You're all idiots. Unless I am
14 Settembre Set 2012 0955 14 settembre 2012

Why Italy does not need to worry about its industrial base. Or how I learned to love producing up to a standard and not down to a cost

Following my article a few months back about how the Italian stock exchange and the movement of the Government bond is in no way representative of the health or otherwise of the Italian economy, I have been thinking about the small/mid-sized family-run business and its prominence in Italy. And I have come to the conclusion that it is no better or worse than any other system, but you have to understand how and why it works and plays to the country’s strengths rather than think it is possible to compete on equal terms with other countries which have different cultures or geographies. And understand also that what is at one point a source of competitive advantage will later become a disadvantage. As an example, Italy was pre-eminent in the 10th-14th centuries in Europe because of its optimal position in the Mediterranean for trade, the crusades and the spice routes, which then became a disadvantage as the Portuguese, Spanish and British were much better positioned to exploit the opening up of the Americas due to their position on the Atlantic and the need to develop their ocean-going maritime fleet, while the Mediterranean became a relative backwater.
Italy, I would argue, will never be able to support large, heavy industries for 2 insurmountable reasons: the nature of its geography, being split and divided, in contrast to the wide, open spaces of Germany and Britain, to say nothing of America or Russia, which makes transport and homogenising markets much harder here; and the lack of any energy resources, such as coal and oil, which could power this industry at low cost. Compare the composition of the Dax index, 22 of the 30 companies are private, productive companies, for the FTSE MIB, the figure is 16 out of 40. Yet industry makes up 27.8% of Germany’s GDP and 25.3% of Italy’s. Where are the industrial companies in Italy?
But what this does encourage, as is very evident from Italy’s cuisine, is diversity. This is also what would be considered normal if you look at how evolution affects species differentiation on islands or in cramped conditions, they rapidly differentiate to exploit the very specific conditions they find rather than being able to remain in large, homogenous groups. Think of the difference between Darwin’s finches on the Galapagos islands and the flocks of millions of pigeons which were found on continental America when European settlers first arrived. Italian businesses should actually look to remain diverse and exploit the specific conditions they find and not look for mass market appeal. An example: the wine-maker, La Spinetta. Their over-arching policy is to only produce using indigenous grape varieties because otherwise they would be destroyed by the competition from Chile, Argentina, etc, where the estates are larger and the work-force costs less. They simply can not hope to compete if they produce a merlot or a cabernet sauvignon, any international wine, because it requires nothing special, nothing Italian of them. This policy has seen them grow from cultivating 8 hectares in 1980 to 170 today and they are the second most successful wine producer in Italy, according to Gambero Rosso.
What should also be clear from the above example is that, in this environment, you need to have a clear and constant focus on quality and excellence. You produce up to a standard, not down to a price. Now, in some ways, this should come naturally through the specific and intimate knowledge of the niche, but it bears repeating because there is always the temptation to cut corners. Reduce costs and become more efficient, yes, but never lower the quality if that’s why your customers come. My example for this is the success of the Italian car industry. To which you might look slightly incredulous and say what success. But actually, the Italian car industry is very successful when you look at the cars produced according to the theory above. The niche cars, the excellent cars, the Ferraris, Maseratis, etc. Both are consistently profitable, to the extent that Ferrari had an operating profit of € 245mln in 2009 compared to BMW’s € 289mln. Now I am obviously picking my figures carefully, but this illustrates the point that, in the worst recession in the past 30 years, the customers were still prepared to pay for excellence. Or just look at the queues at Grom.

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