Machine fault diagnosis systems need to collect and transmit dynamic monitoring signals, like vibration and current signals, at high-speed. However, industrial wireless sensor networks (IWSNs) and Industrial Internet of Things (IIoT) are generally based on low-speed wireless protocols, such as ZigBee and IEEE802.15.4. To address this tension when implementing machine fault diagnosis applications in IIoT, this paper proposes a novel IWSN with on-sensor data processing. On-sensor wavelet transforms using four popular mother wavelets are explored for fault feature extraction, while an on-sensor support vector machine classifier is investigated for fault diagnosis. The effectiveness of the presented approach is evaluated by a set of experiments using motor bearing vibration data. The experimental results show that compared with raw data transmission, the proposed on-sensor fault diagnosis method can reduce the payload transmission data by 99.95%, and reduce the node energy consumption by about 10%, while the fault diagnosis accuracy of the proposed approach reaches 98%.