An introduction to Mechanical
Engineering: Study on the
Competitiveness of the EU
Mechanical Engineering
Industry
Within the Framework Contract of Sectoral
Competitiveness Studies – ENTR/06/054
Final Report

Client: Directorate-General Enterprise & Industry

2.1.1 Description of the sector 19
2.1.2 Mechanical Engineering compared to total manufacturing 27
2.2 Mechanical engineering in selected Member States 31
2.2.1 France 31
2.2.2 Germany 35
2.2.3 Italy 38
2.2.4 Spain 41
2.2.5 United Kingdom 45
2.2.6 Poland 47
2.2.7 Czech Republic 50
2.2.8 Slovakia 53
2.3 Subsectors of Mechanical Engineering 55
2.3.1 Engines and turbines 55
2.3.2 Pumps and compressors 60
2.3.3 Taps and valves 65
2.3.4 Bearings, gears and drives 68
2.3.5 Lifting, handling and storage equipment 74
2.3.6 Non-domestic cooling and ventilation equipment 83
2.3.7 Agricultural and forestry machinery 87
2.3.8 Machinery for mining, quarrying and construction 93
2.3.9 Machine Tools for metal working 98
2.3.10 Machinery for textile, apparel and leather production 105
2.4 Specific topics for the assessment of the performance of EU ME 109
2.4.1 Supply side analysis of EU Mechanical Engineering 109
2.4.2 EU ME – regional distribution and division of labour 112
2.4.3 Non-European players activities in the EU 118
3 Major competitors and sales markets 120
3.1 Major competitors 120
3.1.1 United States 120
3.1.2 Japan 128

competitiveness of supply 199
4.6 Performance of the EU ME in technological competition 201
4.6.1 ME as innovation enabler 201
4.6.2 Resources to R&D – a methodological view 201
4.6.3 Trends in corporate R&D expenditure 202
4.6.4 Trends in corporate patent activities 204
4.6.5 Assessment of the technological competitiveness 207
4.7 Concluding evaluation of the EU ME’s competitiveness 208
5 Framework conditions 212
5.1 Market regulation 212
5.1.1 New Approach and New Legislative Framework 212
5.1.2 Market surveillance 213
5.1.3 National provisions hampering free trade in the Single Market 214
5.1.4 Multiple requirements for manufacturers of intermediary products 215
5.1.5 Internal combustion engines and mobile machinery 215
5.1.6 Energy related regulation 216
5.1.7 Self-regulation 217
5.1.8 Reliable regulatory environment 217
5.1.9 Smaller firms 218

5.1.10 International standards 218
5.2 Knowledge: R&D, innovation, and product development 219
5.3 Labour force and skills 229
5.3.1 Overall development in employment 230
5.3.2 Country trends in employment 231
5.3.3 National importance of ME as an employer 233
5.3.4 Sub-sector developments 235
5.3.5 Occupational structure and qualifications 236
5.3.6 Evidence at the national level 238
5.3.7 Evidence at sub-sector level 240

6.2.3 Long-term prospects for services 272
6.2.4 Conclusions 273
6.3 Long-term outlook 274
6.3.1 Economic growth potential 275
6.3.2 Productivity development 279
6.3.3 Employment implications 281
6.3.4 Conclusions 282

6.4 Recommendations 283
6.4.1 Organisation and industry structure 283
6.4.2 Market regulation 284
6.4.3 Financial markets 286
6.4.4 Labour market 286
6.4.5 Innovation environment 287
6.4.6 Access to third markets 289
7 References 290 List of tables
Table 1.1: Key figures for EU-27 in Mechanical Engineering 6
Table 1.2: Distribution of enterprises by size category and average employment 8
Table 1.3: Distribution of employment by size category 8
Table 1.4: Regional distribution of Mechanical Engineering in the EU 2008 9
Table 1.5: Research efforts measured by business expenditure on R&D in
mechanical engineering (ISIC Rev.2) in € million 17
Table 1.6: Research efforts measured by R&D intensity 2007 - 2009 18
Table 2.1: Key indicators on the performance of total manufacturing and
Mechanical Engineering by the size of enterprises 2008 20
Table 2.2: Energy savings – ex-post and expected – in Germany induced by ME 27
Table 2.3: Key-figures for French Mechanical Engineering 32

Table 3.8: Russian trade with mechanical engineering products 150
Table 3.9: Trade performance of the Turkish mechanical engineering 153
Table 3.10: Trade performance of the Middle East and North Africa in mechanical
engineering 156
Table 3.11: Trade performance of the Indian mechanical engineering 159
Table 3.12: Trade performance of the South Korean mechanical engineering 162
Table 3.13: Trade performance of the Taiwanese mechanical engineering 165
Table 3.14: Trade performance of the Indonesian mechanical engineering 167
Table 3.15: Trade performance of the Australian mechanical engineering 169
Table 3.16: Trade performance of the Canadian mechanical engineering 172
Table 3.17: Trade performance of the Mexican mechanical engineering 174
Table 3.18: Trade performance of the Brazilian mechanical engineering 177
Table 4.1: Key figures on the economic performance of major competing
economies in mechanical engineering 184
Table 4.2: Key figures for global trade with mechanical engineering products 190
Table 4.3: Key indicators for the EU-27 foreign trade 191
Table 4.4: Global and bilateral EU trade with mechanical engineering products
of major competing nations 192
Table 4.5: Penetration of major competing economies in the EU-27 market for
mechanical engineering products 194
Table 4.6: EU machinery trade with important sales markets 195
Table 4.7: R&D expenditure in Mechanical Engineering 2006 203
Table 4.8: R&D intensity of large Mechanical Engineering enterprises 204
Table 4.9: Transnational Patent Applications in Mechanical Engineering 2006-
2008 by selected countries 206
Table 5.1 Ex-post and projected annual rates of change in employment in
machinery manufacturing in the US. 236
Table 5.2: Short term demand and supply as perceived by associations 241
Table 5.3: Skills required to a larger extent over the next 3-5 years in different
jobs in ME companies 242

Engineering 28
Figure 2.6: Employment of total manufacturing and Mechanical Engineering 29
Figure 2.7: Wages of total manufacturing and Mechanical Engineering 30
Figure 2.8: Unit labour costs of total manufacturing and Mechanical Engineering 30
Figure 2.9: Structure of the French Mechanical Engineering production 33
Figure 2.10: Structure of German Mechanical Engineering production 37
Figure 2.11: Structure of the Italian Mechanical Engineering production 40
Figure 2.12: Structure of Spanish Mechanical Engineering production 44
Figure 2.13: Structure of the British Mechanical Engineering production 47
Figure 2.14: Structure of the Polish Mechanical Engineering production 49
Figure 2.15: Structure of the Czech Mechanical Engineering production 52
Figure 2.16: Structure of Slovakian Mechanical Engineering production 55
Figure 2.17: Gross value added in old and new Member States for Mechanical
Engineering 113
Figure 2.18: Labour productivity in old and new Member States for Mechanical
Engineering 114
Figure 2.19: Employment in old and new Member States for Mechanical
Engineering 115
Figure 2.20: Wages in old and new Member States for Mechanical Engineering 116
Figure 2.21: Unit labour costs in old and new Member States for Mechanical
Engineering 117
Figure 2.22: Sectoral division of labour in the EU-27 Mechanical Engineering 118
Figure 3.1: Evolution of Russian trade 151
Figure 3.2: Evolution of Turkish trade 152
Figure 3.3: Evolution of MENA trade 154
Figure 3.4: Evolution of Indian trade 158
Figure 3.5: Evolution of South Korean trade 161
Figure 3.6: Evolution of the Taiwanese trade 163

Figure 3.7: Evolution of Indonesian trade 166

of study ISC52 and ISC 54, 2000-2008 244
Figure 5.13: Engineering graduates (ISC 52 and 54) as a share of employment in
Mechanical Engineering 2000-2007 245
Figure 5.14: Attractiveness of engineering industries and ME for private equity
investors 253
Figure 6.1: Kinds of services supplied by German fixed asset manufacturers -
Share of total service sales in % 273
Figure 6.2: Forecasted GDP development 275
Figure 6.3: Share of manufacturing sector as % of GDP 276
Figure 6.4: Share of mechanical engineering as % of total manufacturing 277
Figure 6.5: EU27 productivity development for manufacturing and mechanical
engineering 280
Figure 6.6: Forecast of EU27 productivity development until 2020 281
Figure 6.7: Relative development of employment in manufacturing and
mechanical engineering 281
Figure 7.1: Gross value added for the European Union and major competitors 304
Figure 7.2: Labour productivity for the European Union and major competitors 305

Figure 7.3: Employment for the European Union and major competitors 306
Figure 7.4: Wages for the European Union and major competitors 306
Figure 7.5: Unit labour costs for the European Union and major competitors 307


FN97615 – FWC Sector Competitiveness – Mechanical Engineering 1

1 An introduction to Mechanical Engineering
1.1 Structure of the report and the team
The study on the competitiveness of the EU mechanical engineering was carried out by
the Ifo Institute (Ifo), Cambridge Econometrics (CE) and the Danish Technological
Institute (DTI). The project lead was carried out by Ifo. The Ifo institute executed the

most important competing economies and an investigation in its performance in major
sales markets.

FN97615 – FWC Sector Competitiveness – Mechanical Engineering
2

Chapter 4 provides a comprehensive assessment of the EU Mechanical Engineering
sector’s competitiveness. A quantitative evaluation of the price competitiveness and of
the performance in international markets is carried out. Moreover, companies’ behaviour,
the organisation of value chains and structural changes are taken into account for a
qualitative evaluation of the EU ME’s performance.

Chapter 5 investigates the framework conditions of relevance for the EU Mechanical
Engineering sector. It is dedicated to identify beneficial and obstructive factors for the
long-term development of the EU Mechanical Engineering sector.

Chapter 6 provides a long-term outlook for the EU Mechanical Engineering sector. It
takes into account aspects that can become drivers in the future. Among them are the
strengthening of services as supplements or even new business areas for ME. The chapter
concludes with a set of policy recommendations.

1.2 Understanding the project and its objectives
The request for services, dated 30
th
September 2010, in the context of the framework
contract on Sectoral Competitiveness Studies (ENTR/06/054), was signed between our
consortium, led by ECORYS NL, and DG Enterprise and Industry. The Study on the
Competitiveness of the EU Mechanical Engineering Industry (ME) is led by the Munich
based Ifo Institute. Cambridge Econometrics and the Dansk Technological Institute are
members of the team responsible for the execution of this project.

The EnginEurope report is the most recent study on ME commissioned by the European
Commission. However, the report was concluded just before the financial crisis shattered
the global economy. The report highlights the importance of ME. It is not only one of the
largest manufacturing industries but also an enabling industry of outstanding importance
for advanced manufacturing processes and high productivity. European ME – a global
leader in production technologies – provides advantages to other industries and is a vital
player in a much wider value chain. The regional proximity of suppliers and users of
machinery and equipment is an advantage even in the era of globalization, since the
introduction of cutting-edge technologies and the optimization of processes is much
easier.

The Terms of Reference (ToR) call for a new study to assess changes in the
competitiveness of ME. The study comprises an investigation of the strengths and
weaknesses of the industry and an investigation of framework conditions to identify
opportunities and threats.

The study on ME is aimed at contributing to the initiatives of the European Commission
to strengthen the competitiveness of the EU. The ToR mention the Communication of 3
rd

March 2010 on objectives to be reached by 2020 as a guideline for policy options.
1

Additionally the “Communication on a New Industrial Policy” - published in October
2010 - provides further information on policy measures that will be implemented to reach
the Europe 2020 goals. Policy recommendations are designed to be in line with the
initiatives put forward in both Communications and build on related schemes.

Much emphasis is put on changes induced by the global crisis and the identification of
further existing threats as a foundation for the assessment of ME’s competitiveness. The

machinery and equipment, are also taken into account.

1.3 Specifics of Mechanical Engineering
Since the late 1970s, ME has evolved into a leading industry in the development and
application of high tech, ranging from optoelectronics to new materials and alike. Many
products of the industry combine mechanical technologies – often denigrated as old
technologies – with advanced technologies. The engineering ingenuity to create
innovative products that combine different technologies is one of the prominent strengths
of European ME. Although ME is understood as a supplier of hardware, machinery and
equipment, it has evolved in the direction of a service industry. Services such as the
installation of manufacturing systems, training of operators, maintenance and repair, and
even the supply of finance, have become more important. These services contribute not
only to higher productivity but simultaneously reduce the exposure to low-cost
competition.

As a consequence, the assessment of ME’s competitiveness will put a degree of emphasis
on upstream and downstream linkages. The supplier industries’ state of technology and
their pace of innovation are of importance for the performance of ME in the global
technological competition. Likewise, vibrant client industries’ “demand pull” stimulates
innovation in ME. The growing weight of the emerging countries in manufacturing has
even accelerated in the course of the global crisis – and this has become an important
topic for the assessment of the opportunities and threats to ME.

ME is characterized by smaller companies. These are not only enterprises with less than
250 employees – as SMEs are defined by the European Commission
2
- but also bigger
family-owned firms with up to between 1,000 and 2,000 employees that are small
compared to their global competitors. These companies are strongly dependent on
business favourable EU framework conditions, functioning markets and infrastructure.

different requirements on companies’ abilities and their strategic orientation. In some
market segments, the market environment imposes requirements on suppliers that small
firms struggle to meet. Examples are volume markets with serial products
4
and the
building of turn-key plants. Moreover, the industry is characterized by a strong intra-
sectoral division of labour. Final product manufacturers of machinery, manufacturing
systems and plants rely on suppliers of high-tech components that are of crucial
importance for the quality and the performance of final goods delivered by ME.

Secondly, upstream and downstream linkages are highlighted that are of major
importance for the competitiveness of the industry. The innovation of upstream industries
is an indispensable prerequisite in maintaining pace in the international technological
competition. Downstream linkages are just as important. A demand push contributes to
innovation in ME. This does not only affect the pay-back period of research expenditure
but also provide opportunities for the optimization of customized solutions that contribute
to the European firms leading technological position.

Thirdly, general developments in global markets are identified. They provide insight into
the dependency of ME on business cycles that are strongly dependent on the global
investment propensity. Another aspect concerns long-term trends in demand that have
been caused by the emerging economies’ industrialization and soaring demand for raw
materials.

Fourthly, the innovation system of ME – an industry that has been marked as a high to
medium tech industry – is highlighted. This assessment deals with the fact that R&D
expenditure is only roughly the average of total manufacturing. It is revealed that ME is
strong in engineering and innovation activity that has never been included in the R&D
surveys.


00
2000–
05
2005–
08
2008–
10
Manufacturing 5,885 5.3 2.1 6.7 -5.2
ME
1)

Production, in
current prices
€ bn
502 4.0 2.3 10.4 -8.4
Manufacturing 1,504.0 2.1 0.0 1.5 -5.2
ME
1)

Gross value added,
at 2010 prices
€ bn
157.5 2.4 0.3 6.0 -9.3
Manufacturing 30,063 -0.6 -1.3 -0.3 -4.8
ME
1)

Employees 1,000
2,9001 -1.6 -2.2 1.8 -4.8
Manufacturing 50.0 2.7 1.3 1.8 -0.4

ME seems to contradict the conventional wisdom that ME is an industry with a majority
of smaller firms as compared to other industries. In fact, there are only few large
corporations, which support the assumption, but there is also a broad range of companies
within the size category of 500 to 2000 employees. The bulk of these companies is
responsible for the higher average number of employees per firm. This result is also
explained by two other factors: firstly, the higher manufacturing depth linked to in-house
production and comprehensive engineering activities and, secondly, the fact that
Germany - with its larger firms - accounts for around one third of the EU-27 ME output.
5This size structure of ME is not accidental in nature, but results from production
requirements. Only in exceptional cases are ME products suitable for large-scale
manufacturing. This reduces the need for large production sites that are fully automated
which are capable of achieving noteworthy economies-of-scale.
6
The structure of the ME
industry, as well its value chain, is notably different from its automotive and aerospace
counterparts in the sense that OEMs do not benefit from the same level of purchasing
power there within. Larger firms can be found throughout the value chain and there are
numerous suppliers to final product manufacturers that possess a strong position in the
market, based upon their technical expertise and ability to manufacture components with
unique characteristics.

A more detailed analysis by companies’ size structure cannot be conducted for the total
EU 27, but only for selected Member States. Table 1.2 depicts that there are larger
companies as compared with other industries. However, the average number of
employees for companies with a staff of 250 and more is only 790 for ME, whereas the
average for all of manufacturing is 895.
7

Shares Average
2)
Shares Average
2)

Between 0 and 9 empl. 79,4% 2,6 59,8% 3,4
Between 10 and 19 empl. 10,5% 13,1 17,6% 13,4
Between 20 and 49 empl. 5,8% 31,6 11,8% 31,8
Between 50 and 249 empl. 3,5% 109,2 8,8% 111,6
250 or more empl. 0,7% 894,5 1,9% 790,2
Total 100,0% 15,8 100,0% 33,3
1)
Based on CZ, DE, ES, FR, IT, SK, PL, UK;
2)
Number of employees per enterprise.
Source: Eurostat; Cambridge Econometrics; Ifo Institute.

Nearly all of the small enterprises below 50 employees in total manufacturing and ME are
handicraft companies. They do not possess the typical industrial manufacturing processes
that are optimized and controlled by a planning department. Although these companies
are subsumed under “Total Manufacturing” and ME their structures and their market
environment is different. However their weight is limited as depicted in Table 1.3. More
than three quarters of total ME’ workforce is employed in companies with more than 50
employees.

Table 1.3: Distribution of employment by size category
Total manufacturing
1)
Mechanical engineering
1)

average ( Table 1.4).

The three new member states included in Table 1.4 contribute a markedly higher
share to EU-27 employment than to value added. This is explained above all by labour
cost differences enabling them to compete in low cost areas and that induced an intra-EU
division of labour. A similar pattern can be observed for most of the other new member
FN97615 – FWC Sector Competitiveness – Mechanical Engineering 9

states that accessed the EU since 2004. Already before their accession to the EU these
countries had become members of the European value chain in ME. Foreign direct
investment (FDI) and relocation of production stimulated growth. Their share of the EU-
27 has been growing for all variables illustrated in the table and this trend is still ongoing.

Table 1.4: Regional distribution of Mechanical Engineering in the EU 2008
Production Value added Employment
Member state
Share of EU-27
Germany
38.0% 41.5% 34.1%
Italy
19.1% 15.6% 15.1%
United Kingdom
6.3% 7.1% 6.6%
France
7.9% 7.9% 8.6%
Spain
3.9% 3.9% 4.1%
Poland
1.9% 2.3% 4.8%
Czech Republic

8
Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania.
9
Some problems have been reported from the foundry industry in recent years. There is no sufficient supply of coking coal
within the EU and it has become extremely difficult to procure metallurgical grade coal in the global market during phases of
strong growth.
FN97615 – FWC Sector Competitiveness – Mechanical Engineering
10

machine tools. Progress in controls for electric drives has contributed much to more
efficient ME products and a reduction of the number of moving parts, such as gears.
Inter-industrial relations have deepened in production and common engineering.

The dissemination of micro-electronics during the 1980s led to innovation. On the leading
edge of these technologies was the machine tool subsector. However, the Japanese were
the first to apply advanced controls and gained shares in global markets propelled by their
lead. Since then Europe has caught up and ME competes at eye level with Japan.
10
A
detailed assessment of the technological position in this area and other fields of relevance
for ME, such as nanotechnology, optics, new materials and composites, is performed in
Chapter 0.

Roughly one third of ME output is intermediary products that are delivered to other
companies, such as bearings, gears, taps, valves, fluidics and engines. Many of these
deliveries are intra-sectoral and are made for other ME firms. Other industries that
procure intermediary products from ME are electrical engineering, the automotive
industry and medical equipment, precision instruments and others.

There are a few large groups in ME that have been specializing in the automotive industry

industry and holds – in certain segments – the majority of global capacities.
11
European Commission, Enterprise and Industry Directorate-General (2007a). The EnginEurope Report, Brussels, p.21,
p.25.
FN97615 – FWC Sector Competitiveness – Mechanical Engineering 11

and the service sectors, the share in total investment in machinery and investment is, on
average, below 20%. Although these results are for Germany only, it may be assumed
that in other countries the pattern does not differ too much
12
. The structure of capital
endowment within a particular industry is more dependent on production and process
technologies than on national specifics ( Figure 1.1).

One the most noteworthy characteristics of ME is the industry’s close links with both
high-tech upstream industries and a broad range of client industries. It provides the
explanation of why ME is coined as an enabler. It is of crucial importance for the
transmission of basic inventions and innovations.

Another approach is to assess the importance of industries as clients for final ME goods.
Total output of machinery, equipment and plants that is delivered to clients in Germany is
procured above all by the manufacturing sector, on average over the years more than
60%, with the automotive, chemical industry and ME itself in the lead as investors in this
kind of fixed assets
13
. This consideration illustrates that the service sector is an important
client for ME. This is due to the size of the sector with roughly double the contribution to
German GDP ( Figure 1.2).
Office machinery, computer equipment and
facilities
Manufacture of electrical machinery and
apparatus n.e.c.
Radio, television and communication
equipment, electronic components
Medical, precision, control, control engineering,
optics
Manufacture of motor vehicles and parts
Other transport equipment
Manufacture of furniture, jewelry, Musical
Instruments., sports equipment, toys and other
RECYCLING
ENERGY WATER SUPPLY
CONSTRUCTION
SERVICE AREAS
1995 2006

Source: Ifo Investment Matrices.

The distribution of deliveries varies between member states due to differences in
economic structures. For Germany, the share of manufacturing as a client for ME is much
higher than for countries with a manufacturing sector which is less important, such as the
UK. However, in Italy, the new member states and, to a certain extent in Spain, the
relative size of manufacturing is quite similar to that of Germany. In spite of these
discrepancies between economies, one can conclude from this analysis that ME is a most
important supplier of capital goods for many industries. However, the industry is strongly
dependent on the manufacturing sector that is widely considered to be the driver to create
business cycles, due to the fact that business cycles are characterised by a more volatile
nature in this sector than in others.

segment for power plant engineering where funding abilities and access have become
important factors in winning orders. 14
One driving factor for the growing importance of services lies in the increasingly complex design of machinery, that asks for
highly-qualified and better trained operators, maintenance and repair becomes know-how intensive. See: European
Commission, Enterprise and Industry Directorate-General (2007),The EnginEurope Report, Brussels 2007, p. 26. Beyond
that driver changing clients’ competence and interest in outsourcing services contribute to this development.