In late August, Italian shipbuilder Fincantieri published its consolidated financial results for the 1st half of 2022, with one noteworthy figure: the return of net losses, estimated at €234mn, after rather promising 2021 results.
These poor results may come as a surprise, as in March 2022, the Italian shipbuilder was confident about the forecasted impact of the Ukrainian-Russian war, even anticipating a positive effect on military shipbuilding, which accounts for about 30% of its business. Indeed, naval revenues are supported by the Qatari Ministry of Defence and Italian Navy orders, as well as the FMS program with the Kingdom of Saudi Arabia (MMSC).
Yet, in its mid-year review, Fincantieri acknowledged being affected by the increasing price of raw materials. The Italian company also mentioned “the effects of a strategic review of the infrastructure business, […] the write-off of some financial assets, and the goodwill impairment for the Norwegian subsidiary Vard and the U.S. subsidiary Fincantieri Marine Group”, leading to “extraordinary and non-recurring expenses” amounting to €156mn.
The company is also reportedly experiencing supply chain issues, although this is neither new – these difficulties began during the COVID19 pandemic – nor singular. Indeed, as outgoing chairman Giampiero Massolo declared to the media earlier this year, Fincantieri is not the only “large company [to be] affected by supply chain bottlenecks”. While not specific to Fincantieri, the situation “will have an impact on the group”, acknowledged Mr. Massolo, and has already begun to do so: Fincantieri is currently renegotiating several of its contracts, under pressure from the significant rise in costs, and $39.4mn contract modification was recently awarded to Fincantieri Marinette Marine for Constellation-class frigates program for the U.S. Navy.
The Italian trade union FIM-CISL stated in a press release in late April 2022 that the management will have to respond to the current problems observed in the group’s supply chain and to present a new industrial strategy – in the wake of a major leadership reshuffle.
Indeed, in April 2022, the Italian government has decided to dismiss Giuseppe Bono (CEO) and Giampiero Massolo (Chairman) from their positions, revamp the entire board of directors and introduce a new management at the head of Fincantieri. Pierroberto Folgiero, until now CEO of Maire Tecnimont (an engineering and contracting company in chemistry and energy), was appointed, although “in-house” candidates were initially regarded as the favorites.
Mr. Folgiero is portrayed by the media as a “financier”, whose profile is in sharp contrast to that of Mr. Bono. In doing so, the Draghi government clearly indicated its intention to discontinue the management of Fincantieri. The Italian press reported that the government had decided to “wipe out the old guard” at the head of Fincantieri, to “start a new chapter in the life of the group”.
Another major change at the head of Fincantieri is the dismissal of Giuseppe Giordo, general manager for the military ship division and former strong candidate to replace Mr. Bono. He was suspended in the wake of the so-called “Colombiagate”, an embezzlement scandal in connection with the sale of military ships to Colombia in which Mr. Giordo was suspected of being involved.
Former Italian Prime Minister Massimo d’Alema was identified as an “informal negotiator” for a contract for two frigates and two submarines to Bogota, and is said to have asked for a commission of €80mn to “convince a reluctant interlocutor”. Following press revelations about these discussions, the Naples public prosecutor’s office opened an investigation and suspended the negotiations between Fincantieri and the Colombian government, reportedly close to be finalized.
These governance changes – aimed at reshaping the face of the Italian company – have led to a significant strategic shift. In his first public statement, the new CEO of Fincantieri outlined his strategy: he believes that the Italian company’s two main growth areas are the naval shipbuilding and cruise markets. Thus, the infrastructure business had to be reviewed, leading to exceptional costs (as mentioned above).
In the military sector, Mr. Folgiero still expects military spending to increase, especially in Italy, due to the current geopolitical context and sees this as an opportunity for Fincantieri to establish its leadership in the naval military sector. Furthermore, to stand out from the competition, he declared Fincantieri must show “religious respect” for meeting deadlines and costs – adding that “competitors are rarely able to give [such] guarantees”.
While ambitious and promising, this new strategic vision also bears a significant risk factor. Thus, the Italian trade union FIM-CISL expressed its “concern” about the threat of having “what has been achieved in recent years in terms of job growth and industrial workload” jeopardized by the reformist policies of the new management. FIM-CISL called on Mr. Folgiero to perpetuate the investments made to improve the group’s productivity.
Another concern for the Italian unions is the recurring human resources and workplace safety problems at Fincantieri’s shipyards. These incidents currently entail legal and financial consequences, which call into question Fincantieri’s core production paradigm. For instance, in March, the unions again denounced the repeated breaches of safety rules at the Italian shipyard, the result – they said – of an abusive use of subcontractors. This statement followed an incident on the Monfalcone shipyard, where a subcontractor was hit by a crane load and seriously injured.
The company is also facing multiple lawsuits regarding the deaths of workers from asbestos exposure while working in Fincantieri’s shipyards, attracting media attention at the national level. More recently, unions alerted the press to an incident at the Muggiano shipyard in La Spezia: a worker fell out of a hatch of the aircraft carrier Trieste on August 18 during a bad weather episode. The worker suffered “no serious harm”, but the unions expressed their discontent with what they call a “cover-up” of the incident by Fincantieri.
Tech transfer or not?<:b>
Therefore, between the pressure of the unions to guarantee improved employment and working conditions and investments in the production assets, and the massive crisis in raw materials and supply chain, the promise of the new CEO to keep contractual costs and deadlines under control seems far-fetched – unless Folgiero intends to lead Fincantieri down the path of austerity on its international programs, limiting all risk factors, notably by keeping production under tight watch in Italy.
Indeed, the production in a client country most often leads to higher prices and longer lead times, especially as Fincantieri lacks experience in transfer of technology (ToT) programs: since the early 2000s, most of military export contracts to European and the Middle Eastern clients have been carried out at Fincantieri’s shipyards in Italy, without the buyer country being involved in the production: FREMM Frigates to Egypt, LCS/MMSC (Marinette Marine shipyards, USA) to Saudi Arabia, Doha class corvettes, San Giusto class LPD type and patrol boats to Qatar, amphibious ships to Algeria, Falaj class patrol boats and Abu Dhabi class corvettes to the United Arab Emirates…
Only the sale of the Sirio-class patrol vessels to Turkey was conducted by RMK Marine in Tuzla, with limited ToT on documentation and technical assistance.
Today, the Italian company is discussing the local production of advanced warships with Indonesia – for the construction of FREMMs at PT PAL shipyard in Surabaya – and Greece – to build FCx30 corvettes at the Elefsis shipyard owned by ONEX. However, in a context of major strategic renewal led by a managing team new to the company and multiple external pressures linked to the geopolitical context, the execution of large-scale international expansion or technology transfer programs seems unlikely and by all means very risky for a company willing to focus on its own reorganization and business.
The new constraints should direct the company towards securing its supply and production chains in Italy, by divesting some activities and guaranteeing investments at the national level.
Undoubtedly, Mr. Folgiero’s future announcements and the consolidated results for the year 2022 will soon shed new light on these issues and the situation of one of the European top shipbuilders.