'If you don't invest enough in innovation, you get left behind'
PORCIA, Italy (Reuters) — The boxy white and grey factory of this rainy northern town makes fewer than half the washing machines it did when Italy joined the euro. It is one of the many symbols of Southern Europe's industrial decline.
Today, however, the Porcia plant is also a testing ground for the region's industrial future.
Home appliance maker Electrolux, which owns the factory, wants to cut the salaries of some 5,000 workers at the plant and three other factories across Italy by up to 15 percent over the next three years. The Swedish company says lowering labour costs is the only way its washing machines, fridges and other home appliances can compete against rival products made in eastern Europe and Asia.
The Italian government, unions and workers say any wage cut would impoverish thousands of families who rely on the plant and its suppliers.
"It's a matter of survival," says Annarita Licci, a 38-year-old mother of two, who moved to Porcia in 2000, the year after Europe introduced its single currency.
Then, Italy was the leading world exporter of home appliances. Now it is ranked third, far behind China, which has grabbed more than one-third of the 100 billion euro ($154 billion Cdn) global market. Like many others, the Porcia plant has progressively downsized.
Last year Licci's partner took a company buyout. If Electrolux cuts her 1,000-euro ($1,544 Cdn) salary by 130 euros — in line with the ballpark reduction estimated by the company — Licci says she will no longer be able to afford monthly expenses, which include a 600-euro ($926 Cdn) mortgage.
"The company wants to lower its labour costs and starve us," she says. "What about investing in developing better products for this factory instead?"
The battle over Electrolux wages is at the heart of one of the most pressing dilemmas facing the battered economies of Italy and other southern European countries: The competing needs to both cut costs, and spark growth.
Companies across Europe's southern rim struggle because wages and prices have risen higher than their products can justify. But euro zone countries can no longer depreciate their currencies to make their products cheaper in foreign markets. That leaves so-called "internal devaluation" — pushing down wages and prices — as the best way to stay competitive.
Spain, Greece and Portugal have pushed through deep wage cuts and made it easier to hire and fire, allowing firms to trim the price of their goods. This has helped Spain's economy grow for the first time since 2011. Italy, where labour costs are still high, is flatlining.
But there are risks. A squeeze on pay could choke off already feeble consumer spending because workers have less money to spend. And as producers lower prices, it risks triggering what economists call a "deflationary spiral" in which consumers no longer buy goods, in the expectation that prices will continue to fall — a belief that creates an ever deeper recession.
The most dramatic recent example is the two-decade great deflation from which Japan is only just emerging. InSpain, there is growing concern that the effects of wage cuts on the country's feeble internal consumption could cripple long-term recovery.
Inflation helps countries lower their debt by increasing the money at their disposal to pay it off. Deflation, on the other hand, makes reducing debt harder because money is more expensive. It also puts companies off borrowing and investing. That's a problem in Italy, which has 2 trillion euros in debt - the second-highest in the euro zone after Greece, as a share of Gross Domestic Product.
"Pushing down wages is dangerous: The most worrisome consequence would be depressing consumption where there is already a demand crisis," said Carlo Devillanova, economics professor at Milan's Bocconi University.
STEADY DECLINE
In many ways the factory in Porcia mirrors Italy's economic rise and decline.
It was built in the 1950s, just as the economic miracle that lifted Italy from the rubble of World War Two got started. Lino Zanussi, whose blacksmith father Antonio had started out making stoves and ovens in a workshop in Pordenone in 1916, used the plant to help transform Zanussi into a top European home appliance maker.
Along with Germany, Italy became the world's leading exporter of home appliances. Porcia was a vibrant artery ofItaly's industrial heartland. Locals in the Pordenone province called the area the "Manchester of Italy" for its huge output.
By the 1980s, though, Zanussi had run into financial troubles and in 1984 the family sold to Electrolux.
The Swedish firm kept a big presence in Italy until the mid-2000s when competition prompted it to move a chunk of its production to low-wage eastern Europe. Over the past 14 years, Electrolux has shed 71 per cent of its workers in western Europe and 60 per cent in the United States. At the same time, the company's staff in eastern Europe has risen by one-third to 8,480.
Luigi Bidoia, economist and co-founder of research firm StudiaBo, says that after the mid-2000s it made little sense to keep producing in Italy. "Other countries now offer the same skills and pay at a half, a quarter, a tenth in wages," said Bidoia.
HIGH END OR NOTHING?
Cutting wages is not the only way for Italy to compete. The southern economies would all benefit if Germany, the euro zone's strongest economy, boosted its internal consumption and encouraged more imports from its neighbours. The European Central Bank could also do more to try to stimulate southern European economies, allowing inflation to rise from its current 0.8 per cent.
So far, though, there are no signs of either happening. ECB President Mario Draghi has welcomed "relative price adjustment" — wage cuts — in Spain, Portugal and Greece.
Such an adjustment has not happened in Italy. According to the European statistics agency Eurostat, unit labour costs rose 4.2 per cent between 2000 and 2012 in Italy, against a fall of 2.8 per cent in the European Union.
Part of the reason is that Italy's labour laws make it difficult for companies to adjust pay and hours to fluctuations in the economy. The cost of employing workers is also pushed up by the high labour taxes and social contributions employers must pay. According to the OECD, those make up just under half the cost of employing a worker in Italy. In other developed countries they total 35.6 per cent, on average.
At the end of February when he first took office, Italy's Prime Minister Matteo Renzi promised to reduce the burden on companies, citing the Electrolux standoff as a key issue for his new government. Fiat CEO Sergio Marchionne has criticised Italy's rigid labour market rules and in 2011 reached a deal with workers at the car marker's main factories, introducing more flexible conditions in exchange for investments.
BETTER PRODUCTS
The other way to compete is to produce high-value products that warrant higher prices, innovating to create products that people crave. Italy already successfully makes high-end goods from luxury clothes to food and small electronics.
But as spending on research and development has shrivelled — Italy's is among the lowest in the developing world — the country has steadily lost out in other areas, including home appliances. In a speech last year, Bank of Italy governor Ignazio Visco singled out the sector as emblematic of the country's industrial decline. One example: Italy made two million refrigerators last year and 10 million in 2001.
"A country like ours has to position itself as a maker of high-end products through innovation and research," said Claudio De Vincenti, a top official in Italy's economic development ministry recently appointed by Renzi.
That may have been a factor in Electrolux's struggles, according to one former employee. As it moved production east, Electrolux also shifted its commercial strategy. In particular, it bundled together well-known home appliance brands such as Rex in Italy and Germany's Juno with its generic, namesake Electrolux brand. The Zanussi brand survived, but production was partly moved outside Italy.
Mario Grillo, a former Electrolux manager who used to run its refrigerator plant in the north-eastern town of Susegana, says the change in strategy was a mistake, because brand loyalty is a key factor among home appliance customers. Grillo blames that decision and a dearth of investment in new products for Electrolux's loss of market share in Italy to U.S. firm Whirlpool, Germany's Bosch and South Korea's Samsung.
"If you don't invest enough in innovation, you get left behind," says Grillo.
Electrolux said in a statement that it has invested considerably in Italy, including more than 245 million euros ($378 million Cdn) between 2009 and 2013. In the statement, the company said more than 800 of Electrolux's 6,000 staff in Italy are engineers and technicians working on research and development, and the firm produces most of its highest-end washing machines, refrigerators and stoves in Italy. But an Electrolux spokeswoman declined to say how much the company invested in Italy before 2009.
Ernesto Ferrario, the firm's chief executive for Italy, last month put together a proposal with union leaders aimed at securing the plant's future. Under the proposed deal, Electrolux would not touch wages but would reduce the plant's workforce by at most 400 people over three years. It would also guarantee some investment in exchange for a government commitment to cut some labour taxes. Officials from Renzi's government met Electrolux management last week, but no decision was taken.
In Porcia, people are bracing for the worst.
Claudio Pedrotti, a former Electrolux manager who is now the mayor of Pordenone, says that if a deal isn't found and the plant closes, there will be a "tidal wave" of job losses.
On a recent Friday afternoon, Licci, the Electrolux factory worker, joined a union-led protest outside the factory. A petite blonde with thick eye makeup and a cigarette in hand, Licci said employment at the factory had helped her get a mortgage and buy a house.
Up until 2008, Licci took home 1,400 euros a month. But Electrolux gradually reduced her hours so her wage has fallen to 1,000 euros. On top of her 600-euro mortgage she pays 310 euros a month for school lunches, electricity and gas, and fuel for her commute to work. "We made sacrifices thinking we had a safe future ahead, but now everything seems to be at risk," said Licci.
Paolo Candotti, head of human resources at Porcia until 2003 and now the general manager of local business lobby Unindustria, put it more starkly: "Someone should explain to workers that without a cut in wages, a 1,200 euros salary risks soon becoming zero."
