Twilight In Italy

By Peter Gumbel

The biggest chair in the world stands seven stories tall, weighs almost 23 tons and is found just to the left of the second traffic light in the tiny town of Manzano (pop. 7,000) in the northeastern corner of Italy near the Slovenian border. The red pine monument is not some avant-garde artistic statement. It's an oversize acknowledgment by the community of the industry that brought immense prosperity to Manzano and 10 small burgs around it over the past half-century. Known as the "chair triangle" (il triangolo della sedia), this district every year produces as many as 40 million chairs of all shapes and sizes--typically of beech and oak wood--for offices, homes, hotels, cruise ships, hospitals and restaurants around the world. Locals like to boast that the district in its heyday made 1 of every 3 chairs sold. The demand provided ample work for a tight-knit network of 1,100 highly specialized small firms. And it transformed a once modest rural area into one of Italy's richest and most dynamic commercial zones, a district with virtually full employment and a chronic shortage of skilled labor. "We were the China of Europe," boasts Giulio Fanin, an entrepreneur who makes machine tools for chair manufacturers.

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--and its life. Over the past three years, about 200 Manzano companies have closed, and a worrisome number of the remaining 900 are struggling. The cheap labor isn't just in China. Sawmills have moved to Croatia, Poland and Romania, where an increasing amount of prefabrication is carried out.

Manzano's once dominant share of the market for no-frills office swivel chairs has collapsed because Chinese producers churn them out with almost the same quality at a fraction of the cost. Now the Chinese are stepping up to more sophisticated chairs in wood and leather too. Talk about "the crisis" is ubiquitous in Manzano--even the executives of thriving companies are worried 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 a half-century ago, Mininsedie, produced up to 500,000 chairs annually. But last year Mininsedie made just 130,000. Revenues have declined 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 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 Zamo, one of the few remaining successful manufacturers of office chairs in the district. Zamo 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."

Manzano's claim to be the chair capital goes back centuries. An 8th 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, 75 miles 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-a-year business. To cope with the demand, the number of firms grew tenfold as highly specialized artisans set up their own shops, supplying individual parts to their neighbors, who would then work them into the next stage of the manufacturing process. One artisan would do just leather upholstery, for example, or specialize in varnishes. The 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 proved 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 all but a few are sorely undercapitalized and lack the resources to build their business to a global scale. And virtually no one has much experience selling to customers other than the big German distributors that once snapped up as much as 70% of the district's output. Says Giovanni Masarotti, president of the Manzano chair district and chief executive of Montina, one of its oldest firms: "If I say three companies have true marketing departments, I'm exaggerating."

Nor is there protection in design capability, which has long been an Italian strength. Chairs are easily copied. Manzano's entrepreneurs complain that Chinese manufacturers simply steal what they find in catalogs and on websites. The Italians insist they still have an edge in quality--especially with chairs made out of fine wood or upholstered in top-quality leather-- and in their ability to tailor production to customers like the hotel industry. But even there the Chinese are muscling in.

How can the Italians fight back? Alessandro Calligaris has a blunt answer: "We have to win the loyalty of our customers." He is 60, with a fuzz of white hair and a reputation as the most successful businessman in the chair triangle. His company, the namesake Calligaris, was started by his grandfather in 1923 and is still growing. Revenues last year rose 12%, to $140 million. His first big insight, more than a decade ago, was to figure out that the future lay beyond chairs. The Calligaris furnishing collection, sold under the slogan "Italian Living," last year included sofas and beds for the first time, as well as shelves, tables and, of course, chairs. One big shift came in 2000 when the firm began buying and processing its wood in Croatia, at a plant near the forests where it's cut. Calligaris switched some of the upholstery work to Bosnia, where wages are one-tenth of those in Italy. And he has put a relentless focus on making his own branded products rather than manufacturing for other companies. In 1997, 35% of the firm's output was of no-name furniture; today it's 1.5%. The firm's 12,000 retail clients include such marquee names as Bloomingdale's.

"Everybody thought Calligaris was mad when he started, but now he is a model for all of us," says Gino Piani, who runs a company called Forsedia, with 50 employees, three lines of furniture and slumping sales. Piani's answer is Calligaris-inspired: he is trying to create his own brand and a sales network with fellow entrepreneurs. Two of the four firms he hoped to team with have since dropped out, but Piani doesn't need to look very far to see that he needs to do something. The Manzano district as a whole is working on a strategy that might help all the chair manufacturers: creating a certified hallmark analogous to the one used by the ham producers of San Daniele, 12 miles away, who make a famous prosciutto. To qualify, chairs would have to be made locally and meet stringent quality standards. Each hallmarked chair would be numbered for authenticity. "The first thing we need to do in this global world is to have an identity. If we don't, we'll disappear," says Fabrizio Mansutti, president of Promosedia, a local trade association that is sponsoring the plan.

Yet even as they talk about focusing on Italian manufacturing heritage, officials for the bigger firms are dealing with reality and shifting production out of the Manzano district. Luigi Cozzi, for example, has relocated his wood treatment to Romania, where his firm, Idealsedia, now has 300 workers--50 more than it has in Italy. Such cost-cutting moves are a matter of survival. Natuzzi, a major Italian sofamaker headquartered in Santeramo, still makes high-end products in Italy. But less expensive sofas aimed at price-conscious North American consumers are wholly made at a factory Natuzzi operates in Shanghai. The company had no choice but to open a Chinese plant, says Daniele Tranchini, Natuzzi's chief global sales-and-marketing officer. "Half our sales come from North America, and that market has been hit more than most with cheap products from China," Tranchini says. Besides, he adds, "everyone recognizes it's an Italian product. Where it is manufactured has really become a secondary issue."

That's a difficult lesson for Manzano to comprehend. A company called Sibau just down the road from Piani's factory collapsed last May, with the loss of 50 jobs. "They stayed still too long," Piani laments. "They thought nobody could make chairs the way they did."

With reporting by Susan Jakes/Beijing