Italian industry as a Global Player

Luca Paolazzi – Director, Confindustria Economic Research Department
The role of open markets for Italian industry
as a Global Player.
Luca Paolazzi
Director, Confindustria Economic Research Department
Berlin, 9th October 2017

There are more things in heaven and earth (and Italy),
Horatio, Than are dreamt of
in your philosophy.
William Shakespeare - Hamlet (1.5.167-8)

Among foreigners (economists, politicians, journalists,
public opinions) there are a lot of deeply rooted
believes about the Italian economy:
Slow growth country,
High and unsustainable public debt,
A lot of pension expenditure,
Ill banking system,
Low and losing competitivness jeopardizing
market shares.

My presentation will focus on the other side
of the moon, that explain why Italy is (still and despite
the dramatic consequences of the crisis),
the second largest industrial economy in Europe.
It is split in five parts.

Topics
Italian export recent strong performance.
The structural factors behind it.
Companies improvements and handicaps.
A widening (but not exclusive) heterogeneity.
The multinationalization of Italian firms.

Topics
Italian export recent strong performance.

In the last six years Italian exports grew at robust
pace. They are well above pre-crisis levels:
+5,6% in 2016 compared to 2007,
while final domestic demand is still 9,0% below.

According to CSC forecasts exports will be the most
dynamic GDP component in 2017-2018, taking full
advantage of the favourable global trade momentum.
In 2018 exports will be 15,0% higher than pre-crisis
levels (-6,6% final domestic demand).

Exports way better than domestic demand
(Italy, data at constant prices, indices 2000=100)
* Final consumption expenditure and gross fixed capital formation.
Source: CSC elaborations on ISTAT data.
90
100
110
120
130
140
96
98
100
102
104
106
108
110
112
114
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Recession
GDP
Domestic Demand*
Exports (rightscale)

Exports way better than domestic demand
(Italy, data at constant prices, indices 2000=100)
2017-2018: CSC forecasts. * Final consumption expenditures and gross fixed capital formation.
90
100
110
120
130
140
96
98
100
102
104
106
108
110
112
114
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Recession
GDP
Domestic Demand*
Exports (rightscale)

Thus, exports increased from 26,3% of GDP in 2011
to 30,7% in 2016; they will be equal
to 32,5% of GDP in 2018.
Firms’ internationalization has increased markedly,
thanks to business strategic choices, government
policies and association activities.

Italian exports of goods have gained global market
shares, growing faster than demand in their
destination markets: +3,2% annual average vs. +2,2%
in 2011-2016 (+1,7% vs. +4,7% in 2000-2010).
According to CSC this trend will continue
in 2017-2018.

Italian exports over-perform global demand
(Goods, volumes, % change)
2017-2018: CSC forecasts.
Source: CSC elaborations on CPB, IMF and ISTAT data.
100
105
110
115
120
125
130
135
2010 2011 2012 2013 2014 2015 2016 2017 2018
Italian exports
Italian potential demand
World imports

Italian export growth is still lower than German one.
However, the gap decreased markedly:
from 3,6 percentage points a year in 2000-2010
to 0,5 points in the last five years.

Wide gap w.r.t. German exports
(Goods, data at constant prices, indices 1999=100)
2017: first two quarters.
Source: CSC elaborations on Eurostat data.
100
120
140
160
180
200
220
240
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Italy Germany France Spain

Robust export performance and favourable terms
of trade dynamics have driven the Italian trade
and current account balances to 20-years highs
in 2016: +3,6% and +2,6% of GDP, respectively.
Thanks to the current account surpluses,
the Italian foreign debt diminished to 13,5% of GDP
in the first quarter of 2017, down by almost
12 pp from end 2013.

Italian external debt is shrinking
(Data in % of GDP)
2017: 1st quarter for the net position and 2nd quarter for CA balances.
Source: CSC elaborations on Bank of Italy and Eurostat data.
-30
-25
-20
-15
-10
-5
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Net position Cumulated CA balances

Topics
The structural factors behind it.

What structural factors sustained the Italian export
performance?
 Potential demand growth, that captures Italian
firms’ ability to catch opportunities
in foreign markets;
 Competitive excellence in traditional sectors
of specialization and ranking gains in others,
like machinery and equipment
and pharmaceutical products.

According to WTO-UNCTAD Trade Performance Index,
that captures competitive excellence along multiple
dimensions, in 2016 Italian manufacturers
have further specialized in medium-high technology
sectors, gaining 2nd place in transport equipment
and other products (like optical, medical
and photographic), while loosing to China
the 1st place in textiles and the 2nd in metal products.

Italy takes second place in export performance
(Trade Performance Index, first 3 positions)
2006 2016 2006 2016 2006 2016
Transport equipment Germany Germany France Italy South Korea Netherlands
Non-electric machinery Germany Germany Italy Italy Sweden China
Chemicals Germany Germany Netherlands France France Netherlands
Basic manufacturing Germany Germany Italy China Sweden Italy
Miscellaneuos manufacturing Germany Germany Italy Italy Switzerland Netherlands
Electronic components Germany Germany Italy Italy France Netherlands
IT & consumer electronics Sweden Hungary China Singapore Singapore Malaysia
Processed food Netherlands Germany Germany France France Netherlands
Wood products Germany Germany Finland Finland Sweden Sweden
Textiles Italy China Germany Italy Taiwan Germany
Clothing Italy Italy China China Romania Turkey
Leather products Italy Italy China China Vietnam India
Source: CSC elaborations on UNCTAD and WTO data.

Italian products in the top 3 positions of the global
ranking are worth:
almost 260 billion euros of exports
(65,5% of Italian manufacturing exports);
almost 97 billion of surplus
(+51,5 billion the total trade balance).

Topics
Companies improvements and handicaps.

What are the variables that shape Italian firms’
competitiveness?
Strengths:
higher product quality;
specialization in the initial production stages
of the global value chains;
innovation and technological upgrading.
Weaknesses:
higher ULC.

Italian firms increased product quality
(Ratio between export unit values and production prices, index 2000=100)
2017: first six months.
95
100
105
110
115
120
125
130
135 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Italy Germany France Spain

Unit value dynamics (net of changes in production
prices) reflects variation in exported goods’ both
quality and composition. Italian gains are partially
due to the increasing share of pharmaceuticals (that
display high unit values). However, gains are
widespread across sectors, with strong improvements
in both these newly emerging and the traditional
sectors of specialization, like machinery and
equipment, shoes and leather products.

Italian products' quality increased in strategic sectors
(% cumulated change 2002-2013, sectoral quality index*, 2010=100)
Germany Spain France Italy Euro area Italy UV
Euro area
UV
(euro per 100KG
of goods, 2013)
Leather products** -12,2 -29,9 52,2 50,2 27,2 10.577,9 3.961,4
Footwear** -4,7 -65,4 - 28,0 -19,3 3.400,9 3.018,7
Pharmaceuticals** -43,8 8,1 17,6 27,5 -4,1 6.780,4 7.426,2
Chemicals 0,9 -16,7 0,8 19,1 -2,9 107,9 100,6
Machinery and equipment -9,6 -2,0 - 18,6 -36,1 1.163,5 973,6
Non-metallic mineral products -4,8 -7,6 - 11,4 6,8 88,0 83,2
Food, beverages and tobacco 47,7 -36,0 22,1 9,8 6,8 101,9 129,0
Wearing apparel -24,9 7,6 - 4,9 -15,2 3.604,1 1.538,9
Basic metals -0,6 -21,2 - 1,3 6,0 169,5 151,2
Electric components -20,4 -24,9 - -3,0 -15,9 1.041,1 1.804,5
Textiles -12,7 3,6 - -7,4 -18,1 999,9 577,2
Furniture -12,4 1,2 - -7,9 -5,0 516,7 515,1
*Ratio between sectoral unit value index and sectoral production prices index of goods sold abroad **2005-2013

Italian participation to the GVC has increased,
more markedly in the initial production stages
(as measured by the Italian value added in foreign
production) than in the final ones (foreign value
added in Italian final goods);
the opposite is true for Germany.
Thus, Italian position in the GVC moved, on average,
towards the initial end (+3,5% from 2000 to 2014),
while the German one towards the final end (-2,0%).

0
5
10
15
20
25
30
35
40
Italy Germany EU World
2000 2014
Italian firms' participation to GVC increased…
(Manuf. escl. oil prod., GVC participation index*)
* Average of forward and backward participations, weighted by the number of border crossings.
Source: CSC estimates on WIOD data.

* Ratio of forward and backward participations, weighted by the number of border crossings.
Source: CSC estimates on WIOD data.
85
90
95
100
105
110
115
120
125
Total Tradewith Germany
2000
2014
…more at initial stages, especially w.r.t. Germany
(Italy, manuf. escl. oil prod., GVC position index*)

According to CSC analysis, specialization in the final
stages of production, especially through outsourcing,
may be a competitive disadvantage, because
it exposes to risk of knowledge and skills losses
and of inflationary pressures from price increases
and currency revaluation in the source countries.

Germany and Italy are not only competitors but also,
increasingly, partners in factory Europe. According to
CSC estimates, European production has become
more fragmented, involving multiple border crossings,
and more connected to GVC. In particular, the share
of European countries’ manufacturing VA activated
by long intra-extra-EU chains (that is, incorporated
into extra-EU exports of other European countries)
increased from 6,2% in 2000 to 9,4% in 2014.

Italian ULC dynamics out of hand…
(Industry except construction, indices 2000=100)
2017-2018: CSC forecasts.
+15,2
+14,1
+15,6
-5,7
-1,9
+8,2
-9,8
+11,0
80
90
100
110
120
130
140
150
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Italy
Spain
France
Germany
% Ch. 2000-2007 % Ch. 2007-2016

…strongly penalizes its competitivness,…
(Italian manufacturing, index 2000=100)
* Inverse of the relative ULC index (w.r.t. 37 countries).
An increase of the index means higher competitiveness, and viceversa.
Source: CSC elaborations on European Commission data.
80
85
90
95
100
105
110
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
ULC competitivity*

…while price dynamics favours it
(Italian manufacturing, indices 2000=100)
* Inverse of the relative prices index (w.r.t. 62 countries) and of the relative ULC index (37 countries).
An increase of the index means higher competitiveness, and viceversa. 2017: first six months.
Source: CSC elaborations on Bank of Italy and European Commission data.
94
97
100
103
80
85
90
95
100
105
110
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
ULCcompetitivity*
Production prices competitivity*
Mark-up (rightscale)

According to CSC estimates, from 2000 to 2013
the competitive losses due to manufacturing ULC
dynamics reduced export growth, on average,
by 0,9 pp yearly.
While the competitive gains thanks to relative
producer prices contributed to export growth
by 0,1 pp yearly.

Topics
A widening (but not exclusive) heterogeneity.

Aggregate data on export and competitivity derive
from highly differentiated and diverging
performances between firms, driven by the gap
in exploiting globalization and technology advances.
Exporting firms are, on average, larger and more
efficient. At the same time, non-exporting ones
contribute to their performance in foreign markets,
acting as strategic suppliers along the production
chains and in the industrial districts.

Exporting firms are more competitive…
(Italy, manufacturing sector, 2014)
0
10
20
30
40
50
60
70
Investiment/worker
(thousand euros)
Averagesize Profits/VA (%) Labour cost/employee
(thousand euros)
VA/employee
(thousand euros)
Exporting firms
Non-exporting firms

…and more resilient to the crisis
(Italy, number of manufacturing firms, index 2008=100)
84
86
88
90
92
94
96
98
100
2008 2009 2010 2011 2012 2013 2014 2015
Total Exporting firms

Gaps are wide and increasing
within the group of exporting firms as well.
Leaders are characterized by the highest degree
of internationalization, that is highly correlated with
other strategic variables (innovation, human capital,
governance, capitalization, management).

More internazionalized firms are growing…
(Italy, industrial firms by degree of internationalization, cumulative % change 2011-2014)
Global firms export to 5 or more extra-European areas.
-20,0
-15,0
-10,0
-5,0
0,0
5,0
10,0
No activity Importers only Exporters only Importers-Exporters Global
Employees Valueadded

…and display increasing productivity…
(Italy, firm productivity by foreign potential demand dynamics*, average
annual % change, 2000-2014)
* Import growth in the destination countries of firm exports.
Source: CSC elaborations on data Bank of Italy.
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
1 2 3 4 5
Quintiles

0
10
20
30
40
50
1 2 3 4 5 6 7 8 9 10
Destinations
Healthy
0
10
20
30
40
50
1 3 5 7 9 11-30
Products
Atrisk
…and higher financial performances
(Italy, economic-financial performance by number of export destination
countries and number of exported goods, % of firms, 2014)
Healthy: financially profitable, solid and liquid firms. At risk: unsustainable profitability (ROI lower than the cost of capital).

The gap of performances is widening
(Productivity, % ratio between upper and lower centiles)
Source: CSC on Bureau van Dijk data.
200
210
220
230
240
250
260
270
Italy Germany Spain France
2007 2014

Quantifying differences
(Italy, manufacturing industry, top 5% and quintiles by ROE, 2014)
Source: CSC calculations based on Bureau Van Dijk data.
43%
26%
10% 4% 1%
-17%
-20
-10
0
10
20
30
40
50
Top 5% Leader Follower Medium Laggards Atrisk
AverageROE: 7.2%

Topics
The multinationalization of Italian firms.

A relevant proportion of global firms in Italy
are multinationals:
in 2014 20% were domestic and 9% foreign-owned.

The central role of multinationals in exports
(Manufacturing exports by type of ownership, % change, 2015)
2011 for Italy and 2014 for Spain.
* Germany: data not available for domestic multinationals.
0
10
20
30
40
50
60
70
80
90
100
Spain Italy Germany
Domestic firms* Other domestic firms Domestic multinationals Foreign multinationals

Italian multinationals in foreign countries…
Few firms, many employees
and high revenues
Relevance of domestic-owned foreign firms for
the Italian economic system
Values in % of total in Italy; year 2014 • 22.400 domestic-owned foreign firms
• More than 1.800.000 employees
• Yearly revenues higher than 531,4 billion of euros
• Foreign revenues are 28,3% of total ones
• In textile, clothing and footware sectors almost
44% of exports of domestic-owned foreign firms
are directed to Italy.
0,5
10,4 15,2
99,5
89,6 84,8
0,0
10,0
20,0
30,0
40,0
50,0
60,0
70,0
80,0
90,0
100,0
Firms Employees Revenues
Resident firms
Domestic-owned foreign firms

…are growing
(Industry, indices 2007=100)
85
105
125
145
165
185
205
2007 2008 2009 2010 2011 2012 2013 2014
Firms Employees Revenues Exports

Italian large multinationals invested
exstensively abroad in 2015-2016
Main groups Medium-large
groups
Small groups
0
10
20
30
40
50
60
70
Large groups plannew foreignacquisitions...
(% of multinationals that plan new control investment abroad)

Italian large multinationals invested
exstensively abroad in 2015-2016
0 50 100
Mantain core business in Italy
Favourable corporate taxation
Reducing regulatory burden
Reducing labour costs
Access to new skills and technical
knowledge
Following other firms' decisions
Reducing other costs
Quality improvements or new
products
New market access
...in order to get into new markets
% of multinationals that declare foreign investment is important in order to:

Quality, product mix, innovation and more dynamic
destination markets are the winning ingredients
of Italian firms’ internazionalization.
There is only one way to go:
promotional and supporting activities by both
government and industry associations.

Confindustria Economic Research Department
provides in-depth analyses to forecast
future trends and understand
the current economic situation.
To be updated check out our website or write us to
csc@confindustria.it
Mission and contacts

Italian industry as a Global Player

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