respect to global trade in services.

There are several factors behind this trend, including the increasing fragmentation of the value chain as well as rising levels of prosperity around the world. The increase in trade has also been facilitated by technological progress in the fields of transportation and communica-tion, and by institutional improvements in areas such as legal certainty. The ratification of the General Agreement on Tariffs and Trade (GATT) and later the General Agreement on Trade in Services (GATS) by many countries has reduced global barriers to trade still further. Rising international integration is reflected not only in the increased volume of goods and services being exported, but also in the grow-ing membership of the World Trade Organiza-tion (WTO), which has enlarged its member-ship from 78 founding member states in 1995 to its current 160 members.

Analysis The emerging future

Sibille DussEconomist, UBS AG

Increase in trade within and between regions

UBS outlook 7

Different regions of the world account for very different shares of global trade. European countries exported the most in 2012, followed by the Asian countries. Asia overtook North America as the world’s second-largest region for commerce based on the value of exported goods back in 1977. Since the year 2000, how-ever, the biggest increase in global exports has not been from the Asian countries, but from the countries of the former Soviet Union, followed by the Middle East and Africa. The strong growth of the African countries should be put into perspective, however, by their low starting point. Growth in a particular region is often driven by the strong development of individual countries. China, for example, saw its global goods exports rise by 720 percent during the period in question, India’s rose by almost 600 percent, and Russia’s grew by 400 percent. Global goods exports from Eu-rope and North America, on the other hand, have only experienced slow growth rates of 150 percent and almost 100 percent respec-tively since the year 2000. Europe remained the undisputed leader in terms of global service exports in 2012, followed by Asia. Between them, these two continents accounted for almost 70 percent of global service exports.

Different economic trends in export destination countries A shift in export destinations is due in part to different economic trends in the various destination countries. While the economies of Japan and Europe have witnessed slow growth for years, the economic output of the BRIC countries (Brazil, Russia, India and China) has risen sharply. The US tends to experience stronger trend growth than Europe, but has also been struggling with lower rates of economic growth since the financial crisis of 2007/08. The BRIC states and other Asian countries are expected to continue growing faster than the US in terms of GDP in future, while growth in Europe and Japan is expected to fall even further. The BRIC countries are therefore set to become even more important

Global trade in goods and services based on exports, in USD trillions

Global trade in goods exploded following the Asian crisis of 1997–98

Figure 1

Source: WTO, UBS

2468

101214161820

01948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Goods exports

Service exports

The emerging future Analysis

The largest GDP growth will likely be in the BRIC states and other Asian countries.

as sales destinations for international trade in future, at the expense of the industrialized countries.

Of all the regions of the world, Europe is where intra-regional trade is most important. Euro-pean countries export 70 percent of their goods to other European countries. Asia, where trade within the region is a very strong factor behind economic growth, has a similarly high percent-age of 54 percent. On the other hand, intra-regional trade is relatively weak in Africa (13 percent) and the Middle East (10 percent).

Trade between two countries consists of more than just the exchange of goods. Trade transactions often also entail transactions on the currency market. If a Swiss exporter sells goods to China and the transaction is conducted in renminbi, the exporter may either hold on to the proceeds as a foreign currency reserve

Shifts in global trade affect the currency markets

UBS outlook8

or exchange them for Swiss francs. Exchanging currency boosts demand for Swiss francs, which bolsters the value of the franc over the long term. However, central banks can counteract the appreciation of their currency by increasing the money supply. The People’s Bank of China, for example, only allows the renminbi to gain value gradually relative to the US dollar; the Danish krone is linked to the euro; and the Swiss National Bank actively prevents the franc from appreciating relative to the euro through a minimum exchange rate of 1.20 francs to the euro set in September 2011.

Emerging economies, and those of Asia in par-ticular, have accounted for a steadily growing share of global trade in recent years. This has been accompanied by a continuous rise in demand for their currencies. The proportion of global currency transactions conducted in renminbi, for example, has risen by almost 400 percent over the last six years. However, it is still the currencies of the industrialized coun-tries that are traded the most. In 2013, the US dollar accounted for 87 percent of global foreign exchange trading. The Swiss franc was in sixth place, with a share of only 5.2 percent of total trading volume. But two curren-cies are required for foreign exchange transac-tions, which is why the percentage shares accounted for by all currencies add up to 200 percent. The implications of sovereign debt and political stability Factors other than trade also affect a currency’s long-term value. Solid economic growth, political stability and the rule of law, as well as healthy state finances and current account surpluses, bolster national currencies in the long term.

• Current account balance and investment

A country’s current account balance, which includes its balance of trade, has a signifi-cant influence on the value of its currency.

The currencies of countries with long-term current account surpluses (such as China, Japan and Switzerland) tend to appreciate in the long run, while those of countries with continuous current account deficits (such as the US, the UK, Turkey and South Africa) tend to lose value.

• Relative economic growth and central bank policy

Countries with stronger economic growth offer a wider range of opportunities for investment, which attracts inflows of capital from other countries. If the ratio between the increase in productivity and the increase in the money supply rises faster in country A than in country B, this will strengthen the value of country A’s currency in relation to country B’s in the long term.

• Political stability and the rule of law Investors are more willing to invest their

assets in the currencies of politically stable countries. A lack of confidence in stability, justice and the law, on the other hand, raises the specter of capital flight and its associated negative consequences for the cur-rency and the economy.

• Manageability of debt Public finances are another important factor.

Sustainable financial conduct promotes demand for government bonds denominated in the local currency and therefore demand for the currency itself. In addition to the current debt ratio, a country’s track record of surpluses/deficits is also important. Coun-tries that constantly generate a substantial surplus are able to pay down their debts over the long term provided the interest owed on the debt does not exceed the pri-mary surpluses generated. It is much easier for a country with strong economic growth to generate a primary surplus because the state coffers are filled with tax revenues.


UBS outlook 9

It is not unknown, however, for currencies to experience short-term deviations from the long-term trend. Political uncertainty in coun-tries such as Turkey, Thailand and Ukraine has weakened these countries’ currencies in recent months. In order to mitigate this trend and make the currency more attractive to investors out-side Turkey, the Turkish central bank recently raised its base interest rates. Countries that have generated substantial current account deficits in past years, including Brazil, India and Indonesia, and also South Africa and Turkey, have benefited from the relaxed monetary policies of the developed world, as it has been relatively easy for them to plug these “gaps” using capital from the developing world. But since the Federal Reserve started tapering the volume of bonds it buys, these countries are now finding it difficult to attract foreign capital or even hold on to their existing capital. Both these effects are weakening the currencies of the emerging economies. Conversely, countries with a strong focus on exports such as China, Poland and South Korea are benefiting from the improved prospects for growth in the US and Eurozone. We believe that the downward trend in the economic growth of emerging economies has bottomed out, and expect these economies to recover slightly in 2014.

US dollar and euro currently the most important currencies for Swiss exportersAlthough the emerging economies now account for a greater share of global trade, the Euro-zone and the US are still the main trading part-ners for Swiss exporters. We expect the Swiss franc to remain stable relative to the euro over the next twelve months. However, we think it will tend to weaken against the US dollar over the same period, since the Federal Reserve is expected to tighten its monetary policy and scale back its bond-buying program. Never-theless, we expect the Swiss franc to remain fundamentally strong relative to these two currencies in the long run.

The downward trend in the economic growth of emerging economies has probably bottomed out.


UBS outlook10

We expect the structural parameters discussed above to improve in most emerging economies in the long term. The stability and transparency of their political structures and institutions are likely to improve, the average difference in inflation relative to industrialized countries is expected to narrow, and public finances should remain largely solid. It is reasonable to assume, however, that the long-term trend toward stronger currencies in the emerging economies will sometimes be punctuated by periods of uncertainty and instability. The Swiss franc is also likely to count among the strong currencies in the long term, which will continue to cause problems for exporters in the future.

Another important factor for exports, along-side the trend in the exchange rate between the currencies of the exporting country and the destination country, are changes in the differ-ence between the two countries’ interest rates. Let us assume, for example, that a Swiss ex-porter sells goods with a value of 1 million US dollars to a company in the US over the next year, and these goods are paid for a year later in US dollar upon the completion of the entire de livery. If the Swiss franc gains value in rela-tion to the US dollar during this time, the pay-ment received by the Swiss exporter will be lower in Swiss francs. If the currency forward (the current exchange rate plus the interest rate differential) is higher than the anticipated ex-change rate in a year’s time, the exporter will hedge its transaction (see box).


Example

Assuming a current exchange rate of USD 1 = CHF 0.88 and a one-year interest rate of 3 percent for USD and 1.5 percent for CHF, the same return would be achieved in both USD and CHF (interest rate parity) if:

1 USD * (1+0.03) = 0.88 CHF * (1+0.015) Or, after one year: 1 USD = 0.87 CHF

The one-year forward rate in this instance is therefore USD 1 = CHF 0.87.

If the Swiss exporter expects the Swiss franc to gain even more value relative to the US dollar than suggested by the currency forward, it will hedge the transaction using the currency forward and conclude the transaction in a year’s time at an exchange rate of USD 1 = CHF 0.87.

If the Swiss franc strengthens to USD 1 = CHF 0.84 as anticipated by the exporter, the hedge will have earned the exporter (not incuding hedging costs) CHF 30,000 (USD 1 million at an exchange rate of USD 1 = CHF 0.87 instead of CHF 0.84). If, however, the Swiss franc does not appreciate as strongly as anticipated by the exporter, or even loses value, the exporter will have suffered a loss as a result of the hedge.

UBS outlook 11

Switzerland is often described as a small, open economy with a high proportion of exports. In reality, Switzerland has been overtaken in this respect by other countries in recent years. Nevertheless, the Swiss economy, with an ex-port ratio of 52 percent, is highly reliant on international trade, although the Swiss indus-tries that export goods to other countries differ significantly from one another. More than two thirds of the country’s exports stem from the chemical, pharmaceutical, mechanical engi-neering, and watch industries. Switzerland thus exports products that are largely unaffected by economic trends (such as medicines and food), but also highly cyclical capital goods in the fields of metals and machinery. The sales markets are also very varied. While the metal, electronics and mechanical engineering indus-tries have a strong focus on Europe, the watch industry is benefiting significantly from growth in Asia. Not only do the various sales markets exhibit different economic trends, their curren-cies also vary in strength. Both factors influence exports to these countries.

The importance of the different export destina-tions varies according to the exporting industry. Just 4 percent of the metal industry’s ex-ports went to China in 2013, while for the watch industry the figure was 26 percent (table 1). The difference by industry is even starker for Germany, Switzerland’s most important trading partner overall. Just 6 percent of watches were exported to Germany, compared to 38 percent of metal exports.

The sales markets have also changed significant-ly over time. Although Europe is still the main destination for Swiss exports, its share is steadily dwindling. Recent years have seen a sharp rise in the share of exports to the BRIC countries and other Asian countries (figure 2). China overtook the UK as Switzerland’s fifth-biggest trading partner in 2011, and exports to the US are at a high level and growing. It is remarkable that Switzerland’s nominal exports to Japan have remained stable for some time. The major de- valuation of the Japanese yen in 2013 and the financial crisis of 2007/08 had only a mar-ginal impact on exports.

Just 6 percent of all Swiss watch exports are to Germany, compared with 38 percent of metal exports.


Percentage of exports to different destinations, by industry (2013)

Metal Electronics Machinery Precision instruments

Chemicals Pharma- ceuticals

Food Watches

Germany 38 27 24 23 22 14 15 6

France 7 6 5 5 10 5 13 5

Italy 8 3 4 3 4 8 6 6

UK 4 3 4 4 5 5 6 4

USA 7 8 9 18 10 15 11 10

China 4 8 8 6 3 3 2 26

India 1 1 2 1 2 1 0 1

Russia 1 1 2 1 1 2 2 1

Brazil 1 1 2 1 4 1 1 0

Source: Swiss Federal Customs Administration (EZV), UBS

Table 1

Germany still the most important trading partner for Swiss companies

UBS outlook12

Less price-sensitive goods are the top Swiss exportsSwiss companies mainly export less price-sensi-tive, high-quality goods that are less depen-dent on the state of the economy in destination countries. It is therefore unsurprising that Switzerland has a revealed comparative advan-tage1 with respect to goods such as precision instruments, pharmaceutical products and watches in particular. A great many people in Asia will rise above the income threshold of 30,000 US dollars over the next few years to join the ranks of the middle class. Since health is a luxury good, demand for medical equip-ment grows disproportionately as income rises. Life expectancy has also risen throughout the world in recent years, which also feeds the demand for medical equipment. This is why we see significant potential for precision instru-ments (around 60 percent of which are medi-cal instruments or devices) and the pharmaceu-tical industry, especially in emerging economies.

Companies operating in more price-sensitive industries, such as the textile, paper and graph-ics industries, but also the metal industry, are more likely to encounter difficulties in the long run. The metal industry’s share of Swiss exports has shrunk steadily in recent years, from just under 10 percent in 1990 to its current level of around 6 percent. This is a decline that can be observed throughout the world and not just in Switzerland. However, these indus-tries can also produce the occasional niche product that performs well and is able to compete at an international level.

Exports of goods by destination, moving average over 12 months, in CHF millions/month

The declining importance of Europe as an export destination

Figure 2

Source: Reuters Ecowin, UBS

500

1000

1500

2000

2500

0

2500

5000

7500

9000

11500

01988 1993 1998 2003 2008 2013

BRIC

USA

UK

Japan

Asia excluding Japan, including China

EU (right scale)

1 The revealed comparative advantage is a measurement used to calculate a country’s relative advantage in the production of particular goods. It measures the proportion of an industry’s exports as a share of Switzerland’s total exports in relation to the same industry’s share of exports within the OECD.


UBS outlook 13

Innovate or emigrate?

Many Swiss companies have an above-average ability to innovate that will ensure their survival in the long term. And yet many are no longer ruling out the idea of relocating their production to other countries. The pressure resulting from the continued strength of the Swiss franc is simply too great, particularly for exporters with a focus on Europe.

Outlook

UBS outlook14

Shifting patterns of global trade and the strength of the Swiss franc are causing problems for Switzerland’s export indus-tries. Companies are responding to the ongoing gradual narrowing of their mar-gins by optimizing their processes in a targeted manner, and by turning their attention to new markets with high growth rates, chief among which are the emerging Asian economies of China and India.

Global trade in goods and services has under-gone tempestuous expansion in recent years, with the total value of cross-border movements of goods almost tripling in the last 50 years. This marked increase can be attri buted to an upturn in many developing and emerging economies, accompanied by their stronger integration into international trade.

The trend toward globalization continues

It is true that economic growth rates around the world experienced a temporary meltdown as a result of the financial and economic crisis triggered by the collapse of the New York investment bank Lehman Brothers in the fall of 2008. However, trade recovered relatively quickly and has now gone on to hit new heights.

As globalization progresses, the relative im-portance of the various export destinations is also changing. This represents a challenge that should not be underestimated for a coun-try like Switzerland, which has such a strong focus on external trade and earns half its income from exports. On the one hand, Swiss export-ers are benefiting from the uninterrupted growth of the emerging economies; but on the other, they are also being hit hard by the structural economic slump across much of the European

Outlook Innovate or emigrate?

UBS outlook 15

Innovate or emigrate? Outlook

Union (EU), which is still the destination for just under 60 percent of their exports. With the debt problem still unresolved in most EU mem-ber states, it is above all the strength of the Swiss franc in relation to the euro that is caus-ing problems for Swiss exporters. The Swiss franc has gained around 20 percent relative to the euro since the outbreak of the crisis. This shift in the exchange rate is problematic for Swiss exporters because it makes the goods and services they supply to the Eurozone that much more expensive.

The strong franc is putting pressure on operating marginsFor Swiss companies with a strong focus on exports, the appreciation of the franc has had the uncomfortable side effect that “any-thing we do in the export business now costs one fifth more”, as one manager of an affected SME put it. In other words, Swiss exporters’ ability to compete on a price basis has deterio-rated by about 20 percent, which has hit the operating margins of many companies. In the-ory, exchange rate losses can be offset by rais-ing sales prices accordingly. In the real world, however, the options for passing on increased prices are generally very limited and most providers find that breaking free of the established pricing structure on the markets is extremely difficult. Only very few Swiss exporters have any significant potential to increase their prices. This is something that can only be done by companies that dominate their market in some way, for example by offering products for which there is no competition, or if they enjoy a leading position at least in their own market if not on the global market. Generally, the current exchange rate situation most severely affects companies with a strong focus on exports that incur most of their costs in Switzer-land but are forced to invoice in a relatively weak currency like the euro.

Exporters who are fortunate enough to be paid for their goods and services in Swiss francs, on the other hand, are able to pass on in-creased manufacturing costs to their customers

or sales partners. There is therefore a monetary incentive for companies to specialize. In an attempt to mitigate exchange rate losses, they are renewing their efforts to penetrate special-ized markets and high-tech, less price-sensitive niches. Simpler, standardized products, on the other hand, are coming under increasing pres-sure or even disappearing entirely from compa-nies’ ranges.

Firms are switching to other countriesGeographic diversification is another way to circumvent the chronic slow growth experi-enced by most industrialized countries since the financial crisis. Many emerging economies, including China and India with their huge pop-ulations, continue to exhibit significantly stronger economic growth and faster rising incomes than the aging and debt-ridden economies of the West. Today, emerging econ-omies such as China, Russia and Indonesia, as well as Poland, Mexico, Thailand and India, boast solider state finances and lower rates of debt than the faltering core Eurozone countries. It is therefore not surprising that the number of households in the emerging economies with significant purchasing power is set to ex- plode in the future. In China, India and Latin America alone, experts expect the creation of a

“Anything we do in the export business now costs one fifth more.” – SME owner

Others Other AsiaEU IndiaUS ChinaJapan

2000 2010 2020 2030 2040 2050

1009080706050403020100

Middle class’ share of global consumption, 2000 – 2050 (in %)

Source: OECD Economic Outlook 92 database

Figure 1

UBS outlook16

new “middle class” of around two billion con-sumers with annual incomes of between 30,000 US dollars and 120,000 US dollars by the year 2030 (figure 1).

In order to be able to closely monitor the impact of macro-economic conditions on domestic industry, UBS makes use (among other things) of the most recent surveys of Swiss industrial companies conducted by the Swiss Federal Institute of Technology’s economic research office (KOF). However, this data is only collected for individual industries and therefore provides little information about the specific situation of particular companies. In order to understand their needs better and tailor our products and services accordingly, UBS conducted an online survey of our corporate clients.

Only a few have no cross-border activitiesSome 85 percent of the companies that partici-pated in the survey were small or medium-sized enterprises (SMEs) with fewer than 500 employ-ees, while the other 15 percent consisted of large corporations with workforces of over 500 people. When asked about their geographic focus, 83 percent of companies claimed to op- erate internationally (exports, imports, whole-sale, etc.). This contrasts with the just 17 percent of respondents who limit themselves to the domestic Swiss market and have no cross-bor-der activities.

In terms of the most important sales markets for Swiss SMEs, Germany (traditionally Switzerland’s main destination for exports) is clearly out in front with 61 percent of responses (figure 2). China, with which 43 percent of domestic companies maintain sales relationships according to the survey, is now in second place. The US comes third on the list of most popular export destinations, putting it ahead of France, Italy, India, the UK and Saudi Arabia. The most com-mon procurement markets reveal a similar pat-tern, with Germany and China once again at the top, with shares of 51 percent and 36 percent respectively. The third most popular source for

Swiss companies to procure the production inputs they require, such as commodities, com-ponents and semi-finished goods, is currently Switzerland’s southern neighbor, Italy, followed by the US, France, the UK and India (figure 3).

Value creation is being shifted to other countriesThe question regarding the percentage of the entire value chain currently generated within Switzerland’s borders is particularly revealing with respect to the increasing globalization of Swiss industry. While about half the surveyed companies said that Switzerland accounts for over 50 percent of the entire value added, the other half put the figure today at less than 50 percent (figure 4).

What are your most important countries to which you export?

Figure 2

Source: UBS

61%

43%

37%

31%

31%

28%

25%

23%

22%

10%

9%

8%

7%

Base: Respondents working in a company predominantly active in the sector “Exports” or “Import and Export” (n = 239), multiple responses.

Germany

China

US

France

Italy

India

Other

United Kingdom

Saudi Arabia

Taiwan

Singapore

Russia

Turkey

Half the companies generate less than 50 percent of their entire value-added in Switzerland.


UBS outlook 17

It gets interesting when we compare the current situation regarding the international division of labor with companies’ expectations for the future. Only a third of companies expect to remain generating more than 50 percent of their total output in Switzerland in five years’ time. One in four expect Switzerland to account for between 30 percent and 50 percent of value added, while another third expect the share of value added generated within Switzerland to amount to less than 30 percent five years from now (figure 5).

A survey of members of the Swiss Export asso-ciation paints a similar picture: almost two thirds of the SMEs surveyed said that they were plan-ning to, or had already relocated operations to other countries. Operations had already been relocated in 17 percent of cases. “There have indeed been many cases of production facilities being relocated”, confirms Claudia Moerker, Director of swiss export, adding that competi-

What countries do your main suppliersdeliver from?

Figure 3

Source: UBS

51%

36%

27%

21%

20%

14%

12%

10%

8%

2%

1%

Base: Respondents working in a company predominantly active in the sector “Exports” or “Import and Export” (n = 97), multiple responses.

Germany

China

Italy

Other

US

France

United Kingdom

India

Taiwan

Saudi Arabia

Singapore


UBS outlook18

tion has become tougher on the whole for many SMEs. “So the situation reflected in the results of the survey has in fact come to pass. The trend for offshoring continues.”

Emerging Asian economies are targets for expansionBut where do exporters see the greatest mar-ket opportunities? And in which countries do they expect to see growth in the years ahead? Unsurprisingly, the list of top countries for expansion for Swiss exporters is topped by the booming Asian emerging economies, with China and India leading the pack. Switzerland comes in third as a domestic market which, while limited in terms of volume, remains interesting in terms of purchasing power. Russia is in fourth place, ahead of Asia as a whole, the US and Turkey. Germany, the driving force within the EU, comes in lower, in eighth place. While our neighbor to the north is not expected to exhibit above-average growth rates when compared with the boom markets of Asia, it will remain by far the most important destination for Swiss products for the time being in terms of volume (figure 6).

When doing business with new countries that have not yet become fully established as export destinations, a country like Switzerland, which has little political influence but punches above its weight on the international markets, depends on generally accepted and reliable rules, for example in the fields of tariff reduction or pat-ent protection. Swiss exporters should there-fore welcome the fact that in December 2013, having been at an impasse for years, progress was made again on talks within the World Trade Organization (WTO) following tough negotia-tions. “Customs administration will be made simpler for our industry, and we will enjoy greater legal certainty. Above all, this will ben-efit our small- and medium-sized enterprises”, said Swiss Commerce Minister Johann Schneider-Ammann, in praise of the Bali Package nego-tiated by the WTO to promote free trade. In addition to multi-lateral regulations under the auspices of the WTO, Switzerland has conclud-

If you consider your company’s entire value chain, what proportion thereof is generated in Switzerland?

Figure 4

Source: UBS

48%

19%

29%

4% 51–100%30–50%Less than 30%Don’t know

Base: total respondents (n = 339)

What proportion of your output do you expect to be generated in Switzerland in five years’ time?

Figure 5

Source: UBS

34%

25%

35%

5% 51–100%30–50%Less than 30%n. A.

Base: total respondents (n = 339)

“There have indeed been many cases of production facilities being relocated.” – Claudia Moerker, swiss export


UBS outlook 19

What countries does your company primarily seek to grow in the future?

Figure 6

Source: UBS

43*

35

24

18

18

14

13

13

11

7

Base: All respondents (n=339) / Multiple responses possible *number of mentions

China

India

Switzerland

Russia

Asia

USA

Turkey

Germany

Brazil

Africa

1 A list of Switzerland’s free trade agreements can be found at www.seco.admin.ch (> Topics > Foreign trade > Free Trade Agreements).

ed bilateral agreements with its most impor-tant trading partners.1 While Swiss trade diplo-macy recently succeeded in concluding a bilateral free trade agreement with China, nego-tiations with India are dragging on due to differing stances regarding the protection of intellectual property.

European periphery countries are attractive againThe importance of the BRIC countries (Brazil, Russia, India and China) for small- and medi-um-sized exporters is often overestimated any- way, according to Claudia Moerker of swiss export. This is firstly because wages have now also risen noticeably in some of these loca-tions, and secondly because many bosses now take a more optimistic view of the opportunities presented by the European periphery coun-tries. Hungary, Poland, Portugal and Turkey in particular have recently come to the fore as potential production locations. Claudia Moerker adds that a significant number of SMEs (for example in the field of precision instruments and machines) are withdrawing from China after several years there in favor of Eastern or Southern Europe. “The BRIC countries are generally very challenging for SMEs. Since it takes substantial amounts of capital and expertise to get involved in these markets, they are really only suitable for larger companies. And when a foreign SME does enter a mass market like China, for example, it is not given priority and is seen as an ’also-ran’.”

“A significant number of Swiss SMEs have withdrawn from China after several years there in favor of Eastern or Southern Europe.” – Claudia Moerker, swiss export


UBS outlook20

UBS outlook: What prompted UBS to conduct a client survey on the subject of international trade?Erwin Freiburghaus: As a bank we make it our business to know exactly what our clients’ needs are – especially when it comes to launching new products and services. In order to do this in a professional manner, it was important to let our clients have their say. Of course, we continuously keep an eye on developments and analyze the latest research on export trends. But this time we wanted to get more precise information directly from our clients about the challenges they face in the export business.

What were the main questions? First, we were interested in getting a current snapshot of the Swiss export industry: what are its strengths and where are there weaknesses or problems? Then we wanted to determine which export markets will become more impor-tant for our clients in the future. And, last but not least, which banking products and services do our clients use most often, and how will their needs change over time?

Are you satisfied with the results of the survey?Yes, the survey was a success for three reasons: First, the response rate of around 21.5 percent showed that a grati-fyingly large number of UBS clients took part. Secondly, the quality of the answers was well above average, as

evidenced by the many interesting comments and sugges-tions we received. And thirdly, this client survey helped us to clarify a string of open questions, and confirmed that we’re heading in the right direction with our products and services.

How is the Swiss export industry currently positioned?The majority of our clients have adapted amazingly quick-ly and well to the prevailing market conditions. In terms of the weak euro, there has been criticism that an ex-change rate of under 1.30 Swiss francs per euro would mean the end for many Swiss export firms. This pessi-mism has turned out to be overblown. Compared to the situation in other countries, the Swiss economy is still doing very well.

But there are still those who warn of a creeping de-industrialization in Switzerland. Do you think this fear is justified?Switzerland is a country of high prices. But at the same time it has a highly trained workforce and delivers above-average quality. It is mainly companies that work on narrow margins that will have a problem with high prices in the long run. Our survey also clearly indicates that even more Swiss export companies will relocate their pro-duction abroad in future, or at least parts of it.

What did UBS learn from this survey?What was particularly revealing were the responses on the quality of our services. While the majority of survey participants judged our service quality to be significantly higher than that of our competitors, they also stated clearly that this above-average quality has its price: in other words, that you generally pay a bit more at UBS.

Will UBS adjust its prices accordingly?International business is becoming noticeably more com-plex and there are a wide range of financial aspects to consider. So it will be increasingly important for compa-nies to receive advice that can address their changing needs. That’s why UBS is doing everything we can to stay on top when it comes to expertise, reliability, speed of response, and efficiency. We are continually investing in the quality of our advice and in expanding our range of products and services. The destination markets in Asia are

Erwin Freiburghaus, Head of UBS Trade & Export Finance Consulting Swiss Bank

“The destination markets in Asia are becoming more important.”


UBS outlook 21

becoming more important. As a result, we are adapting the products and services we offer as well as our network of correspondent banks. At the moment we have no plans to make systematic price adjustments, and we are focusing on supporting the Swiss export industry with the same, renowned quality of service in the emerging markets.


UBS outlook22

Innovation and flexibility remain key

Swiss exporters are seeking to compensate for exchange rate losses by improving productivity and using “natural hedging”. Where this is not sufficient, one option is to relocate parts of the value chain to other countries.

In order to succeed in the long term, companies must constantly assess the products they offer and adapt them to changing market conditions. Against this background, the professionalism and prudence with which the majority of Swiss companies handle the increase in competition is a constant source of amazement. They opti-mize their internal production workflows and processes, bring out innovative new products and get them to market faster, or turn their attention to more promising markets outside the Eurozone.

The above-average capacity for innovation of many Swiss companies is particularly vital, because at the end of the day, it is a compa-ny’s ability to reinvent itself that will ensure its long-term survival. At the same time, there are also sectors and industries that seem to have no future in our country. The paper industry, for example, is in the process of disap-pearing from Switzerland entirely, due to its generally poor prospects in our small country with few natural resources.

A significant number of Swiss SMEs have used the strength of the franc as an opportunity to look for more cost-effective suppliers within the EU. This strategy of “natural hedging” is aimed at offsetting increased costs at home through lower procurement prices for the required production inputs (for example, com-modities or semi-finished goods). A Swiss provider could theoretically achieve the same result by paying its domestic suppliers in euros, although this is only likely to happen in very rare cases due to the euro’s lack of acceptance among Swiss suppliers. Other com-panies go the other route, in a manner of speaking, by increasingly looking to tackle as many work processes as they can themselves. This renewed focus on companies’ own abilities is aimed at returning parts of the value chain that were previously handled by suppliers back to the company. Targeted productivity meas-ures can also be helpful, such as the accelerated automation of processes, the elimination of small-run series or individual parts, or the setting up of a state-of-the-art central warehouse.

Probably the most drastic option for improving a company’s ability to compete is to relocate part or all of its production to another country. Due to the progress of globalization and the increase in economic links across national bor-ders, even SMEs now have a wide range of

Impo

rt

ProducerForeign supplier

Company inSwitzerland

Foreign production subsidiary

Cooperation / joint venture

Commercial branch

Buyer in other country

LicensingFranchising

Procurement Production Sales

Import Export

Export

Figure 1


UBS outlook 23

options available to them when moving into foreign markets. Essentially, they can now choose from a whole menu of potential inter-national structures, from a simple export business, to forms of cooperation including franchising, licensing or entering into joint ventures, to setting up their own sales organi-zation, relocating individual functions or, as the ultimate step, establishing a subsidiary in another country (figure 1).

According to the UBS client survey already mentioned, companies in the machinery, equip-ment- and automotive manufacturing industries in particular see increased expansion in other countries as the answer. However, providers in the chemical and pharmaceutical industries, in the trading business and in the metal industry, also expect to increase their growth in other countries in the future (figure 2).

What branches expect “growth” in their foreign core market over the next two years?

Figure 2

Source: UBS

3%

2%

2%

2%

2%

2%

1%

1%

1%

1%

1%0%

Base: Total respondents selling products “only abroad” or “in Switzerland and abroad” and expecting “growth” in foreigen markets over the next two years.

42%

13%

10%

10%

7%

7%

4%

4%

4%

Machinery, equipment- and automotive manufacturing

OtherChemicals and pharmaceuticals

Trading (retail and wholesale)Metal industry

Corporate and business servicesTextile industry

Construction and architecture

Energy (supply and disposal)Traffic and transport

Waste disposal, recycling and recoveryOther services

Food and beverage production

Non-food productionIT and telecoms services

Wood and paper processing industry

Materials and construction suppliesPlastics industry

Agriculture and forestry

Financial servicesPublishing and printed products, media


UBS outlook24

Exchange rate risks: the focus of discussionThe persistence of the debt crisis means that businesses are becoming more aware of the risks involved in trading goods across borders. This means that banks will continue to play an important role as sources of suitable hedging and financing instruments.

Companies trading merchandise from one in-dustrialized country to another, especially between neighboring countries, can often rely on solid business relationships dating back many years. They know their trading partners and trust them from experience. If the economy is also in a good state, one trend that has become evident over recent years is that many companies are prepared to supply goods on

open account. However, the opening up of new markets in emerging economies and developing countries that are enjoying dispropor-tionately strong growth – China, South-East Asia and India, for example – is making it essential to enter into business relationships with previously unknown partners. Wherever lucra-tive opportunities arise, there are usually risks and unexpected difficulties lurking. Setbacks are inevitable when companies try to gain a foot- hold too quickly or without taking a sufficiently systematic approach in markets they are un- familiar with. Before embarking on a process of internationalization, it is therefore worth analyzing both the risks and the opportunities in as much detail as possible, in order to assess the possible impact on the company.

Reasons for failure

Figure 1

Source: Switzerland Global Enterprise

3%

2%

2%

2%

2%

0%

1%

1%

32%

11%

7%

6%

6%6%

6%

5%

4%

4%

11%

7%

Wrong partner/untrustworthy partnerPrices/costs too high

Broken contracts/failed contract negotiationsCustoms formalities

Insufficient knowledge of the market in the target countryWrong product

Crisis in the export countryInsufficient legal knowledge

Transport/logistical problemsCulture misunderstood

Poor preparationWrong export strategy

Excessive waiting timesLanguage difficulties

Too little commitmentToo few resources in company

Insufficient knowledge of exportNot enough personnel

OtherNot specified


UBS outlook 25

To determine the financial risks involved in an international commitment, it makes sense to work with various scenarios. In addition to regu-lar financial planning and investment apprais-als, worst-case and best-case scenarios should be drawn up. These can help to identify the maximum risks, quantify financial lower limits, and realistically illustrate possible consequences.

Growing demand for hedgingWhat can cause internationalization plans to fail? A survey by Osec (since 2013: Switzerland Global Enterprise or S-GE) of Swiss SMEs paint-ed the following picture: By far the most com-mon reason cited for failure was ”the wrong or untrustworthy partner”. This view was shared by 32 percent of the businesspeople who had experienced failure. For 11 percent of those surveyed, the costs were too high, and for 7 percent, broken contracts or failed contract negotiations meant an early end to planned internationalization. Other reasons for failure were the wrong product, a lack of preparation, insufficient expertise, and cultural and lin-guistic barriers. But entrepreneurs should not be put off by the list of potential stumbling blocks; in reality the final assessment shows that there were many more successful instances of internationalization than failed adventures abroad (figure 1).

Uncertainty gives rise to a greater need for external hedging and financing. This trend has been further accentuated by the smoldering financial crisis. Since 2008, the conditions for business relationships in some regions have taken a clear turn for the worse. Banks have had a mutual mistrust of one another, leading to a shortage of credit facilities. Countries ran into massive difficulties in paying their bills because of their debts, and were shored up by interna-tional bridging loans. Political upheaval in North Africa and the Middle East (the Arab Spring) added to the mix.

As a result of all these events, confidence has seriously waned in the ability and willingness

of contractual partners in international business to pay up. Swiss exporters have also had to adapt to the new circumstances. All of a sudden, certain clients could no longer easily obtain financing for their purchases. Demand for con-firmed documentary credits when dealing with markets such as Spain and Italy, which had previously been supplied by many exporters on open account, shot back up markedly in the past few years. Goods destined for the Gulf States are also increasingly supplied today on a secured basis.

There is a growing awareness among compa-nies of the risks involved in trading goods across borders – another result of the financial crisis. At the same time, they are generally becoming less able and less willing to bear these risks themselves. This means that banks will also have an important role to play in the future as sources of hedging and financing instruments. The continuously expanding global market with more and more new players coming into it fun-damentally increases the need for hedging and financing. The debt problem in the industri-alized world will also likely remain critical for many years, which will keep demand high for the corresponding solutions.

Exchange rates as a source of concernWhen asked about the greatest dangers in international business, 94 percent of UBS corpo-rate clients described exchange rate risk as “sig-nificant” or “very significant”. Nearly as many survey participants, or 92 percent to be exact, believe political risks to be similarly significant. Also high up on the list of worries for Swiss bosses and entrepreneurs were credit risks (88 percent) and transfer risks, such as govern-ment trade barriers or restrictions on foreign exchange (84 percent). Meanwhile, somewhat less common concerns appear to be a fear of production risks, performance risks and techni-cal risks (figure 2). Responses to the follow- up question (“Which of these risks will become more significant in the next few years?”) produced a surprisingly similar picture, with

The smoldering financial crisis accentuates the need for external hedging and financing.


UBS outlook26

What risks are likely to become more significant or less significant for your company over the next two to three years?

Figure 2

Source: UBS

Currency risks

Political risks

Credit risks

Transfer risks

Manufacturing risks

Technical risks

Performance risks

in % 49 45 2

4

4

4

5

6

7

5

7

5

7

12

14

11

47

60

66

71

71

73

46

31

21

10

10

9

Rising significanceSame significance

Declining significanceDon’t know

94 percent of respondents expecting the risk of erratic exchange rate fluctuations to be as high as they are now or even higher in the future.

Should the fears of entrepreneurs prove well-founded, political risks and credit risks will rise significantly in the future (figure 3). Taking a look at credit risks shows that these survey results should, however, be put into perspec-tive: according to the Trade Finance Loss Regis-ter of the International Chamber of Commerce (ICC), the average default rate among short-term trade loans is a mere 0.2 percent. In other words: in cross-border business, only two cases out of a thousand lead to the unwelcome situation where a foreign client is unable or unwilling to pay.

Which of these risks will become more significant in the next few years?

Figure 3

Source: UBS

in %71 23 4

5

2

4

3

5

6

10

12

26

28

25

27

43

51

53

48

53

65

45

33

19

19

16

Currency risks

Political risks

Credit risks

Transfer risks

Manufacturing risks

Technical risks

Performance risks

Rising significanceSame significance

Declining significanceDon’t know


UBS outlook 27

Risks and side-effects

Taking a step over the border opens up interesting prospects for Swiss companies, and allows them to tap into new sales or production markets. But the risks are numerous. To support Swiss companies’ international activities, UBS offers a broad range of solutions to secure pay-ment, exchange rate, perfor-mance or transfer risks, and also provides suitable financing.

Solutions

UBS outlook28

Solutions Risks and side-effects

Financial solutions along the value chainPositive growth rates in the traditional industrialized countries, and the strong growth of emerging Asian economies, present new market opportunities for Swiss companies, whose value chains are developing into international networks that can be optimized and sustainably strengthened with the help of financial solutions.

The continued rapid growth of the emerging and developing economies, led by China, South-East Asia and India, presents new sales opportunities for Swiss companies. But pur-chasing power is not the only thing growing in these markets. Progress in terms of technical capabilities and manufacturing quality is also creating new sources for procurement. Compa-nies in high-price countries like Switzerland are increasingly offshoring parts of their value chain in order to remain internationally competi-tive. This is referred to as “decreased vertical integration”.

Switzerland is becoming more integrated inter-nationally, as its companies increasingly pro-cure commodities and semi-finished products in other countries, process them to create consumer or capital goods, and then export them all over the world. On the one hand, this rising international division of labor and specialization benefits everyone involved: Swiss companies can produce at reduced cost, consumers enjoy lower prices, and suppliers gain access to a share of the profits. On the other hand, tapping into new markets also has its drawbacks, because new business rela-tionships with previously unknown partners mean increased risks. Companies are often un- familiar with local business practices. New markets often also prove more complex due to different legal systems and a lack of transparency.

International business activities generally entail additional and greater risks in many areas, which include:

Credit risk

Currency risk

Contingent currency risk

Manufacturing risk

Performance risk

Transport risk

Political risk

Transfer risk

Types of risk Description of risk

Non-payment, insolvency of buyer

Exchange rate fluctuations

The risk of having to terminate a forward transaction (following negative exchange rate developments for the exporter) in the event of a claim

Delivery may become impossible or cannot be reasonably executed, including inopportune unilateral cancellations or amendments of orders

The producer is unable to meet contractual obligations (due to production problems, financial difficulties, or transport problems)

Damage to or loss of goods in transit

The loss, damage or seizure of goods due to political events or war

Transfer difficulties, state-imposed payment blocks

Most risks can be hedged and minimized, al-though this requires them to be promptly identi-fied and correctly assessed. Ultimately, however, it is up to individual companies to decide how much risk they can and wish to bear.

From a business perspective, companies can only succeed internationally on a sustainable basis if they are constantly improving and opti-mizing their entire value chain, from the pro-curement of goods to the sale of their prod-ucts (supply chain management). The key is establishing a close working relationship based on trust between the company and all its up-stream and downstream business partners (suppliers, subcontractors, intermediaries and end customers). If the company can create benefits and win-win situations for all its part-

UBS outlook 29

ners, it will have put the right conditions in place for long-term and sustainable success on the market.

Rising globalization is causing the value chains of Swiss companies to develop into increas-ingly broad and more international networks. As a result, companies are confronted not only with a changed risk structure, but in order to remain successful in the long run, they also need to take into account the individual, business-related hedging and financing re-quirements of their network partners. And these can be very different, depending on each particular partner’s position within the value chain. A Swiss exporter, for example, hopes that the goods will arrive safely, that its foreign client pays promptly and reliably, and that payment is made in a currency that is favorable from its own perspective. The buyer/importer, on the other hand, hopes that there are no delays in delivery, that it is grant- ed as long a payment deadline as possible, and

Payment transactions and cash management

Trade and export finance

Financial requirements along the value chain

Financing

Securing of performance and payment

Additional services Risk management; managing and hedging currencies and securities

Outgoing payments Liquidity managementand optimization

Payments received

Overview and transparency of transactions and liquidity

Procurement Transformation Sales

that he can make payment in an established trading currency. The more international the value chain, the more varied the transaction, securing and financing requirements of the business partners involved.

The value chains of Swiss companies are developing into increasingly broad and more international networks.

Risks and side-effects Solutions

UBS outlook30

Local banks can cover specific individual needs along the value chain. However, such a service is becoming increasingly inadequate for meet-ing the needs of internationally networked Swiss companies. In such cases, it is prudent to work with an equally internationally net-worked universal bank that can support its partners across international borders with expertise and services along the entire value

chain. If liquidity is called for at short notice, if there is a need for more long-term financing, if payments have to be made in a particular currency, or if risks must be hedged – there are corresponding instruments available for the vast range of challenges faced in connection with foreign trade from Trade & Export Finance (TEF), Foreign Exchange (FX), and Cash Manage- ment Services.


Trade & Export Finance solutions to meet the challenges of foreign trade

Purchase Contract Delivery Payment

Tender Signage contract

Advance payment

Supplier Exporter/Seller Buyer

Securing paymentfor the supplier

Securing performance/payment for the exporter/seller

Securing performance/payment for the buyer

Buyer credit

Documentary credit import

Tender bond/Bid bond Payment guarantee

Performance bond Guarantee for warranty obligations

Supply chain finance Advance payment guarantee

Receivables finance

Documentary credit export/BPO/Documentary collection

Documentary credit/BPO with deferred payment

Financing production Export finance

UBS outlook 31

Securing performance and payment for the buyer

Bank guarantees and standby letter ofcreditWith a guarantee, the bank undertakes to pay a certain sum to the beneficiary should the contracting partner fail to make a payment or a service as agreed. The contract of guaranteecontains an abstract promise to perform and is a separate obligation that is completely inde-pendent of the underlying transaction. Guaran-tees are used to hedge a wide range of performance and payment obligations. The standby letter of credit originates from former US bank-ing law and is used like a guarantee.

Counter guarantee issued by Swiss Export Risk Insurance (SERV)On behalf of the exporter, SERV covers the bank issuing the guarantee against non-payment by the exporter in the event that a contract bond is invoked. The SERV bond guarantee allows the bank to issue a guarantee for the exporter with-out requiring additional collateral.

Securing performance and paymentfor the exporter/seller

Documentary collectionThis instrument is suitable for trade transac-tions where the contracting parties do without the security of a documentary credit but are still reluctant to make a delivery on open account. With a documentary collection, the exporter instructs its bank to debit a certain amount from the importer upon presentation of the con- signment papers. Payment may be made in cash or upon acceptance of a bill of exchange.

Documentary creditA documentary credit is a written assurance by the bank that it will pay a specific amount in an agreed currency to the beneficiary (seller) on behalf of the buyer provided the beneficiary submits the documents stipulated by the docu-mentary credit within the specified deadlines. With a confirmation from the seller’s bank it is also possible to secure the credit risk for the foreign bank as well as the transfer risk. Con-firmed documentary credits can generally be discounted or paid in advance, and are therefore a favorable financing option for the exporter.

Receivables financeCompanies can use factoring to monetizetheir trade receivables for deliveries of goods and services. The company sells or assigns all its receivables from its clients.

Payment guaranteeThis secures the seller’s claims against the buyer, in other words: the payment of the purchase price by the agreed date. A payment guarantee offers greater security for deliveries to Switzer-land and abroad made on open-account terms. It can be used instead of a documentary credit, and is frequently employed for recurring transactions.

BPO (Bank Payment Obligation)A BPO is much the same as a documentary credit without the requirement to present and check documentation. Instead, the buyer’s and the seller’s banks compare data electronically via a standardized data exchange platform. Like the confirmation of a documentary credit, the seller’s bank can assume the payment risk associated with the buyer (or its bank) abroad from the seller, against an appropriate fee.

Numerous different instruments are available for the wide rangeof requirements and challenges in connection with foreign trade.


UBS outlook32

Buyer credit/Export financing

Export financing helps with the medium- to long-term financing of capital goods. The way this is implemented depends on the structure of the particular export transaction.

Credits with SERV coverSERV (Swiss Export Risk Insurance) offers in-struments that make it easier for exporters to do business in countries where political oreconomic instability could jeopardize receiptof payment.

In the case of buyer’s credit, the exporter’sbank issues the buyer a loan, which is paid outto the exporter in order to settle the purchaseprice, and repaid by the buyer at a later date.Due to the large amount of work involvedin documenting the loan, buyer’s credit is onlyworth considering for high-value export loans.

The exporter can, however, finance the pur-chase price for the delivered goods in advance and in its own name. This is referred to as supplier’s credit. In this case, the exporter sells its goods with financing included. This gives it more freedom to specify the financing conditions, because its costs, profit margin and financing costs are an integral part of the terms of payment in the delivery contract.If the exporter sells its receivable in connection with the supplier’s credit to its bank, this is referred to as purchase of receivables.

UBS has framework credit agreements with a large number of banks in the key export markets, which enable the financing of individual transactions at standard, predetermined terms and conditions. The advantage for the exporter is that this makes negotiating with the buyer on the financing of the supply transaction significantly simpler and quicker.

The Swiss government uses mixed credits toallow the governments of developing economies or government organizations to take out loans in Swiss francs in order to finance Swiss goods and services for high-priority development pro-jects. Mixed financing consists of a federal gov-ernment portion and a bank portion. The fed-eral government portion is gifted to the borrower. Swiss banks provide the bank portion to the borrower on behalf of the federal government, with insurance from SERV, in the form of buy-er’s credit. It is important for exporters to be aware that the project cycle leading up to the conclusion of a contract and delivery takes much longer than for transactions financed on a purely commercial basis, with or without SERV.

In the case of multi-source financing, interna-tionally networked universal banks help both suppliers and buyers put together complex financing packages. The advisory and financing services offered cover short-, medium- and long-term loans, with or without export credit insurance.

Credits without SERV coverForfaiting is the non-recourse sale of receivables from the export of goods and services by the exporter. For suppliers, this is a simple and attrac-tive way of export financing. Finally, the exporter also has the option to finance advances and interim payments as well as local costs by taking out an export finance credit from its bank.


UBS outlook 33

Securing payment for suppliers

Supply chain finance is a modern financingsolution for the procurement of goods by companies. Suppliers reduce their credit risk and receive earlier access to liquidity on fa-vorable conditions, which they can then use to secure production and the provision of goods and services on an ongoing basis.

Import documentary credits are a good way for suppliers to secure their payments. The supplier is paid provided it meets the delivery deadlines stipulated by the documentary credit and presents the specified documents on time.

Financing production

In the case of a working capital loan, the bank grants the exporter a transaction-related credit to finance production at cost for an export transaction generally insured by SERV.


UBS outlook34

Once a company starts doing business abroad, it has the ups and downs of the currency markets to cope with.

Even minor changes in exchange rates can have a major impact on Swiss companies that export or import. For example: let’s say a product costs 9,000 Swiss francs to make and sells for 10,000 Swiss francs. This means the margin is 1,000 Swiss francs. The company receives an order from the US and invoices the delivery at the current rate of 1.00 franc

to the dollar. Before the goods are delivered and the invoice paid, the dollar/franc rate falls to 0.9. The 10,000 US dollar return on the sale is now worth only 9,000 Swiss francs and instead of a profit on the deal, the company is looking at a big fat zero.

Hedging protects the fruits of our labor. Even small changes in exchange rates can affect a company’s financial position and make it more difficult to calculate the margins. Systematic hedging offers companies planning certainty and protection against exchange rate risks – in much the same way that hedges have always protected the harvests of English farmers.

Systematic hedging offers companies planning certainty and protection against currency risks.


A brief explanation of instruments used to hedge foreign currency risks

FX forwardA forward transaction is a commitment to exchange one currency for another on a specific date. The difference between the spot price and the forward rate is the cost of the hedge. Forward currency purchases are conduct ed in the expectation that exchange rates will rise by the settlement date, and sales in the expectation that exchange rates will fall.

Alternatives to forward transactions: options, structured products and spot transactionsUnlike unconditional forward transactions, FX options give the buyer the right, but not the obligation, to trade a currency pair at a particular rate. A premium is paid for the option, in the form of the option price. This facilitates complete hedging against disadvanta-geous currency movements. At the same time, you stillhave the choice not to exercise the option if exchange rates move in your favor.

Exotic FX options are barrier options and, unlike the conventional options described above, include addition-al terms or agreements, as well as specific payment and risk structures depending on the individual case.

There are a large number of structured products avail-able, consisting of a combination of money market in- vestments, currency options, and option products, etc.

FX spot transactionsThis is the buying or selling of foreign currencies with the contract concluded and fulfilled “at the same time”. Thus it allows you to hedge against the settlement of receivables in future at an unfavorable movement in exchange rate. If exchange rates move in your favor, however, you also lose out on potential earnings and your cash is tied up.

Protecting profits against currency losses

UBS outlook 35

Systematic management of exchange rate risksHandling currency risks is a (rolling) process involving five steps. Time and again, experience has shown that what matters is not so much the hedging of individual transactions, but having a clear hedging strat-egy and sticking to it.

1. Identify risks Exchange rate risks can arise in connection

with a) cash flow from trading goods in foreign currencies, b) offers in foreign currencies, and c) currency reserves in accounts. It is vital to spot these risks at an early stage.

2. Measure risks Identified risks must be quantified. It is

particularly important to gauge which way the currency markets will move over a particular period of time.

3. Reduce risks Companies can eliminate many exchange

rate risks naturally − by intelligently coordi-nating their international purchases and sales. This is known as “natural hedging”.

4. Transfer residual risks or hold on to them

Where residual risks are concerned, it is necessary to decide how far it makes sense to hedge them. After all, a residual risk can still lead to currency-related profits. Only when these questions have been cleared up should a hedging instrument be chosen.

5. Measure performance Systematic evaluation of both the impact

of foreign currencies and of the hedging measures taken will provide valuable infor-mation for future decision-making.

Abrupt swings in exchange rates hit companies harder than long-term trends that can be prepared for. In any case, the crucial thing is that a clear hedging concept more securely hedges imminent cash flows than those further in the future. This preserves flexibility should condi-tions on the market change in the meantime.


UBS outlook36

When dealing with business partners either in your own country or elsewhere, it is absolutely essential that payments can be made reliably, quickly and simply. Buying and selling in a number of different currencies, and the costs for production and infrastructure in the cur-rency of a company’s domestic market, tie up liquidity and make it difficult to keep an overview. The better a company can make use of its working capital and thus keep costs to a minimum, the stronger its income statement will be.

Securing liquidityRegardless of whether a company operates locally or internationally, it is essential that its customers pay as quickly and fully as pos-sible for goods delivered and services pro-vided. To achieve this, the company’s own accounts receivable function must send out invoices promptly, and issue reminders to those in default. Even simple measures, such as paying-in slips with reference numbers, allow steps in the process to be automated, and can bring about sustainable improvements in debtor management.

Keeping an overviewLiquidity should be planned in advance in order to avoid bottlenecks. Both outstanding payments and ongoing or planned expen-diture have a strong impact on the liquidity required by a company. This is a particular concern for companies whose business is cyclical. Basing liquidity simply on the maximum amount of working capital required cannot be the aim, as unused, this results in costs. The interim investment of surplus liq uidity using maturities and forms tailored to the company’s capital requirements will prevent bottlenecks and unnecessary costs.

Therefore: systematic cash management is the lifeblood of any company and should ideally include the following elements:

UBS Cash Management approach at a glance

Cash overview

Comprehensive reportingprovides a full overview of all your cash movements and how much cash youhave, in which accounts,and at any time.

Cash movement

A wide range of paymentsolutions enable you to move your money efficientlyboth within and outsideSwitzerland.

Cash investment

Depending on the cash youhave available, you can investyour capital where you needit in line with your particularliquidity requirements –drawing on the targetedadvice and support of ourspecialists, as needed.

System integration

With our support, you can link your accounting and treasury management systems simply and securely to UBS.


Global payments from Switzerland in over 130 currencies

UBS offers corporate and institutional clients with international activities an innovative new way to make payments all over the world in 130 different currencies – Pay Worldwide. Alongside all the major currencies, a host of exotics are available.

Clients use their normal access channel to issue a payment instruction directly in the beneficiary’s local currency. UBS has the amount converted into the target currency before the payment is forwarded to the receiving bank. Since the payment arrives in the local currency, no conversion charges are owed to the beneficiary bank.

Both the instructing party and the beneficiary enjoy attractive conditions and transaction prices. The only requirement is a UBS account in CHF, EUR, USD or GBP, and the relevant agreement.

Cash management and international payments

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Systematic cash management is the lifeblood of any company.

Selected solutions for international transactions

Switzerland/EuropeSEPA1 payments:The single euro payments area currently com-prises 34 countries, including Switzerland.

Gateway accounts:These are maintained in Switzerland as a main account, and offer direct access to selected European markets, allowing incoming and outgoing international payments to and from these countries to be processed subject to the same terms and charges as local payments. They make it easier to sell goods and services from Switzerland, since many customers in the EU have difficulty making cross-border trans-fers to Switzerland and are wary of the charges imposed by foreign banks.

Switzerland/globalInternational payments: The better a company’s financial partner is networked internationally, the easier it is for the amount being transferred to reach the recipient efficiently, whatever country they are in. Possible alternatives include selected pay-ment systems or partner banks in other coun-tries. Payments to other countries are either processed electronically and cost-effectively, or by traditional, paper-based means, depending on the options available and the client’s indi-vidual requirements.

Multibanking solutions: These are suitable for all companies that hold accounts with other banks in addition to their main bank. Special software and corresponding interfaces can be used to include all the com-pany’s banking relationships in its accounts receivable system.


The advantages of SEPA

Thanks to SEPA, domestic companies can transfer euros to participat-ing financial institutions in the EU, EEA, Monaco and Switzerland, more easily, transparently, securely, quickly and inexpensively.• More easily, because details such as the IBAN (International

Bank Account Number) and BIC (Business Identifier Code) allow the fully automated processing of transactions.

• More transparently, because the break-down of fees is clearly defined and recipients receive the entire transfer amount. However, some recipient banks charge their clients (recipients) a price for payments received from Switzerland, which they communicate in advance.

• More securely, because all banks apply the same review criteria.• More quickly, because UBS passes on payment orders submitted

in good time on the same day, even with a currency conversion.• More inexpensively, because with SEPA, international payments

cost the same as domestic payments in euros.

1 Single Euro Payments Area.

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Example: renminbi payment options available to the Lucerne-based company “Elektronik AG”Elektronik AG regularly procures goods from various Chinese manufacturers. Contracts were always negotiated in US dollars in the past, which incurred substantial costs for cur-rency conversion and payment transactions. The Chinese manufacturers also regularly took the opportunity to renegotiate prices on ac-count of “currency problems”.

It therefore made sense for Elektronik AG to open a renminbi account from which it could settle the Chinese suppliers’ invoices directly. Payments are charged directly to the account and sent to the suppliers in “mainland China” via UBS Hong Kong. Before being credited, the offshore currency (CNH) is converted to the onshore currency (CNY) at a rate of 1:1 using the local clearing system (CHATS).

Thanks to this solution, Elektronik AG enjoys attractive exchange rates, and simpler and faster processing of payments. It also makes negotiations with Chinese partners easier. In addition, Elektronik AG can consider other suppliers who could not be used before be-cause they only invoice in CNY.

The new account has enabled Elektronik AG to expand its collaboration with its Chinese partners within a short space of time. The company also saves money because it no longer has to go through the US dollar as an interim currency.

Additional information on the solutionswww.ubs.com/sme-internationalwww.ubs.com/tef www.ubs.com/cashmanagement Brochures on Trade & Export Finance, Foreign trade, Foreign currencies and Cash Management


The renminbi and the yuan − more than one currency in China?

RMB is the abbreviation of renminbi (“people’s currency”), and is mainly used in China to refer to the physical currency.

CNY is the official ISO code for the Chinese currency, and the market term for the RMB. It is also the abbreviation for the Chinese yuan that can be traded on the domestic spot market (but is not available outside China).

CNH is the technical market term for the tradable and deliverable offshore renminbi used exclusively outside the Chinese mainland.

CHATS refers to a local clearing system.

Outside China (offshore) In China (onshore)

UBS Hong Kong operating in CNH

Payment to China (CNH)

Payment from China (CNH) Payment from China (CNY)

Payment to China (CNY)Bank of China operating in CNH/CNY

Crediting1:1No Fees

Client in China has a CNY account

PublisherUBS AG, Marketing SwitzerlandP.O. Box, 8098 Zurich

In cooperation with

UBS AG, Chief Investment Office WMP.O. Box, 8098 Zurich

Editorial staffKathrin Wolff Schmandt

Authors Sibille Duss, Jörg Becher, Christian Rintelen, Michèle Debrunner, Heiner Lang

Layout Margrit Oppliger

Printing galledia ag, Flawil

Production managementBarbara Litschi

Photo creditsUBS Photo DatabaseiStockphotogettyimagesTom Haller

Contact [email protected]

Ordering addressUBS AGPrinted and Branded ProductsP.O. Box, 8098 Zurich

[email protected]/outlook

SAP order numbers83418D-140183418F-140183418E-1401

Printed in June 2014

Also published in the UBS outlook series:

Alpine tourism*SAP order number 83418D-1302, 83418F-1302

Energy**SAP order number 83418D-1301, 83418F-1301, 83418I-1301

Information technology*SAP order number 83418D-1201, 83418F-1201

Mechanical Engineering, Electrical and Metal Industry*SAP order number 83418D-1001, 83418F-1001

Wholesaling*SAP order number 80711D, 80711F

Company succession*SAP order number 81976D, 81976F

Reports on the world economy, the Swiss economy, the Swiss franc and the real estate market in Switzerland are available in the quarterly publication UBS outlook Switzerland.

* in German and French only** in German, French and Italian only

UBS AG P.O. Box, 8098 Zurichwww.ubs.com

The facts in this publication have been carefully researched, however, no warranty is given as to their accuracy. The views and opinions expressed herein may deviate from the official opinion of UBS AG. For better readability we have always used the masculine form.

Published in English, German and French. Printed in Switzerland in June 2014.© UBS 2014. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

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