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03. July 2019

Mechanical engineering industry expects production to fall in 2019

Mechanical engineering industry expects production to fall in 2019

• Forecast: Production declines by 2 percent in real terms • Geopolitical upheavals slow down investment • VDMA President Welcker: Expansion of infrastructure is absolutely necessary • VDMA calls for tax relief to promote investment and innovation

Frankfurt, July 2, 2019 – Incoming orders and real production in mechanical engineering have slowed down considerably in the first few months of the year, and looking forward does not promise any improvement. "Therefore, a revision of our forecast is unavoidable; we now expect production to fall by 2 percent in real terms in 2019," explained VDMA President Carl Martin Welcker in a press conference. This revision is necessary despite the high order backlog, which was sufficient for 8.5 months in April. This is because this backlog is unevenly distributed across companies and industries and cannot completely cushion the sharp drop in incoming orders till the end of the year. Previously, VDMA economists had assumed a slight increase in production of 1 percent for the year as a whole. In the first four months of the current year, mechanical engineering production stagnated in comparison with the previous year. According to preliminary figures, in April it was 0.8 percent below the previous year's figure. In the first five months of the current year, order intake in the mechanical engineering sector was 9 percent lower than in the previous year. Capacity utilisation still reached 87.4 percent in April.

Cyclical downswing and geopolitical distortions
In addition to the now clearly noticeable cyclical downswing, geopolitical conflicts are also responsible for the poorer prospects. This again has a direct impact on the export-driven machinery and plant engineering sector:

• Contrary to many assumptions, the trade dispute between the USA and China has escalated again.
• The Brexit has been postponed once more, thus the uncertainty continues.
• There is also uncertainty about the threat of trade restrictions on the part of the US with the EU.
• In Italy, the budgetary situation has deteriorated further and the Italian government is on a tough confrontation course with the European Commission.
• The situation in the Middle East is getting more and more tense with further negative effects on investment.

Investments are postponed or frozen
In addition, the automotive industry is going through a profound structural change, which is also causing complete uncertainty among customers and is having a noticeable and faster than expected negative impact on current and future investment projects. "All this brings customers of the machine manufacturers to postpone or temporarily freeze their investments," explained Dr. Ralph Wiechers, Chief Economist of the VDMA. Although numerous companies in the mechanical engineering sector can continue to rely on well-filled order books and thus cushion order declines for some time to come, this might not be sufficient. “In order to achieve only a slight increase in production, significantly better data for the coming months would be mandatory. However, it is questionable whether this can be achieved in an environment of resurgent trade disputes. And even a hesitant upturn in the economy in the second half of the year would take some time for production in the mechanical engineering sector to reach its peak. That means, it would not benefit the industry in the current year," summarized Wiechers.

Business-friendly framework required
This makes it all the more important that politicians stop imposing ever new burdens on medium-sized industry and instead relief companies of bureaucracy, VDMA President Welcker demanded. The government’s work must be focused on its core tasks: creating innovation- and business-friendly frameworks and providing an internationally competitive infrastructure. "We need real tax relief, as other industrialised countries have long since done. We need more political commitment to open markets and new free trade agreements, especially with the US. Germany urgently needs to modernise the infrastructure – in the digital field, but also in the transport and energy sector. And we must finally noticeably reduce the bureaucratic burdens on businesses so that we can invest more," Welcker explained.

In order to maintain the competitive strength of the mechanical and plant engineering industry even in difficult times, the VDMA demands that politicians act quickly in the following five areas:

• Open markets and free trade agreements: In a persistently difficult economic environment, the benefits of globalisation must not be further jeopardised by increasing trade conflicts and politically motivated restrictions. WTO reform must ensure free world trade, and the EU must conclude new free trade agreements with the US. In addition, the EU needs an investment agreement with China.
• Digital infrastructure: Machine and plant manufacturers need a state-of-the-art digital infrastructure in order to remain successful in the world market. Broadband expansion must not only focus on urban regions, Germany needs a nationwide and powerful Internet. The Federal Network Agency must announce as soon as possible the terms of allocation for the local 5G frequencies in the range of 3.7 to 3.8 gigahertz. There is an urgent need for clarity on the part of the manufacturing sector, in particular with regard to fees. These local frequencies are a prerequisite for becoming a leading market and supplier for industrial 5G applications.
• Labour market and bureaucracy: Digitisation requires modern framework conditions for “Work 4.0”. To achieve this, more room for manoeuvre must be opened up for companies and individuals. This means, for example, no further regulation of fixed-term employment contracts, making rest periods more flexible and switching from daily to weekly maximum working hours, promoting work and service contracts as the basis for knowledge and innovation networks in an economy based on the division of labour. The mechanical engineering companies also suffer from the constantly growing bureaucracy. Especially medium-sized companies are overloaded with documentation and reporting obligations. It is therefore necessary to limit the traceability of data, to consistently reduce bureaucracy under labour law, to create a European standards monitoring body and to better evaluate laws with regard to bureaucratic compliance requirements. In addition, the procedures for A1 forms and the Posting of Workers Directive must be critically reviewed and significantly simplified at the European level.
• Corporate tax reform: Germany's position in international tax competition has deteriorated in recent years. After major tax reforms in the USA and many other industrialized countries, Germany now has an excessively high corporate tax burden. Thus, there exists an urgent need to reduce the income tax burden to a competitive level of no more than 25 percent by international standards, next to other measures such as completely abolishing the solidarity surcharge. In addition, the blatant tax discrimination of family owned business in the field of reinvesting profits must be eliminated. Furthermore, the digital change forces the medium-sized industry to invest significantly more. The reintroduction of degressive depreciation would support this. Faster depreciation creates financial scope for investments. Therefore, the instrument should not be implemented as an economic stimulus for a short time, but as a permanent measure of 25 percent.
• Research funding: Research is in the very interest of companies and secures prosperity and jobs in Germany and Europe. Policymakers must support this with innovation-friendly framework conditions. The government's tax research subsidy is an important step that the industry for a long time has been waiting for. However, it must be further improved in the legislative process and then put into effect quickly. It is particularly important to set clearer incentives for innovation in the case of mid-range companies (larger medium-sized companies with 250 to 3000 employees) by raising the cap. A procedure with little bureaucracy must be implemented. In addition, there is a need for a sustained financial expansion of pre-competitive and broad-based joint industrial research, a strengthening of research for intelligent production and the involvement of industry in program planning.

"Mechanical engineering companies are not afraid of a normal downturn, we can deal well with the ups and downs in economic cycles. However, the number of political imponderables is currently growing so strongly that internationally active companies must not be left to alone. The companies will do everything they can to open up new markets and thus secure jobs. Now politics also has to play its part", summarised VDMA President Welcker.

Mobility: Open technology is the order of the day
The mechanical engineering industry is also feeling the impact of changes in product strategies and investment planning of the automotive industry, which results in profound changes. However, this development is not a one-way street, especially in the field of electromobility. "Our innovative production technologies are indispensable for the successful transformation," emphasized Welcker. The second, no less important dimension concerns mechanical engineering as a user industry, i.e. in logistics or mobile machines. "Of course there are uncertainties and perhaps frictions, but alarmism is out of place," Welcker stressed. "The negative effects of the transformation process can potentially be overcompensated by something new." The VDMA study "Antrieb im Wandel" has shown that the combination of hybrid drives, greater complexity in the combustion engine and rising vehicle sales figures - especially in China - will have a positive overall effect on value added in the powertrain over the next few years. "It would be a disservice to all of us, if politicians thought they knew the way to the future of mobility in detail. An open-mindedness to all technology is needed and investments should be made where they contribute best to the success of change - in research, production technologies and infrastructure.“

Climate protection: Creating market-based incentives through CO2 pricing
The draft for a climate protection law in Germany, the establishment of a “climate protection cabinet” as well as the imminent penalty payment due to the non-fulfilment of European climate targets show that the climate policy discussion has once again reached the top of the political agenda. The pressure on the economy and each individual sector to make their contribution to reducing emissions is increasing. "Our guiding principles here are economic efficiency and common sense as well as a global approach as far-reaching as possible," emphasises the VDMA President. Effective and cost-optimised instruments are needed to achieve climate targets – as well as global thinking and action. Companies need market-based incentives to invest in CO2-reduced technologies. However, due to the unequal and unsystematic pricing of energy sources, the current system does not provide the right incentives to strengthen the role of lower-carbon energy sources. Because under today's energy source load, there is no incentive to act in the interests of climate protection.

CO2 avoidance takes time and is expensive
CO2 pricing, on the other hand, can be an effective and cost-optimised instrument for reducing CO2 emissions and can thus act as an investment and innovation signal. A targeted and economically revenue-neutral transformation of today's energy source load, based on its carbon intensity, could make a significant contribution to achieving climate protection goals. Compared to other approaches, which lead to a collective additional burden for all, such a transformation creates the right incentives and rewards those who consume and produce with low emissions. "Politicians must create reliable framework conditions in this discussion, so that an ambitious domestic market, economic rationality and technological potential can add up to climate protection," Welcker summed up.

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