Switzerland: More Than An International Private Wealth Management Center

For many people, Switzerland is both miraculous and mysterious. In films, we frequently see scenes like this: one of the richest people in the world walks quietly into a private bank in a street corner in Switzerland, where he has deposited a hefty chunk of cash.

Switzerland has a national territorial area of more than 40,000 km². It is a little larger than Hainan Province, a little smaller than the Ningxia Hui Autonomous Region, and about half the size of Chongqing, China. Switzerland has a population of over eight million, which is equivalent to the population of Shandong Province’s Jining city. In this sense, it is really “a small country with a small population”. However, Switzerland is well-known for its numerous mountains and lakes and its beautiful natural scenery, and is widely recognized as a sort of paradise, with high incomes, abundant wealth and beautiful landscapes. It has been called “small, but rich and beautiful”.

However, when it comes to its economic characteristics, Switzerland is more than an international private wealth management center.

Treasury of the world’s wealthy

Private wealth amounting to trillions of American dollars from all over the world is managed by financial institutions based in Switzerland. As a country in the Alps that is highly favored for its political neutrality and economic stability, Switzerland has become the well-deserved champion of the private bank management industry.

Geneva is the cradle of the global private banking industry, and shares a reputation with Zurich – the “capital of commerce” – as one of the “Twin Stars” of Switzerland. Switzerland has a total of more than 140 private banks nationwide, and over one fifth of job opportunities in Zurich are provided by private banking institutions or related industries.

The fact that Switzerland became an international private banking center might be considered a case of being in the right place at the right time. In the 16^th century, Protestants were persecuted in France, so they fled to Switzerland, taking with them their enormous wealth and wealth management experience. This was the birth of the first generation of private bankers in Switzerland. During the two world wars, Switzerland took advantage of its identity as a neutral state, managing immense amounts of money that flowed in from various countries. Relying on the scale of its private banking, it soon built up its position as the champion of the global private banking industry.

In terms of location, Switzerland is geographically the absolute center of the European continent. Surrounded by three major economies in Europe (France, Germany and Italy), Switzerland divides its territory into four language areas. These factors serve as the best natural ties.

With regards to its people, the Swiss have combined the merits of the Germans and the French. They are precise, reliable and conservative; they keep a low profile, and are discreet when it comes to wealthy people’s personal affairs. These are all ideal qualities for financial management, valued by the wealthiest people around the world, and interpreted perfectly by the behavior and character of the Swiss.

In fact, Switzerland has introduced legislation (i.e., the Financial Secrecy Law) to ensure that their clients’ financial information remains confidential. The Financial Secrecy Law requires all bank clerks to protect financial information’s confidentiality, or they will be criminally liable. The Financial Secrecy Law is regarded as the cornerstone of the Swiss private banking center. In 2014, Switzerland joined the Standard for Automatic Exchange of Financial Account Information agreement, which affected the authority of the Financial Secrecy Law. However, Switzerland's private banking industry is deeply rooted in its level of service and financial management. No other country or city in the world compares in terms of service level and wealth management scale. Hong Kong, Singapore and Dubai have raced to try and keep up with Switzerland, but have failed.

The Swiss control half of the world

Henry Kissinger, Former US Secretary of State, famously said: “Whoever controls oil, controls all countries; whoever controls food, controls humans; whoever controls money, controls the whole world.”

While the Americans used to control both petroleum and money, the Swiss now control the commodities represented by grain and the world oil trade, so it’s fair to say that the latter now controls half of the globe.

In fact, every aspect of our life – from things as small as food and clothing, to something as big as the economy – is closely related to commodities. Commodities can be divided into three major categories: 1) agricultural products, like grain, oil, cotton, sugar, coffee, cocoa, rubber and other economic crops; 2) metals, such as gold, silver, copper and iron; 3) energy and chemicals, such as petroleum products, coal and alcohol. Given that commodities are at the forefront of industrial production and that price fluctuations directly influence downstream products and overall economic operations, their importance is self-evident.

In this sense, whoever controls commodities also controls the world, and makes huge profits. The decade from 2000 to 2010 was the golden age of the commodity industry. The world's top commodity traders accounted for nearly US$250 billion, far exceeding the Wall Street investment bank in the same period, and surpassing commercial banks in the same period, becoming the most profitable in the world.

In 2012, within the global volume of bulk commodities, crude oil that was traded in Switzerland accounted for 38%, agricultural products accounted for 38%, and metal minerals accounted for 59%. According to estimates by Swiss National Bank, the total transaction volume of Swiss bulk commodities in 2010 reached 762.9 billion Swiss francs, with a profit of about 20 billion Swiss francs. It contributed 3.5% to national GDP, equivalent to that of the mechanical manufacturing industry (one of the pillar industries of Switzerland) and exceeding the tourism industry.

The key to the profitability of commodity traders comes from their extensive global information network, which controls all the links in the supply chain, from the supply of raw products, through intermediary trade, to the delivery of end products.

The Swiss Traders Association assigns people to check cocoa stocks in Côte d'Ivoire, or set up cameras in Japanese power companies to record the level of coal stocks. Swiss dealers know more about price changes and regional differences than any other industry and company, and sufficient information guarantees huge profits.

From a certain point of view, the commodity industry is similar to the financial industry, as they both rely on information and financial advantages for making money. In this sense, Switzerland provides the best conditions for commodity dealers.

First, Switzerland has a “loose” supervision system, as demonstrated by the extremely straightforward phrasing used by the Swiss government in a recent report: “Theoretically, spot commodity dealers are not subject to any regulations.”

Second, Switzerland has very low tax rates. Crude oil and mining companies worldwide pay an effective tax rate of between 30% and 45%, and banks on Wall Street have an effective tax rate of about 20%. In contrast, commodity traders in Switzerland, Cyprus, the Netherlands, Singapore, and other countries have an effective tax rate of 5% to 15%.

As far as commodity trading is concerned, Switzerland is like the American West during the “Westward Movement”, where there are fewer constraints and abundant opportunities.

An economic public interest organization once asserted: “The commodity trader industry (to the outside world) is still a black hole.” Glencore, Switzerland's largest commodity trader, is also the world's largest commodity trader, and has done business with Sudan and Iran against the recommendations of the US. The experience of its founder, Marc Rich, is quite legendary. He was sentenced to 200 years in prison in the absence of US justice and was later pardoned by US President Clinton.

Switzerland's leading position in commodities and its advanced banking industry bring out the best in each other. Banks play a pivotal role in the financing of the global commodity trade.

According to the Swiss Bankers Association, in 2011 the trade volume of raw materials handled by banks in Switzerland was as high as 1.5 trillion US dollars, which is equivalent to a quarter of the total global raw material trade credit line. Switzerland has taken the lead in this highly profitable business line.

Both “quick money” and “slow money” are earned

Some people think that Hong Kong is a relatively obvious example of the shifting of certain industries in the financial center and the hollowing out of industry. However, Switzerland not only has an advanced financial service industry, but also has a strong industrial force.

Its economy is internationally competitive, and based on the service sector. The tertiary industry (the financial service industry) accounts for 70% of the total number of persons employed by industry, while the secondary industry (industrial manufacturing) and the primary industry only account for 25% and 4%, respectively.

The job opportunities provided by the secondary industry are mostly in the fields of mechanical engineering, electronic engineering and metal processing. High-tech industries also play an important role in the Swiss economy. The important economic branches include biotechnology, medical technology, health care products, cosmetics and environmental technology.

Switzerland has an export-oriented economy. Export trade accounts for half of the economic income of Switzerland, and its main trade partners are various member states of the EU. Profits in machinery, electronic engineering and chemicals account for more than half of the total export income of Switzerland.

Looking at Switzerland from a bird’s eye view, two-thirds of the country is forests, lakes and glaciers, plus 1.6 million cows. Yet it is among the world’s top five foreign exchange earners, with a per capita annual export volume of 34,000 USD – more than twice the average of the “Four Asian Tigers”.

Having a “non-smoking” financial industry that occupies little land and generates quick profits, no wonder Switzerland doesn’t have to invest a lot of effort in developing industries.

In fact, there is an interdependent relationship between industry and finance because, without support from local industry, there would be no sustainable momentum for the local financial industry. Actually, excellent performance in industrial operations is icing on the cake for the financial industry.

In addition, the people employed in the financial industry are mostly rare talents with high levels of education, which determines that it will never be a pillar industry in terms of creating job opportunities. In contrast, industry creates the most stable job opportunities, and serves as the “stabilizer” of employment in the country. As a matter of fact, Switzerland’s unemployment rate rarely drops below 4%, even in a global economic downturn.

Switzerland not only makes “quick money” from banking and commodities, but also makes “slow money” from industry.

Innovation first

Switzerland has a small population of a little over 8 million, and, without its own natural resources, commodities and labor are very expensive. Among the Swiss, there is a common understanding: “We must compete on quality and innovation, instead of prices.”

According to The Global Competitiveness Report 2017-2018 which ranks 137 economies worldwide, Switzerland has been the most competitive economy in the world for nine consecutive years.

Switzerland’s annual R&D investment has been maintained at a level of 3% of its GDP, coming out top among developed countries. Measured by the ratio of the number of patent applications to population, Switzerland is number one in Europe.

In 2015 alone, there were 873 patent applications per million inhabitants in Switzerland. The Netherlands and Switzerland ranked 419 and 392 respectively, coming second and third.

The ideal R&D environment in Switzerland has also attracted top scientists from all over the world. According to statistics, there are 11.2 scientists in every 1,000 people, and the proportion of foreign scientists has reached 31.9%. Switzerland ranks fifth worldwide for the number of Nobel Laureates per capita.

Besides all of this, Switzerland also has many other champion industries, from the frequently-seen computer mice, watches, cheese, chocolate, Swiss army knives, and drones, and through the less frequently-seen fragrances, hearing aids, precision machinery and automation equipment, banks, pharmaceuticals, conventions and exhibitions.

Innovations in small and medium-sized enterprises have bred a number of less visible global champions. In Switzerland, one in every ten small and medium-sized manufacturers is a market leader; in particular, in the field of precision instruments, nearly 60% of enterprises are unseen market leaders. By virtue of these factors, Switzerland has the business competitiveness of a country with a population of 80 million. For instance, each country has its bank notes, but none of them can do without Switzerland. It is home to the world’s biggest supplier of banknote printing ink, foil and paper.

Swiss enterprises value “precision” and “uniqueness”. Taking the banknote industry as an example, this niche market has a low, but stable, growth potential; it is also an industry with a high cost, a high price, and a high threshold to entry, with few competitors.

Coffee offers another example in case. On the one hand, Nestle, a Swiss multinational food giant, has developed capsule coffee; on the other hand, a small-sized Swiss enterprise has won a special honor in the world. While competing with each other intensely across the globe, both Starbucks of the US and Costa of the UK have selected coffee makers manufactured by Thermoplan, a small-sized enterprise based in Switzerland.

A country of multinational corporations

The status of Switzerland as a country of multinational corporations is inseparable from its superior financial environment, strong sense of innovation and hard-working people. In the 2018 Global Fortune 500 list, there were 14 Swiss enterprises. In terms of the number of multinational corporations per capita, Switzerland ranks second in the world, behind Sweden.

Swiss enterprises on the Global Fortune 500 list in 2018

Data source: Fortune magazine.

Meanwhile, more than 1,000 multinational corporations have established their global or regional headquarters in Switzerland, via which they manage their businesses all over the world. Switzerland has become a well-deserved “country of multinational corporations” with more than 60% of US multinationals, including General Motors, Hewlett-Packard, IBM, Procter & Gamble, and Google all headquartered in Switzerland.

The fact that so many multinationals are headquartered in Switzerland is generally attributed to its preferential tax policies. The total tax paid by Swiss companies accounts for about 25% of their net income. In this respect, only Ireland and a few other countries are comparable to Switzerland. In fact, if a multinational corporation establishes a business control center in Switzerland, it will be able to cut its tax rate to between 6% and 10%. In January 2006, US food giant Kraft Foods announced the decision to transfer its European headquarters in London and Vienna to Zurich. At that time, UK corporation tax was as high as 28%, while Kraft's tax rates in Zurich began at 15%.

Besides the tax categories specified by the Swiss Federal Government, various states of Switzerland each have their own tax laws and power of taxation. In most states, tax registration is not open to public supervision, and holding companies are sometimes entirely exempted from income tax. For some remote states in Switzerland, using tax leverage to attract enterprises can be a solid choice.

Since the signing of the free trade agreement between China and Switzerland, more and more Chinese enterprises such as Huawei, China Grand Enterprises, Air China and FIYTA are establishing branches in Switzerland, and using it as a gateway to Europe. This move has proved to be very fruitful for them. In the future, even more Chinese enterprises are expected to be attracted by the unique business environment and geographical advantages of Switzerland for new development opportunities.