High end or nothing?
Cutting wages is not the only way for Italy to compete. The southern economies would all benefit if Germany, the euro zone's strongest economy, boosted its internal consumption and encouraged more imports from its neighbours. The European Central Bank could also do more to try to stimulate southern European economies, allowing inflation to rise from its current 0.8 percent.
So far, though, there are no signs of either happening. ECB President Mario Draghi has welcomed "relative price adjustment" - wage cuts - in Spain, Portugal and Greece.
Such an adjustment has not happened in Italy. According to the European statistics agency Eurostat, unit labour costs rose 4.2 percent between 2000 and 2012 in Italy, against a fall of 2.8 percent in the European Union.
Part of the reason is that Italy's labour laws make it difficult for companies to adjust pay and hours to fluctuations in the economy. The cost of employing workers is also pushed up by the high labour taxes and social contributions employers must pay. According to the OECD, those make up just under half the cost of employing a worker in Italy. In other developed countries they total 35.6 percent, on average.
At the end of February when he first took office, Italy's Prime Minister Matteo Renzi promised to reduce the burden on companies, citing the Electrolux standoff as a key issue for his new government. Fiat CEO Sergio Marchionne has criticised Italy's rigid labour market rules and in 2011 reached a deal with workers at the car marker's main factories, introducing more flexible conditions in exchange for investments.
The other way to compete is to produce high-value products that warrant higher prices, innovating to create products that people crave. Italy already successfully makes high-end goods from luxury clothes to food and small electronics.
But as spending on research and development has shrivelled - Italy's is among the lowest in the developing world - the country has steadily lost out in other areas, including home appliances. In a speech last year, Bank of Italy governor Ignazio Visco singled out the sector as emblematic of the country's industrial decline. One example: Italy made two million refrigerators last year and 10 million in 2001.
"A country like ours has to position itself as a maker of high-end products through innovation and research," said Claudio De Vincenti, a top official in Italy's economic development ministry recently appointed by Renzi.
That may have been a factor in Electrolux's struggles, according to one former employee. As it moved production east, Electrolux also shifted its commercial strategy. In particular, it bundled together well-known home appliance brands such as Rex in Italy and Germany's Juno with its generic, namesake Electrolux brand. The Zanussi brand survived, but production was partly moved outside Italy.
Mario Grillo, a former Electrolux manager who used to run its refrigerator plant in the north-eastern town of Susegana, says the change in strategy was a mistake, because brand loyalty is a key factor among home appliance customers.
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Grillo blames that decision and a dearth of investment in new products for Electrolux's loss of market share in Italy to U.S. firm Whirlpool, Germany's Bosch and South Korea's Samsung.
"If you don't invest enough in innovation, you get left behind," says Grillo.
Electrolux said in a statement that it has invested considerably in Italy, including more than 245 million euros between 2009 and 2013. In the statement, the company said more than 800 of Electrolux's 6,000 staff in Italy are engineers and technicians working on research and development, and the firm produces most of its highest-end washing machines, refrigerators and stoves in Italy. But an Electrolux spokeswoman declined to say how much the company invested in Italy before 2009.
Ernesto Ferrario, the firm's chief executive for Italy, last month put together a proposal with union leaders aimed at securing the plant's future.
Under the proposed deal, Electrolux would not touch wages but would reduce the plant's workforce by at most 400 people over three years. It would also guarantee some investment in exchange for a government commitment to cut some labour taxes. Officials from Renzi's government met Electrolux management last week, but no decision was taken.
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