Italian Election Uncertainty Threatens Automotive Industry

The results of the recent general elections held in Italy pose an even more shaky future for the nation than what could have been imagined on the eve of the vote. Particularly for the Automotive Industry. The Democratic Party registered a narrow victory at the Chamber of Deputies which afforded them a majority; while the Senate of the Republic using a different electoral system did not have a party achieve an absolute majority. This implies a likely state of gridlock.

[protected]Only a coalition among factions could prevent new elections. Collaboration seems difficult considering that Pierluigi Bersani’s Democratic Party could find a stable solution and organize a government either with Silvio Berlusconi’s People of Freedom or with the Five Stars Movement, founded by the comedian Beppe Grillo that registered a success above the expectations (respectively over 25% and 23% of votes at the lower and upper house).

The current situation, dominated by a high level of uncertainty, negatively impacts financial markets and industrial activities. After Mario Monti’s interim government, which implemented austerity measures and managed a return to tenuous international credibility, Italians risk to frustrate all the economic sacrifices of the last year and see the nation’s perception in the EU plummet. Financial markets have already panicked and Milan Stock Exchange lost around 5% in the first day after the vote, dragging the other main European markets down.

The austerity policies should have been the employed as an opportunity to drive new development strategies for national economy. It continues to struggle because of lack of investments and a growing trend to offshore production to lower-cost destinations. The repercussions of the weak economy are evident in the automotive industry.

Fiat and subsidiary companies were a driving force in the Italian economic miracle between the end of World War II and the 1970s, but the situation has since completely changed. The acquisition of a majority share of Chrysler Group in 2011 led to a boosting of Fiat’s off-shoring production program. Italian plants started falling behind in productivity compared to other OECD countries. The reasons for this trend are a matter of heated debate. Executives often accuse trade unions of slowing down production with unpalatable requests; on the other hand, trade unions argue that the company does not invest in long-term programs for enhancing national production.

Fiat has often been caught in the middle of social or economic political debates that affect its activities. Such intertwining with the elected government mean that its future now depends on the resulting winning party’s policies. Over 60,000 employees now wait for the decision and its consequences, positive and negative.

2012 was a terrible year for the national automotive market: a loss of 19,9%1 was reported in terms of new car registration compared to the previous year. In order to find a level of sales as low as the last year, we should go back to 1979, when 1´397´0392 new cars were registered. The same negative trend was reported across Europe, but not as strong as in Italy. The exception was Volkswagen, which was able to get double-digit sales growth in the main European markets.

Some key factors that were detrimental to car sales can be easily identified. Firstly, according to Europe’s Energy Portal, Italy has the highest fuel prices among EU countries due to cumulative excise taxes imposed by different governments. Average prices are 1.85€ and 1.76€ per liter of unleaded gasoline and diesel respectively. Furthermore, Italian highways recently increased their toll and the government under Monti considerably raised the tax on vehicle possession. These three aspects have pulled down the level of disposable income of potential new car customers and the already decreasing demand has fallen into a downward spin. The previsions for the current year compiled by Anfia, the Italian Association of the Automotive Industry, project an ominous outlook. They maintain that Italy’s Auto Market is in the direst shape from those in Europe.

All the candidate parties have affirmed that they have no intention to provide direct financial aid to Fiat, although this several precedents. They have, however, agreed to work towards creating the right conditions to promote innovation and competitiveness across the sector and safeguard national production.

The topic is extremely delicate because the Italian automotive industry and its satellite activities involve 1.2 million people and represent around 12% of the national GDP. The risk of a failed automotive industry is a serious domino effect for all other national industries. Italian automakers will need to significantly invest in new technology, such as hybrid or electric vehicles. The government will need to pull together to strategize economic credibility and growth that fully backs the nation’s most vital industries. Otherwise, the industry will face the likelihood of default in a saturated market with economic margins close to zero.

1,2 Source: Anfia, Italian Association of the Automotive Industry.