Digitalisation Promises Productivity Gains in the Mechanical Engineering Sector

The productivity measured in the mechanical engineering sector has experienced a decrease in the years after the financial and economic crisis of 2008/09 – despite high capacity utilisation, growing profits and employment being at a record high. This paradoxical development cannot be attributed to one single cause, but rather to the interplay of several factors, including initial investments in digitalisation, which only pay off at a later stage, as well as statistical effects resulting from the increasing internationalisation in the mechanical engineering sector. In addition, price increases tend to be overestimated in official statistics, which in turn leads to productivity growth being underestimated. Finally, the growing share of services within the mechanical engineering sector also plays a considerable role in this development.

“It is especially the progressing digitalisation in the German mechanical engineering sector that will help this industry achieve productivity gains in the medium and long term,” says Dr. Thomas Lindner, chairman of the board of trustees of the IMPULS-Stiftung. These are the key findings of the joint study “Produktivitätsparadoxon im Maschinenbau” (“The Productivity Paradox in Mechanical Engineering”, available in German only) conducted by the Centre for European Economic Research (ZEW), Mannheim, and the Fraunhofer Institute for Systems and Innovation Research (ISI) on behalf of the IMPULS-Stiftung, a foundation associated with the German Mechanical Engineering Industry Association (Verband Deutscher Maschinen- und Anlagenbau – VDMA).

The starting point of the study is the phenomenon of contradictory developments observed in the mechanical engineering sector in Germany in the years following the financial and economic crisis of 2008/09. On the one hand, employment rates and exports have grown in this period, while on the other hand, productivity has been stagnant in this flagship industry of the German economy. Productivity gains are, however, an essential factor contributing to a sustainable and successful development of the economy, of competitiveness, as well as of growth and profits that can then be invested or distributed to shareholders and workers.

Contradictory developments in the German mechanical engineering sector

“For such an innovative and internationally oriented branch of industry as the German mechanical engineering sector, these contradictory developments are not only surprising, but also unique compared to other industries in Germany or the mechanical engineering sectors in other countries,” explains Dr. Christian Rammer, deputy head of the ZEW Research Department “Economics of Innovation and Industrial Dynamics” and co-author of the study. “In our study we therefore focused on identifying the reasons for the productivity paradox in the German mechanical engineering sector,” Rammer continues. On the basis of empirical analyses and interviews with companies, the study examined seven different approaches that might explain the productivity paradox in the mechanical engineering sector, four of which have been confirmed by the results of the study, while the other three have not been matched by empirical evidence.

These four relevant approaches include, first of all, a time effect which explains why digital change in the production area of the mechanical engineering industry has so far failed to produce productivity gains on a broader scale. One of the reasons for this is that new business models are only just beginning to emerge. Secondly, the sector’s increasing international orientation is – statistically speaking – contributing to a decline in productivity, since profits generated at business locations abroad are not taken into account when calculating overall productivity in Germany, whereas expenses incurring in Germany (for R&D, construction, marketing or administration), which contribute to the success on international markets, are included in the calculation.

Both businesses and policymakers will need to increase efforts

Thirdly, the productivity decline is also attributable to a rising share of services in the mechanical engineering sector. While this allows firms to exploit new business potentials, the service branch is also characterised by structurally weaker productivity levels, since the automation potential of services is rather low. Finally, the price development in the mechanical engineering sector has been found to be difficult to identify accurately, since products undergo major changes and improvements over time, for example through innovation, or are tailored to specific customers. As a result, both the gross value added and productivity development tend to be underestimated in official statistics.

The study, however, excludes the trend towards lot size one production and the broadening of the product range, as well as the investment reluctance in the sector and firms hiring workers that are currently not needed on a precautionary basis, as possible reasons for the productivity paradox in the mechanical engineering sector.

In order to address the productivity paradox in the long term, the study concludes that companies should make targeted strategic investments in technologies, develop new business models – in particular by building on smart services – and engage in cross-sectional collaborations. Furthermore, policymakers should also ensure a good infrastructure, particularly with regard to widespread access to high-speed internet. In addition, approaches to measure the price development in the mechanical engineering sector should undergo extensive revision, so as to provide a better picture of the productivity development of the industry. To this end, the study recommends a standardised measurement concept based on structural business statistics of the German Federal Statistical Office, according to which economic data should be adjusted on the basis of the producer price index.

For further information please contact:

Dr. Christian Rammer, Phone +49 (0)621-1235-184, E-mail christian.rammer@zew.de