Significant decline in Production expected for 2025

German manufacturers have been leaders in production and exports for decades. In 2024, they ranked second behind China in production and tied with China for first place in exports. Even in difficult times, they continue to invest around 3% of their turnover in research and development. A good 50 internationally renowned research institutes with numerous top experts are available at German universities for joint projects. The very well-trained employees are also driving the industry's development with their high level of motivation. By November 2024, the industry had slightly increased its workforce to around 65,300 employees. "On this basis, companies can cope well with fluctuations in demand. They have proven this often enough in previous periods of weakness," summarizes Bernhard.

Bold reforms called for

Nevertheless, they need a tailwind from politicians. The new government must set the course very quickly after the federal elections at the end of February with a convincing plan for more economic growth, demands the VDW Chairman. Reducing bureaucracy, driving forward digitalization, lowering energy costs and taxes, improving education and renovating infrastructure are at the top of the agenda. "The Supply Chain Duty of Care Act, Corporate Social Responsibility Directive (CSRD), Cyber Resilience Act, European Deforestation Regulation and who knows what else are overburdening companies," says Bernhard, describing the situation. Depending on the size of the company, they have to spend between 1 and 3 percent of their turnover on documentation, money that is not available for investment.

Decline in production expected for 2025

Machine tool production in Germany will fall by four percent in 2024. © VDW

According to estimates by Oxford Economics, the VDW's forecasting partner, the production of machine tools in Germany will fall by 4% to around EUR 14.8 billion in 2024. A year earlier, however, the industry was able to expand its production in Germany by 9% to EUR 15.4 billion. In addition, output at foreign production sites grew disproportionately by 13% to EUR 3.8 billion. This accounted for a quarter of global machine production by German manufacturers.

Germany's machine tool exports: More machine tools were exported to the USA and India. © VDW

Exports fell by 5% by October 2024. Within the triad, Europe declined sharply by 16%. America, on the other hand, clearly positioned itself as the driving force with an increase of 17%. After a long time, the USA overtook China as the most important sales market, increasing by a fifth. By contrast, exports to China, the second largest customer, fell by 12%. India has now positioned itself as the sixth largest sales market. Exports rose by a whopping 36 percent. Thanks in part to good export business with South Korea, Asia as a region remained almost at the previous year's level.

In general, the economic environment should improve slightly in 2025 with falling interest rates, a normalization of inflation and a revival in private consumption. Incoming orders, a leading indicator for future development, fell significantly last year, by 22% up to November. However, there are signs of a bottoming out at the current margin. The domestic market lost a tenth of its value, while foreign markets fell by 27%, almost three times as much. The decline is spread across the entire triad.

Even if demand for machine tools stabilizes and the general conditions improve somewhat, production will decline significantly. The VDW expects a drop of 10 percent to 13.3 billion euros.

Diversification of markets and customer sectors offers potential

Machine tool exports in Germany: 46.4 percent of exports go to Europe. © VDW

Around half of German exports go to neighboring European countries. With 450 million consumers with purchasing power in the EU alone and an incipient recovery in industrial investment, Europe remains an interesting and attractive sales market. German manufacturers are well established there, enjoy a very good reputation and are close to their customers. "This potential can be exploited even more in the future," recommends the VDW Chairman.

The EU Commission wants to support the development of competitive industries, for example in the digital sector. The focus is on developing a circular and crisis-proof economy that focuses on research and innovation. Stimulus for manufacturing is provided by investments in modernization and replacement requirements.

European investment activity is broadly diversified. Aviation and the defense industry are investing particularly dynamically in the UK, France and Germany. Investments in the expansion of solar energy and in hydrogen and battery production are focused on Spain, Italy and Portugal. Wind energy dominates in Scandinavia, the UK and the Netherlands. In Italy, further tax credits for investments in the industry are expected. Demand should therefore pick up again somewhat in the current year.

The shortage of skilled workers and the necessary progress in productivity are driving investment in mechanical engineering. Eastern Europe in particular is currently benefiting from the expansion of electromobility in the automotive and supplier industry. International OEMs are building up capacities in Poland, Hungary, Romania and Slovakia. Eastern Europe is particularly attractive as an industrial location due to lower wage levels and the availability of labor and is therefore increasingly in need of manufacturing technology.

USA and China remain important markets

The USA is the largest customer with a share of around one fifth. Exports have risen by over 30 percent in the past two years. With lower energy prices and taxes, less bureaucracy and major spending programs such as Inflation Reduction and the Chips Act, they are attracting investment into the country. This will continue to increase under the new Trump administration with America first. German manufacturers can benefit because they are broadly positioned and offer technologies that are not produced locally but are urgently needed for reindustrialization. A number of German manufacturers are already producing in the USA and would not be affected by the threatened tariffs.

The current weakness in demand in China, the second-largest market with a 16% share of German exports, is characterized by overcapacity in industry, deflation, consumer restraint and falling investment in traditional industries. In contrast, the focus today is more on electromobility, wind power and solar energy. The Chinese government has launched the Large Scale Equipment Renewal Plan. Industrial equipment is to be renewed with favorable loans and subsidies. This also includes the replacement of machine tools that are more than ten years old. Together with measures to support consumption, this could provide initial impetus in China again this year. The country is the largest foreign production location for German manufacturers. "In order to survive, however, German manufacturers must consistently secure and further expand their technological lead through innovation," says VDW Chairman Bernhard.

A trade war between the USA and China could cause major upheaval, which would affect the entire global economy. The VDW Chairman is concerned that stronger protectionism with generally higher import tariffs would also affect European and German industry and therefore our customers.

Markets with potential

India has long been seen as a market with great future potential. German machine tool exports have grown very strongly by over 60 percent in the past two years. The largest industrial sector in particular, metal production and processing, is planning to invest heavily in expansion by 2030. The automotive industry is also expanding. India is now the fourth largest manufacturing country in the world. Mechanical engineering also plays an important role as a customer. Food and packaging machinery, construction and mining machinery, power plant technology and plastics machinery are manufactured locally. The energy industry here also relies on renewable energies.

The smaller markets of Southeast Asia, Thailand, Malaysia, Vietnam and Indonesia also offer potential. They only account for around 1.5 percent of German exports. Nevertheless, increased efforts are worthwhile because international corporations are active in these countries, also as an alternative location to China. This increases the demand for high-quality, state-of-the-art production technology. However, competition with Japan, China and other Asian manufacturers in their home region is fierce.

New customers need new solutions

The customer structure of the German machine tool industry: Mechanical engineering overtook the automotive industry as the largest customer group for the first time in 2023 © VDW

The transformation process in the automotive industry from combustion engines to electric drives, with the current very bumpy development, is motivating machine tool manufacturers to tap into other customer industries. "It was not to be expected that the transformation process would take place without structural changes among suppliers and equipment manufacturers," says Bernhard. Accordingly, the sector has already reduced the proportion of its deliveries to the automotive and supplier industry. In the VDW customer structure survey for 2023, 27.2 percent of production went to the automotive industry instead of 31.1 percent two years earlier. Mechanical engineering is now the most important customer with 30.1 percent.

Other sectors are also gaining in importance and new business areas are developing. The aviation industry is investing in more fuel-efficient fleets. Medical technology is playing an increasingly important role in an ageing society. The energy transition is leading to investments in wind power, solar energy, hydrogen technology, carbon capture and storage and heat pumps. Spending on defense and armaments will continue to rise in Western countries as a result of Russia's war of aggression in Ukraine. And the sharp increase in digitalization and networking is strengthening the electronics industry, for example with the production of state-of-the-art chips or the expansion of server farms. Diversification into new customer groups requires an adaptation of the range of solutions. This is where companies can play to their strengths. Drivers for modern production technology are automation and digitalization, intensified by the labour shortage, but also sustainability.

"There are still major challenges for German and European industry. Our companies will do their homework. I have no worries about that," concludes Bernhard.