Twilight In Italy

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Italy is the sick man of Europe these days--its economy has shrunk 4% since 1999, after adjusting for inflation--and the predicament of the chair triangle helps explain why. Along with Germany and France, the nation has been struggling with weak consumer spending, waning productivity and rising government deficits. But unlike its neighbors, Italy lacks large robust corporations that can export their way out of trouble. Many of the thousands of small and medium-size companies that once gave the Italian economy its flexibility and dynamism are poorly equipped to deal with the challenges of a fast-changing world. Most don't have the scale, the funding or the commercial know-how to become global players. What they produce is beautiful, but it's neither particularly sophisticated nor difficult to replicate. In other words, Italy's economic structure is almost perfectly composed for an attack by China, which excels in moderately sophisticated manufacturing and can turn out products far cheaper than is possible in Western Europe. In sector after sector--from textiles to shoes to furniture--companies have been losing ground.

When Italian manufacturers ran into competitive problems in the past, there used to be an easy fix: currency devaluation, which made Italian exports cheaper relative to those of other countries. But that solution is no longer available, because Italy swapped the lira for the euro, which has risen against most other currencies, including the dollar. "We used to say small is beautiful, but that's no longer true," says Adalberto Valduga, president of the regional chamber of commerce in nearby Udine, the provincial capital. While the strong euro is penalizing firms, he says the real challenge is a more fundamental one: "We need to change our way of thinking." The International Monetary Fund agrees. It recently castigated Italy's economic policies and said the nation's waning competitiveness was due to "deep-seated inefficiencies" as much as to foreign competition. China, in fact, overtook Italy last year as the world's fourth largest economy.

The Manzano entrepreneurs know they can't compete on price. But if they can find a way to carve out an upmarket niche for themselves--as the most successful chairmakers are doing--there's every reason to believe that Europeans and Chinese can coexist and flourish, building on their respective strengths. Several Manzano chairmakers are already looking to China as a market where they can both buy and sell. "Nobody can stop the Chinese anymore," says Lucio Zamò, one of the few remaining successful manufacturers of office chairs in the district. Zamò has been able to cut expenses by building chairs using imported Chinese aluminum bases, which cost 40% less than Italian ones.

If Manzano is to recover its mojo, the chair triangle's entrepreneurs know that they--and not politicians wielding protective tariffs--will be the ones to find it. "This is a moment of maturation," says Fanin, the machine-tool manufacturer, who recently laid off six of his 15 workers. "You can't compete on price. You need to believe in the company and innovate. There's no third way."