The Swiss Academy of Engineering Sciences (SATW) has presented an updated study that confirms the trend toward deindustrialization in Switzerland it already identified in 2018. SMEs (up to 250 employees), which play a similarly central role in Switzerland as in Germany, are particularly affected. Without targeted countermeasures, a threat to Switzerland as an industrial location is emerging. At the same time, the study provides good arguments for more investment in R&D. (All graphics courtesy of SATW)

On February 1, 2022, the SATW released the study “Innovative strength analysis of Swiss industry: an update”, which can be downloaded free of charge from the Academy’s website in the form of a short and a long version. The academy had already caused a stir in 2018 with a study that identified a trend toward deindustrialization. It contradicted the then still clearly positive assessments of Switzerland’s overall economic innovative strength in various rankings. It even took first place several times in a row.

This has changed in the meantime. Switzerland has slipped to fifth place in the World Economic Forum’s (WEF) 2019 ranking, for example. In retrospect, the SATW study from 2018 is therefore proving to be an early warning sign.

The number of industrial employees is falling continuously

The reason for the different assessment: In the international rankings, entire national economies are compared on the basis of economic, financial, political and demographic indicators; the SATW study, on the other hand, focuses exclusively on the manufacturing industry (excluding the construction industry). Their innovative strength is examined, for example, in terms of how spending on R&D develops and translates into groundbreaking new products.

The role of SMEs in Switzerland

In 2018, the manufacturing industry in Switzerland comprised 660,730 full-time positions. 59.7 percent, or 443,731 employees, of these are employed in SMEs. By comparison, 42 percent of all industrial employees in Germany work in SMEs. The SME share of industrial jobs is therefore even greater in Switzerland than in Germany. Because of the special role played by SMEs, the results of the study were broken down into large companies and SMEs.

Changing numbers of companies (left) and changing numbers of employees (right)

From 1997 to 2018, SATW recorded a continuous downward trend in the numbers of both jobs and companies. On average from 2016 to 2018, SMEs alone employed nearly 20,000 fewer people than in 2011 to 2013. Across both scales, the number of industrial companies declined, but more sharply among SMEs than among large companies. The number of jobs also declined overall, although there were signs of a trend reversal here among large companies, as more employees were counted here again in the most recent period.

The core element and prerequisite for industrial innovation was identified as companies’ spending on research and development in Switzerland and abroad. They declined in all size classes surveyed, again most strongly among SMEs.

The market novelties matter

In addition to research into new technologies and their application, however, industrial innovation also includes the steps involved in developing new products and successfully marketing them. The study distinguishes between incremental innovation with company innovations, i.e. new product versions or generations, and disruptive innovation with market innovations. Across all scales, there is a clear shift from market novelties to company novelties. The latter are increasing, while truly disruptive innovations are declining massively.

 Growing numbers of company novelties on the left vs. shrinking numbers of market novelties on the right.

This is a frightening development, because it is not simply new products that are the basis for a positive development of the industry and thus the economy in the medium and long term. It’s more like a flash in the pan. Market novelties and disruptive innovations are what count. But this requires investment in research and development, and this is where industry in Switzerland is exercising restraint.

A broad-based SME industry

In its investigation and analysis, SATW relied on the classification of industry into NOGA classes, a Swiss equivalent to the NACE classes in Europe.

[NACE (Nomenclature statistique des activités économiques dans la Communauté européenne) is a European Union system for classifying economic activities. In Switzerland, this corresponds to NOGA (Nomenclature Générale des Activités économiques)].

The graphic assignment of companies to these classes alone makes it clear how highly diversified industry is in Switzerland. There is no excessive dependence on a few sectors here, as there is in Germany, for example, on the automotive industry. This is positive because weaknesses in one division can be compensated for by others.

 

The innovation analysis also shows how strongly investments in R&D affect the economic development of entire industries. It is precisely in this respect that individual NOGA classes differ very significantly. To illustrate this correlation, R&D expenditure was set in relation to the sales generated per employee

In Switzerland, the most dramatic departure from R&D and thus from economic success has been in the energy, water/environment sector.

The study concludes that targeted public support for disruptive innovations could break the trend in the industry. In particular, the SMEs that are most affected, whose resources are indeed very limited, seem to be in urgent need of such a boost.

I search in vain for comparable studies in Germany. And with regard to Switzerland as well as Germany, I am particularly interested in how industry and SMEs in particular stand on digitalization and what willingness there is to invest in this presumably crucial point in particular.