Hit rock bottom: Machine tool industry looks ahead

The German machine tool industry is facing a turning point. After a production decline of 8 percent in 2025 to 13.6 billion euros, the German Machine Tool Builders' Association (VDW) forecasts a growth of at least 1 percent to 13.7 billion euros for 2026. However, behind this cautious optimism lies an industry in upheaval, struggling with massive structural challenges.

Franz-Xaver Bernhard, chairman of the VDW, made it clear at the annual press conference last Monday that the decline is not cyclical but structural. Compared to the record year of 2018, production is now one-fifth lower, and price-adjusted even 35 percent. By October 2025, the workforce had already been reduced by 3.9 percent to 63,300 employees, and further capacity adjustments are foreseeable.

China takes over export leadership

A historic turning point occurred in 2025: Germany had to relinquish the world export championship to China for the first time. "As expected, China has massively increased its machine tool exports according to the government's strategy," explained Bernhard. With an increase of 18 percent, the Middle Kingdom took the lead. This development was reinforced by the domestic demand weakness in China itself.

Particularly concerning is the geographical expansion of Chinese competition. China is massively expanding its position in the ASEAN region, the same applies to Brazil, the Middle East, and North Africa. Even in EU countries like Germany, Poland, and Italy, Chinese exports continue to rise, although the overall imports of these countries were declining. In the 27 EU countries, China has doubled its import share to 10 percent over the past six years, while Germany holds just under 30 percent.

German exports, on the other hand, declined in 2025 in almost all world regions. The slump was particularly dramatic in the two largest sales markets, the USA and China. Only a few of the top 15 foreign markets were able to grow, especially Italy after a previous sharp decline, India with a stable upward trend, the Netherlands thanks to ASML's impulses for chip manufacturing, and Sweden.

Local-for-local as a survival strategy

In view of this development, the foreign production of German manufacturers is becoming increasingly important. Twelve larger machine tool manufacturers now produce in 43 branches worldwide and generate more than 40 percent of their total production there - over 3 billion euros in 2024. Foreign production thus accounts for a good fifth of the entire German machine tool production.

Regionally, this production is distributed with 45 percent in Europe, 32 percent in China, and 20 percent in the USA. "Companies that can perceive this have a better chance to participate more strongly in local market growth despite existing trade barriers and also realize cost advantages," emphasized Bernhard. Foreign production compensates for declining exports and stabilizes company results.

Europe as a strategic home market

Despite all international turbulence, Europe remains the top sales region for German manufacturers. About half of the exports go to the European home market, and when the German market is added, over 60 percent of machine tool sales flow into the region. In the USA, 13 percent are sold, and in China, 11 percent.

As the largest supplier in Europe, German manufacturers rank first among important suppliers in 17 of the 27 EU partner countries - including all major markets. Bernhard sees promising prospects here: "Customer industries such as the defense industry, aircraft manufacturing, electronics, energy, or medical technology are promising." The expansion of critical infrastructure in batteries and chips, the development of hydrogen technology, digitization, and data centers are unleashing investments in Europe. 

This assessment is shared by the German machine tool manufacturer Hermle. However, the company from Gosheim emphasizes that industries such as aerospace, medical technology, or energy technology are by no means new to them. "Both aerospace technology has been active in civil aviation for many years, but also in the defense sector and has always had an important share of Hermle's sales," explains Kai Bacher, board member for sales, research & development at Hermle, upon request. Medical technology, the electrical industry, and energy technology have also relied on Hermle's expertise in machining for many years. 

Especially the aerospace sector has appreciated and used the Hermle 5-axis concept combined with the mill/turn technology for engine components and complex impeller manufacturing for many years. The high precision of the machines and the perfect machining of high-strength materials offer enormous advantages here - also for other industries such as medical technology, tool and mold making, as well as for contract manufacturers serving a wide range of industries.

Although these areas cannot replace the automotive industry in their significance, according to Franz-Xaver Bernhard from VDW, they can mitigate the transformation pressure. After three years in reverse, machine tool orders are showing positive signs again at the current edge. The impetus came from abroad, while domestic demand remains weak. Orders from Europe have grown significantly, albeit after two very lean years.

Technological leadership as a trump card

"Our position as the second most important supplier worldwide is thanks to our technological leadership," Bernhard explained confidently. Despite the decline, Germany plays a significant role worldwide with an international export share of 17 percent. Companies repeatedly succeed in meeting the changing demands of customers - from individual machines to complete systems.

Innovations are currently being driven particularly by automation, productivity, and efficiency improvements in energy and material use, as well as digitalization and artificial intelligence. "We can score here because we have many years of experience, because we can do high-tech, and because we have access to excellent scientific resources," said Bernhard. Mature service and retrofit are also gaining importance when less is invested in new machines. 

At Hermle, AI applications are seen as an important building block for the future. "AI applications will support us in recognizing anomalies and deviations from sensor-acquired data on vibrations, forces, temperature, and much more before they lead to problems, thus ensuring and further increasing the availability and quality of our machines," said Bacher.

More technology in one setup: precision, speed, and process reliability

"There is still a lot of potential in the integration of more and more processes in the machining of a workpiece in one setup. It enables the highest precision, short cycle times, and maximum process reliability," explains Franz-Xaver Bernhard, and Kai Bacher confirms: "Hermle already paired machining centers for optimized milling technology with turning functionality at the beginning of the 2010s and developed its own machine series, the MT (Mill/Turn). The combination of drilling, milling, and turning in one setup is particularly suited for a variety of machining processes." 

For several years now, special cycles have also been integrated into the machining process. These cycles optimize machining and combine a wide range of technologies such as milling, chamfering, drilling, countersinking, turning, grinding, smoothing, and other special processes in one setup. Even exotic turning technology is finding more and more applications. 

Bacher lists the measurable advantages for customers: By integrating various technologies, re-clamping processes and cycle times are reduced, which directly affects the precision of the manufactured components. "Component manufacturing in one setup and machining without rework," says Bacher. Additionally, automation is seen as an additional tool to manufacture more economically, as further auxiliary times are reduced and processes do not have to be constantly interrupted.

The high intensity of research and development forms the foundation of this technological leadership. The R&D ratio in mechanical engineering is over 4 percent of sales, with 15 percent of sales achieved through product innovations. Internationally, German patent applications rank 4th. The research allowance, which enables tax write-offs especially for small and medium-sized enterprises, has provided a noticeable boost.

However, larger companies are increasingly considering relocating parts of research and development along with production abroad. "This must be prevented at all costs," demanded Bernhard, urging improvements to the research allowance: simplified access, less bureaucracy, and faster disbursement of approved funds.

Urgent appeal for economic reforms

Despite the adaptability of the industry, Bernhard made it clear that companies are exhausting their possibilities, but the government is needed to address the self-inflicted location problems. "As medium-sized businesses, we stand by this location because we cannot easily relocate our activities abroad," he emphasized.

The demands are concrete: capping social spending, extending and flexibilizing working hours, raising the retirement age, and reducing bureaucracy in labor law. "It is time to put aside the friend-enemy thinking and pull together to secure and expand employment," appealed Bernhard. "This should be the primary interest of both collective bargaining partners."

The essential basis for the forecasted stabilization in 2026 is the expected positive effects of the federal government's special fund, which is to be invested in infrastructure, defense, climate protection, digitalization, and mobility. The federal statistical office has been reporting rising industrial orders for three months, especially from domestic and European sources.

"Therefore, we expect economic policy reforms that will advance growth and investment in this country. We expect clear priorities and, above all, we expect speed," concluded Bernhard in his statement. With the infrastructure package, the course has been set, now speed is of the essence.