Identifier
Created
Classification
Origin
09MILAN78
2009-03-23 16:18:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Milan
Cable title:  

NORTHERN ITALIAN "DISTRETTI" FACE THE GROWING

Tags:  ECON EINV EAGR PGOV IT 
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ZNR UUUUU ZZH
R 231618Z MAR 09
FM AMCONSUL MILAN
TO RUEHC/SECSTATE WASHDC 1733
INFO RUEHRO/AMEMBASSY ROME 8774
RUEHFL/AMCONSUL FLORENCE 0198
RUEHNP/AMCONSUL NAPLES 0196
RUEHRC/DEPT OF AGRICULTURE WASHDC
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS SECTION 01 OF 02 MILAN 000078 

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV EAGR PGOV IT
SUBJECT: NORTHERN ITALIAN "DISTRETTI" FACE THE GROWING
CRISIS

UNCLAS SECTION 01 OF 02 MILAN 000078

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV EAGR PGOV IT
SUBJECT: NORTHERN ITALIAN "DISTRETTI" FACE THE GROWING
CRISIS


1. (SBU) Summary: Across Italy's industrial northern
heartland, we've heard the same message with respect to the
economic crisis in recent weeks: we're holding on, but won't
last forever. Northern Italy's economy is dependent on
clusters of "distretti," each with dozens of small firms that
produce one thing, largely for export. As export markets
have sagged, many of these "distretti" have suffered.
Fortunately, credit still seems available for smaller firms
with good ties to their local banks. Also, small and
medium-sized firms are flexible enough to make adjustments
(to their labor force or with innovation) to keep afloat in
hopes of waiting out the tough times. The real concern is
that the demand slump extends into next year when the
worst-hit "distretti" may start to go under. This could
potentially cause serious localized unemployment problems,
and a political backlash against the central government, in
cities across northern Italy. End summary.

Distressed "Distretti"


2. (U) To compile a snapshot of how the economic crisis is
starting to bite in the industrial heartland of Italy, the
Consul General recently traveled to Udine (in Friuli),Parma
(Emilia Romagna),and Verona (Veneto). Rather than hosting a
small handful of large employers, Italy's north is home to a
number of "distretti" ) concentrations of dozens of
export-oriented small and medium-sized enterprises (SMEs)
focused on one industrial sector.


3. (U) The primary message that came through from our various
meetings was that the situation is worrisome for nearly all
the "distretti" ) we spoke primarily with ones that produced
foodstuffs, furniture, textiles, and steel products.
According to a trade association in Udine, already five
percent of SMEs in its area of coverage have gone bankrupt.
However, the consensus was that things had not yet become
disastrous.

Good Products, No Buyers


4. (U) Considering the export nature of the "distretti," the
number one topic on the minds of businesspeople and local
officials was the perilous condition of traditional overseas
markets in Europe, the United States, and Asia. As the level
of exports ) especially to the EU 27 ) continues to dive

nationwide these firms are questioning their ability to
replace lost international consumption with increased
domestic purchases.


5. (U) One producer of fabrics for use in the automobile
industry said that orders were still being fulfilled, but
that buyers in Europe and the United States were unable to
pay the invoices. A specialty steel producer told us that
his order books were still OK, but only for a scant few
months into the future. On a more positive note, producers
of wine in Veneto and Friuli told us that their sales were
still decent, but that sales of high-end wines were down.
Many makers of foodstuffs (pasta, olive oil, Parma ham, and
San Daniele prosciutto from Udine) said they were actually
looking to expand their international market presence. The
one thing they feared was an uptick in protectionist
sentiments in favor of domestic agricultural interests.


6. (U) Indeed, the inconsistent impact of the crisis across
various export sectors is, thus far, a good sign for whole
regions ) though not for the smaller, undiversified
"distretti" within a region. Recent data released for
Lombardy, which can be extrapolated to some degree for the
regions we visited, showed that those "distretti" producing
things like foodstuffs, machines, and pharmaceuticals were
actually prospering. Meanwhile, those relying on textiles,
wood and woodworking, and vehicles were suffering
inordinately. Likewise, those who had primary export markets
in the United States and Asia were much better off than those
who looked mostly to consumers in Europe.

Small is Better


7. (U) Another area of concern for the entrepreneurs with
whom we spoke was financing. A senior banker at a large
national institution here in Milan claimed that his bank is
still offering loans and that the problem is more of demand
(no sales so companies don't need to expand) than supply of
credit. Outside of Milan we heard essentially the same
message. Industrial associations and individual

MILAN 00000078 002 OF 002


entrepreneurs told us that, for now at least, they can still
rely on longstanding relationships with small, regional banks
for infusions of credit. However, entrepreneurs ) even
those with medium-sized firms ) told us they were reluctant
to take on additional debt burden (or take out a loan for the
first time),preferring to get through these lean times using
built-up savings and creative workarounds.


8. (U) In fact, many pointed to the adaptability of SMEs,
compared to their larger contemporaries, as a potential
saving grace for their "distretti." Because these firms have
more flexibility in adjusting their staffing, they can reduce
costs more easily than larger firms. However, none predicted
major spikes in unemployment as SME representatives were
reluctant to fire skilled employees. Since these "distretti"
are so focused on one area of production, someone laid off
(rather than placed in temporary "cassa integrazione" to
which most of these smaller firms have no access) would
likely have to leave town to find work, and thus not be
available when and if the company wanted to hire them back.


9. (U) SMEs are also better able, funding permitting, to
innovate to improve productivity. A research center in
Friuli, together with the University of Udine, for example,
is working with entrepreneurs producing chairs (a key local
"distretto") to rationalize their production. One trade
association told us they hoped, in fact, that the economic
crisis would provide a spark to encourage local SMEs to merge
or otherwise become more efficient.

Comment: Approaching the Waterfall


10. (SBU) Most of our entrepreneur contacts tell us they are
getting by for now and aren't planning anything drastic.
However, even the most optimistic said they can't last in
such a state for much longer. Should the crisis extend much
beyond 2009, we would expect the hardest-hit "distretti" to
start failing ) a phenomenon that would hollow out towns
that rely on this undiversified model, and make the economic
crisis increasingly a political one for Rome. People with
whom we spoke were very supportive of attracting foreign
investment as a way to help reposition the "distretti" to be
more competitive in difficult times. However, there was
general pessimism that the central government in Rome would
react to the north's economic woes by improving the nation's
poor investment climate.
WEYGANDT