The Italian manufacturing sector is changing

and in need of investments

14 November 2016
cristina.rossi@prometeia.com
Despite the uncertainty and the difficulties within the scenario, picture of Italian
industry doesn’t look gloomy, but instead it suggests a deep and still ongoing
reorganization.
The current image of the Italian manufacturing shows enterprises in pursuit of a strong transformation, so as
to be ready to face the new challenges posed by an increasingly competitive scenario. The analyses on
enterprise data emphasize how the strict selection in the past few years and the recent intensifying of M&A
operations have offered a slimmer, but healthier enterprise system with ever-improving accounts in most
sectors. [1]

In 2015, the turnover continued to increase in a widespread manner and without any significant rifts for
enterprises of all size classes (in terms of growth dispersion has remained below pre-crisis levels).

In almost all groups, by sector and by size, there has also been an increase in the ability to generate financial
resources. Then a reduction of enterprises with a negative cash flow stands outs by analyzing financial
statements, that is to say a smaller portions of operators could ultimately be at greater risk of insolvency.

With respect to profitability, the overall favorable context in terms of growth and margins (for the latter, the
limited pressure on input costs encouraged the upswing) led to further improvement of the Roi (Return on
Investment). In this sense, however, the dispersion of results has continued to rise (thus confirming an
ongoing trend since 2011), as a sign that that a full recovery has not yet been completed.

Despite these improvements and virtuous transformation, a crucial point of weakness still remains:
uncertainties about the future – in terms of demand prospects, but also of optimal technological trajectories
in fast changing environment as today’s – have been curbing investments of the enterprises. In 2015,
a limited increase in investments was observed only for medium-sized enterprises. All the other size classes
[2] confirmed instead a substantially stable and low amount as in the past few years.

Looking ahead, the improvement of accounts seems now at risk, considering the slowdown in revenues
observed in 2016.

The lower contribution of domestic demand (constrained since spring due to a growing uncertainty), on one
side, and especially a revision on exports that are down almost 2 percentage points as compared to the May
forecast (despite good results for Italy in terms of market share) have lowered estimates on growth for the
entire year. In 2016, the revenue growth of the Italian manufacturing industry will be at around 1.2% (at
constant prices), 7 billion EUR less than the estimate reported in the May AIS Report.

In the 2017-18 two-year period, domestic demand shall yet again sustain a modest acceleration of the
manufacturing activity, estimated at an annual average of 1.5% (at constant prices), against virtually no
contribution of the foreign channel. Internal demand will partially benefit also the import side, since growth
will be stronger in those items, where national producers have been struggling in the recent past, due to an
array of causes ranging from the erosion of the manufacturing capacity to the poor competition vis-a-vis
foreign competitors. Hence, a high elasticity of import to national market is confirmed, stabilizing
the external balance at the 2016 level, namely at around 80 billion EUR.
Considering a barely dynamic scenario, in order to reinforce their improvements Italian enterprises should
reverse their investment trend. Evidence says that the (few) sectors that started investing again before the
others - Automotive, Electronics, Electrotechnical, Furniture industries – are now being rewarded by
improved results. Financial statements say that in 2015 many enterprises refrained from investing, despite
having the resources. Looking at the bright side of it, the current large level of liquidities and short term
financial assets indicates that if (at least) some of the uncertainties were reduced, the very enterprises would
now have the means to spend, quickly and by a significant amount.

Fig. 1: Share of enterprises with a negative cash flow, by size

Fig. 2: Contributions to the revenue growth of the manufacturing industry in 2017-‘18 (average
annual contributions at constant prices)
Source: Analysis of Industrial Sectors, Prometeia – Intesa Sanpaolo, October 2016

[1] The only relevant exception, in 2015, concerns the fashion System, which faced
an intense competition on a number of important foreign markets.
[2] A number of differences were observed at the sectoral level: in 2015, among the
sectors with more dynamic investments the automotive sector stands out, with a
positive spill over effect on adjacent sectors such as the electronics, electrotechnical
and metal working industries; this has been complemented by a significant
resumption for large and medium-sized undertakings in the furniture industry;
instead, almost all the other sectors are stable or declining.