Strengthening Growth and Innovation in the European Machinery Industry
Like many other industries, the machinery sector in Europe has been adversely affected by various macroeconomic uncertainties. Macro factors including the war in Ukraine, the energy crisis, and continued supply chain challenges, put profitability at risk for companies in the machinery and equipment industry. However, some managed to overcome these adversities and flexibly adapt to the new situation, coming out stronger after the crisis in 2020. In fact, a study by our group found that those who braved the aftermath of the pandemic were able to leverage their competitive advantage and continued to deliver growth well into 2022 and beyond.
Economic Landscape: The Present and the Future
Demand for machinery products and services has continued to be strong in the post-pandemic years, supported by solid order intake. However, profitability once again is a major concern for machinery companies. Driven mostly by inflation, the persistent increase in material costs has increased the cost of goods sold, shrinking margins and shaving off profitability.
Setting against these pressures, the outlook is far from hopeless. The machinery sector still faces new challenges and opened opportunities. Pressed to compete, European firms must take advantage of emerging labour shortages, invest in technological innovation, and accelerate decarbonization processes. Moreover, a programmatic M&A approach offers the way to surmount most of their difficulties and seize fresh growth opportunities.
Comparative Performance: European Machinery Companies Lag Compared to North America
European machinery companies have been lagging their North American peers along all major vectors of margin growth, M&A activity, and productivity. Whereas European companies enjoyed strong revenue growth, at about 18% in 2022, they underperformed their North American peers in terms of profitability. While EBIT margins, at about 10.4%, remained strong in North America during the year 2022, those in Europe decreased slightly by 1.3 percentage points to about 8.6%. The divergence in profitability suggests heavy headwinds for European machinery companies in trying to remain competitive.
Despite these challenges, the regional data shows a more interesting underlying trend: companies that managed to bounce back from the pandemic crisis in 2020 maintained the positive momentum of their profitable growth through 2022. This success has also been driven by an uptick in M&A activity as companies look to bolster their portfolios and capabilities. In particular, M&A activity, especially in Nordic countries and North America, has moved in line with improved margin performance, indicating that strategic acquisitions can take some of the sting out of the financial squeeze.
Talent Shortage and Technological Innovation
One of the key challenges that the European machinery sector faces today is the increasingly worsening labour shortage. In fact, according to recent research, the number of open manufacturing jobs in Europe increased by 70% between 2020 and 2022. The shortage hit Germany hardest of all, with the German machinery sector accounting for about 250.000 job vacancies in 2022, up substantially from previous years. What has made this shortage a growing concern is that this sector today depends on skilled labour more than ever to handle advanced technologies like robotics and automation.
This is a gap that the machinery companies in Europe will have to fill-in by attracting, developing, and retaining talent, particularly in the fields of automation and digitalization. Companies that manage to integrate digital technologies into their operations will not only remain competitive but also gain a leading position in the marketplace that is under evolution.
In an increasingly commoditized market, technological innovation remains key to success. Machinery companies would have to invest significantly in R&D if they are going to stay at the leading edge of technological development, including applied AI, next-generation computing, and process automation. But most of all, innovation must happen at scale and pace. Collaboration with technology organizations and experts can enable the speeding up of digitalization and give access to the competencies that are required for driving progress in these important areas.
Decarbonization and Sustainability as Strategic Imperatives
European machinery companies are not only facing labour and technological challenges but must also press even harder toward sustainability. The net-zero emissions drive has made many industries stand at the core of their operations, and machinery companies can no longer afford to compromise on sustainable ways of production if they are to meet the 2050 goals of the Paris Agreement. Energy is one of the most important inputs in the manufacture of machinery, and shifting to renewable sources of energy will be important in reducing operational costs and increasing competitiveness.
Already, European countries are leading the world in renewable energy generation, especially the Nordics, where Norway, Denmark, and Sweden are in the front line. This opens a unique opportunity for European machinery companies to position themselves with global sustainability trends and to set themselves apart from their competitors. The companies offering low-carbon products and services would be better positioned to gain reputation boosts while improving their margins through high-quality product offerings.
The Role of Programmatic M&A in Advancing Competitiveness
Programmatic M&A can help European machinery companies master labour shortages, technological developments, and sustainability targets. There’s a positive correlation between M&A activity and margin performance, showing how companies pursuing a programmatic approach to M&A outperformed their peers in terms of profitability. A programmatic approach to M&A means acquiring meaningful market share through a series of acquisitions, with each helping the company fill capability gaps or stay ahead of industry trends.
With technology-driven acquisitions, machinery companies can acquire necessary patents and technological capabilities to drive innovation at scale in areas such as automation and digitalization. Acquihiring will solve the shortage of skilled labour through talent acquisition. Product expansion will be immediately reflected in revenue growth and customer growth. Regional expansion brings new markets with local knowledge, hence accelerating market entry and growth.
Conclusion: How to Find Your Way Through Uncertainty-Strategic Investments
The European machinery industry is certainly at a period of great uncertainty. Labor shortages, increasing material costs, and the pressure to innovate are just some of the challenges that companies must contend with. But with a clear focus on attracting and developing talent, accelerating technological innovation, and embracing sustainability, European machinery companies can remain competitive in an increasingly complex global market.
Companies in Europe can benefit from the adoption of a programmatic M&A strategy and from the leverage on digitalization when the new revenue streams are unlocked. With strategic investments in innovation, education, and sustainability, the machinery sector can emerge stronger and more resilient, driving growth and contributing to global decarbonization goals.
