MILAN (Reuters) – Small Italian car filter supplier Ecofiltri took out a state-guaranteed loan last year, as did thousands of other companies struggling to stay afloat during the pandemic.
But, instead of spending money to pay rent and overdue bills, Ecofiltri is investing the money in a technological overhaul of its business. Already facing a long-term shift to electric transport, the company was encouraged to act after the virus crisis reduced the number of drivers on the roads.
“We expanded our facilities, bought high-tech equipment and even created an R&D department where we’re working on three projects that we hope to be able to patent to provide smarter products and services,” Ecofiltri co-founder Simone Scafetta told Reuters during a Video call.
Italy ranked fourth and last in the EU in digital competitiveness in 2019, according to the Digital Economy and Society Index (DESI). By forcing a huge technological acceleration in the country, the pandemic is offering Italy a unique chance to boost its weak productivity and economic growth.
For a chart in the DESI 2020 index:
Faster economic expansion is essential for Rome to sustain the world’s third largest public debt, which the pandemic inflated to 1.6 times the gross domestic product (GDP).
Research from the Polytechnic University of Milan shows that Italy could add 1.9 percentage points per year on average to GDP growth if its small and medium-sized enterprises (SMEs) overcome a 40% gap in relation to their Spanish peers measured by indicators that vary from e-commerce or e-invoicing resources to use big data.
“But the trick only works if companies move from a reactive (crisis-driven) approach to technology to a strategy, and the environment in which they operate evolves with them,” said Giorgia Sali, who runs the Polytechnic’s research center on SMEs and digital innovation.
For a chart about DESI index connectivity:
Italy estimates that its business in recent years has lagged behind the rest of Europe in terms of digital investment by an amount roughly equal to 2 percentage points of GDP.
The pandemic has brought a welcome change, with 86% of Italian respondents in a survey of medium to large companies commissioned by Dell Technologies saying they accelerated digital transformation plans in 2020, above the European average of 75%.
“The pandemic has forced Italian companies to address the country’s huge digital divide,” said Francesca Moriani, CEO of IT service provider VAR Group, adding that Europe as a whole lags behind the United States and China.
The eurozone’s digital economy is only two-thirds the size of that of the United States.
Fortunately, 92% of SMEs interviewed by Grupo VAR expect to invest in digital capacity in the next two years, despite the blow to the pandemic’s sales.
RECOVERING FUNDS
Italy’s digital deficit has several roots.
In a country where broadband access is below the EU average, large companies that can maintain technology investment programs represent only a small proportion of companies.
Many companies are family owned and managed, which means they tend not to have managers with the right skills to lead a digital transformation.
A study by the European Central Bank also highlighted funding constraints when companies rely primarily on bank financing, as in Italy, saying that traditional creditors often find it difficult to assess the risk involved in projects based on complex technologies.
Add to that the aging population and a very low proportion of ICT graduates – around 5,000 a year, compared to around 18,000 in small Spain, according to Eurostat data here – and Italy has lagged behind in the digital race .
To support its companies’ adoption of cutting-edge technologies and ultra-high-speed connectivity, Rome has set aside 46 billion euros in EU recovery funds yet to be disbursed for digital investments.
It also offers tax incentives for companies looking to boost digital spending and has named former Vodafone CEO Vittorio Colao as its technology czar to oversee efforts for years to come.
As in Greece, the modernization effort is also aimed at public services, which Ecofiltri’s Scafetta said set a bad example.
“We provide our staff with palmtops and screens to share information non-stop and interact with customers … people do not add value by walking alongside to carry paper documents, as you see state officials do,” he said.
Located in the central region of Abruzzo, Ecofiltri was successful in developing a process that gives diesel particulate filters a second life.
To finance its projects, which include sensors to more easily detect problems with its filters and a digital warehouse management system to provide information to its website and connect with electronic vendors such as Amazon, Ecofiltri last September borrowed 100,000 euros from Credimi, a fintech lending company.
Credimi says that digital innovation is an important driver of the credit demand facing SMEs.
“With a few exceptions, the pandemic has caught Italian small and medium-sized businesses unprepared, making them struggle to keep up with digital progress,” said Fabio Troiani, CEO of Italy and global digital services at BIP Consulting, based in Milan.
“For some, it has become a matter of life and death.”
FALLING BACK MORE
Many smaller Italian companies are facing the challenge.
The share of SMEs using e-commerce in 2020 increased by 50% to a third of the total, as e-buyers for the first time increased by 2 million during a national block last spring, according to data from the Polytechnic and the lobby of the Netcomm e-commerce.
For a chart about SMEs selling online:
Polytechnic data also points to a 42% jump in cloud services for SMEs, as remote workers have increased 11.5 times to 6.6 million.
So far, the Italian government’s programs aimed at fostering digital investments have mostly been taken over by larger companies.
The challenge is to bring companies like Ecofiltri, which is one of the more than 4 million Italian companies with less than 10 employees, or 95% of the total.
Small businesses find it difficult to attract people with the necessary skills in a country where ICT graduates represent only 1% of the total, the lowest in the EU, contributing to Italy having the last score on the DESI human capital index.
“It was not easy, but we brought in an engineer and the next person we hired must also be an engineer or they would not fit into our development plans,” said Scafetta.
Diego Ciulli, senior public policy manager at Google, warned that failing to fill Italy’s digital gap when consumers around the world turned to online channels would be more than a missed opportunity.
“The real risk is falling behind,” he said.
“If Italian wine producers expect commercial exhibitions to resume to find new foreign customers, while the French become really good at selling their wines online, you don’t just lose the chance to grow, you lose market share.”
Additional reporting by Giuseppe Fonte in Rome; Stefano Bernabei graphics; Editing by Toby Chopra