Karl Haeusgen, VDMA President: "High inflation and the war in Ukraine with all its consequences will continue to affect our industry for a long time to come."

© VDMA

Despite all the adversity in 2022, the mechanical and plant engineering industry "has remained on course and is looking ahead to the coming year with some confidence," said VDMA President Karl Haeusgen at the association's annual press conference on December 13. "We are therefore confident that we will achieve our target of 1% real production growth this year and are sticking to our forecast for the coming year. We continue to expect a slight real decline in production of 2% for 2023. This is a far cry from the setbacks of previous years and shows the robustness of our industry."

Bottlenecks in supply chains remain high

Production in the mechanical and plant engineering sector continues to be noticeably affected by difficulties in supply chains and material bottlenecks. According to the latest VDMA flash survey conducted at the beginning of December, in which more than 600 member companies took part, 74% of companies believe that their business activities are seriously or noticeably impaired by such bottlenecks. In June, however, the figure was 87 percent. In the latest survey, companies reported a noticeable easing of the situation with regard to chemicals, plastics and metal products. In contrast, the situation for electronic components remains tense, albeit with a downward trend. According to VDMA economists, this development could have a positive impact on production in the final months of 2022. From January to October inclusive, real production in the mechanical and plant engineering sector was still 0.4% below the previous year's figure. Incoming orders in the first ten months of the year remained 1% below the previous year in real terms, while the order backlog in September 2022 was still 11.9 months and therefore remains very high.

Half of companies are optimistic about 2023

The figures underline the optimism in the sector: according to the survey, almost half of respondents (48%) are optimistic or cautiously optimistic about the new year. 38% are undecided, while only 14% are pessimistic or cautiously pessimistic.

© VDMA

The association expects the environment to remain difficult in the coming year: growth in China is expected to remain weak, the war in Ukraine will continue to result in high energy prices and central banks around the world are responding to high inflation rates with rising interest rates. "This will weigh on the global economy and therefore also on the capital goods industries for the foreseeable future," said Haeusgen. "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 start of the war in Ukraine. We therefore only expect a slight real decline in production of 2 percent in 2023. Compared to previous declines in growth, this is a moderate drop in production and significantly less than many had feared," emphasized the VDMA President. He shares this assessment with numerous entrepreneurs from the industry: according to the survey, almost half of those questioned (48%) are optimistic or cautiously optimistic about the new year. 38 percent are undecided, while only 14 percent are pessimistic or cautiously pessimistic.

This confidence is also reflected in the employment situation in the sector. In September 2022, there were 1.019 million people in the core workforce (companies with more than 50 employees) in the mechanical and plant engineering sector in Germany - an increase of 1.0% compared to the previous year. The sector thus remains the largest industrial employer in the country.

Price brakes for energy: too complex and bureaucratic

The mechanical and plant engineering industry has so far coped well with the risks in the energy supply, "but also because a gas shortage was prevented", said the VDMA President. "Energy costs are incurred in our industry primarily due to energy-intensive upstream products. That's why we believe the concept of price brakes for electricity, gas and district heating makes sense at this critical time. It should work along the entire value chain." However, these price brakes have now become too complex, particularly 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, explained Haeusgen. "If you want to create an effective instrument that is not just a rescue package, then it has to be simple and unbureaucratic," he demanded.

Maintain and expand export promotion instruments

The People's Republic of China is the second most important export market and foreign investment location for mechanical engineering from Germany. However, the Chinese government's aggressive economic policy poses major new challenges for medium-sized industry. "China wants to develop economically and strengthen the innovative power of its own economy. To this end, it is strategically intervening in the economy to the detriment of foreign companies," explained Haeusgen. It is therefore right and important that the German government is now reassessing its relationship with China and developing a corresponding strategy. "However, the Chinese market cannot be replaced in the short and medium term, which is why the export promotion instruments should not be dismantled. Exports to China provide well-paid and highly qualified jobs in Germany," warned the VDMA President. "Instead, 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."

The EU must also conclude further free trade agreements with partner countries in Asia and finally implement the Mercosur agreement. "It is also important to protect the EU internal market from unfair trade practices from third countries, especially China. However, there must always be a balance between offensive and defensive trade instruments. There must be no more "Fortress Europe"," emphasized Haeusgen.

Inflation Reduction Act with limited impact

The current strains in the relationship between the EU and its most important trading partner, the USA, are also a cause for concern for the mechanical and plant engineering industry. "We are experiencing an intensive debate on the US 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 impact of the IRA on our industry is limited", he emphasized. This is because the new US 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 machines, construction machinery, agricultural technology or robotics - are at best indirectly affected and may even benefit from the increased American investment.

"However, in certain areas such as wind energy or hydrogen, which are also important for the sustainable transformation, investors could prefer American projects to European ones. The EU must find an answer here if it wants to keep pace with the technology ramp-up and the associated value creation. It is not about even higher sums in the billions, but about the simplicity and reliability of funding. We can even learn from the USA here," explained Haeusgen.

In principle, however, the Inflation Reduction Act represents a breach of the rules of the World Trade Organization (WTO). "It is therefore a regrettable further step by the USA away from free trade," criticized Haeusgen. "Instead of reflexively calling for a 'Buy European' program, it would make much more sense to launch an offensive to make European industry more competitive. In concrete terms, this means reviewing the regulatory environment, removing obstacles to innovation and simplifying the processes in the numerous existing funding programs," demanded the VDMA President.

Planned EU supply chain law not feasible for SMEs

According to the VDMA, however, the framework conditions and regulation in Europe are currently designed in such a way that they do more harm than good to Europe as an industrial location. "We support the EU's political intentions and goals to shape the green and sustainable transformation. However, many legislative proposals do not take into account the realities of medium-sized industrial companies," complained Haeusgen. He cited the directive on sustainability reporting and the EU supply chain law as examples: "Both sets of regulations will not only impose disproportionate but also unnecessary burdens on the internationally networked European SME sector, noticeably weaken its competitiveness and are therefore counterproductive in terms of the goals being pursued.

"Politicians believe, for example, that a medium-sized company could ensure at all stages of its supply chain in distant countries that not only child labor is prevented, but also that European environmental standards are observed, religious freedom is guaranteed and trade unions are allowed to form. Anyone who cannot prove this risks being sued in the future if the EU supply chain law comes into force as planned by the EU Parliament. All in all, it unfortunately appears that many political decision-makers are completely subordinate to the competitiveness of a sector that is crucial for Europe and also for the green and digital transformation," concluded the VDMA President.