Firing on just a few cylinders: recent performance of the UK machinery and equipment manufacturing sector

Despite its pivotal role in the economy, the UK’s Machinery and Equipment (M&E) sector has faced significant hurdles since the 2008-2009 financial crisis, marked by a decline in value-added and employment.

Drawing on insights from Section 3 of the 2024 UK Innovation Report, this article explores the sector’s essential contributions to GDP, employment, and innovation across various industries, including agriculture, construction, and healthcare. We explore the complexities of export dynamics, the impact of offshoring, and the crucial role of R&D and present key policy recommendations aimed at revitalising the sector’s performance.

Machinery and Equipment (M&E): the hidden innovation backbone of the economy

Due to its business-to-business nature, the machinery and equipment (M&E) sector is often hidden from the sight of most people. Even in our day-to-day lives, we often interact with machinery and equipment without acknowledging the benefits they bring. Nevertheless, this sector is not only a significant component of global GDP, employment, and trade, but its companies are major contributors to the productivity and innovation of all other economic sectors. The impact of the M&E sector extends far beyond manufacturing and extractive industries. It directly affects sectors such as agriculture, construction, utilities, logistics, retail, and others. This can be seen in various applications, from check-out machines in supermarkets to the heating and ventilation systems in hospitals and the lifting equipment used by maintenance personnel in buildings.

M&E firms also play a crucial role in the generation and diffusion of innovations. For instance, cutting-edge advancements in microchips and even in artificial intelligence heavily rely on the development of advanced semiconductor production machines, which are among the most sophisticated machines in the world. More broadly, almost no product and process innovations in the economy can be achieved without new developments and adaptations to machinery and equipment. Recent economic transformations, such as decarbonisation and digitalisation are no different and will require a strong process of retooling and modernisation of existing machines and equipment across all economic sectors.

The UK M&E sector is a major global player, but some subsectors have contracted significantly

The UK M&E sector is a key part of UK manufacturing, representing 7.0% of its value added, 6.1% of its employment, and 10.3% of its exports. The UK is also the 10th largest exporter of M&E in the world and is the European leading producer of construction equipment.

Despite these strengths, the UK M&E sector has been on a downward trend of -0.4% compound annual growth rate (CAGR) in value added since the 2008-2009 global financial crisis. This means that the sector performed worse than UK manufacturing as a whole, whose growth rate in value added stood at +1.3% in the same period. This trend, however, does not represent all segments of the M&E sector, as it consists of very different sub-sectors. For example, the ONS’s statistical definition of the sector puts together products such as agricultural tractors, industrial robots, air compressors used by dentists, and fairground Ferris wheels. A more disaggregated analysis is thus needed.

Chart 1 shows the value added performance of the different M&E sub-sectors in the 2008-2021 period. It reveals that the downward trend in the aggregate data is driven mainly by a large fall in two sub-sectors: Other engines (-1.2 billion) and Machinery for plastics and rubber (-1.1 billion). Other sub-sectors, in turn, had a significantly positive performance in the period, such as other general machinery, lifting and handling equipment, machinery for other special purposes, machinery for agriculture and forestry, and fluid power equipment.

During our discussions with stakeholders for the UK Innovation Report, many highlighted that the UK M&E sector’s value added has been impacted by a general trend of offshoring manufacturing activities. 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 and other low-cost countries. The UK’s exit from the EU also contributed to the consolidation in Europe of manufacturing in the pumps and compressors sub-sector, which is dominated by European firms.

CHART 1 – UK Machinery and Equipment manufacturing value added by sub-sector (£billion at basic prices), 2008-21

Source: ONS (2023). Annual business survey

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 decreasing trend in employment is even more accentuated. 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 as a whole, which employed 2.7 million people in 2021, around 4.8% fewer than in 2011.

Reductions in employment cut across M&E segments, with 17 out of 21 sub-sectors reporting a contraction. The largest decreases occurred in the 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). In contrast, 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 (Chart 2).

Despite the fall in employment, the consulted stakeholders from the M&E sector reported difficulties in hiring younger and more diverse workers. New employees are also seen as not having the right specialised skills, such as the traditional mechanical and electrical skills that are key for age-long sectors such as fluid power equipment, pumps, and compressors. These recruiting difficulties cut across sub-sectors and functions, affecting both engineering and technician positions.

Source: ONS (2012–22). Business register and employment survey. Note: Employment data for Great Britain only; Data for Northern Ireland unavailable.

The consulted stakeholders also mentioned that some companies used the pandemic’s idle periods and furlough schemes as an opportunity to automate and rationalise their operations, which likely contributed to reductions in headcount. However, they highlighted that 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.

Investments in automation and factory optimisation have contributed to increased productivity in the sector. In 2021, the 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. This is not an isolated case, 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 (Chart 3).

CHART 3 – UK Machinery and equipment manufacturing value added (VA) per employee (£ Thousand in Chained Volume Measure – CVM)

Source: ONS (2024). GDP output approach – low-level aggregates; ONS (2012–22). Business register and employment survey; ONS (2023). EMP13: Employment by industry. Note: Productivity estimated as value added divided by number of employed; productivity data corresponds to the whole machinery and equipment (M&E) sector. Data for each M&E sub-sector might show different trends.

While the UK is the 10th largest M&E exporter in the world, the country has one of the largest trade deficits

Companies in the UK M&E sector are highly export oriented. The Construction Equipment Association (CEA) estimates that over 60% of the UK’s output in construction equipment is exported. 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.

Based on UN trade data, the top 10 global exporters of M&E manufacturing goods accounted for 71% of the global market in 2022. In the same year, the UK exported USD42 billion M&E products, giving it the 10th largest global market share (2.6%) in M&E goods. Its top exporting product was other diesel or semi-diesel engines. The country with the largest growth in export market share in the 2011-2022 period was China, increasing from 10.7% to 18.6% and overtaking Germany, the US and Japan to become the largest exporter of M&E (Chart 4).

Despite its significant exports, 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 M&E trade balance in 2022. In the same period, China climbed to the top of the trade balance ranking while the US became the biggest net importer.

The consulted stakeholders from the UK M&E sector mentioned new trade rules with the EU 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. Interviewees also mentioned a reduced trade promotion policy by the UK government, with the closure of some government units and the narrowing of the sectors that can benefit from such a promotion.

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, or to concentrate on the production of high-value products while offshoring the lower value ones. This could explain a large share of the rise in imports in the country.

CHART 4 – Machinery and Equipment manufacturing – Top 10 countries by export market share in 2022

Source: UN Comtrade (accessed February 2024).

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. These top sub-sectors were: other engines; machinery for mining, quarrying and construction; other special-purpose machinery; other general-purpose machinery; and other pumps and compressors.

Out of these, other pumps and compressors and other general-purpose machinery had trade deficits of USD0.7 billion each. In contrast, machinery for mining, quarrying and construction; other special-purpose machinery, and other engines had trade surpluses of USD1.3 billion, USD0.3 billion, and USD0.2 billion, respectively.

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

Consulted stakeholders have highlighted that R&D efforts in the UK M&E sector are largely driven by the private sector. However, they also noted that some research relevant to the sector also occurs in UK universities and the Catapults, such as the High Value Manufacturing Catapult’s Manufacturing Technology Centre. Nevertheless, R&D activities in the sector appear to be growing at a sluggish pace in recent years.

The methodology for R&D data has been changed by the ONS recently, leading to some data gaps and making the analysis of R&D trends in the sector challenging. Nevertheless, the latest ONS data shows that the UK business expenditure on R&D (BERD) in the M&E sector was £1.4 billion in 2022, accounting for 5.9% of total UK BERD in the manufacturing sector.

Data using the previous methodology shows that 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 of 1.9% during this period. This growth rate was lower than the compound annual growth rate observed for UK manufacturing as a whole (2.9%) in the same period (Chart 5). This slow pace has been validated by the consulted stakeholders, who perceive M&E companies in the UK to be less R&D-intensive than in other countries, except for some large internationally competitive firms, such as JCB and Cummins. The fact that many segments of the M&E sector are dominated by foreign-owned companies also affects the level of R&D done in the UK, as many companies prefer to keep their R&D activities close to their headquarters overseas.

Environmental sustainability has been the most important driver of R&D efforts in recent years. New regulations and new firm-level targets towards Net Zero have made the development of greener and more energy-efficient products imperative. For example, UK firms had to adapt to Stage V emissions regulations for non-road mobile machinery in the construction equipment segment, which required significant product innovations and adaptations. Soaring energy prices also create incentives for acquiring more energy-efficient equipment, especially energy-intensive ones such as compressed air equipment.

Interviewees also saw digitalisation as a strong driver of R&D in the sector. This includes improving the drives and controls of mobile machinery (sometimes towards remote operations), enhancing human-machine interaction, and digital solutions for supply-chain tracking in sectors with strict safety regulations, such as valves and actuators. Advances in 3D printing technologies and modelling are also providing benefits for sub-sectors with complex parts and components, such as fluid power equipment and valves and actuators.

CHART 5 – UK Machinery and equipment manufacturing: Business enterprise expenditure on R&D (BERD), billion pounds (£) in current prices 

Source: ONS (2021). Business enterprise research and development time series; ONS (2022). Business enterprise research and development; ONS (2024). Business enterprise research and development. Note: ONS has revised the methodology for BERD since 2022. Please see ONS (2023). Update on transformation of research and development statistics: November 2023.

Key areas of policy action that could enhance the UK’s M&E sector

This article has shown that the M&E sector comprises many sub-sectors, and in recent years, the UK has been “firing on just a few cylinders”. While each sub-sector has its own challenges, some issues were found to be cross-cutting, and policy action by the UK government to address them could have a significant impact:

1. Address issues currently raising manufacturing costs in the UK, such as energy prices and diversity of suppliers of basic inputs;

2. Provide stability and regulatory certainty, especially regarding trade with the EU, to foster long-term investments and facilitate exports in the sector;

3. Improve technical education, especially for the younger workforce, ensuring enough people are trained in the traditional mechanical, electrical, and increasingly digital skills required by the sector;

4. Enhance trade promotion to facilitate access to new markets and increase UK product penetration overseas;

5. Create a substantial incentive for the acquisition of energy-efficient machines and equipment, ensuring that all relevant sub-sectors are contemplated.

As discussed in this article, this sector is a hidden driver of growth and productivity in the economy and is also key to achieving societal goals such as decarbonisation and digitalisation. Solving the issues above would significantly contribute to the performance of the UK M&E sector and ensure that, like a well-oiled machine, it can perform to all its potential.