The machinery and plant engineering sector has remained on course in the unexpectedly heavy seas of 2022. A real production increase of 1 percent is still in sight. A slight minus of 2 percent is expected for 2023. This is a far cry from the setbacks of earlier years.
The mechanical and plant engineering industry has stayed on course with a great effort in the unexpectedly heavy seas of 2022 and looks to the coming year with some confidence. "High inflation and the Ukraine war with all its consequences will also continue to weigh on our industry for a long time. Material bottlenecks and difficulties in the supply chain continue, and more and more countries are returning to protectionist measures. The companies in the machinery and plant engineering sector have once again demonstrated their innovative strength and adaptability by making use of their entrepreneurial freedom," said VDMA President Karl Haeusgen at the association's annual press conference. "We are therefore confident of achieving our target of 1 per cent real production growth this year and are also sticking to our forecast for the coming year. We continue to expect a slight real output decline of 2 per cent in 2023. This is a far cry from the setbacks of previous years and demonstrates the robustness of our industry."
In particular, the goal of a climate-neutral economy is a great opportunity for medium-sized mechanical and plant engineering companies and their innovative technologies. "A prerequisite for this, however, is that companies can rely on a reliable and affordable supply of materials and energy. Here, the EU and the German government are called upon to keep the markets open and to implement all necessary measures quickly and with as little bureaucracy as possible," Haeusgen warned.
Bottlenecks in supply chains still exist, but slightly easing
Production in the machinery and plant engineering sector continues to be noticeably impaired by difficulties in the supply chains and by material bottlenecks. According to the latest VDMA flash survey from the beginning of December, in which more than 600 member companies took part, 74 percent of the companies see their business activity seriously or noticeably impaired by such bottlenecks. In June, however, the figure was 87 per cent. In the latest survey, the companies reported a noticeable easing of the situation with regard to chemicals, plastics and metal products. The situation for electronic components, on the other hand, remains tense, albeit with a downward trend. According to VDMA economists, this development may have a positive impact on production in the final months of 2022. From January up to and including October, real production in the mechanical and plant engineering sector was still 0.4 percent below the previous year's figure. Order intake in the first ten months of the year remained 1 per cent below the previous year in real terms, while the order reach in September 2022 was still 11.9 months and thus remains very high.
VDMA survey: half of the companies are optimistic about 2023
For the coming year, the association expects an unchanged difficult environment: growth in China is expected to remain weak, the war in Ukraine continues to bring high energy prices and almost worldwide, central banks are responding to high inflation rates with rising interest rates. "This will weigh on the global economy and thus also on the capital goods industries for the foreseeable future," Haeusgen said. "Nevertheless, the mood in many countries around the world has not been as negative in recent weeks as it was in the first few months after the Ukraine war began. Therefore, we expect only a slight real production decline of 2 per cent in 2023. Measured against earlier declines in growth, this is a moderate drop in production and significantly less than many feared," emphasised the VDMA President. He shares this assessment with numerous entrepreneurs from the industry: according to the survey, almost half of the respondents (48 percent) are optimistic or cautiously optimistic about the new year. 38 percent are undecided, only 14 percent are pessimistic or cautiously pessimistic.
Employment growth planned - shortage of skilled workers remains
This confidence is also reflected in the employment situation in the industry. In September 2022, there were 1.019 million people in the core workforce (companies with more than 50 employees) of the mechanical and plant engineering sector in Germany – an increase of 1.0 percent compared to the previous year. The sector thus remains the largest industrial employer in the country. Well over half (54 per cent) of the mechanical engineering companies surveyed by the VDMA in autumn actually want to expand their workforce in the coming year, and a good 30 per cent want to keep it constant. However, companies continue to have great difficulty in filling these positions. The general shortage of skilled workers means that almost all the companies surveyed (97 per cent) are experiencing bottlenecks here.
Price brakes for energy: too complex and bureaucratic
So far, the machinery and plant engineering sector has coped well with the risks in energy supply, "but also because a gas shortage was prevented", said the VDMA President. "Energy costs arrive in our industry primarily through energy-intensively manufactured preliminary products. That's why we think the concept of price brakes for electricity, gas and heating makes sense at this critical time. It should work along the entire value chain." However, these price brakes have now become too complex, especially due to the European state aid regulations. The first companies in the mechanical and plant engineering sector want to refrain from taking advantage of the aid despite the high costs, Haeusgen explained. "If you want to create an effective instrument that is not just a rescue parachute, it has to be simple and unbureaucratic," he demanded.
Maintain and expand export promotion instruments
China is an enormously important market for German and European mechanical and plant engineering and will remain so for the foreseeable future. The People's Republic is the second most important export market and foreign investment location for mechanical engineering from Germany. However, the aggressive economic policy of the Chinese government poses new, major challenges for medium-sized industry. The VDMA has therefore drawn up a comprehensive China position that deals with the goals of the government in Beijing and its means of enforcement, as well as the options for action available to companies. "China wants to develop economically and strengthen the innovative power of its own economy. To this end, it is intervening strategically in the economy, to the detriment of foreign companies," Haeusgen explained.
It is therefore important that the German government now reassesses its relationship with China and develops a corresponding strategy. "However, the Chinese market cannot be replaced in the short and medium term and therefore the export promotion instruments should not be dismantled. Exports to China provide well-paid and highly qualified jobs in Germany," the VDMA president warned. "Rather, German policy can help to open up new sales markets with its promotional instruments. For example, we finally need a functioning export credit insurance system for small order values."
In addition, the EU must conclude further free trade agreements with partner countries in Asia and finally implement the Mercosur Agreement. "Furthermore, the EU's internal market must be protected against unfair trade practices from third countries, especially China. However, there must always be a balance between offensive and defensive trade instruments. There must not be a 'Fortress Europe' again!", Haeusgen stressed.
Inflation Reduction Act with limited impact
The current strains in the EU's relationship with its most important trading partner, the USA, are also a cause of concern for the machinery and plant engineering industry. "We are experiencing an intensive debate on the American Inflation Reduction Act (IRA) and thus on the question of whether Europe is threatened with a significant relocation of industrial value creation and jobs to the USA," said the VDMA president. This is not to be expected in the mechanical and plant engineering sector, "the effects of the IRA on our industry are limited", he emphasised. This is because the new American tax credits are only available for renewable energy projects and therefore primarily affect the sectors that are part of these value chains. Many other important sectors in mechanical and plant engineering – for example packaging machinery, construction machinery, agricultural technology or robotics – are at best indirectly affected and may even benefit from the increased American investments.
"However, in certain areas such as wind energy or hydrogen, which are also important for sustainable transformation, investors may prefer American projects to European ones. The EU must find an answer here if we want to keep up with the technology ramp-up and the associated value creation. It is not about even higher sums of billions, but about the simplicity and reliability of funding. Here we can even learn from the USA," Haeusgen explained.
In principle, however, the Inflation Reduction Act in part represents a breach of the rules of the World Trade Organisation (WTO). "It is thus a regrettable further step by the USA away from free trade," Haeusgen criticised. "Instead of reflexively calling for a 'Buy European' programme, it would make much more sense to launch an offensive for greater competitiveness of European industry. In concrete terms, this means examining thoroughly the regulatory environment, removing obstacles to innovation and simplifying the processes in the numerous existing support programmes," demanded the VDMA President.
Planned EU supply chain law not feasible for SMEs
In the view of the VDMA, however, framework conditions and regulation in Europe are currently designed in such a way that they do more harm than good for Europe as an industrial location. "The political intentions and goals of the EU to shape the green and sustainable transformation are supported by us. But many legislative proposals fail to take into account the realities of industrial SMEs," Haeusgen stated. As examples, he mentioned the directive on sustainability reporting or the EU supply chain law: "Both sets of regulations will not only impose disproportionate but also unnecessary burdens on Europe's internationally networked SMEs, noticeably weaken their competitiveness and are thus counterproductive with regard to the goals pursued.
"Politicians believe, for example, that a medium-sized company can ensure in all stages of its supply chain in faraway countries that not only child labour is prevented, but also that European environmental standards are complied with, religious freedom is guaranteed and trade unions may be formed. Those who cannot prove this risk being sued in the future if the EU supply chain law is passed as envisaged by the EU Parliament. All in all, it unfortunately seems that for many political decision-makers the competitiveness of a sector that is crucial for Europe and also for the green and digital transformation is completely subordinate," the VDMA president summed up.
German government must set course for transformation
On the "anniversary" of the so-called traffic light coalition in Berlin, Haeusgen demanded that the government now implement the promises it had made. In particular, he said, it was a matter of loosening the brakes on growth by reducing bureaucracy and introducing a moratorium, as well as finally implementing the ambitious shortening of planning and approval procedures. "We must ignite the necessary transformation turbo for investments in climate protection, efficiency and digitalisation. The mechanical and plant engineering sector is ready for this with a broad portfolio of offerings," he said. The VDMA also called on the government to put public finances on a sustainable footing. This means complying with the debt brake in accordance with the constitution and capping the public spending ratio at a maximum of 40 per cent of the gross domestic product. "We need a future-oriented restructuring of government spending: Less consumption and more investment, for example in transport, digitalisation and education," Haeusgen emphasised.
Germany is still lagging behind other countries in research funding: only a good 3 percent of corporate research and development expenditure comes from the state in this country, compared to 7 percent and more in the UK and France. "That is why we need funding instruments that are open to all topics and have a broad impact. The introduction of tax-based research funding was the right thing to do, and it is more important than ever. It should therefore be expanded and the Joint Industrial Research should be strengthened. Above all, however, the necessary crisis intervention must not be allowed to degenerate into a small-scale, over-regulated industrial policy," warned the VDMA President.
Transformation Opportunity Manufacturing-X
The VDMA sees the expansion of digitalisation as a major opportunity for maintaining and expanding the competitiveness of small and medium-sized industry and technological sovereignty in Germany and Europe. The Manufacturing-X project can play a decisive role here. The aim is to create a supportive data ecosystem for industry in which companies can share their data securely without having to hand it over. "For the development of digital business models and for the European data economy, this is an extremely important development," explained Haeusgen. The VDMA has been strongly committed to the topic of Manufacturing-X from the very beginning, together with the ZVEI and other players. "We expect the initiative to take on a concrete implementation form in the spring. The ball is now in the politicians' court," Haeusgen concluded.