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MILAN — From the silk mills of Lake Como to the leather tanneries of Tuscany, the economic scenario is beginning to call to mind the abandoned factory lines and downcast city streets of the Great Depression.

This story first appeared in the June 26, 2012 issue of WWD.  Subscribe Today.

Fashion leaders here are calling for immediate government action as the small and medium-sized companies that uphold the nation’s artisan allure face increasing difficulty in obtaining lines of credit, serving up another blow to Italy’s beleaguered small businesses. Loans to the small and medium-sized textile and fashion companies dropped 3.4 percent in February compared with a year ago, according to data compiled by Italian fashion and textile consortium Sistema Moda Italia.

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“We are risking an irreversible breaking point in our industry, which serves as the real added-value factor in penetrating foreign markets, China in particular,” said SMI president Michele Tronconi, suggesting that the government take measures to, among other things, reduce energy costs and taxes in order to help boost export growth.

The trend underscores the struggle for smaller companies with rising borrowing needs to enhance innovation and expand amid fierce competition from foreign competitors.

While vanguard Italian brands like Prada and Giorgio Armani are among Europe’s fastest-growing luxury labels, about 90 percent of all of Italy’s fashion companies are represented by small and medium-sized firms, according to Tronconi.

Rising energy costs and higher taxes implemented by the government have hindered these smaller firms from riding the positive wave being seen by much of the luxury market, as emerging markets fuel sales growth across the board, Tronconi explained.

In value terms, about 10 to 20 percent of the global apparel market is represented by Italian companies, while Italian accessories makers make up about 30 to 40 percent of the world’s accessories market, said Luca Solca, global head of European research at Crédit Agricole Cheuvreux.

Small and medium-sized companies comprise 99.9 percent of all Italian enterprises and 80 percent of the industrial and service labor force, according to the Organization for Economic Cooperation & Development. Many of Italy’s small and midsized fashion companies rely on domestic customers, while larger luxury companies, such as Ermenegildo Zegna and Bulgari, have been well positioned by buoyant Asian markets like China for years. On the other hand, these well-placed larger Italian brands are loyal clients of companies that make textiles and fashion accessories and components.

“The big brands of the world like Gucci, that want to maintain their Made in Italy claim, will have to support their suppliers,” Solca said. “Companies like Gucci could soon find that their suppliers are in trouble, as banks are cutting their credit lines.”

Solca added that larger brands can help support their suppliers by reducing payment terms to two months — the European norm but hardly the standard in Italy — from three months or more, a measure that would help these firms better cope with their working capital requirements.

Beppe Pisani, president of silk mill Serikos, agreed that a major problem for many smaller companies is that they are not being paid regularly and on time.

“Clients are late with payments, businesses are closing and we end up being their bank,” Pisani said.

A recent OECD study showed that after the dawn of the financial crisis of 2008-09, bankruptcies in Italy peaked in 2010 to 11,289 compared with 9,429 a year earlier.

Overall, small and medium-sized enterprises requesting loans between 2007 and 2010 faced higher interest rates than large companies. Loan conditions included shortened maturities and increased demands for collateral. The easier credit terms for large companies suggests that smaller firms were considered to be a higher risk with poorer business prospects, the report said.

“What we are seeing [in the fashion industry] is a shakeout of smaller players that are not connected to larger players,” Solca said.

Several government measures have been taken since the financial crisis to bolster smaller companies in Italy. In addition to government tax exemptions and deductions, 8 billion euros, or $10.5 billion at current exchange, were made available by the nation’s Deposits and Loans Fund (Cassa Depositi e Prestiti), which originated from postal deposits and were then channeled onto the banking system for smaller firms. Banks reported that by the end of 2010, 2.8 billion euros, or $3.7 billion, were allocated to these companies in need, the OECD said.

Since bolstering credit lines to small companies wasn’t enough of a catalyst to secure a real recovery, the government could aid them by allowing firms with less than 100 workers to keep accrued severance pay funds within the company instead of being siphoned off to the social security services, Tronconi said.

Italy’s economy, stuck in a recession, contracted 0.8 percent in the first three months of 2012 compared with the fourth quarter of 2011. The economy is expected to contract more than 1 percent this year, and the national debt ratio remains 120 percent of gross domestic product. Union and industrial leaders have criticized the tax-heavy austerity measures of Prime Minister Mario Monti’s government for their adverse effects on domestic economic growth. Yet room for improvement remains within the Italian system, which has been mired for decades by corruption, inefficient spending and ineffective measures in curbing rampant tax evasion.

In April, the deputy governor of Italy’s central bank, Fabrizio Saccomanni, explained that throughout all industries, the ability of banks to grant loans has been weakened and the credit ratings of banks’ clients have deteriorated.

“The operation of the credit markets in Italy and in the euro zone in the past month has been deeply affected by the sovereign debt crisis and by the negative economic climate,” said Saccomanni, adding that the adequacy of the legal framework should be evaluated and new rules should be introduced, taking into account the change in the banks’ product offer policy and the financial needs of the families and enterprises.

Tronconi, who runs a family-controlled textile business, said Italian companies like his have been resilient throughout history — from World War II to the adoption of the euro.

“What companies are facing now is not very different from what happened in America during the Great Depression of 1929,” he added. “Only, here, there is no New Deal. Italian politicians, together with all the European main leaders, are just creating solutions that create more problems.”

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