The point on Italian manufacturing and the Revolution 4.0

The point on Italian manufacturing and the Revolution 4.0

November 9, 2017

cristina.rossi@prometeia.com

The signs of growth consolidation are more widespread. But a deep transformation of the production base is needed to keep up with the new trends

 

The recovery of the Italian manufacturing industry has gained momentum. After several false starts, the signs of growth strengthening are becoming more widespread and robust, showing an acceleration of both domestic and foreign activity. The 92nd Report Analisi dei Settori Industriali forecasts for 2017 a 2.3% growth of manufacturing turnover, at constant prices. The expansion is set to consolidate in 2018-‘19, at around 2% growth rates.
In the coming years growth will continue but there will be significant challenges for Italian manufacturing, expected to deal with the transformation induced by the “Industry 4.0” Revolution. The growth of global goods markets is projected to be increasingly driven by services: new opportunities will come from “borderless” markets, where customers and firms are digitally connected, and from the new business models based on value-added services and “end-to-end” solutions. 

A deep transformation of the production base is required to face the new challenges: the upgrading process just started by Italy’s industry will have to continue and strengthen in coming years. The demand scenario and the competitive arena should contribute to achieve this goal. But do companies have the resources needed to take the path to transformation?

 
 
Fig: 1 Manufacturing: contribution to output growth
% change, at constant prices
Source: calculations on Prometeia's ASI database
 
 

The operating profitability of manufacturing is improving

The economic and financial condition of active companies suggests some optimism. The analysis of a large sample of balance sheets updated to 2016 shows a constant and widespread improvement of manufacturing operational profitability between 2012 and 2016 (from 4.5% to 8.1%) which will be driven both by a recovery in profit margins and progress  – still with some critical points, especially among small-sized companies – in the rotation of investment capital.

The recovery was widespread to all size classes, with big and medium-sized firms back to the 2008 Roi levels in 2016. The share of loss-making companies has returned to the 2006-‘08 levels – in some ways “physiological” - in all size classes and almost in all sectors. At the same time, in the last three years the share of high Roi (more than 10%) companies has increased, reaching 1/3 of total even among “smaller” manufacturers (annual turnover between 2 and 10 million euros); this is an evidence of good profitability also in this size class. In a context of improving operational profitability, also the overall profitability (Roe) has started to pick up since 2014, along with a capitalization strengthening.
  
More capitalization, subdued growth of financial debt, margins improvement and increasing liquidity are all factors contributing to significant progress in terms of debt sustainability. In this favourable demand scenario, there will be enough resources to continue the process of transformation and competitive upgrading of the Italian manufacturing sector. So companies will have to increase their investment spending to win this challenge, overcoming concerns about the uncertainty of the international scenario.

 
 
Fig: 2 Evolution of Roi by size classes*
Source: calculations on Bureau van Dijk data
* small firms: turnover between 2 and 10 mil. €; medium-sized firms: turnover between 10 and 50 mil. €; large firms: turnover > 50 mil. €.