Last June the Assomac Research Centre carried out a survey to answer the challenging question: ‘If the Covid-19 pandemic has made us understand the importance of proximity in the supply chain, is it conceivable that economic activities relocated to other parts of the world could return to Italy, or at least to Europe?’.
Global phenomena such as the pandemic emergency and the attention of businesses to reducing the environmental impact of their production and logistics processes should encourage the reorganisation of proximity supply chains.
And yet, the hint of a response already appearing in some macro studies does not lead us to believe that this hypothesis will come true. According to the Allianz survey, “2020/21: Vaccine Economics”, less than 15% of multinational companies are oriented towards post-Covid repatriation, while 30% could relocate some factories to neighbouring countries. Moreover, according to Banca d’Italia, “Note Covid-19”, more than 60% of companies with factories abroad will not change their strategy. Of course, this is a global forecast and in order to understand if and how this phenomenon will impact the leather and footwear supply chain, it is necessary to better understand the specific supply chain and observe what is happening internationally.
The starting point can only be China, the so-called “factory of the fashion world” although to a lesser extent than in the past. With the XIV Five-Year Plan launched in March of this year, the Chinese government is focusing on indigenous innovation, technological independence and development of the domestic market. The watchword is “double circulation”, i.e. the reduction of exports and public investments and the increase of domestic production and consumption. It is no accident that the manufacturing model developed is called ‘Made in China 2025’ and aims to launch brands capable of competing with Western ones. It also focuses on automation and Industry 4.0. This strategy is linked to China’s trade rift with the United States, which Trump wanted and which, on the US side, leads to a possible reshoring or, more likely, a relocation of companies outside China, while remaining in Asia. This latter phenomenon, defined as Nearshoring, does not in any case reward Europe.
On the other hand, other markets such as Vietnam will benefit: Vietnamese exports to China increased by 15% for the first time last year. The country’s leather and footwear industry has made great strides in R&D, technology and design, thanks to increased investments. Even during the full impact of the Covid pandemic, in January this year, the production index of fashion items increased by more than 10% compared to the same period in 2020. The Chinese strategies also identify Cambodia as another relevant country for their development plans.
The question at this point is whether these movements at international level could benefit European machinery manufacturers.
According to the Assomac study, it is conceivable that in the immediate future there may be a hold on trade capacity with Asia, if not an increase, but the Chinese government’s investments in R&D for the country’s mechanical and IT companies will soon lead to substantial autonomy. There is already a decline in European machinery exports to Asia, and Covid has exacerbated the negative trend. Moreover, the serious shortage of steel in the EU certainly does not help the mechanical engineering industry.
India does not seem to be a good possible outlet for European machinery exports either. In fact, despite the fact that after the global financial crisis China has freed up space in the clothing and footwear sectors to the tune of some 150 billion dollars, India has been able to grab at most 10-15%, due to a very unusual combination of industrial policy, protectionism and little commitment to the most dynamic part of the world. Since 2014, India has abandoned the consensus of the last 30 years towards a slow opening of the economy in favour of embracing protectionism, as a result of which tariffs increased from an average of 13% to 18% in the last budget.
So, if the Asian market is likely to dry up over time, where else can we turn our attention?
The study suggests looking at African markets. With the African Continental Free Trade Agreement for trade between African countries, 90% of all textile and leather goods become duty-free for all countries that have already deposited their instruments of ratification with the chair of the African Union Commission (AUC). Already today, global luxury brands are sourcing leather processed by Nigerian tanneries. And, in South Africa, buy local campaigns are reinforcing the footwear revival plan.
It could be advantageous to look again at the Old Continent. In Europe, some interesting policies are being implemented. For example, the Spanish government, through the Next Generation-EU, has launched the EcoChallenge project to encourage more than 40 companies and start-ups to return to Spain for a sustainable and digital relaunch of Spanish footwear. Hopes and forecasts lead us to believe that these initiatives will drive the renewal of technological supplies and that it will be necessary to prepare to meet the needs of a market whose demands will focus on product customisation, new materials and increasingly shorter time-to-market.
In the light of these international dynamics that lead value chains to regionalise, Italian-made companies risk losing competitiveness unless they make every effort to maximise their strengths.
What are the competitive levers that need to be strengthened?
The study points to the customisation of products which, in fashion more than elsewhere, has been translated into an industrial practice based on great productive agility and on the ability to create and move an increasingly large number of different small stocks. The growth of e-commerce has greatly enhanced this trend.
The values that Italian mechanical engineering companies will have to express in order to remain competitive will be closely linked to the reduction of the environmental impact of processes and their documented transparency. In terms of technology, this means enhancing the ability of machines to track processes and materials. A second point will concern the ability to manage new materials, which even in a traditional sector such as leather and luxury goods are gaining important market shares. We can see this in the strategies of brands that are increasingly interested in including alternative materials to those of animal origin in their collections. Take Portugal, for example, whose Recovery and Resilience Plan (RRP) provides significant funding to promote the incorporation of bio-based materials in textiles, clothing, footwear and resins.
The message for the Italian and European technological industry that emerges from the Assomac is, therefore, quite clear. Covid will not lead to a major reshoring of production. It will certainly not be such a phenomenon as to condition the entire future of the supply chain. That’s why it will be important to focus on the strengths of the mechanical engineering sector: first and foremost, research and innovation of technologies and materials.