Why Bombardier is right at home in Switzerland

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Bombardier owns Switzerland.

About 70 per cent of the trains and trams in use there are Bombardier products. Swiss International Airlines is the launch customer for the new C Series jet, which is due to make its maiden flight at the end of June.

But there's more. Tiny Switzerland, half the size of Lake Superior, has also become the headquarters of two of Bombardier's 10 global divisions – locomotives and train propulsion and controls – and is one of the biggest sources of the Canadian transportation giant's engineers. At last count, 530 of them, about half of the European total, were Swiss.

History is only part of the reason for Bombardier's strong presence in Switzerland, where it collected six companies, one of which was founded in 1871, and turned them into one, spread over four sites. The bigger reason is competitiveness, which in Bombardier's case goes far beyond low taxes; it's more about talent, infrastructure and the ease of doing business.

"In Switzerland, we have to develop our people because we have no natural resources," says Stéphane Wettstein, 54, managing director of Bombardier Transportation Switzerland and the parent company's chief country representative. "If you want to be successful here, you have to be more efficient."

Switzerland is one of the world's biggest magnets for international business. Hundreds of brand-name companies and a lot of wannabes are using Switzerland for their global, European or EMEA (Europe, Middle East and Africa) headquarters.

Each of Switzerland's 26 semi-autonomous cantons competes vigorously to be their hosts and, collectively, their success rate is astounding. The canton of Vaud, the district that includes Geneva in the French-speaking region of the country, is home to the global, European or EMEA headquarters of heavyweights ranging from Archer-Daniels-Midland Co. and Honeywell International Inc. to Nestlé SA and Yahoo Inc.

From 2003 to 2009 alone, 269 companies transferred from abroad to Switzerland, according to a 2009 report by Arthur D. Little called "Headquarters on the Move: Benchmarking of Global and Regional Headquarters in Switzerland" (the report has yet to be updated).

While the financial crisis, the European recession and rising Swiss costs have greatly slowed the pace of corporate moves into Switzerland since then, there is no doubt the country remains highly competitive. It consistently ranks at or very close to the top of the Global Competitiveness Index, produced by the World Economic Forum. In the 2012-13 list, Switzerland was again ranked No. 1, followed by Singapore, Finland, Sweden, Netherlands, Germany and the United States (Canada was 14th, down two spots from its 2011-12 position).

Why do they come? Of course the attraction has a lot to do with low tax, companies interviewed by The Globe and Mail say. But they also insist that tax alone was not enough to convince them to move there. If tax were the only factor, they might well have chosen Panama or Liechtenstein or Cyprus.

The Arthur D. Little report cites Switzerland's top five attractions (according to its clients), in order, as: tax, qualified work force, central location, transportation infrastructure and work force availability. Quality of life, political stability, international schools, little bureaucratic red tape and flexible labour laws also rank highly. Strikes are rare in Switzerland.

Switzerland has a tax system that encourages competition among cantons – that is, they can race one another to the bottom to attract companies. While the average canton tax rate is 19 per cent (compared with 30 per cent in Germany and 33 per cent in France), some cantons' rates are as low, or lower, than countries such as Montenegro that market themselves globally as tax havens. The rate in the canton of Obwalden, at 12.7 per cent, is the lowest. Switzerland also has the European lowest value-added tax (VAT) by a long shot, at 7.6 per cent.

Transocean Ltd., the offshore oil driller best known as the owner of the Deepwater Horizon rig that exploded and sank in the Gulf of Mexico in 2010, moved its headquarters to Geneva from Texas in 2008 and says it has no regrets, even though Switzerland, home of Swatch, Rolex and other luxury groups, is hardly oilman's country.

Spokesman Guy Cantwell says "Switzerland is centrally located for our worldwide operations. … In addition, Switzerland has a stable and developed tax regime. Further supporting our Swiss presence, we have listed on the SIX Exchange and the SMI," a reference to the Swiss stock market and its blue-chip index.

He also cited "good infrastructure for schools" as bonus attractions.

Switzerland is not quite as competitive as it looks in a few industries, notably manufacturing, said Bernd Hirschle, head of the manufacturing practice for Arthur D. Little, in Zurich (who was not an author of the 2009 relocation report). Manufacturers suffered because of the rising franc, considered a safe-haven currency, and the shortage of skilled labour as the country tries to cope with an influx of companies.

"The efforts of the central bank of Switzerland to maintain the franc at a stable exchange rate to the euro and increasing manufacturing efficiency are some of the measures which are currently being taken to regain its competitiveness," he says. "However, some companies both national and international have already moved non-value-added manufacturing out of Switzerland to lower-cost countries."

The skilled labour shortage doesn't seem to be hurting Bombardier, at least not yet. The company has exploited universities and technical schools to feed its train factories and research centres.

Bombardier has 900 employees in Switzerland, up from 750 a decade ago. The country has emerged as one of the company's most important R&D and testing sites as it tries to solidify its position as the European train market leader. Two of Bombardier's biggest innovations – tilting trains, that allow the train to go far faster in curves, and double-decker inter-city carriages – were developed in Switzerland. "Our basic asset is the brains of people," Mr. Wettstein says.

To keep the talent rolling in, and the innovation levels up, Bombardier has formed partnerships with some of the leading Swiss schools. One is the Swiss Federal Institute of Technology, considered one of the world's leading universities for engineering, science and technology (Mr. Wettstein calls it the "MIT of Switzerland"). "We are able to train and educate people here to become professionals," he says.

One joint project with the technology institute was the development of an airbag for city trams. The airbag is mounted underneath the very front of the train and is triggered when sensors detect a pedestrian in danger of getting struck and falling under the train.

No companies, foreign or domestic, in Switzerland like the rising costs and the strong franc. But high costs have one advantage – it forces companies to be disciplined and creative to remain competitive. Bombardier's view is that if it can compete in Switzerland, it can compete anywhere. "If I want to be successful here, I have to be highly efficient," Mr. Wettstein says.

Little cantons compete to attract big-name clients in need of a tax haven

For international companies looking for a low-tax home, Switzerland's cantons are a blessing.

That's because the country's 26 semi-autonomous cantons – roughly equivalent to U.S. states – use tax rates to compete with one another for corporate offices and wealthy individuals.

The competition works: Switzerland has attracted hundreds of big-name companies, turning Zurich and Geneva and a few other cities into thriving cosmopolitan centres. In Zurich alone, it is estimated that about 28 per cent of the work force is composed of foreigners employed at multinational companies. One recent arrival is Google Inc., whose Zurich office, with 1,100 employees, is now home to the company's biggest development site outside of the United States.

The cantons have been competing for international companies since the 1950s. American chemical giant DuPont moved its regional headquarters to Geneva in 1959. Many others, from industrial equipment maker Caterpillar Inc. to offshore driller Transocean Ltd., have become neighbours in Geneva. The cantons have always been pros at international marketing and are now testing their charms in Asia. Sony, Toyota, Nissan and Hitachi now have big corporate presences in Switzerland.

Switzerland is an odd tax duck. The federal government funds itself mainly through indirect taxation, such as consumption taxes. The cantons, which provide most of the public services, rely on income and property taxes. According to a 2009 report on corporate relocations by the Zurich office of Arthur D. Little, the cantons that have been most successful at attracting head offices are Zurich and Zug, in the German-speaking north, and Geneva, Vaud and Fribourg in the French-speaking west. The report said that about 60 per cent of all the headquarters in Switzerland can be found in those five cantons.

While the average canton corporate tax rate is 19 per cent, some have rock-bottom rates in an attempt to compete not just with the other cantons, but with tax havens such as Montenegro and Ireland. The canton of Obwalden, with a 12.7 per cent rate, has the lowest rate in Switzerland (though remarkably few head offices, since low taxes are not the only lure).

Cantons also have the right to negotiate tax privileges, such as tax holidays. Taxes are not universally low within the cantons. Some of the cantons known for low corporate rates impose high personal taxes on the wealthy, and vice versa. A 2012 Credit Suisse report says that, historically, the German-speaking cantons have been the most competitive on the tax front. But that is changing, with the French-speaking cantons getting into the game.

In spite of the competitive tax cutting, Credit Suisse says that most of the cantons are running balanced budgets. Take that, euro zone, where gaping budget deficits are the norm.

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