by Romano Prodi22
Dicembre
2014
The near future of industry and of the Italian ceramic district
An essay written by Romano Prodi for Cer – il giornale della ceramica where he analizes the key success factors of Italian ceramic manufacturers
Many years ago, when I began to address the ceramic sector, the industry had just witnessed its initial stage of development: companies amounted to less than 100, and although most of them were small high-growth firms they were still linked to the internal market, and totally family-run at the time. It’s been many years now, and the ceramic industry and district are totally changed today. Allow me to use the words ‘industry’ and ‘district’ as synonyms since 80% of total Italian production is district-made, with a further 10% produced in the rest of the Emilia-Romagna region. It can no longer be defined as a fast-growing sector, a definition which I had chosen almost 50 years ago for my first book. Yet it is one of the districts that has best tackled the different challenges along the years, surviving the initial fast growth and the subsequent ageing of our country. It should be remembered that the territory has never provided any real competitive advantage to this highly energy-intensive industry, considering that energy is more expensive here than in the main competitive countries. As to raw material, whose local availability initially allowed the first industrial development, it didn’t have the necessary quality to keep up with the product evolution, and became gradually replaced by imports. It’s not therefore by a matter of natural resources that challenges have been faced over the years but mostly through capacity to adapt. Our comparative advantage was, and has to remain, human capital: businessmen engaging in processes and products, with a will to engage and undertake; technicians and highly skilled workers: every effort has been made towards the creation of the necessary synergies between people, companies, and the environment.
As to finding the necessary financial resources, if companies once used to deal with banks on a personal basis, with growth and profitability encouraging fast decision making and long term programs, today the funding process is more formalised, maybe more efficient but also more aseptic in a way, not always capable of supporting companies through their current difficulties. But if banks are less likely to support firms, a greater capitalization of companies is bound to become necessary.
Our industry has had to face (successfully) many challenges. Among the most important ones, the urgence to attack foreign markets, at first mainly European; the Spanish competition; last, the most difficult of all challenges: globalization.
To the Italian ceramic industry globalization has meant Turkish, Brazilian, and Chinese competition. It has brought the challenge of distant markets, conquerable only through a position in the top end of the market. This capacity to adapt was based on a leadership pulling together technology, design and adaptability of product and process. Grinding kilns; single firing; refining technologies for stoneware production; increasingly flexible production lines; Rotocolor; digital printing system; these are just a few of the innovations which have allowed Italian firms to slightly anticipate competition. Nothing that could not be copied in its single aspects, as it actually was. But the capacity of the industry to be ahead allowed it to be competitive when things were going fine and to survive when they were not. In fact not many of the so called traditional sectors have been able to innovate both production process and products while remaining “caged” in the specific category of product. Investing 5% of total turnover in innovation is certainly not negligible for an industry as this.
The advancement of production has also been possible thanks to a significant industry of capital goods for the sector. Nothing compares the sophistication and variety of our equipment and machinery for ceramic production.
I have often heard these same producers being blamed for equipping and modernizing our competitors; but it is the law of the market. And with no competition, we wouldn’t have that little advantage we’re so proud of. Surely globalization has brought about increased difficulties, and it could not be any other way. Never has the future of the Italian ceramic industry been as questioned as it has over the last 10 years. As we previously said, the last decade saw China bursting out as a tough competitor, but at the same time other production countries emerged such as Turkey, Brazil, and the Emirates. At the same time, starting 2008, the European market has stopped while the internal market has dropped. During the 2007 - 2013 five-year period, domestic sales almost halved, going from 1.6€ billion in 2007 to 856€ million in 2013. Exports have fallen from 4.2€ billion to 3.8€ billion, registering a negative performance yet not as negative (both in value and percentage) as the one registered by the national market.
Our greatest wish would be the recovery of the national market. But taking into consideration the new competition and the fact that it has pushed us towards the top end of the market, we’ll be forced to consider the Italian market as increasingly less important. Since our destiny is to be high-cost producers, if we want to remain strong on the market we’ll need to take into consideration the whole world, with all the consequences that this implies, both on the size of companies and organisational model. Today a third of total exports cross European borders. This is quite significant as competitiveness in ceramic products is quite hard to gain, having the big burden of transportation costs penalising distant markets. Competitiveness is possible only when products are both technically and aesthetically of very high quality, so that transportation and production costs don’t have a sole influence. This excellence is a sign of trust towards our industry when the antidumping measures the EU had to adopt against China will be lifted.
The Italian ceramic industry has overcome and won challenging battles that have left, however, some painful scars. Compared to the top levels recorded, the number of firms has halved while the labour force directly employed has been reduced by over 10,000 units. The challenge of internationalisation has been tackled, at least temporarily: this is both true for exports and for the capacity of our firms to produce abroad. The decision to invest abroad has often been criticised but without this step our firms would not be as strong today. Italian companies produce in Portugal, France, Spain, Germany, Russia, and the United States. Production abroad has been able to compensate reduced exports started in the first years 2000. This is another sign of the sector’s strenght and foresight.
The ceramic district counts less companies, with the large companies growing ever more competitive on global markets, and smaller ones concentrating with success on specific countries. Other companies have succeeded in creating products which can compete on the European market with the Chinese ones despite their highest costs of transportation.
Today we’re witnessing the district’s last phase of globalization, a new and relatively uncommon phase among Italian industrial districts: the handover of Italian production to foreign ownership. Fincuoghi was the first one to sell to the Turkish group Kale; then came Marazzi, the main Italian manufacturer, that sold to the American group Mohawk. Others are likely to follow. Should this evolution concern a limited number of companies, and be compensated by our foreign purchases, no harm would be done. But it’s difficult to say how things will evolve. Nevertheless, it can be said that there is a double possible approach to such a scenario. The first one is to consider it as a sign of decline, an impoverished outcome. The second approach envisages to integrate the district and its companies into the global chains, and considers this evolution as necessary, almost phisiological, also given the new competitive scenario. Integration also means grasping and assimilating competitors’strategies; covering distant markets through direct investments; improve the size of companies; keep promoting the virtuous circle linking tile manufacturers to production lines manufacturers. The capacity to innovate before others do it, even if with little advantage, is key to maintaining leadership in the area of design, therefore maintaining higher margins. Our ceramic industry cannot therefore be considered a mere productive district: it needs to work as a logistic distributive centre and also as an innovation centre. In other words if a district wants to maintain its centrality it has to keep the ‘heads’ of the companies bought by foreign operators in Sassuolo. It’s a difficult challenge as the head moves more rapidly than a production line, especially if the purchasing companies are larger and get to be operated through a global mindset that has the shift of production plants or decisional centres on its daily agenda.
Maintaining excellencies, specialities and relations of the district is the key element of our future.
A few weaknesses persist though. First, the fragile internal market, still the hard core (although a shrinked one) for Italian production; second, the high cost of energy. Over the last decades I took part in many meetings and conferences addressing the issue of the cost of energy through the evaluation of several proposals. Little or no progress has been achieved. Considering the trend towards a more diversified and liberalised energy market it may be worth to try again.
There is a need for industrial policies not merely supporting ceramic companies but being able to trigger a dynamic change within the district. The adoption of less energy-consuming technologies and the promotion of research for such technologies could be implemented also to other productive sectors that use similar technologies.
A new industrial policy is to enhance both the companies and the district companies are born within.
As experience has shown, generational turnover and interpersonal choices have too often disturbed the even development of companies. This problem does not just affect our sector but it particularly hit an industry born and almost entirely based on family run businesses. Preparing the generation of successors while insisting on the importance of a strategy-oriented culture where the most unpredictable family event will be dealt with therefore becomes a non-negligible task. Generational turnovers are too often speed-up elements of a merging policy between companies. While it is true that more than a few mergers have actually worsened the companies’ situation instead of relieving it, it is also true that mistakes came from implementing a positive process in itself. If we exclude a few cases of heavy specialisation, the problems connected with the size of the companies are of crucial importance. Yet the management organization should be changed or strengthened.
Another issue which hasn’t been properly addressed concerns relations between family ownership and external managers. The sons may not have the same qualities as their fathers: they could be more dynamic and better than their fathers or they may lack the necessary skills to drive an enterprise.
An industrial company is a private good with public functions: its potentialities must therefore be enhanced and developed.
But the district is facing other challenges. The training and specialization of human resources, both in secondary technical schools and in universities, should be reinforced. Universities in particular have, especially in the last few years, enhanced their teaching and research skills. Maintaining supremacy in technology and design means to train men to be the best in the world at both tasks.
None of these objectives can be reached through an autonomous and self-sufficient strategy: the strenght of the district lies in its being open to innovation coming from other sectors and from other parts of the world. I am convinced that such strength still exists in this country and that Italian ceramic manufacturers may be among the major global players for many decades to come.
If Italian ceramic industry was able to stem from entrepreneurship of the provinces of Modena and Reggio Emilia, it is mainly due to Mr Romano Prodi who was the first to analyze and write about this unique economic and industrial process in the whole world. On the occasion of Confindustria Ceramica 50th anniversary, CER has asked Mr Prodi to share his views and opinions on the industry and ceramic district, also in the light of the changes and the challenges brought about by globalization.
We deeply thank him of this extraordinary and remarkable report.
Andrea Serri, Editorial Director for 'CER il giornale della ceramica'