Theme 3
Industrial performance
Focus on the UK machinery and equipment (M&E) manufacturing sector
Key policy questions addressed
- How does the UK machinery and equipment (M&E) manufacturing sector perform in international comparison?
- Is the UK M&E sector investing enough in R&D compared to the rest of UK manufacturing?
- What are the drivers behind the productivity, value added and employment economic trends in the UK M&E sector?
Machinery and equipment manufacturing sector - key trends
The UK machinery and equipment (M&E) sector is a major global player, but some sub-sectors have contracted significantly.
- According to OECD data, the UK ranked among the top players in the world by value added in 2021, behind Japan, the US, Germany and Italy but ahead of the Netherlands, France and Switzerland.
- Between 2008 and 2021, value added in some M&E sub-sectors experienced substantial expansion, with other general-purpose machinery and lifting and handling equipment growing by 41% and 36%, respectively. Conversely, some sub-sectors have experienced a significant contraction, particularly other engines and machinery for plastic and rubber, which declined by 50% and 90%, respectively.
- Overall, value added in the M&E sector contracted from £13.1 billion in 2008 to £12.5 billion in 2021. However, the productivity of the M&E sector remains 37% higher than the average productivity of the whole manufacturing sector and 60% higher than the whole economy.
A decline in employment across 17 out of 21 UK M&E sub-sectors resulted in a loss of 28,000 jobs between 2011 and 2021.
- The UK M&E sector ranked sixth in terms of employment among OECD countries in 2021, employing 162,000 people.
- This represents a loss of 28,000 jobs compared to 2011, amounting to a 15% reduction over the course of 10 years.
- Among M&E sub-sectors, the most significant job losses between 2011 and 2021 were reported in machinery for mining, quarrying and construction
(-5,300), machinery for plastics and rubber (-4,000), office machinery (-3,200) and pumps and compressors (-3,200).
While the UK is the 10th largest M&E exporter in the world, the country has one of the largest trade deficits.
- The UK’s trade deficit in the M&E sector more than tripled between 2011 and 2022, ranking 176th out of 188 countries in trade balance.
- The largest UK M&E sub-sectors by trade value in 2022 were other engines and machinery for mining, quarrying and construction.
- China, the largest M&E exporter, has been gradually gaining market share at the expense of other competitor countries.
Growth of business expenditure on R&D (BERD) in the UK M&E sector has been slower than in the manufacturing sector as a whole.
- Business expenditure on R&D (BERD) in the M&E sector represented 5.9% of total BERD in the UK manufacturing sector in 2022.
- BERD in the UK M&E sector rose from £0.7 billion in 2000 to £1 billion in 2020, with a compound annual growth rate (CAGR) of 1.9%.
- This is lower than the compound annual growth rate observed for overall UK manufacturing (2.9%) during the same period.
Machinery and equipment manufacturing sector - key drivers
- The M&E market depends on demand from other sectors and is typically sensitive to economic cycles. The UK M&E sector aggregates many sub-sectors, which are quite distinct from each other and which respond differently to economic cycles. Sales orders in the M&E sector are usually tied to the long-term investment plans of other sectors. In periods of economic uncertainty, these plans are often postponed.
- High production costs, political uncertainty and foreign ownership are among the factors influencing offshoring decisions in some sub-sectors. Reasons for offshoring appear to be the loss of key suppliers and high production costs in the UK. For example, the fluid power equipment and the valves and actuators sub-sectors are affected by the high cost and low availability of steel in the UK. As a result, many products are designed in the UK but manufactured in China. The UK’s exit from the EU has contributed to the consolidation in Europe of manufacturing in the pumps and compressors sub-sector, which is dominated by European firms.
- Changes in regulations, intra-industry trade and policy changes in export markets may have impacted UK imports and exports. New trade rules with the EU have impacted the ability of SMEs to export to Europe. The decision to move away from the European CE conformity assessment marking, and to create a UK-specific UKCA marking, followed by a reversal of this decision, has also affected some sub-sectors. New regulations require certain valves to be tested within China by a local inspector, adding costs to qualify for the Chinese market.
- Labour shortages have impacted growth and incentivised automation across sub-sectors. The consulted firms reported difficulties hiring younger and more diverse workers for the sector. These difficulties cut across sub-sectors and functions, affecting both engineering and technician positions. New skills are also needed, for example, cyber-security, robotics, IoT, advanced manufacturing, cloud and big data. Investments in automation and factory optimisation have been occurring in the sector and partly explain the reduction in employment.
- R&D investment decisions in the UK M&E sector are often made abroad. There is a dominant presence of foreign-owned original equipment manufacturers (OEMs) and distributors across UK M&E sub-sectors. The consulted stakeholders perceive UK M&E companies to be less R&D-intensive than foreign ones, except for some large internationally competitive firms. The UK M&E sector is dominated by SMEs, which might have fewer resources available for R&D and fewer advisory and support options from the broader innovation ecosystem than large firms.
- Sustainability, digitalisation and materials research trends have shaped the direction of innovation efforts in recent years. Emissions regulations, such as those for non-road mobile machinery, and net-zero targets make it imperative to develop more energy-efficient and environmentally sustainable machines and equipment.
Machinery and equipment(M&E) manufacturing – statistical definition
This report uses the statistical definition applied by the UK Office of National Statistics (ONS) – UK SIC 2007 code Division 28: Manufacture of machinery and equipment n.e.c., which includes:
- Group 28.1: Manufacture of general purpose machinery (Other engines; fluid power equipment; other pumps and compressors; other taps and valves; and bearings, gears, gearing and driving elements).
- Group 28.2: Manufacture of other general-purpose machinery (Ovens, furnaces and furnace burners; lifting and handling equipment; office machinery; power-driven hand tools; non-domestic cooling and ventilation equipment; other general-purpose machinery n.e.c.).
- Group 28.3: Manufacture of agricultural and forestry machinery
- Group 28.4: Manufacture of metal forming machinery and machine tools
- Group 28.9: Manufacture of other special-purpose machinery (Machinery for metallurgy; machinery for mining, quarrying and construction; machinery for food, beverage and tobacco processing; machinery for textile, apparel and leather production; machinery for paper and paperboard production; plastics and rubber machinery; and other special-purpose machinery n.e.c.).
The definition excludes:
The manufacture of metal products for general use, associated control devices, computer equipment, measurement and testing equipment, electricity distribution and control apparatus, and general-purpose motor vehicles.
Note: the repair and maintenance services of machinery and equipment are coded in Class 33.12 in the UK SIC 2007. For the detailed statistical definition for each subsector within the machinery and equipment manufacturing, please refer to the UK Standard Industrial Classification (SIC) Hierarchy published by the ONS
Source: ONS, 2023.
Machinery and equipment (M&E) manufacturing – contribution to the UK economy
Machinery and equipment (M&E) manufacturing – value added, employment and labour productivity
- Based on OECD data, the UK ranked fifth among member countries by machinery and equipment (M&E) manufacturing value added in 2021, behind Japan, the US, Germany and Italy but ahead of the Netherlands, France and Switzerland [1].
- The M&E value added for the US was eight times larger than for the UK in 2021.
- In terms of employment, the UK ranked sixth among OECD member countries, with 162,000 people employed in the sector, below the US, Japan, Germany, Italy and Mexico.
- A labour productivity value of USD137,100 per employee places the UK M&E sector fifth among OECD comparator nations, ahead of countries such as Japan, Germany and Italy.
- The consulted stakeholders suggested that the high productivity of the Netherlands could be attributed to its focus on high value-added M&E segments such as machinery for semiconductors.
- The UK is Europe’s leading producer of construction equipment, accounting for 28% of total European production, followed by Germany with 21% [2].
Note: [1] Data does not cover China, Korea or India.
[2] Construction Equipment Association (2023) The UK’s Construction Equipment Sector Report 2023.
UK machinery and equipment (M&E) manufacturing – value added (1/2)
- According to ONS data, value added for the UK M&E sector experienced a contraction between 2008 and 2021, with a compound annual growth rate (CAGR) of -0.4%.
- In contrast, value added for the UK manufacturing sector grew with a compound annual growth rate (CAGR) of 1.3% during the same period.
- The UK M&E sector aggregates many sub-sectors that are quite distinct from one another and that show variable degrees of sensitivity to economic cycles and instability.
- In general, sales orders are tied to the long-term investment plans of other companies. In periods of economic uncertainty, these plans are often postponed. For example, a large share of demand for valves and actuators comes from the oil and gas sector and is indirectly affected by global oil prices and investments in oil and gas projects.
- The consulted stakeholders pointed out that M&E sectoral growth may have been constrained by regulatory uncertainties, rising costs and the loss of key suppliers, which could have resulted in the offshoring of various operations. For example, offshoring in the fluid power equipment and the valves and actuators subsectors have been driven by labour and energy costs and low availability of raw materials such as steel in the UK.
UK machinery and equipment (M&E) manufacturing – value added (2/2)
- Within M&E sub-sectors, other engines[1] and machinery for plastic and rubber were the sub-sectors that experienced the highest reduction in value added between 2008 and 2021, losing £1.2 billion (50%) and £1.1 billion (90%), respectively.
- In contrast, lifting and handling equipment and other general-purpose machinery experienced the highest value added increments during the same period, gaining £0.4 billion (41%) and £0.5 billion (36%), respectively, becoming the two sub-sectors with the largest value added in 2021.
- Other sectors that experienced significant value added growth between 2008 and 2021 include other special-purpose machinery, agricultural and forestry machinery, and fluid power equipment.
Note: [1] “Other engines” includes the manufacturing of internal combustion engines, steam and other vapour turbines, hydraulic turbines, and wind and gas turbines. In addition, this sub-sector includes the manufacturing of parts such as pistons, piston rings, carburettors and exhaust valves. The manufacturing of motor vehicle, aircraft and cycle propulsion engines and generator sets is excluded from this sub-sector.
UK machinery and equipment (M&E) manufacturing – employment (1/2)
- With 163,000 total employment in 2021, the UK M&E sector employed 28,000 fewer people than in 2011 (14.7% reduction).
- This reduction is higher than that experienced by the UK manufacturing sector, which employed 2.7 million people in 2021, around 4.8% fewer than in 2011.
- Despite the fall in employment, the consulted stakeholders reported difficulties hiring younger and more diverse workers for the sector. New entrants are also seen as not having the right specialised skills. These difficulties cut across sub-sectors and functions, affecting both engineering and technician positions.
- According to consulted stakeholders, some companies used the idle periods and furlough schemes of the pandemic as an opportunity to automate and rationalise their operations, often leading to reductions in headcount. However, automation does not fully explain the recent downward trend in UK employment in this sector, which could also be attributed to the poor performance of some sub-sectors.
UK machinery and equipment (M&E) manufacturing – employment (2/2)
- The 28,000 reduction in employment experienced by the UK M&E sector between 2011 and 2021 can be attributed to a loss in employment in 17 out of 21 sub-sectors.
- Machinery for mining, quarrying and construction (-5,300), for plastics and rubber (-4,000), office machinery (-3,200), pumps and compressors (-3,200) and other general-purpose machinery (-3,100) experienced the highest reductions in employment.
- Machinery for food, beverages and tobacco (+400), other special purposes (+400) and agriculture and forestry (+1,500) were the only sub-sectors to increase their employment levels during the same period.
- In absolute terms, the UK M&E sub-sectors with the highest employment in 2021 were other general-purpose machinery (20,900), non-domestic ventilation and cooling equipment (18,900), lifting and handling equipment (16,600), other engines (13,200) and other pumps and compressors (11,800). Together, these sub-sectors accounted for 52.5% of total employment in the UK M&E sector in 2021.
UK machinery and equipment (M&E) manufacturing – labour productivity
- In 2021 productivity of the M&E sector was 37% higher than the average productivity of the whole manufacturing sector and 60% higher than the whole economy.
- Overall, the UK M&E sector’s productivity (measured in value added per employee) was higher in 2021 than 2011, mostly driven by a reduction in employment during this period.
- Productivity in the UK M&E sector has remained consistently higher than the UK manufacturing sector as a whole between 2011 and 2021.
- Despite this gap, the difference between M&E productivity and the productivity of the UK manufacturing sector narrowed, from £32,800 per employee in 2011 to £27,400 per employee in 2021.
Machinery and equipment (M&E) manufacturing – trade balance
- Based on UN trade data, the UK trade deficit in the M&E sector widened to USD7.2 billion in 2022 from USD2 billion in 2011, driven by a reduction in exports (CAGR: -0.5%) and an expansion in imports (CAGR: 0.6%) during this period.
- The widening M&E trade deficit meant that the UK moved down to 176th position out of 188 countries in terms of trade balance in 2022.
- China climbed to the top of the trade balance ranking by becoming the top net exporter in the global M&E sector in 2022, while the US became the biggest net importer.
- New trade rules with the EU were mentioned by the consulted stakeholders as a factor influencing long-term investment decisions and trade. The rules have particularly impacted the ability of SMEs to export to Europe, as many lack the organisational capabilities to deal with the additional certifications and bureaucracy.
- As value chains become fragmented, and UK companies offshore their manufacturing activities, the trend in some sub-sectors is for companies to keep only the early stages (e.g. R&D and design) and final stages (e.g. testing, inspection, assembling and marketing) of production in the UK, which could explain a large share of the rise in imports in the country.
Machinery and equipment (M&E) manufacturing – global export market share
- UK M&E companies are highly export-oriented. The Construction Equipment Association (CEA) estimates that over 60% of UK’s output in construction equipment is exported [1]. Similarly, the Manufacturing Technologies Association (MTA) calculates that over 80% of UK machine tools, cutting tools and tool/work-holding equipment production was exported in 2021 [2].
- The UK had the 10th largest global market share (2.6%) in M&E goods in 2022, down from 3.1% in 2011.
- China had the largest export market share in 2022, increasing from 10.7% to 18.6% and overtaking Germany, the US and Japan.
- In 2022, the top 10 global exporters of M&E manufacturing goods accounted for 71% of the global market.[1]
- Equipment for semiconductor manufacturing was the top export category for the US (USD17.6 billion), Japan (USD18.9 billion), the Netherlands (USD17.4 billion) and Singapore (USD13.5 billion) in 2022.[3]
- For the UK, the M&E product with the highest export value in 2022 was other diesel or semi-diesel engines.[4]
Note: [1] Construction Equipment Association (2023) The UK’s Construction Equipment Sector Report 2023
[2] Manufacturing Technologies Association (2023) Basic Facts 2023
[3] UN Comtrade.
[4] UN Comtrade items under other diesel or semi-diesel engines include engines and compression-ignition internal combustion piston engines (diesel or semi-diesel engines), of a kind used for other than marine propulsion or vehicles.
UK machinery and equipment (M&E) manufacturing – exports and imports
- In 2022 the top five UK M&E sub-sectors accounted for 58.6% of exports and 49.2% of imports of the total sector.
- Of these five sub-sectors, pumps and compressors and other general-purpose machinery had trade deficits of USD0.7 billion each.
- In contrast, machinery for other special purposes, machinery for mining, quarrying and construction and other engines had trade surpluses of USD0.3 billion, USD1.3 billion and USD0.2 billion, respectively.
- Overall, the largest UK M&E sub-sectors by trade value (considering both exports and imports) in 2022 were other engines and machinery for mining, quarrying and construction.
UK machinery and equipment (M&E) manufacturing – business spending on R&D
- ONS data by product group classification shows that the UK business enterprise expenditure on R&D in the M&E sector was £1.4 billion in 2022, accounting for 5.9% of total UK BERD in the manufacturing sector.
- Business spending on R&D in the UK M&E sector increased from £0.7 billion in 2000 to £1 billion in 2020, with a compound annual growth rate (CAGR) of 1.9% during this period.
- The 1.9% annual growth rate was lower than the compound annual growth rate observed for UK manufacturing (2.9%) in the same period.
- ONS manufacturing BERD data, estimated with an updated methodology for 2018–22, shows a higher growth trend (dotted blue line) than data calculated using the previous methodology. The 2022 M&E BERD estimate obtained under the new methodology is 40% higher (£1.4 billion) than the last data point available for the old methodology in 2020 (£1 billion).
- The consulted stakeholders perceived UK M&E companies to be less R&D-intensive than foreign ones, except for some large internationally competitive firms, such as JCB and Cummins.
- Environmental sustainability and digitalisation were seen by interviewees as the main current drivers of R&D in the sector.
What is driving value added, employment, productivity and trade trends in M&E manufacturing?
Key trends identified:
- The UK machinery and equipment (M&E) sector is a major global player, but some sub-sectors have contracted significantly.
- A decline in employment across 17 out of 21 UK M&E sub-sectors resulted in a loss of 28,000 jobs between 2011 and 2021.
- While the UK is the 10th largest M&E exporter in the world, the country has one of the largest trade deficits.
Potential drivers identified from the literature review and consultations with sector experts
The M&E market depends on demand from other sectors and is typically sensitive to domestic and global economic performance.
- The UK M&E sector aggregates many sub-sectors that are quite distinct from one another and which show variable degrees of sensitivity to economic cycles and instability. In general, sales orders are tied to the long-term investment plans of other companies. In periods of economic uncertainty, these plans are often postponed.
- For example, a large share of demand for valves and actuators comes from the oil and gas sector and is indirectly affected by global oil prices and the timing of investments in oil and gas projects. In the case of mining, quarrying and construction equipment, government investment (e.g. public works) is a crucial source of demand.
M&E sub-sectors show variable resilience levels to recession and external events.
- Events such as the COVID-19 pandemic affected the various segments of the sector differently. For example, while the consulted stakeholders mentioned that the value added for machinery for mining, quarrying and construction was acutely affected by the pandemic (and in 2021 had not recovered to pre-pandemic levels), lifting and handling equipment, pumps and compressors, fluid power equipment and agricultural and forestry equipment did not suffer the same effect and recovered well in 2021. In particular, segments such as agricultural and forestry equipment are not easily affected by external events, as they deal with essential products from sectors with inelastic demand, such as agriculture.
- In the case of mining, quarrying and construction, UK companies faced supply chain issues in the aftermath of the pandemic, which allowed Chinese firms to supply new equipment faster and may partly explain the increase in M&E imports observed after 2020. This effect may be observed in other sub-sectors such as machinery for agriculture and forestry.
High production costs, political uncertainty and foreign ownership are among the factors boosting offshoring in some sub-sectors.
- Across some sub-sectors, there has been a relocation of manufacturing activities to other locations in Europe, the US and Asia. This is driven by UK firms setting up facilities abroad and by European firms consolidating production in Europe. Key reasons for this movement appear to be the loss of key suppliers and high production costs in the UK.
- For example, offshoring in the valves and actuators industry has been driven by the high cost and low availability of raw materials such as steel in the UK, which represent 30%–50% of the final cost of products. This has led to a situation where many products are UK-designed but manufactured in subsidiary plants in China or other lower-cost countries.
- The pumps and compressors and fluid power equipment segments have also experienced offshoring, according to the consulted interviewees. The UK’s exit from the EU contributed to the consolidation of manufacturing activities in Europe to facilitate exports to the EU, thus reducing manufacturing employment in the UK.
Changes in regulations, intra-industry trade and policy changes in export markets may have impacted UK imports and exports.
Changes in trade regulations and rules
- New trade rules with the EU were mentioned by the consulted stakeholders as a factor influencing long-term investment decisions. They have particularly impacted the ability of SMEs to export to Europe, as many do not have the organisational capabilities to deal with the additional certification and bureaucracy. The stakeholders also claimed the decision to move away from the European CE conformity assessment marking, and to create a UK-specific UKCA marking, followed by a reversal of this decision (DBT, 2023; DBT, 2024), has also affected some segments.
- Interviewed stakeholders suggested that the UK government’s changes to its export promotion policy, focusing on a narrower selection of sectors, while closing down some export promotion units, has reduced sectoral promotion overseas. Slow processes for dual-use (civil and military) exports also affect the sector’s ability to compete internationally in some segments.
Vertical disintegration
- As value chains become fragmented, and UK companies offshore their manufacturing activities, the trend in some sub-sectors is for companies to keep only the early stages (e.g. R&D and design) and final stages (e.g. testing, inspection and marketing) of production in the UK, which could explain a significant share of the rise in imports in the country.
Policy changes in export markets
- For example, the Chinese government has created extra requirements for foreign products to enter the country by implementing in-country mandatory auditing. In the valves and actuators sector, all valves of a certain specification will have to be tested in China by a local inspector, adding costs to qualify for the Chinese market, according to the interviewed stakeholders.
Labour shortages have impacted growth and incentivised automation across subsectors
- Consulted firms have reported difficulties in hiring younger and more diverse workers for the sector. The younger workforce is also seen as not having the right skills, especially the traditional mechanical and electrical skillsets which are essential for age-long sub-sectors, such as fluid power equipment, pumps and compressors. These difficulties cut across sub-sectors and functions, affecting both engineering and technician positions. New skills are also needed, for example, cybersecurity, robotics, IoT, advanced manufacturing, cloud, and Big Data (European Commission, 2021).
- According to consulted stakeholders, some companies used the idle periods of the pandemic and furlough schemes as an opportunity to automate and rationalise operations, often leading to reductions in headcount. The increasing productivity of the sector reflects these investments in production efficiency. However, automation does not fully explain the recent downward trend in UK employment in this sector, which could also be attributed to the poor performance in some sub-sectors.
What is driving business R&D expenditure trends in M&E manufacturing?
Key trends identified:
- The UK machinery and equipment (M&E) sector is a major global player, but some sub-sectors have contracted significantly.
Potential drivers identified from the literature review and consultations with sector experts:
The prominent presence of foreign-owned OEMs and distributors across UK M&E sub-sectors may impact BERD figures, with R&D investment decisions often made abroad.
- Despite the UK having a high-quality R&D ecosystem, including the Catapult network and high-quality research institutions, the consulted stakeholders perceive UK M&E companies to be less R&D-intensive than foreign ones, except for some large internationally competitive firms, such as JCB and Cummins. The UK M&E sector is dominated by SMEs, which might have fewer resources available for R&D and fewer advisory and support options from the broader innovation ecosystem.
Environmental sustainability, digitalisation and materials research trends have shaped the direction of innovation efforts in recent years
- Environmental sustainability: emissions regulations, such as those for non-road mobile machinery, and firm-level net zero targets, create an imperative for the development of more energy-efficient and environmentally sustainable machines and equipment. For example:– Mining, quarrying, and construction equipment: The segment has had to adapt to comply with Stage V emissions standards (ICCT, 2016), which required innovation, investments, and development of new products and services (CEA, 2023). Also, London’s Low Emission Zone is anticipated to transition to a Zero Emission Zone for construction equipment in the mid-2030s, driving further investments in zero-emission technologies and solutions within the industry. Other efforts towards decarbonisation include developing full electric machines, utilising hydrogen fuel cells, and hydrogen combustion engines (CEA, 2023).– Valves and actuators: According to the consulted stakeholders, there is a strong focus on this segment becoming an enabler for hydrogen- and carbon-capture national infrastructure, as the current valves are not adapted to hydrogen gas. In this regard, interviewees perceive limitations in the availability of government R&D funding to support innovation at established players, beyond the existing focus of supporting R&D in academic organisations.– Pumps and compressors: Interviewees suggested that energy efficiency is one of the most important competitiveness drivers in this sub-sector, as energy represents around 80% of the costs in compressed air. New compressors are around 30% more energy efficient than those of 15 years ago. However, a significant incentive policy for the acquisition of energy-efficient compressors in the UK is lacking (DESNZ, 2024).– Other Engines: more stringent industrial emission regulations in the UK have incentivised the manufacturers to invest more on the R&D of low-emission industrial engines. Meanwhile, wind turbines and combined-cycle gas turbines have seen significant opportunities from the UK’s Net Zero target by 2050 (IBIS World, 2023).
Other R&D trends:
- Digitalisation: Smart machines, telematics, human-machine interaction, 3D printing, digital supply-chain tracking and digital modelling have also been important R&D trends in the UK M&E sector. For example, 3D printing enables faster modelling and prototyping of complex valves and components, and digital passports enable tracking of components and production processes within the supply chain.
- Materials: Significant R&D in the sector is dedicated to developing, adopting, and adapting new materials. The M&E sector is heavily reliant on steel, with an emerging trend towards green steel necessitating substantial increases in renewable electricity and green hydrogen production.
Appendix 3.1 Correspondence between SIC 2007 code and HS code
Appendix 3.2 References and consultations
