The 2025 European edition of our “State Of The Industrial Goods Sector” report highlights what has been a challenging year for the region’s industrial goods companies. Against a backdrop of slow macroeconomic growth, difficult competitive conditions in Europe, and continued geopolitical disruption, Europe’s industrial goods sector has only produced marginal growth. In response, companies are adjusting priorities and pursuing new growth opportunities to safeguard their future success.
Industrial goods run out of steam amid changing market conditions
Executive sentiment in the sector has fallen to a new low, and short-term growth expectations are subdued (Exhibit 1). Sentiment is particularly pessimistic in Germany, which is now facing its third consecutive year of recession. CEOs and other interviewed executives noted that it has been another year of “grinding” — sideways movement and considerable effort for limited gain.
Based on market capitalization, the industrial goods sector is clearly losing momentum — growing by only 4% in 2024, versus a 10-year annual average of 11%. This shift reflects both structural challenges and current developments. Technology subsectors have seen the largest setbacks, including manufacturers of semiconductor equipment and industrial software companies. Overall, North American and Chinese firms are seeing a four-fold increase in market cap over their European counterparts (Exhibit 2).
One area where European companies have been successful despite headwinds this year is in defending their profitability through tight cost management and effective use of commercial levers. Another bright spot is that firms capitalizing on electrification had a rewarding 2024, by addressing demand from applications such as data centers, grid modernization, renewable energy infrastructure, and automation. As a result, valuations for power systems manufacturers surged by 34%.
Geopolitical risk tops industrial sector concerns in 2025
In our survey of industrial goods executives, some 83% of respondents expressed concern about geopolitical risk, versus 68% a year ago (Exhibit 3). Tariffs and other trade policy dynamics are particularly worrying, as European industrial goods firms face greater exposure to trade barriers compared to their North American and Chinese counterparts. The concern is less around direct tariff impacts and more over the lack of predictability and loss of long-established rules — leading to deferred investment decisions across the board.
Cyber risks jumped from sixth to fourth place in the ranking. Under a barrage of attacks, many firms are investing heavily in cybersecurity. On the other hand, artificial intelligence (AI) and digital solutions are seen as a major opportunity — more so, than in previous years — with firms moving along the learning curve to a better understanding of how to realize value.
Refocusing industrial strategies and operating models for growth
As the industrial goods sector grapples with global uncertainty, we are seeing greater focus on customer proximity and product and service innovation (Exhibit 4).
These levers are taking a number of different forms:
Innovation: Top managers in the sector acknowledge that Chinese competitors have not only caught up, but in some cases are surpassing European firms in product performance and innovation. Examples of how firms are responding include appointing a “head of innovation” and partnering with pioneering startups.
Product strategies: Key product strategies include catering specifically to local demand through localized products and introducing sub-brands with pared-down specifications for more price-sensitive markets.
Footprint focus: Executive are pursuing greater regionalization of their operational footprints, with a significant share looking to increase production in India and the United States, as well as in lower cost locations in Europe, such as Bulgaria and Serbia.
Expanding markets: India also is emerging as a market, with 60% of executives planning to increase their focus on the subcontinent. The Middle East also is sparking interest, due to a number of large-scale projects. Local content requirements frequently outweigh price considerations in this region, boosting investment in local production.
Emerging opportunities: The defense sector is sparking enthusiasm for half of the executives we surveyed. One-third are looking to expand their existing operations, while 17% are looking for entry points into this sector.
Industrial sector outlook more positive through 2027
The mid-term outlook of sector executives is positive — more than 85% expect at least moderate growth in the next few years (Exhibit 5). This is supported by analyst recommendations, with 77% of companies in the sector receiving a buy or outperform rating. Despite persistent headwinds, strong balance sheets, ongoing innovation, and the sector’s proven ability to adjust business models are all reasons for optimism.
In conclusion, as Europe’s industrial goods sector feels its way through the current tides of economic uncertainty, the imperative to think strategically and adapt flexibly has never been clearer. European industrial firms clearly are not just aiming to defend ground but are seeking new paths to growth. The real test, of course, will be in moving from intent to execution, translating strategic ambitions into tangible results.
This report provides insights into the European industrial goods sector, based on a survey of 115 C-suite level executives, interviews with leading CEOs and CFOs, and market research on 1,300 listed global firms — including 240 in Europe with annual revenues exceeding €100 million.
