Analysis of the Italian Manufacturing Sector

Abstract

When creating a roadmap, it is important to contextualise the sector under consideration. The work in this chapter is based on identification of relevant indicators which are analysed with a comparative approach both along the time horizon and with other countries and sectors. For this reason, this chapter is based on the extraction of data from International, European, national and regional dataset and describes the Italian manufacturing industry, exploring which are the most relevant sectors, which is the position comparing with European and international countries, and a focus is made on the machine tools sector. The system competitiveness is also analysed in terms of capability to bring innovation to Italy and to the sustainable development goals. The chapter closes with an analysis of the reaction of manufacturing to disruptions like the pandemic crisis and a proposal for a systemic recovery.

1 Industry Data

In Italy, the manufacturing sector achieved a turnover just short of €1,000 billion in 2019, employing 3.8 million people, with a value added of over €250 billion. The manufacturing sector took out the top spot at the European level, too, as it is clear from the NACE EU-27 non-financial business economy rankings in terms of value added and number of people employed, while it came second for turnover.

In 2019, the sector employed 23% of all Europe's workforce, and generated 29% of its value added. Overall, more than 30 million people worked in 2 million manufacturing companies, generating a turnover in the region of €7,800 billion and a value added of almost €2 billion (Table 1 and Fig. 1).

Table 1 Non-financial business economy in Europe, 2019 (Source Data from Eurostat)

Fig. 1

Value added in EU non-financial sectors, 2019 (Source Data from Eurostat)

The manufacturing value added of the top 4 European countries accounts for 60% of the total value of European manufacturing, while the value added of the top 10 accounts for 87%. Over the last 10 years, the manufacturing value added of the top 10 European countries has increased to the extent that it now tops 1,800 billion in total, while Italy continues to play a foremost role on the European stage, placing second after Germany for value added (Figs. 2 and 3).

Fig. 2

Manufacturing added value (€M) of top EU countries, 2009.2019 (Source Data from Eurostat)

Fig. 3

Manufacturing size of the top 10 EU countries (dimension of the bubble is value added), 2019 (Source Data from Eurostat)

In Italy, within the manufacturing industry, there are a number of sectors that have demonstrated particularly impressive performance in terms of value added and turnover (Fig. 4). Most notably, the sectors concerned with manufacturing machine tools, fabricated metal products, food products and the fashion industry account for 46% of value added, 42% of turnover, and 41% of exports. These sectors, together with the furniture and timber industry, traditionally represent the “made in Italy” brand, consistently earning our country a place amongst the top European countries in terms of turnover and value added. Over the years, mature economies have lost their leadership position in terms of global share of manufacturing, but now it is possible to see the emergence of a new map of global manufacturing hubs after two years of changes brought about by the pandemic and the fallout from the Ukraine crisis.

Fig. 4

Italian manufacturing sectors, 2019 (Source Data from Eurostat)

The growth of manufacturing is no longer driven by foreign demand alone, it is also driven by the increase in domestic consumption stimulated by the potential of digitization and by the need to develop manufacturing and distribution models where geographical distance might still play a significant role.

High demand for new products has led to the evolution and redefinition of manufacturing models, with shorter planning horizons and life cycles, reduced lot sizes, hence entailing optimized use of resources in terms of streamlining, flexibility, agility and reconfigurability of the production process. The intensive use of the planet's resources, new production sites in emerging countries, and shortening of product life cycles have made environmental issues increasingly pressing, and the need to implement the circular economy is bringing forth important business opportunities at the global level.

Lastly, new standards impact heavily on production processes, while the lack of homogeneity between different countries results in unbalanced advantages, further compounded by the difficulty in protecting intellectual property rights in the global context.

The shocks to the system caused by COVID-19 and the nearby war in Ukraine, and the push towards product and process sustainability, call for the country to adopt a new approach to resilience in order to mount an adequate response to the critical and unexpected events occurring all along the supply chain, which has proven remarkably fragile.

2 Global Positioning

2.1 Ranking of Global Manufacturers

The advent of the pandemic crisis resulted in a drop in manufacturing worldwide in the first six months of 2020, which was followed by a recovery over the rest of the year. Essentially, the positions of the various countries being compared in terms of their % share of global manufacturing value added (calculated at current prices) reveal a fundamentally stable situation, with the Chinese sector accounting for 30% of global value added, and Italy still falling within the top 7 countries for manufacturing with 2.2% (Table 2).

Table 2 Global ranking per manufacturing sector dimension (Value added in current$) (Source Data from CSC)

However, there has been the odd exception, for example China's market share was up almost two percentage points, going from 28.6% of total value added in 2019 to 30.1% in 2020, further widening the gap with the United States (16.6%). South Korea and Taiwan—whose manufacturing systems have developed a strong specialization in electronics-related manufacturing—managed to climb up the rankings last year (by one and two places respectively). Italy claims its place as the world's seventh-ranked manufacturer, with a 2.2% share—consistent with its 2019 performance—followed by France (1.9%) and Great Britain (1.7%).

Analysing countries from the standpoint of the evolution of global manufacturing export and import shares in 2019, the world's top 20 exporting countries have continued to account for 80% of global exports for 20 years, and almost half of them (47%) are from Asia. Italy sits in ninth place with a 3.4% share of world trade and with a consistently positive trade balance (Table 3).

Table 3 Manufacturing value added of top 10 countries (current $) (Source Data from UNDATA)

Notably, in terms of exports by the Italian manufacturing sector (Fig. 5), the machinery makes up the biggest exported product category out of the various manufacturing subcategories, totalling 82 billion euros for 2019, and still managed to retain the same 14.5% share of Italy's total exported value in 2021 despite the serious falling-off in the wake of the pandemic. When it comes to sectors driving development, a comparison of contributions by the various industry segments to the change in manufacturing value added of the different countries reveals the clear dominance of two sectors that have acted as an engine driving global industrial development.

Fig. 5

Manufacturing exports by product type, 2019 (€) (Source data from Eurostat)

Both constitute an important component of the current paradigm shift to the new digital economy: on the one hand, the manufacture of machinery and equipment, which incorporate enabling technologies for industry 4.0; and on the other, the manufacture of electronic components and hi-tech goods, thanks to the widespread application of technologies such as advanced sensor equipment, Internet of Things (loT), AI and big data. The contributions of each sector to the percentage growth of the manufacturing value added of China, the United States, Japan, Germany and South Korea highlight that both sectors appear in the top four on the list of sectors driving industrial development.

As pointed out at length in the Confindustria study on Italian industry (CSC, 2019), the strong push towards digitization of industrial processes has had significant impact on national manufacturing of capital goods (the sector making the biggest contribution to growth over the last two years) and on related industrial machinery installation and repair activities. However, at the same time, it does not appear to have stimulated the electronics segment, which continues to account for only a marginal portion of Italy's total manufacturing value added, with a virtually unchanged share over the past 20 years or so of roughly 3.5% (in nominal terms), with a high trade deficit.

3 Focus on Machine Tools and Capital Goods

Following robust growth in recent years—during which the machine tool sector strengthened its position in the global market—in 2019, Italian manufacturing of machine tools, robots and automation came in at 6,510 million euros, down 3.9% on 2018.

Consumption has dropped, by 6%, to 4,855 million as a result of the fall-off in deliveries in the domestic market (−6.5%, 2,911 million). In terms of global manufacturing, the manufacture of machine tools fell to below 59 billion euros in 2020, with Asia claiming the top spot accounting for 55% of global manufacturing, followed by Europe on 35%. In the manufacturer ranking, China is followed by Germany and Japan, with Italy in fourth place (Fig. 6).

Fig. 6

Manufacturing and export shares in 2020 (mln euro) (Source Data from UCIMU)

Exports have also plummeted, falling victim to restrictions on the movement of goods and people, with Germany claiming the title of top exporting country, and Italy again sitting in fourth place with 2,625 million euros. According to the UCIMU report compiled from Italian statistics (Istat), in the June–July 2020 period, Italy's main export destinations were: the United States (152 million euros −18.2%), Germany (113 million euros −39%), China (105 million euros −36.4%), France (73 million euros −39%), Spain (48.6 million euros, −28.4%).

In terms of capital machinery and equipment in general, represented by 12 sectors making up Federmacchine—Italy's national federation of associations of manufacturers of capital goods—the total turnover of the 5 thousand companies just topped 41 billion euros in 2020, corresponding to 2.5% of GDP (Fig. 7). The most significant contribution to the Italian economy by the sector comes from foreign sales: with 27.8 billion euros, machinery sales abroad account for 5.7% of all Italian exports, a figure that climbs to 6.4% including goods export. Employment in the capital goods sector, in 2020, accounted for 4.3% of employment in the Italian manufacturing industry.

Fig. 7

Capital goods in Italy, 2020 (Source Data from UCIMU)

A distinctive trait of the Italian capital goods industry is a strong focus on exports that, in 2020, accounted for 67.1% of turnover, with a consistently positive trade balance with European Union counting for 29% of the total. Other primary outlets for Italian machinery are Asia (10.3%), North America (10.3%) and Eastern Europe (9%). South America, Africa and the Middle East account for smaller shares.

The Italian capital goods sector consistently rates highly in world rankings, placing amongst the country's top industrial sectors for turnover, exports and value added. This attests to Italy's specialization and strength in the capital goods sector, in a European context marked by German dominance and the marginalization of other countries (Table 4).

Table 4 Machinery and equipment sector in Europe, 2019 (Source Data from CSC and Eurostat)

4 System Competitiveness

Research and development (R&D) is a strategic variable in economic competitiveness of a country as it allows high levels of knowledge content to be incorporated into the production of goods and services, with positive effects on overall economic results.

There are many indicators that can be used to assess a country's capacity for innovation. Information on intra-muros R&D is the main component of statistical indicators on R&D used in the European arena to assess policies in support of research and improvement of a country's capacity for innovation and competitiveness.

Even the UN's Sustainable Development indicators include a number of R&D-related indicators. On the global stage, only the United States, Japan and Korea outperform Europe in terms of improvement in their innovation indicators between 2014 and 2021.

The 2021 European Innovation Scoreboard has updated the indicators, which now include a number relating to digitization and environmental sustainability to bring it into line with the EU's political priorities. Italy has a performance score that is higher than the European average for innovation-related indicators, as well as certain environmental sustainability indicators. Italy is one of the five countries that have seen a 25%-plus improvement in performance since 2014, while still falling into the “moderate innovators” category, albeit closing the gap with the European average.

The ISTAT census data offer an up-to-date picture of the level of evolution in innovative strategies pursued by Italian manufacturing companies, which allows us to assess whether, and to what degree, the intangible asset investment lever (in its various components) is actually being used within the national manufacturing system and, above all, how it is paired with tangible investments in a logic of complementarity. More specifically, in terms of research and innovation activities carried out over the 2016–2018 three-year period by Italian manufacturing companies with at least 10 employees, the following levers were considered: (i) R&D carried out in-house or outsourced; (ii) procurement of licences, software and databases; (iii) personnel training; (iv) procurement of machinery, equipment and hardware.

The first three items capture the importance of investments in intangible assets, the fourth in tangible assets. The information collected by companies concerns whether or not each of these activities is present in innovation projects, without considering the amount of financial resources channelled into each (Table 5).

Table 5 Manufacturing companies per investment levers, 2021 (Source Data from ISTAT and CSC)

The first finding to emerge from the analysis of the data is that two thirds of the 69 thousand companies included in the census state they invested in at least one of the four aforementioned activities, with 36% of innovators in Italian manufacturing actually pulling just one of the four innovative investment levers in question, and an additional 33% pulling just two of them. Hence, the most complex forms of innovative strategy are a prerogative of just a minority of companies (9%).

As Table 6 reveals, investments in tangible goods account for 71% of the innovation levers most widely used by Italian manufacturing companies, although the incidence of innovating companies engaged in R&D activities (59%) and in the purchase of digital goods (46%) is also high. On the other hand, on average, just 29% of companies have personnel training in place for innovative projects. Increasing levels of complexity in innovative strategies are associated with a greater ability to bring about the dual digital and green transition.

Table 6 Complexity of innovation strategies, 2021 (Source Data from ISTAT and CSC)

On this note, out of all the innovating companies, about one third has invested in industry 4.0 digital technologies (loT, advanced robotics, big data analysis, additive manufacturing, virtual and augmented reality), and within this percentage there is a considerable jump from the 20% of innovators who have pulled just one investment lever to the 58.3% of those that have pulled all four of the levers analysed.

Moreover, 82% of the innovating companies were engaged in reducing the impact of their activities on the environment, with peaks of almost 90% within the group of innovators pursuing the most complex strategies.

Companies that manage to simultaneously implement a number of actions in innovative strategies register an improved turnover growth performance, too, and the percentage of those that have experienced an uptrend in revenue for the 2020 June–September quarter was higher than that of non-innovating companies; while it was once again the highest within the group of innovating companies who have invested with more complex strategies (namely, pulling all four of the levers in question at the same time).

Hence, the analysis would suggest that the greatest return on innovative investments is achieved by pairing tangible assets—on which Italian manufacturing companies have focused most efforts to date—with intangible ones. There are several reasons why these strategies are not yet particularly widely practiced by companies, and concern both the different reference landscape in which they operate (quality of the ecosystem for innovation, financial constraints on investments, market structure) and their different ability to profitably handle the complexity associated with innovation, which in turn depends on the quality of technical and business knowledge amassed within the organization.

Generally speaking, the Italian R&D system is characterized by a series of limits that affect the management of relevant policies like fragmentation of actions, with numerous initiatives at both the national and regional level; delays in implementing measures and high variability in terms of availability and size of budget.

One of the goals to be achieved with the upcoming programming is to reduce regional disparities and speed up growth in Southern Italy, which is still suffering from marked inequality in terms of development, for example, of technological activities, income and infrastructures.

5 The Role of Manufacturing in Implementing Sustainable Development Goals

In 2015, the United Nations adopted the development agenda titled: “Transforming our world: the 2030 Agenda for Sustainable Development” (UN, 2015). The 17 Sustainable Development Goals (SDGs) making up the agenda refer to different areas of social, economic and environmental development, and industrial processes also play a part in promoting this development in a sustainable way.

The list of SDGs features numerous references to the wellbeing of people and equitable sharing of benefits arising from development, clear references to the use of resources and to the environmental impact of activities. For each SDG, specific goals have been defined that are to be reached over the course of the years and are monitored by means of almost 250 system indicators.

More specifically, when it comes to goal 9 “Industry, innovation and infrastructure”, an analysis of the indicators in this area reveals that, in 2020, the pandemic containment measures resulted in a reduction in the manufacturing industry's per-capita value added, while industry's contribution to the economy as a whole in terms of value added and employment remained unchanged.

As Fig. 8 below shows, the contribution of companies to indicators related to R&D spending is better than 10 years ago on all fronts, while it is up from the year before in terms of research intensity, number of companies with innovative product and process activities, and investments in research and development out of total investments.

Fig. 8

(Source Data from ISTAT)

Reference indicators for SDG9, value for Italy

When it comes to goal 12 “Sustainable consumption and production”, progress in curbing material consumption—which has characterized Italy since 2010, allowing our economy to gain in efficiency in production processes—has levelled out over the last five-year period, but Italy is one of the EU countries with the lowest domestic material consumption (DMC) both per capita and per unit of GDP, claiming first place in the per-capita rankings and fourth place per GDP. In 2019, the DMC per unit of GDP was stable compared to the 2017–2018 two-year period (0.28 tonnes per 1,000 euros). On the other hand, the circular material use rate—namely the portion of all material recycled and fed back into the economy—has seen an improvement between 2010 and 2019, in Italy, whose rate thus comes to 19.3% compared to the EU 27 average of 11.9%; the data also show a greater improvement in Italian performance than the EU 27 average, both over the last decade and over the last year, putting our country in fourth place in the European rankings, after the Netherlands (28.5%), Belgium (24.0%) and France (20.1%) (Fig. 9).

Fig. 9

Rate of circular material usage, 2019 (% value) (source: data from ISTAT and EUROSTAT

When it comes to goal 13 “Action to combat climate change”, a steady reduction in emissions was recorded in the period between 2009 and 2019, both within institutional sectors (families and companies) and within the various activities, albeit with differing intensity. For companies in general, in 2019, the level of the emissions rating was 81.8 (2009 = 100), while for the manufacturing industry, the rating fell to even lower levels than 2009 (75.4). Therefore, manufacturing is a key factor in achieving these sustainable development goals and it is necessary to consider how they can be broken down into actionable research and innovation priorities when defining medium to long term research and innovation strategies in the sector.

6 Manufacturing and the Pandemic Crisis

6.1 Global Situation

Over the last few years, the international landscape has been dominated by the financial crisis triggered by the effects of the COVID-19 pandemic, while the war currently playing out in Ukraine could further disrupt reference scenarios, already beset by significant dynamics of change.

In terms of the pandemic crisis, the measures required to contain the spread of the virus—the adoption of which, from the very start, followed different timelines from one country to the next—have had a profound effect on the social and economic fabric, resulting in a real shock that has simultaneously affected both supply (businesses forced to close and temporary interruption of value chains) and demand (plummeting consumption, increased unemployment, reduced income).

To counter the effects of the lockdown on the economy, all the main central banks promptly and repeatedly intervened with emergency measures to bolster demand, pumping cash into the economy. At the same time, many governments have introduced expansive fiscal measures aimed at shoring up the incomes of their citizens and manufacturers hit hard by the lockdown measures. Despite these best efforts, last year, with the exception of China, all major economies recorded a marked drop in GDP (CSC, 2021).

Structural delays (application of stricter health protocols for unloading cargo, personnel shortages in the transport and logistics sectors), along with “anomalous” growth in the demand for goods—resulting from manufacturing companies and businesses needing to replenish stocks, which had been depleted during 2020—were compounded by chance factors (temporary closure of a number of ports in China or blockage of the Suez Canal).

All the above led to a considerable increase in transport costs and additional bottlenecks in international supply chains, which have had a negative effect on global industrial production growth. Manufacturing's recovery after the most acute phase of the pandemic is following very different trajectories according to sector.

The explosion of the health emergency sent demand skyrocketing for the pharmaceutical industry, at the front line of Covid-19 medicine and vaccine development, and the electronic device industry (due to the accelerated digitalization dictated by isolation, at first, and then by social distancing measures), recording a boom in production volumes worldwide between the fourth quarter of 2019 and the months of June-July 2021 of 15.4% for pharmaceuticals and 12.2% for electronics respectively.

The recovery of capital machinery and equipment has been driven by growing sectors calling for new or reconfigured machinery to help them manufacture products required by the pandemic event (such as face masks, drugs, dedicated packaging).

6.2 The Reaction of the Italian System

In Italy, following the drastic drop in production of over 40% recorded two months out from the introduction of the March 2020 restrictive measures, business volumes began to increase as early as the second quarter of 2021, with production sitting comfortably at its late 2019 levels, experiencing a return to pre-crisis levels that has yet to be seen in the other major European industrial economies.

With the figures characterizing the current phase, Italy no longer plays the role of “follower” behind the other major eurozone economies in terms of manufacturing growth, and—unlike the situation that unfolded in the years following the previous global financial crisis (the 2008–2009 period)—the country's behaviour changes in terms of its ability to respond to shock: this time around, finding itself in the position of driving the area's recovery in production volumes.

The reason for this performance lies, above all, in the dynamic of the domestic component of the demand for goods that—thanks to the government's initial income support measures, followed by spending stimulus measures—has made a crucial contribution to manufacturing's recovery, marking a far cry from the events following the outbreak of the 2008 financial crisis, when national industry's growth was structurally curbed when part of domestic demand was wiped off the board.

While export turnover—due to ongoing challenges in the international context—in August this year was up barely 2.8% in value on the pre-crisis peak of February 2020, domestic turnover recorded a 7.0% increase over the same period.

Since late 2020, the global landscape has been characterized by significant increases in commodity prices: price hikes are widespread and concern not just metals (copper up 51% on the end of 2020, and iron up 73%), but food, cotton, timber and oil, too (World Bank data). These price rises greatly affect both Italian companies and consumers, because Italy is a manufacturing country that is heavy on processing and has high volumes of imported commodities.

Between January and March 2021, the increase in turnover was seen across many of the manufacturing sectors, with rates varying to great degrees: while performance was good in the furniture, metallurgy and electrical equipment segments—up almost 30%—and automotive and machinery sectors—up 25% on the first quarter of 2020—there was a noticeably more subdued recovery, or plateau, for sales in some traditional manufacturing segments (textile, clothing) that, in the first quarter of 2020, had experienced some of the most severe drops in turnover of the entire sector (Istat, 2021).

A key factor in the recovery has been the low level of exposure of Italian manufacturing companies to the bottlenecks that are plaguing global value chains at this juncture. According to an analysis by Confindustria, with reference to the beginning of the third and fourth quarter of 2021, “just” 15.4% complained about restrictions on manufacturing supply due to a lack of materials or shortage of equipment, compared with an EU average of 44.3%, and with an even more weighty 78.1% of respondents in Germany. Italy's overseas trade in goods, following the freefall recorded in the second quarter of 2020, has picked up quickly and strongly, climbing convincingly back above pre-crisis levels. In the months of June–August 2021, exports at constant prices topped late 2019 levels by 2.6% (exports up 7.3% in value). Exports of intermediate inputs and investment goods, above all, enjoyed positive performance, while consumer goods, as yet, have seen only a partial recovery. Within the asset category, growth has been driven chiefly by electrical equipment, while capital machinery and equipment have not yet recovered fully.

For what concerns employment, the increase in industrial production starting in summer 2020 was reflected in a significant recovery in the number of job hours, even though, at the end of Q2 2021, it was still below pre-pandemic levels (−4.2%). Manufacturing companies’ expectations on the labour demand appear to be improving constantly and significantly, which comes with an increase in the number of companies who are reporting increasing difficulties in procuring the labour required for the production cycle, in a context with a progressive increase in the plant utilization rate.

The business climate is continuously evolving and, following the pandemic emergency, it has become clear just how hard it still is to predict the fallout from the Russia–Ukraine conflict: in addition to generating a crisis in a number of supply chains (prime examples include rolled metal, metal castings and grain), the conflict has also generated a series of unprecedented economic measures against Russia and a parallel increase in the cost of procuring gas, the impact of which on society and on the manufacturing sector is still hard to predict.

6.3 Proposal of a New Collaborative Model: Manufacturing a Resilient Country

Italy clearly emerges as a country characterized by a strong manufacturing sector that, despite the market's economic criticalities in terms of both supply and demand, has managed—even over the course of the last two years—to evolve and reinvent itself, seizing market opportunities to tackle criticalities and the most challenging of economic times.

Having different production sites offers countless economic and social advantages for a country working in a networked system, and the “intelligent factory” (meaning a factory that adopts emerging enabling technologies designed to assist human capital in an efficient way) is becoming a well-established reality thanks also to the efforts of different actors across the country, including the Cluster itself, promoting actions to improve awareness of the role played by manufacturing at the national and European level.

More specifically, during the early stage of the pandemic, the Cluster created a task force to define strategic actions to support manufacturing, their work culminating in the compilation and proposal of the document entitled “Manufacturing a Resilient Country”.

The document suggests three types of action intended to cast manufacturing in a leading role for the recovery of the country during emergency periods.

These actions are classified into:

• (i). Immediate actions aimed at helping companies transform in the direction of resilience and competitiveness, taking into account the state of emergency, using solutions available in the market;

• (ii). Specific medium-term actions based on research and innovation activities that can produce new solutions to handle emergencies appropriately and enable systems to improve performance in changed competitive landscapes;

• (iii). Long-term systemic actions where the direct intervention of public bodies is supported by partnerships with companies and with Universities and Research bodies.

More specifically, drawing on the strong manufacturing base already present in the country and pooling the best existing skills, the Cluster's proposal is for a model to exploit a certain amount of the existing manufacturing capacity and put it in a position to be able to rapidly act on goals determined in times of emergency, without prior warning.

The term manufacturing capacity is used here to mean all activities required to make and deliver the product to its point of use within the right timeframe and in the right conditions. Hence, an implementation model is proposed that must be based on the creation of new collaboration opportunities that can be used for the activity in question, but which can also be harnessed for other initiatives.

The plan is to create a public–private collaboration model that, if activated in times of crisis, would enable companies to swiftly produce the necessary volumes of all products required to handle the situation, and to help geographical areas that do not have such an emergency response system in place by supplying necessary products in situations of global significance, increasing their resilience.

When this system is activated under normal circumstances, it allows the country to progress thanks to the new products stemming from the creative interaction between various stakeholders, the creation of products and machinery for pioneering sectors, the creation of new products in the health industry and civil defence sector and, more generally speaking, products and solutions for societal challenges in the event market rules are insufficient to automatically create trigger conditions.

7 Evolution of Italian Manufacturing and the Roadmap Objectives

There are various explanations for Italy's apparent paradox of a high capacity for innovation coupled with low R&D spending. Firstly, the small average scale of manufacturing companies in the country, which results in most innovation activities not being formalized. Then there is the fact that the Italian industrial system has a strong presence in sectors in which innovation mostly takes the shape of incremental development of production processes and products (learning by doing, learning by using and learning by interacting), incorporating new technologies into machinery or into patents and licences, while less prevalent is innovation based on the introduction of radically new tech, necessarily entailing underlying scientific research activities (ranging from fundamental to applied research).

Supply chains are currently undergoing a shake-up that—paired with the technological discontinuities stemming from the dual digital and green transition—represents a structural change factor in the competitive landscape, which leads to a profound transformation in value-creation mechanisms.

Emergent collaborative models are requiring companies to demonstrate a new capacity for innovation since it is proving increasingly necessary to:

• (i). engage with customers to provide solutions to complex production problems rather than simply applying a make-to-order approach;

• (ii). increase the level of coordination with other actors in the supply chain to boost resilience to shocks and maximize knowledge spillover;

• (iii). keep up with the constant evolution of market needs.

Investment along these lines is not limited to aspects directly related to production process efficiency, and instead increasingly encompasses the various company functions both upstream and downstream, from design to configuration all the way through to distribution and after-sales, embracing a logic of growing the intangible component of the product's value.

This gearing towards new strategies today calls for increasingly structured and “coded” forms of innovation, with formal product research, development and design activities being promoted alongside the existing unofficial exchange of information. At the same time, companies should be systematically making use of the data available to them with the aid of digital tech for activities such as process and product monitoring—which also ties in with sustainability—analysing market changes, and engaging employees in the formalization and use of knowledge, and in the development of knowledge and skills through training.

This is also required to cater to the growing demand from end consumers, financial markets and legislators for information on the sustainability of production processes and supply chains. Italy has a unique heritage in terms of tradition, culture, skills, image, design and technologies, which represent the optimal environment for a manufacturing sector that produces high-added-value products and services. More specifically, the distinctive resources on which Italy is privileged to draw are:

• The ability to customize products and services, making them unique for their customers.

• An impressive degree of manufacturing flexibility achieved through an extremely creative approach and a widespread entrepreneurial spirit.

• The hi-tech nature of production systems made in Italy, which helps national manufacturers purchase advanced equipment.

• The ability to combine design and cutting-edge technology.

• The tradition of the Made in Italy brand, which generates international credibility and a prominent image.

• The high standard of human resources and professional skills in a number of sectors and industrial niches, found in industrial communities with strong ties to their local area.

• The ability of small and medium enterprises to join together in clusters and networks to achieve a critical mass with the aim of competing on the international stage.

• A first-rate training system capable of supporting production processes and innovation.

The engine behind this transformation should be a research and innovation process based on collaborative approach along supply chain, accompanied by a training plan designed to refocus the set of skills within the national industrial context. A multi-year research plan must leverage the qualities of Italy's available production resources and must be aligned with research challenges and international trends in the manufacturing field.