Italy - Military Industry

Since 1990, the Italian defense market and industry have changed significantly. The post-Cold War decline in defense budgets, both in Italy and across Europe, intensified European efforts at cross-border cooperation, as, e.g., in the Letter of Intent (LOI) process. Since then, Italy has relied mainly on international cooperative efforts for its major defense programs, reinforcing a trend that began in the late 1970s in areas such as combat aircraft. Whereas previously Italy often relied on U.S. foreign military sales (FMS) or licensed production of U.S. systems, since the end of the Cold Wa Italy has sought to have higher value added work performed in Italy, viewing this as essential to sustaining its industrial and technology base.

In 1990 Italy was Europe's fourth-largest defense market, with defense sales of $4.5 billion, 8000 firms (200 principal firms), and some 50,000-80,000 employees. Italy's 1989 aerospace sales were approximately $4.8 billion ($4.6 billion in 1988), also the fourth largest in NATO Europe. Aircraft is the most important sector, accounting for over half (51 percent) of all sales. Like Germany, Italy in the postwar period rearmed initially with US equipment, moving on in the 1960's to licensed production of US designs. For Italy, like its European counterparts, the decline of the export market (from 70 percent of Italy's defense production in 1980 to 35 percent at the end of the decade), coupled with the prospect of a declining national defense budget, created new pressures to consolidate the Italian industry and eliminate duplication and over-capacity. Italy's low level of research funding provides an impetus to consolidation in order to reduce research duplication and fund high-cost projects: Italy is said to devote only 1.5 percent of its GDP (L 15 trillion, or $11 billion) to research.

Italy’s defense export profile declined significantly over fifteen years 1985-2000 under three principal influences. The first was Italy’s current export regulation, Defence Export Law No. 185. This was passed in 1990, triggered by political decisions to withdraw Italian commitments to provide naval forces to Iraq in the mid-1980’s. The law contains many ambiguities and a complex set of approval and reporting procedures. The four years it took to pass the law also created a waiting period that curbed Italian defense industry’s international activities.

The second factor of influence was the abrupt decline in international demand, coupled with the changes in global defense industries and markets that followed and the new era of a buyer’s market supported by strong international competition. Italian industry was not prepared for the new market requirements and furthermore was the weakest of the European defense industries. The third factor was the glacial pace of transformation of the Italian Armed Forces to meet the new security conditions.

Italian defense exports increased significantly over 2010 to 2014 due to the various joint development programs such as the Joint Strike Fighter, Horizon-class Frigates programs, Eurofighter typhoon and the FREMM program etc. In addition, the Italian defense industry has collaborated with several other equipment manufacturers thereby boosting its export after the recession. Italy was the seventh largest exporter of arms over 2010 to 2014. However, in the forecast period, defense exports are expected to decline further due to the defense budget cuts of most European countries, such as France and Greece, which are the major defense trading partners of Italy. With the expansion of growing BRIC markets like India and Brazil the demand for defense goods is expected to be strong and Italy is expected to experience overall exports growth during the period 2015-2019.

Italy strongly supports the development of a consolidated European armaments process. The urgency for a consolidated European approach stems from the creation of large defense industrial companies elsewhere and from increased global competition. Italy supports the efforts of the thirteen Western European Armament Group (WEAG) countries to eventually create a European Armaments Agency (EAA), recognizing that there are still many obstacles. These include the political issues associated with surrendering some aspects of national economic, social, and security plans to a European structure. LT Gen. Alberto Zignani, Italian National Armament Director, will become the president of the WEAG starting in January 2001. In November 1996, Italy, along with France, Germany, and the UK, became signatories to the establishment of the Organization Conjointe de Cooperation en mateire d'Armement (OCCAR) to handle selected multi-national programs. One major aim of OCCAR is to create European synergism and standardization with respect to acquisition procedures, policy standards and product standards. Italy viewed OCCAR to be an important first step toward the creation of the EAA.

The MoD is said to be dedicated to promoting domestic weapons production and manufacturing, but not at the expense of modernization. Parliament reportedly is often disposed to put domestic industrial base considerations above modernization. The logistics structure has been overhauled to improve out-of-country sustainability. Emphasis is shifting from the traditional role of national defense within borders to international security. This shift in focus is driving weapon systems evaluation and forcing changes in organizational structures.

Italy has worked with both U.S. and European suppliers in the past and is open to foreign manufacturers, particularly those offering Italian participation in research and new technologies. Competition from major European suppliers is getting stronger, as greater political emphasis is being given to "European solutions". It is important to note that for the next ten years aerospace defense systems will dominate the Italian military acquisition budget. Most defense sector business opportunities fall within the areas of aviation, communications/electronics, command and control systems, avionics, advanced composite manufacturing, advanced electronics, advanced munitions, and computer software and simulation technologies. High demand exists for improved munitions and all varieties of simulation programs. Logistics systems that increase force survivability and sustainability in remote territory are being heavily considered for future funding.

Further heavy budget reductions are influencing decisions on new systems production and development. Presently, plans to upgrade battle tanks, personnel carriers, artillery and howitzer systems, air defense systems, fighter and attack aircraft, communication platforms, anti-tank systems, small arms, and some rotor wings aircraft are being evaluated. In the meantime, new systems continue in development and are nearing production. There is a continuing requirement to provide spare parts for a number of existing U.S. manufactured weapon systems. Italy is developing an improved munitions manufacturing capability (i.e. OTO Melara); however, some opportunities still exist for the supply of new main tank gun ammunition, artillery munitions, air defense munitions, propellants, small arms ammunitions, etc.

The need for a new logistic support system presents opportunities for U.S. firms willing to partner with local Italian companies. Systems ranging from logistics management to heavy transports (although Fiat Iveco represents a very strong competitor) to fuels distribution are needed and are being considered as emerging requirements. Italy has long depended on a mix of U.S. and European products; however, the emphasis is shifting to European, especially Italian production. In fact, to gain approval, virtually every program must include some employment generation in Italy, and especially in Southern Italy, where the unemployment rate reaches 30 percent in some areas.

Usually the MoD will only fund developmental costs for major weapons systems programs, while programs that involve Italian firms will receive Ministry of Economic Development funding. Recently the MoD has often opted for already developed solutions and "off-the-shelf" products, capitalizing on contractor or agency funded developments, this method being more economical and timely. Quite often, a deciding factor is whether the program will involve a significant work share for Italy, licensed production for Italy, or a teaming arrangement with an Italian firm.

Firm fixed price contracts are generally preferred by the Italian MoD, as this term better fits MoD's budget requirements; however, other contracts can be negotiated depending on the nature of the acquisition. Bid packets usually include all necessary technical specifications and contract information. Contracting procedures are generally similar to those in the United States, however, they frequently take longer to execute, sometimes two or more years from the date of bid acceptance, and the price is considered firm until the contract is finalized. Recently there has been a growing Italian preference toward Direct Commercial Sales (DCS) and away from Foreign Military Sales (FMS) transactions due to perceived increased bureaucracy, red tape and increased cost. In the long-term, the FMS total package approach tends to be of greater benefit to the customer.

Offset requirements can play an important role and it is useful to understand how public procurement rules are administered. Generally speaking, 100 percent offset is theoretically required for most major bids. However, this rule is not always strict and terms are at times negotiated, granting forms of co-production or reaching other ad hoc agreements.

Italy has one of the more imperfect defense markets in Europe, marked by a relatively opaque, informal acquisition system; by limited, informal competition; and by acquisition decisions determined largely by political considerations, jobs and work share factors. Notwithstanding the strong geopolitical relationship between the United States and Italy and deep cooperation, U.S. firms face substantial market access challenges in Italy. There are sometimes considerable barriers to U.S. contractors; however, teaming with an Italian partner can help overcome such problems. It is often easier if the prime contractor or significant partner is an Italian entity.

As in the United States, the prime contractor is responsible for subcontractor selection and quality controls. The MoD normally will not interfere with the prime contractor-subcontractor relationship, but competition among subcontractors is encouraged. Contract administration is normally performed by the procuring agency, whose staffs are assisted by quality assurance and technical/financial personnel.

To promote efficiency in armaments, part of the Italian defense restructuring effort has combined several armament related functions into a new combined General Defense Secretary and National Armaments Director (SG/DNA) with responsibility for both defense industrial strategy and the armaments process. One of the challenges is to create an industrial strategy that will maintain key Italian defense capabilities. This implies that the Italian defense industrial base must have the resources and freedom to be effective in competitive global markets, to include active pursuit of international cooperative activities. In turn, the defense industries must be structured efficiently, be flexible in their ability to meet market demand, have an efficient commercial support network, and be involved in several well-conceived alliances with leading foreign industries. One of the missions of the SG/DNA is to actively promote international industrial cooperation, especially involving the high-technology sectors.