Italy’s auto suppliers feel the pinch
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
With the business of carmaking facing radical change, Italy’s automotive component producers must adapt quickly. But experts say they are struggling to do so — raising doubts about the future of one of the country’s most thriving and export-oriented industries.
There are signs of hope, particularly in the so-called “Motor Valley” district around the northern Italian cities of Modena and Bologna, home to supercar manufacturers Ferrari, Lamborghini, and Pagani and their top-end suppliers.
“There is a lack of awareness among our businesses with respect to the changes that are happening,” says Anna Moretti, a business management professor at Venice’s Ca’ Foscari university and co-editor of a report published this month on the state of the Italian auto parts industry.
The fact that Ferrari, a brand beloved by petrolheads, is working to introduce a fully electric model by 2025 gives a sense of the transformation the industry is grappling with.
In July, Italy’s environment minister Roberto Cingolani quipped that the prancing horse marque and the rest of Italy’s Motor Valley risked shutdown if they failed to adapt to the EU’s draft plan to phase out fossil-fuel engines from new cars by 2035.
One of the most alarming findings from Moretti’s “Observatory on the Italian Automotive Components Sector” report is that Italian auto-parts makers reduced their spending on research and development in 2020 — a change probably influenced by last year’s coronavirus disruptions.
“It is the first time that we have observed this, and it is very worrying,” Moretti says.
The report found that the share of firms that reinvested part of their turnover in R&D fell to 69.4 per cent last year, almost four percentage points down from 2019.
The publication also found that the combined turnover of more than 2,200 businesses active in the industry fell below €45bn in 2020 — down 11.9 per cent on the previous year and primarily as a result of the pandemic.
Italy’s car-parts makers are mostly small, family-owned and concentrated in the north. And their recovery is hampered by problems affecting suppliers the world over, such as a shortage of computer chips, higher prices for raw materials and shipping, and the accelerating switch towards hybrid, electric and self-driving technologies.
They also have to deal with the consequences of the recent merger between Fiat Chrysler and France’s PSA. There are fears that Stellantis, as the new company is known, will be less focused than its Italian-American parent was on Fiat’s old industrial base in Italy.
Moretti talks about a “dual-speed” situation, with half of Italian auto-components businesses investing, innovating and holding their own in the global marketplace, while the other half are not doing enough and falling behind class-leading German rivals.
She says opening up to outside co-operation in order to innovate, and forming inter-firm networks, is the best way out of the morass. But too many entrepreneurs are resistant to the idea.
An exception is Florenzo Vanzetto, CEO and owner of VRM, a Motor Valley producer of auto and motorcycle parts that works with the likes of Ferrari, BMW, Ducati and Triumph.
He says establishing RaceBO — a network of suppliers based around Bologna — was crucial to business growth.
“I put together a group of companies, each supplying one another and none in direct competition,” he explains. “This helped us win a lot of business abroad . . . I couldn’t have won an order from a client like BMW on my own but, if you talk to them as part of a network of suppliers, it is different.”
Vanzetto, who controls Marzocchi, a suspensions manufacturer he rescued from bankruptcy in 2016, plus RCM, a maker of engine and transmission components, expects turnover to grow from €85m to €110m this year.
However, he is also bracing for a big squeeze on margins due to spiralling prices for raw materials and shipments from key suppliers in the Far East. “It is a disaster,” he says.
Nevertheless, VRM looks to be on a solid footing, with factories working at full capacity.
Vanzetto puts it down to the “cast-iron decision” to work solely as a tier-1 (ie, direct) supplier to carmakers; to the reinvestment of “at least 15 per cent” of turnover on new technologies and production systems; and to a deal with a technical college in southern Italy that helps the company recruit specialised workers who are otherwise in short supply.
Still, big challenges lie ahead, for his business and the industry as a whole. “We make 150,000 cylinder heads per year, and if that line of business is going to disappear [with electric mobility], we must be quick to diversify,” he says, outlining a future for VRM focused on the production of body frame components and suspension systems.
“It’s not going to be so quick and easy,” Vanzetto predicts.
For relatively niche players like VRM, who work at the top end of the market, the transition is likely to be tough but manageable.
For the rest of the Italian car component industry, perhaps less so.