In the Italian press, there is a lot of buzz about the possible closing of an Electrolux washer plant in Porcia. The threat of closure is seen as an example of the state of the Italian industry as a whole, including car manufacturing.
It sounds dramatic, and it really is. Why? White goods is a very Italian product.
Italy, together with Germany, is a leader in white goods manufacturing in Europe, but both countries have nearly been overtaken by Poland— not only because of direct labour costs, but also because of a lack of worker flexibility (many white goods sales are seasonal), conservative unions and horrible bureaucracy.
Of course, labor costs are the main issue. In Poland, one worker costs 300 to 600 euro. In Italy, one worker costs 1,200 euro.
Italy still has an excellent white goods culture and production, in addition to design and development. Whirlpool and Electrolux still have large development facilities in Italy, and for Whirlpool, even the European head office.
But other factors are just as important. Italy is not a very business-friendly country, unlike Poland, where everyone understand that business, especially exports to Western Europe, is the key to economic prosperity. Long ago, Italy used to have cost advantages, but those days are gone. Italy produced 10 million refrigerators in 2011, Now, they only produce two million.
This is not a new issue. For many years, mass production has moved away from high-wage Western Europe. BSH has moved to Poland and Turkey. A large Electrolux plant was closed in Nuerenberg, the origin of their German AEG brand, and Swedish top brand Asko, owned by Gorenje, moved production to the main location in Slovenia. Even premium brand Miele produces outside Germany.
In 14 years, Electrolux reduced their Western European workforce by 71 percent, but now has 8,500 staff in Poland. BSH has 12,000 staff in Poland and Turkey combined.
Germany did find a way to deal with this shift. Remember that Germany and Japan are the two high-wage countries with the largest manufacturing industries (roughly about 15% of GDP). What the Germans did was combine production with low wages, but in nearby Eastern European countries that have their own high-cost, high quality manufacturing. If you produce a lot of cheap parts in the Czech Republic or Romania, like Volkswagen does, you can feed those parts easily into German plants. Or you can just open extra plants, like BMW.
For the French and Italian manufacturers, this was more difficult— partly due to political reasons, but also because of a lack of long-term vision. The Germans always had a lot of high-end production which could absorb the high-skilled workers, an option not available for their competitors. Also, Italian manufacturing has been plagued by provincial management that does not want to give up their own positions to integrate into larger companies that can afford larger R&D budgets.
The Merloni family is a typical example. Aristide Merloni created his company after the war; but since his three sons could not agree, they split into Merloni Elettrodomestici (now Indesit), Merloni Thermosanitari (now MTS), and Antonio Merloni (now bankrupt). Naturally, competitors were very happy. None of the once-famous Italian manufacturers are currently as large as the “big three”: Whirlpool, Electrolux and BSH. Of course, you could point to the large Italian manufacturing of parts for white goods, heating and cars, but those are very vulnerable to Chinese and Eastern European competition, much more than to well-designed premium German products.
Italian labor costs are significantly higher than in the rest of Europe. Combines, taxes and social charges comprise about 50 percent of wages, against 35.6 percent for Western Europe on average (OECD data). And Eurostat figures show that total costs of labor in Italy have risen by 4.2 percent between 2000 and 2012, where the European average was 2.8 percent reduced. Even expensive Germany has kept wages and taxes down.
Bureaucracy in Italy is horrible; you are actively sabotaged instead of forced to stick to the rules, as Germans do. Corruption is widespread and unions make it impossible to reduce your workforce, even if you have a clear-cut case.
But in regard to Electrolux, it is difficult to determine if company policies are to blame for the situation. The truth is that Italy does not have a lot of demand for higher prices appliances, unlike Germany, so going up in the value chain was not much of an option. Top Italian brand Zanussi once held a market share around 30 percent, but that number has since been halved. And competition from Koreans (Samsung, made in Poland) and Turkey’s Beko, both from low-wage countries, is cutthroat.
The decision to close has not been finalized. There seem to be alternatives: reduction of workers hours or wage adjustments, for example. The recovery of the European market might help a bit.
One might look at the example set by Fiat, Italy‘s ailing flagship automaker. Brilliant CEO Sergio Marchionne bluntly told the unions that he would shut down Italian manufactories if they wouldn not accept his proposals. That plus the profits generated by Chrysler, taken over in the middle of the crisis, kept Fiat afloat.
Many observers wonder what will happen when Marchionne is no longer available. They fear that the Italian Disease, cured for now, will return with deadly strength.