The ANNOTICO Report

The alpine manufacturing towns of northern Italy, have their speciatlies. Como has its silk industry, Lucca its leather goods, Montebelluna its shoes, and Biella its wool, to name a few.

In the past, these small, often family-run firms share information, know-how and business, and this communal approach was admired for its flexibility and shared economies of scale.

The first competitive threat in the silk business was fended off with superior quality,
but is not surviving China's improved quality.

The current threat in the wool business is resulting in some Italian manufacturers  fighting back with constant innovations in design, style, blend, fiber, while others shift production to China, and partner in retail outlets in China's emerging markets.

What is in store for leather goods, shoes, etc?
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Thanks to Walter Santi

THREAT FROM CHINA STARTS TO UNRAVEL ITALY'S CLOTH TRADE

Close-Knit Industry Became European Powerhouse;
Now, Quality Gap Narrows

The Wall Street Journal
By Christopher Rhoads
Staff Reporter
December 17, 2003

BIELLA, Italy -- For more than 600 years, the icy rivers that roar through this Alpine town have made it a natural for weavers, who used the fast-flowing waters to power looms and clean wool. Over time, the region bred some of the most famous names in Italian clothing, including Zegna and Cerruti.

The manufacturing towns of northern Italy are built on clusters of small, often family-run firms that share information, know-how and business. Como has its silk industry, Lucca its leather goods, Montebelluna its shoes and Biella its wool, to name a few. In the past, the communal approach was admired for its flexibility and shared economies of scale.

Now a new factor is radically remaking this arrangement: China. The competitive threat of its factories is bearing down on Biella and other towns that for more than a century helped power the Italian economy. Trades built on craftsmanship and cachet, such as cashmere and leather, for years dismissed the threat from low-wage countries. But they are suffering today as China steadily narrows the quality gap.

In the past, the region's strength depended on unity. The impact of China is scattering Biella companies in different directions. Botto Poala SpA, part of a group of wool companies started in 1876, is moving more production in-house to ensure high quality and has laid off workers for the first time in its history. Ermenegildo Zegna SpA, the men's fashion designer, has moved much of its business away from Biella and is focusing on building its brand-name, rather than that of Biella. Fratelli Piacenza SpA, a 270-year-old firm that specializes in cashmere, is shifting new production to China. In the future, its executives predict, firms will replace "Made in Italy" with "Created in Italy" labels to signal that their designs -- if not the production -- remain home-grown.

The American economy's size, flexibility and embrace of technology have allowed it to absorb -- and in many ways benefit from -- the effects of China's emergence, through relocating production or selling more goods to China.

For Italy, the world's sixth-largest economy, China's arrival is tougher. Inflexible labor laws constrain Italian companies from firing workers and moving jobs abroad. The majority of manufacturers remain family-run outfits with fewer than 100 workers. Uprooting to distant China remains out of the question for many. And many Italian firms believe that what sells their products -- whether a Versace dress, a Gucci bag or marble sinks -- is that they bear "Made in Italy" labels.

Home to more than half of Europe's textile companies along with other low-tech manufacturing industries, such as shoes, Italy lies squarely in the path of the charging Chinese economy. China last year exported $20 billion in textile products, a 53% increase from three years earlier, making it the world's second-largest textile exporter behind the European Union. China also imports textiles but in far smaller quantities.

Located in the foothills of the Italian Alps, Biella's textile traditions date back at least to the 14th century. Toward the end of the 19th century, the region borrowed technology and factory designs from England, erecting massive mills along the rivers.

After World War II, lower trade barriers drove a continent-wide economic boom. Italian clothiers traveled to Paris, the capital of fashion, to learn the latest weaves and styles. Italy's own growing wealth fueled the rise of Milan, Rome and Florence as fashion hubs. Even as some high-wage European countries began scaling back their textile industries in the 1960s and 1970s, Italy's was flourishing. In Biella, more than a thousand textile companies helped to make the region one of the richest industrial districts in Italy.

Europe felt the first rumblings from China in the late 1980s, when it ramped up production of silks, a traditional Chinese product. The ensuing glut drove many European firms out of business, but buyers then rejected the Chinese silks for their poor quality. The Italian companies rode out a dip in sales and then thrived.

In the past three years, the Chinese have returned with much higher quality. "The second shock has begun," says Michele Canepa, president of the International Silk Association. Some longtime silk makers in Como have given up producing silk altogether. E. Boselli & C. SpA, located in the hills overlooking Lake Como, now just makes polyester blends. Such materials allow for more innovation, which the company believes is the only way to stay ahead of the Chinese. "We have to keep looking for new ways," says Giulio Balossi Restelli, a senior executive, sitting among racks of colorful polyester. "That's the only way to survive."

Now, China has turned to wool -- making it Biella's turn to feel the consequences.

Biella, which is the name of both the town and the surrounding province, has about 200,000 people living in the foothills of the snow-capped Alps. Many residents live in tiny villages that cling to narrow mountain roads. For centuries, pilgrims have come to pray at its numerous mountain sanctuaries. But it's the wool and other textile factories, which today provide work for about one-third of the province's total work force, that put Biella on the map. Outlet stores selling sportswear, pajamas and blankets clutter the main road leading into town.

At Botto Poala's mill in the center of a tiny mountain village, sales are down 10% from two years ago and show no sign of improvement. Rodolfo Botto Poala, whose grandfather started the firm, says he has no choice but to bring more business in-house. The answer to the Chinese threat, he believes, is focusing on quality, which calls for more internal production and less outsourcing. The company now does its own dyeing where in the past it contracted that work out to others.

But Silvio Botto Poala, Rodolfo's 37-year-old son who handles several business lines, counters that "quality is no longer enough." The Chinese are winning business from Botto Poala in nearly every segment, he says, and they are increasingly competing on quality and design rather than just price. The decline in sales has prompted the firm's first-ever job cuts, of more than 50 of its 290 workers in the past year.

Across the street, wool company Lanificio di Lessona SpA is also feeling the pinch. While some specialty customers are sticking with the Italians, more and more bulk orders -- from major U.S. customers like Calvin Klein and clothing chain Men's Wearhouse -- are going to the Chinese. "The effect was, 'Ouch!' " says Elena Crotti, a senior executive at the firm. Men's Wearhouse told her two years ago it wanted its usual shipment but that it had received a Chinese offer at half the normal price. "I told them we can't do that, so go for it," says Ms. Crotti. "And they went for it." A spokesman for Calvin Klein says that the company still places many orders with Italian suppliers.

When orders dry up at Botto Poala and Lanificio di Lessona, two of the bigger producers in these hills, the effect travels immediately several miles up the mountain road to Rammendo Terzoglio Snc, a small workshop of 16 workers. The firm is run by Mariangela Terzoglio, a 55-year-old woman with bushy dark hair and reading glasses draped around her neck; her husband and son also work here.

The company relies on other companies having too much to do. They send her nearly finished fabrics to check and fix any flaws. Several carts containing stacks of cashmere and wool clutter the small work area. Still, orders are down a third from 18 months ago. Ms. Terzoglio has begun to fret about meeting mortgage payments on the building. She is waiting until next month, after orders for the next winter season come in, before deciding whether to lay off staff.

"Everyone is worrying now, that's what's different," she says, smoothing her soft hands over a large piece of dark, pin-striped wool stretched over her examining table. "It's not just one or two firms."

Many Biella textile firms have already cut workers. Two thousand textile jobs, about 8% of the total, have been lost in the past year, according to the Biella industrial association. Though the local unemployment rate is just 4.8%, that's up from 3.8% a year earlier.

The drop in sales could be cyclical in part. The three-year global economic slump has persuaded many consumers to put off purchases such as an expensive suit. The rise of the euro against the dollar and other currencies has made European exports more expensive abroad. And wool has lately fallen out of fashion, pushing down prices.

But Biella companies say something more lasting is at work. For years, the Italian textile makers were the only low-cost providers within the EU. "We used to be the Chinese of Europe," says Carlo Piacenza, who runs cashmere company Fratelli Piacenza with his brothers. "In the 1950s and 1960s, we took the market from England and France. Now we have to be prepared to leave this to someone else." Since the last remaining global textile quotas will be abolished in January 2005, as part of trade liberalizations agreed to under the World Trade Organization, Mr. Piacenza believes the surge of Chinese textiles will only get worse.

Piacenza, located in a field just outside the main town of Biella, is transforming its business in response. Since the strength of the Chinese still lies more in copying products than in making new ones, he says, the company has changed 70% of its product line in just the past two years, introducing new blends, dyes and fibers. In the past, such an overhaul would have taken a decade.

Mr. Piacenza figures that the 224 workers in Biella will increasingly focus on design and innovation. Production will go to China, where the company opened its first mill in 1994, employing 200 in Beijing. Mr. Piacenza expects to transfer "more and more" production there, he says.

The Biella district is trying to fight back. In September, it launched a marketing campaign at the Milan fashion show to inform customers of the quality and standards behind its fabrics, including better working conditions and environmental practices at its factories, compared with those in China. The local industry association has put out a compact disk with a jingle touting Biella's excellence; a new Web site bears the slogan "E l'arte di emozionare," or "It's the art of creating excitement."

But many others are turning their backs on Biella. For Ermenegildo Zegna, China is a huge opportunity. The company has teamed up with a Chinese garment company to make clothing there, and it's also opening retail stores to capitalize on the country's growing wealth. Zegna plans to have 46 such stores in major Chinese cities by the end of this year, and 60 by the end of next year, says Paola Zegna, the company's co-chief executive.

The company is pouring its advertising into building its own name; a recent ad campaign features Oscar-winning actor Adrien Brody. Though Biella is where the company got its start, "If you ask me if we really need it, the answer is no," says Mr. Zegna.

For others, the response is even more drastic. Lanificio Alfredo Pria SpA was one of the biggest mills in Biella, employing more than 1,000 people by World War II. It later sold its wools to the best houses, including Yves Saint Laurent and Christian Dior.

But sales declined, in large part due to rising competition from China. In 1999, owner Guido Azario, a relative of the founder, laid off the remaining 200 workers and shut down the plant. Today, Mr. Azario and his wife, Anna, still live in the building and rent part of it to a call center, an architecture firm and an art gallery.

One of the rooms houses a renowned archive of more than a thousand leather-bound volumes, containing textile patterns and other specialized knowledge on making fabrics. Leafing through the dusty, cracking books, Ms. Azario said the Chinese are among the most frequent visitors to the room. "They are taking our ideas," she said. "I don't like to open it to the Chinese anymore, unless they bring a lot of money."

--Carlta Vitzthum in Madrid contributed to this article.

Write to Christopher Rhoads at christopher.rhoads@wsj.com2

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