The economic downturn is impacting the German economy broadly, and many industrial sectors are uncertain about how sustained high energy costs and changing competitive factors will affect their business. Many businesses find themselves grappling with worsening conditions just as they embark on extensive transformation initiatives that frequently necessitate substantial investments. Hence, there is a longing for a market environment that is less risky and more foreseeable.

According to the consulting firm Alix Partners, there is no sign of recovery yet for German manufacturers of industrial goods such as machinery, equipment, or components. The pressure is expected to increase further in 2024. "German industrial goods manufacturers, still the backbone of the German economy, need to sharpen their focus in the right areas now to avoid falling behind", says Patrick Widmaier, Partner & Managing Director at Alix Partners.

The German economy managed to escape 2023 with only minor damage. However, it is slowly reaching a point where order backlogs are declining, and companies need to adjust their capacities. According to calculations by Alix Partners, the average profitability of the industrial goods sector was around one-fifth lower in 2023 than in 2016.

Regarding the drivers of economic development worldwide, Widmaier expects the weakness in Europe to continue for some time. In contrast, things are still relatively good in the United States, where "the American economy is hardly affected by interest rate hikes." The consultant expects the US economy to remain strong until the presidential election in early November. "Election years typically go smoothly, but once the new administration is in place, it could become a bit more challenging." Especially if Donald Trump were to become president, one should expect America to focus more on itself and make imports more difficult. "However, most industrial goods companies have subsidiaries in the US and could more or less benefit from this situation. Therefore, I would not consider this scenario to be so risky", notes Widmaier.

Widmaier has a significantly more negative view of developments in China. Many problems need to be addressed due to the real estate and debt crisis, dampening economic development. "This will continue for some time." Nevertheless, China had strongly driven the industrial goods segment in Germany and Europe before the crisis, so the situation in China significantly affects European companies.

"We expect the engine to start running again in 2025, but it may take longer, depending on what happens in the world by then", Widmaier predicts. "It's a bit like gazing into a crystal ball at the moment. The industry is facing a period without significant identifiable investment impulses and has the task of positioning itself correctly for the future in a stagnant or slightly declining market."

Various issues need to be addressed for future security. Geopolitical uncertainty forces companies to rethink their supply chains. "Firms bring products closer to themselves to secure their delivery capability. This costs money and often leads to higher capital commitments and additional costs in times of higher interest rates", explains Widmaier. Cost control and pricing processes are therefore in focus. "Companies need to secure their sales and consider how to enter new markets, how to use their technologies elsewhere, and how to make their products cheaper", summarizes the consultant.

High energy prices will remain a central cost factor in the long term. According to Widmaier, this issue has often not been addressed intensively in companies in the past because energy was so cheaply available. "Those who neglect it now will have a permanent cost problem", warns Widmaier.

The increasing shortage of skilled workers in Germany is seen as a particularly serious problem. Widmaier considers it a crucial location advantage in Europe and Germany that companies have "a well-trained workforce". "This needs to be nurtured and expanded."

Instead of reducing jobs, companies should send employees to qualification programs, Widmaier advises. Companies may have to accept temporarily lower profitability for this. "It burdens profits in the short term but has a positive long-term impact."

A big question mark at the moment is the extent to which production could be relocated from Germany due to deteriorating location factors. As per Widmaier, international networking and division of labor have been "significant drivers of global prosperity" since World War II. Currently, industries are naturally contemplating how to reliably serve markets, no longer necessarily outsourcing production solely based on cost-effectiveness but also considering aspects of delivery security.

"Nevertheless, there will continue to be international division of labor in the future, but companies will create buffers and secure themselves", adds Widmaier. Most companies affected by location risks are already internationalized and secured against national isolation tendencies through their market presence worldwide anyway.

"The fact that they serve the world market is what makes these companies successful and stabilizes their business. In Germany, wages are high, but if you consistently work on automation and invest, you can keep manufacturing in the country. This makes sense because it also preserves know-how", concludes the consultant.