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 Today, however, the Porcia plant is also a testing ground for the
region's industrial future.
Home appliance maker Electrolux, which owns the factory, wants to
cut the salaries of some 5,000 workers at the plant and three other
factories across Italy by up to 15 percent over the next three
years. The Swedish company says lowering labor costs is the only way
its washing machines, fridges and other home appliances can compete
against rival products made in eastern Europe and Asia.
The Italian government, unions and workers say any wage cut would
impoverish thousands of families who rely on the plant and its
suppliers.
"It's a matter of survival," says Annarita Licci, a 38-year-old
mother of two, who moved to Porcia in 2000, the year after Europe
introduced its single currency.
Then, Italy was the leading world exporter of home appliances. Now
it is ranked third, far behind China, which has grabbed more than
one-third of the 100 billion euro ($140 billion) global market. Like
many others, the Porcia plant has progressively downsized.
Last year Licci's partner took a company buyout. If Electrolux cuts
her 1,000-euro salary by 130 euros — in line with the ballpark
reduction estimated by the company — Licci says she will no longer
be able to afford monthly expenses, which include a 600-euro
mortgage.
"The company wants to lower its labor costs and starve us," she
says. "What about investing in developing better products for this
factory instead?"
The battle over Electrolux wages is at the heart of one of the most
pressing dilemmas facing the battered economies of Italy and other
southern European countries: The competing needs to both cut costs,
and spark growth.
Companies across Europe's southern rim struggle because wages and
prices have risen higher than their products can justify. But euro
zone countries can no longer depreciate their currencies to make
their products cheaper in foreign markets. That leaves so-called
"internal devaluation" — pushing down wages and prices — as the best
way to stay competitive.
Spain, Greece and Portugal have pushed through deep wage cuts and
made it easier to hire and fire, allowing firms to trim the price of
their goods. This has helped Spain's economy grow for the first time
since 2011. Italy, where labor costs are still high, is flatlining.
But there are risks. A squeeze on pay could choke off already feeble
consumer spending because workers have less money to spend. And as
producers lower prices, it risks triggering what economists call a
"deflationary spiral" in which consumers no longer buy goods, in the
expectation that prices will continue to fall — a belief that
creates an ever deeper recession.
The most dramatic recent example is the two-decade great deflation
from which Japan is only just emerging. In Spain, there is growing
concern that the effects of wage cuts on the country's feeble
internal consumption could cripple long-term recovery.
Inflation helps countries lower their debt by increasing the money
at their disposal to pay it off. Deflation, on the other hand, makes
reducing debt harder because money is more expensive. It also puts
companies off borrowing and investing. That's a problem in Italy,
which has 2 trillion euros in debt — the second-highest in the euro
zone after Greece, as a share of Gross Domestic Product.
"Pushing down wages is dangerous: The most worrisome consequence
would be depressing consumption where there is already a demand
crisis," said Carlo Devillanova, economics professor at Milan's
Bocconi University.
STEADY DECLINE
In many ways the factory in Porcia mirrors Italy's economic rise and
decline.
It was built in the 1950s, just as the economic miracle that lifted
Italy from the rubble of World War Two got started. Lino Zanussi,
whose blacksmith father Antonio had started out making stoves and
ovens in a workshop in Pordenone in 1916, used the plant to help
transform Zanussi into a top European home appliance maker.
Along with Germany, Italy became the world's leading exporter of
home appliances. Porcia was a vibrant artery of Italy's industrial
heartland. Locals in the Pordenone province called the area the
"Manchester of Italy" for its huge output.
By the 1980s, though, Zanussi had run into financial troubles and in
1984 the family sold to Electrolux.
The Swedish firm kept a big presence in Italy until the mid-2000s
when competition prompted it to move a chunk of its production to
low-wage eastern Europe. Over the past 14 years, Electrolux has shed
71 percent of its workers in western Europe and 60 percent in the
United States. At the same time, the company's staff in eastern
Europe has risen by one-third to 8,480.
Luigi Bidoia, economist and co-founder of research firm StudiaBo,
says that after the mid-2000s it made little sense to keep producing
in Italy. "Other countries now offer the same skills and pay at a
half, a quarter, a tenth in wages," said Bidoia.
HIGH END OR NOTHING?
Cutting wages is not the only way for Italy to compete. The southern
economies would all benefit if Germany, the euro zone's strongest
economy, boosted its internal consumption and encouraged more
imports from its neighbors. The European Central Bank could also do
more to try to stimulate southern European economies, allowing
inflation to rise from its current 0.8 percent.
So far, though, there are no signs of either happening. ECB
President Mario Draghi has welcomed "relative price adjustment" — wage cuts — in Spain, Portugal and Greece.
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Such an adjustment has not happened in Italy. According to the
European statistics agency Eurostat, unit labor costs rose 4.2
percent between 2000 and 2012 in Italy, against a fall of 2.8
percent in the European Union.
Part of the reason is that Italy's labor laws make it difficult
for companies to adjust pay and hours to fluctuations in the
economy. The cost of employing workers is also pushed up by the high
labor taxes and social contributions employers must pay. According
to the OECD, those make up just under half the cost of employing a
worker in Italy. In other developed countries they total 35.6
percent, on average.
At the end of February when he first took office, Italy's Prime
Minister Matteo Renzi promised to reduce the burden on companies,
citing the Electrolux standoff as a key issue for his new
government. Fiat CEO Sergio Marchionne has criticized Italy's rigid
labor market rules and in 2011 reached a deal with workers at the
car marker's main factories, introducing more flexible conditions in
exchange for investments.
BETTER PRODUCTS
The other way to compete is to produce high-value products that
warrant higher prices, innovating to create products that people
crave. Italy already successfully makes high-end goods from luxury
clothes to food and small electronics.
But as spending on research and development has shriveled — Italy's
is among the lowest in the developing world — the country has
steadily lost out in other areas, including home appliances. In a
speech last year, Bank of Italy governor Ignazio Visco singled out
the sector as emblematic of the country's industrial decline. One
example: Italy made two million refrigerators last year and 10
million in 2001.
"A country like ours has to position itself as a maker of high-end
products through innovation and research," said Claudio De Vincenti,
a top official in Italy's economic development ministry recently
appointed by Renzi.
That may have been a factor in Electrolux's struggles, according to
one former employee. As it moved production east, Electrolux also
shifted its commercial strategy. In particular, it bundled together
well-known home appliance brands such as Rex in Italy and Germany's
Juno with its generic, namesake Electrolux brand. The Zanussi brand
survived, but production was partly moved outside Italy.
Mario Grillo, a former Electrolux manager who used to run its
refrigerator plant in the north-eastern town of Susegana, says the
change in strategy was a mistake, because brand loyalty is a key
factor among home appliance customers. Grillo blames that decision
and a dearth of investment in new products for Electrolux's loss of
market share in Italy to U.S. firm Whirlpool, Germany's Bosch and
South Korea's Samsung.
"If you don't invest enough in innovation, you get left behind,"
says Grillo.
Electrolux said in a statement that it has invested considerably in
Italy, including more than 245 million euros between 2009 and 2013.
In the statement, the company said more than 800 of Electrolux's
6,000 staff in Italy are engineers and technicians working on
research and development, and the firm produces most of its
highest-end washing machines, refrigerators and stoves in Italy. But
an Electrolux spokeswoman declined to say how much the company
invested in Italy before 2009.
Ernesto Ferrario, the firm's chief executive for Italy, last month
put together a proposal with union leaders aimed at securing the
plant's future. Under the proposed deal, Electrolux would not touch
wages but would reduce the plant's workforce by at most 400 people
over three years. It would also guarantee some investment in
exchange for a government commitment to cut some labor taxes.
Officials from Renzi's government met Electrolux management last
week, but no decision was taken.
In Porcia, people are bracing for the worst.
Claudio Pedrotti, a former Electrolux manager who is now the mayor
of Pordenone, says that if a deal isn't found and the plant closes,
there will be a "tidal wave" of job losses.
On a recent Friday afternoon, Licci, the Electrolux factory worker,
joined a union-led protest outside the factory. A petite blonde with
thick eye makeup and a cigarette in hand, Licci said employment at
the factory had helped her get a mortgage and buy a house.
Up until 2008, Licci took home 1,400 euros a month. But Electrolux
gradually reduced her hours so her wage has fallen to 1,000 euros.
On top of her 600-euro mortgage she pays 310 euros a month for
school lunches, electricity and gas, and fuel for her commute to
work. "We made sacrifices thinking we had a safe future ahead, but
now everything seems to be at risk," said Licci.
Paolo Candotti, head of human resources at Porcia until 2003 and now
the general manager of local business lobby Unindustria, put it more
starkly: "Someone should explain to workers that without a cut in
wages, a 1,200 euros salary risks soon becoming zero." ($1 = 0.7225
euros)
(Additional reporting by Elisa Anzolin
in Milan and Maria Sheahan in Frankfurt; writing by Alessandra
Galloni; edited by Simon Robinson and Sara Ledwith)
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