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After several years of virtual standstill, sales revenues in the German mechanical and plant engineering sector grew by around 3 percent in 2017, reports Ulrich Ackermann, Head of VDMA Foreign Trade. For VDMAimpulse he not only looks back, but also looks to the future.

By Ulrich Ackermann

Please click to enlarge the image.<br>© VDMA2017 will go down as a successful year in the history of German mechanical and plant engineering. After several years of virtual standstill, sales revenues are forecast to have risen by 3 percent in the previous year. As a result, the mechanical engineering industry was able to record sales revenues in excess of 220 billion euros for the first time ever. We expect this dynamism to remain the same in 2018, with a sales growth of 3 percent once again.

So is everything going well? It is actually remarkable how well our industry has coped with the worldwide uncertainties over the past few years. After all, with an export rate of almost 77 percent, for better or worse the German mechanical and plant engineering sector is dependent on open sales markets. And in recent years the world has developed rather negatively in this respect. According to our calculations, today around 35 percent of machine exports go to countries with medium to high import barriers and this figure is set to rise.

Exports rise by 6.2 percent in the first nine months of 2017

The export business was extremely positive for our industry last year. In the first nine months of 2017, machines and systems worth 124 million euros were sent abroad, representing real growth of 6.2 percent compared to the previous year. The European Union (EU) was the largest sales region by a clear margin. The largest single export market in this period was the USA, although China enjoyed considerably stronger growth. As such, China is once again on track to recover the leading position in our export rankings. At the start of the year, no-one in our industry would have considered export growth of 24 percent in the first nine months possible. Unnoticed by the outside world and without any official announcement, the Chinese government pumped massive amounts of money into the markets around the time of the 19th National Congress of the Communist Party in order to present the country in the best possible light. There will be no such "secret economic stimulus program" in 2018. As a result, the growth of exports to China is expected to slow down.

Brexit uncertainty evident in export decline

We are concerned by the Brexit developments. In the first nine months of 2017, exports to the United Kingdom, the fourth largest single export market, fell by 4.5 percent compared to the previous year. Time is pressing and progress in the negotiations regarding the future relationship of the EU and Great Britain is urgently needed in order to prevent a hard Brexit in May 2019. With the second phase of the negotiations beginning, we expect trade and economic issues to be resolved quickly. We need measures that prevent the currently aligned market requirements from drifting apart following the UK's exit from the EU. A customs union would be the most suitable way of achieving this. Should Britain leave the customs union, however, German mechanical engineering companies will be faced with additional annual costs totaling 180 million euros, according to our calculations. There would also be 44 million euros of extra costs when importing machines from Great Britain, as well as further expenses when importing components for production in Germany.

"Financial Christmas gift" in the USA

In the USA, there was a "financial giveaway" just before Christmas: the most far-reaching tax reform since the term of office of Ronald Reagan in the 1980s. This came as a surprise to many people, myself included. The actual consequences of this are still unclear. However, the tax reform will significantly intensify competition between locations in the United States and Europe. The tax relief measures and the special depreciations for companies in the USA should have a positive effect on the mechanical engineering sector. Innovative machines and systems are required to build the modern industrial sector in the USA as desired, which our industry can supply.

Hope for free trade

How can the mechanical engineering sector in Germany and Europe remain successful in the long term? Alongside the companies themselves, the European Union must also take action here. After all, the EU is responsible for our relationships with foreign states outside the EU. Despite all the gloomy predictions, 2017 was not a bad year in this regard. As well as the conclusion of the free trade agreement with Japan (JEFTA) and the provisional entry into force of the agreement with Canada (CETA), the nearly completed modernization of the free trade agreement with Mexico is also relevant to the mechanical engineering sector.

The free trade agreement between the EU and Japan concluded in December 2017 will create an open trading area for 600 million people as of 2019. Important factors for mechanical engineering are the consistent use of international standards and rules in the bilateral exchange of goods, the planned joint formulation of standards and easier access to public contracts in Japan. After less than two years of intensive negotiations, the political basic agreement regarding the modernization of the free trade agreement with Mexico is within reach. The German and European mechanical engineering sector should benefit above all from improved market access thanks to modernized rules of origin, the acceptance of international standards and access to public procurement contracts. And finally, the negotiations for the planned free trade agreement between the EU and the Mercosur states have made considerable progress. Although this could not be concluded in 2017 as planned, the negotiations are in the finishing straights. As is so often the case, there are hurdles to be tackled in the agricultural sector.

As an outward-looking economy, Germany is particularly dependent on free trade and the international division of labor. The political arena in Germany should also take this into account. As the country’s politicians are currently in the process of forming a new government, now is the right time to incorporate important topics for maintaining its strength as an exporter in the coalition agreement - such as new free trade agreements, more efficient customs, improved promotion of foreign trade and the simple issuing of long-stay visas in Germany for training purposes.

Further Information

VDMA Foreign Trade

Ulrich Ackermann, Head of VDMA Foreign Trade.