After two consecutive years of decline, the German machine tool industry is cautiously preparing for a modest upturn. Production is forecast to rise by around 1% to 13.7 billion euros in 2026. Franz‑Xaver Bernhard, chairman of the
VDW (German Machine Tool Builders’ Association) and presenting the outlook at the association’s annual press conference, said: “The fundamental basis for this is the expected recovery of domestic demand.”
He noted that investment activity in 2025 was held back by high costs, poor planning certainty and the lack of economic reforms needed to revitalise Germany’s manufacturing base. However, some relief is expected this year from the German government’s so‑called “special assets” — funds allocated for infrastructure, defence, climate protection, digitalisation and mobility — which may at least provide a mild stimulus.
Production in 2025 had slipped by 8%, leaving overall output around one‑fifth below the 2018 peak — a shortfall that widens to 35% once adjusted for inflation. Both domestic sales and exports weakened, with almost all major foreign markets contracting. Only a handful of the top 15 export destinations recorded growth.
Mr Bernhard said: “We are very concerned about competition from China.” As expected, China has significantly expanded its own machine‑tool exports — up 18% — fuelled in part by softer domestic demand and supported by state strategy. Germany has now lost its long‑held position as the leading exporter to China. Chinese suppliers are rapidly strengthening their presence across the ASEAN region, Brazil, the Middle East and North Africa. Meanwhile, exports to certain European Union (EU) partners, including Germany, Poland and Italy, have continued to edge higher despite overall import declines in those countries.
Mr Bernhard continued: “Not good news, but we are making intensive use of all options available to us to adapt to structural change.” These adjustments, he acknowledges, inevitably include capacity reductions. By October 2025, employment among companies with more than 50 staff had fallen by 3.9% year‑on‑year, to 63,300 people. To regain momentum, he warned that the industry must use every tool at its disposal — ranging from capacity reshaping and foreign production to broader market diversification, strengthening technological leadership, intensifying R&D efforts and securing high‑calibre personnel.
Overseas footprintA growing number of major German machine tool manufacturers are now producing abroad. Twelve of the largest companies have established international manufacturing sites, which collectively account for more than one‑fifth of Germany’s total machine tool output. Of this, 45% is produced in Europe, 32% in China and 20% in the USA. This overseas footprint helps offset falling exports and supports business stability. Mr Bernhard noted: “Companies that recognise this have a better chance of participating more strongly in local market growth despite existing trade barriers and also realising cost advantages.”
Exports to the two largest international markets, the USA and China, fell sharply in 2025 due to US tariffs and declining Chinese imports. Europe remains the strongest commercial base for German manufacturers, accounting for around half of all exports. When domestic sales are added, more than 60% of total turnover is generated within the region.
Customer industries such as defence, aerospace, electronics, energy and medical engineering offer promising prospects. Investment activity is also being driven by Europe’s efforts to expand critical infrastructure — from battery and semiconductor production to hydrogen technology, digital‑ready operations and data‑centre construction. These areas will not eclipse the automotive sector’s importance, but do provide welcome relief as the auto industry navigates its transformation.
Despite last year’s decline, Germany maintains a global export share of 17% and retains its position as the world's second‑largest supplier. Mr Bernhard said: “The industry owes its position as the second most important supplier worldwide, with a 17% share, to its technological leadership.” German manufacturers continue to excel at meeting customised requirements, whether for standalone machines or integrated systems.
Innovation remains strong, particularly in automation, productivity enhancement, resource efficiency, digitalisation and AI‑driven production. “Here we can benefit from our many years of experience, because we know how to make the most of high‑tech, and because we have access to excellent scientific resources. And moreover, we also offer sophisticated service and retrofitting. Both are gaining in importance as less is invested in new machines” he added. Emerging fields such as e‑mobility, digital transformation and artificial intelligence are expected to open new opportunities.
This technological leadership is underpinned by high levels of corporate R&D activity. In mechanical engineering, R&D expenditure amounts to more than 4% of revenue, while 15% of turnover stems from product innovations. German patent applications rank fourth worldwide. The Research Allowance — a tax incentive introduced to support innovation — has already provided a significant boost, particularly for small and medium‑size businesses.
Less bureaucracyMr Bernhard said: “The Research Allowance could be further improved by making access to it simpler and less bureaucratic and paying out approved funds more quickly. Although more than four‑fifths of R&D is carried out domestically, larger companies are increasingly relocating parts of development alongside their production abroad. This is something we must prevent.”
Highly skilled personnel remain the backbone of the industry’s technological strengths. Communicating the appeal of careers in engineering and offering modern training and attractive working environments are long‑term priorities. Even with current workforce reductions, the medium‑term demand for specialists remains high.
Mr Bernhard also called for reforms to strengthen the labour market. He said: “I am thinking of capping social expenditure, extending and making working hours more flexible, raising the retirement age, and the debureaucratisation of labor law. The time has come for the social partners to discard the friend‑foe logic and to pull together to secure and expand employment. That should be the overriding interest of both social partners.”
Small and medium‑size manufacturers, in particular, will continue to rely heavily on engineers to maintain their technological edge. Over 60% of the companies surveyed in the latest VDMA engineers’ study plan to maintain or increase engineering staff numbers. This demand will persist even as artificial intelligence (AI) becomes more widespread. Mr Bernhard noted: “Improved education and training have long been demanded by the mechanical engineering industry. There is a need for minimum standards and improved quality across the education system, the introduction of Technology as a compulsory school subject, and rapid implementation of the ‘Digital Pact’.
He concluded: “The German machine tool industry is facing challenges on many fronts in international competition. While companies are working intensively in all areas within their control, the government must address Germany’s structural location problems. SMEs are committed to this location because they cannot easily relocate their activities abroad. That is why we expect economic policy reforms that encourage growth and investment here, in this country. We expect clearly defined priorities, and above all we expect a certain urgency.”