Small Italian auto filter supplier Ecofiltri took out a state-backed loan last year, just like thousands of other businesses fighting to keep afloat during the COVID-19 pandemic, but instead of burning through the cash to pay overdue rent and bills, Ecofiltri is investing the money on a technological revamp of its business.
Already facing a longer-term switch to electric transport, the company was spurred to act after the pandemic cut the number of drivers on the road.
“We’ve expanded our facilities, bought high-tech equipment and even created an R&D [research and development] department, where we are working on three projects we hope we can patent to provide more intelligent products and services,” Ecofiltri cofounder Simone Scafetta said in a videoconference call.
Illustration: Mountain People
Italy ranked fourth to last in the EU for digital competitiveness in 2019, Digital Economy and Society Index (DESI) data showed. By forcing a huge technological acceleration on the nation, the pandemic is offering Italy a one-off chance to boost its feeble productivity and economic growth.
Faster economic expansion is essential for Rome to sustain the world’s third-largest public debt, which the pandemic has inflated to 1.6 times GDP.
Research by Milan’s Politecnico University shows that Italy could add 1.9 percentage points a year on average to its GDP growth if its small and medium-sized enterprises (SMEs) bridged a 40 percent gap to their Spanish peers, measured by indicators ranging from e-commerce capabilities or electronic invoicing to use of big data.
“But the trick only works if businesses switch from a [crisis-driven] reactive approach to technology to a strategic one, and the environment where they operate evolves with them,” said Giorgia Sali, who heads the university’s research hub on SMEs and digital innovation.
Italy estimates its businesses have fallen 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 shift, with 86 percent of Italian respondents in a survey of middle to large-sized firms commissioned by Dell Technologies saying that they sped up digital transformation plans last year, above a 75 percent European average.
“The pandemic has forced Italian companies to confront the country’s huge digital gap,” said Francesca Moriani, chief executive of information technology services provider VAR Group, adding that Europe as a whole lags the US and China.
The eurozone’s digital economy is only two-thirds the size of that in the US.
Encouragingly, 92 percent of SMEs polled by VAR Group expect to invest in digital capacity in the next two years, despite the blow to sales from the pandemic.
Italy’s digital deficit has a number of roots.
In a nation where broadband access is below the EU average, large companies that can sustain programs of technological investment make up only a tiny proportion of businesses. Many firms are family-owned and run, meaning they tend to lack managers with the right skills to lead a digital transformation.
A European Central Bank study also highlighted funding constraints when businesses rely mostly on bank financing, like in Italy, saying traditional lenders often struggle to evaluate the risk involved in projects based on complex technologies.
Add to that an aging population and a very low share of information and communications technology graduates — about 5,000 a year compared with about 18,000 in Spain, Eurostat data shows — and Italy has fallen behind in the digital race.
To support the adoption of new technologies by its companies and ultra-high-speed connectivity, Rome has earmarked 46 billion euros (US$55 billion) in yet-to-be disbursed EU recovery funds for digital investments.
It also offers tax breaks to firms seeking to boost digital spending and has appointed former Vodafone chief executive Vittorio Colao as its technology czar to oversee its efforts.
Like in Greece, the modernization push also targets public services, which Scafetta said set a bad example.
“We’ve given our staff palmtops and screens, to share information nonstop and interact with customers ... people don’t add value by walking next door to carry paper documents, like you see state employees do,” Scafetta said.
Based in the central Abruzzo region, Ecofiltri has found success by developing a process which gives a second life to diesel particulate filters.
To fund its projects, which include sensors to more easily detect issues with its filters, and a digital warehouse management system to feed information to its Web site and liaise with e-sellers such as Amazon, Ecofiltri in September last year borrowed 100,000 euros from Credimi, a fintech lending firm.
Credimi says digital innovation is an important driver of credit demand it faces from SMEs.
“With a few exceptions, the pandemic has caught small and mid-sized Italian businesses unprepared, sending them scrambling to catch up with digital progress,” said Fabio Troiani, chief executive of Italy and Global digital services at Milan-based BIP Consulting. “For some it’s become a matter of life and death.”
Many smaller Italian businesses are rising to the challenge.
The share of SMEs using e-commerce last year rose 50 percent to one-third of the total, as first-time e-shoppers surged by 2 million during a nationwide lockdown in the spring, data from Politecnico University and e-commerce lobby Netcomm showed.
University data also showed a 42 percent jump in cloud services being used by SMEs, as remote workers increased 11.5 times to 6.6 million.
So far, Italian government programs aimed at fostering digital investment have been mostly taken up by larger companies. The challenge is to bring onboard companies such as Ecofiltri, which is one of more than 4 million Italian businesses with fewer than 10 staff, or 95 percent of the total.
Small firms find it hard to attract people with the necessary skills in a nation where information and communications technology graduates make up only 1 percent of the total, the lowest in the EU, contributing to Italy scoring last in the DESI human capital index.
“It wasn’t easy, but we’ve brought in an engineer and the next person we hire must also be an engineer or they wouldn’t fit our development plans,” Scafetta said.
Google senior public policy manager Diego Ciulli said that a failure to fill Italy’s digital gap when consumers globally have turned to online channels would be more than a missed opportunity.
“The real risk is falling further behind,” Ciulli said. “If Italian wine producers wait for trade exhibitions to resume to find new foreign customers, while French ones get really good at selling their wine online, you don’t just lose a chance to grow, you lose market share.”
Additional reporting by Giuseppe Fonte
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