Italy, like all industrialized countries, will have to export production jobs,
hoping to replace them with design jobs.

Deindustrialization is behind schedule of other European competitors.
Greatly needed efficiencies may be thwarted by protectionism and cronyism.
The government will need to remove restrictions to needed transformations.
Employers AND Employees are both accustomed to protectionism. BIG Hurdle.
Both Large and Small business will need to be reinventing themselves.
The clever use of currency devaluation is longer available to devise profits.
Italy's unique District "Cluster" Industries have a very special challenge.
Mom and Pop operations with "dumb" sons will falter.
Returned "Flight" Capital has been invested in Real Estate rather than Capital.

A dynamic Mr. Montezemolo new head of Confindustria, the Italian employers' confederation may be the savior, badly needed now.
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ITALIAN COMPANIES MUST MAKE RAPID STRUCTURAL CHANGES TO SURVIVE

THE FINANCIAL TIMES
2 giugno 2004 -

De'Longhi, the Italian appliance maker, has been nimbly moving manufacturing overseas, copying the US of 20 years ago, and Britain 10 years ago, and setting the pattern for what Italian Industry must do very soon to survive, but is reluctant to do.

De-industrialisation will be more painful than in the US or the UK. Should entrepreneurs and government leaders fail to correct them within the next few years, Italy could plunge into economic decline.

The challenge concerns companies large and small. The generational change at Fiat, highlighted by the death of Umberto Agnelli last week and his replacement by Luca Cordero di Montezemolo, the chairman of Ferrari, is but a first step for Italy's largest industrial group. Fiat has gone through numerous crises during the past 30 years, mainly because of increased global competition. Now dwarfed by its competitors, Fiat may be too small to compete, analysts fear.

It is clear that Italy will be forced to de-industrialise further. About 30 per cent of its workforce remains in industry - more than twice the level of the US and the UK. The challenge is twofold: while business must redirect investment into services and high-value-added manufacturing ventures at home and abroad, government must remove numerous obstacles to such a transformation.

Franco Tato, former chief executive of Enel, Italy's dominant energy group and the former head of Fininvest, the media holding company of Silvio Berlusconi, the prime minister, says: "The system doesn't work and there's little sign of change . . . . We haven't de-industrialised enough. There's too much protectionism and [cronyism]. Too many regional and municipal aid and contracts are handed out in the guise of competitive bids that aren't competitive at all."

Many Italian business leaders like to say, they have succeeded despite the state and they can repeat the feat. The challenge, however, is greater now than when Italy's main competitors were other European nations with similar, if lesser, problems. To beat those rivals, Italian industry and the government relied on currency devaluations to remain price-competitive and to compensate for the low level of investment in research and development. "Devaluations were a drug," says one prominent banker.

As a result, Italy failed rapidly to de-industrialise and develop strong service companies before India and China began to pose a serious challenge with their production costs.

With Italy's adoption of the euro in 1999, it could no longer devalue its currency, and the lack of structural refom could no longer be disguised. There is concern that thousands of companies did little to prepare for global competition.

Roberto Meneguzzo, chief executive of Palladio, a private equity firm, says: "De-industrialisation could be so violently rapid. Take the 2,000 goldsmithing companies around Vicenza [in northern Italy]. [Their work] can all be done in China now, which is where the market for their products has shifted. I wouldn't be surprised if there were 10 companies [left] in five or 10 years."

Many companies are also hobbled by generational problems with the founders nearing retirement. Even if there is a son or daughter willing to take over the family business, he or she may not have the skills needed for the task - what some bankers call the "dumb son" syndrome. As a result, many company owners prefer to shut down or sell off their company rather than invest fresh cash to compete.

Much of the cash generated by family businesses was siphoned off to Switzerland and other tax havens. The Berlusconi government three years ago offered a tax amnesty for repatriated funds, drawing back more than €80bn. But most of it went into property rather than into industry as the state had hoped.

Italy, of course, is full of successful manufacturing companies that have come back from the brink, including Ferrari, Gucci, Pirelli, and Franco-Italian STMicroelectronics. Among service companies, UniCredito Italiano is one of Europe's best-run banks; Mediaset, the television group owned by Mr Berlusconi, is one of the more innovative programmers.

The revival of Ferrari under Mr Montezemolo's leadership following near- bankruptcy 10 years ago helped propel him to the helm last week of Confindustria, the Italian employers' confederation. His rise is symbolic. The debonair Mr Montezemolo, as popular in Italy as any football star, replaces the dour Antonio D'Amato, who alienated trade unions and blamed others for the failings of Italian industry.

Mr Montezemolo promises a greater attention to promoting Italian business interests abroad, to getting private interests to develop tourism in southern Italy, and to improve the "Made in Italy" image of quality lifestyle products. "China is a great opportunity, not a threat," says Mr Montezemolo. "We have all the right ingredients and businesses to thrive. But we have so few large companies that can lead the way. We must encourage more aggregations (joint ventures or mergers) of companies, improve the approach of the small business owner. That is not easy but we are on the right path."

Much will depend on the ability of Italy's industrial districts to adjust. Many economists, including Michael Porter of Harvard Business School, believe districts, or clusters of companies operating in the same or related industries, have been crucial to national competitiveness.

Many Italian districts long ago adapted to globalisation by setting up factories abroad and building up development, design and marketing at their Italian headquarters.

Sassuolo in northern Italy, the region that produces 82 per cent of Italian ceramic tiles, is exemplified by Marazzi, that added a plant near Dallas, Texas,  and  a new factory in Russia. The district's 140 tilemakers focus on a segment of the market in which they can sell their products at higher prices, in part to build up profit margins that are eaten away by Italy's high energy costs.

Montebelluna, a town 50km north of Venice, once produced most of the world's ski boots. Over the past 20 years more than half the production has shifted overseas. The district's companies, many of which have diversified primarily into other sports shoes, also joined forces to create an industrial base in Timisoara, Romania. Timisoara once served as a source of cheap labour for exports to west European countries; now it has become a launch pad for sales to the east European market.

"The problem is how to encourage aggregations . . . . small companies can remain separate, but for China we're looking at plans for joint sales, logistics, distribution, purchasing and production efforts," says Andrea Tomat, president of the Association of Industrialists of Treviso, which includes the town of Montebelluna. Last year, 25 Montebelluna companies had plants in China, up from 17 the previous year.

While international expansion has allowed manufacturing jobs in Montebelluna to be partly replaced by design and marketing work, the employment prospects for the less technologically advanced districts of southern Italy are not as good.

Gianfranco Viesti, an economic policy professor at the University of Bari, says the outlook for companies in the region has changed "radically" in recent years. "I'm a bit concerned. The slowdown [in the south] has been particularly conspicuous and persistent since late 2000. That's partly because of the world economy but there's a strong suspicion that it's also structural," says Mr Viesti.

Economists and bankers worry that too many business owners, particularly those employing fewer than 100 people, lack the capital and management know-how to adapt. This is important since Italy has a higher proportion of small, family-owned companies than any other European country. Many have little inclination to merge with a competitor. "The basic business owner mixes his family needs with those of the company," says one management consultant. "The house will be next to the factory or warehouse. The senior sales manager will be a son or a cousin, the accountant will be the wife. You can see how that can lead to cooked books, tax evasion and dumb decisions taken by dumb sons. Even if it's all above board, which it often is, how do you merge all that [with another company]?"

Parmalat's collapse has pushed many family-owned businesses into tackling financial weaknesses. "They're looking for outside advice more," says one investment banker in Milan. "They know they have to be larger and better run to be more credible and to be considered reliable for partnerships and joint projects abroad." There are also signs of change among Italy's largest businesses, most of which were privatised over the past 14 years and subsequently streamlined. Their corporate governance record is considered to be slightly better than the norm in continental Europe. Their management and creative skills, which once lagged behind the nimble entrepreneurs of Montebelluna are now highly regarded.

But many of Italy's largest family businesses bought into regulated industries, a shift that critics say highlights the Italian tendency to seek protection and avoid open competition.

The Benetton family, which runs the clothing chain, took control of Autostrade, the highway operator, when it was privatised four years ago. Marco Tronchetti Provera, the main owner of Pirelli, the tyremaker, three years ago gained control of Telecom Italia, the former state monopoly. Others, such as Carlo De Benedetti, the industrialist, have poured money into utilities.

Protected or not, however, many of their investments and subsequent management decisions indicate that the necessary de-industrialisation and push for added-value services has begun. Mr Tronchetti Provera says: "The new generation of business leaders in Italy is very aware of the problem. We are viewing it as an opportunity to react. There is an increasing sense of urgency, and that is turning into action."

RSC PROVIDES LATEST TEST

Change is overtaking some of Italy's top companies.

The Agnelli family is slowly easing its grip on Fiat after years of losses. A shareholder revolt at Mediobanca, a powerful investment bank, resulted in the departure of Vincenzo Maranghi, its Machiavellian chief executive. Following Parmalat's implosion, numerous companies are upgrading their auditing standards and hiring independent directors.

In the next few weeks, another boardroom battle is looming at RCS Mediagroup, the publishing company that owns Corriere della Sera, Italy's most influential newspaper.

On one side is Cesare Romiti, the 80-year-old iron-fisted former chairman of Fiat who controls 9 per cent of RCS. Maurizio, his son, runs the company. On the other side are numerous institutions, including Fiat, Mediobanca, and Banca Intesa, who are tired of the Romiti family's dreadful management record.

Whether shareholders succeed in stripping the Romiti family of control will be an important test case for how serious Italy's business leaders, including many RCS board members, are about modernising Italy's companies. If sucessful, Italian business could more easily claim to be entering a new era.

News ITALIA PRESS
http://www.newsitaliapress.it/interna.asp?sez=240&info=83981