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Brussels, 22 March 2012
Mechanical Engineering Industry – A large, successful and heterogeneous sector
The Mechanical Engineering Industry is a very wide and diverse sector. It mainly covers machinery and equipment, machinery for the production and use of mechanical power, except aircraft, vehicle and cycle engines, agricultural and forestry machinery, machine tools and other special purpose machinery. With more than 20 subsectors that face quite different market environments it is one of the most heterogeneous industry sectors.
Large and successful
Mechanical Engineering Industry is one of the most shining examples in performance of EU economy. It is characterised by relatively small family owned companies. The typical firm size is between 500 and 2,000 employees. Most of them do not fall under the EU Small and Medium sized (up to 200 employees).
ME is one of the major branches of manufacturing in the EU-27, with a share of around 9.1% of all production in manufacturing industries. As compared to other industries, ME firms are characterized by a relatively high manufacturing depth. This is mainly explained by three factors:
EU ME’s growth in productivity is on average much higher than of total EU manufacturing. Only during the financial crisis, when ME was hit harder than other industries, productivity broke down (table 1)
A job intensive sector with outstanding international success
The EU’s share in global trade with mechanical engineering products (ME) amounted to 37.2% in 2010, and around 3% above its share in 2000. This development contrasts to the performance of the US and Japan, whose shares fell from 25.6 to 17.4% and from 21.3% to 15.6%. China was the outstanding winner: its share increased to 13.0% from only 3% in 2000.
The EU ME is not only one of the most important providers of workplaces within the EU, but contributes also significantly to a sound current account balance of the EU-27:
EU ME employment development has been better than for total manufacturing, despite the fact that ME was hit harder by the crisis than most other EU-industries. Over the period 2000 – 2010, overall employment for the ME showed a decline with 2.6%, in the US, 3.3% in Japan, and 1.5% in the EU.
Resilience during the crisis has improved the EU's ME relative position. The analysis of the economic performance has disclosed that the EU ME’s labour productivity grew stronger over the period under investigation than that of the US. The Japanese labour productivity had declined. For the whole period under investigation, EU ME’s labour productivity grew at an average yearly rate of 1.5%, whereas the US only reached 0.8%.
The EU ME-industry faces a major productivity challenge
Japan is in the lead in terms of labour productivity (defined as value added per employee that can be taken as an indication for price competitiveness), closely followed by the US. Third in this ranking is the EU-27. This could be caused by heterogeneity within the EU-zone, which includes member states with substandard economic performance.
However, intra-EU regional differentiation discloses that none of the Member States comes close to the US or Japan. For the EU-countries under investigation, Germany shows the highest labour productivity at a level of around 70,000 €, still more than 20% below the US ME labour productivity.
Similar to labour productivity, wages vary among competing economies. The US ME have the highest wages per employee, with about 20% above the EU average. Despite a much higher labour productivity, Japan’s wages are only close to those in the EU. China lags far behind, with wages of 11% of the EU average.
New Member States will face growing competition from China
Chinese ME’s labour productivity grew in the period 2000 – 2010 with an average rate of more than 10% per annum, reaching around half the EU-27’s level. Current Chinese labour productivity levels are comparable to those in Poland, the Czech Republic and Slovakia, whereas labour costs in these new Member States are much higher. This gives Chinese enterprises an edge and challenges these (new) Member States that are more focused on production than on R&D, design and marketing. They will therefore experience growing competition from China.
Innovation crucial for success
The “innovation intensity”, as measured by the share of innovation expenditure of total sales, shows a strong position of the EU ME as compared with major competing economies:
This means that it supplies machinery and equipment as well as process know-how to all its client industries, enabling them to produce their goods and services with an optimized use of input factors at an extraordinary quality.
High specialisation, market consolidation and Asian markets
One of the long-term tendencies of ME enterprises has been its specialization on certain market segments and its focus on clients with specific needs:
Outlook - The strengths and opportunities of the industry
Prevision: Total production for ME of the seven analysed countries and the EU-27 will grow from 527 bn € in 2010 to 928 bn € in 2025, equalling an annual average rate of 3.8%. Even though all individual countries and the EU-27 are able to grow, China will be clearly dominating the world output of mechanical engineering products by 2025. A second 'trade-adjusted' scenario is derived in which 60% of the growth is generated domestically, whereas the remainder is generated by increased demand of the world market. Using this second scenario, the EU-27 would be able to achieve a market size of 232 bln € by 2025, compared to the predicted market size of 204.7 bln € in the first scenario.
In the long run, growth rates in other BRIC countries may well exceed those of China. Although China is clearly leading in growth rates from 2000-15, those from other BRIC countries will become similar or even higher in the period thereafter.
Actual developments fit together very well with the long-term trend from 1995 to 2008. Average annual growth rates in productivity are 2.0% and 3.5% for manufacturing and ME respectively. As these growth rates have been very stable for more than a decade in the pre-crisis period, it is assumed that productivity will continue to grow at these growth rates after the recovery from the crisis.
Strong success on global markets is needed for securing jobs…
Even though the mechanical engineering sector is expected to achieve consistent absolute growth in the following years, this growth is probably not strong enough to more than compensate growth in labour productivity, leading to a net loss in employment. The evolution of EU ME must be valued against the background that domestic demand is expected to be dampened for several years by urgent measures to overcome the public debt and private banking crisis. Without success on global markets and stimulation by emerging economies’ growth, the ME’s perspectives would be worse.
… and strong success means above all further penetration in emerging markets
Both of these paths of development highlight the importance of ME’s global alignment. Strong growth can only be generated if EU companies are successful in emerging economies’ markets. The EU ME’s companies are on the leading edge of technology and have always been leader in the supply of resource efficient processes. In this respect, the EU ME is not only an enabling industry in the domestic market but also in global markets. The success in the latter markets will be decisive and require a strong focus on third countries’ needs in products systems and services.
Climate change-related challenges provide important opportunities for the ME
Promising areas, such as resource- and energy-efficient products and technologies, technologies to fight climate change, etc. can add positive effects to the evolution of the EU ME that commands a leading position in international markets. However, the success of Chinese manufacturers of solar cells in Europe highlights the necessity not only to become a technology leader. Simultaneously, it is necessary to trust in companies with the potential and the ability to raise the means necessary to pursue global strategies. Moreover, in contested markets it is extremely important for companies to supply budget priced products. This means that resource-efficiency is only one criterion. In the case of CO2 emissions, for instance, foreign clients’ decisions will strongly be dependent on the level of CO2 avoidance costs. R&D efforts should be directed more on products and processes that are most efficient with regard to CO2 avoidance.
Recommendations to promote the mechanical engineering industry
The recommendations below are shortened and represent only a selection (for the full pictures see the report and its summary)
1. Organisation and industry structure
2. Market regulation
3. Financial markets
4. Labour market
5. Innovation environment
6. Access to third markets
The Study on the Competitiveness of the Mechanical Engineering Industry1, which was finalised in December 2011, is based on data until the end of 2010 to early 2011.
An introduction to Mechanical Engineering: Study on the Competitiveness of the EU Mechanical Engineering Industry Within the Framework Contract of Sectoral Competitiveness Studies – ENTR/06/054 Summary