Italy - Military Industry Structure

During the Cold War the structure of the Italian industry was unique; it was dominated by two large state holding companies (enti publici economi): IRI-Finmeccanica (with ties to the Christian Democratic Party) and EFIM (traditionally associated with the Socialist Party), both of which are responsible to the Ministry for State Holdings. Together they control about 60 percent of Italy's defense turnover (37 percent IRI, 23 percent EFIM). Yet Italy too is influenced by the trend toward privatization. This can be seen in the merger of Selenia and Aeritalia, where part of the new company, Alenia, was in privatehands. Before the merger, Aeritalia's CEO, Fausto Cereti, predicted that Aeritalia's private-sector share could go from 16 percent to asmuch as 49 percent. Because its defense equipment budget is relatively small, Italy is heavily committed to cooperative programs, ranging from aircraft (Tornado, EFA), to helicopters (EH-101, NH-90), radar (Euroradar for EFA), and missiles (FAAMS as part of Eurosam and Otomat). These arrangements allow Italy to meet its armament requirements with indigenously produced equipment'19 while maintaining a reasonablelevel of technological sophistication in its military forces.

In 1992 EFIM [Manufacturing Industry Holding and Financial Company] created a new holding company called Systems and Space to oversee all the electronic systems activities of the group. Four companies were part of Systems and Space: two from the Agusta group and two from the Ernesto Breda Financial Holding Company. They were Omi and Agusta Sistemi, involved in the area of electronic systems, SMA, specialized in the field of naval and air signaling systems, and Galileo, which operated in the sectors of missile avionics, space instrumentation, monitoring environmental pollution, and industrial automation. The next goal of the program by state-controlled enterprises to streamline production in the defense industry was an agreement with the corresponding IRI-Finmeccanica [Institute for the Reconstruction of Industry-Mechanical Engineering Finance Corporation] companies: Fiar and Alenia. Finmeccanica began the transformation in 1994 when it took over the state-owned Ente Partecippazioni e Finanziamento Industrial Manifatturiera (EFIM) Group.

As European industrial consolidation proceeded, Italy gradually relinquished significant state ownership of its large defense firms. Finmeccanica SpA (some 30 percent state-owned) became a holding company for dozens of Italian businesses and emerged as the leading Italian defense firm. Finmeccanica also became a multidomestic firm, with key holdings in the United Kingdom (UK) and a growing presence in the United States (especially with the acquisition of leading defense electronics company, DRS Technologies, Inc.). Directly and indirectly, through its extensive business holdings and national and multinational program participation, by 2005 Finmeccanica received about 70 percent of the Italian defense research and technology and procurement budget. Increasingly, all roads in the Italian defense market pass through Finmeccanica.

Marconi Italiana is the Italian Branch of GEC Marconi with orders of $909 million and 7,000 employees, 80 percent of them in Italy. The company develops and produces communication, EW, radio navigation, avionic, military computer, satcom and IFF systems. The remaining major organizations in Italy's defense industrial base include Fincantieri, whose Naval Shipbuilding Division is responsible for designing and building both surface vessels and submarines, including all of the major ships in the Italian Navy. Another company, Elettronica, specializes in electronic warfare systems design and production.

As European defense industries reacted to the opportunities presented by merger and privatization potentials, new complexities arose for the Italian defense industry. In December 1998, a merger between GEC plc (UK), Marconi Electronic Systems, and Alenia created Alenia Marconi Systems (AMS), (equally owned by GEC and Finmeccanica). Finmeccanica's strategic agreement with GEC-Marconi established the basis for cooperative alliances in defense electronics, missiles, and other weapons systems activiites. The team is especially strong in surface-to-air missiles. Finmeccanica is strong in platform development and production and GEC is strong in systems integration.46 The 50-50 joint venture, Marconi-Alenia, comprises two separate companies and would be incorporated in The Netherlands.

After the merger was completed, British Aerospace purchased the defense elements of GEC, including its ownership of half of AMS. The result was BAE Systems, the first European defense giant. Some Italians reacted negatively, arguing that this is the kind of action that will threaten to absorb Italian defense industry into larger conglomerations based on financial investment considerations rather than on preserving national elements. In reaction, Finmeccanica began negotiations with British Aerospace to repurchase its share of AMS.48 As a result of further discussion and agreements between Finmecannica, BAE Systems, and Aerospatiale Matra, the missile systems capabilities of AMS were internally transferred to a Matra BAE Dynamics. In return for AMS received the surfacebased radar, land, and naval systems capabilities of BAE Systems. This action further consolidated the European missile industry. It also resulted in a new position for AMS as the largest C2, radar, and systems integration company in Europe.

By 2000 there were three main players in Italy's defense industrial sector: the state owned Finmeccanica Group which controlled about 70 percent of Italy's defense and aerospace industry, the private-owned FIAT Group and the Marconi-Italiana Group, a subsidiary of the new UK defense giant BAE Systems. By 2005 Avio (propulsion) and Fincantieri (shipbuilding) were the only two Italian large defense companies outside Finmeccanica's ownership and control. That said, both have significant work agreements with Finmeccanica as the Italian leader for the production of joint programs. In addition to these larger players, there remain dozens of medium and mostly small private companies, often specialized in niche capabilities and depending on subcontract work assigned by the main players.

Although Italy already has accomplished a significant reorganization of the defense industrial sector, there are two main weaknesses: the fraction of public ownership is still too high, and the overall size of the sector is small when compared with other European countries.54 To better support the process of European consolidation, there has been a clamor throughout the industry for full privatization of Italy's defense industry. As a precursor to this, several Finmeccanica subsidiaries engaged defense industries in France, Germany and the U.K in cooperative agreements for joint bidding as well as production without the direct involvement of the Italian government.

As significant cross-border consolidation began in Europe, Italian defense industry leaders became concerned about being left out. In the early 1990's, the fact that Italian defense industry concentrated on internal restructuring had put them behind as companies in the other countries began to focus on cross-border teams. At the same time, they realized that their companies were less attractive to the consolidated European companies because of their eroding revenue base. They concluded that in order to remain attractive partners, their strategy must specialize in specific areas of excellence in order not to become overextended.

With these concerns in mind, Italy is moving aggressively to try and create relationships between the Italy's defense industry and those of the other European companies. Ministerial level discussions concentrated on the relative role to be assigned to national defense industries and corporate discussions are taking place between Italian industry and European-wide firms. Domestic actions in Italy are focused on creating the supporting administrative and procedural regulations and processes. A major concern is also the preservation of Italy's technological base within Italy. At the same time, the need for a European-wide approach is seen to be essential.

In parallel Italy believes that she must increase the technological level of her defense industry to demonstrate that she can be an effective participant in the European consolidation process. This means that either the Italian government must raise the magnitude of defense-industrial investment or significant levels of foreign investment must be secured.