By  on September 18, 2007

MILAN — A strong euro-to-dollar exchange rate is biting into Italian exports and making it more expensive for a fashion company to craft a handbag out of Tuscan leather or weave Biellese wool into a suit.

Unfavorable exchange rates are hardly a new problem for Italian companies that have learned to cope by limiting their price increases to stay competitive and focusing on high-end luxury products outside the expertise of low-cost countries like China. That said, the euro's continued strength to the dollar is becoming a point of increasing concern in the longer term. The euro is currently trading at about $1.38.

"I am very worried. I'm afraid of losing business because there will be clients who can't pay higher prices," said Giacomo Festa Bianchet, vice president of Italian yarn spinner Loro Festa, who added that the euro-dollar exchange rate and the rising costs of raw materials such as Australian wool and Chinese cashmere have forced him to increase the prices of his yarn between 25 and 30 percent since last year.

While Italian exports are still expected to grow this year, they are slowing down. In June, the Camera Nazionale della Moda Italiana said the euro-dollar impact, combined with a worldwide rise in interest rates, would make 2007 a less-than-brilliant year. Exports of textiles, clothing, leather, shoes and leather accessories will rise 3.7 percent to 42.17 billion euros, or $58.15 billion, this year, the Camera forecast. Exports of those items grew 4.6 percent in 2006.

Last week, buyers and manufactures descended on trade show Milano Unica to view swatches of the high-quality cashmere, silk and wool that have made Italy a major textile resource. The industry has languished over the last few years on increased competition from China and other countries, currency woes and the rising costs of raw materials. Although there are signs that Italian textile sales are picking up, thanks to increased demand in Europe and emerging markets, executives are cautious about the future.

"The numbers for our industry have been positive, but they could be much more positive [without the currency effect]," said Paolo Zegna, president of Milano Unica. "Companies don't want to lose market share, so they are sacrificing their profit margins, a situation which can't go on forever."In the first four months of the year, Italian textile exports grew 2.3 percent to 1.65 billion euros, or $2.28 billion, according to data from trade association SMI-ATI. Knits, wool and silk were the best performers, while demand slipped for cotton and linen. Overall, business with clients in countries such as Germany, France, Tunisia and China made up for a 6.9 percent drop in exports to the U.S.

The leather industry is facing similar problems with exchange rates. Salvatore Mercogliano, director of trade organization UNIC, said Italian tanneries have been forced to mark up the prices of their leather by an average of 10 percent this year. In the first four months of the year, Italian exports of finished leather to the U.S. lost 20.2 percent, according to data from UNIC.

"[Faced with such an increase], customers usually slow down and reduce the size of their orders and see how the situation evolves or they change the items they buy," Mercogliano said, noting that an increasing number of foreign buyers are opting to replace calfskin with sheepskin when possible. "Sheepskin was traditionally used for clothing like jackets or gloves, but now, for cost reasons, it is also being used for shoes and even handbags."

Executives, regardless of their industries, reiterated the importance of retaining clients with original, quality products and customer service.

To wit, Festa Bianchet of Loro Festa said he works with one of his top clients, J. Crew Inc., to develop exclusive fibers such as a wool and cashmere blend.

"I'm trying to collaborate with my clients in a partnership rather than just act as a supplier," he said.

Zegna also stressed the importance of striving for quality.

"When we say we want to be excellent, we need to follow through," he said. "The customer can't find any fault with an Italian product."

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