Digital disruption and manufacturing transformation: an Italian case study

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Robotic industrial machinery

An issue of paramount importance for the future of the Italian economy is the long-term resilience of manufacturing – in particular in the regions of the North-West (the primary locus of the country’s early industrialization) and North-East (the primary locus of industrialization in the 1980s and 1990s). These areas comprise Piedmont, Lombardy, Emilia Romagna and “Triveneto” – i.e. the three regions of Veneto, Friuli Venezia Giulia and Trentino-Alto Adige. Overall, this geographical macro-area accounts for about 27 million people, equivalent to the population of BeNeLux. The journey from Milano by train takes 45 minutes to reach Torino, 60 minutes to reach Bologna and 200 minutes to reach Venezia. Milano and Torino can be considered an urban agglomeration (e.g., the Metropolitan Statistical Area of greater Boston is about 110 km in diameter involves a mean work commute travel time of 45 minutes).

Our analysis is based on a set of indicators aimed at capturing industrial resilience since the mid-1990s, when Italian productivity began to lag behind that of Germany, the other main European exporter.  And we focus specifically on how digital technologies (big data, computational power, algorithms and the related fast developments in artificial intelligence) are shaping the development of a new generation of cyber-physical systems based on the convergence among robots, sensors and 3D printing. As is well known, digital technologies are reshaping the division of labour within and between firms, with a reallocation of capital and labour towards new activities. Against this background of opportunities and challenges, regions and countries have a major interest in re-shoring those industrial activities with higher potential for generating value for their territories.

Resilience and change in advanced manufacturing

Italy and its most advanced Northern area are emerging from the longest economic recession since the Second World War, having been particularly badly hit by high levels of unemployment and significant loss of GDP per capita compared to the most advanced regions in Europe. However, we have identified clear possibilities for economic resilience based on advanced manufacturing capacity. The data tell the story of a crisis that started well before the most recent economic recession, related to a slowdown of Italian growth and productivity rates since the mid-1990s. The crisis merely exacerbated and accelerated what was already in motion and it probably triggered a very painful process of selection among those companies that were unable to keep abreast with foreign competitors, due to lower levels of investment in innovation and over-reliance on internal demand. A prolonged period of reduced internal demand spared only those companies able to innovate and to growth in their export shares.

Like most advanced economies, Italy has been affected by the greater fragmentation of production across national borders, with supply chains that can stretch across many countries and industries. Following the wave of enthusiastic offshoring and outsourcing by many companies, Italian business is finding very hard to pursue a reshoring process However, Italy has recently become more attractive for new manufacturing, beginning to reduce the gap with its competitors.

Today’s manufacturing production differs from past manufacturing production, due to the process of intensive servitization (whereby an increasing share of business services are used as manufacturing inputs and manufacturing goods are increasingly bundled with service). While services are responsible for the largest share of GDP, a large portion of their value exists because they are crucial for the delivery of manufactured products and they are sold together with physical goods. In this context, Italian manufacturing has a relatively high services component. ‘Made in Italy’ relies increasingly on service activities to generate value for consumers.

The combination of firm capabilities and public infrastructure is allowing the North of Italy to respond to the challenges of new digital manufacturing. In a comparison to a sample of European regions involved in advanced manufacturing production, such as the German regions of Baden-Wurttemberg and Bavaria, we show that Italy’s Northern regions (especially Piedmont, Emilia Romagna and Lombardy) have a competitive advantage in high-medium technology areas.

To trace technological capabilities, we have investigated the number of patents owned by companies and public institutions in Robotics & Automation (an area in which Europe enjoys a position of competitive advantage), and Computing Technologies (an area of relative weakness for Europe). In Robotics & Automation, Italy is ranked among the top countries in absolute and relative terms with a high level of relative specialization (i.e. the relative importance of a technological area in a country compared to its importance at the world level), second only to Germany’s. At the regional level, Piedmont and Emilia Romagna perform well for number of patents per inhabitant and exhibit strong (growing for Emilia Romagna and decreasing for Piedmont) relative specialization, even higher than that Bavaria. In the area of Computing Technology, the situation is rather bleak; it is well-known that the US dominates this technological area, while Italy is ranked last among the eight countries we have examined, in both absolute and relative terms. At the regional level, the situation is slightly better, with all Northern Italian regions (especially Piedmont) capturing a growing share of patents in relative terms. With the exception of Île-de-France, all the regions considered have a negative specialization in Computing Technologies.

Italy’s share of R&D expenditure in GDP is low (1.37% in 2014) due not only to the small size of its companies and its sectoral industrial focus but also to the low propensity of large high technology companies to invest in R&D. The situation improves when we consider Italy’s Northern regions. All the Italian regions considered have achieved significant growth in the period 1995-2007, and then again after the 2008 economic crisis. The growth rate has been particularly significant in Emilia Romagna and Triveneto. Piedmont with 2.2% of R&D to regional GDP outstrips countries such as Canada, The Netherlands, and the UK, and the share of business funding in Piedmont is about 80%, higher than all the countries considered and at the same level as Baden-Wurttemberg and Bavaria.

Looking at another key ingredient of technological innovation, i.e. secondary education, the Northern Italian regions perform similarly to the highest ranked countries in Europe (e.g. Veneto is similar to Finland, the top ranked country in Europe). However, the percentage of the population with tertiary education is much lower, with a catching up in recent years, in the age bracket 30-34. Italy seems to suffer from lack of development of a dedicated technical higher education system. In other European countries, such systems started to operate in the 1980s and 1990s, producing significant results over the years; in Italy, following several failed attempts, the Istituti Tecnici Superiori (ITS – Higher Technical Institutes) were finally launched in 2011.

We have also mapped the characteristics and future prospects of two key technologies such as  robotics and 3D printing. In the former sector, the segment of “collaborative robots” (or CO-BOTs) appears to show the greatest potential. Italy is a key robotics market, with a 1.7% growth in its market share in 2016; many producers and research institutions are exploiting these market opportunities (with Piedmont and Lombardy accounting for more than half the Italian market).

Similarly, Italian additive manufacturing is a fast-growing sector, with top notch companies in Piedmont specialized in the aerospace and energy business.

Italy’s automotive sector has traditionally been heavily concentrated in Piedmont, a region which continues to play a pivotal role with over 36% of the country’s car suppliers. As the automotive industry is experiencing a major transformation worldwide, (with increasing concentration among large established companies, and a long value chain both upstream and downstream) demand has markedly recovered since the lowest point of the post-2008 crisis: there are great new opportunities but also major challenges to keep pace with current global developments. The position of Fiat Chrysler Automobiles in this context certainly benefits from its strongly export-oriented profile – and Piedmont’s overall export propensity has allowed the supply chain to ride the recent crisis.

In general terms, we have identified a shortage of competences in Computing Technology and Artificial Intelligence – key competitive areas for Northern Italy. Although the machinery and robotics industrial base is quite robust, there may be bottlenecks in the evolution towards advanced digital manufacturing which would negatively affect competitiveness. Indeed, the synergies between all these sectors are essential and require targeted investments and coordination among the key actors.

A few lessons and policy proposals

To address these challenges, policies aimed at developing human capital should be pursued at multiple levels: secondary, tertiary and post-graduate education. And formal education should complement on-the-job training and apprentice contracts. At the same time, it is necessary to attract foreign professionals, based on career opportunities, financial incentives and local quality of life.

Production processes require not only graduates but also specialized technicians. Piedmont, in particular, is already reaping the rewards of the Istituti Tecnici Superiori (ITS – Higher Technical Institutes) introduced in 2011, although the number of students is still very small. ITS in the region are organized in seven schools and cover areas such as innovation, mobility, tourism, culture and fashion, energy and biotechnology. The activities include co-design of profiles and skills, support and advice on job placement, rapid adaption of profiles to business needs, transfer of innovations, focus on work objectives and practice, high-level apprenticeships and internships. The two year ITS higher education programme could be complemented by a system of online training that would allow workers to continue to update their skills. Such an online system, premised on the ITS courses, would benefit from the alumni network and support infrastructure. To facilitate knowledge sharing at the local level, the physical infrastructure of the ITS could become the locus for the creation of an online repository of software, best practices, data, etc., accessible to all accredited ITS students.

A second set of policies needs to focus on coordination and diffusion mechanisms involving universities and research institutions that are already focusing on computing and robotics. There are indeed successful cases that could inspire similar and broader efforts, but in a highly dynamic and competitive global setting, today’s windows of opportunity could close quickly.

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