Italy’s largely family-run independent suppliers, like SMEs the world over, are facing up to globalisation and shrinking defence spending
A tour of Italy’s independent aerospace suppliers initially conveys wa comforting sense of continuity and stability, with the same names appearing time after time, and several generations of the same family often controlling companies that have existed independently for the best part of a century.
However, behind the scenes, small and medium-sized enterprises (SME) are having to work harder than ever to win sufficient levels of work to hang on to their profitability in a market where defence budgets are falling, the weak dollar is taking its toll and competition – both at home and abroad – is fiercer than ever.
In the companies that are successfully facing up to these challenges, certain common themes emerge. Cutting costs and increasing efficiency are vital, according to Sergio Bogni, deputy general manager of Secondo Mona, which supplies fuel systems, pumps, valves and actuators and is a prime example of a family business: the grandsons and great grandchildren of its eponymous founder still own and work for the company.
Secondo Mona, based in Somma Lombardo, just outside Milan, has had a “continuous improvement” project in place for the last two years to drive down costs, remove waste and increase efficiency. “It is paying off – it is making the difference between us and other companies,” says Bogni. The company’s results back this up – Secondo Mona aimed to increase turnover by 6-7% in 2005, but has surpassed that target with an increase of nearly 14%, as well as doubling its orderbook in the last seven months.
In January the company will launch a “lean supply-chain project” in which it will help its top 11 suppliers improve their working practices and become more competitive. “Our customers are looking for lower prices all the time – we have to be more efficient to keep our margins, and to absorb the tremendous impact of the weak dollar we have to improve efficiency enormously,” Bogni says.
A high level of investment in research and development is crucial to suppliers’ future success, in an industry that is facing a “financial crisis”, because of the lack of defence spending, according to Carlo Festucci, secretary general of industry association AIAD. Companies are having to dig deep into their own pockets for R&D investment, as spending for new programmes is not forthcoming from the Italian government, he says. “SMEs must invest more in R&D – those who don’t will be out of the market.” he says.
It is not all bad news, however: suppliers that increase R&D investment will be able to take advantage of an opportunity, as Italian giant Finmeccanica continues its bid for a new role as an international prime contractor, leaving smaller independent companies free to move up the supply chain and fill its shoes, designing and developing more complete, and complex, products. Festucci says: “Moving towards providing a complete product is vital – the alternative is to die.”
Rome-based defence electronics supplier Elettronica, which is one-third owned by Finmeccanica, relies heavily on its well-known name and brand to win contracts, says marketing and business development director Cristina Von Beckh. Finmeccanica’s push for the US market could bring new business Elettronica’s way, although Von Beckh is cautious on this because of the sensitive nature of the company’s products. For this reason, collaboration with US companies might be a way to win new contracts, she says. Although the company remains a “family-led enterprise”, it benefits from being able to participate in Finmeccanica’s company-wide R&D strategy (see feature P46).
Although the Italian industry has undergone some consolidation, more lies in store, including an increased trend towards strategic partnerships and consortia, and in particular agreements with foreign companies that will allow Italy’s suppliers access to new markets, he adds. AIAD has been a key player in encouraging SMEs to maintain their competitiveness through keeping ahead in the technological stakes and pursuing a policy of internationalisation. To this end, in 2004 the company took part in an initiative with Italy’s chamber of commerce in Toulouse to facilitate meetings between French and Italian suppliers.
“Globalisation is obligatory, and if companies want to work in international markets they will have to be prepared to work with local companies,” says Festucci. One company doing just that is Logic, a supplier of fuel-gauging systems, whose customers including Boeing, Hindustan Aeronautics and Northrop Grumman. Milan-based Logic acquired German lighted panel and keyboard specialist Comtronic last year and is now focusing on integrating its first acquisition outside Italy, including improving its ability to supply more completed products to the market. Further activity in foreign markets could follow.
General manager Valerio Cattani says: “We are analysing how to grow Logic’s presence in the USA – perhaps through collaboration [with other companies].” In 2004, 63% of Logic’s €20.8 million ($25.2 million) turnover came from exports.
“What allows us to export is that we have invested in technology in the past and we do so now,” Cattani says. Cost-cutting is key, too: “We have invested a lot to be able to certify products in-house. This allows us to cut down development times, certification times and risk,” he says.
Diversification does not just have to be geographical – Secondo Mona is looking to the regional jet market for future contracts. The company aims to expand its civil revenues to around 25-30% by the end of 2006: “They have increased, but not as much as we wanted them to,” Bogni says. The company has put in bids for work on regional aircraft and light jets and is hoping in particular to expand its presence in Canada. The company is well aware of the threats and opportunities presented by emerging markets. Bogni says: “We have to keep our feet firmly on the ground and chase business that will lead to short-term turnover.” China is “a very important market”, but the company is viewing it with caution.
Airframe parts and general aviation manufacturer Oma Sud, based in Capua, near Naples, recognises the importance of collaboration with other companies (see box P28). Although Italy does not have an aerospace hub comparable with that of Toulouse in south-west France, locations specialising in the sector – Milan, Naples, Rome and Turin – give rise to opportunities for collaboration and support between local businesses. In 2004, aerospace and defence companies across Italy – which employ around 50,000 people – posted a combined turnover of €10.3 billion. In north-west Italy larger companies such as Avio and Piaggio are well known. But smaller establishments are pooling resources too.
The Italian Technological Cluster (ITC), based near Turin, groups seven high-technology specialists in the aerospace sector and boasts customers including many of the big names in Italian aerospace.
Co-ordinated efforts in marketing, sales and production logistics benefit all seven companies, which are also pushing to expand into other sectors. Similarly, the Precision Mechanics Association (PMA), also based near Turin, aims to use the expertise of its five members to supply single parts as well as designing, developing and producing more complex products to the aerospace and other industry sectors.
Diana Giorgini, aerospace sector co-ordinator for the foreign trade office, Piedmont chamber of commerce, says meetings between the two consortia and foreign companies at the Paris air show demonstrated the appeal of consortia of this type in international commerce.
“Several extremely advanced companies stand out within the consortia, and thanks to the possibility of working together these are able to sign contracts with large foreign contractors.”
Other important advantages for the members of the consortia are certification and references, technological advancement, the capability of offering complete systems and services and not only components, and not least their international outlook and the ability to communicate in French and English.
Initiatives to help aerospace SMEs are not just localised: the Italian government has initiatives in place to support SMEs in the aerospace sector via its agency Sviluppo Italia, which can make temporary investments in a variety of aerospace companies to help them through transition periods. One company that is benefiting from this involvement is Sicamb (see box below).
Sviluppo Italia last month sold its 22% stake in Brindisi-based composite manufacturer Salver to Invesco. Over the last five years Salver has modernised its manufacturing facilities and cemented its position in both the national and international markets, supplying among others Alenia Aeronautica, Aeronavali, AgustaWestland and Piaggio in the commercial and military sectors. In 2004, the company posted a turnover of around €10 million. A key contract for the company’s future is the design and manufacturing of composite piping for the Boeing 787’s climate control system, which will allow it to double its production facilities and take on new employees.
The existence of so many long-established and fiercely independent family businesses in Italy is no coincidence: hand-in-hand with longevity goes a heavy reliance on reputation: “We spend a lot of time making sure that what we promise, we deliver. Our image as a reliable company is good,” Bogni says.
HELEN MASSY-BERESFORD/MILAN & ROME
Source: Flight International