VDMA warns of investment drift as pressure builds on Germany’s “innovation hub”

Frankfurt – Germany’s mechanical and plant engineering sector risks losing its position as an “innovation hub” unless business conditions improve rapidly, industry association the VDMA has warned.

And, speaking at the association’s annual press conference 10 Dec, VDMA president Bertram Kawlath pointed out that “innovation only takes place where production occurs.”

While the sector is determined to maintain its production in the domestic market,  Kawlath believes this will not be possible if operating conditions continue to deteriorate.

Morever, according to Kawlath said, in the absence of “genuine, far-reaching [government policy] reforms”, more research, production and innovation will “shift abroad”.

Pointing to average corporate taxes of around 30%, the VDMA leader said Germany was increasingly uncompetitive internationally, particularly when combined with a comparatively inflexible labour market.

“We are in global competition with countries that also have many bright minds – who work longer hours and whose companies pay considerably less tax,” said Kawlath.

Federal government, he said, should reduce corporate taxes more quickly than agreed in the coalition programme and introduce a weekly, rather than daily, maximum working time.

Extending working lives and reforming social security are also essential, Kawlath warning that Germany was heading towards a government spending ratio of more than 50%.

“This is ‘regulatory madness’ that burdens both employees and companies and stifles innovation,” Kawlath said.

The president also rejected current plans for a law requiring compliance with collective agreements, arguing that it would increase bureaucracy and place a disproportionate burden on SMEs.

“Instead of implementing measures that reduce costs and bureaucracy, the federal minister of labour is introducing a law that will create even more red tape,” said Kawlath.

SMEs, he added, would be forced to prove compliance even when they already offer good working conditions and wages.

R&D, production, employment

Despite the pressure, Germany remains the most important location for the sector’s future viability, Kawlath said.

According to VDMA data, 84% of R&D activities by mostly medium-sized companies are still carried out domestically.

“Unfortunately, the trend is that companies expect to expand their research expenditures abroad more than at home,” he said, noting that this was particularly true for large companies.

As a result, “pressure on Germany and Europe as hubs of innovation is growing”, with bureaucracy “hanging like a millstone” around companies’ necks.

While he welcomed recent steps such as the expansion of the research allowance and the 'high-tech agenda', Kawlath said implementation now needed to move “just as quickly” as plans to digitalise Germany.

The VDMA chief noted that production will is expected to see a 5% year-on-year decline in 2025, meaning output will have fallen for 12 consecutive quarters by the fourth quarter of the year.

“This puts the situation comparable to the severe recession of the early 1990s,” Kawlath said, when the sector endured 13 straight quarters of decline.

Capacity utilisation currently stands at 78.3%, well below the long-term average of just over 85%.

A 1% increase is forecast for 2026, but Kawlath said this would still fall short of “genuine growth momentum”.

Employment in companies with more than 50 employees fell 2.4% year-on-year to just over 1 million in September. At the same time, the number of employees on short-time work rose 27% to 41,000 in August.

“Our companies want to retain their core workforce,” Kawlath said, "while continuing to seek skilled workers to address demographic change."

He called for the abolition of early retirement at 63 and easier access for skilled workers from abroad.

Tariffs and China add pressure

Trade policy remains a major challenge, according to the VDMA leader.

Nearly 47% of VDMA members surveyed reported a fall in orders from the US since April, following steel and aluminium tariffs expected to affect around 56% of machinery exports to the country.

“These tariffs are poison for both trading partners,” Kawlath said, adding that two-thirds of companies expect revenue losses, with almost half estimating declines of more than 10%. Only around a quarter believe they can meet the associated reporting requirements.

Competition from China poses an even greater challenge, Kawlath said, urging stronger EU market surveillance to prevent non-compliant products from entering the bloc. He also called for faster progress on free trade agreements, particularly with Mercosur and India.

With the EU’s 2040 climate targets approaching, Kawlath said Europe must remain a strong domestic market for hydrogen, wind and storage technologies while defending itself against unfair competition and avoiding “new dependencies”.