The spoken word applies!

German machine tool industry still gaining momentum in 2017

Sector doing well in a less-than-easy business environment

Technologically well equipped for the future

Statement by Dr. Heinz-Jürgen Prokop, Chairman of the VDW (German Machine Tool Builders’ Association), speaking at the organisation’s annual press conference in Frankfurt am Main on 2 February 2017

Ladies and gentlemen,

May I bid you a most cordial welcome to the VDW’s annual

press conference. We are delighted to host you here today,

and to be able to discuss with you the situation of the

German machine tool industry and its prospects.

Before I come to the ongoing situation, please permit me

some introductory remarks.

Business cycles are losing their relevanceFor many years, the development of the machine tool

industry had been cyclical in character. Substantial upturns

were repeatedly followed at two-year intervals by extreme

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downturns. For years now, this hitherto characteristic cyclical

succession has been practically overridden: instead, it is

observable that the growth curve is being largely smoothed

out. The sector is advancing in small steps from one

production record to the next. The reason behind this trend is

that more and more newly industrialising countries, chief

among them China, are investing more heavily in production

technology for upgrading their industrial base. The ASEAN

region is another striking example here. The demand for

machine tools in China has now stabilised on a lower growth

trajectory.

Nowadays, moreover, exogenic factors are interrupting this

pattern: developments in economic policy are superimposed

upon the previous business cycles, and thus counteract the

classically steep cyclical upturns. We are currently

experiencing this once again with the numerous turbulences

around the globe. Investors are uneasy, and putting their

projects on the back burner. This in its turn means that the

global market for machine tools is growing more slowly than it

was years ago. Nonetheless, the German machine tool

industry is successfully holding its own in this volatile

business environment. The reason for this is not least the

sector’s leading technological status internationally. Its

products are much in demand, particularly when high-tech,

strategic investments or intricate problem-solving are

involved.

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Globalisation favours the European capital goods industryAgainst this background, it may seem surprising that Europe,

of all places, has for years now been able to maintain its

position as the most important sales region for German

manufacturers, with consistently high growth rates. The

Eurozone has evolved into a cornerstone of Germany’s

machine tool sales.

Why is this the case? After all, years ago Europe was already

being described as a saturated, and concomitantly less-than-

dynamic market. But German and European machine tool

companies, in particular, following a severe slump in 2009,

have managed to regain lost ground in a vigorous process of

catch-up. Europe is characterised by a strong capital goods

industry, which has been able to benefit from the globalisation

of major customer sectors like the automotive industry.

German machine tool companies are likewise giving more

and more preference to manufacturing their products abroad,

so as to enable them to serve their customers on the spot as

well. According to the most recent figures from a survey

commissioned by the VDW, around 8,800 staff were

additionally producing machines worth almost two billion

euros. And the uptrend continues. This is also helping them to

secure the future of their facilities in Germany.

Machine tool sales decoupled from market trend

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Ladies and gentlemen, the position of the German machine

tool vendors is particularly well illustrated in the two premier

markets of China and the USA. In both these countries, they

have recently been achieving above-average growth in order

bookings, contrary to the market’s general trend. From China,

for example, our manufacturers increased their orders by 30

per cent in the first nine months of 2016. These primarily

involve project business with automakers and their

component suppliers. German vendors are becoming

progressively more successful in gaining Chinese OEMs as

customers as well: a clear indication that China is undergoing

a politically motivated structural transformation, and

increasing its investment in higher quality and automation, so

as to become internationally competitive. With concomitant

direct benefits for German vendors.

USA depends on machinery importsNow you will doubtless be asking: how will the US market

develop in future under Donald Trump? Since he took office a

good two weeks ago, the headlines have been dominated by

gloomy scenarios and a constant stream of speculations and

fears. The USA, with a machine tool consumption of 7.5

billion euros, is the second-most-important market worldwide,

but only about a third the size of China’s. More than 60 per

cent of the USA’s requirements is covered by imported

machines. After Japan, Germany is the second-ranking

supplier, with a share of most recently 16 per cent.

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There is meanwhile a frequent shortage in the USA of

performatively capable product portfolios covering the entire

spectrum of machine tool technology. But if President Trump

wishes to deliver on his promises to bring back competitive

industrial jobs, he will have to depend on imports of high-tech

equipment, primarily from Germany, for the production lines

involved.

Oxford Economics, too, the VDW’s forecasting partner, is

confident that the USA cannot in future do without high-

precision technology “Made in Germany”. It can therefore be

anticipated that sales in the USA will in the medium term

show no significant decrease, and that German

manufacturers will also continue to be able to generate

substantial turnover there. The USA is Germany’s second-

most-important sales market, with an export volume of most

recently around 935 million euros. Nevertheless, protectionist

tendencies following the new president’s inauguration, with

their effects on the NAFTA land of Mexico, which has most

recently been performing extremely well, are being observed

with considerable concern.

Mission accomplished for the sector in 2016After this introduction, I will now address our sector’s

performance in the past year and the VDW’s forecast. First

the good news: according to the provisional results, the

German machine tool industry achieved a production volume

of 15.2 billion euros in 2016. This corresponds to an increase

of around one per cent. So following a record year in 2015,

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our sector can once more report mission accomplished, right

in line with our expectations of around a year ago, at what is

again a very high level. The companies concerned have thus

impressively succeeded in holding their own despite an

extremely difficult macro-economic environment.

In comparison to forming technology, metal-cutting

contributed three-quarters by volume to the year’s result. But

following a strong year in 2015, it ultimately fell by one per

cent. The manufacturers of forming technology, by contrast,

following a weak preceding year, regained ground with a plus

of three per cent. Service support, focusing mainly on

maintenance, was the principal growth driver, with an

overproportional rise of seven per cent.

With an export ratio of 66 per cent, and a fall of three per cent

to their present approximately 9.1 billion euros, exports made

a somewhat weaker contribution towards the result for the

year than did the domestic market. The ongoing decrease in

exports is attributable to markedly subdued demand from

China in the preceding year of 2015. Nonetheless, China

remains the most important sales market for German

machine tools. Almost a fifth of them went to the Middle

Kingdom in 2016 as well.

Within the triad, Asia finished 2016 with a minus of six per

cent. Nonetheless, business with Japan and countries in the

Middle and Near East, including Iran, Saudi-Arabia and the

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United Arab Emirates, was highly successful, and in each

case contributed high growth rates to the sector.

The European market was also down, by two per cent,

though the Eurozone, with growth of eight per cent, achieved

a significant rise. This growth has been predominantly

underpinned by Italy, Poland, France and Spain. While Brexit

did not at first show up in the export figures, its

consequences are now becoming manifest. Following years

of growth, exports to the UK recently slumped by 15 per cent.

Other problem children in Europe include Russia and Turkey.

In these two countries, German deliveries fell by 34 and 20

per cent respectively.

America as a crucial sales region for German machine tools

finished 2016 with an overall zero. The USA, however, did

well, with exports to there up by nine per cent. Mexico,

though top of the class in the preceding years, had a hard

time in 2016, and saw exports fall by eleven per cent, more

as a base effect. In Brazil, there is not much prospect of

improvement, even in the long term. Most recently, the fall in

exports totalled almost 40 per cent.

Impressive growth in domestic consumptionMachine tool consumption in Germany, up by four per cent,

grew significantly faster than production output. This was of

crucial benefit to domestic sales, while imports stagnated in

the same time period. The import ratio came to around 41 per

cent in 2016. Often, imports from particular countries are

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attributable to the closely intermeshed supply relationships

between German manufacturers and their subsidiaries

abroad. The top supplier nations are still Switzerland, Japan

and Italy.

There is more good news: in 2016, employment in the

German machine tool industry, as in the preceding years,

remained high. Averaged over the year as a whole, 69,000

people were employed in the sector. This is a clear indication

that even in times of global uncertainty our firms are retaining

their excellently trained specialist staff and are thus well

equipped to meet and master the challenges of tomorrow.

Capacity utilisation averaged 88 per cent over 2016 as a

whole, continuing at the preceding year’s level. The most

recent figure available, from January 2017, shows a modest

rise, at 89.1 per cent. The order backlog, at 6.9 months, was

slightly up on the figure for 2015.

German manufacturers lead the world In the context of international competition, too, German

machine tool manufacturers continue to lead the pack. In

2016, they succeeded in becoming export world champions,

well in front of Japan. Excluding parts and accessories, the

manufacturers achieved an export result totalling 7.6 billion

euros. Japan, the previous year’s champion, suffered heavy

losses of more than a fifth, and finished at 6.3 billion euros. In

2015, Japan was still just in front of Germany, with export

revenues 200 million euros higher. The reason for the slump

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in Japan is the weakness of the Asian sales market,

particularly the throttled level of Chinese demand, previously

focused on standard machines.

Not only in terms of exports, but of production output too,

Germany ranks among the world’s leaders. In 2016, we once

again went head to head with Japan. According to the

provisional figures, Japan, with a minus of five per cent and

11.4 billion euros, is set to remain only just in front of

Germany, with its 11.25 billion euros. The undisputed leader

in terms of production output is and remains China, which

with 16.5 billion euros, continued at roughly the preceding

year’s level.

Production output expected to rise by three per cent in 2017So much for last year. And what are the prospects for 2017?

There are some indications that the global business cycle

may show a modest recovery despite the choppier waters it

has to navigate. According to Oxford Economics, international

industrial production output is set to show a moderate

increase of 3.3 per cent over the preceding year. This will

mean that global demand for machine tools will stabilise once

more. Consumption is predicted to increase by two per cent.

For the German machine tool industry, the economic

researchers are even anticipating a three-per-cent rise in

production output, to 15.6 billion euros.

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This optimistic prognosis is also supported by an uptrending

Purchasing Managers Index, which by the end of 2016 had

risen to 52.7 points worldwide. An unequivocal signal for

growth, since figures above 50 signify positive prospects.

This applies particularly to the premier markets of China, the

USA und Europe, which according to the index are all on

course for growth.

Good order situation fuels justified optimismThe forecast has also been influenced by a comfortable order

backlog from 2016. By November, orders had risen by seven

per cent. The high level of demand was being driven primarily

by exports, while domestic orders continued at the preceding

year’s good level. Overall, the German machine tool industry

is benefiting from high-volume project business, driven by the

automotive industry for China, the USA and Mexico.

In the first three quarters of 2016, orders in all regions of the

triad showed double-figure growth.

The EU has since 2014 been recording consistently high

growth in demand. This is set to continue in 2017, though

more weakly. In the first three quarters of 2016, for example,

German manufacturers upped their orders by an impressive

17 per cent. This is primarily attributable to orders from

Southern Europe. Markets like Sweden, the Netherlands,

Poland and Austria also achieved substantial rises.

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Whereas Switzerland, due to the strong franc, reported slight

declines in terms of orders, the situation in Turkey is

perceptibly deteriorating. In view of the uncertain political

situation, investors are cutting back, which is why orders

have most recently slumped by one-fifth. The same applies to

Russia: sales in the third-most-important market for German

machine tool manufacturers have once again been severely

hit. Despite a selective growth in orders over recent months,

the situation remains fraught, due to the unfavourable macro-

economic climate and the continuance of sanctions.

In the period concerned, orders from Asia rose by 14 per

cent. China, in particular, with a rise of 32 per cent, made a

crucial contribution towards this good result. The ASEAN

region, by contrast, recorded a relatively weak order

performance. This is attributable primarily to these nations’

close dependence on China. India, conversely, deserves to

be spotlighted for increasing its orders by almost 100 per

cent. Even if this growth is likewise heavily project-driven,

there is quite generally a hope that for India the ambitious

reforming efforts under Prime Minister Modi will take effect

and in the medium term ensure a continuous stimulation of

the market.

Technological trends offer opportunitiesLadies and gentlemen, the German machine tool industry

faces many challenges once again in 2017. These, however,

also offer a whole lot of opportunities for generating new

competitive advantages and expanding our product portfolio.

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This applies above all to digital networking in production

operations and the solutions on offer for Industry 4.0 in all its

many facets.

Networking creates transparency in production operations

that are becoming ever more complex. Batch sizes are

falling, products are being progressively more individualised.

If efficiency cannot be upgraded, unit costs will soar. A “faster,

further, higher” in terms of pure processing will no longer be

able to adequately counteract this. There are very significant

potentials to be found in consistently holistic automation of

the entire order processing procedures, and remedying

disturbances in the process. This is solved firstly by using

new machinery concepts that optimise the production

process and sequence. High efficiency enhancements are

definitely conceivable with holistically networked solutions,

and help our customers to stay ahead of the pack in a

competitive business environment. This is fundamentally

conditional upon acquiring and analysing machine and

process data. Secondly, we need a flexible IT infrastructure

that’s affordable even for relatively small manufacturers, from

the machine to the cloud. The competence for tapping into

these efficiency potentials is provided by the machinery

manufacturer, with his comprehension of the system and the

process involved.

The sometimes unresolved or not-yet-harmonised issues of

networking in production operations, like standardisation of

interfaces, data security, data sovereignty, liability issues,

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staff skilling, employment legislation, and lots more, are well

enough known. These have to be tackled. We’re still in very

good shape on an international comparison. The Jimtof in

Japan in late 2016, however, impressively demonstrated that

there as well many machine tool companies are doing very

intensive work on these networking issues. The VDW

accordingly set up the Industry 4.0 Working Group back in

2015, tasked with progressing the technical questions

involved. In addition, there will be another working group

drawing up proposals for resolving the legal issues

concerned. Staff skilling questions are already being

intensively addressed in the VDW’s Youth Foundation, with

the “Digital Specialist” project.

Keeping a close eye on e-mobility Another major issue that is meanwhile gaining momentum

(driven by political and public debate) is electro-mobility.

Dynamic advances for the upcoming ten to 15 years are

currently being forecast by all the relevant institutions, like the

big international consultancy companies and automotive

researchers. Where the journey will ultimately take us, and

what the consequences will be for our sector, are in the final

analysis still unresolved questions, since even the most

urgent issues are a long way from resolution. This relates

firstly to the actual figures: how high will the proportion of

electric vehicles actually be in the future? How much metal-

cutting volume will it render superfluous? How will the metal-

cutting times at more highly integrated workpieces change, in

hybrid vehicles, for example? According to a prestigious

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German research institute, the dynamic incidence of hybrid

drives will entail an increase in metal-cutting time in the order

of magnitude of ten per cent. This is explained by smaller, but

more highly integrated drive systems. The fact is, at least,

that for a lengthy transitional period there will be a rather high

proportion of hybrid vehicles. Their degree of complexity, due

to the combination of internal combustion engines and

electric motors, will continue to necessitate high metal-cutting

volumes.

Other aspects in regard to widespread use of electric vehicles

also throw up question marks: how will the additional demand

for electricity be covered, not least sustainably and

economically in the context of the overall energy balance?

Will the German automotive industry in future become

dependent on Asian battery manufacturers? How quickly can

the requisite charging infrastructure be put in place

worldwide?

One thing, however, remains undisputed: all firms that deliver

their products to the automotive industry will inevitably have

to engage with these issues. The VDW is currently analysing

what developments must be anticipated in what timeframes,

so as to provide the foundations for strategic business

planning.

2017 is an EMO year An abundance of new ideas and innovations for the

production operations of tomorrow will be showcased at the

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EMO Hannover 2017. Following a four-year break, the

world’s premier trade fair for the metalworking sector will

again be held in Hanover from 18 to 23 September 2017.

Under the motto of “Connecting systems for intelligent

production”, manufacturers of production technology from all

over the world will be showcasing not only classical trade fair

keynotes of the metalworking world, but also mapping out

what has to be done in order to generate maximised

customer benefits from tomorrow’s digital and networked

production operations.

Almost nine months before the fair begins, the EMO

Hannover 2017 is on course for record figures: 1,858 firms

from more than 40 different countries have so far registered

for this event, on a net exhibition area of almost 158,000

square metres. This auspicious response shows that the

EMO Hannover over the long decades of its history has

evolved into the world’s premier platform for innovations.

Summary: in good shape for the futureLadies and gentlemen, let me sum up: the German machine

tool industry is in good shape. It is doing intensive work on

weather-proofing itself for the storms of international

competition. The vast majority of German machine tool

manufacturers are preparing to meet and master the

challenges ahead, maintain a worldwide presence whether

this involves service support, sales or production, and are

continuing to upgrade their structures abroad.

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Global demand for machine tools is rising, and the German

manufacturers are at the forefront in meeting it. They are able

to cover this demand, which creates direct benefits for them.

The firms are integrating new technologies in their products

and developing new solutions. Even in a very difficult

business environment, different from any economic crises

before it, and which can be influenced hardly at all by the

companies concerned, they are optimally positioned. I am

confident that in the future, too, we shall be right up there with

the leaders in the premier league.

Thank you very much for your attention!