Identifier
Created
Classification
Origin
09MILAN220
2009-11-20 13:13:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Milan
Cable title:  

NORTHERN ITALIAN "DISTRETTI" HANGING ON

Tags:  ECON EIND EINV IT 
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RR RUEHFL RUEHNP
DE RUEHMIL #0220/01 3241313
ZNR UUUUU ZZH
R 201313Z NOV 09
FM AMCONSUL MILAN
TO RUEHC/SECSTATE WASHDC 1872
INFO RUEHRO/AMEMBASSY ROME 8950
RUEHFL/AMCONSUL FLORENCE 0231
RUEHNP/AMCONSUL NAPLES 0226
RHEHNSC/NSC WASHDC
UNCLAS SECTION 01 OF 02 MILAN 000220 

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EIND EINV IT
SUBJECT: NORTHERN ITALIAN "DISTRETTI" HANGING ON

REF: MILAN 78

UNCLAS SECTION 01 OF 02 MILAN 000220

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EIND EINV IT
SUBJECT: NORTHERN ITALIAN "DISTRETTI" HANGING ON

REF: MILAN 78


1. (SBU) Summary: The clusters of small same-sector firms
known as "distretti" are the backbone of the Italian -- and
particularly northern Italian -- economy. To varying degrees
these "distretti" have been suffering from the global
economic crisis that has hit their traditional export
markets. Though some firms will definitely succumb, there
are encouraging signs that many of these clusters are turning
to innovation and market diversification to keep competitive.
The media has made much of the perception that banks are
starving these firms of credit. We believe the more serious
short-term problems are the slow recovery of export markets
and government policies that don,t encourage investment or
innovation. Even in the best case scenario, there will be job
losses. However, minimizing these losses will be critical
for the longer-term demand-driven recovery of the northern
regional economies. End summary.
Distressed "Distretti"

2. (U) Despite some optimistic signs from the Italian economy
and encouraging noises from policymakers in Rome, the future
of many of northern Italy,s "distretti" is still unclear.
As noted in reftel, these geographical clusters of small,
export-oriented firms producing the same or similar product
are characteristic of the northern Italian economy, where
over 70 percent of the country,s 101 largest clusters
reside. Nationwide these "distretti" employ at least two
million people.

3. (U) According to GOI data, and discussions with
entrepreneurs, the crisis has hit some clusters harder than
others. For instance, in the first half of 2009 exports of
clothing and fashion were down 18.5 percent year-on-year in
Italy and furniture was off 24 percent. On the other hand,
food and wine exports were only off 2.4 percent and high-tech
exports were down 7 percent. Bank Intesa Sanpaolo data show
that during the first semester of this year 11 of the 101
"distretti" (primarily food and electronics clusters)
actually expanded their exports. Despite the generally bad
news, the drop in the clusters, exports as a whole was
smaller than the overall decline in Italian exports
year-on-year. As one academic noted, the "distretti" remain
the pillar (and future) of Italy,s export strength.

4. (SBU) Nonetheless, as the crisis lingers we are hearing

that a number of small business owners, viewed as heroes who
will fight until the last centesimo, are at the end of their
rope. It is only a matter of time before they decide to shut
their doors rather than sell out or change their age-old
model. Indeed, experts with whom we spoke believe some of
the harder hit northern "distretti," such as machine tools,
chairs, textiles, and jewelry, might shrink dramatically
(though nobody predicts disappearance of a cluster). One
senior banker told us he expects about 10 percent of Italy,s
estimated five million mostly small and medium companies to
go belly up.
Markets Key to Staunching Job Losses

5. (SBU) These SME closures, combined with the looming end of
unemployment insurance for those previously laid off from the
largest firms, will lead to job losses in the short term.
Economists are telling us that Italy's unemployment crisis
has yet to hit. However, for the "distretti" at least the
scope of these losses will depend on factors such as access
to credit and the recovery of export markets. Media coverage
has focused on the former, highlighting public meetings of
small business owners angrily accusing bankers of choking
them off. Some GOI policymakers have echoed this criticism.
Though bankers admit that it is getting harder for SMEs to
meet lending requirements, they assert that new credit is
down primarily because demand is down -- no markets, no
expansion, no new loans requested. The head of one of
Italy,s largest banks told the Consul General that borrowers
still have 61 billion euro in untapped credit lines at his
bank.

6. (SBU) Thus, we believe a more serious challenge to the
short-term health of the northern "distretti" is the slow
recovery of export markets. The length of the crisis, and
the number of ultimate firm closures, will depend in good
part on the time it takes for traditional markets (Germany
and the EU in particular) to start buying again. Thus far,
economists have told us the recovery has been focused more in
Asia than Europe and the results have been too modest to
spell much relief for the SMEs.

7. (SBU) Though less of a concern for the export-oriented
northern SMEs, some businesspeople have also mentioned
problems in the domestic market. In particular, we have
heard complaints about delays in payments by the government
or large corporations. In a time when the smaller firms have
no fat to spare, payment terms longer than 60 days are no
longer tenable.
Innovation and New Markets for the Long Haul

MILAN 00000220 002 OF 002



8. (SBU) In the longer term, survival of firms and clusters
will have more to do with their ability to adapt to the new
realities of the global economy. This is similar to 2003
when the "distretti" first faced the challenge of Chinese
low-cost competition and innovated their way back to
prominence. For now, observers are hopeful that as closures
occur a new generation of entrepreneurs will step in to
revitalize older "distretti" via mergers and retooling, or
start new ones in relatively unexplored territory such as
energy/environment and aerospace. Also as in 2003,
rejuvenation now will require diversification into new
markets -- experts mention China and North Africa. Overall,
most believe the traditional flexibility and innovativeness
of northern SMEs allow them to respond better to the ongoing
poor market conditions than their larger, slower peers.

9. (U) Several regional governments have grasped this and are
pushing programs to encourage just these things. For
instance, in Lombardy the regional government has launched
the "Driade Program," which will provide 23 million euro
worth of grants to help seven promising clusters become more
competitive and find new overseas markets. The funds will be
managed by local chambers of commerce and will be used for
aerospace, thermo-electric energy appliances, cosmetics,
eco-friendly furniture, eco-friendly car components, arms,
and nautical equipment clusters. In Piedmont, the regional
authorities have already made available 450 million euro in
project grants for about 1,000 green technology firms working
in ten research centers across the region. They key sectors
in Piedmont are renewable energy, hydrogen fuel, and
recycling.
Comment: Distretti Remain Afloat, But Await Wiser Policy

10. (SBU) The good news is that every few months our contacts
push off their predicted day of reckoning for most
"distretti." Last spring it was September, then it was the
end of 2009, now it,s spring 2010. For now the dedication
of SME owners to survive, the innovations these firms are
making, the small but targeted response of regional
authorities, and the stirrings of a recovery in some export
markets seem to be enough to keep their collective head above
water. Low inflation has also helped. A key domestic factor
missing is a GOI policy to encourage the enhanced investment
and innovation all agree are necessary. In its absence, one
business consultant noted, some troubled firms in the
northeast have been moving over the border to EU neighbors
Austria, Slovenia, and even Bulgaria, to take advantage of
more favorable investment climates. Regardless of the GOI,s
response, jobs will almost certainly be lost in
various"distretti." Minimizing these losses in the short and
longer terms will be critical for the demand-driven recovery
of the northern regional economies.
PEREZ