The potential for Italy to emerge stronger out of the covid crisis

A survey of international entrepreneurs reveals strong interest in the competitiveness and manufacturing capabilities of Italian companies. Riding this interest can contribute significantly to restarting the Italian economy after the crisis, leading to increased employment, GDP growth and sustainability of the Italian public debt pile. Existing obstacles are mainly regulatory and can be removed with limited financial impact.

International Trends

Italy has the second largest manufacturing sector in Europe and it has been hit hard by the Covid-19 lockdown. Manufacturers’ confidence (as measured by the Manufacturing Purchasing Managers’ Index) is at its lowest point since the financial crisis of 2008. This may lead to losses of production capacity and jobs, but that would be a strategic misstep for the country at a time when some favourable trends are beginning to emerge:

  • Italian and international companies are planning to reconfigure their value chains. The objective is to increase the local manufacturing content, in order to shield business from external shocks arising from unpredictable calamities (e.g. global Covid-2019 epidemic or floods in Thailand). Trade wars and tariffs are also driving the globalisation into reverse. Reshoring also aims to increase flexibility and adaptability to changes in demand volume (see Case Study n.1 – IKEA/Decathlon)
  • The cost gap between production in Europe or China is narrowing, due to the increase in manufacturing automation, rising Chinese labour costs and higher shipping/warehousing costs (see Case Study n.2 – 3T Cycling).

Italian manufacturing is also well positioned to exploit several trends arising from Covid-19 that will drive changes in consumer behavior and increase the focus within the following sectors:

  • health care / luxury / food / home
  • home-office and teleconferencing
  • B2C online shopping
  • environment

Italian Strengths and Required Improvements

Italian manufacturing companies are well regarded by International entrepreneurs for their cost competitiveness, flexibility and design abilities. An increasing number of European and international companies are beginning to select a local manufacturing partner and could turn to Italy if the appropriate business conditions exist and obstacles are removed. Italy has already a strong presence in several sectors that will benefit from international trends, e.g. in health care, food or luxury.

Italian employment and GDP could grow substantially if Italy can position itself as a destination of choice for international entrepreneurs looking for a strong European partner. Possible steps that could remove obstacles perceived by international entrepreneurs include:

1. High-Volume Manufacturing

It is possible today to proceed with the required deregulation without increasing risk, as digitalisation allows for tighter control. Entrepreneurs in these sectors would welcome measures such as:

1.1 Increased labour market flexibility

Fear of not being able to scale down the labour force when needed can prevent international companies from setting up in Italy. In comparison, Spain has reduced unemployment by introducing new measures including an increased trial period of 12 months (it is possible to dismiss the employee at the end of the period) and the possibility to reduce hours worked and salaries when companies are under pressure. This would require that a fund created and paid for by all companies should pay the full salary for the first six months. Changes could be introduced gradually after some experiments.

1.2 Eliminate employers’ contribution on gross salaries up to 20k€

This would reduce to 20.000 euro the labour cost for Italian companies (currently between 25.000 and 30.000 euro) vs. the cost of blue collar workers employed by Chinese companies of 11.000 euro. A reduced labour cost differential would facilitate repatriation of production.

1.3 Reduce uncertainty associated with civil justice

Contract enforcement or delayed payments are notoriously difficult to obtain in court within a predefined time frame. Adoption of new processes and technology (e.g. Smart contracts) could play a role in addressing this problem.

2. High Value-Added Manufacturing: Application of new technologies to a tradition of craftsmanship and ingenuity

2.1 Design-based industries

Consumers increasingly require ‘unique’ products and the times of ‘mass production of standard products’ are over. This requires a flexible production set up and design ingenuity, well suited to Italian companies.

Italy has a strong tradition of local manufacturing/craftsmanship, particularly valuable in the luxury segment characterised by clusters of low-volume, high-value manufacturers. Incentives should be provided to stimulate clusters of small companies to cooperate (as done already with ‘Contratto di rete’) to build sufficient scale and enable dialog with larger international partners.

Increasing adoption of B2C technologies and the development of e-commerce platforms will enable this successful ecosystem to thrive, facilitate access to consumers and increase direct sales and export sales.

Regulation should also allow for clear and fast approval processes for B2B. The need to collect data before a sale is closed should be reduced to allow one-click buy, an option currently available to giants such as Amazon, but not to SME’s.

2.2 R&D – based industries

Very strong Italian leaders can be found in several high-tech sectors, from pharmaceuticals to aerospace and from medical devices to packaging. Labour cost is not the main issue

  • Increase incentives for companies investing in young talents.

In the last few years, the drain of young graduates’ talent has accelerated, as tens of thousands chose to expatriate every year. In today’s knowledge economy, Italy has an advantage in its skilled and cost-competitive labour force, with young graduates earning low starting salaries by European standards. Incentives offered to employers hiring new talent would increase competitiveness of Italian companies.

  • Remove obstacles to new company creation and growth

Setting up a legal entity and opening a bank account should be made simple, fast and inexpensive. It should be possible to complete the process on-line in 24 hours by streamlining the process, that currently can take several weeks involving heavy fees.

Create an environment for Start-ups and Scale-ups that encourages a Silicon-Valley-like culture of risk taking: easier access to venture capital and to mentorship/coaching, lower earnings tax, taxation on dividends when money leaves the company.

Build “Centers of excellence” clustered by theme (Robotics, AI, Biomedical, Green Energy, …) and supporting start-ups and scale-ups with all resources needed. Encourage cooperation among companies to create strong champions instead of small scale boutiques.

Restarting the Italian economy after the crisis is possible and will lead to increased employment, GDP and sustainability of the Italian public debt pile. Existing obstacles are mainly regulatory and can be removed with limited financial impact.

Case Study 1 – Supply chains getting local

Ikea is sourcing from Eastern Europe rather than China the furniture it sells in Germany. Decathlon is also producing more and more regionally. Stronger and faster integration of italian manufacturers within e-commerce platforms selling within Italy would drive business. Italian entrepreneurs may also have to develop the local e-commerce market for health goods and other basic necessities.

Case Study 2 – Production can move back to Italy as cost gaps narrow

The global cycle manufacturer 3T moved production of carbon fiber components for its bikes from Taiwan to Bergamo in 2019. Reasons mentioned for the decision include:

  • better protection of IP
  • shorter lead times (from 10 months from China to 2-3 months for made in Italy)
  • faster development cycles
  • more customization possible
  • less stock / goods in transit, more JIT production
  • lower import duties
  • better quality

This was only possible when the cost differential narrowed, thanks to increased automation in carbon fiber manufacturing.

Another interesting example is the manufacturer of health care equipment Creanova, active in design and innovation of healthcare Solutions. Some of Creanova’s products are used in the fight against Covid19, such as Spirometers with SpO2 measuring.

Creanova differentiated production between

  • producing its full Healthcare Device in Como, Italy while
  • keeping in Serbia high volume production to ISO13485 standards.

By this strategy, Creanova’s B2B clients will no longer move to China for production, while having shorter logistic lead times and better Quality Control.

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