VDMA: Innovation location in danger

"Germany as an industrial location thrives on innovation. And innovations only take place where production is taking place. The mechanical and plant engineering industry is determined to maintain its production in its home market - but this is not possible if the conditions for the location continue to deteriorate. Genuine, far-reaching reforms in Germany are essential if we want to prevent more and more research, production and therefore innovation from taking place abroad!" With this appeal to the German government, VDMA President Bertram Kawlath assessed the coalition's work to date at the association's annual press conference, explicitly criticizing the recent resurgence of class warfare rhetoric from parts of the SPD. "In view of the challenges we are all facing, the verbal armament of Labor Minister Bärbel Bas is completely inappropriate," said Kawlath. "Her statement fails to recognize that companies in the mechanical and plant engineering sector in particular, as the largest industrial employer in the country that pays good wages, have an important social and societal role to play," emphasized the VDMA President.

Industrial SMEs need a more flexible labor market

In view of corporate taxes averaging 30 percent, which are far too high by international standards, and a comparatively inflexible labor market, Kawlath called for quick and noticeable relief for industrial SMEs. "We are in global competition with countries where there are also many bright minds - who work longer and whose companies have to pay significantly less tax. That won't work in the long term," he warned. It is therefore urgently time to reduce corporate taxes faster than stated in the coalition agreement and to make the labour market more flexible. "For example, we expect the federal government to finally fulfill its promise in the coalition agreement and introduce a weekly maximum working time instead of a daily one. This would increase flexibility for employees and employers. And we also need to increase working life," emphasized Kawlath. Structural reforms are also needed in the social security system: Abolition of the deduction-free pension, a gradual increase in the retirement age and a uniform period of entitlement to unemployment benefit I for a maximum of twelve months. "We are currently heading towards a state quota of more than 50 percent. This is regulatory madness that burdens employees and companies alike and prevents innovation," warned the VDMA President.

Collective bargaining laws place a particular burden on small companies

Kawlath also clearly rejected the current plans for the so-called Collective Agreement Loyalty Act. "Instead of implementing measures that reduce costs and bureaucracy, the Federal Minister of Labor is launching a law that will create even more bureaucracy! Small and medium-sized companies in particular will feel the effects of this," criticized Kawlath. This is not only contrary to the aim of the special infrastructure fund to get the funds on the road quickly. Medium-sized companies will be heavily burdened because, despite good working conditions and good wages, they are often not bound by collective agreements and now have to prove that they meet the criteria of collective agreements. "We are also very concerned that compliance with collective agreements ends at the federal border. Anyone providing services abroad for a public contract awarded by the federal government is exempt from the obligation to comply with collective agreements. This may be required under European law, but it makes a mockery of the law," emphasized Kawlath. Contrary to what was agreed in the coalition agreement, there is also no exception for start-ups in the law.

Growing pressure on the innovation location

The VDMA President added that Germany is still the most important location for the future viability of the mechanical and plant engineering industry. According to a study by the association, the mostly medium-sized companies carry out around 84 percent of their research and development activities in Germany. "Unfortunately, however, the trend is that companies are expecting to increase their research expenditure abroad more than at home," added Kawlath. This is particularly true for large companies. "This is why the pressure on Germany and Europe as a location for innovation is growing. Bureaucracy hangs like a millstone around companies' necks and ties up money and time that could be better invested in research." With the expansion of the research allowance and the high-tech agenda, the German government has recently shown a good way forward, especially as it wants to move forward with industry and not against it. "But now this agenda must be implemented just as quickly as the plans to digitize the location," demanded Kawlath.

Economic situation comparable to the severe recession at the beginning of the 1990s

The reform backlog at home and the many bureaucratic obstacles, coupled with geopolitical crises, growing trade restrictions and global uncertainty among customers, mean that the mechanical and plant engineering sector will not emerge from the economic trough. VDMA economists continue to expect a real decline in production of 5% in 2025 compared to the previous year, although the latest data gives some hope for a better figure. "This means that production in our industry has been shrinking since the beginning of 2023, and the fourth quarter of 2025 is likely to be the twelfth consecutive negative quarter," summarized Kawlath. "This means that the situation is now comparable to the severe recession in the early 1990s, when there were 13 negative quarters in a row." At 78.3%, capacity utilization in the mechanical engineering sector currently remains well below the average value of just over 85%. Companies are hoping for a slight improvement in the business situation in the coming year; the VDMA economists have therefore confirmed their production forecast of plus 1 percent in real terms for 2026. "But at this level, the increase would have to be significantly higher to speak of real growth momentum," said Kawlath.

Increasingly clear traces on the labor market

The difficult economic situation is now also leaving ever clearer traces on the labor market. With just over 1 million employees in Germany in companies with more than 50 people (September 2025), mechanical and plant engineering is still the largest industrial employer in the country. And with 190,000 engineers, the sector is also the leader in this field. However, compared to the previous year, employment has fallen by 2.4 percent, while at the same time the number of people on short-time work rose by 27 percent to 41,000 in August 2025 (more recent figures are not yet available). "Our companies want to retain their core workforce and we are still looking for skilled workers to counter demographic change," emphasized Kawlath. "But politicians must finally correct previous mistakes and, for example, abolish the retirement age of 63. It must also make it easier for skilled workers from abroad to gain a foothold in our industry," demanded the VDMA President.

Companies cannot comply with bureaucracy for US tariffs

The trade practices of the two most important sales countries outside the EU, the USA and China, are also among the biggest challenges for an industry that relies heavily on exports. "The punitive tariffs imposed by the Americans on steel and aluminum, which will most likely affect around 56% of our machinery exports to the USA in the near future, are poison for both trading partners. They must be negotiated away again quickly," demanded Kawlath.

According to a new VDMA survey of almost 400 member companies, almost half (47%) of companies have reported a decline in incoming orders from the USA since April of this year. Two thirds of the companies surveyed anticipate a drop in sales due to the tariffs, with almost half putting the figure at more than 10 percent. "What's more, it's not just about the absolute amount of the tariffs, but also about the associated bureaucratic burden, for example in correctly declaring the value of steel and aluminum," explained Kawlath. "Only around a quarter of our companies believe they can meet the American requirements," he said. "The German government and the EU must therefore make it clear to the USA that German and European machines also safeguard American industry. The tariffs are absolutely counterproductive for both sides!"

Strengthen market surveillance for Chinese products

The even greater challenge for companies in the mechanical and plant engineering sector is the ever-increasing competition from China. Chinese mechanical engineering companies are becoming real competitors in more and more sectors, including on third markets - and in some cases are benefiting greatly from unfair state subsidies. "Our companies are fighting tooth and nail to remain competitive, but in many cases this is no longer enough. The best remedy against this competition would be better location conditions in Germany and Europe, because our SME sector lives from exports and cannot simply relocate production facilities abroad," emphasized Kawlath. "But politicians must also take stronger action with internationally recognized means," demanded the VDMA President, referring to the EU's inadequate market surveillance. "We must not continue to allow Chinese products that do not meet EU standards to enter our economic area so easily," he said.

Free trade agreements are a top priority

The EU is also called upon to conclude new free trade agreements. In view of the problems in trade with the USA and China, "opening up new markets must be a top priority for the EU Commission", emphasized Kawlath. "The agreement with the Mercosur states has absolute priority here and must now finally be ratified. And the agreement with India should be concluded immediately afterwards." In this context, the VDMA President also emphasized that extremist parties in particular are a threat to the economy and prosperity in Europe. "Anyone who, like the AfD, wants to leave the euro, the EU or even NATO and pander to Russia is building a coffin with a lid for our medium-sized industry," he emphasized. "We must defend our democratic and economic freedom and our market economy system with all our might," he emphasized.

EU buses ease the burden on industry

After all, the EU has recently proven that it wants to move in the right direction, added the VDMA President. The so-called omnibuses, i.e. simplified regulation of sustainability reports or supply chains, would relieve the burden on companies to a certain extent. The postponement of the deforestation regulation was also the right step. "With the other omnibus plans on digital and the environment, however, the EU Commission is getting too bogged down in detail. Small simplifications are to be introduced, but the overall regulatory structure remains far too complex," he criticized. The VDMA is therefore skeptical about the currently discussed obligations for the public sector to purchase European products ("local content"). "Local content regulations can only be the exception for the development of strategically important technologies if strategic dependency cannot be prevented with other instruments. But the focus must remain on opening up markets all over the world, not on sealing them off," warned Kawlath.

EU climate target 2040 needs strong European technologies

This also applies to the still important task of global climate protection, which can only be solved with the help of technologies from the mechanical and plant engineering sector. "The EU has once again set itself an ambitious climate target for 2040, which is right. Now the way must be paved to achieve it," he said. Worldwide, more is currently being invested in renewable energies than in fossil fuels. China has strategically promoted many of the necessary transformation technologies and is aggressively pursuing them on the global market. "Europe must therefore remain a strong domestic market for hydrogen, wind energy and storage technologies - and it must also defend itself against unfair competition. We must control the value chains here and keep them alive so that we do not slip into new dependencies," emphasized the VDMA President.