Made by Foreign Hands

The town of Prato, just outside Florence, is not exactly typical of this part of Italy. Sure, it's got the requisite medieval wall, a handful of baroque churches and charming cobblestone streets. But instead of sautéed garlic, the lingering aroma is of fried wontons. In the cafés, red paper lanterns are as prevalent as red-and-white-checkered tablecloths, and more people speak Mandarin than Italian.

In fact, this Tuscan community of about 200,000 is home to Europe's second largest Chinatown, after Paris. It's also the heart of Italy's apparel industry, home of the MADE IN ITALY label, which for many conjures up visions of old Italian craftsmen hunched over workbenches, sewing the last stitches on a pair of leather shoes or designer handbag. Gucci and Prada have their factory outlets here; Prato even houses Italy's official textile museum, which traces the history of the country's luxury-garment industry.

But the image of the skilled Italian worker lovingly plying his trade is fading fast. In the late 1990s, many fashion houses started outsourcing their work to China and Bangladesh, where labor is cheaper and output faster. Unable to compete, a number of Italian-owned garment factories shut down. Cash-rich Chinese entrepreneurs immediately snatched them up and brought in their own workers. Today the region is flooded with Chinese laborers, the majority of them illegal, allowing high-end fashion houses that refused to export their handiwork to hire Chinese after all—in Tuscany, but at Chinese prices. Indeed, the Cooperation for the Development of Emerging Countries estimates that many work for as little as €2 an hour, and can get by in Italy only by sticking to Prato's Chinatown businesses.

Immigrant artisans have always played an integral role in Italy's fashion industry, but until recently they worked mainly behind the scenes. Now immigrant laborers are playing a more open role in luxury-garment making. Of the 4,275 textile factories in Prato, 2,500 are owned by Chinese, who tend to employ only Chinese workers. And most of Italy's major design houses—including Prada, Versace and Giorgio Armani—rely heavily on Chinese-owned suppliers from Prato.

Indeed, hiring Chinese workers in Italy may be the answer to a tricky dilemma for luxury labels: how to cut costs while retaining the right to call a garment "made in Italy." In a study of Italian textile companies, Michela Pellicelli, a professor of economics at the University of Pavia, found that luxury designers like Gucci and Armani think outsourcing production is too big a risk for their reputations —even if it means losing profits. Rather than farm out much of its manufacturing, Prada last year opted to sell off many of its assets, including the Jil Sander and Helmut Lang labels. Other luxury designers have had to do the same, believing that "consumers, particularly Asians, would not buy if the [clothes] were not made in Italy," says Pellicelli.

To be sure, 31 percent of Italy's top design houses admit to having, at one time or other, outsourced abroad; only 7 percent never have, according to Pellicelli's study. But most fear a loss of control over the product and the demise of critical skills in Italy. "If outsourcing is the only strategy, the firm is going to lose technical competence and ultimately its ability to innovate," she says. Many high-end designers believe that the MADE IN ITALY label, evoking a long history of artisanship, justifies premium prices—even if the items are produced by foreigners. "If their clothes are stitched at low-cost factories overseas, how will consumers react?"

Not necessarily badly, as Benetton has found. Though the company produces 80 percent of its clothing outside Italy, its profits continue to grow, with an increase of almost 12 percent in first-quarter net income from 2006 to 2007. The clothes may be produced in China or Turkey, but the labels simply read MADE BY BENETTON.

Some production will never move to foreign hands, especially sophisticated items made in low volume. And the push to keep manufacturing in Italy has some pretty powerful proponents—chief among them Paolo Zegna, heir to the Ermenegildo Zegna label and president of the Federation of Italian Textiles and Fashion Enterprises. He has become something of a hero in Italian luxury circles for chiding companies that ship production abroad or open sweatshops at home. "For centuries the Italian companies have passed their methods from father to son, offering a product that is quite unique," he says. "If we don't get our act together, we risk losing all that." At this rate, even those who resist the lure of what Pellicelli calls the world's new workshop will have to post an addendum to the MADE IN ITALY label: BY THE CHINESE.