ALEXANDER CAMPBELL / ROME
In this eight-page special, we examine Italy's aerospace industry and its prospects of reforming its often creaking working practices and red tape
Since the end of the Cold War, the Italian aerospace industry has changed almost beyond recognition. An industry once divided largely between state holding companies and private (usually family-owned) firms is now concentrated under Finmeccanica, the mostly privatised company that is serving as the vehicle for the Italian government's ambition to sit at the top table in the aerospace business.
"In the future, Finmeccanica will probably be the only large company in Italy still involved in aerospace," says Carlo Festucci, secretary general of AIAD, the Italian aerospace industry association. "It is the only way they can continue to have joint ventures with other countries in Europe and elsewhere. The government wants to maintain strong defence and aerospace companies in Italy."
But an accident of history has left Italy's industry largely outside the European core, participating only on a project-by-project basis. This makes operating on equal terms with foreign partners difficult - as do Italian laws on labour and technology export, which, manufacturers complain, make the Italian state as much of a hindrance as a help to the industry it is trying to protect.
Left behind
Italy's outsider status goes back to the start of European collaboration in aerospace, when the Italian government declined to participate in the Airbus programme.
"Neither the government nor the major companies believed Airbus would get off the ground, so Italy was left with no real involvement," says Roberto Mona, president of fuel systems specialist Secondo Mona.
Since then, government and industry have attempted to repair the damage done, with Aeritalia (now part of Finmeccanica) signing up for the Avions de Transport Régional (ATR) regional aircraft joint venture with Aerospatiale in 1981.
The company combined separate but similar Aeritalia and Aerospatiale (now EADS) designs for a regional turboprop to produce the ATR 42, which was followed by the larger ATR72. But even with an ATR assembly line in Naples, French engineers carried out most of the design work, with French suppliers' specifications built into the design, effectively excluding Italian subcontractors, says Mona.
The ATR experience means Finmeccanica and its subsidiaries are now determined to avoid being the junior partner in any alliance. "Finmeccanica will only consent to a joint venture if they have 50% of it or more," says Festucci. In contrast to the UK's BAE Systems, whose chief executive Mike Turner continues to seek a tie-up with a US manufacturer, Finmeccanica is wary of merging with a foreign company. Finmeccanica chief executive Roberto Testore says: "We have opted for product-by-product co-operation," rather than outright merger.
Testore's dismissal of mergers reflects the fact that Rome exercises greater influence over Finmeccanica than, say, the UK government does over BAE Systems, as well as different industrial priorities. Finmeccanica is no longer a state-owned holding company, but the Italian government still holds 32% of the stock, and on occasions like the recent sale of Fiat's aero-engine division, Fiat Avio (now Avio), Finmeccanica acts on the government's urging to keep Italian industry in Italian hands.
"The government wants to maintain strong defence and aerospace companies in Italy, "Festucci says, and Testore emphasises that all future alliances" would be along the lines we have already drawn with AMS and AgustaWestland - in other words not cutting out our presence in Italy". To put it another way, for Finmeccanica - and its government - the highest priority is to keep Italian technology inside the country.
Avio is the most recent example of this strategy. Nominally, 70% of the company went to the US private equity firm Carlyle Group, with its industrial partner Finmeccanica getting only 30%. But in reality, the balance of power is on the Italian side, according to Finmeccanica's chairman Pierfrancesco Guarguaglini.
Speaking after the takeover announcement earlier this year, Guarguaglini said it was "a perfect marriage of convenience between Finmeccanica, the industrial partner, and Carlyle, the financial partner", and added that the Italian government's desire to maintain Italian control over a strategic asset had given Finmeccanica more influence over Avio than would normally be the case. "In the agreement with Carlyle, Finmeccanica is responsible for industrial development," making Carlyle more of a sleeping partner, Festucci says.
However, Carlyle's next move could raise problems. The US company is now bidding for German engine manufacturer MTU and, if the sale goes through later this year, it will probably attempt to integrate the two companies. This plan was well in evidence before Carlyle bought Avio, but the Italian government's attitude towards it is still unclear.
A merger would dilute Finmeccanica's stake – MTU is the larger of the two companies - and giving the Italian government an effective veto over a mainly German company might not sit well with the German authorities, now on the point of introducing a new law restricting foreign ownership of German defence-related companies.
The problem would worsen if, as some observers have speculated, Carlyle continues to push a further merger between Avio/ MTU and either Volvo Aero or Snecma, especially since Snecma was turned down as a suitor for Avio in the first place.
Things to come
But, assuming that its strategy continues to work smoothly, the next question for Finmeccanica and the Italian state is this: in how many areas of the industry can Italy really hope to keep a top-class industrial capability?
Avio, like other smaller European engine builders such as MTU and Volvo Aero, has increasingly moved away from building whole engines to focus on specific subsystems - in Avio's case gearboxes, turbines and transmissions, operating in partnership with other manufacturers to produce joint-venture engines. Guarguaglini says the Finmeccanica group - and, by extension, the entire Italian industry - will have to follow a similar strategy on a larger scale. "The plan is to grow organically in key areas like helicopters and military communications. We do not want to be always a prime contractor: we want to create a series of alliances."
Guarguaglini says selling to the US market "is an absolute priority for us", and Testore points in particular to Finmeccanica's long-standing relationship with Boeing, but the company will have to increase its business with Airbus, Testore says.
Finmeccanica's collaboration with Boeing Commercial Airplanes is twice that with Airbus, but Testore says his group is trying to "improve our co-operation with Airbus to make it more balanced with Boeing". The Italian group has won the contract to supply key components of the fuselage and wing of the Airbus A380.
Outside Airbus, Finmeccanica is expanding its long-standing communications and systems alliance with BAE Systems. Their joint venture AMS (formerly Alenia Marconi Systems) is set to grow to include Marconi Selenia Communications and Galileo Avionica in a new series of joint ventures called Eurosystems (Flight International, 15-21 July).
While Finmeccanica may be pushing its way into Airbus projects, smaller companies outside the Finmeccanica group are still finding that Italy's absence from Airbus is making life difficult for them. "We'd love to compete for civil contracts, but the return on investment is around 10 years," says Sergio Bogni, marketing executive at Secondo Mona. "It is a huge disadvantage that Italy is not a part of the Airbus consortium."
Danilo Miglieriana, marketing manager of tooling manufacturer Geven, says: "We are excluded from new European projects when they are at the planning stage. There are lots of very competent Italian suppliers not given the opportunity to show their potential because of this."
There are, of course, successful companies existing outside state control in the civil market. Piaggio Aero has recovered from bankruptcy by focusing its niche product effectively, and Italy still leads the world in parts of civil aviation, such as interiors. Latina-based Aviointeriors, for example, supplies seating to around 100 airlines.
But chief executive Franco Mancassola says that, while his business may not be suffering, "the aerospace industry in general could benefit, if there were a more prominent Italian civil aerospace manufacturer".
Italy, like the rest of Europe, has seen defence spending fall since the end of the Cold War, and the domestic military market cannot support the industry at its current size alone.
For smaller Italian manufacturers, blocked from the large US military market by "buy American" requirements, the civil arena is the only option. Airbus's procurement policy is altering rapidly towards an "approved list" system, and if Italian suppliers are not on the list they will be shut out from their most promising local customer.
Working for change
Forty years ago, Italian industry could play on its relatively low costs to undercut foreign competition. Today, as in many other European countries, wages are high, and social legislation makes redundancies difficult and costly, which - whatever its benefits for the country - makes life difficult for a restructuring industry.
"It is virtually impossible to sack people in Italy, so most firms opt for early retirement," says Giorgio Abrate, head of business development at Avio. But things are changing; last year the government introduced laws covering contract employees, which "helps a lot", he says, adding: "We now have 'lavore interminale', or contractors, which enables us to use a pool of workers on continuous fixed-term employment. Italy may not be as flexible as some, like the Netherlands or the UK, but it is now more flexible than some European countries."
The situation is not as clear-cut as Abrate might suggest: before contract employment became legal, industries managed to restructure. José di Mase, president of Piaggio Aero, says: "Italian labour laws are not very flexible, but the government was very helpful when we restructured [in 1998]. We had to guarantee workers' jobs in return for funds from the government. But when we changed from custom-built aircraft to a production line, we had to rely on natural attrition of workers rather than redundancy to trim numbers."
Even now, contract employment will be of limited use, suggests AIAD's Festucci: "It is a good idea, but this is a specialised sector, and it is not easy to have specialist temporary employees. It's better to choose the best employees and keep them in the company."
While employment laws are loosening, the industry is still having trouble with the Italian government's attitude towards exports. "It's not easy to export in Italy," says Festucci. "All the bureaucracy is very difficult for Italian companies - it's a bureaucracy supported by law."
If an Italian company wants to export aerospace products, or collaborate with a foreign company, "they need to ask the prime minister for permission to start contacts. These controls over military and civilian technology export are very different from France and Germany." While Italian laws are intended only to restrict the spread of sensitive military technology, Festucci says they are overused: "Parliament confuses civil aerospace with bombs and guns. This affects the civil industry as well."
Confused regulation
At present, the regulatory situation is confused, with European military aerospace exports falling between national governments and the European Commission.
While other European exporters, led by France, are campaigning for a common system of regulations on defence exports, Italy is delaying. In 2001 the six leading European exporters signed a letter of intent (LoI) on the control of the arms trade that would make exports easier, especially between co-signatories. But only now is the Italian government close to ratifying this agreement, and expansion to the whole of the European Union is still further away.
Festucci blames resistance from the Italian parliament, which he says is worried it may lose some of its power by allowing a Europe-wide regulatory treaty to supersede Law 185, the current Italian regulation.
"It is possible to change the law, but in parliament there is a lobby that doesn't want it to change. LoI has been delayed for two years because of this lobby. Many members of parliament suppose that the European law is a way to change the Italian Law 185." There is only one realistic solution, he adds: "The law must be the same for all EU countries."
Many complain the industry does not receive the same support from its diplomatic service as aerospace manufacturers do in other countries, although this is starting to change.
"In previous governments, trade diplomacy was lacking, but now Rome is beginning to support exports. It's nothing on the scale of what other countries such as France and the UK have, but there is now senior political influence to help us," says Roberto Garavaglia, vice-president of marketing at AgustaWestland.
Offset agreements are another area where the Italian industry needs more diplomatic muscle on its side, says Festucci. "We have no law about offset. This means we need to put offset work in other countries, but no law supports offset in Italy."
Cultural drawbacks
Uncertain political guidance, inflexible workforces and unhelpful bureaucracy may sound like a clichéd picture of Italy, but Italian executives admit that the clichés have some basis in fact.
"It's clear we have some drawbacks as Italians," says Avio's Abrate. "We're not as organised as Germans, but we also have some advantages. We are more flexible, for example, which means we are capable of going beyond the limited scope of some proposals to find a solution."
But such differences in national character are dwindling away as the worldwide aerospace industry, driven by European integration, spreading free trade and shrinking defence spending, becomes increasingly international.
Abrate adds: "Across the world we have a shared cultural field. We have been exposed to foreign practices for 20 years and our work must be integrated."
Italy's aerospace industry retains many of the attributes of its protected past - other governments may regulate their manufacturers through golden shares or holdings, but few play as active a role as the Italian state (through Finmeccanica) has in recent years. Aerospace is a political game, and the Italian industry has suffered in the past from too little political backing. In the years to come, Finmeccanica could prove that too much political backing - coupled with too much ambition - can be just as damaging.
On the other hand, if the Italian state can limit itself to taking the brakes off the industry, rather than putting its weight on throttle and joystick, the prospects will be significantly brighter.
ADDITIONAL REPORTING BY JUSTIN WASTNAGE IN MILAN
Source: Flight International
