Advanced Industries Practice

European machinery
companies:
Opportunities in
recovery from crisis
McKinsey benchmark data highlight challenges for European
machinery companies. A response focused on supply chains and
sustainability can help.
by Samuel Bayerlein, Dorothee Herring, and Thorsten Schleyer

© Westend61/Getty Images

December 2022
 The ongoing effects of the COVID-19 crisis. Supply may compound regional complications, such as
chain disruptions in a period of high demand. An projected increases in labor costs.
acute energy crisis. These interlocking crises have
These challenges require expansive responses.
buffeted the machinery sector, as they have every
European machinery leaders should manage their
other part of the economy. However, these crises
supply chains to control their inventory levels and
also present significant opportunities in recovery.
embrace sustainability. Both tasks are broad and
Despite an uncertain global economic outlook,1 therefore easier said than done, but the rewards
machinery companies did surprisingly well are outsize.
throughout 2021. According to our benchmark,
machinery companies have come out of the Multilayered challenges and
COVID-19 crisis stronger than before: 50 percent uneven performance
of the companies in our sample saw higher revenue
Our updated benchmark highlighted five
in 2021 compared to 2019, 60 percent saw higher
characteristics of European machinery companies:
EBIT margins, and 35 percent improved on both
dimensions.2 The companies that outperformed 1. European machinery companies’ performance
their peers on profitability after the peak of the lags behind that of their North American
COVID-19 crisis in 2020 did so by increasing counterparts.
efficiency, optimizing pricing, and prioritizing high-
2. Regions within Europe perform differently.
margin products.
3. Some companies rely heavily on certain
However, the news is not entirely positive. Thirty
customers, particularly from the automotive
percent of companies in our benchmark group
sector.
have not increased their revenue or margins, which
suggests that they have not recovered from the 4. European machinery companies operate in a
initial dent in performance from the COVID-19 context of escalating labor and material costs.
crisis. At the same time, escalating costs, supply
5. Supply chain challenges are leading to rising
chain disruptions, and the critical transition
inventory levels.
toward lowering emissions and operating more
sustainably—particularly in the automotive sector— These findings reflect the sector’s structural
may complicate machinery companies’ ongoing challenges amid an ongoing sustainability transition.
quest for growth.3 These structural challenges

Thirty percent of companies in our

benchmark group have not increased
their revenue or margins, which
suggests that they have not recovered.
1
“World economic outlook update: Gloomy and more uncertain,” International Monetary Fund, July 2022.
2
The benchmark draws from verified sources and contains, as of publication, major data points on 104 machinery companies’ balance sheet
metrics, cash flow, and overall information such as share price and head count. The benchmark contains European and North American
companies. For most of the KPIs, data are available from 2013 to 2021.
3
In this article, the European companies we reference are based in the European Union, Scandinavia, and Switzerland.

2 European machinery companies: Opportunities in recovery from crisis

Lagging performance compared supply chain disruptions.4 Second, North American
to North American peers machinery companies adjusted prices to reflect
European machinery companies are on a separate the increased cost of supplies earlier than their
path from their North American peers. While European counterparts did. Finally, North American
revenue growth followed a similar path for European companies derive a higher share of their revenues
and North American companies from 2016 to 2021, from services, which yields higher overall margins.
European companies’ profitability has not kept up
Regional differences within Europe
with that of their North American peers (Exhibit 1).
Machinery companies’ performance within Europe
A fundamental challenge for European companies also differs across regions. For instance, Nordic
is how to achieve margins comparable to those of companies have grown their profitability and
their North American peers. Our analysis shows resilience,5 achieving outcomes that are similar to
that North American companies outperformed those of their North American peers.
their European peers on EBIT margins from 2016
However, the experiences of machinery companies
to 2021. North American firms’ margins shrank by
in Germany have exemplified the challenges in
0.9 percentage points from 2019 to 2020, while
Europe as a whole. German-based companies had
European companies’ margins dropped by 1.9
a margin drop of 3.1 percentage points from 2019 to
percentage points.
2020, giving them the lowest margins in Europe.
Several factors contribute to this performance
Unlike their peers in the rest of Europe, German
gap. First, North American players tend to operate
companies have not yet been able to offset their
with a less complex product portfolio. This creates
higher costs with higher productivity, which is defined
lower complexity costs, especially in the face of
Web <2022> as revenue per full-time equivalent (Exhibit 2).
<European Machinery Industry>
Exhibit <1>1 of <2>
Exhibit
While revenue development was similar for both regions, European peers’
While revenue development was similar for both regions, European peers’
profitability suffered far more.
profitability suffered far more.
Revenue development, indexed (2016 = 100) EBIT margin, %

125 14 North
Europe America
13
120
North 12
115
America 11
110 10 Europe
9
105
8
100
7

2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021

Note: North America, n = 47; Europe, n = 57.

McKinsey & Company

4
For more on the costs of complexity, see Bikramjit Chaudhury, Alessandro Faure Ragani, Ruth Heuss, and Thorsten Schleyer, “Calculating
complexity: Maximizing the value of customization,” McKinsey, April 7, 2021.
5
Henry Legge, Fabian Newger, Thorsten Schleyer, Ville Väliaho, “The ascent of Nordic companies in the global machinery market,” McKinsey,
April 21, 2021.

European machinery companies: Opportunities in recovery from crisis 3

 Web <2022>
< European Machinery Industry>
Exhibit <2>
Exhibit 2 of <2>
German machinery companies in the benchmark that could not lower their
German machinery companies in the benchmark that could not lower their
material cost share had lower margins.
material cost share had lower margins.
Margin development of the German machinery industry, 2019–21, (n = 21)

Margin development
–0.4 p.p. +1.1 p.p. 2019–21 in p.p.1

Yes –1.9 p.p. +2.1 p.p. +1.9 p.p.

Material cost
share improved2

No –2.8 p.p. +0.6 p.p. –0.5 p.p.

No Yes

Productivity improved3
1
Percentage point.
2
Changes in material cost share calculated by comparing 2021 data to the average of 2016–19.
3
Productivity defined as revenue per full-time equivalent. Changes in productivity calculated by comparing 2021 data to the average of 2016–19.

While
McKinseyabout a third of German players were able to
& Company
improve their margins by increasing productivity
and reducing material cost share, 45 percent of
non-German companies in our benchmark sample
were able to improve on both dimensions.
Reliance on sectors affected by
sustainability transformations,
particularly the automotive sector
Our benchmark shows that the companies whose
profitability and margins have suffered the most are
the ones that provide equipment for downstream
manufacturing, particularly in industries that are the
most affected by sustainability transformations.
The most relevant example is European machinery
companies’ relationship to the automotive sector.
The automotive industry’s work toward more
sustainable operations and offerings—such as
electric vehicles (EVs)—has drawn a response
from European machinery companies. Machinery
companies have lowered their R&D ratios (the share
of revenue that is spent on R&D) in 2021 to 4.0
percent (down from 4.4 percent in 2020), the first
reduction in seven years.
Now that the way forward within the EV space
is more tangible, machinery companies in the
benchmark sample that have major exposure to
the automotive sector are investing, with capital
expenditures rebounding after a drop in 2020. The
capital expenditure ratios of European machinery
companies with exposure to the automotive
industry were 1.5 times higher compared to those of
companies with no automotive sector exposure.
The energy sector also faces a transition to help it
meet sustainability goals, so machinery companies
with heavy exposure to the industry will likely
encounter similar challenges. Specifically, we
expect demand for heavy machinery, such as drilling
equipment, to decline as the energy sector moves
toward renewables.

4 European machinery companies: Opportunities in recovery from crisis

Two weeks of production losses due
to a lack of key inputs could create
a 1.7-percentage-point loss for the
average European machinery company.
Escalating costs
For European machinery companies, increases in
the cost of labor should be a built-in expectation.
In the past, we have seen an increase in personnel
cost of 3.5 to 4.0 percent per year.6 If personnel
cost continues to rise by 5.0 percent per year,
profitability for the average European machinery
company will decline by 1.4 percentage points if
nothing else changes. Significantly, companies
with a labor-to-material cost ratio of more than 40
percent—which describes one in three European
companies in our benchmark—would lose an
average of 1.7 percentage points in margin if they do
not have an effective response.
Projected cost increases should be especially
relevant for German machinery companies: two
out of three German machinery companies in our
benchmark have lower margins than they did in the
2016–19 period because they were constrained in
their ability to contain overall costs. By contrast,
two out of three non-German European machinery
companies have improved their margins since 2020.
Supply chain challenges leading
to rising inventory levels
The effects of unpredictable supply chains are
undeniable. Our scenario analysis suggests that
two weeks of production losses due to a lack of key
inputs could create a 1.7-percentage-point loss for
the average European machinery company.
Supply chain disruptions hit the machinery sector
twice. Disruptions quickly create production
problems because many companies have optimized
6
For more, see “Results of the 2022 negotiations: Two-stage pay increase plus $3,000 euros,” IG Metall, accessed November 30, 2022.
European machinery companies: Opportunities in recovery from crisis
their supply chains for the pre-COVID-19 context.
This means strong relationships with relatively
few suppliers and sourcing from around the world
for the best technologies and prices. At the same
time, customer demand has become more volatile.
Customers—who face supply chain disruptions
of their own—are ordering more than expected
to ensure a minimum supply of inputs. Customers
may also respond to disruptions of their own by
canceling orders on short notice.
Indeed, supply chain issues economically
constrained machinery companies across all
regions during the benchmarking period. About 50
percent of companies in the sample were not able to
grow their revenue in 2021 compared to 2019.
Supply chain issues kept many companies from
completing their products. More than 80 percent
of the European companies in our benchmark
registered increased inventory levels in 2021
compared to average levels in 2016 to 2020. The
inventory ratio for European machinery companies
in our benchmark increased by 3.4 percentage
points to 20.6 percent, compared to average
inventory ratios in 2016 to 2020. Days inventory
outstanding, a measure of how quickly inventory
is converted into revenue, also increased by ten to
15 days. This is the largest change in inventories in
more than five years.
Inventory challenges are associated with lower
revenue improvements among companies in our
benchmark sample. Of the companies that did not
increase their revenues, more than 55 percent
5
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6 European machinery companies: Opportunities in recovery from crisis
registered their highest shares of inventory to to share the costs of rising materials. Done right,
revenue since 2016. Among this group, about this could reinforce existing relationships and
two-thirds have high levels of exposure to the protect margins at the same time.
automotive sector.
Embrace sustainability
Similarly, the net working capital ratio across Rather than deal with disruptions from
the European region declined more than one sustainability, European machinery companies have
percentage point from 2019 to 2021. This suggests an opportunity to reframe it as an opportunity for
that assets have not been able to outpace liabilities. themselves and for their customers. For instance,
sourcing for raw materials such as steel can be a
Combining short- and long-term moves
significant step toward decarbonizing operations
and helping to lower customers’ Scope 3 emissions
Decision makers at machinery companies can
(emissions from activities and assets not controlled
examine the strategic implications of escalating
by an organization).8 European machinery
costs, snarled supply chains, and the transition
companies that accomplish this task especially
toward more sustainable ways of operating.
soon—or especially well—may also be able to
Managing their supply chains with an eye toward
achieve price premiums.
inventory management and operating more
sustainably can have outsize effects on overall European machinery companies could also use
performance. sustainability as part of their value proposition.
Offerings that support sustainable industries—such
Manage supply chains to improve inventory levels
as reactors for carbon capturing, compressors for
High inventory levels are a sign of larger challenges.
heat pumps, or machines for sustainable packaging—
A central culprit since 2020 has been inconsistent
may be significant opportunities for growth.9
supply chains. Critical best practices include the
overhauling of supply chains, the incorporation
of new suppliers, localization, second sources,
analytics, and end-to-end monitoring.7 In the face of structural, global challenges as well
as industry-specific ones, a big-picture response
One way to build more flexibility into supply
centered on managing supply chains, inventory
chains is to reduce the variability of parts required
levels, and sustainability can steady the European
to manufacture products. Delaying product
machinery industry. Done right, the industry can
customization in the manufacturing and assembly
continue to recover from the initial COVID-19 crisis,
process can also help. This makes modular supply
navigate volatile markets, and achieve growth and
chains more relevant to supply chain resilience.
new opportunities.
Decision makers at European machinery companies
could also collaborate more closely with customers
7
“ Taking the pulse of shifting supply chains,” McKinsey, August 26, 2022; Jan Henrich, Jason Li, Carolina Mazuera, Fernando Perez, “Future-
proofing the supply chain,” McKinsey, June 14, 2022; “Big data and the supply chain: The big-supply-chain analytics landscape (Part 1),”
McKinsey, February 16, 2016; “Supply chains: To build resilience, manage proactively,” McKinsey, May 23, 2022.
8
For more, see Christian Hoffmann, Michel Van Hoey, and Benedikt Zeumer, “Decarbonization challenge for steel,” McKinsey, June 3, 2020.
9
For more on the circular economy, see Eric Hannon, Marianne Kuhlmann, and Benjamin Thaidigsmann, “Developing products for a circular
economy,” McKinsey, November 14, 2016. For more on sustainable packaging, see “Sustainability in packaging: Inside the minds of global
consumers,” McKinsey, December 16, 2020.
Samuel Bayerlein is a consultant in McKinsey’s Munich office, where Thorsten Schleyer is a partner; Dorothee Herring is a
partner in the Düsseldorf office.
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