German machine tool industry anticipates increase in production

"There's a good chance that 2022 will be a successful year for the machine tool industry," says Franz-Xaver Bernhard, Chairman of VDW (German Machine Tool Builders' Association) at the association's annual press conference in Frankfurt am Main. The sector has been experiencing a strong and, in terms of markets and customer segments, extensive upturn since last year. A 14 per cent increase in production is predicted for 2022.

Strong demand justifies confidence

"The basis of the optimism for 2022 is the exceptional increase in demand since the middle of last year," explained Bernhard, adding that this shows the huge backlog demand in terms of global investment; demand which is happily being supplied with "Made in Germany" machine tools. In 2021, incoming orders increased by a total of 58 per cent. A strong driver of this were orders from abroad which rose by 62 per cent. Domestic orders also increased strongly by more than half.

According to preliminary VDW figures, the Europeans led the way in terms of foreign markets. They increased their orders by 90 per cent, followed by America with a growth of 66 per cent and Asia where orders rose by 61 per cent. China and the USA remain the two largest markets and key customers with high double-digit growth of 65 per cent and 92 per cent. All countries in the list of the top 20 increased their demand by at least a double-digit figure, in some cases even by a three-digit figure. Orders were particularly strong from Italy, Austria, the Czech Republic, Switzerland and India. Italy and Austria benefited from government support.

According to forecasting partners Oxford Economics, in 2022 global gross domestic product is set to grow by 4.2 per cent, industrial production by 4.4 per cent and investment by 4.3 per cent. Of the three biggest foreign markets, Europe leads the way in terms of increased investment as our largest customer. "We can benefit from this as order books for many customers are pretty full," says Bernhard. adding that for Germany, some of the data is looking even better. Following slower growth in the previous year, German industry is now catching up. The two leading indicators, the ifo Business Climate Index and the purchasing manager index, are also pointing upwards.

"Nevertheless, the forecast for 2022 is still characterised by uncertainty," adds Bernard. In view of the huge numbers of infections associated with the omicron variant, Oxford Economics is concerned that many people will have to self-isolate, will not travel and that this will therefore place constraints on commercial activity. While experience may show that the economy gets going again quickly when infection figures fall, the weak start to the year will have a dampening effect on the overall result. China's zero-Covid strategy is also making it difficult for supply chains to return to normal.

2021 recovery quicker than expected

Following the sharp decline in the machine tool industry due to the pandemic in 2020, the sector got off to a good start again last year with good orders. According to VDW estimates, it produced machines and services to a value of around €12.7 billion in 2021. This was equivalent to a growth of 4 per cent.

Business was driven by exports where the 8 per cent rise was twice that of production. America led the way in terms of foreign business with growth of 13 per cent, followed by Asia with growth of 11 per cent and with Europe bringing up the rear with growth of 5 per cent. Among the ten largest markets, the Czech Republic, Italy, Mexico, China and the Netherlands saw double-digit growth. China recovered again following a sharp fall in 2020.

By contrast, reluctance to invest on the part of the automotive industry meant that domestic sales fell by a further 5 per cent. The slight rise in consumption of 1 per cent was supported by imports which grew by over a tenth. Capacity utilisation for January 2022 was 87.2 per cent compared to 72.7 per cent for the year before. The number employed for December was 64,000 and stood at 6.1 per cent below the previous year.

The biggest challenges are supply bottlenecks and the shortage of skilled workers

"Supply chain bottlenecks of electronic components and metal products were a major issue for the industry over the past year and they still are," explains Bernhard. According to a survey, by the end of 2021 almost all manufacturers in the machine tool industry felt the effect of this.

The impact in particular of the chip shortage on companies is twofold. On the one hand, this limits the ability to supply the automotive industry – an important customer. On the other hand, there is a lack of chips for control units, one of the key components in machine tools, and also for gateways, edge computers and drives. This delays the delivery of machines which have been ordered.

The causes of the chip shortage started with the falling orders at the beginning of the coronavirus pandemic. This resulted in capacity mothballing and diverting supplies into the consumer goods industry. Production capacity to support new chip generations takes time. Freight capacity is also limited as a result of airport and port closures in China as part of the country's strict zero-Covid and lockdown policy. "This can escalate again at any time," warned Bernhard. For a while now, the increased demand for some products, for safeguarding against future uncertainty, is placing suppliers under additional pressure.

For the machine tool industry, the potential to influence and compensate for this over the short-term is very limited. The switch to a new chip generation takes time as development costs involving many man-years can quickly be incurred. "For now, all that remains is to show real creativity in material procurement and accept higher prices which we may not be able to pass on," explains the VDW chairman. Over the medium term, he explains, it is becoming increasingly important to set up stable supply chains and diversify the number of suppliers in order to reduce dependency.

Actively strengthen the image of dual vocational education and training

In the view of almost all machine tool businesses, the skilled worker shortage is more or less equally as severe as supply bottlenecks. According to a survey, more than two-thirds of manufacturers are seeking to add to their core workforce over the coming year. By contrast, there were approximately twice the number of vacancies in engineering in December 2021 as there were at the end of 2020. The numbers of applicants for a training position and the numbers of concluded training contracts are also falling.

Skilled worker availability in the highly specialised machine tool industry is an essential requirement for competitiveness. "And a requirement for qualified skilled workers is qualified training," says Bernhard. He is calling for both businesses and policymakers to actively emphasise the attractiveness of vocational education and training. He explains it offers just as many opportunities as the academic route and that businesses must highlight its appeal as well as offer good training and specific support where required. In his view, businesses must also work to retain trainees after training by means of continuing education offers, advancement opportunities and appropriate salary progression. For their part, policymakers must also emphasise the value of the vocational education and training and support industrial and technical vocational schools, which may also be a regional economic factor. He explains that they are also a good example to use as in many cases they are technologically better equipped than other types of schools. In order to push on with digitalisation, many more vocational schools need to be allowed to budget independently – this would enable them to take responsibility for their own investments. "Dual training is an export success which we must not compromise," claims Bernhard.

Energy revolution offers potential for the machine tool industry.

The energy revolution announced also shifts the focus on to the restructuring of the energy industry. On behalf of VDW, the Munich-based consultancy Strategy Engineers is currently looking into the potential that might come from this for the machine tool industry. The study is in the final phase and will be presented to VDW members in the second half of March.

Most major industrial countries have developed ambitious strategies for reducing CO2 emissions. The key variable in this is the energy sector as this is where 25 per cent of emissions are currently produced. Central components are the development of low emission energies, expansion of the electricity grid and establishing a hydrogen economy. "Overall, switching to low emission energy providers is a global, mammoth task, for which billions of euros need to be invested worldwide on an annual basis," says Bernhard.

So far, due to its low volumes and high service lives, the energy industry has not been a focus for machine tool manufacturers. However, high investments are now resulting in increasing volumes of mechanical components for wind turbines (for example gearing mechanisms, tracking systems and large sized bearings), internal combustion engines relevant to the energy revolution (gas turbines), general peripheral mechanical components, for example in the area of heat pumps for heating houses (generators, compressors) and, looking ahead, components in hydrogen generation (electrolysis) and hydrogen use in mobile and stationary fuel cells (fuel cell system with cell stacks and the balance of plant involving compressors, valves and pumps, and so on.)

"How large the volumes will be in the individual sectors depends on the speed of the transformation," says Bernhard in conclusion, adding that so far there are many statements of intent. Policymakers must now put the restructuring framework in place so that companies can also refocus if they see opportunities in this area.