Years of crisis have reinforced the pressure on Italy’s once-envied industrial base

Years of crisis have reinforced the pressure on Italy’s once-envied industrial base

Aug 10th 2013 | ROME |From the print edition

THE traditional August shutdown of Italian factories usually lifts the spirits of blue-collar workers, who can look forward to up to four weeks away from toiling on the production line. In recent years, however, many have spent their holidays wondering if there will be a job to come back to at the end of summer. Almost one manufacturing firm in five shut between 2009 and 2012, and the carnage continues unabated. Italy has long been Europe’s second-biggest manufacturing power, beaten only by Germany. It still is, just about, but its production base is being jeopardised by competition from abroad and the downturn at home.Since the financial crisis, two recessions have sent firms reeling. In the first, between 2008 and 2009, manufacturing output fell by 24%. In the second, which began in 2011 and has yet to end, output has so far fallen by almost 10%, more than wiping out the gains of the intervening brief recovery. Production is now 26% below 2007’s peak.

Italy’s makers of luxury clothing and accessories have done fairly well, boosted by strong demand from the emerging world’s new rich. But producers of low-price fabrics and clothes have been badly hit: overall, the textile industry’s output is down by 35%. Production of electrical goods has fallen by a similar proportion, and carmaking is down by 45%. Last year just 397,000 cars rolled off domestic assembly lines at Fiat, Italy’s largest carmaker, against 911,000 in 2007. Its output of vans has recovered a bit since hitting rock bottom in 2009, but at 207,000 last year was 18% below its pre-crisis peak.

Such a slump would have led to mass redundancies were it not for a long-running government scheme in which workers can be laid off and the state pays them up to 80% of their normal salary while their employer sorts out its problems. Fiat, like many manufacturers, has relied heavily on this scheme: since 2009 around 11,000 of its total Italian workforce of 41,000 has been on a state-financed lay-off at any one time. Employers are supposedly allowed to use the scheme for only three years in any five-year period, but as Italy’s crisis has dragged on, the rules have been interpreted more flexibly.

The picture is also grim in domestic appliances, another area of manufacturing in which Italy used to be a world leader. The success of firms like Merloni (now renamed Indesit), Candy, Ignis and Zanussi was such that they became the subject of business-school case studies in the 1960s and 1970s.

All the leading appliance-makers were established or made their names between 1945 and 1965, when “white goods”, as they used to be called, epitomised Italy’s post-war economic miracle. Today the production figures paint a picture of an industry under siege. In 2007 Italy turned out 24m appliances. Five years of decline reduced the total to 13m last year: output of washing machines was down by 52% to 4.4m; dishwashers by 59% to 1.1m; fridges by 55% to 1.8m; and cookers by 75% to 300,000.

The crisis has served to highlight systemic weaknesses in Italy like high labour costs, bureaucracy and poor infrastructure, says Antonio Guerrini, the director-general of CECED Italia, the appliance-makers’ trade body. The only way to survive weak demand and growing competition from giant Chinese appliance firms like Haier is to shift production to lower-cost countries, as Italian makers are now doing. “Manufacturing mass or entry-level products in Italy is no longer competitive,” says Mr Guerrini. If so, many of the 130,000 remaining jobs in Italian appliance-making are endangered.

Slumping output at producers of cars and kitchen gadgets has devastated those who make parts for them. Many have already gone bust. Innocenzo Cipolletta, an economist at Trento University who sits on several company boards including Indesit’s, worries that the steady loss of links in their supply chains is forcing the big makers of final products to recreate the whole chain abroad, accelerating the hollowing-out of Italian manufacturing.

Absent a proper resolution of the euro crisis and sweeping economic reforms in Italy (don’t hold your breath on either count) there is not much that can be done in the short term to protect domestic manufacturing. Bigger tax breaks for research, as the appliance-makers are seeking, might help firms move upmarket and sell more abroad. But that would take years, and they do not have that much time. For the foreseeable future Italian manufacturers are stuck trying to sell their existing products to consumers who seem in no rush to replace their old bangers and creaking kitchen gadgets. In a climate of political and economic uncertainty, with rumoured tax rises and certain job losses, Italians are disinclined to spend, and who can blame them for that?

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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