Italian Businesses Navigating the Perfect Storm: Full Speed Ahead!

At the Crossroads of Global Trade the Challenge is Identifying Opportunities to Create the New Normal 

The global economic system has been rocked by an event so violent that it will take years before we fully emerge from its wake. We are at a momentous crossroad which forces us to redefine the developmental paradigm that has characterized the last few decades. The era of globalization, as we understood it until recently, is over. It had transformed the world economy into a highly- interdependent cross-border network. Its global division of labor helped the world achieve tremendous growth and prosperity, pulling millions of people out of deep poverty. This powerful development engine had a fragile side. A high degree of interdependence between physically distant and heterogeneous economic areas created vulnerability. A process of partial rethinking, or de-globalization, had already been underway for some years. When COVID-19 suddenly burst into our lives at the end of 2019, this vulnerability sprang to life, accelerating de-globalization trends and sending a shocking supply-and-demand contraction throughout international trade. Italy and the world now face not only a tragic loss of life and historical economic downturn, but a sudden and radical shift in societal fabric.  

History and especially nature teach us that even the most brutal shocks are a form of evolution in which some will fare better than others at surviving, adjusting and laying the foundations for their future well-being. Not everyone will make it, mind you. Charles Darwin understood and described it with great clarity: “It is not the strongest of the species that survives, nor the most intelligent; it is the one most adaptable to change.” 

Italian industry is an important protagonist in this complex game. Our country, our companies, and each of us, are called on to face this new scenario. To do so we must answer a simple question whose answer is not so simple: how will be the world with which measure ourselves? In my opinion, the most plausible answer is that we will have to deal with a new development paradigm characterized by a multipolar economy, largely de-globalized, and regionalized by homogeneous economic areas in which the physical distance between production and consumption of goods and services decreases. I see a world in which global supply chains are largely dismantled and rebuilt at the regional level (Europe, North America, Latin America, Africa, Middle East, Far East, etc.), reconstituting less extensive and fragmented supply chains that safeguard the safety, autonomy of production/supply (the striking case of masks during the lockdown prompted a reflection in this sense), and the ability to respond flexibly to market demand, even at the expense of efficiency and economy. I see market shares, until recently consolidated, which we must conquer before the others are put back into play.

This represents a huge opportunity, perhaps unrepeatable in our lives, that presents us with the challenge of being among those who emerge stronger from the ongoing process of change. Italian industry is one of the most solid in the world and our entrepreneurs over time have demonstrated their above-average adaptability. In a progressive and certainly less traumatic way, globalization has also been a strong discontinuity, yet our production system, at the dawn of this paradigm, has been able to react virtuously when the resilience of the economic fabric was given up for dead. Instead, due to the inventiveness and diversification capacity of small and medium-sized enterprises, it has kept the Made-in-Italy name prestigious and well-known on international markets, intensifying - as never before - trade with foreign countries. Last year Italy was the 9th exporter globally, with about a third of GDP coming from the exports, a contribution that this year would have touched 500 billion euros if Covid-19 had not intervened to change the cards on the table. What now needs to be done, both at entrepreneurial and national levels, is to defend the results we have achieved so far, drawing from this experience some ideas for rethinking and structural adaptation to exit the crisis with an even stronger globally competitive position. Despite the slowdown caused by the pandemic, exports and internationalization will keep their place as the bedrock from where to start over. However, to keep up with international peers, Italian companies will no longer be able to rely solely on the design and quality of the products that have made them famous in the world. It will be essential to quickly analyze and ride the trends that are gradually establishing themselves.

Our companies must not be caught unprepared. It is essential they equip themselves to safeguard production capacity by defending the space gained during years on the international chessboard. They must also aim to conquer new space through foreign direct investments (FDI, currently particularly convenient due to the contraction of multiples caused by the pandemic.

To respond and successfully face these new global challenges, Italian companies must no longer postpone the process of technological innovation and digitalization. Above all SMEs, which produce more than 50% of the Italian export value, can take advantage of innovative and efficient e-commerce channels to reach consumers and business partners. The evolution of digital development will certainly be fundamental in increasing the productivity and competitiveness of businesses. But its importance will also be in creating employment and stable growth for the country. We have had proof of this in recent months of lock-downs that will certainly leave lasting and structural effects both in consumption models and in the reorganization of the workplace into "teleworking.”

Finally, the progressive adaptation to these transformations will also oblige entrepreneurs to invest in sustainability. This is a path already undertaken for some time, in which Italy has so far has played a leading role - second in Europe from 1990 to 2018 for the abatement of greenhouse gases - and which can no longer be underestimated (in this context, European funds are lending support with plans to allocate 37% of funding green-friendly investments). The sustainability criteria, environmental as well as social, will very quickly become an essential element for accessing credit and financial resources - they have already been included in the credit parameters that the European Banking Authority (EBA) imposes on banking institutions - and , therefore, to have the means necessary to develop their business. The European Insurance and Occupational Pensions Authority (EIOPA) is doing the same towards insurance companies. The new Basel IV and Solvency II rules are based on this concept.

All professional investors are introducing investment selection criteria that favor sustainable businesses, while regulators are introducing penalty criteria for those who are not. Financing and credit markets and consumer demand are rapidly moving in that direction. Being "sustainable" is no longer a habit to attract an elite niche of consumers who are particularly sensitive to ethical issues. It is now one of the main critical success factors in competition and access to financial resources in the coming decades. It is no coincidence that 40% of the resources of the European Recovery Fund must be invested in sustainable activities.

In this new and delicate scenario, the ability to team up with the country system is fundamental to providing support that is not only "emergency" but also structural.

This is a complex and ambitious action, the starting point of which was undoubtedly the Export Pact (Patto per l’Export), signed last June on the initiative of the Italian Ministry of Foreign Affairs and International Cooperation (MAECI) in which have participated public institutions, banking and business associations, to relaunch Made in Italy throughout the world. Of the 2 billion euros made available by the Italian government through the Pact, almost 1.4 billion have been entrusted to SIMEST to strengthen its subsidized finance instruments, managed on behalf of MAECI, in order to promptly support the emerging needs of Italian companies that also operate abroad. These are loans that are granted at a very advantageous rate (0.065% per annum in November) to cover all the main phases of entering international markets. Due to new facilitation measures implemented through a series of regulatory acts – exemption from the presentation of guarantees, the possibility of requesting a non-repayable loan, the raising of ceilings that can be requested and of the widening of the number of companies and expenses that can be financed - have proved to be a concrete and timely response to the growing demand for liquidity by companies to face the crisis while not interrupting the path of internationalization.

In particular, in order to allow companies to meet the challenges of the new macroeconomic climate, SIMEST has:

- extended operations to the countries - hitherto excluded - of the European Union both of subsidized finance instruments and of the Public Fund (Fondo Pubblico) managed by SIMEST, manages the FDI of Italian companies (Venture Capital Fund) as a supplement to its investment in the foreign capital. A response to the looming regionalization of international trade.

- increased and expanded funding relating to the establishment of e-commerce platforms (which can now also be registered with a generic domain) and the hiring of temporary managers with qualified expertise in the fields of innovation, internationalization or digitization, thus allowing companies to seize the opportunities offered by digitalization and to keep up with the times. Furthermore, on the FDI side, access to the promotional conditions for the participation of the Venture Capital Fund has also been extended to innovative start-ups, which are the true Italian hotbed of technology and innovation and whose role is fundamental for developing new digital solutions to benefit of the entire industrial fabric.

- introduced a discount on the guarantee required for funding for internationalization by green companies and integrated the sustainability parameters into their own evaluation criteria for FDIs, in order to incentivize sustainable investments.

The response of companies has been surprising. Within only a few months from the activation of the measures, the overall value of the requests for funding exceeded available resources. This is a fact that, in addition to emphasizing the need for refinancing tools, highlights the reactivity and courage of our companies, determined to restart by investing in the future of internationalization and Made in Italy.

We are in the midst of a violent storm but our ship is solid and better than most. We have to decide whether to be overwhelmed by the waves or ride them out. Let's ride them out. All that remains is to chart the course and open the sails, with courage and resourcefulness. 

As always.