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I've had most of those units in those hexes for 4 turns plus. They are combat units, they are supplied, and the HQ is set to priority 3 (nothing set to 4), and there has been no entrenchment at all. The other units not inside the ellipse are all digging in. I've read the rule on entrenching, and I'm wondering what I'm missing. The one para regiment on the far left is digging in, but I did have another combat unit there before it.

Are you within 20 hexes of an enemy unit? See 15.3.2.2 for limitations.

There are no allied units on mainland Italy, so that must be it. Now I understand why the Axis AI builds forts here usually. That's what I did to resolve the problem. I'm just very inexperienced with the axis.