But these days, the real China is making Manzano's prosperity as precarious as a two-legged stool. In a perfect example of globalization at work, ferocious competition from Chinese manufacturers is snatching away Manzano's customers. Over the past three years, about 200 Manzano companies have closed and a worrying number of the remaining 900 are struggling. Sawmills have moved to Croatia, Poland and Romania, where an increasing amount of initial pre-fabrication is being carried out. Manzano's once dominant share of the market for no-frills office swivel chairs has almost entirely collapsed because Chinese producers can churn them out at almost the same quality for a fraction of the cost. Now the Chinese are starting to attack the market for residential and other chairs, not just basic models in metal and plastic but more sophisticated ones in wood and leather, too. Talk about "the crisis" is ubiquitous in Manzano—even the executives of thriving companies say they worry that the unique industrial fabric of the area is fraying. "We see people with tears in their eyes not knowing what to do next," says Simone Focacci, manager of one of Manzano's three principal banks.
Valerio and Lucio Minin are two of those shedding tears. During the 1990s, the company their father founded half a century ago, Mininsedie, produced up to 500,000 chairs annually. But this year Mininsedie will make just 130,000—many of those stacked and waiting for buyers in a cavernous warehouse that serves as the firm's headquarters. The French distributor who was their biggest customer is out of business. Revenues have declined by 50% in two years and, with losses mounting, the Minin brothers recently laid off five of their 15 employees. "The situation here is tragic," says Valerio, 51. "I just don't know how we're going to continue. You keep banging your head against the wall and either the wall falls—or you do."
Italy is the sick man of Europe these days—its economy has shrunk by 4% since 1999 after adjusting for inflation—and the predicament of the chair triangle helps to 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 robust large corporations that can export their way out of trouble. Many of the thousands of small and medium-sized 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 shaped 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 a panacea, because Italy swapped the lira for the euro, which has risen against most other currencies. "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. In a tough report last month, it 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 looks set to overtake Italy this year as the world's sixth-largest economy after several years of jockeying for the spot.
The Italy vs. China manufacturing battle has a significance that transcends national borders. If the Italians can find a way to carve out an upmarket niche for themselves—as the most successful chair manufacturers are attempting to do—there's every reason to believe that Europeans and Chinese can coexist and flourish, with each building on its respective strengths. Several Manzano entrepreneurs are already looking to China as a market where they can both buy and sell. "Nobody can stop the Chinese anymore," shrugs Lucio Zam, one of the few remaining successful manufacturers of office chairs in the district. Zam has been able to cut expenses by building chairs using imported Chinese aluminum bases, which cost 40% less than Italian ones. But should the Europeans prove unable to resist the fierce competition, politicians may try to level the playing field by imposing protectionist trade restrictions on Chinese imports. The European Union made a botched attempt to restrict imports of Chinese textiles this year and is now considering slapping tariffs on leather shoes.
But if Manzano is to recover its mojo, the chair triangle's entrepreneurs know that they—and not politicians—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."
Manzano's claim to be the chair capital dates back centuries. An eighth-century altar in nearby Cividale contains the first trace of chairmaking. During the Renaissance, local carvers and carpenters from the region had their hands full with orders from Venice, 120 km away. Production of chairs for the masses began in the 1800s but the real boom came after World War II. Big distributors, primarily from Germany, discovered the local craftsmanship and started buying in bulk, turning Manzano chairs into a $1 billion-per-year business. To cope with the demand, the number of firms grew tenfold as highly specialized artisans set up on their own, supplying individual parts to their neighbors who would then work them into the next stage of the manufacturing process before passing that on to another firm. One artisan would just do leather upholstery, for example, or specialize in varnishes. This highly decentralized industrial structure, a type of extreme outsourcing network, is quite common in Italy. By one estimate there are about 100 such industrial clusters in the country, producing shoes, clothes and even some food products.
The flexibility of such clusters is sometimes held up as a model by experts on economic development such as Harvard Business School professor Michael E. Porter. But the system has proven vulnerable to an onslaught of international competition. About 90% of the firms in the district have fewer than 20 employees, while just a dozen have more than 50, according to a study by Professor Roberto Grandinetti of the University of Padua. Local bankers say that all but a few are sorely undercapitalized and lack the resources to build their business up to a global scale. And virtually nobody has much experience selling to customers other than the big German distributors who once snapped up as much as 70% of the district's output. "Twelve years ago, I began saying that it wasn't enough just to make chairs, but that we also needed to sell them," says Giovanni Masarotti, president of the Manzano chair district and chief executive of Montina, one of the oldest firms. "If I say three companies have true marketing departments, I'm exaggerating."