• Historically expanded product portfolios are limiting profitability
• Physical AI is expected to become a key success factor over the next five years

• CxOs expect more than 37,000 jobs to be lost in Germany

   

Efficiency improvements and cost reductions continue to be the highest strategic priorities in the machinery industry due to ongoing pressure on profitability. However, the majority of top decision-makers recognize that cost-cutting alone is no longer sufficient to remain competitive. Complex product portfolios and excessive bureaucracy are currently limiting profitability and agility of many companies. The industry is turning to “Physical AI” as a new growth driver. These are findings from Horváth’s “Machinery & Industrial Automation 2026” study.

Despite significant restructuring efforts in recent years, the machinery industry remains under economic pressure. Around 60 percent of surveyed CxOs view legacy product portfolios as the single greatest challenge to profitability within their companies, even ahead of labor costs. 86 percent of respondents believe that companies in the industry are structurally overorganized and therefore unable to keep pace with today’s requirements for speed and margins.

Looking ahead, the challenge is no longer simply to operate lean organizations, but to become structurally more competitive. “German machinery companies have become very good at managing downturns. The question now is whether they are equally well prepared to capitalize on the next upswing,” says Daniel Kittelberger, Principal and Head of the Machinery & Industrial Automation Industry Business Unit at Horváth. “Established machinery and industrial automation companies must now simplify their portfolios, organizations, and value chains in order to unlock productivity, speed, and profitable growth.”

Physical AI as a Disruptive Force

In the area of AI and digital transformation, the industry sees another growth driver beyond cost savings. Increasingly, the focus is shifting toward the question of how technology can be scaled. Forty-eight percent of companies have already implemented AI in their operational processes, an increase of eleven percentage points compared to the previous year. However, poor data quality, a lack of process integration, and insufficient employee skills continue to present obstacles to company-wide adoption. “AI is exposing years of accumulated transformation debt within organizations, ranging from fragmented data and processes to governance and organizational capabilities,” says Kittelberger.

The next challenge is already emerging. While companies have spent recent years competing over connected machines, the focus in the future will be on making machines autonomous. Ninety-two percent of CxOs expect that AI embedded directly into machines, robotics, and automation systems (“Physical AI”) will fundamentally reshape competitive advantage in the industry over the next five years. Companies can use Physical AI not only to increase their own productivity but also to incorporate it into the products and automation solutions they bring to market. By contrast, digital twins and connected platforms are now viewed by the majority of respondents as a basic requirement for operating in the industry rather than a source of differentiation.

Particularly regarding competition from China, the ability to translate technology into customer value more quickly will be critical. Eighty-nine percent of respondents no longer see China merely as a cost-driven competitor, but as a structural threat in key technologies. “Western companies are no longer competing primarily through lower costs, but through faster learning, innovation, and adaptation cycles,” says Horváth Principal Daniel Kittelberger, describing the upcoming paradigm shift.

Transformation of the Global Organization

At the same time, the organizational structure of companies is changing significantly. The industry expects 37,300 jobs to be eliminated in Germany this year. Future hiring and capability building are expected to take place primarily in India, China, and North America.

Nevertheless, 37 percent of investment spending will remain in Germany this year (2025: 32 percent), as the industry continues to view Germany as the backbone of engineering and research. “The expected reduction of around 37,000 jobs in Germany is not a sign of industrial decline. Rather, it reflects the structural transformation in how machinery companies organize their value creation activities globally. Future growth will increasingly take place where markets are expanding and talent can be attracted,” explains Horváth expert Daniel Kittelberger.

About the Study

For the Horváth study “Machinery & Industrial Automation 2026”, a representative sample of board members and managing directors, primarily from Germany, was surveyed. The sample includes 127 respondents who participated in in-depth personal interviews. These interviews were conducted as part of the international and cross-industry Horváth “CxO Priorities 2026” study, for which more than 1,000 decision-makers were surveyed.