The real test of European manufacturing competitiveness: Why VDMA emphasizes “don’t just focus on protectionism”

Opening: Europe’s manufacturing pressure is no longer a cyclical fluctuation

The decline in Europe’s manufacturing competitiveness is not a new topic, but it is shifting from “cost pressure at the enterprise level” to “structural issues at the institutional level.” When industry associations begin to openly warn the EU not to base industrial policy too heavily on protectionism and state-driven demand, that in itself points to a deeper reality: European industry is facing not just external competition, but also the ongoing constraints of the internal institutional environment on the manufacturing system.

For German industry, the importance of this issue lies not in the wording of any single policy, but in the fact that it exposes a divergence in Europe’s industrial strategy: should the priority be protecting existing capacity, or improving overall manufacturing competitiveness?

What happened: VDMA brings the issue back to the “foundation of competitiveness”

According to the source material, VDMA Executive Director Thilo Brodtmann said that the EU should not rely solely on protectionism and state-led demand to advance industrial policy, because that would not be enough to eliminate Europe’s structural competitive disadvantage as an industrial location. He also pointed out that what the EU really needs to focus on is deepening the single market, reducing regulatory burdens, and creating a more favorable environment for innovation and entrepreneurship.

VDMA also noted that approaches such as setting rules on local content and carbon emissions may, in some industries, help resist unfair competition and retain production bases, but that does not amount to improving the international competitiveness of the industrial base as a whole. At the same time, VDMA believes the “European Competitiveness Fund” is directionally correct, but that the funding should focus on key technologies such as industrial AI and manufacturing.

The key point of this position is not whether a particular bill is effective, but a larger question: is Europe’s industrial policy plugging holes, or rebuilding capabilities?

Deeper reasons: why European industry is increasingly dependent on policy debates rather than efficiency advantages

VDMA’s stance is representative because it touches on several structural problems that have accumulated in European manufacturing over the long term.

1. Europe’s industrial problem is not a single weakness, but systemic friction

Manufacturing competitiveness depends on an entire system: energy, regulation, capital, market size, supply-chain coordination, talent supply, and technology diffusion. Europe’s problem is often not a single link in the chain, but the “institutional friction costs” created by multiple links combined.

If companies must simultaneously deal with more complex compliance requirements, higher energy costs, more fragmented market rules, and slower technology diffusion, then even if an individual factory is efficient, the manufacturing system across the region will gradually lose its comparative advantage.

2. Protecting local production capacity does not mean improving manufacturing capability

Local content rules, carbon constraints, and similar industrial protection measures can indeed provide a short-term buffer in specific sectors. But these tools are better at “protecting existing capacity” than at “creating new productivity.”

Germany’s historical industrial advantage was never built on a closed market, but on engineering capability, process iteration, export orientation, and the efficient coordination of an intermediate-layer supply chain.The historical strengths of German manufacturing have never been built on closed markets, but on engineering capability, iterative process improvement, export orientation, and the efficient coordination of a mid-tier supply chain. If policy leans too heavily toward defense, it may keep the industry locked in an old structure rather than pushing it into the next-generation manufacturing system.

3. The real competitive focus is shifting toward industrial AI and manufacturing digitalization

VDMA’s particular emphasis on industrial AI and manufacturing is highly significant. That is because future manufacturing competition will no longer be just about equipment, labor, or unit cost, but about data-driven design, intelligent scheduling, predictive maintenance, flexible manufacturing, and cross-factory coordination capabilities.

In other words, competitiveness is increasingly coming from the “learning capability of the production system,” rather than the static efficiency of any single factory.

What this means for German industry: machinery manufacturing is pointing the issue toward the “institutional environment”

For German industry, especially machinery manufacturing, industrial equipment, and high-end manufacturing companies, this statement has several practical implications.

First, what German manufacturing needs is not only market protection, but a scalable innovation environment

The core competitiveness of Germany’s machinery industry has long played the role of a “production-capacity enabler” in global supply chains: it is not a star industry on the final consumer end, but it determines the upper limit of production efficiency across multiple sectors such as automobiles, chemicals, electronics, and energy equipment.

If EU industrial policy focuses only on local sourcing and capacity retention, without simultaneously improving conditions for innovation, financing, permitting, and cross-border markets, then even if German machinery manufacturers benefit in the short term, they will struggle to expand their advantage through faster technology diffusion.

Second, regulatory relief is not an “administrative issue” for manufacturing, but a competitiveness issue

VDMA’s call to reduce regulatory burdens is not simply a business demand, but a question of whether the manufacturing system can iterate quickly. Industrial technology is evolving faster and faster; if companies must disperse resources across too much policy uncertainty and compliance cost, their room for R&D, automation, and talent investment will be squeezed.

For German industry, regulatory design directly affects two things:

• whether new technologies can enter factories faster
• whether new factories can achieve scaled production faster

That is also why manufacturing is increasingly focused on whether policy itself has “industrial implementability,” rather than merely “political expressibility.”

Third, European industrial policy is shifting from a “subsidy logic” to a “capability competition logic”

Across Europe, there is growing emphasis on strategic autonomy, localization, and supply chain security. This direction is not surprising in itself. But VDMA’s warning is that if Europe focuses only on defense, it may overlook a more important issue: the essence of industrial competition has already become a competition of systemic capabilities.

What German companies truly need is a unified market environment that supports engineering innovation, digital upgrading, large-scale investment, and cross-border coordination—not a fragmented policy patchwork.

What this means for Europe’s industrial chain: can the single market still be a source of competitiveness

VDMA places “deepening the single market” at the top of the list, and this actually points to the most fundamental structural asset of European manufacturing: scale, unified rules, and cross-border collaboration.VDMA’s placing of “deepening the single market” at the top of its priorities actually points to Europe’s most fundamental structural asset in manufacturing: scale, common rules, and cross-border collaboration.

If the single market can no longer continue to reduce transaction costs, standard divergences, and compliance friction, then European industry will find it very difficult to maintain an efficiency advantage in global competition. For upstream machinery manufacturers, midstream component suppliers, and downstream equipment makers, a fragmented market means:

• Longer product certification and compliance processes
• Higher costs for coordinating cross-border supply chains
• Slower diffusion of new technologies
• Higher barriers for SMEs to go international

This is especially important for German industry, because one of the strengths of German manufacturing is its ability to achieve scale and specialized division of labor by relying on the European market. Once the efficiency of the single market declines, Germany’s chain-based advantages will also be weakened.

Europe and the global perspective: industrial policy is moving from “repair” to “strategic choice”

From the global manufacturing competition landscape, Europe is currently facing two different industrial policy paradigms.

One is to maintain local manufacturing share through government procurement, regional rules, and industrial protection; the other is to strengthen long-term competitive advantage through technology investment, standards capabilities, digitalization, and productivity gains.

VDMA’s position is clearly closer to the second. The reason is practical: in global manufacturing competition, defense alone cannot long sustain a stronger scale effect, faster technological iteration, and higher capital concentration.

For German industry, this means that if Europe’s industrial strategy cannot shift toward productivity-oriented goals, German manufacturing will face a dilemma:

• In the short term, it may receive more protective support
• In the long term, it may lose the opportunity to build technological leadership in an open competitive environment

This is also why the machinery industry, more than some sectors that depend heavily on subsidies, tends to emphasize market openness, an innovation-friendly environment, and institutional certainty.

Long-term assessment: in the next 3 to 10 years, European manufacturing competition will depend more on “infrastructural capabilities”

If we place this statement in a longer cycle, it signals several directions for future European industrial competition.

1. Industrial AI will move from a “technology hotspot” to an “industrial infrastructure”

VDMA’s explicit mention of industrial AI means AI is no longer just a topic for the software industry; it will gradually become part of the manufacturing system itself: design, processes, maintenance, quality control, and supply chain planning will all be affected.

2. Manufacturing policy will place more emphasis on “whether it can truly be implemented”

In future EU policy debates, the question may no longer be whether industry should be supported, but rather: has the policy truly reduced companies’ execution costs, and has it genuinely helped factories upgrade?

3. European industrial competitiveness will depend more on the actual operating efficiency of the single market

If Europe wants to maintain its manufacturing position, it must ensure that the unified market exists not only in legal texts, but also in the daily operations of enterprises.

4. German machinery manufacturing will continue to play the role of an industrial policy “calibrator”German machinery manufacturing will continue to play the role of a “calibrator” for industrial policy

German mechanical engineering is usually among the first to feel changes in the market, technology, and institutions, so its judgments on EU industrial policy are often closer to industrial reality than simple political statements. In the years ahead, such voices are likely to continue pushing the EU to reassess the balance between protection and competition, subsidies and innovation, regional security and open efficiency.

Conclusion: What European industry truly needs to solve is whether it can become strong again

VDMA’s statement this time was ostensibly about the EU’s manufacturing competitiveness policy, but in fact it was reminding European industry of a more fundamental issue: protecting existing capacity does not mean rebuilding competitive advantage.

For German industry, this means that the key in the future is not just to win more policy support, but to push the EU back onto an institutional track capable of fostering efficiency, innovation, and scaled manufacturing. What European manufacturing needs to confront is not whether industrial policy should exist, but whether industrial policy serves defense or serves renewed competition.

That is the direction of German manufacturing that will be most worth watching in the future.