Italy's Toy Story

There were positive signals in Italy at the end of 2006. Though facing concrete difficulties, the toy sector still shows vitality and inventiveness, as the outlook increasingly becomes more and more international. The Italian economy closed 2006 on a high note, with industrial output and exports rising and unemployment falling to a record low. After years of stagnation, it does appear that Italy has been able to get its act together and to embark once again on a road of steady growth—not at the pace set by the other principal European nations, but nevertheless already in a significant way.

Italy's manufacturing network is strongly hinged on small- and medium-sized enterprises, and their end-of-year figures show that it is these businesses that have driven this initial recovery. Hit hard in the last few years by competition from the Far East—especially from China, where low technology products traditionally manufactured in Italy have been replicated at an enormously lower cost—and to a lesser extent from Eastern Europe, most Italian manufacturers have shown resilience, singling out ways to react and adapt to a changing global business environment.

First and foremost they have been able to shed their provincialism and realize that globalization is something they have to come to terms with. They have realized that it is necessary to strengthen international relations, forge alliances, penetrate new markets and, in some cases, de-localize manufacturing. They have also noted the fact that it is rarely possible to compete with emerging nations by focusing on costs, except in very specific cases, such as through hyper-automated manufacturing.

What modern businesses here have to do is insist on the excellence of Italian manufacturing, the element that makes products more attractive because of their originality, innovation, high quality and style—distinguishing traits that justify higher prices compared to mass market products coming from Asia or Eastern Europe. If managed efficiently, the “Made in Italy” appeal—driven worldwide by the prestige of its labels in the areas of fashion, cars, design, wine and food (without neglecting that Italy also hosts world-renowned high-tech content producers)—could become a formidable resource. But a further step still needs to be taken by many Italian manufacturers: boosting marketing and communication, key operational levers in today's fast-changing and very crowded markets.

The rationale outlined above is perfectly suited for the Italian toy industry which, barring very few exceptions, is based on a network of small- and medium-sized networks, mostly located in the northern and central regions of the country. Without considering the local branches of multinationals, which have grown in the past years, Italian toy manufacturers are mostly family-run businesses set up after World War II. Many of them are currently facing a delicate phase, as ownership is passed down to the next generation in a transition whose outcome is not certain.

These businesses have operated against a demographic backdrop that recorded plummeting birth rates in the 1980s, followed by long-term stabilization of population trends. Only recently has the birth rate improved, upped by very tiny percentages thanks to a rising immigrant population (mainly from Eastern Europe) and from Italians in the southern part of the country having more children per household. This stabilization of the number of children has consequently led to the stabilization of the toy market.

At the same time, the increased presence of international toymakers in Italy has led to the erosion of the market quotas held by Italian manufacturers. To survive, the country's home grown firms have been forced to venture into international markets, inevitably clashing with a manufacturing giant such as China, which alone produces 70 percent of the toys circulating in the world today. And there is also a further problem: toys must now compete with music, fashion, computers and cellular phones as children's entertainment options change.

Italy's toy market is an industry where there have been victims, but we can see though the haze a still-brilliant future for Italian toymakers if they can express creativity and inventiveness, and link-up with the prestige that Italian-made products continue to have around the world. The seeds planted by some players may not have fully grown yet, but many companies have consolidated towards greater strength and others have been successful as innovators, launching new product categories, such as that of magnetic construction toys. Such moves prove that, with an increased focus on profitability, on quality and on communication, Italian toymakers can play a larger role in the global toy market.