Sectoral Report of Bank Austria Economics Department:
Clear-cut growth for mechanical engineering in Austria
- Mechanical engineering in 2014 will easily make up for last year's production decline of 0.8%
- Sector continually creating new jobs; employment rose by 3.1 percent in 2013, despite weak economic activity
- Sector successful so far in compensating for losses in price competitiveness due to high increases in wage costs
- Mechanical engineering proves competitiveness with growing foreign trade surpluses; EUR 5.2 billion in the black in 2013
- 79 percent "actively innovative" companies secure future successes
In the 2013 financial year, Austria's mechanical engineering sector saw production contract by 0.8 percent owing to weak economic activity, but still managed to grow revenues by 0.6 percent to roughly EUR 21 billion. The latest sectoral report on the mechanical engineering sector published by the economists at Bank Austria comes to a much more optimistic assessment for 2014: the sector will not just compensate for the previous year’s result in 2014, but is also likely to beat its long-term average growth trend of 5 percent.
Bank Austria economist Günter Wolf: "In 2014, mechanical engineering will benefit from the sharp increase in investment spending by businesses in Austria and in the main export markets. Germany in particular, the market for more than one third of the industry's exports, will play a crucial role in this development." The recovery of activity in the sector is evident in the improved order flow since the start of the year and in the much more optimistic production expectations of companies compared to the previous year.
The mechanical engineering sector is one of the few industrial employers that has been able to create new jobs for years. Eleven thousand new jobs have been created over the last ten years, representing an increase in employment of 17 percent in total. In comparison to this, fewer than 1,000 jobs were created in other industrial sectors over the same period. In 2013, mechanical engineering companies raised their personnel capacities by 3.1 percent to the record figure of 77,500, bucking the industrial trend, as the number of jobs stagnated in industry on average.
Although companies have become more cautious since the start of 2014 with regard to staffing, and current data along with business forecasts suggest a marked slowing of employment growth trends, the sector has remained a driver of employment in Austrian industry: in the first quarter of 2014 the number of new jobs in the sector rose by 1.2 percent, compared with a 0.2 percent fall in industry overall.
Mechanical engineering highly competitive by international comparison
Personnel expenses have risen in line with the number of new jobs created, but in recent years the mechanical engineering sector has no longer been able to compensate for this through productivity gains. Unit labour costs in the sector increased by approximately 15 percent from 2011 to 2013, compared to an average 8 percent for industry as a whole. Bank Austria economist Günter Wolf: "Measured in terms of economic success, Austria's mechanical engineering sector has proved to be relatively immune so far to the high structural and location-based costs, compared to both Austrian and international industry. The performance of the sector underlines the competitive strength of mechanical engineering." Production output has risen by 5.1 percent per annum on average over the last three years – and therefore much faster than the industrial average of 2.4 percent and the EU-27 industry output figure of 3 percent.
However, the analysis at sector level glosses over the fact that the competitiveness of smaller and less innovative companies with less capital is presumably suffering heavily under the conditions. One indication of this is the relatively broad differences in the earnings figures for the sector: according to the figures in the OeNB annual report, return on sales of mechanical engineering averaged out at 4.7 percent, with the strongest quarter producing a figure of 10.2 percent and the weakest quarter just 1.2 percent (latest figures: 2012).
Export demand generates crucial growth impetus
Mechanical engineering generates roughly 80 percent of its revenues from exporting, whereby roughly 23 percent heads to Germany and another 10 percent to the new EU Member States. That said, for years the main demand stimulus for the industry has come from markets outside Europe, first and foremost the USA, China and Russia, where 5 to 6 percent of exports are supplied. All told, high and sustainable export surpluses are generated with Austrian machinery in all of the main overseas markets.
Austria's foreign trade surplus with machinery and equipment has risen almost continuously since the early 1990s, reaching EUR 5.2 billion in 2013. Surpluses are generated in all of the main product groups, with the best results achieved with specialist machinery for processing plastics and wood, with cranes, lifts and construction machinery. As a rule, these are products with much higher product values, i.e. unit values both in exports and in imports. Consequently, their high-quality and very often tailored (custom-made) machinery sets Austrian mechanical engineering firms apart from competitors offering just cost and price benefits, thereby enabling them to compensate for market share lost with standard products.
With an R&D ratio of 3.5 percent, Austrian mechanical engineering numbers not just among the sectors most open to research in Austria, but also among the most research-minded mechanical engineering sectors in Europe. On average, mechanical engineering firms in the EU-27 spend roughly 2 percent of their revenues on research and development. High R&D commitment is the basis for innovative products and processes, which in turn are vital for the competitiveness of companies in a global environment. The number of mechanical engineering companies considered "actively innovative" in EU innovation surveys is rising steadily, and latterly totalled 79 percent – this is also an impressive figure in comparison to the average for Austrian industry, where 57 percent of companies are actively innovative.
"Austria's mechanical engineering companies are set not only to reach their long-term growth rate of approximately 5 percent in real terms in 2014, but also to maintain this average in the coming years. Machinery export trends show that the sector’s success is higher than the average in international competition, and in future it will likely move ahead of economic trends in the industry at European level too", said Bank Austria economist Günter Wolf, in conclusion.
Enquiries: Bank Austria Economics & Market Analysis Austria
Günter Wolf, Tel.: +43 (0) 50505 - 41954