ceosurvey

Growth reimaginedProspects in emerging markets drive CEO confidence

www.pwc.com/ceosurvey

Contents

1. 14th Annual Global CEO Survey2. Indepth CEO Story: Interviews3. CEO interview transcripts4. Executive summary5. Communications industry summary6. Entertainment & Media industry summary7. Engineering & Construction industry summary8. Pharmaceuticals & Life Sciences industry summary9. Retail industry summary10.Technology industry summary



14th Annual Global CEO Survey

Main report

Foreword

Confidence is back – say CEOs in PwC’s 14th Annual Global CEO Survey. Chief executives were nearly as confident of growth this coming year as they’ve ever been in our survey.

But with much of Europe and North America still confronting the lingering effects of the downturn, many companies in search of sustainable economic growth are focusing their sights on specific markets far from home – where recoveries are strong

and the outlook is stronger still. In ‘Globalisation reimagined’, the survey explores where CEOs see growth coming in 2011 and just how they plan to achieve it.

Realising growth aspirations won’t be easy – thriving in a multi-speed recovery is a new undertaking for CEOs – one that demands different approaches and attitudes. CEOs are already shifting strategies in areas like talent and innovation and reconsidering the upside of working more closely with partners and governments.

Bottom line – companies will not only be affected by this multi-tiered recovery; their targeted investments will help shape the path of globalisation. There are great opportunities ahead for those who anticipate how business is changing and creatively search for value in new markets.

I want to thank the more than 1,200 company leaders and government officials from 69 countries who shared their thinking on these difficult issues. The demands on their time are many and we are greatly appreciative of their involvement. I am particularly grateful to the 31 CEOs who sat down with us in the last quarter of 2010 for a more extensive conversation and provided additional context to our findings.

The tremendous success of the PwC Global CEO Survey – now in its 14th year – is directly attributable to the enthusiastic participation of leaders around the world. We at PwC are very proud of that ongoing commitment.

Dennis M. Nally Chairman, PricewaterhouseCoopers International

14th Annual Global CEO Survey 2011 1

Contents

Introduction .........................................................3

Targeting emerging markets ................................4

Putting customers at the centre of innovation .......9

Bridging global skills gaps ..................................13

Achieving shared priorities with government ................................................18

Globalisation reimagined ...................................22

Final thoughts from our CEO interviews ............23

Research methodology and key contacts ............30

Acknowledgements ............................................31

Related reading ..................................................32

2 14th Annual Global CEO Survey 2011


Introduction

Just two years after the depths of the worst economic crisis in 75 years, CEOs have a renewed optimism.

The 1,201 chief executives in 69 countries we polled for our 14th Annual Global CEO Survey were nearly as confident in their outlook for revenue growth over the coming 12 months as in the boom years before the crisis (see Figure 1). The rise in short-term confidence holds true among CEOs from all regions.

High levels of confidence in light of continued uncertainty in several major economies are surprising. Yet, CEOs honed their cost discipline during the recession, driving a patient optimism about their prospects when global growth returned. This can be seen in the high confidence CEOs reported last year in their three-year revenue growth

outlooks. This year, they have set their targets on more immediate growth, in particular, by growing revenues in regions where recoveries are strong and the promise stronger still. And those regions are not always close to home.

CEOs in our survey also identified three focal points to drive strategic change internationally: innovation, talent and a shared agenda with government. In all three areas, they pointed to new attitudes and approaches, tailored to deal with the issues of the multi-speed global recovery that they hope is now underway.

Figure 1: CEOs prepared for recovery in 2010 and expect growth in 2011

Q: How confident are you about your company’s prospects for revenue growth over the next 12 months/3 years?

Very confident about company’s prospects for revenue growth

over the next 12 months

over the next 3 years

26%

31%

41%

52%

50%

21%

31%

48%

44%42%

34%

50%51%

0

10

20

30

40

50

60%

2011201020092008200720062004 20052003

Base: 2011 (1,201), 2010 (1,198), 2009 (1,124), 2008 (1,150), 2007 (1,084), 2006 (not asked), 2005 (1,324), 2004 (1,386), 2003 (989)Note: Percentage of CEOs who are very confident about their companies’ prospects for revenue growthSource: PwC 14th Annual Global CEO Survey


‘The key point about Asia is that there is no real need for capital to come into that market. Rather, the emphasis is on what sorts of technology enhancements are needed there. How can Asian labour work smarter and more efficiently? How can Asian operations deliver added value to a global marketplace that is already well served? I think that’s what the CEOs of the world are thinking about. Being in Asia for its own sake is entirely pointless – and a great way to destroy value.’

Nicholas Moore CEO, Macquarie Group Limited, Australia

1 IMF World Economic Outlook (October 2010). Estimates for shares of the world economy made on a purchasing power parity basis.

The divergence within the global economy is one of the main reasons why most CEOs (84%) say they’ve changed their company strategy in the past two years – with a third of them describing the change as ‘fundamental’. Only half the world is growing at a robust rate. Although the International Monetary Fund (IMF) forecasts global growth at 4.2% for 2011, developed countries – which make up 52% of the world economy – are growing at only half that pace. In contrast, emerging markets are booming, with Indonesia, India and China all forecast to grow faster than 6%.1

So where CEOs expect to grow is notable. While 83% of Western European CEOs are at least ‘somewhat confident’ of their overall revenue growth prospects in 2011, for example, 41% see only low growth opportunities for their companies at home. They’re confident because growth will come

Targeting emerging markets

Figure 2: Growth to come in emerging markets’ operations, regardless of location

Q: In the next 12 months do you expect your key operations in these regions to decline, stay the same or grow?

0% 100%

Africa

Asia-Pacific

CEE

Latin America

Middle East

North America

Western Europe

Africa Asia Austral-asia

EasternEurope

LatinAmerica

MiddleEast

NorthAmerica

WesternEurope

Companyheadquarters

Region of operations

93%

73%

80%

67%

70%

64%

72%

89%

88%

87%

86%

100%

94%

92%

33%

77%

83%

18%

50%

71%

57%

100%

40%

73%

59%

0%

67%

75%

100%

80%

80%

86%

0%

80%

86%

75%

70%

55%

47%

85%

73%

75%

29%

40%

71%

48%

25%

67%

55%

36%

32%

69%

31%

0%

51%

48%

Base: Respondents who reported operations in said region (168-672)Note: Percentage of respondents who expect to grow their key operations in the region.Source: PwC 14th Annual Global CEO Survey


from other regions: 92% of Western European CEOs expect growth in their Asian operations, while only 48% expect growth in their Europe operations. On the other hand, CEOs from Asia-Pacific and Latin America were more likely to expect growth in their own regions than elsewhere. In both cases, this likely represents a break from the recent past, when consumption in developed markets was a primary driver of growth.

‘Any industrial company – if they’re going to be a global leader – has to have a large presence in emerging markets,’ Ed Breen, Chairman and CEO of Swiss-based industrial conglomerate Tyco International, said in one of 31 in-depth follow-up interviews we conducted (see the appendix for some additional commentary from the CEOs we interviewed). ‘Fifteen percent of our revenue right now is coming from emerging markets, and we’re looking to double that in the not too distant future. It’s an opportunity that you have to take very seriously.’

High expectations are placed on Latin America and Asia (see Figure 2), and most clearly, on China. China is likely to overtake the US as the world’s largest economy within the next 25 years.2 So 39% of CEOs named China as one of the three countries most important to their company’s growth. And they’re being very selective in choosing specific markets, rather than adopting a shotgun approach to entering emerging markets all at once.

Still, the net effect is growth spreading across emerging markets, and beyond the BRIC (Brazil, Russia, India and China) economies. Take Africa – companies are not only investing in Africa’s natural resources, but also banking on growth in their African operations in 2011. The interest in the continent from international players has not been lost on African CEOs: 28% have changed their strategy because of ‘competitive threats’ compared with a global average of 10%.

Many of those competitors will come from other emerging markets; ‘south-south’ trade (i.e. trade among emerging markets) will expand. ‘Earlier, Europe and the US were our major export markets. Today, they are minor markets for us and the Latin American and African markets have become more important,’ Sajjan Jindal, Vice Chairman and Managing Director of India’s JSW Steel, said. ‘That has been a huge change for us.’

Although CEOs expressed fears of protectionism coming into 2010, trade barriers overall appear to be coming down. As a result, emerging markets are becoming hyper-competitive battlegrounds for global companies. Many of the toughest competitors are making reasoned bets in key markets, signally intensifying competition in the regions experiencing the most growth. Sixty-four percent of automotive CEOs named China as important for their growth, 25 percentage points higher than the global average. Revenues are rising steadily for public companies in China – but competition is pushing margins down.3 So companies need to approach markets with a careful eye on their operating models if they want growth that is profitable and sustainable. That’s true in all markets, not just in China. ‘In the future, we hope

to further expand our overseas networks through a range of strategic options that include establishing additional branches and considering select merger and acquisition opportunities,’ said Li Lihui, President of the Bank of China. ‘Regardless of the approach, though, our objective is to improve the efficiency and profitability of our overseas operations.’

2 ‘The World in 2050’, PwC (January 2011 update). 3 ‘Where are the profits?’, The Economist (11 December 2010).

‘The current situation in the financial markets has significantly changed our approaches and outlook on those areas, those territories where we are planning to invest. In other words, the range of countries we are ready to go to has decreased.’Evgeny Dod CEO, RusHydro, Russia

‘Throughout the world, new markets are developing. We’re soaring in Western Europe, and the Far East, Eastern Europe and Latin America are beginning to buy more. So we’re seeing a great international marketplace for our content.’

Leslie Moonves President and CEO, CBS Corporation, US


Developed markets play to their advantagesBut developed markets are far from barren of opportunity. Indeed, the US was the second most popular choice for a growth market, with 21% of CEOs naming the nation among the three most important for growth. Another 12% selected Germany.

Large developed economies still have their attractions. Case in point: we asked CEOs which nations would be most important for their future sourcing needs. China dominates the list, largely for reasons of cost competitiveness. But quality control, risk profiles, innovation capabilities, logistics and existing relationships remain factors to many CEOs. ‘I haven’t seen a shift towards low cost products, nor any change relative to low cost country sourcing. It’s more about the quality and technology,’ said Stephen A. Roell, Chairman and CEO of Johnson Controls Inc. in the US. ‘Customers are looking for quality products and value.’ As a result, the US and Germany joined China, India and Brazil in the ranks of the most important future suppliers (see Figure 3). Developed markets that focus on quality and innovation are still competitive suppliers on the world stage.

CEOs wary of macro risksAs CEOs select target markets overseas, 71% are somewhat or extremely concerned about economic uncertainty and volatility (see Figure 4 on the facing page). Partly, this is an after-effect of the crisis. As Agah Uğur, CEO of Turkey’s Borusan Holding A.Ş. , said, ‘Our baseline is definitely a stable political and economic view – a less volatile pattern than the past in terms of crisis – but the risk is our memories.’

But they’re also watching a broad range of macro-economic threats. Rising public sector deficits is their number two concern. Concerns over the ability of highly leveraged countries to refinance their debt, and subsequent volatility in currency and bond markets, greatly complicate strategies geared towards more trade. And lingering uncertainty could erode the willingness and ability of businesses to invest and expand.

Moreover, there is a clear expectation that governments in mature economies will have to raise taxes and cut spending further. Nearly three-quarters (74%) of US CEOs, for example, believed their company’s total tax contribution will rise because of their government’s response to a rising public deficit.

‘I am quite sceptical regarding the capacity of governments to prevent another crisis of this magnitude in the future. I believe a crisis like the one we just experienced is likely to occur every 30 or 40 years whenever levels of public indebtedness reach a breaking point.’

Marcos Marcelo Mindlin Chairman, Pampa Energía S.A., Argentina

Figure 3: Developed nations have competitive advantages

Q: Which countries, not including the country in which you are based, do you consider most important to your future sourcing needs? Which of the following reasons apply for shifting sourcing to the countries you have just mentioned?

China USA India Germany Brazil

63%15%

55%

13%

31%

11%

4%

13%

35%18%

10%

6% 6%

7%3%

How many CEOsplan to shift theirsourcing to this country37% 22% 15% 14% 11%

Cost

Quality

Innovation

Base: China (442), USA (261), India (178), Germany (172), Brazil (137)Note: Top reasons why CEOs plan to shift their sourcing to these supplier nationsSource: PwC 14th Annual Global CEO Survey


The sentiment is shared in many emerging economies, as well, with 70% and 63% of CEOs in India and Brazil, respectively, agreeing. The concerns are surfacing despite concerted efforts at improvements by a number of countries. A 2011 PwC study of 183 economies found paying taxes is getting easier, and that since 2006, the tax cost has fallen on average by 5%.4 So it is the spectre of future government policies to address deficits, rather than the current tax burden, that haunts many CEOs.

Related government austerity measures are also a concern, and not just in markets where budget cuts and national bailouts are in the headlines. CEOs in all regions (except the Middle East) perceive risk to their own domestic economies from possible contagion stemming from sovereign debt crises in countries like Greece and Ireland, as well as to the tax rises and public spending cuts that other governments are taking to pre-empt the risk of such a crisis.

‘The high level of government debt in Greece could be a concern in our expansion in the country, as a high government debt can lead to a crowding out effect, a reduction in private consumption and/or investments and constrain our opportunities for asset expansion in the country.’Efthimios Bouloutas CEO, Marfin Laiki Bank, Cyprus

4 ‘Paying Taxes 2011: The Global Picture’, PwC (2011).

Figure 4: Top risks relate to government policies – and talent

Q: How concerned are you about the following potential economic and policy/business threats to your business growth prospects?

Recession/economy

Overregulation

Low-cost competition

Scarcity of resources

Energy security

Protectionism

Security of supply chain

Technology disruption Security of supply chain

Recession/economy

Overregulation

Inflation


Recession/economy

Overregulation

Currency volatility¹

Economic imbalances¹


Protectionism

Protectionism

Recession/economy

Public deficit¹

Overregulation

Increasing tax burden¹

Exchange rate volatility

Shift in consumers

2008 2009 2010 2011

¹ New options

Availability of key skills

Unstable capital markets

Energy costs



Energy costs




Energy costs

1

2

3

4

5

6

7

8

9

Base: 2008 (1,150), 2009 (1,124), 2010 (1,198), 2011 (1,201)Note: Rank of top threats, by % of somewhat or extremely concernedSource: PwC 14th Annual Global CEO Survey


The heightened awareness of macro risks is clearly having an impact in the boardroom. Risk management is increasingly high on the agenda for boards and senior management, and incorporated in formal strategic planning processes, according to CEOs. The fact that strategy and risk must be considered in concert has always been present in successful companies, but has been given a further boost by the crisis. Senior level attention to this could strengthen the linkage between operational and strategic approaches to risk, and mitigate the impact of another crisis.

Strategic focal points for targeting growthThree themes emerged in how CEOs were reorienting their strategies and operations to respond to the multi-speed recovery. Nearly half of CEOs who reported a change in strategy pointed at the uncertainty of economic growth or changes in customer demand as the primary reason. Although some sectors were the exception – for example, the primary driver for banks is a changed attitude towards risk, while utilities are closely watching regulatory shifts – the pattern is clear.

Most CEOs are responding to a rise of middle-class consumers in emerging economies by developing products and services tailored to those high-growth markets, while also looking to serve the changed needs of more mature markets. So innovation, in the context of new patterns of demand, is a clear strategic focal point for CEOs. The rise in importance for new products and services, in fact, marks a significant shift for CEOs in where their best avenue for growth lies.

Talent is a second strategic focal point. As they look across their organisations, CEOs fear they won’t have the right talent to compete effectively as recoveries take hold. At a time of high unemployment in parts of the world, and large numbers of recent graduates in others, CEOs are reporting worrisome skills mismatches. A lot of investment in talent over the past few decades has been made in economies that are now slower growing. Whether that talent can understand and adapt to the realities of faster-growing emerging markets remains to be seen. CEOs are planning to deal with this deficit now.

Yet CEOs don’t necessarily want to go it alone. That raises the third strategic focal point – a more effective collaboration with government in areas deemed critical for business growth. Education and workforce health, IP protection and infrastructure development, are all part of a shared agenda with governments to maintain competitiveness.

These three business imperatives have always had their place on the CEO agenda. But now, with the worst fears of the crisis behind them and an emerging recovery ahead, CEOs are applying a different lens to the three focal points. We explore them further in the sections that follow.

Most CEOs are responding to a rise of middle-class consumers in emerging economies by developing products and services tailored to those high-growth markets, while also looking to serve the changed needs of more mature markets.

‘Three themes emerged in how CEOs were reorienting their strategies and operations to respond to the multi-speed recovery.’

For further detail on all results, see the interactive graphics at our website at www.pwc.com/ceosurvey, where you can explore responses by sector and location. A companion publication, the‘In-depth story’ – with more detailed charts from our entire questionnaire and insights from the in-depth interviews – is also available at our website.


Putting customers at the centre of innovation

CEOs are placing a higher premium on innovation today. Since 2007, business leaders have consistently reported that their single best opportunity for growth lay in better penetration of their existing markets. Now they’re just as likely to focus on the innovation needed for new products and services (see Figure 5). It’s high on the agenda in virtually all industries, including industrial sectors such as metals, chemicals and manufacturing.

Revamping the organisation for innovationCEOs are confident their innovations will succeed: 78% expect their development efforts to generate ‘significant’ new revenue opportunities over the next three years. It won’t be easy. But they are making changes at all levels of their organisation to make that happen. ‘For the first time in our corporate history, I’ve decided to task a specific E.ON board member with the responsibility for focusing exclusively on technology and innovation. We realise that our future success really hinges on our ability to innovate and mobilise new technology’, Johannes Teyssen, Chairman and CEO of German energy corporation E.ON AG, told us.

They’re also doing the hard work of putting operational arrangements in place to make innovation work. Eureka moments are few and far between. ‘People tend to see innovation strictly in terms of revolutionary, breakthrough products – technologies to sequester carbon emissions or microchips that can process data 600 times faster. That’s fine. But most innovations are the result of steady, continuous improvement’, said Paul Polman, CEO of Unilever, UK.

Turning a geographic toehold into a growth stronghold requires innovation that is precisely tuned to the needs of customers.

Figure 5: CEOs have a new commitment to innovation

Q: Which one of these potential opportunities for business growth do you see as the main opportunity to grow your business in the next 12 months?

0

10

20

30

40%

20112010200920082007

23%

31%

37%38%

29%

17%

15%

20%

17%

20%

19%15%

13%

14% 14%13%

10%11%

10%

13%

14%

21%

Increased share in existing markets New product/service development New geographic markets

Mergers and acquisitions New joint ventures and/or strategic alliances

Base: 2007 (1,084), 2008 (1,150), 2009 (1,124), 2010 (1,198), 2011 (1,201)Note: Percentage of CEOs who see the following as the main opportunity to grow their business in the following 12 monthsSource: PwC 14th Annual Global CEO Survey


Yet incremental innovations can only become revenue and profit generators when companies are effective at linking up new ideas with customer needs. So marketing, distribution and finance, among other functions, all need to be part of the innovation development and assessment process. ‘Innovation goes way beyond just the products. It’s the way you market the product, the way you sell the product, the whole aspect of consumer engagement’, said Louis Camilleri, Chairman and CEO of Swiss/US-based Philip Morris International. That means addressing cultural and organisational factors for some, and fresh thinking about what technology can enable for others.

Using technology to drive ambidextrous innovationIn what could be called ‘ambidextrous innovation’, CEOs are looking to gain both efficiencies and differentiation at the same time: 79% of CEOs in the survey believe innovation will drive efficiencies and lead to competitive advantage, to go with the 78% who expect new revenues. Technology is one way of capturing both; CEOs are approaching IT with the spirit of ambidextrous innovation in mind.

Close to 70% are investing in IT to reduce costs and become more efficient, while 54% are also funnelling funds towards growth initiatives, including emerging technologies in mobile devices, social media and data analytics.

Cloud computing, for example, can enable companies to manage business processes more efficiently. But it can also empower entirely new business models, for example, ones that connect supply chain partners in a single differentiated offering for customers. In the survey, CEOs told us they are exploring both possibilities for technology, in general, and for cloud computing, in particular.

Innovation begins with customersCEOs are approaching innovation with an emphasis on putting customers first. ‘Companies give innovation a lot of “airtime” but not enough “dollar time”,’ said Vineet Nayar, Vice Chairman and CEO of India’s HCL Technologies. ‘At HCL, we put innovation on our balance sheet. We innovate on behalf of our customers and participate with them in the risk associated with innovation. When innovation results in a new

revenue stream for them, we share in it. We have this arrangement now with several customers. It’s a way of “putting your money where your mouth is”.’

Many companies are bringing their innovation activities closer to their customers by giving customers a say in the design of offerings, or opening innovation up to more partners. A consumer goods business looking to expand in India, for example, is focused not only on shipping the best possible product out of its facilities, but also on where it is best designed, and on how to package, distribute and sell it into a changing marketplace. Innovation takes place at each stage and increasingly with different partners along the way.

‘Today, nearly every new item we bring out was produced with at least one partner somewhere in the world’, said Bob McDonald, Chairman of the Board, President and CEO of US-based Procter & Gamble Company (P&G) ‘For example, we co-locate scientists from partner organisations and from our organisation in the same laboratory. It’s amazing what you can do when you knock down the barriers in an organisation or the barriers between organisations.’

Making innovation localInnovation is considered an essential ingredient to a global model. ‘You end up having to innovate simply to provide the same high-standards across very diverse operating environments’, said Douglas M. Baker, Jr., Chairman, President and CEO of Ecolab, in the US. ‘So, innovation is a constant in our business.’

‘Innovation has a cultural dimension too, so Angang Steel has taken steps to nurture a culture in which innovation can thrive. This includes building relationships with external research institutions; engaging clients in research and development; creating a corporate environment in which risk-taking is encouraged and mistakes are tolerated, and recognising and rewarding individual initiative.’

Dr. Zhang Xiaogang President, Anshan Iron and Steel Group Corporation, China


‘The question is, where do you place your bets? If you go on a certain new media platform, is it going to hurt any of your core businesses?’Leslie Moonves President and CEO, CBS Corporation, US

Some CEOs, however, are literally moving development processes to customer locales, in order to get closer to them. They’re creating products for faster-growing markets, in those markets, and then distributing worldwide. General Electric’s CEO, Jeffrey Immelt, described GE’s ‘reverse innovation’ strategy in 2009. Developing products domestically ‘worked fine in an era when rich countries accounted for the vast majority of the market and other countries didn’t offer much opportunity. But those days are over – thanks to the rapid development of populous countries like China and India and the slowing growth of wealthy nations’, he wrote.5

Similarly, Juha Rantanen, President and CEO of the Finnish firm, Outokumpu Oyi, told us, ‘One of the big issues for us is that our European-based customers are moving many of their operations off-shore.’ As a result, with its customers increasingly moving their factories to China, Outokumpu established a new service centre in Shanghai – to serve existing customers as well as new customers in China.

Giving consumers their say You can’t get closer to consumers than involving them directly in product and service development, a trend that many CEOs see coming. That doesn’t mean shoppers are putting on lab coats and entering clean rooms. More frequently, it involves having consumers test new offerings before they’re launched. Media and entertainment companies, for example, increasingly factor input from the global consumer base in determining the viability of new products and consumption models, before the ‘official’ product launch.6

Consumers now expect that level of engagement from businesses. Technology has become a key enabler, as well as a driver of consumer involvement in product development. Close to half of consumer-facing CEOs in the survey foresee social media and mobile devices prompting a ‘significant change’ to their strategy, as consumers turn to these media to voice their preferences. U.S. Bancorp is investing in mobile banking technology, for example, deciding the time is now right. ‘The next step, though, is mobile banking and the advent of transaction-based activities, including banking on the more viral options, and so we have been investing heavily in that’, said Chairman, President and CEO Richard K. Davis. ‘But five years ago we would not have been investing but, waiting for others to do it and then being a quick follower.’

Companies are responding to changing consumer expectations in other ways. Many continue to innovate in energy-saving and sustainable technologies, not because of the prospect of regulation, but rather because enough consumers are telling companies they prefer sustainable products and green companies. So 64% of

CEOs said that developing environmentally friendly products or services are an ‘important part’ of their companies’ innovation strategy, a nod to the greening of consumers.

Opening innovation to supply chain partners and beyondThe same demand for innovation is driven through the supply chain. ‘Our basic strategy is focused on improving technology to improve fuel economy and reduce emissions. Every country in the world is focused on improving fuel economy and reducing CO2 emissions. It’s turned out to be an excellent strategy. It was strong before the recession, it was strong during the recession and it’s strong after the recession.’, Timothy M. Manganello, Chairman and CEO, BorgWarner Inc., said in an interview. The US auto components supplier reduced operating costs during the recession, but has continued to reinvest in technology, innovation and new product launches. Post-recession, its fuel economy and emissions technologies are driving sales while profits growth is stemming from cost-control strategies, he said.

5 ‘How GE is disrupting itself’, Harvard Business Review (October 2009).6 ‘Global Entertainment and Media Outlook: 2010-2014’, PwC (2010).


It’s not uncommon for supply chain partners to work together in the search for innovation; 39% of CEOs this year expect the majority of their innovations to be co-developed, following established models for supplier innovation (see Figure 6). Consider the automobile industry, where a lot of high-value components emerge from suppliers. Entirely new industries are evolving with supplier partnerships in innovation at the core; utilities are working jointly with electric car, battery makers and IT companies around the smart grid, for example.

In part, the willingness to team-up reflects post-recessionary challenges with working capital, which is also reflected in the popularity of joint ventures over M&A among most CEOs in the survey. Many CEOs are concluding that no one organisation has enough of the right people and the right amount of funding to innovate successfully on its own.

Given that an estimated 90% of all patents expire without creating any economic value,7 an approach to innovation that envelops employees, partners and alliances makes sense. It keeps costs down and improves the odds of success. Open innovation provides companies a way to use market discipline to foster innovation. ‘The world has changed. The definition of ‘competition’ is different’, P&G’s

McDonald said. ‘Another thing we spend a lot of time talking about is new categories we can create. Often, new categories will fall between the boundaries of two existing categories. So if you’re an innovative company and you’re organised by category, who’s going to invent the category that falls between the boundaries?’

Similarly, UK based Unilever believes changing the relationship with its entire supply chain is how it can drive innovation. ‘Tesco is going to be around for another hundred years or more – and so is Unilever. It only makes sense to work in concert to meet consumers’ needs’, said CEO, Paul Polman. ‘By working together towards a common goal there is much more value to be gained than there is in haggling over costs.’

‘In order to strengthen our R&D efforts, we have entered into collaboration agreements with universities in Mexico, the United States and Europe. We also have technological partners in some of our companies, who provide us with valuable support in this field.’

Armando Garza Sada Chairman of the Board of Directors, Alfa, S.A.B. de C.V., Mexico

7 C. Wasden, ‘Getting beyond novelty: How discipline and failure foster innovation’, View, PwC (Fall 2009).

In brief: InnovationCEOs are adopting new strategies to embrace technology and innovation, and get closer to customers. Innovation has become a big tent, with companies at once giving customers a say in product offerings, opening innovation up to more partners, and shifting development to the countries where they’ll be purchased.

Figure 6: CEOs expect innovation to involve external partners

Q: To what extent do you agree or disagree with the following statements about your expectations regarding your company’s innovation over the next three years?

1 An important part of our innovation strategy is to develop products or services that are environmentally friendly

2 We expect the majority of our innovation to be co-developed with partners outside of our organisation

3 We use M&A as a significant source of innovation

4 We expect the majority of our innovations to be developed in markets other than the country in which we are based

5 We expect government assistance to boost our innovation output

Disagree strongly Disagree Agree Agree strongly

5

13

18

24

29 27 18 7

27 19 10

26 26 7

24 30 9

12 41 23

%

Base: All respondents (1,201)Note: Expectations regarding companies’ innovation over the next 3 years Source: PwC 14th Annual Global CEO Survey


Bridging global skills gaps

The ‘war for talent’ was declared more than 10 years ago, but few CEOs are prepared to declare victory. They know talent isn’t just a numbers game. It means finding, retaining and motivating employees whose skills really fit the company’s strategy. Given that 84% of CEOs have changed strategies in the past two years, companies’ talent needs are changing, too. So talent is now at the top of the CEO agenda for 2011, across all regions (see Figure 7).

More companies expect to add jobs in 2011 than they did in 2010 – led by industrial sectors such as chemicals, automotive and manufacturing. There are other differences by region and by industry. The entertainment & media

sector is the least optimistic about jobs growth, for example, as industry dynamics adapt to internet delivery models. By contrast, the technology sector is the second most likely to add jobs. (For a detailed look at which regions and industries are adding jobs, go to www.pwc.com/ceosurvey.)

As more ready plans to hire, the talent crunch becomes more apparent: two-thirds of CEOs believe they’re facing a limited supply of skilled candidates, particularly as they establish a long-term presence in key emerging markets. ‘As we shift eastward, we have to make sure that our corporate culture and operating model reflect the markets there. Trying to get that right is where I spend most of my time’, Paul Polman, CEO of Unilever told us. The consumer products group expects around 70% of its business will come from Asia-Pacific within 10 years.

‘As we look at growing globally, we recognise we’re going to need a more diverse workforce, including more women and different geographic leaders.’

Stephen A. Roell Chairman and CEO, Johnson Controls, Inc., US

Growth opportunities, especially in emerging markets, prompt changes to talent strategies

Figure 7: Talent is now on top of the CEO agenda

Q: In response to changes in the global business environment, to what extent do you anticipate changes to any of the following areas of your company’s organisation or operating model over the next 12 months?

1 Strategies for managing talent

2 Approach to managing risk

3 Investment decisions

4 Organisational structure (including M&A)

5 Corporate reputation and rebuilding trust

6 Capital structure

7 Engagement with your board of directors

17

23 54 23

23 48 28

25 47 27

36 41 22

50 34 15

52 34 12

52 31

No change Some change A major change

%

Base: All respondents (1,201)Note: Anticipated changes in the companies’ organisation or operating model over the next 12 monthsSource: PwC 14th Annual Global CEO Survey


Thinking globally and locallyFilling skills gaps in these regions begins with companies making themselves more attractive to potential and current employees, and looking for better ways to develop and deploy staff globally. Becoming the ‘employer of choice’ is a vital advantage in dynamic markets where top talent has the pick of jobs from domestic and foreign employers. Hiring the best workers amounts to nothing if the firm can’t retain top talent in hypercompetitive talent markets.

In high growth markets such as China, India and parts of Latin America, talent shortages are as critical as – and in some cases more acute than – the rest of the world. Businesses looking to double or triple revenue in five years in emerging markets, for example, and anticipating equivalent growth in their workforces, find that the availability of talent is often their biggest constraint. In 2010, 41% of employers in Asia-Pacific had difficulty filling positions, according to a Manpower survey of 35,000 employers worldwide, 10 percentage points greater than the global average.8

Despite the relatively large numbers of recent graduates in emerging markets, around 40% of CEOs report difficulty forecasting talent availability in these regions. ‘These nascent markets come with various uncertainties. One is the regulatory environment; another is talent-related. Finding the appropriate talent to take advantage of the growth prospects of emerging markets is one of the biggest challenges we face,’ Louis Camilleri, Chairman and CEO of Swiss/US-based Philip Morris International, pointed out. ‘There is a high level of education, there’s a lot of enthusiasm, but there is a pretty steep learning curve as well. It’s just a process, and it will take some time in some markets.’

8 ‘Supply/Demand: 2010 Talent Shortage Survey Results’, Manpower (2010).

‘For much of its history, Kirin was focused on serving a domestic market only, but in the past few years, we changed course dramatically and have embraced globalisation.Consequently, Kirin needs human resources that are capable of working with people of very different backgrounds and nationalities. So our priority is to make sure that our young and up-and-coming managers are prepared to work internationally. For their part, however, our young employees appear to have an intrinsic expectation of building careers that include assignments in other countries. We also actively recruit veterans with extensive international business experience.’

Senji Miyake President and CEO, Kirin Holdings Company, Limited, Japan

Figure 8: Retention and deployment figure highly in CEOs’ talent strategies

Q: To what extent do you plan to change your people strategy in the following ways over the next 12 months?

1 Use more non-financial rewards to motivate staff

2 Deploy more staff to international assignments

3 Work with government/education systems to improve skills in the talent pool

4 Incentivise young workers differently than others

5 Change policies to attract and retain more women

6 Increasingly recruit and attempt to retain older workers

7 Set compensation limits for executive talent

8 Grow our contingent workforce faster than our full-time workforce

9 Relocate operations because of talent availability

No change Some change Significant change

34

39

44

52

56

57

58

66

71 20 7

26 7

32 8

32 10

32 11

34 12

41 13

40 19

47 18

%

Base: All respondents (1,201)Note: Plan to change people strategy in the following 12 monthsSource: PwC 14th Annual Global CEO Survey


‘A top priority in our HR strategy is to develop more financial management talent enhanced with international experience to the extent possible, to support the Bank’s future global development.’Li Lihui President, Bank of China, China

9 ‘Talent Mobility 2020:The next generation of international assignments’, PwC (2010). 10 ‘Women in labour markets: Measuring progress and identifying challenges’, ILO (March 2010). 11 J. Siegel, L. Pyun and B.Y. Cheon, ‘Multinational Firms, Labour Market Discrimination, and the Capture of Competitive Advantage by Exploiting the Social Divide’, Harvard Business School working

paper (2010).

Stepping up overseas deployments Over half of CEOs are planning to send more staff on international assignments in 2011 (see Figure 8). The number of international assignments among multinationals increased 25% over the past decade; PwC predicts there will be further 50% growth over the next 10 years.9 Indeed, 20% of our CEO respondents lead organisations based in a nation other than the one where they were born. In the talent market, skilled employees with experience in more than one country are increasingly viewed as valuable as their specialties. Nonetheless, close to half of CEOs foresee problems deploying experienced employees in other countries.

Global deployments are a first step to address shortages as company footprints change, but many CEOs know they need to nurture local talent in the long run. ‘We use foreign managers to manage foreign companies because they have the best management team already; it’s totally impossible for us to go over there and manage them well. We have learnt some lessons in this regard’, Zhou Zhongshu, President of China Minmetals Corporation told us.

Any idea that a centralised headquarters can effectively dictate to far-flung operations in increasingly important markets is disappearing. Many of today’s multinationals want to give independence to local managers, to get closer to those markets. ‘We’re building the next generation of leadership to take International Paper to the next level,’ John V. Faraci, Chairman and CEO of the US-based firm, said. ‘We don’t believe you can run a global business with expatriates. You’ve got to have local talent. They understand the local culture and how to do business there.’

Casting wider nets in the talent pool

The scale of shortages CEOs describe is leading to some new thinking around existing workforces. Consider two talent challenges reported in the survey: two-thirds of CEOs believe there is a limited supply of candidates with the right skills, and creativity in the workforce was found lacking by 44% of CEOs. Fortunately, companies have alternatives within their own companies and communities that can address both challenges at once – by tapping underutilised pools of talent.

In virtually all markets, for example, many fewer women than men are active in the labour market.10 Some companies have already taken note. For example, in South Korea, where only 60% of female university graduates aged 25–64 are working, foreign multinationals got ahead ‘by aggressively hiring an excluded group, women, in the local managerial labour market’, according to research from the Harvard Business School.11 But there is a lot further to go: only 11% of CEOs globally are planning ‘significant change’ to policies to attract and retain more of their female employees today.


Older workers are another underutilised pool of talent. In many countries, populations are ageing and baby boomers are becoming eligible for retirement. In the US, for example, more than one in 10 employees are currently eligible for retirement. Over half of North American CEOs foresee challenges as older workers retire. Even though many valuable workers nearing the traditional retirement age say they want to carry on working, only 10% of CEOs are planning significant changes to hold on to older workers.

Similarly, over half of CEOs (54%) foresee challenges in recruiting and retaining younger employees – the mercurial Generation Y workers who have their own distinct expectations about their relationships with employers. However, outside of Latin America, only a minority of businesses are changing the way they incentivise younger employees to improve recruitment.

These three pools of talent are particularly vital in thinner talent markets where skills are scarcer – but they require specific strategies to approach. You can’t just pay lip service to them. As India-based HCL Technologies Vice Chairman and CEO, Vineet Nayar, told us, ‘With Generation Y coming into the business, hierarchies have to disappear. Generation Y expects to work in communities of

mutual interest and passion – not structured hierarchies. Consequently, people management strategies will have to change so that they look more like Facebook and less like the pyramid structures that we are used to.’

Successfully attracting, developing, deploying and retaining from these talent pools also helps to address the creativity challenge. A diversity of backgrounds on a well-managed team tends to foster diversity of thought – which is a key driver for creativity and innovation. Ivan Blagodyr, General Director of Russian energy group JSC RAO Energy Systems of East, had that in mind regarding one such pool: ‘We need to readjust our thinking, become more innovative, and it’s very important not just to have proper qualifications and experience but a proper mindset as well. That is why I think it’s important to recruit young people.’ No doubt others have had similar experiences when they’ve tapped underutilised pools of talent of their own.

Necessity is the mother of retentionMany employers made concerted efforts through the recession to hold as many qualified people as possible, opting for hiring freezes and pay-cuts rather than layoffs. Voluntary turnover declined in mature economies during the recession, but historical trends demonstrate that it will return.

In hot talent markets, turnover rates can be high, reflecting scarcity. Annual staff turnover in China can reach 20% or even 40% in some sectors, compared to turnover rates that are typically less than 10% in the US or UK. ‘Assembling talent is part of the reason companies are making acquisitions in the emerging markets. At the same time, retaining that talent is very tough. In China right now, competition for people is quite fierce’, said Ed Breen, Chairman and CEO of Tyco International, based in Switzerland. A majority of CEOs globally said they’re concerned about competitors recruiting key personnel.

‘Only 20% of our young people every year are studying at the university. OECD said we should have at least 40% or 50%. And we said no because we do not want an “academic proletariat”. We have our dual education system with apprenticeships on the one hand and university studies on the other. I think it’s a perfect model. It’s something that other countries don’t have.’

Prof. Dr. Peter Gomez Chairman of the Board, SIX Group AG, Switzerland


‘Our capacity to attract, retain and manage executive talent does not depend on the compensation package, but rather on our ability to create a sense of belonging to an organisation that offers a long-term relationship and a professional development opportunity, and that has a clear conception of itself, of what it wants to be, and of how to achieve it.’Armando Garza Sada Chairman of the Board of Directors, Alfa, S.A.B. de C.V., Mexico

Countering talent poachersRecognising these trends, CEOs are changing their people strategies to improve employee engagement and retention. Most CEOs (65%) say they plan to use more ‘non-financial’ rewards. These approaches can take many forms, but often involve training and mentoring programmes, with a closer focus on career trajectories. ‘There are an enormous number of talented people in the world. But the trick for any organisation is to hire people early enough so that their careers can grow in tandem with the organisation’s vision of its future,’ said Gregory R. Page, Chairman and CEO of Cargill, Incorporated in the US.

Likewise, Russian rail transport group Globaltrans adopted a ‘careful’ approach to pay increases during the recession, ‘Of course, during the crisis we were a bit more careful about annual pay increases. But that was the only action we took that affected our work force. There was no significant reduction in headcount – but neither were there new joiners,’ noted Chairman of the Board of Directors Alexander Eliseev. ‘The key to our people strategy is to provide every employee with the opportunity to advance their professional development.’

Instilling a deeper sense of ownership by spreading employee stock ownership more widely is another important retention tool for CEOs. ‘In a high-growth economy like India, many companies are building capacity rapidly and, as a result, become easy targets for talent-poaching. So, employee retention is a real challenge,’ said Sajjan Jindal, Vice Chairman and Managing Director of India’s JSW Steel Limited. ‘In order to maintain our own retention rates, we’ve made our employee stock option scheme more attractive.’

In brief: TalentThe challenges CEOs report in recruiting and retaining talent reflect the strategic and geographical changes afoot for many companies. Companies are taking the long view on addressing talent needs in every market where they operate. Experienced and skilled employees are their best asset, and the costs in lost productivity and retraining are becoming clear.


Achieving shared priorities with government

While CEOs focus on their own growth plans, many also see a common purpose with governments. Constrained budgets are forcing difficult decisions on public sector leaders; CEOs are keen to protect shared priorities that are critical to business growth and their own competitive advantages. Fostering a skilled labour force is but one area where CEOs see greater potential for deeper engagement with government bodies.

Sustained collaboration between public and private sectors doesn’t always come naturally. A level of tension over the boundaries and roles continues to colour the ongoing relationship. Overregulation has remained among the top three concerns of CEOs through economic times, good and bad, for example. And countries have different starting points

Businesses adopt a shared agenda to support sustainable growth

Figure 9: CEOs see shared commitments with government to achieve public outcomes

Q: How much does your company plan to increase its commitment in the following areas, to improve national competitiveness and social well-being over the next three years? Which three areas should be the Government’s priority today?

0 30 60%0

30

60%

Should bethe government’spriority

Private sector to raise commitment ‘significantly’

Shared priority

Improving the country’sinfrastructure

Creating and fosteringa skilled workforceEnsuring financial

stability and accessto affordable capital

Reducing povertyand inequality

Generating innovationsand safeguarding IP

Maintaining the healthof the workforce

Securing natural resourcescritical to business

Addressing the risksof climate change

Protectingbiodiversityand ecosystems

Protecting consumers’ interests

Base: All respondents (1,201)Note: CEOs were asked how much their companies plan to increase commitments to achieve these outcomes; and what should be the government’s priority. The plot shows percentages of CEOs who chose each of these areas. Multiple choices were allowedSource: PwC 14th Annual Global CEO Survey


in terms of the cooperation between business and government. Think of the role of government in supporting growth in, say, China versus the United States. The current relationship between public and private sectors in a given country influences expectations about working together in the future.

But barriers are beginning to come down and expectations are changing. Nearly three-quarters of CEOs told us they would actively support new government policies that promote ‘good growth’ that is economically, socially and environmentally sustainable. And they’re optimistic about outcomes: 54% believe that collaborative government and business efforts will mitigate global risks such as climate change. Indeed, as Paul Polman, CEO of UK-based Unilever, commented, ‘we clearly need a business model that will help us return to growth – but growth that is equitable and sustainable for all of society. This will take political will.’

It will also take private sector commitments, as many CEOs pointed out, which means that corporate and government leadership have a shared agenda that each has an interest in pushing forward collaboratively. Worker skills are the highest priority issue on this shared agenda (see Figure 9). Indeed, 42% of CEOs reported a ‘significant increase’ to their commitments on workforce improvement, and another 40% expect ‘some increase’.

CEOs also clearly stated the importance of infrastructure for competitiveness. Those in infrastructure-related sectors such as engineering, construction and utilities, as well as banks, reported increased commitments of their own. But CEOs overall believe it’s the government’s job to build and maintain transport links, power and telecoms grids, and the water supply. ‘In the absence of infrastructure, economic opportunity declines for everyone,’

Gregory R. Page, Chairman and CEO of Cargill, Incorporated, based in the US, noted. ‘No one company is big enough to compensate for a substandard electrical grid. You can’t run a big business on the back of a 300 horsepower diesel engine.’ Similarly, businesses expect government to take more of a lead to ensure financial sector stability, reflecting a post-crisis view that market mechanisms alone may not be enough.

Businesses also have another key expectation for their governments: to tackle fiscal deficits to restore stability to the markets in a way that is mindful of the fragile environment for global growth. Public revenues are of course expected to be part of the equation: a majority of CEOs expect taxes will rise, led by 65% of CEOs in Asia and 70% in Latin America. ‘With worries over sovereign debt, we also see states looking everywhere for sources of new tax revenue,’ said Johannes Teyssen, Chairman and CEO, E.ON AG in Germany. ‘And industries that are more embedded in the national infrastructure and can’t easily avoid state intervention are natural targets for new taxes increases. In my view, states are on a dangerous path in applying special tax regimes on energy companies.’

‘Through public private partnerships, the private sector can also make possible certain investments with optimal allocation of risks and responsibilities. This enables the government to concentrate its investments in key social areas.’Marcelo Odebrecht CEO, Odebrecht, Brazil


Partnering for infrastructure Government leadership in building infrastructure is critical for competitiveness. A majority of CEOs identified the priority for the governments of all countries outside of Western Europe and Japan, where infrastructure is well developed, and of China – where the government allocated almost US$600 billion of stimulus spending for infrastructure projects over the past two years.

But the role of private capital in financing infrastructure is unavoidable: an estimated US$3 trillion per year needs to be spent on infrastructure across the globe in the coming decades, according to a recent report from the World Economic Forum.12 The scale of this funding requirement means it is unlikely to be met solely through public finance – so governments need to engage with the private sector and tap a range of funding sources.

That’s where public–private partnerships (PPPs), in their varied forms, are likely to fit in. ‘PPPs will take root in other countries because most countries don’t have lots of spare cash right now,’ Philip Dilley, Chairman of UK-based Arup Group said. ‘We see substantial PPP activity already in European countries.’ PPPs have the most potential in regions with a stable regulatory structure as a method of sharing risk or financial burden as well as locking in the funding for necessary maintenance of infrastructure. Dilley expects similar partnerships to evolve in India in particular – where 88% of CEOs told us the inadequacy of basic infrastructure was a threat to growth. The Indian government aims to increase investment in infrastructure to more than 9% of GDP by 2012.13

Sajjan Jindal, Vice Chairman and Managing Director of India’s JSW Steel Limited, believes PPPs are perhaps the best model for businesses to contribute to the shared agenda: ‘India’s administrative capabilities are not like China’s. PPPs in healthcare, roads, education, ports, airports or railways can be a good alternative to the government going it alone.’ A key element is the consideration of user fees that can make PPP-financed projects more attractive to private finance, although the World Economic Forum report highlights the need to understand and manage public perceptions at the same time.

Businesses can provide more than cash: they have expertise, and the abilities to execute and manage risks. This is part of what makes PPPs attractive. As Berthold Leetfink, Deputy Secretary General of the Ministry of Economics, Agriculture and Innovation in the Netherlands told PwC, ‘At least for the Netherlands, and I think for many other countries, planning and building infrastructure is very much in the hands of government. But it’s obvious that the private sector has a lot of knowledge in terms of building cheaply, efficiently or in a more environmentally friendly way.’ As an example, a PPP project in 2009 to connect a 12-mile regional rapid transit line in Vancouver – Canada Line – was completed several months ahead of schedule.14

This model of cooperation is explored further in PwC’s forthcoming ‘Rethinking Government: doing things differently’ report.

12 ‘Paving the Way: Maximising the Value of Private Finance in Infrastructure’, World Economic Forum (2010).13 Eleventh Five-Year Plan, Government of India Planning Commission (2008).14 ‘Public-private partnerships: The US perspective’, PwC (2010).

‘We also expect that governments will not only be looking to the private sector for the provision of capital, but increasingly for the delivery of a whole range of social services. For example, in the UK the government is looking at different ways to procure services from the private sector in terms of meeting the governments’ objectives.’

Nicholas Moore, CEO Macquarie Group Limited, Australia


Similar trends can be seen in other countries ranging from the charter schools in the US to free schools in Sweden and academies in the UK. 54 percent of CEOs plan to work with government and the education system to improve the talent pool available. ‘We’ve also undertaken another initiative in cooperation with the technology institution, ITBA – one of the finest universities in Argentina. With support from Pampa Energía S.A., the university re-started an electrical engineering programme which had been previously dropped from the curriculum,’ said Marcos Marcelo Mindlin, Chairman of the country’s largest electricity company. ‘Not only do we fund the programme, but we also offer full programme scholarships to ITBA students whose parents work for Pampa Energía. This is our way of helping to train more local electrical engineers, which Argentina badly needs.’

The issue becomes how to integrate private business in education and define an agreed role for the private sector. In many areas, like Australia and in Scandinavia, the private sector is a new player in education and its role has grown with perceptions of a decrease in the performance of government in dealing with the issue.

Filling the talent pool The highest priority on the shared agenda relates to the workforce. Over the next three years, 42% of CEOs expect to significantly increase their role in fostering a skilled workforce. And 34% plan significant raises in their commitments to healthcare. In both cases, CEOs are addressing their own competitive concerns – while simultaneously responding to the universal need to improve uneven education and healthcare services.

As Juha Rantanen, President and CEO of Outokumpu Oyi in Finland points out, ‘If you think about it, many of the things one learns through formal schooling either at the vocational or university level, often become superseded by new knowledge and new technology within a matter of a few years. That’s why companies like ours have to provide their people with continuous training and education.’

The role for business is well recognised when it comes to leadership development and on-the-job training. What’s newer is that the training and education systems are becoming much more of an integrated market with companies and governments both looking to meet workforce requirements. For instance, in Malaysia, investments are being made directly in the education system. ‘Public education is a big issue and one where the private sector can fill the gaps that government often has a difficult time addressing,’ said Tan Sri Dato’ Azman Hj. Mokhtar, Managing Director, Malaysia’s government investment holding arm Khazanah Nasional Berhad (Khazanah). ‘It’s an issue that links back to how do we define business success, because if we don’t solve the education issue then the problem will eventually degrade the private sector’s ability to recruit a capable workforce.’

In brief: The shared agendaPublic and private sectors have a common purpose in achieving outcomes ranging from improved infrastructure and workforce development, to climate change mitigation and poverty reduction. Leaders from both recognise the need to collaborate more on that shared agenda, but they also still see the need for a government lead in key areas like infrastructure.

‘It is impossible to make education the sole responsibility of the business. Education should be state-supported, with additional corporate programmes aiming to develop the company’s own human resources.’

Evgeny Dod CEO, RusHydro, Russia


CEOs’ shift towards a targeted strategy signals the advance of globalisation – but it may diverge from how it’s looked in the past. Companies are not only affected by globalisation; the actions they take will shape it. And this time, the evidence shows, CEOs are going to do it a little differently.

That 72% of CEOs support ‘good growth’ that is economically, socially and environmentally sustainable is recognition that they would like to see globalisation evolve in a way that links economic growth and social development. Good growth is a long-term path towards value creation that creates lasting prosperity for both shareholders and society.

While that sounds like a lofty ideal, approaches to the three strategic focal points hint that change is really happening. Developing talent is a business imperative, but strategies are shifting towards the view that employee wants and needs – whether for career development opportunities or flex-time for work-life balance – are to be factored into employment agreements. And CEOs expect to work with governments to develop workforces, not just their own employees. So entire communities and countries stand to benefit.

Innovation is a long-term building block for any company, but open innovation – involving partners in a range of innovation processes for mutual benefit – also creates avenues for further value creation in society. Partners in collaboration, think suppliers or academia, for example, learn much more about related processes. That tacit knowledge and experience can bear fruit in future projects, while fully respecting the intellectual property of the initial collaboration. And reverse innovation and other methods that bring innovation processes closer to customers, particularly in emerging markets, stand to deliver products and services that are better matched to the cultures they are sold to.

The shared agenda with government likewise acknowledges how businesses are taking a broader view of their role and responsibility and the connection between competitiveness and social well-being. Even issues such as climate change and poverty reduction, though lower priority on the agenda CEOs reported, are not being ‘outsourced’ to government. Far from it, in fact, as CEOs recognise that equal commitments need to be made by the public and private sectors. If they don’t tackle these issues, their operations will be constrained over the long-term.

These findings suggest that CEOs are beginning to take the long view. This isn’t out of altruism; businesses reap great value directly from getting talent, innovation and government partnerships right. But the approaches they are taking also create broader value for society, value that extends beyond the profits and jobs they create, and the products and services they provide. The public has high expectations and needs to trust that the business community is playing a crucial role in the development of society. If the business community can rise to meet these expectations, its license to operate will be secure.

Globalisation reimagined

The shared agenda with government likewise acknowledges how businesses are taking a broader view of their role and responsibility and the connection between competitiveness and social well-being.


Final thoughts from our CEO interviews

Douglas M. Baker, JrChairman, President and CEO, Ecolab, US www.ecolab.com

‘Sometimes I wonder if we’re working too hard to minimise the risk of a future downturn and whether that outcome is really achievable by government at all. If we discourage people from taking risks – and possibly making mistakes – we’ll have a lot less innovation as a result. Having said that, government can take some positive actions. As a start, government can bring clarity to what the rules are going to be going forward. How are we going to go manage the financial sector? What regulations will they operate under? What are the capital requirements going to be? What about the liquidity requirements? Until we’re clear on those issues, we shouldn’t expect lending to pick up.’

Ivan Blagodyr General Director, JSC RAO Energy Systems of East, Russia www.rao-esv.ru

‘The main thing that we can use now to counter the forces of nature and technology failures is the expertise and readiness of our people. This is what allows us to survive and get prepared for winters, winter and summer peak periods, everything. It is where the value lies, definitely. Everyone who tries to enter the Far Eastern market now understands that utilities companies have valuable human resources. Retaining this value is a big challenge.’

Efthimios BouloutasCEO, Marfin Laiki Bank, Cyprus www.laiki.com

‘Maintaining a strong capital base has been key in attracting liquidity, especially during these turbulent times, and instrumental in allowing us to extend credit. This particular element of our strategy, being in a position to continue extending credit, has been crucial in attracting a number of high quality and profitable clients.’

Ed BreenChairman and CEO, Tyco International, Switzerland www.tyco.com

‘All the companies with big vehicle fleets compare notes about ways to reduce carbon emissions. Fred Smith, CEO of FedEx, was recently here to see what Tyco is doing to modernise our fleet. One of the things that always strikes me is that when we talk to new recruits to our company, they all ask about our environmental programmes. So having a credible environmental track record is actually a big recruiting advantage.’


Louis CamilleriChairman and CEO, Philip Morris International, Switzerland/US www.philipmorrisinternational.com

‘In times of uncertainty and recession, all consumer products companies basically face two fundamental issues. One trend is trading down to cheaper products. The other is consumer fragmentation. In terms of fighting these trends, the answer is innovation. […] But I think it’s a mistake to restrict innovation to product innovation. We have the ambition to innovate across everything we do, to become more effective and to enhance our execution abilities and to get better at speed to market. Innovation goes way beyond just the products. It’s the way you market the product, the way you sell the product, the whole aspect of consumer engagement.’

Richard K. Davis Chairman, President and CEO, U.S. Bancorp, US www.usbank.com

‘In the very beginning when things started to fall apart in fall of 2008, I expected the flight-to-quality to be completely in deposit-gathering. I thought it would be all the CFOs and treasurers of large companies who would be the first to say “Let’s put our money in there, because we have way more than the insurance will cover, so we better know that the company is safe”. That happened, but at the same time those same business leaders invited us into their credit line as the banks they had changed the rules, making it more expensive, making it harder. So the lending side was surprisingly quick to welcome us in under flight-to-quality. They’re both now present. So for us, the longer this goes, on a relative basis we get advantaged. On an absolute basis we don’t get hurt.’

Philip DilleyGroup Chairman, Arup Group, UK www.arup.com

‘Today, we’ve become more strategic about what we do and where; we endeavour to avoid becoming too reliant on any one market. If I look at some of the architectural firms we collaborate with – ones that are now suffering in the current economic climate – often this is because they have been too focused on a single market, such as commercial property. So, diversification across sectors and geographies has been very important for us.’

Evgeny Dod CEO, RusHydro, Russia www.eng.rushydro.ru

‘It is clear that the financial crisis has limited rather than eliminated opportunities for renewables, say, in Southern Europe. This is because today it’s impossible just to set tariffs that would ensure return on the projects. Territories that are in a stable situation or, in our opinion, have growing economies are of key interest for us. These countries include BRIC and developing economies. Here I mean India, Southeast Asia, Africa and South America.’

Alexander EliseevChairman of the Board of Directors, Globaltrans, Russia www.globaltrans.com

‘There’s no doubt that liberalisation of railway freight transport is good for the sector and good for the Russian economy as a whole. But liberalisation also means that competition will become much tougher. The Second Freight Company will be a serious player – it has about 150,000 carriages, which is a considerable inventory. So, they are a powerful potential competitor. But we are used to tough competition. We are sure we can win this game.’


John V. FaraciChairman and CEO, International Paper, US www.internationalpaper.com

‘The recession reminded people, maybe for the first time in their lives or careers, what happens when capital markets are frozen. Even though you have a strong balance sheet, you can’t refinance your debt. That’s a very uncomfortable situation to be in, for an individual, a business, a country or a municipality. The risk-averse way is to have no debt, but that’s not the way to run a company, so it’s the notion of having enough flexibility that you can respond to the unforeseen event. That’s what 2008 and 2009 reminded us of. We didn’t see the recession coming, and when it did, the ability to respond quickly and effectively so that we had enough levers to pull to manage through it is very important. That’s a lesson learned.’

Armando Garza SadaChairman of the Board of Directors, Alfa, S.A.B. de C.V., Mexico www.alfa.com.mx

‘We see a great opportunity: a wide market, customers who have not yet consolidated their preferences, competitors with small-scale processes, with poor technological differentiation and high costs, etc., conditions that could be propitious for our acquiring an interesting part of the market and increasing our operations in Asia.’

Prof. Dr. Peter GomezChairman of the Board, SIX Group AG, Switzerland www.six-group.com

‘One major change is, of course, that regulatory activities have increased considerably. The second is technology. We have today this phenomenon called algorithmic trading, trades are done in nanoseconds. And that requires a lot of technological know-how and very expensive infrastructure. It can be a dangerous thing as we saw about a year ago when the New York Stock Exchange really fell down because there were no circuit breakers built in. The third thing is that we have much more competition and while the incumbents, the existing exchanges, have become more and more regulated, new exchanges are popping out of the ground without much regulation. So fragmentation is going on and that’s very dangerous for the whole system.’

Sajjan JindalVice Chairman and Managing Director, JSW Steel Limited, India www.jsw.in

‘The economic downturn has made us become more India-focused. Before the downturn, we would export 50 to 60 percent of our steel products and sell the remaining in the Indian domestic market. Post-2008, there was virtually no overseas market for steel. Consequently, we had to shut down some of our manufacturing capacity. On the other hand, the domestic market for steel has been relatively less affected by the downturn. Indeed, we found India could be a very good market for us.’

Li LihuiPresident, Bank of China, China www.boc.cn

‘The degree of internationalisation of Bank of China is the most considerable among the Chinese domestic banks, with approximately US$ 360 billion of foreign currency assets. The challenges of the global financial crisis have been especially significant as a result. Apart from foreign currency loans to domestic borrowers in China, these assets largely represent foreign debt instruments and other investments. The turbulent international marketplace created tremendous challenges for us in terms of enterprise-wide and global risk management, including assessment of market conditions. We responded to these challenges head-on, successfully implementing effective global risk management solutions and minimizing the cost of adverse market conditions.’


Timothy M. ManganelloChairman and CEO, BorgWarner Inc., US www.borgwarner.com

‘I think the US manufacturing sector would have had a major problem if we lost the contributions and capabilities of GM and Chrysler. Both companies may have downsized without government help, through bankruptcy, but the government help allowed them to go through bankruptcy in a much more humane fashion. The Automotive Task Force did force them to eliminate a good chunk of excess capacity. In Europe, the governments have probably not allowed some of the auto companies to restructure, and the European industry is going to be faced with a lot of difficulties caused by excess capacity. It’s quite possible not all of them will survive.’

Bob McDonald Chairman of the Board, President and CEO, The Procter & Gamble Company, US www.pg.com

‘In the 1990s, it was all about global expansion in the markets that opened up for capitalism. Eastern Europe, Russia, China. This decade for us, I think, will be about getting our categories into every country around the world. We’re reaching about 4.2 billion people today, but we’re not reaching everybody on the planet. We’re in 38 product categories around the world, and there’s not a single country where we’re in all 38 categories. In the United States we’re in 36 categories. […] At the same time, we’re extending our distribution in developing markets, deeper into rural areas where economies may not exist at all. That combination – more consumers, more parts of the world – will help us get to every consumer and touch and improve every consumer’s life.’

Marcos Marcelo MindlinChairman, Pampa Energía S.A., Argentina www.pampaenergia.com

‘A world of low interest rates and high liquidity is ideal for countries in Latin America because these conditions help us access the capital markets. Today, the prices of Argentine commodities are competitive and on an upward trend. Unless there is a significant slowdown in the Chinese or Indian economies, the demand for Argentine commodities will continue to grow. For us, cheap access to credit is highly beneficial. And China seems to keep growing and able to absorb all the raw materials we produce.’

Senji MiyakePresident and CEO, Kirin Holdings Company, Limited, Japan www.kirinholdings.co.jp

‘In Japan, one of the key trends we see is a new-found attraction towards lower-priced products. So while some businesses remain focused on consumer products with high value-added and brand-recognition, there is also a counter-trend among mass-merchandisers toward bringing to market less-costly, privately-branded products. I think this is a trend that’s here to stay. On the other hand, the personal tastes of Japanese consumers are growing ever more diversified and fragmented. This represents an opportunity for us if we can respond with a broader product offering or develop entirely new product categories. Indeed, it’s critical that each of our business units develop the sorts of products that meet changing and increasingly differentiated consumer tastes.’

Tan Sri Dato’ Azman Hj. MokhtarManaging Director, Khazanah Nasional Berhad (Khazanah), Malaysia www.khazanah.com.my

‘As early as 2004, we were talking about human capital, social capital, knowledge capital, and taking a holistic view of our corporate mission. Ultimately, we focus on total stakeholder return, if you like. Of course, you have to acknowledge the special interests of shareholders. But those interests are contingent upon total stakeholder return. We adopted this approach five or six years ago, and subsequently, have never questioned its validity. In fact, the current financial crisis has strengthened our belief that it is not only the right approach, but the only way forward for us.’


Leslie MoonvesPresident and CEO, CBS Corporation, US www.cbscorporation.com

‘No question, the younger generation is not as used to a television screen as the older ones. They’re much more used to a computer screen. They are much more impatient. We’ve all heard, “I want what I want when I want it.” And for every new media device, there are more and better ways of getting content. It is a challenge for us, getting content out there, and getting paid for it.’

Nicholas Moore CEO, Macquarie Group Limited, Australia www.macquarie.com

‘If US employment begins growing in 2011, that will trigger a series of positive economic outcomes around the world. From an investor and a corporate viewpoint, we’ll start to see confidence returning and more activity flow. We’ll see more allocations in terms of the equity markets, and everyone will start to feel like the world is getting back to a more normal condition.’

Vineet Nayar Vice Chairman and CEO, HCL Technologies, India www.hcltech.com

‘Technology is changing very quickly. Traditional forms of computing are fading and online mobility is rising. Even more importantly, most of the population in the emerging economies will soon require access to digital networks. But while there will be tens of millions of new consumers of digital services in the years ahead, the cost of those services must reflect the sorts of prices that the people in the emerging markets are willing to pay.’

Marcelo OdebrechtCEO, Odebrecht, Brazil www.odebrecht.com.br

‘We are quite optimistic about what lies ahead of us. We do believe that most of the countries in Latin America, Africa and Asia will continue to grow steadily for the next few years, especially those that have done their homework and/or have plenty of natural resources. For its part, the US has always proved able to reinvent itself, and it does have the flexibility and pragmatism to keep doing so. My doubts regard Europe and its capability and even its willingness to change and do what has to be done in order to resume growth. [...] With regard to the risks, the main risk is a downturn in China’s economy, which I do not foresee and which would have a major impact on the volumes and prices of goods and services worldwide. The other risk is that of the developed world trying to hold on to its status, not allowing developing countries to acquire more influence and participation in politics, trade and the overall economy.’

Gregory R. PageChairman and CEO, Cargill, Incorporated, US www.cargill.com

‘In the past, it was probably sufficient to simply run our own affairs in a way we thought appropriate and responsible. Today – local communities, national governments, NGOs – have articulated a higher standard of corporate behaviour. Similarly, our most important customers have made it eminently clear to us that our reputation impacts their reputation. As a result, value-chain mapping – looking back through the value chain to consider issues like water use, environmental stewardship, labour practices – has become a critical element in our business and product planning.’


Paul PolmanCEO, Unilever, UK www.unilever.com

‘The concept of value is continuously evolving. In the past, value was about delivering a basic commodity like sugar or salt to the consumer at an attractive price. Later on, the goal was to create a brand – like Persil or Dove – which was a guarantee of quality. Then, value became synonymous with the experience a product delivered. Starbucks isn’t just about coffee – it’s about a warm, inviting place where you can relax and check your email. It’s an entire experience. Today, the concept of value is increasingly associated with products that demonstrate social responsibility. A successful product must provide utility, but it must also exhibit a social consciousness, if you will.’

Juha RantanenPresident and CEO, Outokumpu Oyj, Finland www.outokumpu.com

‘Climate change and how that will be addressed is another cause for uncertainty. Unchecked CO2 levels are a threat unless some kind of established global scheme is put in place. So far, the US and China have not played a big part in that effort. But Europe has, and that means Europe has to bear most of the cost associated with CO2 reduction. On the upside, greater efforts toward CO2 reduction could open up important business opportunities for our company because investment in low emissions power generation would increase demand for stainless steel.’

Stephen A. RoellChairman and CEO, Johnson Controls, Inc., US www.johnsoncontrols.com

‘In terms of resiliency, I’ve been surprised to the extent the automotive markets recovered in 2010. We also were surprised at how far they fell the preceding year. The supply base, for the most part, has weathered it much better than I thought it would. Had liquidity and access to capital been prolonged, we would have had a lot more issues in our industry around the supply base. In Building Efficiency, as we look at the more mature markets in North America and Western Europe, the recovery has been slow, and it’s expected to continue to be slow. What has been impressive, from a global standpoint, is the emerging markets have held up so well. Markets in the Middle East, China and South America either stayed strong or came back much quicker than we anticipated. The Power Solutions business was down only for a short time.’

Johannes TeyssenChairman and CEO, E.ON AG, Germany www.eon.com

‘Retail customer behaviours are changing and you need to build a relationship with those customers so that they become part of the solution toward the overall goal of energy optimisation. This will pose a big challenge because energy companies will need to adopt technologies and adjust to new patterns of consumer behaviour. It will not be easy and a lot of utilities will probably be unable to make that transition.’


Agah UğurCEO, Borusan Holding A.Ş., Turkey www.borusan.com.tr

‘In the steel business there has been a change in buying patterns and contract patterns from one year or six months down to three months. So every quarter there is a new contract. The supply side has become more of a spot market with quarterly driven business and that behaviour change is going all the way down the value chain. Our customers, including some of our major white goods customers as well, no longer want to make longer term contracts with us: they want quarterly deals as well. So I think that shorter contract periods is the right way to manage price volatility.’

Dr. Zhang Xiaogang President, Anshan Iron and Steel Group Corporation, China en.ansteelgroup.com

‘In recent years, the Chinese steel industry has undergone rapid development. But the economic crisis has exacerbated the complications that come with rapid development. The fundamental way to address these problems is to focus the industry’s efforts on increasing energy saving and decreasing emissions; and ensuring that future patterns of growth are sustainable, both in economic and environmental terms.’

Zhou Zhongshu President, China Minmetals Corporation, China www.minmetals.com

‘We took three measures, which I still remember clearly. First, we decided it was essential to keep our management steady and avoid cash flow problems. We had to have enough liquidity to avoid a capital crunch. Second, we planned to strengthen the internal management of the corporation to reduce costs and increase efficiency. Third, a financial crisis can be an opportunity. This was an opportunity for us to expand or invest with low cost. Looking back, we can say that these measures were effective. At that time, I said that as the leading enterprise in the industry, we shall be the last to fall and the first to stand up. Actually we didn’t fall. The financial crisis led to an industry reshuffle, which gave us the opportunity to get what we wanted. For example, we went abroad to get resources, something which might have been quite difficult before the financial crisis. We also successfully acquired the core assets of OZ Minerals, the third largest mining corporation in Australia.’


In total, we conducted 1,201 interviews with CEOs in 69 countries conducted between 6th September and 2nd December 2010. By region, 420 interviews were conducted in Western Europe, 257 in Asia Pacific, 221 in Latin America, 148 in North America (40 in Canada), 98 in Eastern Europe and 57 in the Middle East & Africa.

The interviews were spread across a significant range of industries. Further details, by region and industry, are available on request. The interviews were mainly conducted by telephone, with the exception of Japan, where a postal survey was administered and Africa, where most of the interviews were conducted face to face. All the interviews were conducted in confidence and on an unattributable basis. The lower threshold for inclusion in the top 30 countries was companies with more than 100 employees or revenues of more than $10 million. This is raised to 500 employees or revenues of more than $50 million in the top 10 countries.

37% of the companies had revenues in excess of $1 billion, and a further 37% had revenues of $100 million to $1 billion. The remaining 21% had revenues of less than $100 million. Company ownership is recorded as private for 52% of all the companies, with the remaining 47% listed on at least one stock exchange.

To better appreciate what is underpinning the CEOs’ outlook for growth we also conducted in-depth interviews with 31 CEOs from five continents over the fourth quarter of 2010. Their insights cover a wide range of topics, from prospects for recovery to new dynamics of post-crisis environment, balancing growth with risk management and lessons learnt. Their interviews are quoted in this report, and more extensive extracts can be found in the CEO Survey In-depth Story companion publication. For further information on the data, interactive graphics are available at our website at www.pwc.com/ceosurvey where you can explore responses by sector and location.

For further information on the survey content, please contact:Sophie Lambin Director of Global Thought Leadership +44 20 7213 3160 [email protected]

Suzanne Snowden Global Thought Leadership +44 20 7212 5481 [email protected]

For media enquiries, please contact:Mike Davies Director of Global Communications +44 20 7804 2378 [email protected]

For enquiries about the research methodology, please contact:Hayley Rimmer Market Research +44 20 7212 2373 [email protected]

Research methodology and key contacts

This is the 14th Annual Global CEO Survey We have followed the same methodology as we used the previous years to ensure we are fairly representing the emerging economies of the world. We have conducted interviews in 69 countries worldwide, and varied the number of interviews in line with their GDP, measured at market exchange rates, in 2006.

PwC’s extensive network of experts and specialists has provided its input into the analysis of the survey. Our experts span many countries and industries.

Note: Not all figures add up to 100% due to rounding of percentages and to the exclusion of ‘neither/nor’ and ‘don’t know’ responses.


AcknowledgementsThe following individuals and groups in PwC and elsewhere contributed to the production of this report.

Core editorial teamCristina AmpilEmily ChurchSophie LambinLarry Yu

Editorial boardMike DaviesJill HassanNick JonesJessica Melwani Christopher MichaelsonElizabeth MontgomeryOriana PoundSuzanne Snowden

Advisory groupDon AlmeidaJon AndrewsTom CrarenMoira ElmsBharti Gupta RamolaJohn HawksworthWarwick HuntDerek KidleyRichard PatersonDavid PhillipsTony PoulterSusan SymonsRichard SykesJon Williams

Publishing and project managementAngela LangHayley RimmerSuzanne SnowdenAlina Stefan

Online and multimediaLee ConnettTracy FulhamNick MastersBlake NeimanDan PiparoRonnie Temple

Design and layoutStudioec4

Graph design US Studio

Research and data analysisThe research was coordinated by the PricewaterhouseCoopers International Survey Unit, located in Belfast, Northern Ireland.


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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2011 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.

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In-depth story



IntroductionThis extended set of figures, and the 31 in-depth CEO interviews excerpted here, shaped the findings of the 14th Annual Global CEO Survey.

In the last quarter of 2010, we set out to uncover how CEOs are approaching growth during a time when sustainable economic growth is far from certain. We surveyed 1,201 business leaders in 69 countries around the globe.

The 14th Annual Global CEO Survey documents a surprising level of confidence in this environment; chief executives were nearly as confident of growth this coming year as in the boom years before the crisis. The survey also revealed where CEOs saw growth coming in 2011, and how they were going to achieve it. In ‘Growth reimagined: Prospects in emerging markets’, we show how CEO confidence

is being driven by targeted investments in particular emerging markets – often far from home.

But don’t take our word for it. If a picture is worth a thousand words then let the figures in this supplement do the talking. While some of the figures in this supplement appear in the body of the main report, many do not.

And the CEOs also speak for themselves. We conducted in-depth interviews with 31 CEOs and present selections from those interviews here. We are grateful to the 1,201 CEOs who took part in the survey, and particularly grateful to the 31 CEOs for sharing their insights on the issues of the multi-speed global recovery that they hope is now underway. The full transcripts, some with video content, for each interview are available online.

Taken together, this supplement provides additional information and offers a visual complement to our narrative. The In-depth story should be read in conjunction with the main report of the 14th Annual Global CEO Survey 2011 also available at www.pwc.com/ceosurvey.

Note: Not all figures add up to 100% due to rounding of percentages and to the exclusion of ‘neither/nor’ and ‘don’t know’ responses.

† This symbol indicates the figure also appears in the main report.

1 14th Annual Global CEO Survey 2011 – In-depth story

Contents

Driving CEO confidence ..........................................2

Targeting emerging markets ....................................3

Strategic change in a multi-speed recovery ...............................................6

CEOs wary of macro risks ...................................... 11

Putting customers at the centre of innovation .............................................. 16

How are customers changing? ............................... 21

Bridging global skills gaps .....................................23

Achieving shared priorities with government ...................................................28

Globalisation reimagined .......................................34


Driving CEO confidence

Figure 1: CEOs prepared for recovery in 2010 and expect growth in 2011





26%

31%

41%

52%

50%

21%

31%

48%

44%42%

34%

50%51%

0

10

20

30

40

50

60%

2011201020092008200720062004 20052003


‘It isn’t about one or two countries really pulling us up or out. We’re all in this together, and if we let the developing develop too fast, that’ll be bad, and if the developed nations don’t celebrate the growth in the developing nations, that will be bad.’

Richard K. Davis Chairman, President and CEO, U.S. Bancorp, US

‘One of the legacies of that downturn, we believe, will be a long period of low interest rates, worldwide. A world with low interest rates creates an appetite for investing in emerging markets. That is clearly to our benefit.’ Marcos Marcelo Mindlin Chairman, Pampa Energía S.A., Argentina

‘In general, over 2011, most Western countries will be expected to implement relaxed monetary and fiscal policies to stimulate economic development, while most of the emerging markets countries will adopt more conservative monetary or economic policies.’ Li Lihui President, Bank of China, China



Figure 2: Growth to come in emerging markets’ operations, regardless of location


0% 100%

Africa

Asia-Pacific

CEE

Latin America

Middle East

North America

Western Europe


EasternEurope

LatinAmerica

MiddleEast

NorthAmerica

WesternEurope

Companyheadquarters


93%

73%

80%

67%

70%

64%

72%

89%

88%

87%

86%

100%

94%

92%

33%

77%

83%

18%

50%

71%

57%

100%

40%

73%

59%

0%

67%

75%

100%

80%

80%

86%

0%

80%

86%

75%

70%

55%

47%

85%

73%

75%

29%

40%

71%

48%

25%

67%

55%

36%

32%

69%

31%

0%

51%

48%


‘Throughout the world, new markets are developing. We’re soaring in Western Europe, and the Far East, Eastern Europe and Latin America are beginning to buy more. So we’re seeing a great international marketplace for our content.’

Leslie Moonves President and CEO, CBS Corporation, US

‘A big area of growth for us was in North America. We saw a number of rare opportunities arise in the funds management area, the securities area, and the energy trading area.’

Nicholas Moore CEO, Macquarie Group Limited, Australia

‘Our four big emerging markets are China, India, the Middle East, and Brazil. But if you look out, say, five years, there is no doubt that others – for instance, South Africa and Indonesia – will be significant growth markets for us.’

Ed Breen Chairman and CEO, Tyco International, Switzerland


Appendixm 1: Companies are downbeat on domestic growth in Western Europe

Q: Compared to other markets where your organisation operates, does the country where you are based offer high, medium or low potential for your company’s growth?

Less than $100 million

RE

VE

NU

ES

HQ

RE

GIO

N

$100 million to $999 million

$1 billion to $10 billion

Over $10 billion

Middle East

Latin America

Africa

Asia Pacific

North America

C E E

Western Europe

%

Low Medium High

13 40 43

24 32 39

38 27 31

43 31 24

19 30 52

14 33 51

13 30 50

28 21 46

13 41 44

13 40 43

41 34 19

Base: All respondents (1,201)Source: PwC 14th Annual Global CEO Survey

‘The economy of the Far East has been recovering – or indeed growing – more quickly than that of other regions. I think this is mainly due to the fact that Russia has been re-discovering Asia-Pacific markets, and we are located close to Asia-Pacific.’ Ivan Blagodyr General Director, JSC RAO Energy Systems of East, Russia

‘We need to continue to build out our sourcing in Latin America. We’re also looking at the Black Sea region as those agricultural economies emerge.’ Gregory R. Page Chairman and CEO, Cargill, Incorporated, US

‘Earlier, Europe and the US were our major export markets. Today, they are minor markets for us and the Latin American and African markets have become more important. That has been a huge change for us. Even in the acquisition of overseas mines, we are looking mostly in the southern hemisphere: Australia, Africa, and Latin America.’ Sajjan Jindal Vice Chairman and Managing Director, JSW Steel Limited, India


Figure 3: Developed nations have competitive advantages



63%15%

55%

13%

31%

11%

4%

13%

35%18%

10%

6% 6%

7%3%


Cost

Quality

Innovation


‘The crisis has encouraged us to consider greater in-country consolidation of related businesses. We also closely monitor our ‘geographic footprint’ – the country markets in which we invest. Starting around 2004-05, we consciously shifted a lot of our geographic focus into our own region.’ Tan Sri Dato’ Azman Hj. Mokhtar Managing Director, Khazanah Nasional Berhad, Malaysia

‘Our suppliers are located in many different countries. We don’t choose them based on their location. Rather, we choose them based on our technology needs.’ Marcos Marcelo Mindlin Chairman, Pampa Energía S.A., Argentina

‘In the near future, it is anticipated that the global automotive industry will come principally from the Asian continent.’ Armando Garza Sada Chairman of the Board of Directors, Alfa, S.A.B. de C.V., Mexico

‘I haven’t seen a shift towards low cost products, nor any change relative to low cost country sourcing. It’s more about the quality and technology. Customers are looking for quality products and value.’ Stephen A. Roell Chairman and CEO, Johnson Controls, Inc., US


Strategic change in a multi-speed recovery

Appendix 2: Strategies are responding to changes in demand

Q: To what degree has your company’s strategy changed over the past two years? Which factor had the biggest impact on your need to change your strategy?

Economic growth forecasts or uncertainty

Customer demand

Industry dynamics

Competitive threats

Regulation

Attitude towards risk

Shareholder expectations

Capital structure/deleveraging

%

No change Somewhat changed Changed in fundamental ways

CEOs changing strategies Factors behind strategic change

51%

23

22

17

10

8

7

6

5

33%16%


‘From a strategic standpoint, we had to decide how to view that business going forward. We set out to de-risk the business in the context of minimising commodity risk, recovering engineering costs and pricing new programmes. We set forth a plan to have the business generate our cost of capital in a normalised pullback of 15-20 percent. Then, in a more normalised period of time, we would generate returns in the 15 percent after-tax base. That’s not the way we managed the business before, so it’s probably the biggest strategic change we’ve made.’ Stephen A. Roell Chairman and CEO, Johnson Controls, Inc., US

‘Looking ahead, there are going to be very large players that can do huge projects, and then there are going to be the boutiques. The firms that are stranded in the middle are going to struggle. At the moment we’re big enough, so I’m not worried about the next several years, or perhaps the next decade. But we will need to ensure that we remain large enough to be significant on a global scale. Partnering on projects with other firms is one way ahead.’ Philip Dilley Group Chairman, Arup Group, UK


Appendix 3: Economic uncertainty is not the only driver of strategic change

Q: Which factor had the biggest impact on your need to change your strategy?

Economic growth or uncertainty

Customer demand

Industry dynamics

Competitive threats

Regulation Attitude towards risk


Capital structure/ deleveraging

Global 1 2 3 4

Automotive 2 1 4 3

Chemicals 1 2 2 4

Engineering & Construction 1 2 3 4

Consumer Goods 2 1 4 3

Oil & Gas 1 3 2 3 3 3

Industrial Manufacturing 1 3 4 2

Metals 1 2 2 4

Pharma & Life sciences 4 3 1 2 5

Retail 2 1 3

Transportation & Logistics 2 1 3

Utilities 3 2 1 4 4

Business & Prof services 2 1 3 4 4

Retail & Comm banking 6 3 2 3 1 5

Insurance 2 1 3 6 3 6 5

Investment mgmt 1 2 2 5 2

Entertainment & Media 1 1

Technology 3 2 1 4

Note: Rank by industry of factors causing the need to change strategy over the past two years. Only responses selected by >10% of CEOs per industry rankedBase: All respondents who stated they had changed in strategy ‘in fundamental ways’ or ‘somewhat changed’ (1,009)Source: PwC 14th Annual Global CEO Survey

‘The question each energy provider must consider is where it should position itself on this spectrum of differing market requirements. How much focus should be placed on supplying the growing needs of emerging economies using well-understood technologies versus, let us say, joining the race for a superior future? Where energy companies position themselves on this spectrum is going to require them to make decisive strategic choices in the years ahead.’ Johannes Teyssen Chairman and CEO, E.ON AG, Germany


4 Paying Taxes 2011: The Global Picture”, PwC (2011).

Appendix 4: Strategic change elevates the importance of risk management

Q: To what degree has your company’s strategy changed over the past 2 years? What additional steps, if any, are you taking to improve the management of risks that accompany your change in strategy?

Allocating more senior managementattention to risk management

Formally incorporating risk scenariosinto strategic planning

Allocating more board meetingattention to risk management

Formally designating executive responsibilityfor risk management

Doing more crisis readiness drills

Adjusting performance incentivesto account for risk

Re-examining capital structure

Increasing the authority of the riskmanagement executive

Increasing risk manager headcount

%


51%

72

67

58

45

40

36

31

29

20

33%16%

CEOs changing strategies Addressing risk in new strategies


‘The downturn also taught us another lesson about the risks associated with large overseas investments. For instance, prior to the downturn, we bought a US steel company for US$1 billion. Today, with one exception, we are looking only at India.’ Sajjan Jindal Vice Chairman and Managing Director, JSW Steel Limited, India

‘The world is a very tricky place right now. We’re dealing with political turmoil in the United States, and that is also affecting our economy throughout the world. However, if we continue to produce premium content, our company is going to be fine.’ Leslie Moonves President and CEO, CBS Corporation, US

‘If you view the world through the eyes of the consumer, which I do every day, it looks as if the world has been run so that the benefits of risk have accrued to a few individuals, while the cost of risk has been shared by society at large. No one would ever run a business like that, but somehow, we let the world operate in that way.’ Paul Polman CEO, Unilever, UK


Appendix 5: The pace of cost reductions is set to decline in 2011

Q: Which, if any, of the following restructuring activities have you initiated in the past 12 months, or plan to initiate in the coming 12 months?

Implement a cost-reduction initiative

Enter into a new strategic alliance or joint venture

Complete a cross-border merger or acquisition

Outsource a business process or function

Insource a previously outsourced business process or function

Divest or spin-off majority interest in a business or exit significant market

End an existing strategic alliance or joint venture

%

Plan to initiate in the coming 12 months Initiated in the past 12 months

64

84

50

40

34

25

31

37

19

25

14

20

14

20


‘When we formed SIX Group by merging three companies, everybody asked me what the cost-saving synergies are. But that was not the issue: I wanted a blueprint of a successful and valuable company in the service of the Swiss financial market centre.’ Prof. Dr. Peter Gomez Chairman of the Board, SIX Group AG, Switzerland

‘Just before the crisis, steel prices were hovering around US$1,200. When the crisis hit, prices dipped to US$500. In order to deal with the situation, we had to take some cost-cutting measures. Fortunately, those measures have been very effective. In fact, we are now reviewing our cost-cutting measures every three months in order to see what additional steps we might take.’ Sajjan Jindal Vice Chairman and Managing Director, JSW Steel Limited, India


Appendix 6: Asia is the most popular region for M&A away from home markets

Q: In which of the following regions are you planning to make this merger or acquisition?

0% 50% >50%

Africa

Asia Pacific

CEE

Latin America

Middle East

North America

Western Europe


EasternEurope

LatinAmerica

MiddleEast

NorthAmerica

WesternEurope

Companyheadquarters

Region of acquisition

93%

10%

6%

2%

36%

3%

6%

20%

69%

12%

6%

27%

42%

34%

7%

22%

6%

0%

0%

9%

7%

7%

7%

82%

3%

9%

15%

27%

0%

12%

18%

82%

0%

27%

16%

7%

7%

6%

3%

82%

9%

11%

13%

30%

12%

14%

0%

73%

27%

7%

22%

24%

8%

0%

36%

53%

Base: All respondents who plan to complete a cross-border merger or acquisition in the coming 12 months (403)Source: PwC 14th Annual Global CEO Survey

‘Our regional strategy is first the logistics business and the places we are investing in are Iran, Algeria, Kazakhstan and Ukraine. For the pipe business, we are looking to the Middle East for the oil and gas industry. For light assets we are investing in Northern Iraq – for steel servicing – shaping, cutting etc. We are investing mainly, therefore, in CIS, the Middle East and North Africa.’ Agah Uğur CEO, Borusan Holding A.Ş., Turkey

‘Our strategy going forward anticipates expansion, purchase of new rolling stock, and business acquisitions. And in terms of financing, we see no obstacles that would limit our strategic plans.’ Alexander Eliseev Chairman of the Board of Directors, Globaltrans, Russia

‘You’ve got to protect your future. The major way the downturn has changed our strategy is that it’s spurred us to move even faster to get positioned in the emerging markets. We’ve been growing organically – for example, a year ago, we doubled our ADT security offices in China – but we’re also now looking at acquisitions.’ Ed Breen Chairman and CEO, Tyco International, Switzerland


CEOs wary of macro risks

Figure 4: Top risks relate to government policies – and talent


Recession/economy

Overregulation



Energy security

Protectionism



Recession/economy

Overregulation

Inflation


Recession/economy

Overregulation




Protectionism

Protectionism

Recession/economy

Public deficit¹

Overregulation



Shift in consumers

2008 2009 2010 2011

¹ New options



Energy costs



Energy costs




Energy costs

1

2

3

4

5

6

7

8

9


‘Currently, expectations for further RMB appreciation remain high. The money flowing into the economy enjoys the benefits of higher interest rates, the potential for RMB appreciation and increases in asset prices, resulting in a relatively strong driving force. However, when these conditions become unfavourable, the tendency, as has been the case in other emerging countries, will be for it to withdraw like ebbing water, creating havoc in the economy.’ Li Lihui President, Bank of China, China

‘We are more sensitive to the risk/reward tradeoffs, because the volatility in the market created during the recession had a big impact on many foreign economies – whether it’s sovereign risk in Europe, capital markets in the US or economic policies in China. We pay much more attention now to making sure we understand and pressure-test the upside/downside of various decisions.’ John V. Faraci Chairman and CEO, International Paper, US


‘In Europe, the risk pertains to liquidity. If the liquidity crisis weakens the euro, businesses across Europe will have to find a way to reboot themselves. This is a risk we have to watch out for. And then there is the issue of revaluing China’s currency and what that would mean for the world economy. These are some of the risks that will impact our customers’ businesses, which, in turn, will impact our business.’ Vineet Nayar Vice Chairman and CEO, HCL Technologies, India

‘The concern I have is that governments are getting more and more involved, either directly or through regulation, in the private sector. And they’re doing that in a manner that inhibits the private sector’s contribution to the economy.’ Louis Camilleri Chairman and CEO, Philip Morris International, Switzerland/US

‘The government has its regulating functions that should clearly and strictly monitor the financial sector. But this is not enough. That’s why there should be supra-national agencies, sort of investment banker communities, and so on. It is also important that, within the chain of control, that control does not suppress the initiative of the business community, bankers and others.’ Evgeny Dod CEO, RusHydro, Russia

‘The relations with investors, legislation and rulemaking procedures should be predictable and long-term, in order to avoid any changes during the timeframes of any of our projects.As renewables, and primarily the hydropower industry, have a long-term investment cycle it may take decades to build a large station. It is obvious that, with changing conditions, investment risks increase, and the probability of joining this or that project decreases.’ Evgeny Dod CEO, RusHydro, Russia

‘I think the clouds on the horizon tend to be geopolitical: The health of the euro, events surrounding North Korea and Iran. But barring those kinds of geopolitical issues, I think we have every reason to be optimistic.’Gregory R. Page Chairman and CEO, Cargill, Incorporated, US

‘The current business environment has exposed weakness in our workforce strategy and limitations in our ability to compete on an international scale. Building an experienced and knowledgeable workforce is the most critical challenge we now face.’ Dr. Zhang Xiaogang President, Anshan Iron and Steel Group Corporation, China


Appendix 7: Political instability is a longer-term concern for CEOs in all regions except North America

Q: Which of the following global risks concerns you the most, regarding their potential impact on your growth prospects in the next 3 years?

0% 100%

Political instability

Scarcity of natural resources

Climate change

Natural disasters

Terrorism

Pandemics and other health crises

Loss of biodiversity

North America

Western Europe

Asia Pacific

Latin America

CEE Middle East

AfricaGlobal risk

37%

25%

22%

28%

26%

32%

6%

56%

36%

22%

20%

24%

21%

3%

59%

44%

35%

31%

23%

23%

5%

76%

28%

36%

33%

31%

19%

12%

54%

19%

13%

11%

12%

7%

1%

52%

44%

19%

37%

19%

15%

19%

60%

33%

40%

23%

40%

40%

7%

36%

32%

69%

31%

0%

51%

48%

Base: All respondents (27-420) Source: PwC 14th Annual Global CEO Survey

‘I don’t believe sustainability is optional anymore. The world today is so flat, so transparent with the Internet, and the impact of individuals is so heightened because of the ability to blog and Tweet and other things, that consumers want to know what they’re buying into when they buy your brand. They want to know the company behind that brand. They want to know what that company stands for, and they want to know how that company takes care of the environment.’ Bob McDonald Chairman of the Board, President and CEO, The Procter & Gamble Company, US

‘The world is so interconnected now, I think there’s a need for some sort of international agency to ensure a level financial playing field right across the globe.’ Ed Breen Chairman and CEO, Tyco International, Switzerland

‘We believe it is very important to adopt stricter risk control standards and maintain a monitoring system that is prudent on a macro scale and can give early warnings regarding potential problems. Of course the implementation of such policy needs to be adjusted for countries at different stages of development.’ Li Lihui President, Bank of China, China


Appendix 8: CEOs see austerity measures as a threat to growth in most regions

Q: How strongly do you agree or disagree with the following statements regarding the economic impact of large fiscal deficits and rising government debt?

0% 100%

NorthAmerica

WesternEurope

AsiaPacific

LatinAmerica

CEE MiddleEast

Africa

67%

67%

49%

44%

15%

14%

63%

53%

47%

35%

24%

13%

69%

55%

47%

33%

19%

27%

51%

46%

38%

30%

19%

22%

55%

48%

31%

35%

18%

14%

37%

30%

44%

26%

15%

19%

70%

47%

53%

37%

27%

20%

Public spending cuts or tax increases to addressrising public debt in the country in which I am based

will slow domestic economic growth

My company’s total tax contribution will rise because ofgovernments’ responses to rising public debt

Public spending cuts or tax increases to rising publicdebt in other countries will slow economic growth in

my company’s key overseas markets

My company is making strategic changes because of publicspending cuts or tax increases faced at home or abroad

My company’s sales to government will decline becauseof governments’ response to rising public debt

Governments’ response to rising public debt representsa strategic growth opportunity for my company

Base: All respondents (27-420) Note: Respondents who stated ‘agree’ or ‘agree strongly’Source: PwC 14th Annual Global CEO Survey

‘The world may have weathered this crisis but many developed countries have been left with significant debt burdens. In these countries, the combination of considerable public debt and weak national economies leads me to expect very low interest rates and high levels of liquidity will continue across the US and Europe.’ Marcos Marcelo Mindlin Chairman, Pampa Energía S.A., Argentina

‘If you take Europe and North America, it’s still a big question mark as to what impact the rapid increase in public debt will have once things begin to stabilise.’ Juha Rantanen President and CEO, Outokumpu Oyj, Finland

‘With sovereign debt mounting, the issue of subsidising alternative energy sources becomes problematic.’ Johannes Teyssen Chairman and CEO, E.ON AG, Germany


‘My concern is that it requires a crisis to create the political will to make the necessary changes. And that’s not unique to the United States. I think other countries face the same political reality. It’s unfortunate, because that sort of brinksmanship creates uncertainty for business, and uncertainty leads to investments withheld, which in turn leads to diminished economic opportunities. We get the governments that we vote for, and regretfully, there doesn’t appear sufficient determination by governments to enact meaningful changes with regard to the size of national deficits.’ Gregory R. Page Chairman and CEO, Cargill, Incorporated, US

‘In the countries of South Eastern Europe where we operate, including Ukraine and Russia, debt levels are low in relation to GDP. Debt levels have been relatively high in Greece, and recently rising in Cyprus. We are particularly concerned with the situation in Greece, while we believe that in Cyprus is improving.’ Efthimios Bouloutas CEO, Marfin Laiki Bank, Cyprus

‘If you look around the world, a number of countries are becoming much more competitive in terms of corporate tax rates.’ Douglas M. Baker, Jr. Chairman, President and CEO, Ecolab, US



Figure 5: CEOs have a new commitment to innovation


0

10

20

30

40%

20112010200920082007

23%

31%

37%38%

29%

17%

15%

20%

17%

20%

19%15%

13%

14% 14%13%

10%11%

10%

13%

14%

21%




‘We continued to reinvest in technology, innovation and new product launches, although we did reduce our operating costs in other areas. So now we’re coming out of the recession with a strong balance sheet, record profits and record sales. The record sales are from our fuel-economy and emissions-technology strategies. The stronger profits are coming from our strategy to control costs.’ Timothy M. Manganello Chairman and CEO, BorgWarner Inc., US

‘Angang must go from being a technology follower to a technology leader, which will require a combination of management efficiency, product and technical innovation, and a nimble and able corporate culture.’ Dr. Zhang Xiaogang President, Anshan Iron and Steel Group Corporation, China


Figure 6: CEOs expect innovation to involve external partners








5

13

18

24

29 27 18 7

27 19 10

26 26 7

24 30 9

12 41 23

%


‘We view innovation as being driven by four mega-developments. The first, of course, has to do with ongoing technological improvements and breakthroughs. The second is the rise of the emerging economies, which will bring entire populations onto digital networks. The third is the new way that digital services are consumed, as exemplified by the preferences of Generation Y. And the fourth is the re-pricing that will be necessary to make digital services ubiquitous around the globe. So you see, innovation is not just technology-led.’ Vineet Nayar Vice Chairman and CEO, HCL Technologies, India

‘We have “patient money” that we use to invest in good customer-focused ideas from our young people. And we are using an assessment tool looking for innovation and commercial behaviours. We use this assessment for the new generation of people in specific roles in our organisation that require more innovative behaviour.’ Agah Uğur CEO, Borusan Holding A.Ş., Turkey

‘Retail customer behaviours are changing and you need to build a relationship with those customers so that they become part of the solution toward the overall goal of energy optimisation. This will pose a big challenge because energy companies will need to adopt technologies and adjust to new patterns of consumer behaviour. It will not be easy and a lot of utilities will probably be unable to make that transition.’ Johannes Teyssen Chairman and CEO, E.ON AG, Germany


Appendix 9: Innovations are for efficiency and growth

Q: To what extent do you agree or disagree with the following statements about your expectations regarding your company’s innovation over the next 3 years?

Our innovations will lead to operational efficiencies that provide us with a competitive advantage

Our innovations will lead to significant new revenue opportunities

An important part of our innovation strategy is to develop products or services that are environmentally friendly

We expect the majority of our innovations to be co-developed with partners outside of our organisation

We use M&A as a significant source of innovation

We expect the majority of our innovations to be developed in markets other than the country in which I am based

We expect government assistance to boost our innovation output

Automotive 84 80 80 36 28 32 32

Chemicals 92 85 83 36 39 42 31

Engineering & Construction 83 62 77 45 32 27 32

Consumer Goods 72 85 70 39 31 31 17

Oil & Gas 78 72 65 43 35 30 33

Industrial Manufacturing 82 82 70 28 37 32 26

Metals 86 76 76 46 30 14 38

Pharma & Life sciences 77 89 58 42 45 43 43

Retail 73 71 52 41 35 24 16

Transportation & Logistics 85 73 67 40 38 27 25

Utilities 64 51 70 38 9 23 30

Business & Prof Services 79 79 59 29 26 29 18

Financial services 85 81 47 38 32 27 17

Entertainment & Media 67 77 40 57 43 37 23

Technology 85 90 64 37 41 25 39

Base: All respondents (30-200)Note: Respondents who ‘agree’ or ‘agree strongly’Source: PwC 14th Annual Global CEO Survey 0% 100%

‘Two markets that I find very interesting are Japan and the emerging economies. Japan has suddenly woken up to the fact that it can be competitive globally if it collaborates extensively with India. Emerging markets like Latin America, South Africa, Russia, India and China are interesting markets in that they will help redefine the way IT solutions are implemented. And those solutions will eventually find their way into the developed economies because those implementations are going to be faster and less costly.’ Vineet Nayar Vice Chairman and CEO, HCL Technologies, India

‘The increase in demand as the global economy recovers will undoubtedly lead to higher prices of certain commodity materials. What we, as a company, need to do as innovators is innovate our way out of that. We’ve got to find substitutes for those materials, and we’re working on that now.’ Bob McDonald Chairman of the Board, President and CEO, The Procter & Gamble Company, US

‘One type of innovation we’re really intrigued by is the potential of using the constituent parts of our portfolio as building blocks to form interesting business combinations that create additional rounds of value.’ Tan Sri Dato’ Azman Hj. Mokhtar Managing Director, Khazanah Nasional Berhad, Malaysia


Appendix 10: Businesses will include consumers and suppliers in innovation processes

Q: To what extent will you change your strategy in the next three years to the following potential changes to long-term consumer, business purchasing/government procurement behaviours?

Consumers will play a more active role in product and service development

Businesses will look more to their suppliers for product innovation

Businesses will look more to their suppliers for process innovation

Governments will play a more active role in product and service development

% of companies for whom consumers/businesses/governments represent >33% of revenues

No change at all Minor change in strategy Some change in strategy A significant change in strategy

2212 43 22

2115 42 21

2516 40 16

2835 24 11

Base: Consumers (546); Businesses (870); Governments (176)Source: PwC 14th Annual Global CEO Survey

‘Within ten years, 70 percent of our business will come from the Far East. And that shift eastward has tremendous implications for our company’s structure and culture. The values at the heart of our company certainly won’t change, but our culture and business model will need to evolve to reflect a changing customer demographic.’ Paul Polman CEO, Unilever, UK

‘I think in the future we’ll see a lot more partnering, a lot more sharing, a lot more acknowledgement of the specialised skills of other firms. And that’s partly because there is going to be greater stratification in our industry.’ Philip Dilley Group Chairman, Arup Group, UK

‘The ‘smart grid’ concept has become very popular these days, but, unfortunately, more often than not it is mentioned as a buzzword by managers or economists. However, one needs to understand that ‘smart grid’ is an intellectual system that helps managing the whole technology chain including the generating company, the grid component and consumers, i.e. with retail covered as well. This should involve generating, grid and retail companies.’ Ivan Blagodyr General Director, JSC RAO Energy Systems of East, Russia

‘What has remained intact is our overall strategy to get closer to the end user and improve our entire sales and marketing effort. That has meant investing more in our skills and capabilities as well as some investments in building service centres around the world. What have we been forced to change? We’ve postponed quite a number of investments mostly in the product area.’ Juha Rantanen President and CEO, Outokumpu Oyj, Finland


Appendix 11: IT investments are ‘ambidextrous’ – made for both cost efficiency and growth

Q: To what extent do you agree or disagree with the following statements about capital investments in strategic IT that your company is making over the next three years?

Our IT investments are made primarily to reduce costs and becomemore efficient operationally

Our IT investments are made primarily to support growth initiatives andleverage emerging innovations, such as mobile devices and social media

Our IT investments are frequently the focus of boardroom discussions

Our IT investments are no longer necessary now that innovativesoftware is available as a service on the Internet

%


113 48 21

185 38 16

2610 28 11

4334 8 2

Base: All respondents (1,201) Source: PwC 14th Annual Global CEO Survey

‘We took it upon ourselves to develop a technology by which we could re-process low-grade iron and use it to manufacture high-grade steel. That innovation has saved us a lot of money. So, even in my position, I spend a lot of time on R&D issues.’ Sajjan Jindal Vice Chairman and Managing Director, JSW Steel Limited, India

‘Five years ago, technology was the thing and content was seen as fungible. I think the respect for content has grown immensely, along with the realisation that you can’t have great technology without great content.’ Leslie Moonves President and CEO, CBS Corporation, US


How are customers changing?

Appendix 12: Consumer-facing companies are using technology to reach customers

Q: What extent will you change your strategy in the next three years to the following potential changes to long-term consumer behaviours?

Consumers will increasingly use mobile devices and socialmedia to voice their needs and preferences to companies

Consumers will focus more on price and value for money

Consumers will factor a company's environmental and corporateresponsibility practices into purchasing decisions

Consumers will place a higher emphasis on the countryof origin for the products they buy

% of companies for whom consumers represent >33% of revenues


148 34 43

1910 40 30

3218 38 11

2548 18 6

Base: Consumers (546)Source: PwC 14th Annual Global CEO Survey

Appendix 13: Business and government suppliers face changes in purchasing

Q: To what extent will you change your strategy in the next three years to the following potential changes to business’s purchasing/government procurement behaviours?

Governments will increasingly prefer to purchase from domestic suppliers

Governments will factor a company's environmental and corporateresponsibility practices into purchasing decisions

Businesses' purchasing decisions will be driven primarilyby price considerations

Businesses will factor a supplier's environmental and corporateresponsibility practices into purchasing decisions

% of companies for whom governments/businesses represent >33% of revenues


1922 37 19

3016 34 17

2519 34 21

17 1728 36

Base: Businesses (870); Governments (176)Source: PwC 14th Annual Global CEO Survey

‘In the same way, for the younger people who went through this current recession, it will forever have an impact on the way they behave, the way they incur debt, the way they spend, the way they save. It will be a permanent change.’ Richard K. Davis Chairman, President and CEO, U.S. Bancorp, US

‘In developing economies, people have become much more conscious of what they eat and drink and we’re seeing many consumers switch from carbonated soft drinks to non-sugared drinks that are marketed as healthier beverages.’ Senji Miyake President and CEO, Kirin Holdings Company, Limited, Japan


Appendix 14: Emerging market consumers will drive revenue growth

Q: To what extent will you change your strategy in the next three years to the following potential changes to long-term consumer, business purchasing/government procurement behaviours?

Emerging market consumers will drive growth for my company

Emerging market businesses will drive growth for my company

Emerging market governments will drive growth for my company

% of companies for whom consumers/businesses/governments represent >33% of revenues


1625 30 25

1721 33 26

1627 34 18

Base: Consumers (546); Businesses (870); Governments (176)Source: PwC 14th Annual Global CEO Survey

‘The standards from the OEMs have been raised over the last couple of years, making quality a differentiator, something they can build their brands around. That has flowed into the supply base, so we look to substantially improve and invest in our quality.’ Stephen A. Roell Chairman and CEO, Johnson Controls, Inc., US



Figure 7: Talent is now on top of the CEO agenda







6 Capital structure


17

23 54 23

23 48 28

25 47 27

36 41 22

50 34 15

52 34 12

52 31


%


‘I do think, though, that our strategy recognises that long-term growth is going to come from emerging markets. But these nascent markets come with various uncertainties. One is the regulatory environment; another is talent-related. Finding the appropriate talent to take advantage of the growth prospects of emerging markets is one of the biggest challenges we face.’ Louis Camilleri Chairman and CEO, Philip Morris International, Switzerland/US

‘The large growth we are experiencing means that identifying and integrating the right people has been our major concern. In 2010 alone we have had to hire more than 30,000 new staff, taking our global headcount to 120,000.’ Marcelo Odebrecht CEO, Odebrecht, Brazil

‘As Kirin has evolved into a globally integrated beverage manufacturer, it has become increasingly important to ensure that we work with companies that have corporate cultures compatible with our own. So far, the overseas beverage makers that we have acquired or invested in have corporate cultures very much similar to ours. As a result, working across the various corporate cultures has not proven too difficult.’ Senji Miyake President and CEO, Kirin Holdings Company, Limited, Japan


Appendix 15: Companies in Brazil and Asia-Pacific are the most upbeat about jobs growth

Q: What do you expect to happen to headcount in your organisation globally over the next 12 months?

ASEAN

India

Brazil

China & Hong Kong

Australia

Germany

Canada

Middle East

Argentina

Russia

US

UK

Mexico

Global

France

Africa (all)

Scandinavia

Netherlands

Japan

Italy

Spain

%

Increase by more than 8% Increase by 5-8% Increase by less than 5%

Decrease by less than 5% Decrease by 5-8% Decrease by more than 8%

3 3 3 25 8 45

40 25 20

53 8 18 20 30

24 20 22 26

35 5 33 18 11

103 8 23 15 25

3 5 28 8 25

7 15 15 26 19

24 20 16

13 3 3 10 16 29

33 9 34 14 7

83 12 28 10 15

113 6 11 23 17

43 9 23 13 15

15

13 17 13

64 11 19 915

10

22 715

103 27 27 7 3

13 3 13 17 7 3

3 5 15 18 10 5

13 28 5 3



Appendix 16: Several industrial sectors are anticipating the most job growth

Q: What do you expect to happen to headcount in your organisation globally over the next 12 months?

Chemicals

Technology

Automotive

Industrial Manufacturing

Transportation & Logistics

Business & Prof services

Oil & Gas

Retail

Engineering & Construction

Global

Metals

Consumer Goods

Financial services

Utilities

Pharma & Life sciences

Entertainment & Media

%

Increase by more than 8% Increase by 5-8% Increase by less than 5%

Decrease by less than 5% Decrease by 5-8% Decrease by more than 8%

3 3 36 15 12

72 2 20 14 25

22 10 22 20 16

34 7 30 13 14

73 2 17 18 20

6 12 24 15 15

2 2 13 22 15 17

5 11 28 11 13

41 8 21 10 21

43 9 23 13 15

35 14 19 16 14

53 12 23 12 13

56 8 20 12 15

42 13 26 99

46 13 19 15 8

7 17 10 10 17


‘From our peak employment during 2008–09 to the lowest trough in that same time period, we laid off 5,000 people. Coming out of the recession, we’ve hired back about 3,000 people, though in different parts of the world. In China we have more people than during our peak, because that’s where our biggest growth curve is.’ Timothy M. Manganello Chairman and CEO, BorgWarner Inc., US


Figure 8: Retention and deployment figure highly in CEOs’ talent strategies












34

39

44

52

56

57

58

66

71 20 7

26 7

32 8

32 10

32 11

34 12

41 13

40 19

47 18

%


‘Ultimately, you can’t rely solely on expatriates to run a local business forever. They certainly have an important role to bring our affiliates in given countries up to certain standards, but they also have the critical role of transferring knowledge and expertise so that those businesses can stand on their own. The goal is that those affiliates are eventually run by country nationals.’ Louis Camilleri Chairman and CEO, Philip Morris International, Switzerland/US

‘Human resources pose a really significant challenge. Previously, we were only a trading company, but now we are a corporation with R&D, industrial and trading activities spanning all parts of the supply chain, encompassing the upstream, middle stream and the downstream. Thus, our corresponding human resources face a bottleneck on further development. That’s something we need to solve.’ Zhou Zhongshu President, China Minmetals Corporation, China

‘Talent is becoming very expensive, so it’s important to tap all available sources. That’s the reason we’re looking closely at the non-included workforce.’ Vineet Nayar Vice Chairman and CEO, HCL Technologies, India


Appendix 17: Two-thirds of CEOs foresee skills shortages

Q: Considering the talent required for the success of your business over the next 3 years, what are the key challenges you expect to face?

Limited supply of candidates with the right skills

Challenges in recruiting and integrating younger employees

Competitors recruiting some of your best people

Providing attractive career paths in our industry

Difficulty in deploying experienced talent globally

Talent with the right technical skills lack flexibility and creativity

Understanding and forecasting talent availability in emerging markets

Key employees making career changes for personal reasons

Retirement of older workers

Scrutiny of reward structures by regulators and/or investors

Poor retention of female talent

%

66

54

52

50

45

44

40

39

35

23

12


‘As a reputable international manufacturer, we have the risk of employee retention amplified by a market that is becoming very competitive regarding compensation.’ Timothy M. Manganello Chairman and CEO, BorgWarner Inc., US.

‘Our capacity to attract, retain and manage executive talent does not depend on the compensation package, but rather on our ability to create a sense of belonging to an organisation that offers a long-term relationship and a professional development opportunity, and that has a clear conception of itself, of what it wants to be, and of how to achieve it.’ Armando Garza Sada Chairman of the Board of Directors, Alfa, S.A.B. de C.V., Mexico

‘We’re still in a first generation of middle management in some of our emerging markets, but we recognise that to be successful in five to 10 years, they’re going to have to be part of our global team and senior management.’ Stephen A. Roell Chairman and CEO, Johnson Controls, Inc., US



Figure 9: CEOs see shared commitments with government to achieve public outcomes


0 30 60%0

30

60%



Shared priority












‘The confidence and the trust between society at large, between citizens and the economy, have suffered a lot. In the long run, if we don’t have an agreement on the required value creation of companies with respect to society, we are going to have a huge problem.’ Prof. Dr. Peter Gomez Chairman of the Board, SIX Group AG, Switzerland

‘Create specific incentives for investors to direct their money towards the financing of long-term projects, at attractive costs to entrepreneurs, through mechanisms like project bonds, which hold a specific characteristic of getting their payment back from the flow of receivables, rather than relying on corporate guarantees for their repayment.’ Marcelo Odebrecht CEO, Odebrecht, Brazil


Appendix 18: Shared agenda in North America

Q: How much does your company plan to increase its commitment in the following areas, to improve national competitiveness and social well-being over the next 3 years? Which 3 areas should be the government’s priority today?

0 30 60%0

30

60%



Shared priority


Creating and fosteringa skilled workforce

Ensuring financialstability and accessto affordable capital








Base: North America (148) Source: PwC 14th Annual Global CEO Survey

‘At times like this, we’ve historically seen governments look to the private sector to provide capital for the provision of necessary infrastructure. This can occur through the privatisation processes or through “greenfield” investment by the private sector. In the years to come, we expect to see more of both.’ Nicholas Moore CEO, Macquarie Group Limited, Australia

‘The government should be more consistent in its oversight of the railway sector. The operative word here is, consistent. Certainly, the management of Globaltrans is very active in efforts to advance the reform process. We frequently bring our views to the attention of government officials who, I do believe, are trying harder each year to take the opinions of the business community into account.’ Alexander Eliseev Chairman of the Board of Directors, Globaltrans, Russia


Appendix 19: Shared agenda in Western Europe


0 30 60%0

30

60%



Shared priority











Base: Western Europe (420) Source: PwC 14th Annual Global CEO Survey

Appendix 20: Shared agenda in Asia Pacific


0 30 60%0

30

60%



Shared priority







Securing natural resourcescritical to businessAddressing the risks

of climate change

Protectingbiodiversityand ecosystems Protecting

consumers’ interests

Base: Asia Pacific (257) Source: PwC 14th Annual Global CEO Survey


Appendix 22: Shared agenda in Central and Eastern Europe


0 30 60%0

30

60%



Shared priority











Base: CEE (98)Source: PwC 14th Annual Global CEO Survey

Appendix 21: Shared agenda in Latin America


60%3000

30

60%



Shared priority








Addressing the risksof climate change Protecting

biodiversityand ecosystems


Base: Latin America (221) Source: PwC 14th Annual Global CEO Survey


Appendix 23: Shared agenda in the Middle East


60%3000

30

60%



Shared priority











Base: Middle East (27) Source: PwC 14th Annual Global CEO Survey

‘Governments have been the principal providers of infrastructure for most of the post-war period. However, faced with pressure to reduce public sector debt and, at the same time, expand and improve public sector facilities, governments have looked to the private sector for finance and provision of services.’ Efthimios Bouloutas CEO, Marfin Laiki Bank, Cyprus

‘I think there would have to be a change in the covenant of for-profit companies – which is possible, but not overnight – to expect the business community in general to step in where the government is going to step out.’ Richard K. Davis Chairman, President and CEO, U.S. Bancorp, US


Appendix 24: Shared agenda in Africa


0 30 60%0

30

60%



Shared priority











Base: Africa (30) Source: PwC 14th Annual Global CEO Survey

‘Our company is paying a lot of attention to the development of our staff. We actually start from the school, then the institute.’ Evgeny Dod CEO, RusHydro, Russia

‘We need to provide real value for our customers because, ultimately, that’s how you protect shareholders’s interests. But if you start ignoring the larger social context in which you operate – whether you realise it or not – you end up narrowing your own future options’ Douglas M. Baker, Jr. Chairman, President and CEO, Ecolab, US



Appendix 25: Globalisation figures strongly in CEOs’ expectations

Q: How strongly do you agree or disagree with the following statements regarding the changing dynamics of the world economy?

Business will actively support new government policies that promote 'good growth' that isfinancially, socially and environmentally sustainable at global, national and local levels

Global businesses will be more transparent when reporting their financial results and tax obligations

Emerging markets are more important to my company's future than developed markets

Government and business partnership will be more effective at mitigatingkey global risks like climate change, terrorism and financial crises

The world will be more open to free international trade and capital flows

The top new global brands over the next decade will come from emerging markets

Tax policies and rates will increasingly converge among nations

New regulations will largely be harmonised because of cooperation among governments

National governments will put strategic sectors of their economyoff limits from foreign ownership and control

%


101 51 21

144 48 16

1611 33 25

184 44 10

264 37 12

245 35 12

299 35 6

307 33 7

299 29 7


‘What that [migrating from a company with international operations to one that is truly global] means for us is taking the expertise we have inside the company and applying that to all the places we operate. Whether it’s Morocco, Turkey, China, Brazil or Russia, it’s sharing best practices and building the capabilities that let us be more successful than our competitors in those businesses.’ John V. Faraci Chairman and CEO, International Paper, US

‘Nowadays, when you make investments abroad, foreign governments don’t care how well you do in operations, they care about how well you do in fulfilling your corporate responsibility. This responsibility is not only important to foreign countries, it is important to China.’ Zhou Zhongshu President, China Minmetals Corporation, China

‘I know many governments think of the world economy as a zero-sum game. We don’t think of it that way. Our company, which has sales greater than the GDP of many countries, wants to do business and improve lives all over the world. The best way to do that is to get governments around the world to work together to create economic growth.’ Bob McDonald Chairman of the Board, President and CEO, The Procter & Gamble Company, US




Agah Uğur CEO, Borusan Holding A.Ş.

Interview Transcripts

PwC: What indicators are you watching to tell you how the global economy, or specific local economies, will develop in 2011?

AU: Our strategy differs for each business line. Our most recent but most technically intensive business (energy) will be a purely Turkish business until opportunities come up in neighbouring countries. The indicators for the steel business (two divisions and partners: ArcelorMittal and Mannesmann), are much more international. We export $60 million worth of steel so we must have information about our key markets and how they are developing. Again, our auto distribution is a purely local business but our Caterpillar enterprise has a regional vision and we operate in five countries. What happens there is very critical to us. So we work in a number of business segments: auto (cars, flat steel, special pipes, engine parts) in the Turkish market; we are a major supplier to the home appliance market with flat steel; construction, in which Caterpillar is the main player; and the mining segment, where Caterpillar is the most profitable – especially in Kazakhstan where it is well established. So all in all we look at the Turkish macroeconomic indicators, not only the banking indicators like the GDP but also consumer confidence for the construction sector and new permits. We try to get as much detail as possible for both our pipe business and our Cat business. We have alliances with two universities where professors prepare market predictions for us for the construction sector and pipes sold, and what this means for the capital machinery area. For the automotive sector we have access to the plans of our customers. We have an annual in-depth review of their three- to five-year plans and every six months we have a general informative follow up of what is happening so we base our plans, our growth plans, on our key Turkish customers.

Outside Turkey we tend to follow our specific customer segments rather than look at the big picture, for example our steel export markets, and especially oil and gas in North America and Canada. We are interested in data on exploration and developments for oil and gas transfer. So those areas we cover in more depth. We sell, US$ 60 million of products to the US and US$ 20-30 million to Canada. Kazakhstan is a special case for us. It is a roller coaster: even though it is stable politically there are a lot of upturns and downturns so it is important to understand its banking health. We have two advisors there who support us in terms of lobbying and information on the banking sector. The banking sector is important because we need more finance than we can provide for our mining business. Financing also underpins the general construction sector. So it is not just about macro-economic conditions for the banking sector; the strength of our financing is key.

PwC: What is the outlook beyond 2011 and what are the major risks in that outlook?

AU: We are very positive. Maybe we a re more positive than we should be. We feel that we are in the right industries, at the right time and in the right place. Most of our partners are in very good shape as well. We get strength from them. The crisis is behind us so we are looking forward. There are a number of risks. One is a more general international risk that will impact our business. Another is European risk. Turkey is very dependent on Europe, not only for markets but for direct investments: most of the money is coming from Europe. If Europe as a whole has been affected negatively then cash inflows to Turkey and our exports to Europe will be impacted, because demand will be impacted. There will be a negative impact on the Turkish market and I think the issues of the last six months are quite worrying.

Interview with Agah Uğur CEO, Borusan Holding A.Ş.



Another strand of risk is more internal. Our baseline strategy is along the lines that Turkey will be stable. There will be ups and downs in daily Turkish politics but, on a five-year trajectory, some of the big problem issues, like the Kurds and Cyprus, will be better than today. Our baseline is definitely a stable political and economic view – a less volatile pattern than the past in terms of crisis – but the risk is our memories. All our memories say that Turkey cannot be stable in the way we define it now for a five-year period. So this is more of a psychological or a confidence-based risk rather than an economic one. If confidence ebbs, that will impact us as the demand in Turkey is booming. We have grown on average 35% on every business line this year and we expect another 20% growth next year. This is too good to be true and that is why confidence can be dangerous in the Turkish market.

There is also risk from the mining industries perspective. Our baseline strategy is that we are bullish about the mining industry because Chinese demand will continue and, because of consolidation, it is difficult to see the mining industry declining in the foreseeable future.

PwC: Has your strategy been resilient through the economic crisis and what strategic changes have you had to make?

AU: Most of our businesses are quite cyclical. In terms of steel, the low level of demand affects prices significantly. You lose money when the price goes down and make capital gains when prices go up. It is the same for the infrastructure based Caterpillar, for example. That is also very severely affected. The product support business performed well, though. That is why for

the next five years we are trying to be more of a solutions provider rather than just selling products or more discrete services. Volumes dropped in our Caterpillar earth moving business and power systems marine products but our logistics business became a major player in a 10 year period. Our third party logistics and warehouse management operation didn’t lose customers during the crisis: volumes dropped but we gained many new customers. Weaker competitors lost customers and two or three more resilient companies gained. Profitability increased.

Once you sign a new contract, it takes six months to start to generate revenue because you have to design a warehouse or adapt your warehouse to a customer. It takes time. But the service side is definitely the most resilient and we will invest more and more in it over the next five years. For example, we are building a sophisticated component refitting centre in Kazakhstan for very large mining machines and big trucks. We are aiming to double the Caterpillar service business in five years from €125 million to €250 million. It is a dream business: one machine sale means three to four machines sold over the length of the machine’s life in terms of parts and services. Parts are three times more profitable so you sell a machine and are guaranteed almost nine times profitability over the next 10 years. Not a bad business. Luckily, it does not need too much capital but it needs intellectual change across the organisation.

On the logistics side we will invest more in ports. We have some gaps in our system. We are strong in inbound traffic but weaker in international transportation – so we will look to inorganic growth to serve our customers outbound.




PwC: What is your biggest strategic opportunity?

AU: Our biggest opportunity was deciding to invest in the renewables industry in 2006. Not new. We started looking for opportunities in 2007 and started spending money in early 2008. We decided to do it as a portfolio reshaper. We are very much cyclical. We have GP margins of 16-17% overall so we are very tight. As a B2B business with low margins, we looked for new areas to invest.

The renewables business has positive advantages for us but maybe issues too – when you find the right project and financing and the project pays the debt – it’s long term, high capital expenditure but very central to cash flows. We are talking about 70-80% margins for renewables. Another beauty of this is that you can do it on a modular basis: you can invest in different parts of the renewable portfolio, like hydro dams and windmills, here and there. If you have the resources you can invest and you can take your time. So it was a very attractive project for us but things are very tough in Turkey because the market is being developed and the rules are changing all the time. The market players are very aggressive and are willing to overpay on the projects, because they know if they wait long enough, the value of the investment – like property – will increase. We and our partners are not like that. We have to move more slowly than we would like because data in the Turkish market is not readily available. We review one project per week on wind, for example, but the data quality is so low that it makes the proposition risky. Hydro dams and the other types of power plants also present issues such as road relocation, people relocation, and other environmental considerations.

We are very bullish though; the long-term outlook for the Turkish market is favourable and renewable energy is the right policy but the people lack understanding of the renewables market. As a proportion of the base energy source for electricity, for example, the percentage of renewable energy is too low and there is room to grow. So I think for the next two years, we will do our best to do that. We may move into gas pipes as well, but our major strategy is to produce electricity for Turkey. Our original plan was to grow to 2000 megawatts in a 10 year perspective; this means roughly US$ 3 billion of investment. It is a high capital expenditure figure for us but it would produce a high profit margin compared to our current portfolio. That is why we see it as a major strategic move going forward.

PwC: Last year, a majority of CEOs told us they planned to increase their innovation spending, despite the economic conditions. In what specific ways are you pursuing more innovation?

AU: We as a company are known for innovation, although we are limited by low margins. We are not like 3M, for example, because we are always an intermediary between the final user for products and someone else. We focus on customer management and customer efficiency. Over the past nine years we have trained 2,300 people in Lean Six Sigma. We have over 150 black belts and have done over 100 projects in process management. Lean Six Sigma has taught us a lot and we have changed things: first and most importantly, most of the decisions taken on the commercial and operational strategy are done much more democratically. The person who is closest to the customer has the power to make decisions that won’t be overridden by management. Six Sigma has also created a common language based on efficiency.




Our reaction to the crisis in 2008 was rapid, and we had reduced the workforce by 14% by the end of November 2008. We hadn’t managed the previous crisis as well so this time we put into operation a 14-point crisis management programme from working capital to cash flows and people management. By May 2009 the crisis was behind us. I personally launched an initiative around new products and services. Our steering committee came up with 18 different catalytic mechanisms which we are trying to cultivate and bring together with the leadership. We have a very different and innovative corporate environment. We have ‘patient money’ that we use to invest in good customer-focused ideas from our young people. And we are using an assessment tool looking for innovation and commercial behaviours. We use this assessment for the new generation of people in specific roles in our organisation that require more innovative behaviour.

We have three faculties right now: Leadership, Sales and Six Sigma through the Borusan University, powered by Sabanci University. But we have our own courses, our own diplomas that help promotion. We are now adding a fourth faculty: Innovation. This one is under development and we hope to launch it next September.

And we have launched other initiatives. For example, we have promised board members of our shareholders that we will have KPIs for each company for new products and services. We have also set new products and services goals for our general managers. Most of the variable pay of our different business GMs come from profitability and cash flow management. Now we are adding bonus payments when they meet new products and services targets.

In 10 years’ time I want Borusan to be known not only for its prestige, quality and customer care but also for its innovative approach to customers. It’s a long journey and it will be, hopefully, a very fruitful one because we will need a lot of new ways of dealing with our customers to keep our GP margins. Margins will go down whatever we do so we must find new products, at higher than the average company margins, to offset that.

PwC: What are Borusan’s key markets?

AU: There is a significant change here. Before the crisis we were very bullish and planned to grow our pipe business into a high precision value added tubes supplier for the auto industry. We bid for three different European auto industry companies. Fortunately, we failed to buy any of them: in two of them we were over bid and the last one decided to not sell. This was perhaps a lucky escape.

At that time our oil and gas business was growing but we have to be careful because it is a project business. If you don’t get a project and don’t have the regular business to sell the standard pipes that can cause problems. So we thought growing our precision tube business, for which we have a facility in Italy, and adding a few more brands to sell directly to OEMs like VW, BMW etc, would give us a stable market. This strategy has completely changed now. If an opportunity were to arise, we wouldn’t do it. We will grow our capacity organically but won’t go for a European investment.




PwC: Where are you looking to invest?

AU: We have regional businesses and local businesses. I don’t think that we can be a global player, at least not now. Our regional strategy is first the logistics business and the places we are investing in are Iran, Algeria, Kazakhstan and Ukraine. For the pipe business, we are looking to the Middle East for the oil and gas industry. For light assets we are investing in Northern Iraq – for steel servicing – shaping , cutting etc. We are investing mainly, therefore, in CIS, the Middle East and North Africa.

PwC: How do you source your commercial activities?

AU: This hasn’t changed much except in steel. We are seeing a shift to more Turkish suppliers as there is more investment locally and more competition locally for sourcing. For Caterpillar, which is sold in Kazakhstan, we are sourcing more from Japan and China than from Europe, because the cost base is lower from these countries and better for our pricing.

PwC: What assumptions about the changing purchasing behaviours of your key customers or segments does your strategy depend on?

AU: In the automotive business there has been a clear shift to luxury cars in the Turkish market. The segment has grown from 1.5% of the total car market in Turkey six years ago to 10%. Affluence, especially in countries like Turkey where there is less of a clear distinction, is demonstrated through the car you drive. More prestigious brands, bigger cars are becoming popular – as in Asia. Customers are using more credit now to buy cars instead of using cash. If they have the cash, they want to use it for something else.

In the steel business there has been a change in buying patterns and contract patterns from one year or six months down to three months. So every quarter there is a new contract. The supply side has become more of a spot market with quarterly driven business and that behaviour change is going all the way down the value chain. Our customers, including some of our major white goods customers as well, no longer want to make longer term contracts with us: they want quarterly deals as well. So I think that shorter contract periods is the right way to manage price volatility.

In our earth moving and logistics business we see a shift to low cost producers unless you are a sophisticated business with sophisticated solutions. Brand recognition is not as important. In Turkey the earth moving business (the Cat business) is a two-track industry. The first track is more sophisticated, providing a value added service – almost like a partner. Instead of selling machinery we sell a number of hours and cubic metres of earth moved. We can sell at a higher premium than average brands today because reliability and efficiency is so important for the mining industry. The second track is low-cost simple service.

In the BCP market – where operators do the business using smaller machines – there is a developing preference for rental or second-hand machines or machines from low cost countries like China. This is a major Chinese trend. The same goes for the logistics business. We see two tracks: the value-add track providing sophisticated, value added services and the low cost track where you provide basic service.


PwC: What one thing that should be done to stabilise the financial sector and minimise the risk of another recession?

AU: I still believe that the banks are taking risks again – in different formats. I don’t see a behaviour change in a breakthrough way. Monitoring of risk taking still needs to be very high on the agenda of the ‘rule setters’. I think that, in weaker countries, the banking systems are still weak and there is a lot of corruption going on. Rather than facing the realities, backs are turned in some European and Asian countries. Capitalisation and risk management need to stay high on the agenda.

We are quite shy of the capital markets. Our shareholders have always seen it as a gamble. It is too shallow. The Turkish market is very small as the main borrower is the state but this is changing. We may continue to be shy of the equity markets but we may do more borrowing in the coming years because interest rates have come down significantly. This will be the major shift for us. As far as the labour market is concerned, we are not changing our people strategy. I still believe that we are quite flexible in managing our workforce.

PwC: How might the private sector do more to contribute to social well-being in areas that were once considered the government’s responsibility [e.g., reducing poverty or addressing climate change]?

AU: The first aspect is about encouraging your employees to be volunteers for society and to contribute to it. There is no money involved: it is about behaviour change. I have become the chairman of the Turkish Private Sector Volunteers Association. The Association has 65

members and hundreds of thousands of white collar staff and all the big names: IBM, Microsoft, Garanti Bank, PwC are all members. We have programmes designed to mobilise private sector employers and are encouraging members to come to the leadership with worthwhile projects which can then be co-ordinated and duplicated. I strongly believe that private sector dynamism should come not only from entrepreneurial skills but also from the most respected, good citizens of Turkey. This is the profile that works for the private sector so we must motivate and encourage these people to share their hearts and to do something for their community.

Corporate social responsibility looks great on your annual reports and on your websites but it has to be more than skin-deep. If one team member has to leave a meeting half an hour early for an NGO activity, the way you look at him as he is leaving says it all. So I think there is a big message here. The role of the private sector is not only about giving money but also in helping in this behavioural change.

The second part concerns the private sector’s social responsibility. I don’t want to go into lowering carbon emissions and suchlike but contributing to the community is important. Entrepreneurs have started contributing more in the last few years but I think it is not organised enough. We like to keep things small so we cannot create big ideas and have the masses following. Warren Buffett is a great example: he donated $10 billion to the Bill Gates Foundation because he believed that it was running very well and doing a lot of good. He went for the end result rather than creating a brand for himself. But I think Turkish companies don’t do that.


We must all come together for major causes with a lot of impact rather than staying with individual projects.

PwC: What is your opinion on the roles of the private sector and Government regarding social responsibility?

AU: The current government no doubt listens much more to the private sector than the previous ones but does it act upon what it hears? Does it collaborate as much as those of the Scandinavian countries? I doubt it. So there is a huge role to be played in changing mindsets. The private sector needs to continue to work to convince the government that working together we can accomplish more in terms of the key issues. Our challenges are less than in the larger emerging markets but they are more sophisticated and thus more complicated. I think the schools issue (building schools) is behind us so what we need to do now is more on the ‘soft side’. We can offer more to the government, not only as advice but as collaboration on joint projects.

There has been a big trend in Turkey in the industrial sector for the government to get out of industry. Further privatisation would be good for infrastructure. The government was selling sugar, Raki, it was lending money, it was all over the place. Now, things are different and for the last 10 years we have seen a very positive change.

What more can the government do? So much has been done in the last 10 years. Obstacles created by the public sector have diminished, not only in regulation but also in the way Turkish business is done – it is much freer now. I don’t think that there is much indirect interference. There must be some way to work with specific sectors on ways to improve their competitiveness. I don’t think there is enough of a big picture view with a road

map: the private sector does some things and the state does others but there is not enough ‘big brotherhood’ from the government, in sectors or across sectors. I am not talking about reducing the informal economy but about reducing energy crises, building more railways, etc. High-level strategic coordination with long-term competitiveness should be the focus for the government and the private sector. Let’s come up with ideas together and work together to advance.

Regarding government debt, we have concerns about the chain reaction of the European countries’ high debt and which country will be in trouble next. Until recently no one was talking about Portugal, for example, but now everyone is.

PwC: When thinking about your company, how is your definition of ‘value’ changing? What non-financial kinds of value, if any, are becoming more important? In what ways is the importance of stakeholders other than shareholders changing?

AU: For Borusan, the fundamentals have not changed. As of 1 January, we are relaunching our values, rephrasing them in a better way to give direction on the behaviours we expect from Borusan. Before our values were more distant; now our values are more easily understood with regards to a behavioural code. But the fundamentals haven’t changed. Because we are a conglomerate and have many different businesses, it is more about how we want to behave rather than what we want to achieve.

The message it gives to our people is the responsibility to behave in the Borusan manner. ‘Staying one step ahead’ (part of our values) can be seen in many different ways but you have to do things differently to be seen as one step ahead. I think this covers where we want to be.


Our shareholders’ view of the future is to create a company which itself is a good product. For us it is not about what we produce and sell but the company itself: a reputable company making money and contributing to society in a sustainable long-term basis. The family, as you know, is not in the forefront of things. They are proud to own a company like this but the company does not take strength from the family’s name – the family takes strength from the company. What is changing – not a new value but a behaviour and expectation from our customers – is innovation, with more creation. Now we have innovation as part of our values and what we understand by being creative. Execution is key and will be key to our shift in values. In the overall perspective of value, people want right, decent or ‘just’ things. If you are not just, you cannot survive in the working world. People want humility, modesty. If you can do it now as an individual, as a country, as a business, you will be ahead of everybody else. Eventually it will become the norm. If you do it now, in a sincere way, I believe that it is a differentiator for your brand. But if you do it in 10 years’ time, it will be a hygiene factor. The social pressure is incredible.








Alexander Eliseev Chairman of the Board of Directors, Globaltrans

Interview Transcript

PwC: What indicators are you watching to understand how the Russian economy will develop in 2011?

AE: Railway transport – our core business – serves many sectors of the Russian economy, so we watch a variety of macroeconomic indicators to see where the Russian economy as a whole is headed. We also monitor trends and forecasts for particular industries that comprise the core of our client base. These industries include oil production, oil processing, ferrous metals production, the coal industry, ore mining, and the construction materials sector. In addition, we follow key indicators having to do with the financial sector. We probably pay most attention to the rouble rate relative to other major currencies; and the interest rates at which Russian banks are lending to companies in the real economy. In setting our annual budgets for our holding company and various subsidiary companies, we consider all these indicators.

PwC: What elements of your strategy helped Globaltrans weather the global economic downturn?

AE: There were two factors that helped us get through the crisis. The first is related to our strategy of focusing on growth and the expansion of our business. And the second factor is connected with the planning we undertook to make sure that, while we were growing the business, we wouldn’t get ahead of ourselves – we call it disciplined investments. Before the downturn hit, we were aggressively – but within certain criteria – increasing our rolling stock. In other words, the acquisition of every railcar was viewed as an individual investment project and had to be justified on its own terms.

So, when the financial crisis began, we were not in the situation of having excess rolling stock nor had we incurred excess debt to finance those purchases – as was the case for some of our competitors. At the same time, we developed our fleet in such a way as to meet rising customer demand for two particular types of rolling stock: Gondola (open-top) railcars, which are used to transport more than half of all domestic railway freight; and rail tank cars, which are used for the transportation of oil products and oil. Aswe all know, oil is still central to the Russian economy and even during the downturn the market for freight rail transportation of oil products and oil has demonstrated very resilient performance. So, while we were expanding our fleet, we were doing so in a very deliberate and targeted way, and concentrating on particular types of rolling stock – types we understand, types we know how to manage. Taking that approach is what’s made us a leader among private sector companies in Russia and allowed us to come through the financial crisis in better shape than our competitors. In 2009, the volume of railway freight in Russia decreased by 12 percent, while, at the same time, our cargo turnover grew by three percent.

PwC: In your view, where do the most significant strategic opportunities for your company lie and what risk are associated with these opportunities?

AE: Our major strategic opportunities flow from the reform of the Russian transportation sector, which began in 2003 and has accelerated over the past few years. As a result of these reforms, the Russian railway freight market has been undergoing a programme of liberalisation and privatisation. As of the end of 2009 the share of privately owned fleet in Russia exceeded 40%.

Interview with Alexander Eliseev Chairman of the Board of Directors, Globaltrans



As the result of structural reform of freight rail transportation sector a state owned Russian Railways spun off Freight One (established in 2007) and Freight Two (established in 2010), which compete on the same terms as the private sector railway freight companies. With the establishment of Freight Two completed at the end of 2011, we will have a fully liberalised freight rail transport railcar market in Russia

The Russian government is very clear on the fact that private companies are necessary to the further development of domestic railway freight transport. First Vice Prime Minister, Igor Shuvalov, recently held a meeting to discuss a four-year development model for domestic freight transportation and during that meeting he stressed the importance of private sector participation. So, we are planning to invest and expand our business. In terms of risk, there’s no doubt that liberalisation of railway freight transport is good for the sector and good for the Russian economy as a whole. But liberalisation also means that competition will become much tougher. The Second Freight Company will be a serious player – it has about 150,000 carriages, which is a considerable inventory. So, they are a powerful potential competitor. But we are used to tough competition. We are sure we can win this game.

PwC: Does innovation factor into your long-term plans?

AE: Of course. We view railway freight transport as a high-tech service offering. And the best way to compete is to find new and more efficient ways of accepting, processing, and delivering cargo. In that way, innovative technology helps position Globaltrans as a client-focused company – and that provides us with a competitive edge.

It is very important that Globaltrans be at least a step ahead of the rest of the industry in offering new railway logistics solutions to the marketplace.

PwC: Your business is mainly located in Russia, but you also have a company in the Ukraine. Does Globaltrans seek further geographic expansion?

AE: Let’s say that geography has always been an element of our strategy. Beside Russia, we also operate in the Ukraine, Kazakhstan, and Byelorussia. And we have mid term ambitions to enter to the markets of other CIS [Commonwealth of Independent States] countries. The current political climate is supportive of that ambition. Here, I am particularly referring to the recently established Customs Union of Russia, Kazakhstan and Byelorussia. One of the Union’s documents declares that by 2013, the various tariff systems now operating in these countries will be harmonised, and by 2015, a unified tariff system will be implemented. As a result, Kazakhstan, which, for us, is a very interesting market, will become much more accessible. Additionally, there are reasons to anticipate that the Ukraine may soon begin negotiations to become a member of the Customs Union also. So, all of this in a mid term opens up new geographical opportunities for us.

PwC: In your view, what one measure might governments take to stabilise the financial markets and avoid any repetition of the present downturn?

AE: The most important measure, in my view, would be agreement among the major economies to coordinate their actions with respect to the financial sector. Coordinated action is always promised by the country leaders,

Alexander Eliseev Chairman of the Board of Directors Globaltrans



but apart from the slogans and press releases, every country still follows its own monetary policy. That is why we don’t see any real progress in terms of stabilising exchange rates. I’m not suggesting that economic unification is required. I’m simply referring to the fact that, in the absence of mutually agreed procedures, there will always be a risk of repeating the mistakes that led to the current economic downturn.

PwC: Has the downturned affected the way you raise capital?

AE: Well, we’re much better off than that of most of our competitors. Globaltrans has access to both the equity and debt markets. We were the first company in the Russian and CIS rail transport sector to offer shares to the public. We had our IPO in April, 2008 and a secondary public offering in December, 2009. The success of those offerings leads us to believe that we can mount additional stock offerings should we require further financing. Our top managers and I meet with our major shareholders on a regular basis and we’re getting very positive feedback from them. Globaltrans stock now trades substantially higher than at the time of our IPO, and our shareholders are quite satisfied. So, the equity markets remain open to us. And, of course, we have access to debt financing provided by both Russian banks and the subsidiaries of foreign banks operating in Russia. Based on our interaction with these banks, we understand that they are currently very cautious about lending and don’t consider very many other potential borrowers to be as reliable as Globaltrans. Moreover, in 2010 our major operating subsidiary successfully placed the debut Russian rouble bond issue.

PwC: So you don’t have any difficulty financing your business?

AE: That’s absolutely right. Our strategy going forward anticipates expansion, purchase of new rolling stock, and business acquisitions. And in terms of financing, we see no obstacles that would limit our strategic plans.

PwC: Did the economic downturn have any effect on your people strategy?

AE: The basics of our people strategy haven’t changed. We believe that the quality of our management team is the most important element of our competitive edge. Our current management team is certainly top-notch. But we make a considerable effort to ensure that all our employees – from our rail operators to the leaders of our subsidiaries – have interesting work, are adequately rewarded, and have the opportunity to develop professionally and build careers with us. The economic downturn has not caused us to abandon this approach. Of course, during the crisis we were a bit more careful about annual pay increases. But that was the only action we took that affected our workforce. There was no significant reduction in headcount – but neither were there new joiners. But again, the key to our people strategy is to provide every employee with an opportunity to advance their professional development.

PwC: Do you believe that the private sector should assume some social responsibilities that have traditionally been the function of government?

AE: If a business intends to be more than an enterprise that gains oversized profits quickly, it must reflect the values and needs of its shareholders and the wider society. This is the foundation on which




long-term growth can be built. Such growth is impossible if business is not responsive to the society in which it operates. And you can’t build value without first treating your employees as partners – not merely as hired hands. Employees have families that depend on them. Businesses, therefore, must bear some responsibility for society. In Russia, this approach to business is still in its initial stages. We have to follow the example set by the private sector in other countries. We have to understand that the wealth of the society is directly related to the health of society. So, ultimately, helping to create a healthy society is in the strategic interests of business. At Globaltrans, we provide many employee benefits, which is in keeping with our corporate culture. I hope these sorts of benefits will become the rule for most Russian companies in the future as well.

PwC: What might the Russian government do to promote a more robust business environment?

AE: I think the central issue is quite well understood. There are some areas of Russian business in which the government has too large a presence, and other areas where the government needs to be more involved. For example, the state-owned Russian Railways has enormous assets in terms of rolling stock and track systems. So, in the absence of adequate government oversight, Russian

Railways acts as the de facto regulator in terms of setting technical standards for the entire sector. This is the case not because Russian Railways is intentionally engaging in unfair business practices, but because the government has not followed up at an adequate speed with respect to its oversight responsibilities. So, the government should be more consistent in its oversight of the railway sector. The operative word here is, consistent. Certainly, the management of Globaltrans is very active in efforts to advance the reform process. We frequently bring our views to the attention of government officials who, I do believe, are trying harder each year to take the opinions of the business community into account.

PwC: How does your company define and measure value?

AE: As a service provider, we’re judged everyday by the marketplace – in other words our customers – in terms of the value we provide. Therefore, value creation starts by delivering direct benefit to our customers. In delivering benefit to our customers, we also create value for our shareholders and employees. In the process, we attract and recruit talented people into our organisation. The more talented people we attract, the more value we will create and the more successful our business will be.








Armando Garza SadaChairman of the Board of Directors, Alfa, S.A.B. de C.V., Mexico


Alfa is a Mexican company incorporated in 1974. Its corporate offices are located in San Pedro Garza García, Nuevo León. Measured in terms of its income, Alfa is one of the largest diversified industrial companies in Mexico. It comprises four business groups: Alpek (petrochemicals), Nemak (high-tech aluminum auto parts), Sigma (refrigerated food) and Alestra (telecommunications). Alfa has manufacturing operations in Argentina, Austria, Brazil, Canada, China, Costa Rica, the Czech Republic, the Dominican Republic, El Salvador, Germany, Hungary, Mexico, Peru, Poland, Slovakia and the United States. Alfa markets its products in more than 70 countries around the world.

Armando Garza Sada has been the Chairman of the Board of Directors of Alfa since March 2010. However, he has worked with the Company since 1978, holding important executive positions, among the most important of which were Vice Chairman of the Board of Directors, Senior Vice President of Corporate Development, and President of the subsidiaries Versax, Sigma, Polioles and Selther. He is currently a member of the board of directors of FEMSA, Liverpool, FRISA, Lamosa, MVS and of the Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM). He is also a member of the board of Stanford University and of the Advisory Board of its business school. Armando Garza Sada has a major in Engineering from the Massachusetts Institute of Technology and a Master’s degree from the Stanford Graduate School of Business.

Summary• In recent years, our companies have

been able to increase their market share, while our customers were doing so too. This has allowed us to grow.

• We serve our markets “from the bottom up”; that is, we try to discover or anticipate the needs of our customers in order to provide them with the best possible solutions.

• In Alpek we have interesting investment opportunities. We recently entered into a process of acquiring petrochemical plants from Eastman Chemical Co., which produce raw materials for polyester in all its applications.

• In Nemak, the expectation of accelerated growth of the automotive industry in Asia has driven us to develop our business in that region. We have top executives living in China, whose mission is to open spaces for our products and explore new alternatives in which we may benefit from our knowledge and experience.

• Our subsidiary Sigma is expanding internationally, both in the United States market, with a primary focus on the Hispanic segment, and in South America. We wish to adapt to these markets the business model we have implemented with great success in Mexico.

Alestra has found in the business niche of the Mexican market a significant growth opportunity through offering its customers a solid platform of value added telecommunications services.




• Although we have always been significantly aware of our corporate social responsibility in Mexico, we have now expanded this concept to encompass our activities in other countries and regions. We have gotten involved with the needs and ambitions of our employees and of the communities surrounding our facilities, actively participating in the promotion of their well-being and quality of life.

• In Mexico, it is important to have a “country vision”, which is accepted by all or at least a vast majority of our population. This would allow us to recognise the areas that are really relevant so that we can advance in the correct direction.

Global environmentIndicators and trendsThe virtuous circles of competitiveness

The economic crisis of 2008 brought very different challenges and opportunities for each of our businesses. The crisis was not so severe in food or in petrochemical products, since demand continued growing or at least did not fall. Neither was the crisis severe in the telecommunications services sector, which is in the forefront of the technological wave. Hence, our only business sector affected by the crisis was the one supplying the automotive industry.

In 2010, the first three businesses mentioned continued growing. The fourth sector experienced a strong recovery, as a result of the rebound of the automotive markets, which grew strongly although not achieving pre-crisis levels. The steps adopted by our subsidiary to cope with the difficult situation proved their worth and, with the increase in the demand, allowed it to generate record cash flow figures.

In the case of the economic regions, we have seen that the recovery of the North American and European markets has been slower than everyone would wish. Also, risks persist in the Euro Zone which could affect financial stability. On the other hand, the economic horizon looks clearer and more promising for the emerging nations of Asia and Latin America.

In any case, the good news is that our companies have been able to increase their market share, in tandem with our customers. This has allowed us to grow. In summary, the crisis has strengthened us, leaving us better prepared to continue steadily expanding.

Change of strategiesLiving markets from the bottom upOur business models are solid, as demonstrated during the global crisis we have undergone. We did not have to restructure these models or submit them to significant organisational reengineering, although we did take steps to protect our cash flow against the risk that the financial crisis could result in a generalised lack of liquidity. Thus we can state that the strategic changes made in the last few years, and those contemplated in the short or medium term, were not made in response to the crisis or its aftermath.

The only exception, as expected, was Nemak, in the automotive industry, where, in view of the problems faced by our customers from mid 2008 to the first quarter of 2009, we had to implement emergency measures and reduce our labor force.

At Alfa, we serve our markets “from the bottom up”; that is, we try to discover or anticipate, as precisely as possible, what the needs of our customers are, so as to provide the best solution. It is this




“upwards” approach that has allowed us to increase our market share, whether through organic growth, acquisitions, joint ventures, or innovation and development of new and improved products.

Long-term planning pays offAs mentioned above, except for the automotive business, the crisis did not force us to make any significant changes. Thus, for example, in the petrochemical business, the market factors continued to be raw material prices and energy costs; as well as the manufacturing of products increasingly friendly to the environment. In the case of refrigerated foods, the inclination of the consumer towards healthier products or the search for specific nutritional content, trends that had already been present prior to the crisis. The same may be said for the telecommunications markets, where the key factor is found in the design of convergent connectivity solutions (voice, data and internet services), tailored to the specific needs of our current and potential customers.

Our strategic approach has been maintained within the framework of the mid- and long-term planning exercise, which is valid even for the big acquisitions we made this year, such as those of BAR-S in Sigma, and the petrochemical plants of Eastman Chemical Co., in Alpek. These acquisitions were not the result of a chance opportunity, but rather of the process of planning, resource management and negotiations over a long period of time.

Growth and geographic diversificationMarkets on wheelsThe automotive industry, of which we are suppliers, has faced a difficult situation recently. In addition to the financial crisis, the industry faced its own crisis, characterised by the oversupply of vehicles, a trend of rising fuel prices, technological advances, and changes in the preferences of consumers, who are increasingly sensitive to ecological and environmental sustainability problems.

We have a fairly clear picture of the new trends and of how the automotive industry markets will be in the short and medium term. We know that the most dynamic markets will be those of the emerging countries, mainly Asia, while the markets of Europe and the United States will grow at a considerably slower rate. We see that there is a clear trend toward manufacturing vehicles with more efficient engines, but without sacrificing power, as well as toward replacing large vehicles with lighter ones and with compact SUV’s. We are ready to quickly take advantage of the business opportunities in the markets of the future, and those resulting from the transformation of the automobile to which I have referred.

Learning Mandarin…In the near future, it is anticipated that the global automotive industry will come principally from the Asian continent. For that reason, we are closely observing those business is done in that region.




For a few years now, we have been manufacturing and selling our products in China. Now, we are building a plant in India. Even though both efforts are still incipient, our commitment is strong: we have sent top-level executives to the region, with the mission of developing spaces for our products and exploring new alternatives through which we could leverage our knowledge and experience.

We see a great opportunity: a wide market, customers who have not yet consolidated their preferences, competitors with small-scale processes, with poor technological differentiation and high costs, etc., conditions that could be propitious for our acquiring an interesting part of the market and increasing our operations in Asia.

With a lot of protein…In the food markets, we have interesting growth options, through strengthening our position in the Mexican market or expanding internationally.

For the Mexican market, Sigma’s strategy consists of strengthening its leadership position and capturing a large share of the market through branding and creating new food alternatives for its customers and consumers. Internationally Sigma is aiming at the United States market, specially the Hispanic segment, as well as at the Central American, Caribbean and South American markets, where we will look to adapt our business model, which has been highly successful, to the circumstances in each case.

Good chemistry…In the petrochemical markets interesting opportunities are also available. Such is the case of the acquisition, currently in process, of the Eastman plants that produce raw materials for polyester. Once this

transaction is closed, Alpek will redimension its capacities, becoming the company with the best technology in North America, which will place us in a good position to expand beyond this region, which has until now been our natural market.

And communicating.In the case of Alestra, we offer value-added telecommunications services to the Mexican market, especially to the business sector. Our strategy is very focused: to provide the best connectivity and added value solutions, in order to benefit from the rapid growth of the sophisticated markets combining telecommunications with information systems.

Innovation and DevelopmentWithout I+D there is no paradiseInnovation has played an important role in the growth of our company. We may be the Mexican business group that destines the most resources to research and development. In fact, four years ago we institutionalised the innovative processes in our technological and research areas. By better orienting our efforts in this area, we have been able to develop new products and implement improvements in the productive processes which have resulted in greater efficiency.

It should be mentioned that in order to strengthen our R&D efforts, we have entered into collaboration agreements with universities in Mexico, the United States and Europe. We also have technological partners in some of our companies, who provide us with valuable support in this field.

In Sigma, our I+D activities have allowed us to launch new products into the market, with which we have gained market share and strengthened our brands. One of these products is Guten®,




a soy-based food which replaces meat products with considerable advantages from the nutrition point of view, since it has the same relative amount of proteins, with a lower fat content. Acceptance by the consumer has been favorable, since, in addition to the aforementioned advantages, this product is competitive in price.

Nemak’s geographic scale and coverage allows it to invest in I+D projects of a multinational scope. We have two technological centers, located in García, Nuevo León, Mexico and Linz, Austria. For several years now, we have been developing projects for new products, new materials and technological improvements. To complement this, we also actively promote the development of new technologies jointly with our customers.

Production costs are the key competitive element in the petrochemical business. For that reason, our R&D efforts in Alpek have focused on searching for ways to increase efficiency. This includes reducing the specific investment per ton, increasing the yield from raw materials, reducing the consumption of energy and improving the environmental performance of the plants. Thus, we can say that Alpek operates with efficiency standards superior to the average in its industry and to many of its competitors.

Money and capital marketsLiquid marketsAlfa is a company that uses external financing to improve its return on capital. The debt markets have been willing to finance the investments of companies like ours that have solid balance sheets and good credit records. For example, in 2009, Alestra, Sigma and Petrotemex (a subsidiary of Alpek) issued bonds under Rule 144-A in the United States market.

The banks have also eased the conditions and costs of access to credit; therefore, they have become safe options for obtaining the financial resources that we have needed. Our good financial results have strengthened the confidence that institutions with which we have worked for many years have in us, as well as that of others with which, without having a very long relationship, we have encountered mutually beneficial business opportunities.

Labor markets and talent managementA well-proven modelAlfa has always achieved a harmonious relationship with its employees. This has resulted in low personnel turnover and in great employee loyalty to the company. The labor model is based on respect for the individual, as well as on investing in the employees so as to achieve their optimum development. This investment goes beyond training for their work position, extending to the assistance granted to the individual in order for him or her to grow as a person, which is made extensive to his or her immediate family.

Long-lasting relationshipsIn terms of executive remuneration, ALFA’s formula is not different from that of other Mexican companies of a similar size. There is a fixed and a variable compensation, both in the short and the long term, which depend on reaching and exceeding pre-established goals.

Our capacity to attract, retain and manage executive talent does not depend on the compensation package, but rather on our ability to create a sense of belonging to an organisation that offers a long-term relationship and a professional development opportunity, and that has a clear conception of itself, of what it wants to be, and of how to achieve it.




In this sense, our commitment goes beyond the trends in most global corporations, where the people easily go from one company to another. On the contrary, at Alfa what we offer our executives is permanence and participation in a long-term business project, allowing them to grow professionally and economically without neglecting their family, social and human sides.

The development of internal talent is our base Generally, in Alfa we hire our future executives when they graduate from university. The key is to evaluate the education they have received and select people with talent. Once they become part of the group, we train them and put them to work. After a reasonable period of time, they get the opportunity to occupy a position of greater responsibility and thus they climb the organisational ladder.

This strategy has yielded satisfactory results for many years, so that only on very rare occasions do we need to go out and look for talent outside our companies. Our management model may not be the most modern and sophisticated, but it has been one of the most solid pillars of our company. It also helps us understand why Alfa is an organisation where the principal stockholders and their families have a very long-term business vision. It also explains why our top-level staff and most of our senior executives have worked in the group for an average of more than 30 years.

Social responsibilityHistorically, we have had a very clear vision of our commitment to Mexican society. In fact, we may state that we have been among the pioneers in our country in the field of corporate social responsibility. Now, we have expanded

outside of Mexico, so that our social responsibility has increased. We accept this circumstance and have gotten involved with the needs and aspirations of the communities where we operate. We are concerned with what happens beyond the limits of our plants.

Modern times demand that companies actively participate in society and that is what we are doing. We have a strong feeling of solidarity. Recently, in our home state of Nuevo León, Mexico, we have had significant security problems and a deterioration of the rule of law. We have also suffered natural disasters. The city, the state, the country and the world we live in demand that we dedicate part of our time to search for a way to solve these problems that affect us all.

Also, due to their greater capacity of organisation, management, handling and administration of resources, companies have a very significant role in supporting the society in its search for solutions to problems as complex and severe as those I have mentioned. An example of the benefits of collaboration between companies, government and society has been the rapid reconstruction of infrastructure in the state of Nuevo Leon, Mexico, which was seriously affected by hurricane “Alex”. Private companies played a significant role in getting the federal funds for reconstruction to flow rapidly, by offering their help and participating as managers and guarantors of the transparent and correct administration of these funds.

Value metricsAt Alfa, we consider that the market value of the share and the return to the shareholders are the principal and least questionable indicators of the creation or destruction of value. On the other hand, we have recently been reflecting on who we are and who we want to be. It is clear that Alfa is a company with a




shareholder base that has maintained its shareholding positions since the beginning and that they come from families that have shown an entrepreneurial spirit for more than 100 years. Our responsibility towards them is to ensure the continued profitable and sustainable growth of Alfa.

With that vision of our future development, we are developing new indicators that will help us to better measure our performance in organisation areas that are key to improving the productivity and competitiveness of our business units.

Public policies to improve the business environmentConstructing a country visionOn the subject of public policies to improve the Mexican environment, I believe our government should take the initiative to promote the construction of a “country vision” as widely shared and agreed as possible. A vision which shows us what we want to be, to be the starting point for all those involved: politicians, businessmen, intellectuals, and the civil society itself, to dialog and define what the country model is that we aspire to, a model that includes all of us, and in which we are all able to recognise ourselves. This would lay the bases for recognising the truly relevant aspects and eliminating those that are not; those that only distract us, preventing

us from focusing on formulating strategies to reach our objectives.

I believe this is one of the most urgent tasks we have to focus on. We cannot continue to lose time on issues that have already been overcome in developed, as well as some emerging, nations. Our government should decide to start searching for that “common denominator”, acting as a catalyst of that process, and above all bringing it to a happy conclusion. If this is done, there is no doubt that we would become a more productive, more prosperous and fairer society.

From reforms… to reformsIn Mexico there is a great debate over what are the structural reforms required by the country in order to trigger a new stage of sustained growth. There is no doubt that there are opportunities in the tax area, and in the energy and telecommunications sectors. But I am one of those who believe the first reform should be that of the government, since it is this that would allow us to have a live interaction process among all Mexicans, generating more productive political-legislative processes and creating the conditions to process and take everything else to a satisfactory conclusion.








Bob McDonald Chairman, President and CEO, The Procter & Gamble Company


PwC: What indicators are you watching to understand how the global economy will develop?

BM: Every Monday morning we have a meeting of our leadership team here in Cincinnati, and we’re surrounded by real-time data from the previous week. We’re watching shipments and consumer purchases from around the world. We see market value growth in the categories in which we operate of about three percent this year: one percent from developed markets and high single digits in developing markets. So the growth that we’re seeing is coming from developing markets.

PwC: The weekly meeting to evaluate economic data in real-time is very interesting. How quickly can a giant organisation like P&G tack?

BM: We look at the data every week, and once you make a decision – depending upon the country of the world or what you’re trying to do – you can react almost instantaneously. Now, it may take time to, for example, build a new factory. We currently have about 20 new factories under construction around the world, 19 in developing markets, one in a developed market, which is the US. W see real-time operation as a competitive advantage. We want to be the most digitised company in the world, and use that real-time operation as a competitive advantage.

PwC: But you really must have the corporate culture ingrained to be able to change so quickly.

BM: You have to move to globally standard systems. About five years ago, less than 20 percent of our systems were globally standard. Each region had its own system; each country had its own system. But today, more than 75% of our systems are globally standard.

What enabled that evolution was the decision back in 2000 to place the profit responsibility and back-office responsibilities in global business units rather than individual countries.

PwC: I read that 98 percent of American and Canadian households use at least one of your products, and a substantial amount of those have seven or eight products. What’s the biggest strategic priority right now: putting more products in these households or introducing your products to consumers in emerging markets?

BM: It’s a combination. In the 1980s, this company was about discovering and entering new categories as we moved into the beauty business with the purchase of Richardson Vicks. We moved into the health care business with the purchase of Richardson Vicks.

In the 1990s, it was all about global expansion in the markets that opened up for capitalism. Eastern Europe, Russia, China. This decade for us, I think, will be about getting our categories into every country around the world. We’re reaching about 4.2 billion people today, but we’re not reaching everybody on the planet. We’re in 38 product categories around the world, and there’s not a single country where we’re in all 38 categories. In the United States we’re in 36 categories. At the same time, we’re extending our distribution in developing markets, deeper into rural areas where economies may not exist at all. That combination – more consumers, more parts of the world – will help us get to every consumer and touch and improve every consumer’s life.

Interview with Bob McDonald Chairman, President and CEO, The Procter & Gamble Company



PwC: It’s generally agreed that by 2020 China will pass the US as the world’s largest economy. The global financial crisis and recession have some thinking that the shift of global economic power toward emerging markets will accelerate even more quickly than previously thought. Does that enter into your strategic thinking at all?

BM: We really take a long-term view. We don’t change our strategy, necessarily, because an economic crisis occurs. In fact, we tend not to think of the world as a zero-sum game or view the world economy as a zero-sum game. I know many governments think of the world economy as a zero-sum game. We don’t think of it that way. Our company, which has sales greater than the GDP of many countries, wants to do business and improve lives all over the world. The best way to do that is to get governments around the world to work together to create economic growth.

PwC: What’s your view on governments becoming increasingly involved in the private sector?

BM: We partner with governments all over the world. I’m a member of the Advisory Trade and Promotion Council for the US Trade Representative. I’m always on Capitol Hill talking to members of Congress, and we’re trying to create a situation where governments don’t see each other as adversaries, but instead work together. I’m rather optimistic, because if you think about it, the WTO structure we have today is much better than what we’ve had in the past. There’s an opportunity to see more free trade agreements, if we can convince governments not to see the world economy as a zero-sum game.

That’s a challenge. It’s a challenge when there’s a recession, because when there’s a recession, normal human psychology is to turn inward. It’s to try to point blame. It’s to become isolationist. And that’s the worst thing we can do. I think any economist would say that’s the worst thing we could do in this time. So, I’m encouraged, and I’m particularly encouraged with the work that President Obama has done on the Korea-US Free Trade Agreement. Now we need to get the Panamanian Agreement and the Colombian Agreement going, as well as get WTO accession for Russia. We want everybody participating. That’s the way to improve all lives.

PwC: Increasing international trade would seem to be an area where everyone can agree. If you look at most periods in history, one sees increasing wealth with increasing trade.

BM: You’re exactly supporting my point, which is that you have to take the long-term view and you have to find common ground. P&G has an agreement with almost every government that we call a joint value creation. Basically, it’s our plan to say, “Here’s how we’re going to help you create economic growth in that country.”

PwC: You just mentioned the products you make and develop around the world. So let’s talk about innovation. Can you tell us a little about your Connect & Develop Initiative?

BM: Innovation is the lifeblood of our company. We live or die based on the innovation that we do. The good news is that we do have an innovative company.

Bob McDonald Chairman, President and CEO The Procter & Gamble Company



We spend about US$ 2 billion a year on research and development. That’s about 50% more than our closest competitor and more than most of our closest competitors combined. When IRI published their Pacesetter study on the top-selling new items in the United States, last year we had half of them. Over the last 15 years, we’ve had 125 Pacesetters – more than our six largest competitors combined.” That’s more than any other company. In the year 2000 – under my predecessor, A.G. Lafley – we set a goal that we would get 50 percent of our ideas from outside the company.

Today, nearly every new item we bring out was produced with at least one partner somewhere in the world. So, for example, we co-locate scientists from partner organisations and from our organisation in the same laboratory. It’s amazing what you can do when you knock down the barriers in an organisation or the barriers between organisations.

PwC: Are there any concrete Connect & Develop examples that come to mind?

BM: Sure. Swiffer is a household cleaning implement. We actually partnered with a competitor in Japan in the creation of that.

PwC: You’re not afraid of working with a competitor or potential competitor when it comes to innovation?

BM: The world has changed. The definition of “competition” is different. We have a joint venture with the Clorox Company. Clorox competes with us in some of our household care products. We define competition within the categories we’re in, but we also look outside that definition and say, “Are

there things we can partner in, in order that we all grow and in order that we touch and improve more lives?” We spend a lot of time thinking about who we want to partner with and the definition of “competition.”

The other thing we spend a lot of time talking about is new categories we can create. Often, new categories will fall between the boundaries of two existing categories. So if you’re an innovative company and you’re organised by category, who’s going to invent the category that falls between the boundaries?

We created new business development units that can look across categories and figure out how to use technologies across our normal category structure to invent new categories. You may have seen recently that we’re now in the franchising business. We have Tide dry cleaners. We have Mr. Clean car washes. Some of these things would not have happened if we stuck to our normal category structure.

PwC: A crucial part of innovation is understanding what consumers in different parts of the world want. How is market research around the world changing?

BM: Well, we have operations on the ground all over the world. So, in China, for example, we do about US$ 5 billion of business a year and have 7,000 employees, the majority of whom are Chinese. The only employees who are not Chinese are development managers that we’ve brought there for developmental assignments. We also spend a lot of money, more than $2 billion on research since 2001. Our employees there spend time in consumers’ homes, shop with consumers, and watch them use our products.




We look for the tension in consumers’ lives. If we can find that tension, we can then get an insight. In India, for example, we initially had some trouble selling diapers. Indian mothers thought the diaper was all about convenience for them, thinking, “Well, I’m not going to do something as a mother that’s just more convenient for me. I want to do something that’s good for my baby.” Well, that’s a great insight. We did clinical research and discovered that the baby that sleeps through the night develops better than the baby that wakes up four times during the night. That changed our sales approach, and sales took off. So, those insights are incredibly important, and we turn those insights into big ideas, and then we turn those big ideas into things we can engage consumers on.

PwC: P&G has stated its desire to serve an additional one billion customers. What assumptions about emerging markets and evolving consumer choices does this strategy depend on?

BM: When I came into the job, we were reaching about 3.8 billion people on the planet, and we set a goal to get to 5 billion by 2015. We’re now at about 4.2 billion people. At the same time – and it’s a synchronous effort – you’ve got to develop products that will appeal to those people, at the right price points. As you get out into rural areas of the world, many people are using very, very basic products. They may be using the same soap to wash their hair, body, and clothes. And so we have to develop unique products in order to extend that distribution.

PwC: Let’s return to public policy. If one thing were to be done to stabilise the financial sector and minimise the risk of another recession, what do you think that should be?

BM: I’m not an expert on the financial sector, but I think the biggest challenge for all governments around the world is to provide more certainty about the future. With that certainty comes hope, and I think hope is incredibly important to people. What businesses need in order to invest in the future, what consumers need to invest in the future of their families, is greater certainty. To the degree that governments around the world can work together and provide greater certainty, I think that would really provide more hope and more willingness to spend and invest.

PwC: Is it a question of leadership, both private and public?

BM: I think it’s partially leadership. Any time you’re in a crisis, normal human reaction is to become isolationist and turn inward. I think what we have to do is have the courage do the more difficult, right rather than the easier wrong. Back late 2008 and early 2009 – around the time of the G20 – many governments around the world were putting in place protectionist measures. What happens with those protectionist measures is that then everybody does them, and they hurt economies. Having that courage to do the harder right, which is to continue the interdependence, the interconnection, is incredibly important. I wrote an Op-Ed recently, around the time of the election, on the importance of China to the United States. China and the United States are entirely interdependent. It would be silly for either country to think they could go their own way without the other.


Because of our business, we don’t export much. Our operations have to be on the ground. Our plants have to be near the consumers they serve. But, importantly, 20 percent of P&G’s jobs in the United States depend upon our international business, and 40 percent of our jobs in Ohio depend upon our international business. So, our international business is good for the State of Ohio and for the employees of the Proctor & Gamble Company. The interconnections around the world today are so dense, we can’t forget about that.

PwC: What’s your view on raw material and commodity shortages as the middle classes in emerging markets continue to grow at a very fast rate?

BM: I think the increase in demand as the global economy recovers will undoubtedly lead to higher prices of certain commodity materials. What we, as a company, need to do as innovators is innovate our way out of that. We’ve got to find substitutes for those materials, and we’re working on that now. We’re working on finding substitutes for the chemicals that come from petroleum that we use in our products. There are organic bio-substitutes and they are renewable, so they may even be better for the environment. So, we’re always working to create the substitutability of raw materials without the consumer ever seeing a different end effect from the product or brand that they use.

PwC: Are issues like sustainability just as important to you, as you go about expanding into emerging markets?

BM: With a company like ours you really can’t separate sustainability as a separate activity from the activity of growing the company. Sustainability is built into everything we do, whether

we’re innovating for the top economic tier or the bottom economic tier. It could be designing laundry detergents that work better in cold water, so people can turn down their water heaters. It could be thinking about a person in a developing market, what do they do with a product when they are finished using it?

We’ve committed to a vision of being neutral to the environment, for our products as well as our operations. We don’t know how to get there yet, but we’re working very hard to reduce our impact on the environment.

PwC: Along those lines, are you working with other stakeholders, say, your suppliers? I know many retailers are working with suppliers to try and cut emissions.

BM: Yes, we work with our suppliers. We have a sustainability scorecard that we use with our suppliers that contains our sustainability criteria. For example, I talked about the new laundry detergent that helps cleaning in cold water. One of our suppliers developed the cleaning agent – what we call “surfactant” – that’s part of that. Other suppliers developed other elements, like enzymes, that are parts of that product. So we do enrol our suppliers in our sustainability goals. We give them a checklist that we work with them on to improve their operations.

I don’t believe sustainability is optional anymore. The world today is so flat, so transparent with the Internet, and the impact of individuals is so heightened because of the ability to blog and Tweet and other things, that consumers want to know what they’re buying into when they buy your brand. They want to know the company behind that brand. They want to know what that company stands for, and they want to know how that company takes care of the environment.


PwC: Do you view P&G as a company of a particular country? Why or why not?

BM: We view Procter & Gamble as a global company. Cincinnati is where we started 173 years ago. We’re traded on The New York Stock Exchange. But we have a lot of international people who hold our stock, and we have on-the-ground operations around the world. If you look at our packaging, generally it’s in the language of the country, and we work very hard to create those one-on-one relationships with every single consumer in the world. It’s easier to do that if you work in the local language and in the local culture than if you’re this international company with an international brand that’s somehow coming from abroad.

The ultimate goal of a global company is being recognised as a local company. I mean, that’s the ultimate. And when you think of that Internet allowing this one-on-one relationship with every consumer, it enables that.








Douglas M. Baker, Jr., Chairman, President and CEO, Ecolab


PwC: What indicators are you watching to understand how the global economy will develop in 2011?

DB: In terms of the economy, I don’t think we have any unique indicators. We look at many of the same things other companies look at: GDP projections, unemployment figures, and so on. In terms of trying to understand how the current downturn is affecting consumer behaviour, we also spend time looking at consumer debt loads. Consumer debt is going to have a significant long-term impact on buying habits, particularly in the US, which is our largest market. With regard to trends that are particularly relevant to our company, which serves the food and beverage production industries, we look at things like chicken production volumes, the number of people walking into restaurants, and how protein markets are changing.

PwC: Besides the US, what other country or regional markets do ou find attractive?

DB: Our business is food safety and infection control. The US represents roughly half of our sales. Nevertheless, we operate in 160 countries globally, and so the impact of emerging markets is very important to our growth story. One of our core strategies is to strengthen our ability to serve customers as their operations expand across the developing world. We want to be able to apply our technology on a consistent basis throughout the world and help set global standards in food safety and infection prevention. It’s of utmost importance to our customers that the services we offer them be of consistent quality everywhere they operate. Having a local presence is key to ensuring that.

PwC: How does that factor into your strategy for sourcing raw materials and manufactured goods?

DB: Our customer service strategy is to make sure that we can produce in the regions where we’re serving customers. To that extent, we are doing a lot of buying, procuring, and manufacturing in local markets using local currency. That helps to mitigate some of the uncertainty around foreign exchange. We don’t want to let foreign exchange fluctuations become a distraction for us or determine whether we’re competitive or not from year to year. So we have many local relationships to make sure that we can buy the materials we require to meet local customers’ needs.

PwC: How are changes in companies’ access to capital affecting your strategic plans?

DB: There are two ways to consider that question – one from Ecolab’s own perspective, and the other from the perspective of our customers. In our own case, we’ve always had what I would describe as an aggressive sales and marketing posture, and a conservative financial posture. We have never believed in highly leveraged balance sheets. That conservative approach has served us well as we moved through this economic crisis. We went into the crisis with an investment-grade balance sheet, and now I’d characterise our balance sheet as ‘A-rated’. So we haven’t had any fundamental challenges accessing capital. Now, if you look at it from our customers’ perspective, we have a number of customers – particularly in the franchise-food side and the hotel side in terms of building new properties – where difficulties in accessing capital has interrupted their plans for expansion.

Interview with Douglas M. Baker, Jr., Chairman, President and CEO, Ecolab



While financing has not been a specific problem for us, it’s a problem for the parts of the industry we serve. So, if we are going to continue to grow, we’ve got to help our customers be successful.

PwC: Has the downturn affected your people strategy?

DB: Long-term, I’m quite bullish on our business. So, with regard to our people strategy, we try to think long-term and not let the current economy dictate how we train and develop people. A capable and knowledgeable workforce is a very important enabler of our strategic plans. But in tough economic times, budgets do get tight. It’s a challenge to determine where you can cut without putting your future in jeopardy. What’s absolutely a ‘must-do’? What can you sacrifice and what can’t you? I would say that when it comes to talent development, that is long-term work that needs to be sustained, regardless of GDP growth from one year to the next. Ultimately, if you don’t pay attention to the people side of your business, you’re not going to succeed long-term.

PwC: What can government do to stabilise the financial sector and reduce the risk of another economic downturn?

DB: That’s a great question. Sometimes I wonder if we’re working too hard to minimise the risk of a future downturn and whether that outcome is really achievable by government at all. If we discourage people from taking risks – and possibly making mistakes – we’ll have a lot less innovation as a result. Having said that, government can take some positive actions. As a start, government can bring clarity to what the rules are going to be going forward. How are we going to manage the financial sector? What regulations will they operate under? What are the capital requirements going to be?

What about the liquidity requirements? Until we’re clear on those issues, we shouldn’t expect lending to pick up. Right now, we’re putting banks and financial institutions in an uncomfortable position, and that’s damaging to the overall economy. So whether or not we agree with the behaviours that led to the financial crisis – and obviously some of those behaviours were objectionable – we are not going to succeed without a healthy financial sector. The sooner we can articulate what the capital regulations are going to be, the sooner we’re going to move out of this downturn. Consequently, I would encourage government to move faster to remove uncertainty around the financial sector.

PwC: How do you view the relationship among business, government and society at large?

DB: As a result of the financial crisis, government today is participating in the private sector in a way that’s very different from the past. I’m not sure any of us really know what the intended and unintended consequences of the government’s role in the private sector will be in the years ahead. I think companies do need to be good stewards and accept responsibility for their actions. If you plan to be in business over the long haul, I really don’t understand how you can manage to have only one constituency. Instead, you need to understand that every business has many stakeholder communities. Yes, business must generate profit – but it must also be done in the right way. We need to provide real value for our customers because, ultimately, that’s how you protect shareholders’ interests. But if you start ignoring the larger social context in which you operate – whether you realise it or not – you end up narrowing your own future options.

Doug Baker Chairman and CEO, Ecolab



There have been a few bad actors in this latest financial crisis. But, by in large, I think it’s also been a learning experience for business. We understand now that we’re either going to self-regulate or accept a lot of regulatory guidance from the government side. I think it’s very important that businesses manage what they can manage while having adult conversations with the different government entities that they have to deal with. Going forward, that’s the responsible path. In some countries, I see that path developing. Other places, there’s still quite a bit of work to do.

PwC: Do you think business should play a larger role to in promoting social well-being?

DB: I would put it this way: Companies have a mission. Ecolab’s mission is to help our customers – whether it’s a food and beverage producer, a food service operator, or an acute care provider in a hospital – provide their customers with clean, safe and healthy food and spaces. I think that’s an important benefit that we contribute to society. How we go about doing that also matters. We must perform our mission in a responsible way. But there are limits as to what we ought to be doing. We do have responsibilities to the communities where we operate, but we can’t single-handedly fix all their issues. And if we start expanding our mission too much, we might lose focus of our central purpose, which is what society counts on us for. So I think there’s a limit to what companies ought to focus on. We pay taxes for a reason – to fund government. And there are plenty of things that government does better than the private sector. I think we’ve got to determine the appropriate boundaries of responsibility. What do companies need to be doing? And what are we going to count on governments to do?

PwC: Other than easing the burden of regulation, are there other steps that government could take in order to improve the business environments in which you operate?

DB: Free trade is very important to us and I think to generally growing global wealth. We go through periods where free trade is unpopular. In the US, which historically has been an advocate of free trade, we’re in a period like that right now. So, I think that’s one of the things that governments can continue to do – keep their markets open to trade. I think immigration – which is an issue that’s pertinent to many countries where we operate – is also an area where government can help. For the US in particular, immigration involves making a decision about whether we are going to be an aging society or a society with a sufficient number of young workers. Without immigration, the US, by default, will soon become an ageing society. I think that’s a dangerous path to take. And then there’s the age-old tax question, as well. If you look around the world, a number of countries are becoming much more competitive in terms of corporate tax rates. Over the years, many economists have made the argument that the corporate tax is an inefficient mechanism for taxation. I think that’s something that government should take another look at. Frankly, I think the US has got it wrong in terms of how they tax businesses, and ultimately, that’s going to put US-based corporations at a significant disadvantage, which is not good for American society as a whole.




PwC: How is the rising level of government debt influencing the outlook for your business?

DB: I think government debt has a significant negative effect on overall economic activity. While it’s difficult to cite specifics as to how government debt will impact our planning for 2011, I can say that’s it’s our belief that we won’t see a ‘V-shaped’ recovery or ‘double dip’ recovery. Instead, we expect the economy to muddle along the bottom and, when we come out of the downturn, grow slower than it had been going into the downturn. As for government debt, the uncertainty it creates erodes the willingness and ability of businesses like ours to invest and expand. What’s the exchange rate for the Euro going to be in six months? How are European governments going to handle sovereign debt? A third of our volume is in Europe and we care a lot about those issues because they shape the underlying economic climate there.

PwC: What strategic opportunities do you see in emerging markets?

DB: I think emerging markets represent a great opportunity for many businesses. In time, the world’s population will reach 9 billion – roughly a 50 percent increase from the present. And with rising income per capita in the emerging markets, people’s buying – and eating – habits start to change. They consume more calories as they shift from cereal- to protein-based diets. So eventually, the world’s caloric needs will double. And as populations get wealthier, they start eating out more. That bodes well for the food and beverage sector, which we serve. But as they eat out more, people also start expecting local food safety levels to be commensurate with global standards. All of these macro-trends help drive our business and reinforce Ecolab’s mission, which is to help our customers provide people with clean, safe, healthy

food and environments. Being a mission-driven organisation makes it much easier for us to stay focused on our core strategy. Strategy becomes a matter of seeing where the opportunities lie, determining what value we can provide, and deciding the types of customers we’re going to serve. Our strategy flows naturally from our mission.

PwC: Does your strategy also include on investments for innovation?

DB: Absolutely. We compete in many different countries and, while bacteria all die the same way around the world, the challenges in targeting the source of infection varies widely from market to market. You have to adapt your technology to the way the food supply is structured in any particular country. What does the “cold chain” look like in terms of refrigerated trucks and shipping? How long are the shipping durations? What are the norms for particular foods in terms of local taste? You end up having to innovate simply to provide the same high-standards across very diverse operating environments. So, innovation is a constant in our business.

PwC: How does Ecolab balance its business mission with environmental concerns?

DB: Our utmost concern is to protect human health – but to do that in a way that has minimal impact on the environment. The nature of the services we deliver result in positive social outcomes and our goal is to have an equally positive outcome with respect to the environment. We do that by trying to use less water, be energy-efficient, and manage waste responsibly. But you do encounter trade-offs between ensuring human health and the conservation of natural resources. Here’s a simple illustration: In preparing dinner at home, at what point is most of the water


that’s used consumed? It’s not in the food preparation. And it’s certainly not at the table. Rather, it’s in the cleanup. That’s not unique: It’s true for food production facilities everywhere. So when it comes to things like water, we make sure that we know how much we’re consuming, how much we can reduce it within acceptable limits, and what that means in terms of energy conservation. We are very conscious of our use of resources, but we cannot risk human health for the sake of using a little less water, for example. Unsafe food is not an outcome that society would willingly choose – and it’s not one we advocate.

PwC: Has you definition of value changed over time?

DB: The concept of value evolves as needs evolve. We spent a lot of time recently articulating Ecolabs’s ability to deliver benefits to customers and to the wider society. Our philosophy is, we want to make sure that our services and products shine their brightest when under intense scrutiny. That requires that we understand how to balance hygiene results against our use of critical natural resources and be able to talk in terms of total value versus total cost. To move forward, the world requires economic growth. But growth must be sustainable and based on businesses that add measurable value. In the absence of strong value drivers, any economy is going to eventually run out of gas. So we’ve got to quit beating up different parts of society for their past sins and start rebuilding our economies around businesses that create real, measurable value.





PwC: What indicators are you watching to forecast how the global and Chinese economies will develop in 2011 and beyond? And what risks does the economic future hold?

ZX: The global economy is recovering slowly. Individual countries are continuing to apply fiscal stimulus in order to assist their respective economies. For example, the US and Japan recently unveiled new stimulus plans. And although the Eurozone is preparing to tighten its financial policies, a policy of quantitative easing is still in effect. While there is still some chance that the global economy will experience a ‘double dip’ recession, it’s my view that the recovery will continue to gain ground – particularly in the emerging markets where economic growth remains strong and there is scope for domestic growth. However, from a global perspective, it’s difficult to see where the engines of sustained economic growth will emerge. I expect overall global unemployment will remain high for some time, and this will be the biggest obstacle to economic recovery. Other indicators we are watching include GDP and the inflation rate. We are also paying attention to changes in economic, monetary, and fiscal policies in developed economies. For the Chinese economy, 2011 will be a year of transition. External demand is very uncertain and fiscal policies here are being tightened. Our expectation is that the Chinese banking authorities will raise both the interest rate and the deposit reserve ratio. With the implementation of the government’s 12th Five-Year Plan and the initiation of large infrastructure projects, investment growth may start to rebound in the second quarter of 2011.

PwC: How well has Angang strategy weathered the economic downturn, and to what extent has it been necessary to make course corrections?

ZX: The economic crisis has had a very negative impact on the real economy and, as a result, the steel industry globally is going through a very difficult period. Nevertheless, Angang Steel has been able to adapt. For example, we have adjusted our export price mechanisms in order to maintain a relatively stable share of the international market. We have also increased efforts to develop new suppliers and widen distribution channels. And as demand levels have fluctuated, we’ve adjusted internal production accordingly. At the same time, we’ve been extremely conscious about keeping production costs low and preserving capital. These measures have been successful, and – in the process of dealing with the crisis – Angang Steel has sharpened its capacity to quickly implement strategic and organisational change.

PwC: What are Angang Steel’s most attractive strategic opportunities and what risks are associated with those opportunities?

According to the Chinese government’s 12th Five-Year Plan, this is a period for building a prosperous economy in all areas of society while continuing the process of domestic economic reform. This is the most important strategic opportunity for both Angang Steel and the Chinese steel industry, generally. In recent years, the Chinese steel industry has undergone rapid development. But the economic crisis has exacerbated the complications that come with rapid development.

Interview with Dr. Zhang Xiaogang President, Anshan Iron and Steel Group Corporation, China



The fundamental way to address these problems is to focus the industry’s efforts on increasing energy saving and decreasing emissions; and ensuring that future patterns of growth are sustainable, both in economic and environmental terms. For Angang Steel specifically, the biggest challenge we face is in maintaining workforce morale while continuing to accelerate growth. Following our merger with Pangang Steel, we adopted the strategic objective of becoming one of the world’s top five steel companies by 2015. Our aim is to become a multinational competitor at the forefront of the development of the global steel industry; and a leader in steel, vanadium and titanium production. To achieve this objective we face a number of immediate issues: establishing group management and control mechanisms across regions; improving our decision-making processes; optimising the allocation of our resources; and transforming our culture from a manufacturing-centred enterprise to a customer-centred one. Relative to its competitors, Angang Steel is limited in its product offering, although it has significantly broadened its product line through its merger with Pangang Steel. The merger also provided us access to markets such as specialised and stainless steel – but our experience in these markets is obviously insufficient and needs to be quickly improved. In terms of supply chain relationships, our ability to control and command upstream resources, such as coking coal and steel scrap in particular, also needs to be improved quickly. At the same time, our customer management system needs further refinement. Compared to European, American, Japanese, and South Korean multinational steel manufacturers, Angang Steel’s international presence is still in its rudimentary phase. In order to improve our ability to operate internationally,

Angang Steel must deal with a number of business realities: understanding and complying with the laws, regulations, and policies of different countries; building a management team with international experience; and deciding how and where to operate in a way that best serves local market needs. More broadly, we must also ensure that our business model is responsive to available opportunities and can identify and take advantage of internal operational synergies. Angang Steel’s production distribution system will also need strengthening in terms of its capacity to allocate resources, coordinate logistics, and adjust its product mix to meet changing customer preferences. Perhaps most fundamentally, technical innovation must be a top priority. Angang must go from being a technology follower to a technology leader, which will require a combination of management efficiency, product and technical innovation, and a nimble and able corporate culture.

PwC: In what specific ways is Angang Steel pursuing innovation?

ZX: The essence of innovation is the delivery of greater value to the marketplace. Innovation is therefore not only a technical concern, but a strategic one. The aim of innovation is the creation of competitive advantage, which enables a company to carve out a sustainable position in the value chain. Innovation is a key element in a company’s strategic planning process and a core task of senior management. In response to the global economic downturn, Angang Steel’s management took steps to coordinate and reallocate resources in order to optimize the synergies among various functions of the company. We believe this will be a good foundation for the long-term development of the company and




provide us with a source of innovation and competitive advantage. Innovation has a cultural dimension too, so Angang Steel has taken steps to nurture a culture in which innovation can thrive. This includes building relationships with external research institutions; engaging clients in research and development; creating a corporate environment in which risk-taking is encouraged and mistakes are tolerated, and recognising and rewarding individual initiative.

PwC: Has the economic downturn changed Angang Steel’s approach to raising capital?

ZX: Angang Steel has signed strategic cooperation agreements with several large banks in order to expand its existing credit line and establish stable access to capital.

PwC: Is the current volatility of the business environment changing Angang Steel’s HR strategy?

ZX: The current business environment has exposed weakness in our workforce strategy and limitations in our ability to compete on an international scale. Building an experienced and knowledgable workforce is the most critical challenge we now face. Accordingly, we are adjusting our HR strategy and training to address this issue.

PwC: Can the private sector do more to contribute to social well-being in areas that were once considered the government’s responsibility?

ZX: As China’s leading iron and steel enterprise, Angang takes its larger social responsibilities very seriously. For example, we have established a comprehensive programme to address

ways to eliminate waste, save energy, and reduce resource consumption. Angang has also established a water recycling treatment system and implemented ecological restoration of mining sites. It terms of social welfare, Angang is active in disaster relief, economic development, and supporting medical and educational infrastructure in the border areas. We are also carrying out studies on the application of technology to reduce greenhouse gas emissions and exploring ‘green factory’ concepts.

PwC: What policy measures might the government take to improve the business environment?

ZX: The China Ministry of Industry and Information Technology issued specifications for the domestic steel industry that address product quality; environmental protection; energy consumption and resource utilisation; technology and equipment; production scale; occupational safety and health; and social responsibility. These specifications will accelerate the further development of China’s steel industry and help it work towards higher environmental and efficiency standards.

PwC: Is your company’s concept of ‘value’ changing?

ZX: I do feel non-financial value is becoming more important in the business world. For example, the value of Angang Steel’s corporate culture – which is based on ‘innovation, truth-seeking, struggling and contribution’ – is a treasure that’s been nurtured over decades. Culture imbues an enterprise with a kind of ‘soft power’ that is difficult for competitors to replicate and has a profound positive impact on the morale of its employees. Angang Steel is a people-oriented enterprise and we try




to operate in ways that keep the expectations of all stakeholders – the government, customers, suppliers, staff, and local communities – top of mind. We strive to improve product and service quality; promote a clean and healthy living environment; and establish mutually beneficial and long-term relationships with our suppliers, With regard to staff, we have labour contracts with all employees, and staff are encouraged to participate in decision-making and supervision. Our staff is also provided with health examinations, a medical insurance system, recreational and sports activities and, professional development. We pay particular attention to the rights and interests of female staff. Moreover, staff share in the performance of the enterprise. The economic crisis has also highlighted the competitive importance of supplier relationships and the necessity of building a value chain that can help us to constantly improve customer satisfaction and loyalty.








Ed Breen Chairman & CEO, Tyco International


PwC: What is your outlook for the economy?

EB: We’re expecting pretty low growth, not only for 2011, but possibly for probably the next three years. Maybe we’re playing it conservatively. But I’d rather plan conservatively and then try to beat those low-growth forecasts. It looks to us like Europe and North America are going to grow at a very low rate for a few years, and emerging markets are going to grow at a very nice rate. And when you combine that on a global basis, one can expect a pretty tepid growth environment overall. So our plan – at least through 2013 – is that it’s going to be kind of bumpy and slow with low growth on a global basis.

PwC: Tyco operates in more than 60 countries. Do you see room for expansion?

EB: We definitely do because wherever new infrastructure is being built in the world, we’ll be there. And there is plenty of new infrastructure being built right now in the emerging markets. Our four big emerging markets are China, India, the Middle East, and Brazil. But if you look out, say, five years, there is no doubt that others – for instance, South Africa and Indonesia – will be significant growth markets for us.

PwC: In what areas, if any, has your strategy changed as a result of the economic contraction?

EB: One thing that we did when the downturn hit was to take the necessary steps – very quickly – to improve efficiency in order to preserve our profitability. At the same time, despite the downturn, we made a fundamental decision to stick with our three-year spending plan to promote future growth. We said, “Let’s maintain our growth initiatives, while taking defensive actions to protect profitability.” In the past two years we increased R&D spending and took our capital spending

up five to six percent. We added sales people globally. We expanded into emerging economies. So we’ve chosen to keep the growth side spend, which we believe is going to pay off for us in the long run. You’ve got to protect your future. The major way the downturn has changed our strategy is that it’s spurred us to move even faster to get positioned in the emerging markets. We’ve been growing organically – for example, a year ago, we doubled our ADT security offices in China – but we’re also looking at acquisitions.

PwC: So you see emerging markets as your biggest strategic opportunity?

EB: There’s no doubt. Any industrial company – if they’re going to be a global leader – has to have a large presence in emerging markets. Fifteen percent of our revenue right now is coming from emerging markets and we’d like to double that in the not too distant future. It’s an opportunity that you have to take very seriously.

PwC: What are the impediments to growing your business in the emerging markets?

EB: Lots of companies went into China ten years ago and built factories so that they could export all over the world. The reason to be in China now is to sell into the Chinese market. For us, that means putting our security and fire products in all their buildings. That’s difficult to do if you rely solely on organic growth. So, I’d say that’s the number one impediment. The second impediment that we deal with – perhaps more so than other companies – are the overseas regulatory issues. If you want to expand aggressively in emerging markets, you probably have to acquire companies. But acquisitions in emerging markets come with a lot of regulatory issues. You don’t just walk in and say, “I’m going to buy your company.” It doesn’t work that way.

Interview with Ed Breen Chairman & CEO, Tyco International



PwC: How difficult is it to assemble the right management talent in emerging markets?

EB: Assembling talent is part of the reason companies are making acquisitions in emerging markets. At the same time, retaining that talent is very tough. In China right now, competition for people is quite fierce. Over time, I think that will settle down. In the Middle East, it’s different. Every person in our Dubai management team is an expat – all of whom are on assignment there for only few years. The Middle East is a region that grew up in the past 30 years. There’s hasn’t been enough time to grow a cadre of local executive talent.

PwC: In what ways are you pursuing innovation?

EB: I’m a big believer in customer relationships. And the way you establish those relationships is by having a product that’s unique – a product that people really want. You can’t just say, “I’ve got widget that’s five percent cheaper than other widgets.” I don’t believe in running our business like that. So we’ve been investing in our three platforms – security, fire protection, and flow control – to develop products that will really differentiate us from our competitors. Right now, we have two new technologies that we’re just launching. In our security business we are just introducing ADT Pulse, our interactive security platform. Nobody else has anything comparable. Just connect to the internet and you can remotely control your security, lighting, heating, and air conditioning systems. It’s very exciting stuff. On our fire platform, we’re launching remote diagnostics. From our call centre, we can see every component in our customers’ systems and watch for potential failures. If a system is about to go down, we can take action to prevent a failure. Or if a failure does occur, we can diagnose and fix it remotely. No one else

in the fire business can do that. Those are two examples of leading with technology to gain greater market share. And when you have differentiated products that are giving your customers something of significant value, price becomes much less of an issue.

PwC: Has your commitment to emerging markets changed your sourcing strategy?

EB: It has. We’ve begun to organise around what we call “low-cost-country-sourcing”. For instance, we have a team of about 40 or 50 people in India, working low cost sourcing for us. And we have a team in China doing the same. We now source about 15-20 percent of our total direct material volume from those two teams. It’s very impactful.

PwC: What progress are you making on environmental and safety issues?

EB: Safety is a big issue for our business. Every day we have 50,000 people going up and down ladders. So, preventing slips and falls is something we really focus on. In the past four years, we’ve improved almost all of our employee health and safety metrics by 50 percent. Last year, we launched a new initiative called “Zero Harm” to take our environmental and safety initiatives to the next level. Our philosophy is that there should be zero harm to the environment and our people. Zero Harm is the next big step for us. It’s going to greatly reduce waste water, employee injuries, and greenhouse gas emissions. With regard to carbon emissions, the single biggest step we are taking is to modernise on our vehicle fleet. In our ADT business, we’ve replaced more than half of our North American service fleet with 4,000 fuel-efficient Ford Transit Connect vehicles over the past year. In doing so, we’re lowering greenhouse gas emissions generating impressive fuel savings. We compare notes with all the

Ed Breen Chairman & CEO Tyco International



companies that have big vehicle fleets. Fred Smith, CEO of FedEx, was recently here to see what Tyco was doing to modernise our fleet. One of the things that always strikes me is that when we talk to new recruits to our company, they all ask about our environmental programmes. So having a credible environmental track record is actually a big recruiting advantage.

PwC: Has your ability to attract talent been affected by the financial downturn?

EB: It hasn’t been an issue. I think companies that are growing, that are dynamic, don’t have an issue attracting talent. After the downturn hit, one of the things we did was to communicate with our people a lot more. And as ugly as the downturn felt, we let them know that Tyco was still strong. During a crisis, you have to communicate and let people know what’s going on. You have to let them know that we’re in this together and we’re going to get through this. People can deal with adversity if they know what’s going on. When I do a Town Hall meeting I show people the growth rates in emerging markets. I’m very honest. I say, “I don’t think the US and Europe are going to grow GDP more than 2 percent over the next three years. We’re not going to ignore these markets – they comprise 70 percent of our business. But we’re going aggressively after emerging markets.”

PwC: What might governments do to stabilise the global economy?

EB: For the developed countries, fixing their balance sheets is an absolute “must”. Of course, there are things you try to do short-term – in the US, quantitative easing is one example. But for a lot of countries, the fundamental problem is their balance sheets. You can’t fix those balance sheets quickly.

And you can’t do it haphazardly because you could damage the economy. But you do need to take action over the next ten or twenty years. It’s vitally important.

PwC: I know one of the things that you’ve been focusing on is execution. How are you getting better performance from your people?

EB: I think improving people performance is probably the key question for Tyco. You can have a great strategy, but if you don’t focus on putting the best people in the right positions, your strategy won’t work. We’re big believers in constantly asking ourselves if we have the right people in place. There are two things our leaders have to clearly demonstrate. Integrity is one. And teamwork is the other. We might have a great executive running one of our businesses. But if that person can’t think and act in a way that benefits Tyco as an enterprise, that person is not going to help our team. Some companies let their executives think they are in competition with one another. But at Tyco, I want our executives to be enterprise leaders. That’s what’s important to us.

PwC: How do you develop that kind of thinking?

EB: We constantly reinforce that message. We recently held our global management meeting and spent an entire afternoon talking about what it takes to be an enterprise leader. When I explain the concept to people, a light bulb goes on and they begin to think differently. I had a recent conversation with an executive who had a particular acquisition in mind. The financials looked good, and we might end up doing it. But I told him that we were also thinking about a Chinese acquisition that was unrelated to his business. I asked him, “If we could do only one of these




two, which one should we do?” And even though it wouldn’t directly benefit his own business, he immediately said, “Ed, we should do the one in China”. That’s an example of enterprise thinking. At the macro-level, we’re setting up enterprise selling teams so, if we go to an oil and gas or mining company to sell them valves, we also ask about their security and fire protection requirements.

PwC: Is there something that governments could do to help the business sector?

EB: In the US, the uncertainty generated by some of the regulation that’s been proposed or already passed has every CEO saying, “Why would I hire right now?” So I think getting clarity around the application and consequences of regulation is important. Governments have to make the ground rules clear. I think regulatory uncertainty is the biggest hurdle businesses face right now.

PwC: What importance do Tyco’s investors, or other stakeholders, place on issues surrounding corporate responsibility?

EB: I think that over the past five or ten years we’ve seen a growing interest in things other than financial performance.

Environmental and safety performance have become issues that people care about deeply. And I would say that there is similar interest in workforce diversity and inclusion. In our yearly bonus calculation, diversity and inclusion is actually a metric we use to measure each team’s performance.

PwC: Do you that it is possible to establish an international financial regulatory agency that might help prevent systemic risk?

EB: I’m certainly no expert in that area. But I would clearly lean towards the view that there should be something of that nature established and that, eventually, there will be. Just consider what’s going on now with the wild fluctuations in the value of various currencies. That, alone, needs to be dealt with. The world is so interconnected now; I think there’s a need for some sort of international agency to ensure a level financial playing field right across the globe.








Efthimios Bouloutas CEO, Marfin Laiki Bank



EB: We usually follow a number of indicators, which vary according to the prevailing market and economic conditions and the country we study. They include: stock market activity as a forward-looking indicator, growth and inflation estimates, interest rates and interest rate spreads, currency movements and trade flows. We also follow closely the monetary policy applied by the central banks, and pay attention to statements and actions from key central banks, such as the European Central Bank, the Federal Reserve in the United States and the Bank of England. We also monitor the employment data and fiscal reforms, consumer spending and consumer confidence, as well as housing data for various key countries.


EB: There are some signs of growth in the global economy. These signs differ a lot depending on the region or the country; nevertheless, signals of economic stabilisation have recently become more evident. The International Monetary Fund, in its October World Economic Outlook, forecasts growth in the world economy to range between 4% and 5% in the medium term, driven mostly by growth in the emerging and developing countries. Growth in the advanced economies is forecast to range between 2.5% and 3% and in the euro area between 1.5% and 2%. At the same time, growth in the emerging and developing countries is forecast to range between 6% and 7%.

The large stimulus packages that countries adopted during the economic crisis are starting to be scaled back.

Although, no sudden cut in public spending is anticipated, fiscal stimulus is not sustainable indefinitely. However, we expect a gradual transition to take place, as both the Fed and the ECB recently announced new measures for quantitative easing.

Sovereign debt problems in Europe are spreading from Greece and Spain to Ireland and Portugal. While the situation is still critical, we neither foresee Europe falling back into financial crisis nor falling apart. We expect the combined effects of the European Central Bank operations and the European Financial Stability Fund to cushion against a renewed financial crisis.

Most advanced economies and a few emerging economies still face large adjustments, while unemployment remains high. There are two fundamental requirements for sustained economic recovery: external and internal rebalancing. External rebalancing requires an increase in net exports in deficit countries such as the United States and a decrease in net exports in surplus countries like China. Internal rebalancing requires fiscal consolidation in advanced economies allowing for the strengthening of private demand.

PwC: In what areas has your strategy been most resilient through the economic crisis, and what strategic changes have you had to make?

EB: 2009 turned out to be an exceptionally challenging year for MPB, as was reflected in the noticeable deterioration of market conditions across our three key geographic regions – Greece, Cyprus and South East Europe. This, in turn, had an adverse impact on credit demand, asset quality and sources of liquidity, thus negatively affecting our group’s operating

Interview with Efthimios Bouloutas CEO, Marfin Laiki Bank



performance. In view of these conditions, we maintained a defensive stance, centred on capital preservation, liquidity enhancement and cost efficiency. This strategy proved to be franchise enhancing, as it enabled us to provide an uninterrupted flow of credit to customers during these difficult economic conditions.

Despite adverse market conditions, we managed to sustain a combination of strong capital and comfortable liquidity position by tapping on our well diversified wholesale and retail customer base. This, together with effective re-pricing and tight cost control, allowed us to maintain a sufficient level of profitability and strong cash flow generation, thus underpinning a healthy expansion of our capital base. Maintaining a strong capital base has been key in attracting liquidity, especially during these turbulent times, and instrumental in allowing us to extend credit. This particular element of our strategy, being in a position to continue extending credit, has been crucial in attracting a number of high quality and profitable clients. This has contributed to our ongoing efforts to materially strengthen our position in target markets.

PwC: How would you describe your biggest strategic opportunity today, as well as the biggest risks associated with that strategy?

EB: For the coming year our strategic focus will be on three key areas: strengthening our presence in Cyprus; optimising our Greek operations; and expanding in Emerging Europe. In Cyprus we want to expand residential mortgage lending for Cypriot and selected non-Cypriot clients. In the wholesale Cyprus market, we are targeting some key infrastructure projects which should materially improve the economy’s output potential,

as well as some key, upmarket, landmark, property development projects. In Greece, our focus will be on optimisation through repricing, cost cutting, improved integration, and via the introduction of a rigorous risk management framework. In Emerging Europe we want to sharpen our focus through strengthening our existing position in certain markets. A number of these markets offer us the potential of creating a number of new home markets for the group.

The risks associated with this strategy are linked to a marked deterioration in our operating environments, especially Greece.

PwC: Last year, a majority of CEOs told us they planned to increase their innovation spending, despite the economic conditions. In what specific ways are you pursuing more innovation?

EB: Despite the tightening economic conditions as a result of the crisis, our budgets and spending on technological infrastructure and product development have not been affected. Following the triple merger back in 2007 and the strategic initiatives taken since, the focus has shifted onto the further integration of the subsidiaries and the enhancement of their policies and procedures through the adoption of group standards. This is expected to create value through more effective and efficient communication among the various entities of the group, both in terms of systems and employee interaction.

An important development in upgrading the technological infrastructure has been the introduction of Temenos T24 as the group’s new strategic banking system. This system is expected to enable us to be more flexible in the development of new products and to




provide a higher level of service to customers. Furthermore, it will contribute to utilising synergies and achieving considerable cost savings.

During the last couple of years, several technology investments and products developed for the bank’s customers contributed to its success, improving customer service and maintaining and strengthening customer relationships. Other than technology investments, several products were developed and brought to market with benefits to customers in both Cyprus and Greece.

The group-wide integration projects, the investment in sound and flexible technological infrastructure, the formulation of strategic, long-running partnerships coupled with the accumulation of knowledge through employee training are expected to enhance flexibility in product development and enable an even more customised and rapid customer service.

PwC: In what ways has your view of the attractiveness of different countries or regions changed over the past year or two?

EB: Our view of the attractiveness of different countries and regions has certainly changed, due to the global economic crisis and developments over the past couple of years.

We hold a well-established and secure position in the highly concentrated and profitable Cypriot market, which we hope to further strengthen and expand. MPB is well positioned to capture a significant share of the increased banking business associated with continued strong economic growth in Cyprus, and also pursue opportunities in the areas of mainstream residential lending, infrastructure projects and premium property development Moreover, demand for international business banking (IBB) has been

expanding on the back of the ongoing integration of key global emerging markets into the global economy. In order to accommodate that growth, we have been investing heavily in both human capital and infrastructure.

As far as the international operations of MPB are concerned, the management wants to build a solid platform for future development in a number of countries offering attractive growth opportunities. Serbia has not experienced as significant an economic downturn as other SEE countries, and opportunities are arising on the back of Serbia’s increasingly pro-EU deliberations regarding its eventual membership.

The Ukraine, after a period of political turbulence, has begun to show solid signs of recovery through the assistance of an IMF-sponsored programme. That recovery is mainly based on its exporters and could, in turn, positively affect consumer confidence and spending. Romania will afford similar opportunities, although we expect that it will be some time before they materialise.

We aim to leverage these positive developments by focusing on niche banking products maximising synergies among the group’s lines of business. This will enable us to offer comprehensive and complementary products and services to local corporate clients.

In Greece, following the revised lower estimates for GDP change for the coming years, our efforts are not focused on expansion. Instead, we are concentrating on improving risk management, streamlining organisational structure, and enhancing integration through the forthcoming merger of Marfin Popular Bank with Marfin Egnatia Bank. We are also focusing on maintaining assets, while improving asset quality and further asset repricing.




PwC: In what ways has your view of sourcing from different countries changed over the past year or two?

EB: We primarily source from European countries with a noticeably rising trend towards emerging Asia, particularly India, in relation to IT procurement. Our critical IT skills-resources base is located in Cyprus and Greece. However, in order to transfer skills and know-how critical for the development of our operations in South Eastern Europe, staff from our Cyprus and Greece operations are being placed on temporary assignments in other countries, mainly Ukraine, Russia, Romania and Serbia. We also provide remote technical/engineering support on a daily basis. We take advantage of the group’s expanded geographical presence in order to achieve economies of scale through our centralised IT procurement and administration functions. At the same time, we are managing the implementation of common projects across the group to ensure uniformity and efficiency.


EB: We are observing changes in certain patterns of consumer and business behaviour in relation to risk taking and demand for lending. Given prevailing uncertainties, private households are reducing their consumption spending and paying down their debts. On the other hand, we see growing opportunities in mortgage lending, as good customers try to take advantage of falling real estate prices.

In the business sector, there are ongoing cost-saving programmes, while expansion plans have been run down. However, we believe that companies will resume investment spending as growth starts firming up.

PwC: What one thing should be done to stabilise the financial sector and minimise the risk of another recession?

EB: Under a fiat money system, based on free trade and capital flows, it is almost impossible to avoid financial crises. Nevertheless, the international financial system’s structure can be strengthened through improved and more globally coordinated financial sector regulation. In view of the increasing importance of emerging markets, the latter should also be part of a more coordinated approach on global trade, capital markets and economic policies.

PwC: How are you changing your approach to raising capital, in terms of the sources of capital that are most attractive today?

EB: Capital has become very critical for banks, especially after the announcements of Basel III for substantial strengthening of existing requirements in the coming years. Although we enjoy a very robust capital base reflected in a Tier I ratio and total capital ratio of 10.2% and 11.8% respectively, we want to further increase our capital buffer, and announced capital raising plans in November 2010. The forthcoming share capital increase consists of: an equity rights issue offered to existing shareholders, which is expected to be completed in early 2011 and raise €488.6 million; and a convertible capital securities issue offered with preferential rights to existing shareholders, which is expected to take place during 2011 and raise up to €660 million. Following these moves, our total capital ratio is expected to reach 16% on a 9M 2010 pro forma basis.




PwC: How are any changes to the outlook for access-to-capital affecting your strategic plans?

EB: Capital is crucial to banks and its scarcity can be a limitation. Following the completion of our comprehensive capital strengthening plan, we believe that we will be in a very good position to pursue our strategic goals. First, we’ll enhance our organic growth prospects, while moving towards meeting the increased regulatory capital requirements regulations introduced by Basel III. Second, we’ll consolidate our position in Cyprus through focusing on mainstream, as well as upmarket mortgage residential business lending, and key infrastructure development projects.

Third, we can lever up on international business banking’s (IBB’s) existing customer base: move upstream from a transaction-driven to an advisory-focused business model, through a comprehensive treasury, wealth management and capital markets product offering. Last, we’ll expand selectively in Emerging Europe with the main focus on potential new home markets of Ukraine, Romania and Serbia; target locally active, Greek and Cypriot clients, but also seek to service IBB customers on the ground.

PwC: How is the current volatility of the business environment changing your people strategy?

EB: It has affected our people strategy in a number of ways. In the context of operational efficiency, our primary objective was to contain operating costs and therefore staff costs, which constitute the largest part of the Bank’s operational expenses. For that reason, we have adopted a stringent recruitment policy aimed primarily at containing staff numbers without any layoffs. Specifically, we have made selective

recruitments on an exceptional basis for candidates with outstanding qualifications and experience, in critical divisions of our bank, and we have tried to satisfy further demands through successful redeployment of staff among the different divisions. Also, we have developed and implemented a compensation policy, which is focused on rewarding employees’ productivity and operational efficiency and effectiveness, while at the same time promoting teamwork and a positive attitude.

PwC: How might the private sector do more to contribute to social well-being in areas that were once considered the government’s responsibility?

EB: At Marfin Popular Bank we have always had social responsibility high on our priorities and through a number of initiatives we have contributed to the well-being of the communities in which we operate. We believe that a stable relationship of transparency and trust with society helps to ensure the success of our growth and development strategy.

For example, in Cyprus we organise annually the Radiomarathon dedicated to children with special needs, in collaboration with the Cyprus Broadcasting Corporation. It provides financial assistance every year to hundreds of families and associations providing care to children with special needs. In Greece, we organise The Marathon of Love, also for children with special needs. Marfin Egnatia Bank provides support for children and young people to attend sports clubs to enjoy sports of their choice.

In Cyprus, the group maintains a cultural centre, which contributes significantly to maintaining the cultural heritage of the country and its people. The centre organises art exhibitions and publishes books of Cyprus’ historical and cultural heritage.


The activities of the group’s Social Responsibility Programme also place emphasis on initiatives concerned with the protection of the environment. In Athens, in collaboration with the state-run Management Body of National Forest Park of Parnitha, a project is underway for the upgrading and protection of Parnonas, which includes reforestation projects, the construction of water reservoirs and fire observatories, a meteorological station, and the provision of the necessary fire fighting equipment.

The ecosystem of Parnonas in Peloponnese consists of many areas, which have come under the Network of Protected Areas, NATURA 2000. In cooperation with the local Forest Authority, various forest protection projects are being implemented. Already we have given the local authorities equipment and forest protection materials which include a vehicle equipped with an autonomous fire-fighting system, complete fire-security equipment and a GPS-compatible map of Central Parnonas.

Furthermore, in collaboration with the Fire Service of Cyprus, we organised a Fire Security Week for the 8th consecutive year, aiming to create the right behaviour and mentality regarding the hazards of fire and knowledge of the necessary preventive measures.

PwC: How also should the private sector contribute to national competitiveness, in areas that were once considered the government’s responsibility?

EB: The private sector contributes to national competitiveness by constantly looking to increase the efficiency and productivity of its operations.

Banks take part in this process by ensuring that credit is allocated to its best uses relative to the underlying risks. In areas once considered the government’s responsibility, such as building infrastructure for instance, the private sector can contribute through public private partnerships (PPP).

Governments have been the principal providers of infrastructure for most of the post-war period. However, faced with pressure to reduce public sector debt and, at the same time, expand and improve public sector facilities, governments have looked to the private sector for finance and provision of services. This led to the public private partnerships which are long-term contractual arrangements for the construction or management of public sector infrastructure facilities by the private sector or the provision of services by the private sector on behalf of the public sector. These projects often take the form of a build-operate-transfer arrangement and are increasingly popular despite their complexity in terms of embedded risks. In Australia for instance, public/private infrastructure arrangements date back to 1988. In the UK, the Private Finance Initiative was introduced by the Conservative government in 1992, widening its privatisation and outsourcing programmes. The European Commission is encouraging PPPs with projects in many countries of the European Union.

The principle underlying these arrangements is a transfer of risk from the public to the private sector through a profit incentive. These arrangements contribute to national competitiveness where the private sector is best placed to manage the risk.


PwC: In what ways have you been affected by the government becoming more active in the private sector, for example, as an owner or investor, other than regulation?

EB: Marfin Popular Bank has neither sought any government guaranteed funding nor has any government provided funding in any of the countries in which it has operations, so it has not been affected by direct government interference. The group has only benefited from various measures taken at a national level and European Central Bank level, as far as access to liquidity is concerned.

Also, a side effect of the process of government intervention, which we have observed during the last two years, is that the transfer of the problem in the form of debt from the private to the public sector deepens the markets’ mistrust towards countries with a weak financial position.

PwC: What is the one thing that governments can do to improve the environment in which you operate, other than reduce the overall burden of regulation?

EB: Following the aftermath of the recent global crisis, we are convinced that governments and central banks should take all the measures and regulations needed in order to be prepared to act in a timely and efficient manner to support their financial systems in the case of a financial crisis. It is absolutely imperative to realise the significance of having a strong and robust financial system, as its role in the monetary transmission mechanism is immeasurable. In this context, rigid

financial supervision and balanced budgets are prerequisites of macroeconomic stability.

PwC: In what ways do rising levels of government debt, either in your home country or in your key markets concern you?

EB: In the countries of South Eastern Europe where we operate, including Ukraine and Russia, debt levels are low in relation to GDP. Debt levels have been relatively high in Greece, and recently rising in Cyprus. We are particularly concerned with the situation in Greece, while we believe that in Cyprus is improving.

In Cyprus, in which we operate the second largest bank and generate approximately 47% of our pre-provision profit, we believe that there is fiscal room to manoeuvre, and we are convinced that the government is taking all the necessary measures to improve the economy. If we take a closer look at the Cypriot situation, we can see that Cyprus has experienced a very shallow recession, and the impact of the recent global financial crisis on the economy has been significantly milder than on its peers, mainly as a result of its existing ties to emerging markets, its robust fiscal position and a profitable banking sector. Moreover, Cyprus is a key beneficiary from the ongoing integration of emerging markets into the global economy, and its high quality infrastructure, well-educated population and well-organised state should underpin its improved positioning, as a key regional business and transactional centre, and help the economy to recover even faster than expected (GDP growth forecast for 2010 is 1.0%).


Greece is undergoing a process of economic adjustment and fiscal consolidation to restore the sustainability of its public finances and regain credibility. Following a 6% budget deficit reduction in 2010, the government expects another 2% reduction to 7.4% of GDP at the end of 2011. The ongoing fiscal consolidation combined with supply side reforms should enable the economy to start moving back towards a positive growth trajectory and improved competitiveness sometime in 2011. The extension of the IMF–EU loan to 2021 is expected to provide more flexibility for Greece to perform its fiscal reforms. However, the high level of government debt in Greece could be a concern in our expansion in the country, as a high government debt can lead to a crowding out effect, a reduction in private consumption and/or investments and constrain our opportunities for asset expansion in the country.

PwC: When thinking about your company, how is your definition of ‘value’ changing? In what ways is the importance of stakeholders other than shareholders changing?

EB: Our definition of value has always been characterised by a high level of responsibility towards our stakeholders, besides our shareholders, that goes far beyond financial results and investment returns. The community, the economies of the countries where we operate, our customers and our employees, feature prominently as stakeholders in our definition of value, especially under the adverse economic conditions of recent years.

We view the importance of our group’s role in relation to future developments in both its two home markets, Cyprus and Greece. For both markets we are

looking to enhance our commitment as a key pillar of their financial stability, as well as to continue supporting local economic growth. Indicatively, during the first nine months of 2010, MPB disbursed 29% of new loans in Cyprus, with the equivalent figure for Greece estimated at above 10%. This reflects our resilient capital and liquidity position, as well as an unwavering commitment to the economy and the customers of our two home markets.

As far as our customers are concerned, we aim to offer tailor-made products and services, provide exceptional service and try to constantly exceed their expectations. Based on this philosophy, we conduct, on a yearly basis, a customer survey. Its results form part of the overall performance of each business unit. At the same time, we invest heavily in customer service training programmes, like the ‘Integrity Selling’ programme, which was introduced in the last couple of years and aims to provide financial advice and services to our customers with integrity and fairness.

The group’s management is firmly committed to the implementation of a performance based reward system, related to individual performance and contribution to the financial results and the ongoing growth of the group. To that effect, during the last three years we have implemented performance based schemes, such as a cash bonus scheme and stock option and restricted stock option schemes, which aim at recognising and rewarding individual performance, attitude and commitment to the organisation. As a result, employees, as stakeholders, consider themselves as an integral part of the group, and share in its profitability. Marfin Popular Bank sets social responsibility very high on its priorities.


A strategic goal is to establish an organisation with vision and responsibility for the development of the societies in which it operates. Marfin Popular Bank aims to do this through initiatives involving important annual events, the environment, culture and athletics. Its ‘Radiomarathon’ for children with special needs, for example, constitutes the most important institution for social and humanitarian contribution in the country.








Evgeny Dod CEO, RusHydro


PwC: Less than six months have passed since your new strategy was approved. Given that the global downturn had begun what exactly did you take into consideration when developing the strategy of your company?

ED: You’re right, one of the key points for us here is that the strategy was approved just about six months ago. This is our competitive advantage as we understand the trends in the market today, and we do not have to update the strategy. Of course we are focused on turning our company into the largest corporation in the global renewables sector, especially because the Rushydro team, it’s new team, has global knowledge and practice. It is necessary for us to use opportunities and resources available within the company today: our research and design complex, our engineering studies, and the tremendous knowledge Rushydro inherited from the Russian and Soviet hydropower industry. Over 800 stations, hydro power stations, have been designed and built by our institutions globally. Projects like the Ottoman Dam and others in the Sahara and the North have given us extensive practise of operating in severe environments. And now we have to convert all this into increased capitalisation, increased value for our company. We should rapidly develop wind and solar power and other areas of renewables that are little represented in Russia today.

We see great opportunities for cooperation and growth in the geothermal power sector, for example. This includes work with Icelandic companies as we also own geothermal stations in Kamchatka. This is, of course, a great global trend in the development of renewables. In the context of the global market, we certainly see changes in the cost of money, and opportunities

to raise financing and funding, and work cooperatively with partners worldwide. We are particularly keen to work with colleagues from European, US and Asian companies to exchange assets and develop joint projects. As you know, we have established a joint venture with Siemens to construct a plant in Russia, with wind turbine towers and wind turbine nacelles. As a part of the upgrade of all Rushydro’s plants, we are in dealings with large manufacturers of hydro engineering equipment. It is a large-scale project worth over €20 billion. So we have a number of important targets and we are adjusting our strategy to the current situation in the country and in the world.

PwC: What was the impact of the global crisis on the company’s strategy? What opportunities and risks do you see in the current situation?

ED: You know, any crisis for us is first of all an opportunity, an opportunity to grow, an opportunity to have a well-developed structure. When the global downturn was at its height, Rushydro was in a stable financial situation with no debts and large cash reserves. Due to good, conservative and professional management, the company faced the crisis with a sizeable liquidity cushion. We did not get into risky projects; we did not have stop losses: in other words, we felt quite comfortable. And, with the current status of our competitors and markets and so on, we may grow significantly while reaching the goals I have just identified. Here I am referring to complex engineering, complex equipment supply, and participation in equity. It is an advantage to be an organisation absolutely targeted on renewables. Of course, there are many views on whether the crisis is over or not, whether it will continue or not. I have always been optimistic and I think

Interview with Evgeny Dod CEO, RusHydro



that we will smoothly get out of the downturn, albeit with some volatility as a result of many factors. The truth is that we believe in the idea of a rapid step change growth in renewables. This includes a 20:20 programme in Europe and the American renewables programme. CAPEX is trending significantly lower on renewables construction, bringing it closer to that of traditional power. And I think that, looking at the global picture, we will be well-placed in this sector.

PwC: According to the company’s strategy, you are planning active participation in the international market. Are there any risks and are they significant?

ED: You know, we are looking at our Chinese colleagues now and we are following a small steps strategy. There’s no rush: to dominate in the global market is not a priority goal at the moment. Of course, we are basically focused on the Russian market as we are the largest producer here, with significant market share, and the major part of added value comes from inside the country. Most of the funds earned in Russia will go to modernise the company’s facilities, comprising more than 96 plants. In the context of re-equipment and reconstruction this is an enormous task. However, we analyse in detail opportunities provided by the external market. In terms of the hydro power sector, territories of interest include Southeast Asia, India, Africa and Latin America. These are regions that have enormous hydro resources. We are trying to develop a very conservative approach in terms of our participation and sale of energy, that is to say, we have to mention guaranteed sales and we have to mention that we are prepared to participate in equity. We would like to have reliable relations with local

governments and local partners. We are focused on the maximum use of our intellectual assets, our power plant engineering expertise. But these steps are very well estimated. Every time, we assess them against the downturn and against the global economic situation in general. In this respect I think that the external expansion of Rushydro will only have a positive effect on the company’s value. And we will never be involved in economically inefficient projects. Our roles may vary. Our competitive advantage is in our ability to act as contractors, as co-investors, as a managing company and as energy sellers. We can act in any function, and we use to choose the least risky one.

PwC: It is well-known that the economic efficiency of this area of the energy industry is connected to support from the government, at home or abroad. What do you see as the role of the government in new projects and new markets?

ED: It is quite clear that the government should set long-term, clear and transparent rules applicable to all investors, both internal and external. This is the main challenge we are planning to discuss with every government we work with. Because the most important thing is the transparency of the rules of the game you’re about to play. The relations with investors, legislation and rulemaking procedures should be predictable and long-term, in order to avoid any changes during the timeframes of any of our projects. As renewables, and primarily the hydropower industry, have a long-term investment cycle it may take decades to build a large station. It is obvious that, with changing conditions, investment risks increase, and the probability of joining this or that project decreases. Being a Russian company, PPP and




state-owned company, it is extremely important for us. The way China goes includes pre-export financing, support provided, state guarantees, inter-government agreements for construction; everything we observed in Soviet times. So, it is a sort of symbiosis of market economy and government relations. And this symbiosis should ensure the same necessary consistency for investors. The most important feature here is a long-term approach and consistency in relations. The government must develop fair and motivating rules for the game. Renewables – not hydro power, but wind and solar power – will not work without incentives such as favourable tariffs and stimulating measures to join the grids.

PwC: The company’s strategy includes a separate line which is about energy saving and innovations. What are you planning to do on that?

ED: I think innovation is a matter of survival in our country. Unfortunately, we are lagging behind in a number of fields, and without rapid development in these spheres we have no chance of being included in the list of top countries with a well-developed engineering, scientific and technical base, with a well-developed community. That’s why this goal, which was set in our strategy, is absolutely clear and right. Especially for Rushydro which actually represents a whole segment, a whole industry within a sub-industry. With its own research institutes, great scientific background, great design background, great engineering base, it’s a perfect environment to produce interesting and relevant projects. Besides, we should admit that we have inherited many interesting studies and valuable expertise from the Soviet Union which remain extremely important and

relevant, especially for the hydro power sector. We allocate considerable amounts of revenue, a significant share of our own funds, to innovative projects. We have created an innovations working group which is a part of the Ministry team and the federal team, and we have initiated 10 to 20 pioneering projects which are expected to produce a very interesting synergistic effect together with our operating business, and generate opportunities for new businesses. All these projects are within our corporation and we are financing them ourselves – we are comfortable with that.

PwC: Going back to global expansion. Have changes in the global economy had any impact on your choice of promising territories for expansion?

ED: Of course, the current situation in the financial markets has significantly changed our approaches and outlook on those areas, those territories where we are planning to invest. In other words, the range of countries we are ready to go to has decreased. It has decreased from both ends: from the bottom and from the top. It is clear that the financial crisis has limited rather than eliminated opportunities for renewables, say, in Southern Europe. This is because today it’s impossible just to set tariffs that would ensure return on the projects. Territories that are in a stable situation or, in our opinion, have growing economies are of key interest for us. These countries include BRIC and developing economies. Here I mean India, Southeast Asia, Africa and South America. We may come out with good proposals in the areas where we have competitive advantage and political support. In other words, the global downturn has essentially corrected our plans.




PwC: Has the global financial crisis impacted your approaches and views on external sources of financing for large-scale new projects? Has anything changed?

ED: The situation changes of course. Before the crisis, the company had no external borrowings. It actually worked using its own revenue and its own EBITDA. Today, with our rather good balance sheet, with minimal debt, with ratio of debt to EBITDA less than one, we have good opportunities for funding. Just a month ago, we completed a deal raising US$ 800 million for the term of five years at a very favourable rate. That was convertible Rouble Eurobonds with a rate almost equalling the Central Bank’s interest rate, i.e. practically the level of the rate of inflation. We have wide opportunities in infrastructure financing as well. Russian projects are financed through Russian sources, and for international projects we are ready to raise financing in external markets, both in foreign currency and in Roubles. As for those equipment supplies by Western companies, by international companies to the Russian market, we are ready to discuss large-scale pre-export financing provided by any agency: German, Austrian, maybe Chinese or Japanese – it does not matter. So, we have a rather diversified portfolio in terms of the cost of raised funds and the cost of realisation. A company with a good balance sheet has a lot of opportunities to raise finance at a good rate in this market.

PwC: Have you noticed any changes in the banking sector’s approach and in fund raising opportunities?

ED: Of course, everything has changed. As you know, we have had serious changes in the industry structure, in ownership structure, in market rules, and in long-term capacity supply

agreements as well. But this covers our local issues. The only thing I may say is that new market rules serve as incentives for raising good long-term financing because there are certain guarantees. The government has introduced new rules, both for Russian and overseas investors, equal for everyone. They are called DPM. If you work, you have guaranteed gains. So, I think, it is easier to operate in the market today, and financing for projects is provided in a more efficient way.

PwC: What do you think could be done to avoid any repetition of the global downturn?

ED: Of course, being manufacturers, we believe that 90% of the problem was caused by financial institutions, non-transparency, obscurity and bubble making. Therefore, control over financial institutions, the investment community and derivatives market is the key expected to move the economy back to normal predictable development trends, emerging trends. It is clear that the yields of the financial sector that may be overstated through derivatives is not comparable to the yields of the real economy. If I were a banker, I might have different view, but we are manufacturers and this is our position.

PwC: Do you mean control by the government or by any international institutions?

ED: It should be a sort of symbiosis. The government has its regulating functions that should clearly and strictly monitor the financial sector. But this is not enough. That’s why there should be supra-national agencies, sort of investment banker communities, and so on. It is also important that, within the chain of control, that control does not suppress the initiative of the business community, bankers and others.


PwC: What opportunities or risks do you see in the labour market? Has it changed on the back of the crisis? What is your staff policy here? And how are you planning to use opportunities available today?

ED: The unemployment rate directly affects inflation and recovery from the downturn. Every country has its own situation. In some, unemployment is going up, elsewhere it is moving down. In some places we notice a labour surplus, in others a labour shortage. Here, unfortunately, we are short of qualified staff. And our company is paying a lot of attention to the development of our staff. We actually start from the school, then the institute. We create a sort of “corporate leader” developing our own staff “from the cradle”. As many of our stations are located in isolated areas, we have to support our employees well and we have an extensive social policy. We have a large-scale, non-state, retirement programme, a management incentive programme, options and so on. We think that the human resource, the human potential – is of the highest importance for us as we operate in a rather specific sector and we need highly skilled professionals.

Our business is connected with risks in terms of technogenic emergency situations. The reason we are implementing the re-equipment programme is to ensure all our facilities are in a perfect state. The risk level at hydro power facilities is high enough already. We understand that if you make a good car but you have a bad driver in it, you will not be immune from accidents. So, we have to care about good drivers, good managers, good constructors, workers and so on. The demographic situation in Russia is not that stable, as you know. Corporate programmes

targeted at developing our human resources are a stabilising factor in our work. The situation on a global level may vary. There is a labour surplus in Asia and Africa. We see a labour deficit in core Europe and the USA. Industrial centres are to be relocated anyway. In this context, innovations, if we go back to that question, should be located in such countries as the US, Europe and Russia. Anyway, manufacturing will be moved where it is cheaper.

PwC: And what role should the government play here? Historically, it was considered that the state should care about staff, with the involvement of manufacturers, of course.

ED: Yes, in the Soviet Union education and public healthcare had always been free of charge. That is why this situation developed, with professional specialisation started at the third year of university, when companies started selecting students. In my opinion, companies that want to have stable, high- quality, efficient operations should build their relationships with potential personnel from the moment when they start developing as a personality. The company should guide the student on how and where to go, help with choosing a path and maintaining interest. If one falls in love with the job as a child, this will be the strongest passion throughout life. Thus, the role of the company here is to explain what one can achieve in this or that field and demonstrate possible growth. And again, if we speak about Moscow, you have a wide choice. But if you are in Kolyma, it’s a whole different story, the choice is not that wide and the opportunities to go to the central region to continue your education and development are limited sometimes. We should be honest about that. As for the role of the government, it is


impossible to make education the sole responsibility of the business. Education should be a state-supported, with additional corporate programmes aiming to develop the company’s own human resources.

PwC: If you had to choose the most important strategic goal out of the list of the company’s goals, what goal would you select?

ED: Accident-free, stable development. For a manufacturer operating in the energy sector, safety and reliability are of paramount importance. The second goal is organic development, organic growth of the value for shareholders. It is difficult to say which aspect is more important. So, I would say reliability and organic growth.

PwC: Has the concept of value changed? How do you see the company’s value in terms of building relations with community, the government in general?

ED: I think our core value is that we give the chance for our clients, our people, to use the blessings of civilisation. Above all, we provide light and heat, giving the chance to live in the conditions we are used to without affecting the environment, whilst maintaining a balance. That is why environmental protection and living in harmony with nature is the main value of the company and our competitive edge. We focus on developing wealth while keeping the balance of nature unchanged.








Gregory R. Page, Chairman and CEO, Cargill, Incorporated



GP: Given the businesses we’re in, we mainly watch indicators of the physical economy: Flows of ocean-borne goods, commodities, and metals – all the things that underpin the industrial economy. We watch commodity prices to get a sense of demand. Over the past year, prices have been dramatically affected by supply interruptions – particularly in food grains. And so on the agricultural side of our business, our focus is on rises and falls in pricing. On the consumer side, we watch what’s in the consumer’s shopping basket. And there, we see signs of stress. Protein is the most expensive food item, and we see people in Western Europe and the US reducing their protein purchases. We also watch restaurant traffic, which is certainly a good indicator of consumer confidence. In the past four to six months we’ve begun to see traffic moving back into restaurants – I think that’s a sign of increasing comfort. Clearly, there’s stress in many other parts of the economy, but we do see in restaurant traffic some encouraging signs regarding people’s feelings about the future.

PwC: Are there specific national economies that are particularly of interest to Cargill at this time?

GP: We see dramatic disparities in growth rates from economy to economy. I just returned from India and you certainly get a different feel in India regarding the local economy than you do here in North America. I was in Indonesia, as well, and saw that there too, the local economy is surprisingly vibrant. I visited Russia in October and was surprised by the buoyancy of its economy, particularly beyond the ring roads of Moscow.

PwC: What are your economic projections for 2011?

GP: The critical number for us is related to per capita GDP. If you disregard the EU-15 and the US economies, we’re probably going to have growth greater than four percent worldwide – and historically, that level of growth has been good for our business. When GDP drops much below four percent, you don’t see significant changes in the composition and quality of people’s diets. So we’re optimistic about 2011 and beyond. I think the clouds on the horizon tend to be geopolitical: The health of the euro, events surrounding North Korea and Iran. But barring those kinds of geopolitical issues, I think we have every reason to be optimistic.

PwC: What parts of your strategy have been more resilient to the economic contraction and what parts have been vulnerable?

GP: Cargill operates under a strategic plan we refer to as Strategic Intent 2015, which reflects where we want the organisation to be by 2015. While the economic contraction that began in 2008 was certainly disruptive, it didn’t change any of the big trends on which our strategy is based. Projections of per capita global GDP, the Western world’s concerns about personal wellness, the issue of commodity price volatility – all of those forces are still in play. So, we don’t see a need to revisit our strategy. Our global leadership team has reaffirmed that Strategic Intent 2015 is the blueprint for our organisation.

Interview with Gregory R. Page, Chairman and CEO, Cargill, Incorporated



PwC: In your view, where do the most significant strategic opportunities for your company lie and where do you see emerging risks?

GP: Some of our opportunities are geographic. For example, while we have significant businesses in China and India, our presence there has not kept pace with their GDP growth. Likewise, we need to continue to build out our sourcing in Latin America. We’re also looking at the Black Sea region as those agricultural economies emerge. On the food side, we have big opportunities to bring more fiber into people’s diet in a flavourful way; and to offer healthier products. So, as we consider people’s dietary issues, we see opportunities to help the Western world deal with its wellness concerns. On the risk side, I already mentioned volatility as a trader, but more importantly as a provider of risk mitigation services for our customers there is opportunity. In terms of societal issues, our customers are increasingly interested in the carbon footprint of their suppliers; their use of minority- and women-owned businesses in the supply chain, how much energy they require to produce a given amount of foodstuffs. We have big opportunities to make our industry more responsive to society’s expectations.

PwC: Do you view environmental responsibility as an opportunity to innovate your operations?

GP: Certainly, there are some technologies that, so far, have been seen as practical only when implemented at a large-scale. But that’s changing. For example, anaerobic digestion can now be applied to an individual dairy farm and not just a mega-factory. So, we have seen a number of innovations that 10 or 15 years ago could only work on a massive scale being re-scaled to much smaller operations.

PwC: To what extent has your investment in R&D been affected by the downturn?

GP: We maintained our R&D investment throughout the downturn. It’s critical to our business – particularly in the food space where the focus is on sodium reduction, fiber increase, caloric reduction, improving the quality of fats, and enhancing shelf-life and food safety. One big area of focus for Cargill is in sweeteners. We’ve worked hard to come up with all-natural, calorie-free sweeteners. We think that’s going to be a big opportunity in the years ahead.

PwC: Has your view of the attractiveness of different countries or regions changed over the past year or two?

GP: Our business requires a global footprint. To run our supply chain, we need to have boots on the ground in as many places as possible. From time to time, we have disruptions in a given country or region, but that doesn’t lead to departure or discouragement – it’s just something we have to work through. We were all disappointed by Russia’s imposition of a grain embargo, but we’ll work through that. Clearly Russia has enormous agricultural potential and we need to be a part of that. So there are these momentary local disruptions around the world, but I think it’s best to characterise them as ‘hiccups’ rather than the kinds of events that cause us to change course.

PwC: A global presence must require Cargill to employ indigenous workforces around the world.

GP: Having a local presence sometimes involves factory work. In those cases, we have to understand the local infrastructure for funding ourselves, for complying with labour laws, and for dealing with export and administrative policies. In other cases, we need local people who understand the local

Gregory R. Page Chairman and CEO, Cargill, Incorporated



agricultural economy – what kind of money is being spent, what kind of yields can be anticipated, how many acres are being improved, and how productivity is increasing. So, based on the sorts of operations we run in any particular country, we require a range of skill sets. But whatever particular skill set is required, the common element is our need to understand local processes and conditions – whether it’s the banking system, the export methodology, administrative processes, foreign exchange, labour laws, agricultural practices, or agricultural investment. In some markets, we are a marketer rather than a supplier or an originator. And in those cases, an understanding of the consumer is critical. In other countries – India would be a good example – we are both a supplier and marketer, and there we need to have a broad understanding of how the local consumer’s diet is changing. Diets can evolve rather quickly.

PwC: Are you able to find the skill sets that you need in local markets?

GP: In most of our important marketplaces, we’re always going to need more people to continue to accelerate our growth. There are an enormous number of talented people in the world. But the trick for any organisation is to hire people early enough so that their careers can grow in tandem with the organisation’s vision of its future. In that sense, hiring in a high-growth market is necessarily aspirational. The organisation has to convince a potential hire that it is actually going to create what it says it’s going to create. And to do that, the organisation must have credibility, it must have sufficient capital to accomplish its stated goals, and it must be relentless in its determination to carry out its strategy. So I think in terms of attracting talent, the challenge is to establish a brand as a great employer while finding those people who

understand and share in the organisation’s ambitions. By definition, the vision that they’re signing on to is not what they’ll find on their first day on the job.

PwC: Can you comment on the challenges of retaining top talent?

GP: You have intervals of employee turnover that are discouraging – and that’s why I talk about the idea of getting people to buy into what you’re going to create. In terms of retention, I think we have done a reasonably good job. Certainly we are not happy when we have turnover among people we’ve invested years in developing. Those kinds of losses – particularly in smaller geographies – set you back because they are the people you were counting on to lead that part of the organisation. In some developing economies, you see people changing jobs for a 10 or 15 percent pay increase. But in most of our important geographies, we’ve seen less of that urgency to leave for relatively small increases in pay. I spent time in Thailand during its boom years in the mid-to-late 1980’s, and you’d see people changing jobs once every eight to ten months. But in a lot of the developing economies, that kind of frantic pace to change jobs for small salary bumps has diminished.

PwC: Do you find that the private sector is being asked to contribute to social well-being in areas that were once considered the government’s responsibility?

GP: The responsibilities of government are a police force, national defense, a functioning judiciary, and a central bank that can be relied upon. No one is asking us to play those roles, and I don’t think we would be very good at any of them. If you’re speaking to the issue of corporate philanthropy, that’s something our employees have always done – and we’ve also had a great culture of volunteerism at Cargill.




In terms of charitable contributions, we have become much more explicit about what our intentions are: Cargill has committed to being a 2 percent-of-pretax-earnings giver. Having certainty around our giving has also allowed us to leverage the volunteerism of our employees. But I don’t view Cargill as taking on the responsibilities of government as much as supplementing the needs of the communities where we operate. The attitude that we take is that we need to be granted – in a figurative sense – a license-to-operate by the communities in which we have a presence. Consequently, we need to behave in a way that deserves that license. So I think this license-to-operate is something we must nurture every single day. In doing so, we don’t act as a substitute for government. Rather, we support our employees in supporting the communities where they live and work.

PwC: Can you speak about Cargill’s efforts in advocating for consumer health?

GP: We think consumers should have choices in the foods they consume. The more choices consumers have, the more likely it is that they will make healthy dietary choices. We have tried to steer clear of the kind of advocacy that labels some foods as good and others as bad. Instead, we talk about good lifestyles and bad lifestyles and good diets and not-so-good diets. Within those domains, people are variety-seekers. Our job, as we see it, is to provide a variety of product in order to allow people to put together a combination of foods that fit with their particular lifestyles – with the overall aim of affecting a healthy dietary balance. I wouldn’t say that our efforts rise to the level of advocacy. Certainly, we work with NGOs and other organisations on nutrition programs. But our central contribution to this effort is in the products we offer. For example, our non-trans fat cooking oils have provided enormous health benefits over

the past decade. Are there consumers out there that still like to prepare French fries using saturated fats? Yes – but they don’t have to. They can choose non-trans, non-saturated oil for cooking. So, it’s our job to provide consumers with healthy options. But consumers have to make decision for themselves.

PwC: Are levels of government debt a concern for your business?

GP: Well, speaking as a private citizen, I do find it concerning: Anything that can’t go on forever, won’t. And I think that’s clearly the case when you start talking about government deficits that are six, seven, or eight percent of GDP. At those levels, it doesn’t take long until the moment of reckoning arrives. My concern is that it requires a crisis to create the political will to make the necessary changes. And that’s not unique to the United States. I think other countries face the same political reality. It’s unfortunate, because that sort of brinksmanship creates uncertainty for business, and uncertainty leads to investments withheld, which in turn leads to diminished economic opportunities. We get the governments that we vote for, and regretfully, there doesn’t appear sufficient determination by governments to enact meaningful changes with regard to the size of national deficits.

PwC: With the exception of reducing the burden of regulation, is there something that government can do to improve the business environment?

GP: Greater transparency, even-handedness, and consistency in the direction of policy would be very helpful. When the direction of government policy is consistent and predictable, business can adapt its behaviour as required. What’s troublesome are these zigzags in government policy that can leave a company like Cargill at the risk of




being caught out in a totally unexpected – and unfair – way. We’ve had that happen to us more often than we’d like. So, transparency, even-handedness, and consistency need to surround whatever policy is put in place. Additionally, the role of government in creating reliable infrastructure – a power grid, transportation, an educational system – are obviously critical to establishing an environment in which commercial activity can flourish. In the absence of infrastructure, economic opportunity declines for everyone. No one company is big enough to compensate for a substandard electrical grid. You can’t run a big business on the back of a 300 horsepower diesel engine.

PwC: In what ways is Cargill’s definition of “value” changing?

GP: I think it’s more relevant to ask, “How is the definition of value that Cargill needs to respond to changing?” I don’t define what value means, nor does our organisation. What Cargill is focused on is responding to the values espoused by our customers, by the communities in which we operate, and by the governments that permit us to operate inside their borders. And clearly, those values are subject to change – no doubt in some cases accelerated by the attention that NGOs have brought to a number of issues. In the past, it was probably sufficient to simply run our own affairs in a way we thought

appropriate and responsible. Today – local communities, national governments, NGOs – have articulated a higher standard of corporate behaviour. Similarly, our most important customers have made it eminently clear to us that our reputation impacts their reputation. As a result, value-chain mapping – looking back through the value chain to consider issues like water use, environmental stewardship, labour practices – has become a critical element in our business and product planning. So, all of the values that accrue to our brand have become a more important determinant in our purchasing decisions. And as a result, Cargill has put more resources – and I think beneficially so – against a wider array of social issues. Those issues define the business imperatives – one might say, the business values – of our time.

PwC: In a sense, what you’re talking about is society setting the value system for a business’s license-to-operate.

GP: After the ink has dried on the initial contract, that’s when you better start working on your business’s license-to-operate. It’s really been remarkable how much difference it makes when, from the first day, business people say, “I have to nurture our license-to-operate.” The people who do that well at Cargill have become an extremely valuable part of our talent pool.








Johannes TeyssenChairman and CEO, E.ON AG


PwC: What sorts of indicators have you been monitoring to forecast how your markets for energy are faring?

JT: Traditionally, the power and gas markets were quite stable and did not react too badly to economic downturns. However, in the global recession of 2009 we saw a steep decline in the European power and gas markets. We learned how to cope with it. At the start of the recession in late 2008 and early 2009, we predominately relied only on the physical volume of energy distributed. That’s because retail and trading measures with their long lead time were totally misleading. Subsequently, we then started to monitor price spreads between the primary and secondary energy products we trade – electricity and natural gas or coal, respectively. From the spreads, we could then determine if our forecasts for value development were off, and whether any significant changes to the market were occurring.

PwC: Last year, many CEOs told us that they planned to increase their innovation spending despite economic conditions. Will E.ON pay greater attention to innovation in 2011?

JT: For the first time in our corporate history, I’ve decided to task a specific E.ON board member with the responsibility for focusing exclusively on technology and innovation. We realise that our future success really hinges on our ability to innovate and mobilise new technology. At the same time, we realise that there is no one-size-fits-all solution. Every market is different. If you look at the emerging markets, you see the need for lots of different energy delivery systems and therefore you must be flexible and very capable in a wide spectrum of generation and distribution technologies. In the European market, we see further expansion, but the

patterns of energy consumption are changing. So for example, auto producers and small-scale power distributors are becoming a more important part of our customer mix. Consequently, it’s important that we stay on top of all these changes and understand how innovation and new technology can make our supply chain more efficient and responsive to customers as their needs evolve. And now, with an E.ON director focused entirely on innovation and technology, I believe that we’ll have an excellent grip at the board level on the things we need to do to keep pushing the innovation envelope.


JT: Well, I would say the recession has accelerated some underlying changes which were previously underway. Never in my lifetime – and I have been working in this industry for over 20 years – have I seen such profound disparities in terms of future needs and expectations among the various markets we serve. I participated in the World Energy Congress in Montreal a few weeks ago, and it was noted there that, overall, there is an expectation of 50 percent growth in global energy consumption. But to put that figure in context, consider the case of Germany, which is representative of much of Western Europe. When the Germans look out a couple of decades, they see a 50 percent reduction in their energy needs. So while many parts of the world look to conventional energy systems to power their economic growth, Europe is predominantly focussed on a fundamental transformation of their energy systems to reduce consumption by up to 50 percent. These contrasting visions demand different capabilities, imply different costs of capital, and require different operational processes.

Interview with Johannes Teyssen Chairman and CEO, E.ON AG



And the question each energy provider must consider is where it should position itself on this spectrum of differing market requirements. How much focus should be placed on supplying the growing needs of emerging economies using well-understood technologies versus, let us say, joining the race for a superior future? Where energy companies position themselves on this spectrum is going to require them to make decisive strategic choices in the years ahead.

PwC: What assumptions do you make regarding the changing purchasing behaviours of your key customers?

JT: Well, you need to distinguish between our various customer segments. Wholesale customers have traditionally looked for secure energy delivery sources offered by well-positioned energy providers. But that’s beginning to change. Today wholesalers are much more willing to take risks with alternative energy providers because they believe the markets are sufficiently liquid so that they don’t have to rely as much on established suppliers. Inevitably, this shift will force us to change our own behaviour towards wholesalers. Also, consider the changing behaviours of our retail customers – private households, small businesses. They’ve gone from being passive consumers of energy to energy optimisers and, in some cases, even energy producers. If you look at the growth of small-scale power distributors and producers of renewable energy in Germany, for example, you can easily see that there has been a tectonic shift in the market. Energy companies will now have to choose what parts of the market to play in. Are they going to try to build a new kind of commercial relationship with retail customers, or will they still consider themselves as just vendors of a

commodity? I believe if you want to be in retail, you cannot just continue to think of energy as a commodity. Retail customer behaviours are changing and you need to build a relationship with those customers so that they become part of the solution toward the overall goal of energy optimisation. This will pose a big challenge because energy companies will need to adopt technologies and adjust to new patterns of consumer behaviour. It will not be easy and a lot of utilities will probably be unable to make that transition.

PwC: Are you changing your approach to raising capital? Have some capital sources become more attractive than others?

JT: In the past we have been willing to rely on short term capital – just raising capital on flexible markets as needed. Today, we also look for longer-term capital and are less dependant on banks. We’d rather raise money directly on the capital markets and through bonds and similar instruments. So, we take a dual approach as necessary: capital markets for longer money and banks for shorter money.

PwC: Are your strategic plans affected by the ways you access capital?

JT: In the future, capital will probably be the resource most valued by the energy market. Just look at the industry’s capital expenditure plans around the world. Plenty of capital will be required to serve the needs of the fast-growing emerging markets. At the same time, the transformation of the energy infrastructure in Europe will probably require a doubling of capital dedicated to that market – in the absence of an equivalent return in energy consumption. So, capital is of high importance. I also believe that in

Johannes Teyssen Chairman and CEO, E.ON AG



the future, rating agencies will not be as liberal with utilities as far as debt ratios are concerned. Traditionally, our industry was allowed quite a high liquidity / debt ratio because markets believed that we were by nature less dependent on underlying market developments and political uncertainty. But the events of the past couple of years shows that the energy market is exposed to, let us say, ordinary market dynamics. Consequently, I believe rating agencies will become a little more stringent and energy companies will need to have greater reserves on hand. So I will definitely be lowering our debt ratio somewhat, both to create more financial certainty and to achieve greater economic independence.

PwC: In what ways have you been affected by the government activity in the private sector, not only as a regulator but sometimes as a business owner or investor?

JT: Well, working in the utility industry as I do, I could probably spend hours talking about government involvement in our business. The energy industry has always had a political dimension to it – and most likely, always will. But if you look over the past couple of years, you do see an upward trend of state influence over the utility industry. If you look at southern Europe, state influence has grown to the degree that in some utilities it is now a more important factor than shareholder ownership. And even in northern Europe, the historical trend towards privatisation has hit a wall. So growing state influence in the utility industry is now a given.

In addition, the issue of climate change, along with growing anxiety about maintaining steady energy sources, have left states with the feeling that they are

obliged to become more involved in energy policies. Look at China or the US where a lot of their underlying foreign policies are based on concerns about energy security. In Europe, state involvement tends to be concentrated on the question of technological transformation as a way to establish some degree of energy independence.

Lastly, with worries over sovereign debt, we also see states looking everywhere for sources of new tax revenue. And industries that are more embedded in the national infrastructure and can’t easily avoid state intervention, are natural targets for new taxes increases. In my view, states are on a dangerous path in applying special tax regimes on energy companies. Look at some of the southern European states that came up with so-called “Robin Hood” energy taxes. It’s pretty clear that these sorts of taxes have nothing to do with Robin Hood, Nottingham Forest or the redistribution of wealth from the rich to the poor. They’re simply a means to satisfy the states’ immediate fiscal needs. Right now in Germany, the government seems to feel that in granting extensions to the operating licenses of nuclear plants, it’s also entitled to capture the majority of economic value that those plants generate. The examples in Hungary are ever worse. So government involvement that’s driven by, let’s say, more fiscally orientated objectives, is growing. And over the long-term, that will not benefit either the state or the energy industry. So I would say that it’s paramount that we establish a reasonable and stable understanding as to the civic responsibilities of energy companies and the limits of state involvement in those companies and their economic interests.




PwC: Other than reducing some of your regulation burden, what is the one thing that governments can do to improve the operating environment for your company?

JT: I think it would be helpful if governments set feasible long term targets for what they want to see in terms of, for example, CO2 reduction, energy independence, price volatility, and so on. At the same time, I think governments should be careful about prescribing the ways to reach those targets or imposing specific milestones on the industry. I think if states do that, they risk setting the industry on a path that may not take into account the sorts of innovations that can dramatically change the way those targets can be achieved. We’ve seen this sort of thing before, where politicians lay out a precise path for the industry while in reality so many things are changing that their plans are quickly overtaken by events. So shying away from micro-managing the process of energy transformation would probably be one of the smartest moves that politicians could make.

PwC: In what ways do rising levels of government debt, either in your home country or in your key markets concern you?

JT: As I said earlier, a state’s fiscal needs often leads to fiscal interventions. So as additional tax schemes and special levies are imposed to capture more and more value from the energy value chain it becomes increasingly difficult to forecast earnings or calculate investment needs. If there is a lingering fear that the value of one’s investments may be nationalised by a state to satisfy its own fiscal needs, capital will naturally shy away from that state. States should not underestimate the importance of that equation.

Secondly, with sovereign debt mounting, the issue of subsidising alternative energy sources becomes problematic. A few years back, when global economic activity was robust, many States felt little hesitation in creating new burdens on energy consumers in order to subsidise expensive approaches to energy transformation. For example, in Spain and now in Germany, solar energy is now subsidised to an extent that is highly questionable.

When a country has no fiscal burdens, nobody pays much attention to these sorts of subsidies. But when money gets tight, it becomes abundantly clear to energy consumers – that is, to the public at large – that if government or private income is spent one way, it cannot be spent in other ways. So government approaches to the way renewable energy sources are rewarded is an issue that’s becoming increasingly contentious and governments have to face that reality. In Germany, the levy on household energy consumption that goes to support renewable energy sources is about to be raised by 70 percent year on year. Last year, that levy was raised almost doubled. So one can expect that tax payers and the media will quite reasonably raise the question, “Do these sorts of subsidies make economic sense? Are they really worthwhile?”

PwC: What categories of non-financial of value, if any, are becoming more important to your company?

JT: I think that one factor – which up until this time has been an issue that has predominantly concerned the banking industry – will soon become just as important to energy and other trading companies. And that’s the issue of risk-adjusted value. I think traditionally, a lot of people just looked at a company’s




top line or bottom line without understanding that even the bottom line might contain risks that only become apparent after the fact. So in the future, I think capital will take a much closer look at the risk / reward profile of energy and other trading companies and attempt to sort out where underlying and sustainable value is being created – and where it is not. Obviously, this is an issue that is very important for us, especially now in that next month E.ON will be establishing a new equity strategy that we expect will create greater value for our shareholders.








John Faraci Chairman and CEO, International Paper


PwC: The economic crisis has had a profound impact on patterns of economic growth, regulation, capital markets and consumer behaviours around the world. We’d like to explore how International Paper – a multinational business designed for worldwide operations with international supply chains and global talent pools – is changing its approach to global operations and global markets. What indicators are you watching to tell how the economy in the US, as well as in the many international markets where International Paper operates, are going to develop in 2011 and beyond?

JF: Starting here in North America, where we do 75 percent of our business, the US economy is largely driven by consumer spending. The factors that either help or hurt consumer spending are the ones we watch very carefully. Because we’re a business to business company, our customers order our paper and packaging products when they have demand. Many of those customers are selling to consumers, so retail sales and consumer confidence are also important. In Russia, energy prices are still important to the economy. Russia is starting to diversify, but it’s still very energy dependent. We have a big position in Russia, and their economy is recovering well from the recession and growing. Latin America is making the transition, particularly Brazil, from being an export oriented economy to one with a growing consumption component to it. The same is true for China, which is still an export driven economy.

PwC: Considering those indicators, what is your outlook for 2011 and beyond? And what kind of risks are there in that outlook?

JF: Going back to 2009, I was never one who thought the world was going to end, although a lot of people did. It didn’t. International Paper came out of this recession in stronger shape, better than we went into it. I think the probability of a double dip recession in North America is diminishing, although it’s not zero. We’re going to be faced with frustratingly slow growth, barely above levels that will start to bring unemployment down, and that’s politically the most sensitive statistic. The reality is that unemployment is probably the last thing that’s going to start to improve, while the economy improves on many other fronts, because employers will be very reluctant to hire until they see demand being sustainable. So our outlook for 2011 is for more of the same: sluggish but positive global growth, with the US probably in the 2–2.5 percent range, Latin America well above that, China and Russia well above that, and Western Europe the same as the US.

PwC: Were there some strategic changes International Paper made during the recession, and if so, did some prove to be more resilient than others?

JF: I wouldn’t say we changed our strategy. We had a strategy going into the recession that focused on making International Paper more global. We remain very strong in North America, which is our key market and generates most of our cash, but looked to selectively invest in places where demand was growing and our cost structures were good, which for us was Brazil, Russia, India and China. We’re now invested in all of those markets, with the exception of India. So we didn’t change that strategy.

Interview with John Faraci Chairman and CEO, International Paper



What we did change is, we had much more of a laser focus on cash and liquidity. When the financial crisis hit and capital markets seized up, the ability to have liquidity and to generate cash and move it quickly was very important. I wouldn’t say we adjusted our strategy regarding cash and liquidity, but we adjusted our management focus and took the opportunity, because of what happened to revenues. Revenues collapsed everywhere. The only way we were going to improve our profitability was to take a lot of cost out, which we did.

PwC: Could you describe your biggest strategic opportunity today, as well as the biggest risk associated with that strategy?

JF: The opportunity and the risk probably go together. We’re right in the middle of the biggest capital project in International Paper’s history, a 50:50 joint venture in Russia with Ilim Holding, called Ilim Group. Together we operate the largest forest-products company in Russia, by a wide margin. We’re spending more than a billion dollars there over the next three years to modernise facilities that are part of Ilim Group. That’s a huge opportunity for us, in terms of putting in place a platform for the next five to 10 years to generate a lot of cash. There’s obviously some risk in doing that, and we’re managing that venture very carefully. We’re in the early days, but we’re excited about that.

PwC: Last year a majority of the CEOs told us that they planned to increase their innovation spending, despite the economic conditions. In what ways have you invested in innovation?

JF: International Paper thinks of innovation as creativity in providing solutions for our customers. In packaging design, for example, we work with customers to make our packaging capabilities better meet their needs and to help them take costs out of their business. At the end of the day, innovation is about how we help our customers be successful in their businesses.

PwC: On the subject of geographic markets and footprints, what does it mean for International Paper to be a “global company,” especially given your history as a predominantly US-based company?

JF: We’ve been International Paper for 110 years, and we’re just becoming a global company. There’s a distinction, however, between a company that has international operations and a company that operates in a global sense. We’re migrating from a company with international operations to one that is truly global. What that means for us is taking the expertise we have inside the company and applying that to all the places we operate. Whether it’s Morocco, Turkey, China, Brazil or Russia, it’s sharing best practices and building the capabilities that let us be more successful than our competitors in those businesses.




PwC: During the recession, were there any shifts in the attractiveness of some of your overseas markets?

JF: We are more sensitive to the risk/reward tradeoffs, because the volatility in the market created during the recession had a big impact on many foreign economies – whether it’s sovereign risk in Europe, capital markets in the US or economic policies in China. We pay much more attention now to making sure we understand and pressure-test the upside/downside of various decisions.

PwC: Has sourcing in your different businesses changed during the economic crisis?

JF: No, I don’t think our sourcing has changed. We’re the world’s biggest user of fibre, but we buy most of that in the open market. Even though we were one of the largest landowners in the US before we sold our forest lands in 2006 for close to $6 billion, we relied on outside purchases for most of our fibre requirements, so that wasn’t a big strategic shift from a sourcing standpoint. It was obviously a huge strategic shift from a portfolio and investment standpoint.


JF: Our customers, by and large, are more environmentally conscious because their customers are. International Paper is a leader in sustainability, in terms of how we run our business, but equally important is having the capability to help our customers understand their business from that dimension. In terms of purchasing, we’re becoming more global in thinking about our requirements and

our capabilities. As a global company, we’re leveraging our ability to buy chemicals and components for our facilities. It’s a capital intensive business, and doing that on a global basis, as opposed to a regional basis, gives us the leverage of scale and of expertise.

PwC: Looking at markets for labour and capital, what one thing should be done to stabilise the financial sector and minimise the risk of another recession?

JF: If it was just as simple as one thing, life would be a lot easier. The challenges for monetary and fiscal policy are big. I think the right moves were made by the US government at the end of 2008 and the beginning of 2009 to avoid what could have been a financial meltdown and very serious damage to the global financial economy.

The question now, in the US, is how to get consumer confidence and spending back to the point where it can sustain growth in the economy, at a rate that will cause unemployment to come down. It’s got to be higher than 2.5 percent. There are two issues: the stock market, which has recovered, if not fully; and housing, which probably has hit the bottom but hasn’t fully recovered. Consumers need to de lever. We all became overleveraged, so the savings rate had to go up, and it has. The question is, how do we get money into consumers’ pockets so that they can de lever faster and/or start to spend more of their income on discretionary purchases? The government’s plan to cut the payroll Social Security tax is an excellent move. Putting more money into consumers’ pockets and not raising taxes near term is much more important than the deficit impacts of those decisions. Longer term, we have to solve the entitlements issues of Social Security and Medicare.




PwC: How are you changing your approach to raising capital, in terms of the sources of capital that are most attractive today?

JF: We’ve paid down our debt from $13 billion to a little more than $8 billion over the last three years. That was going to happen anyway, and the financial crisis just made it more important for that to happen. We’ve termed out a lot of our shorter term debt, so we have longer maturities. We’ve tried to take the lumpiness out of our debt repayment programme, so that we don’t have huge amounts in any one year. Most important, we’ve brought our overall level of debt down, which was part of our strategy even before the recession. We got it done despite the recession.

PwC: In some ways, has the recession enhanced the opportunity to bring down your debt?

JF: The recession reminded people, maybe for the first time in their lives or careers, what happens when capital markets are frozen. Even though you have a strong balance sheet, you can’t refinance your debt. That’s a very uncomfortable situation to be in, for an individual, a business, a country or a municipality. The risk-averse way is to have no debt, but that’s not the way to run a company, so it’s the notion of having enough flexibility that you can respond to the unforeseen event. That’s what 2008 and 2009 reminded us of. We didn’t see the recession coming, and when it did, the ability to respond quickly and effectively so that we had enough levers to pull to manage through it is very important. That’s a lesson learned.


JF: We’re an investment grade company, so we have access to capital. We weren’t dependent on the commercial paper markets for our financing. We were financing long term decisions with long term capital, as opposed to long term decisions with short term capital. The national economic crisis is just a reminder of how important it is to have long term financing in place, because when short term financing dried up, many companies and institutions found themselves with nowhere to go.

PwC: How is the current volatility of the business environment changing your people strategy, as far as plant closings, layoffs and other measures?

JF: We’ve had to make some very tough decisions around people, although not just as a result of the financial crisis. We started that journey when we transformed International Paper in 2005. Since then, there’s been significant improvement in productivity. We’ve got about the same revenues as we had eight years ago, with half the people. Those were tough decisions, because people are the heart of our company. We invest a great deal in people development, but at the same time, we need to make the right long term decisions about how we can operate more effectively with fewer people and fewer facilities.

Beyond that, we’re growing our global management capabilities. In Russia, China, Brazil and Latin America, we’re building the next generation of leadership to take International Paper to the next level. We don’t believe you can run a global business with expatriates.




You’ve got to have local talent. They understand the local culture and how to do business there. Also, when people see leaders who come from within, they become role models.

PwC: Are you able to introduce global best practices into those local markets and still achieve common results?

JF: It happens, but it takes a while. Our joint venture in Russia is a great example. We’re now going into year four, and I watch that organisation more and more tapping into the talents that International Paper has and the know how that our Russian partners have to make it a better company – whether it’s capital project management, financial modelling, people development or marketing best practices.

PwC: Talk about International Paper’s lead role in sustainability, environmental and corporate responsibility efforts, in areas such as reducing your carbon footprint, production of biofuels and similar initiatives?

JF: All that is good business for us, but it’s also the right thing to do. We start from the premise that we’re a natural resource company. We’re not in the extraction business, we’re really in the longer term farming business. Our industry plants almost two million trees every single day in North America, which is more than we’re harvesting. We recognise that we’re stewards of the land, and that’s very important. Sustainability, continuous improvement and transparency about how the forests are being managed, is a very high priority for us.

We also realise we have energy intensive factories that use fiber to make our products, so reducing our carbon footprint and our energy consumption

are both good things to do. We’ve reduced our energy consumption per unit, or product made, by about 25 percent over the last five or six years, which is a big change. We produce 75 percent of our power requirements internally, and we’re the biggest users of biomass fuel in the United States. When it comes to recycling, International Paper is one of the largest collectors of recycled fiber in the United States, but we’re also by far the biggest user of recycled fiber. So we see both ends of recycling. All these efforts have had a positive impact on our costs, but also our environmental footprint and the whole issue of sustainability.

PwC: It’s interesting that you talk about this in business terms, where corporate responsibility also makes good business sense.

JF: There is a connection. When you have a business case that supports something that’s important to society, like the environment, you have the best of both worlds. Our industry sits right i n the middle of that issue, and I think we’re a leader in demonstrating that what’s good for the environment is also good for our business, our customers and our people.

PwC: In conclusion, when thinking about International Paper, how is your definition of value changing? What non financial types of value are becoming more important to you?

JF: We think about value in a several dimensions, looking at it from different stakeholders’ perspectives. Value for our customers is helping make their businesses better. Do we help them solve their problems? Do we know their businesses as well or better than they do, so we can come to them with solutions, as opposed to them asking us to do something? That’s creating value.


For our suppliers, if International Paper is successful, they are going to want to do business with us, because that’s good for their business. So from a supplier standpoint, value is winning in the marketplace. From an employee perspective, the value proposition for us is to attract, retain and develop the best talent. We have a work environment where whoever you are, you can be the best. If you aspire to be the CFO, there is nothing that says you can’t compete for that job. We don’t put people in silos at International Paper. We have a people philosophy that offers a great value proposition for our employees.

From a community standpoint, communities have want us in their towns. We are in a lot of small communities all around the world, and if we don’t have their support, we can’t operate there. Having a value proposition that they understand is good for them, whether it’s around the environment, social responsibility or education, is something we take seriously.

Finally, from an investors’ standpoint, International Paper has to present a good investment proposition. Value creation from their standpoint is about investing in International Paper today, and thinking about the medium to long term results.








Juha Rantanen President and CEO, Outokumpu Oyi


PwC: What indicators are you watching to forecast how the global economy, or specific local economies, might develop in 2011?

JR: If you look at the global economy today it’s characterised by a lot of uncertainty. Some things are quite obvious. Developing economies, such as China, India and Brazil in particular, will enjoy good growth. But for the rest of the world, it is quite difficult to say what will happen. If you take Europe and North America, it’s still a big question mark as to what impact the rapid increase in public debt will have once things begin to stabilise. In order to rebalance their budgets, governments may have to squeeze consumption, either through increased taxation or some other means. What impact that might have on interest rates remains to be seen. How it might impact consumption, consumer confidence, inflation and many other issues is also uncertain. This is the reason that in looking at current corporate behaviour, it’s characterised by a lot of hesitancy and postponed decision-making. As a company, Outokumpu is highly dependent on global investment activity – primarily in the developed economies. When I look to 2011 and 2012 with respect to investment activity the big process industries – chemicals, pulp and paper, energy, oil and gas, power plants – I’m not expecting anything dramatic to occur.

PwC: What is your outlook beyond 2011 and what risks may emerge in the years ahead?

JR: Things look brighter in the long-term than in the short- to medium-term. Still, there are significant issues to be faced. For instance, there’s the issue of currency movements. If you consider how rapidly the dollar has weakened in the last couple of months [Note: The interview took place in October

2010], it’s kind of scary. Climate change and how that will be addressed is another cause for uncertainty. Unchecked CO2 levels are a threat unless some kind of established global scheme is put in place. So far, the US and China have not played a big part in that effort. But Europe has, and that means Europe has to bear most of the cost associated with CO2 reduction. On the upside, greater efforts toward CO2 reduction could open up important business opportunities for our company because investment in low emissions power generation would increase demand for stainless steel.

With regard to future capital needs, that’s become less of a constraint than it has been in the past – primarily because capital-intensive companies already have too much capacity and do not see demand increasing. Take the chemical industry. They’re operating at probably 80 percent capacity and their growth is one or two percent, so they don’t invest because they simply don’t requite additional capacity. The same is also generally true for the power segment. The cost of energy has gone down so they do not have an incentive to invest right now. So the availability of capital is not an issue, but the fact that consumption has fallen, leaving over-capacity in many parts of the economy, is. Under these conditions, we shouldn’t expect to see new investments made.

PwC: In the context of the global economic contraction, where has your strategy been most resilient, and where have changes been necessary?

JR: What has remained intact is our overall strategy to get closer to the end user and improve our entire sales and marketing effort. That has meant investing more in our skills and capabilities as well as some investments in building service centres around the

Interview with Juha Rantanen President and CEO, Outokumpu Oyi

PwC 14th Annual Global CEO SurveyInterview Transcripts

world. What have we been forced to change? We’ve postponed quite a number of investments mostly in the product area for the same reasons I just discussed: Consumption in our main market – Europe – is down 15 percent. And until we start to see demand coming back, we do not require additional capacity. Therefore, the investments we have made have been very selective. So I think the game today is very much about improving the customer dimension while keeping costs down and avoiding any excessive spending.

PwC: How would you describe your biggest strategic opportunity today, as well as the biggest risks associated with that opportunity?

JR: Right now, our biggest opportunity is to create a stronger foothold in the growing economies: China, India, the Middle East and Latin America. Our strategy in these markets is very much about increasing our commercial presence. Local presence will then support Outokumpu’s other strategies such as our transformation to specialty metals and increasing the load on our main production plant in Tornio. So, the key is to expand our commercial presence beyond our current European borders.

PwC: Has the economic contraction slowed innovation at Outokumpu?

JR: We have maintained our R&D, which for us is about 20-25 million Euros annually. We have maintained this level of spending because it supports our commercial strategy. For us, innovation is really about differentiating ourselves from the competition, developing new products – especially special-grade metals – that increase the

value-add in our offerings, and moving away from commodity products. In the commodity arena, we face a lot of competition from new Asian players. We have to escape that by going more value-added. Our Tornio production facility, which produces standard grade products, is competitive with the Chinese. Our other facilities need to be upgraded. This means, if anything, modest increases in R&D spending in the future despite the overall economic uncertainty we see now.


JR: In Europe and the US, that growth will be very modest – the markets can be said to be moving “sideways.” That is why our growth has to come from other regions. This includes China, of course, but India is also a market where we see a lot of potential growth for Outokumpu. At the same time, India is a very difficult market because they are highly protectionist. They have already tried tointroduce anti-dumping duties against our products. We have been fighting these duties with some success, so our sales in India haven’t been limited yet in any significant manner. But when looking at different geographic markets for growth, protectionism is one of the biggest threats we face. In our industry, the US is also extremely protectionist. We know that if our US market share rises above certain percentage, it’s like pushing a button and tens of lawyers would start to investigate us for dumping. That’s not healthy for companies such as ours that are heavily dependent on open markets.



PwC: Are there changes in the purchasing behaviours of your key customers that concern you?

JR: One of the big issues for us is that our European-based customers are moving many of their operations offshore. This is a real issue for us and one we are responding to. For example, one of our largest customers – a global supplier of technology and services – is increasingly moving their factories to China, as are a number of our other customers. So in response, we have to establish a local Chinese presence in order to ensure that all these customers have ready access to Outokumpu products including our special grades of metals. This is the reason we built our new service centre in Shanghai. We’re also in China to serve the indigenous market there – the Chinese nuclear power generation companies, for example.

PwC: In your view, what’s the most important thing that should be done to stabilise the financial sector and minimise the risk of another recession?

JR: Smarter people than me – at the European Central Bank and the US Federal Reserve – are looking at this issue so there is very little for me to add, I think. But from the perspective of our company, one of the key goals should be to somehow stabilise currency movements. It’s very tempting to weaken your currency in order to increase exports, but this has broad implications for the entire global economy. These rapid currency movements shift the relative competitiveness of regions very quickly and unpredictably. An example of this is the recent wide movements of the US dollar, which is the cause of great uncertainty across the world. Consequently, I would advocate efforts to reduce the extreme volatility of currency movements. In Outokumpu’s third quarter disclosures, we discussed the negative impact of rapid currency

movements and our only method of mitigating the effects of it – which is to cut our costs even further. As a rule, I don’t believe in government intervention. All of the evidence indicates that intervention seldom works. But a more coordinated effort by the central banks could have a positive long-term benefit in limiting extreme currency fluctuations.

PwC: Is Outokumpu making any changes in the way it raises capital?

JR: Historically, Nordic companies relied heavily upon direct or syndicated bank debt. Today, in order to raise capital, Outokumpu is increasingly turning directly to investors. And this is being done with encouragement from the banks, which need to preserve capital right now in order to strengthen their own balance sheets. So it’s clear that going forward, we will have to rely more on the marketplace. As an example, just this past June, we went to the market with a €250 million bond issue, which is not huge but is indicative of how we’re changing our approach to accessing capital.


JR: One difference is that we have not been recruiting as much as we have as in the past. On the other hand, retention is much more an issue now than it was even just a year ago. As the markets start to pick up, there is much more competition for talent and many people in Outokumpu’s workforce have specialised skills that are highly valued by other companies. So, retention is becoming an issue. In general, we put a lot of emphasis on the people dimension of our business. In times of slow growth, keeping people motivated is really critical and there are no easy answers to how best to accomplish that.



Recruitment in new markets is also a challenge, especially in China. There, retention is an even bigger issue than in Europe. In China it’s not uncommon to recruit people who you then train over 2 to 3 years, providing them with really valuable skills, only to lose them shortly thereafter. From that perspective, China is a tough operating market.

PwC: How might the private sector do more to contribute to social well-being in areas that were once considered the government’s responsibility?

JR: Companies like ours are addressing this through corporate responsibility. We try to evaluate our actions in term of economic, social, and environmental impact. In terms of business’s impact on society, I would say there’s been a lot of discussion in Finland and in Europe generally about extending careers so that people would have the option to work longer. And this is an area where companies can make a big difference because an ageing workforce requires that we keep our people healthy. So first of all that means doing all we can to avoid workplace injuries. But then we must go beyond that and try to get people to focus on keeping up their own well-being. Another way to extend careers is to increase job satisfaction by developing working environment where people feel trust towards the company and their leaders. That is something we try to emphasise more and more: leaders take care of their people, so that our staff find their jobs fulfilling, and want to continue to work for us longer than they otherwise might. That is an important contribution that companies can make to the wider society. On the climate change issue, companies can contribute by reducing their emission of greenhouse gasses. But I think that it’s very important that governments establish incentives so that companies have a self-interest to minimise their

carbon footprints. As an example, at our Tornio mill, we recently made a large investment in energy savings, which was subsidised by tax benefits. Ideally, governments around the world would establish a global scheme that would encourage companies everywhere to invest in energy savings and CO2 reduction.

PwC: How might the private sector contribute to national competitiveness, in areas that were once considered the government’s responsibility?

JR: More and more, companies are taking on the role of training their personnel. If you think about it, many of the things one learns through formal schooling either at the vocational or university level, often become obsolete by new knowledge and new technology within a matter of a few years. That’s why companies like ours have to provide their people with continuous training and education. And that’s a very valuable social benefit.

PwC: Other than reduce the overall burden of regulation, what is the one thing that governments can do to improve the environment in which your business operates?

JR: As I alluded to earlier, governments can first do something about currency fluctuations. Second, governments could cooperate on establishing a global scheme to reduce CO2 emissions. The current situation is that only Europe has a coordinated CO2 reduction plan, which, of course, has implications for our cost structure. So, if our competitor countries – North America, China, and others – don’t have the same plan it will have a huge negative impact on European industrial competitiveness. This is something politicians need to understand. Regulations can have an enormous effect on business behaviour.



Companies have to do the right things for their shareholders and are therefore sometimes constrained from acting voluntarily on behalf of the common good. The key to establishing a global CO2 scheme is to get the US onboard. If the US is part of it, China will come along, too.

PwC: When thinking about your company, how is your definition of ‘value’ changing?

JR: In tough times – and we are living in tough times –- the basics start to play a bigger role. Companies are getting focused on operating their core business as well as possible, and marginal activities are being reduced. Consequently, we are trying to wring greater value out of our operations by focusing more on our customers and our costs.








Leslie Moonves President and CEO, CBS Corporation


PwC: We’ve divided the questions into four areas, designed to reflect your role in overseeing the diversified properties of CBS. The first area is strategic change. Please begin by briefly explaining the major impact the recession has had on CBS’ Entertainment, Cable, Publishing, Local Broadcasting and Outdoor operations.

LM: The recession affected all of our operations, but in different ways. On the Entertainment side, the cost of production has gotten very expensive. We produce premium-quality television shows, and when things are good and advertising money is rolling in, costs get a little out of control and people aren’t paying quite as much attention to them as is necessary. We took our schedule and literally went through, show by show, and cut costs. We said, “This show has ten writers, but we could do fine with eight.” Or, “This supporting player doesn’t need to be in the show,” and we would eliminate an actor. Or a production could be cheaper if we shot a scene in a different location. Ultimately every show, from our brand-new ones to our biggest hits – the CSIs and the NCISs – all ended up costing less. The entire system went through a shift, in some ways major and in some ways minor, but I think it made the Entertainment business a far more efficient place to be.

We get over 60 percent of our overall revenue from advertising. The recession forced many companies to reduce their advertising, which hit our local broadcast affiliates especially hard. For example, they depend a great deal on automotive advertising, and when the auto industry slumped and their ad spending went down, it forced our affiliates’ sales groups to find new local advertisers. In the Outdoor advertising operation, we had been converting a number of our conventional billboards to digital, which costs a lot of money.

During the recession, the advertising money to purchase billboards wasn’t flowing as well, so we slowed down our capital expenses on digital boards. We recently began to slowly reinvest in those boards, as we’ve seen the advertising climate improve.

Our Publishing operation is primarily a retail business, and like most retail businesses, it was hurt by the troubled economy. To cut costs there, we changed the mix of some book title releases and advances paid to certain authors.

PwC: In what areas have those strategies been most resilient through the economic crisis, and what changes have you had to make, if any, along the way?

LM: The good news is, when you’ve reduced costs within an operation, it usually forces people to be more efficient. For instance, we did more crossovers with local television and radio stations, where they shared a lot of services. We streamlined the process, and it became more efficient. We saved money. As the recession began to fade – which we feel it has, and we’re optimistic that we’re heading in a very good direction – these new things that we’ve implemented have affected our business in a positive manner. Because as revenue comes up and as the costs have stayed down, our margins improve and our business improves. People are pleased that they were able to cut costs and yet perform not only in the same excellent way they had before, but maybe in a better way.

PwC: Would you say you were taking advantage of an opportunity that the economic crisis presented?

LM: No question about it. I think somebody at the White House said, “Never let an economic crisis go to waste.” That’s clearly the case here.

Interview with Leslie Moonves President and CEO, CBS Corporation


Overall, everybody was very conscious of the fact that costs needed to come down throughout CBS. And, I must say, our team rose to the occasion and did very well.

PwC: What indicators are you currently watching to tell you how well the U.S. economy, and those in your key international markets, will develop in the coming months?

LM: The main indicators are actually in our own business. Because we have so many local assets – in terms of radio stations, television stations and billboards – changes in the economy directly affect them almost immediately. Earlier I referred to the automotive category as a major advertising revenue source. As we’ve seen automotive manufacturers coming back – being strengthened, getting new management, getting help from the US government – and begin to advertise again, it directly hits us on the bottom line. We see that effect immediately.

Our business is very much tied to GDP. We see the US economy improving day to day. We see retail improving. We see automotive improving. We see other major advertisers, such as fast food, improving. So it’s not a question of looking at surveys and government reports – although we’re affected by consumer confidence reports and whatever the Federal Reserve is saying –we can see economic indicators pretty clearly from our own businesses.

PwC: What about the economic situation in your international markets?

LM: Throughout the recession, the great thing that has travelled, always, is our content. We are a content provider; that is our bread and butter and what we’re most proud of. We are fortunate to have a company that produces a lot of premium content. In most markets throughout the world, the CSI franchise

is huge, as is the NCIS franchise. We are reaping the benefits of that. Even during the worst times in the global economy, our international sales continued to grow at a fairly remarkable pace.

Throughout the world, new markets are developing. We’re soaring in Western Europe, and the Far East, Eastern Europe and Latin America are beginning to buy more. So we’re seeing a great international marketplace for our content.

PwC: What is your outlook beyond 2011 – and what do you see as the major risks to some of your strategies?

LM: I am an optimist, and I do believe in the value of our content and our businesses. The world is a very tricky place right now. We’re dealing with some political turmoil in the United States, and that is also affecting our economy throughout the world. There’s a lot of unrest. We’re all paying close attention to the trouble spots. However, as we look down the road, if we continue to produce premium content, like we’re doing, our company is going to be fine.

PwC: Describe your biggest strategic opportunity today, as well as the greatest risks associated with that opportunity.

LM: The thing that keeps me up most at night, in a positive way – not a worry but an opportunity – is: where we put our content so it’s financially beneficial to us and doesn’t risk hurting our other businesses. We have what’s called the “content food chain.” It starts with the CBS network, which is the biggest chunk of revenue, and moves into syndication and DVDs. Then it begins to get into all the new media formats – cbs.com, iTunes, iPad, Netflix, etcetera – that are coming forward. The great opportunity is, they desperately need our content. We are going to get paid for it.



The question is, where do you place your bets? If you go on a certain new media platform, is it going to hurt any of your core businesses? Fortunately, we’re the number-one network by a nice margin right now, and I would hate to do anything to jeopardise that, because that’s still the primary focus of our revenue.

Take, for example a hit show like NCIS. We sell it on the network with advertising, we sell it all over the world in syndication and we sell it domestically in syndication. It helps our local television stations get advertising, as well, and it helps us get retransmission-consent payments from our cable operators. So if we put it on a new device and people start watching it a different way, yes, we’re going to get paid for it, but are we getting paid enough to take that risk that it’s going to hurt all these other things in the content food chain?

PwC: Considering those new media platforms and how consumers interact with them, do you look at content any differently? Do you alter content for any particular platform?

LM: Content is the most valuable asset that all these devices need. You can’t have technology without the content. Wireless is useless if you’re hitless. Certain shows work online better than others, such as self contained episodes or ones that have good video clips. Our attitude is still basically the same: Do the best darn show you can. If it’s a great piece of content, it’ll work on the network, it’ll work all over the world. Just put on a good show and good things will happen.

PwC: In last year’s CEO survey and interviews, a majority of CEOs told us that they planned to increase their innovation spending, despite the economic crisis. In what specific ways are you pursuing more innovation in CBS’ different businesses?

LM: New media is a key. We have a great group in San Francisco called CBS Interactive, which has three functions. One is to get our existing TV and radio content online in different ways. Function two is to create original content for the web, which includes our gaming service. The third function deals with where this corporation needs to be digitally ten years from now. What new businesses should we be in? What acquisitions can we make that will fit into our existing content groups? There’s a lot of interesting research and development in that area.

We just started a local web group, combining our radio and television stations to have an online service in a particular city. In Los Angeles, for instance, we had two television stations and two news radio stations. All four of them had different websites, so we put the four of them together to form cbsla.com. We now have the greatest online content platform in that market. We also have utilised our salesmen in those four organisations to sell online. That is fairly innovative, in that nobody can compete with us on the local level with as many salesmen and pre existing content. We now have similar web services in 24 cities. You go on the service in the morning, and it gives you everything you need locally – news, sports, weather – and hooks you into our national news, sports, and weather as well. It also gives you information on local restaurants, driving directions, where to get a babysitter, where to get a coupon.



That innovation we think could turn into something spectacular.

We have also recently invested in three joint ventures for international channels in India, Australia and the UK. In India, we formed a partnership with Reliance Group, which is that country’s largest media company. Initially, we’re using existing CBS content, and we’re going to create original content there. That’s how we’re expanding our brand internationally, and we’d like to do more of that.

We’re trying to build our businesses that don’t rely totally on advertising, so that the balance is better and we’re more recession-proof. Although right now, with the economy beginning to come up, we’re looking awfully good.

PwC: Are these new media ventures a different type of an investment than you would make in more conventional broadcasting areas?

LM: Undoubtedly. In new media, you have to put your foot in the water. And Wall Street has to look at it somewhat differently. They’re not investments that are necessarily going to give you a return in 30–90 days. You have to look a little further out, which is a quandary, in that investors sometimes don’t like looking out that far. They want to know what you have done lately, and I think we’re able to balance that fairly well.

PwC: Is it also a challenge for a traditional broadcaster like CBS to go “outside the box”?

LM: One of the things we’ve had to change is our perception as an “old media” company. Over the last couple of years, we’ve done that quite well. People aren’t looking at us quite the same way. We can still win as a broadcast network and a radio company, and be very proactive in the new media space and attack that equally well. I think people are finally appreciating that.

PwC: Specific to CBS, how have you changed or improved your company’s capital structure, and has access to capital impacted any of the strategic initiatives you’ve mentioned?

LM: The good news about our company is, we produce a lot of cash, so accessing capital has not been necessary to do anything that we’ve wanted. Over the past couple of years, we’ve paid down our debt quite significantly – by about $1 billion, in fact. Our capital structure right now is in a fabulous position, probably the best we’ve been in for a number of years.

PwC: When thinking about CBS’ entertainment and media operations in this evolving digital age, how is the definition of “value” changing, in particular with regard to consumer behaviours and appetites? What is the near future of the value and monetisation of your content in the ongoing debate over whether consumers will pay or want it for free?

LM: We are living in such an interesting time, involving consumers and their consumption of media, which is something that at CBS we give a great deal of thought and conversation to. No question, the younger generation is not as used to a television screen as the older ones. They’re much more used to a computer screen. They are much more impatient. We’ve all heard, “I want what I want when I want it.” And for every new media device, there are new and more and better ways of getting content. It is a challenge for us, getting content out there, and getting paid for it.

We sell our content over the air to cable and satellite and telcos, and then it will appear days later online for pennies on the dollar in advertising revenues. Our biggest nightmare is that instead of one



percent of viewers watching online, 99 percent watch it online for those pennies on the dollar. We wouldn’t be able to produce the quality of shows that we do on that basis. We wouldn’t be able to spend hundreds of millions of dollars purchasing the National Football League contract and putting the highest premium content on the network. All the media companies are walking the fine line of being part of new media, making content available, but still getting paid for it.

The way the dialogue has changed is that five years ago, there was the attitude that technology was the thing and content was fungible. A show is a show is a show. I think the respect for content has grown immensely, along with the realisation that you can’t have great technology without great content. The good news for us is, in a marketplace with 500 channels and a billion websites where you can get content, that only emphasises that the big platform players are still the best game in town. We average 12 million viewers a night. Arguably, that is the biggest channel in the world. There’s no other network that’s higher, certainly no cable network that’s higher, and no website that’s higher.








Li Lihui President, Bank of China (BOC)


PwC: The outside world is most concerned about how the world economy will develop in the next year. What’s your judgment about that?

LL: I think there are lots of uncertainties ahead. I see two trends. One is that the economic growth rate may be lower than in 2010, for a number of reasons. First, it is not clear how quantitative easing policies implemented by the US will drive the US economy itself. Economic data in recent months shows that the post-crisis economic recovery is not as strong as expected. Second, resolution of the sovereign debt crisis precipitated or potentially precipitated in a number of European countries as a result of the global financial crisis will be very costly financially and will definitely have an impact on the economic growth. Third, the situation is not certain in emerging countries, such as China, which play a big role in driving the world economy. I think control may be necessary. My understanding of this Central Economic Working Conference is that decision-makers are aiming for as solid a foundation as possible in the first year of the 12th Five-year Plan and a better structural adjustment at a moderate pace. So, as things stand now, I believe economic growth will be a little slower in the next year.

The trend I see is an increasing divergence in the macro-economic policies of Western countries and those of emerging markets countries. Currently, for example, the US policy of quantitative easing is expected to continue for the foreseeable future. Once such a policy is implemented, among other things, it can exacerbate the adverse effects of any contractions that might occur during the economic recovery. Further, macro-economic policies adopted by the US may influence those of European countries. On the other hand, emerging markets

countries, such as China, are faced with a looming concern over inflation; and the risk of asset bubbles will become increasingly evident, making it imperative to implement policies to manage such risks. As a result, China’s monetary policy will become more neutral, or prudent. In summary, over 2011, most Western countries will be expected to implement relaxed monetary and fiscal policies to stimulate economic development, while most of the emerging markets countries will adopt more conservative monetary or economic policies.

PwC: Is inflation the biggest risk?

LL: Inflation is going to be the key risk in China. A second round of quantitative easing in the US would certainly have some spill-over effects. The effect on the monetary policy-making in other countries will be significant. This policy for sure is creating adverse effects in other parts of the global economy, though whether it is helping the US economy remains unclear.

PwC: Is the impact of the quantitative easing policy on China creating pressure for appreciation?

LL: There are two main aspects. One is the inflow and outflow of hot money. Given excessive global liquidity, both the loan interest rate and the yield rate of financial products in the US are very low, while the interest rate in China is very high. Currently, expectations for further RMB appreciation remain high. The money flowing into the economy enjoys the benefits of higher interest rates, the potential for RMB appreciation and increases in asset prices, resulting in a relatively strong driving force. However, when these conditions become unfavourable, the tendency, as has been the case in other emerging countries, will be for it to withdraw like ebbing water, creating havoc in the economy.

Interview with Li Lihui President, Bank of China (BOC)



Fortunately, RMB is still not freely convertible and China has some tricks up its sleeve to control the inflow of hot money. However, it is difficult to stop completely. After all, some hot money will flow into China in one form or another as trade; some of it is not hot money but normal cash flow in normal trades.

The other aspect is that quantitative easing is driving up the prices of assets, such as gold, oil and mineral resources; this will result in import-driven inflation for China. The Central Economic Working Conference expects the inflation rate to be 4% or so in the next year.

Another big risk is the sovereign debt of some developed countries in Europe. BOC has controlled its investments in this field very strictly and has little exposure. In fact, the Chinese financial industry as a whole has not invested much in this area. The problem is that the crisis may cause instability in the Euro, which will affect economic development in the Eurozone. If the Euro takes the strategy of substantial depreciation, the RMB will face more appreciation pressure.

PwC: In 2009, BOC made a clear strategic adjustment to develop its domestic currency business. How will the complicated economic situation over the next year affect this?

LL: BOC was originally set up to specialise in foreign exchange and foreign trade. In 2005, 45% of the group’s assets were foreign currency assets, and 50% of its profits were in foreign currencies. In our shareholding reform of 2004, we saw the domestic market as the one with most potential and adjusted our business focus accordingly. Of course, we have continued to drive the development of the foreign currency business: as Chinese enterprises become more

internationalised, it will also help improve our competitiveness in the home market.

PwC: Were there any internal disputes about that at that time?

LL: No, because we all saw the growth potential of the home market. Since 2005, the growth of our domestic business has been on par with other banks and financial institutions, and even a little faster in some areas. By the end of 2009, our RMB assets accounted for 75%, up by 20% from 2005; the profits from the RMB business also increased to 75%, up by about 25% from 2005, which is the most important change.

The degree of internationalisation of Bank of China is the most considerable among the Chinese domestic banks, with approximately US$ 360 billion of foreign currency assets. The challenges of the global financial crisis have been especially significant as a result. Apart from foreign currency loans to domestic borrowers in China, these assets largely represent foreign debt instruments and other investments. The turbulent international marketplace created tremendous challenges for us in terms of enterprise-wide and global risk management, including assessment of market conditions. We responded to these challenges head-on, successfully implementing effective global risk management solutions and minimizing the cost of adverse market conditions. We dealt successfully with that crisis. Although it caused some losses at the beginning, they were not material and significantly lower than those of many foreign-owned banks. The annual profit growth has been very high for several years. Our shareholders shared after-tax profit of RMB81 billion in 2009, up by 25.96% from 2008. Although overseas profits declined, the profits of the whole group increased in 2008, showing that we did a good job in risk control.




PwC: What are your plans and objectives in your international strategy for the next few years?

LL: While we now pay more attention to the home market and RMB business, internationalisation is still important for us. Our advantages there are a distinguishing feature for us in the eyes of our local customers. We also note that China is implementing a more open strategy and Chinese enterprises and residents are going out into the world more rapidly. This Economic Working Conference requires that equal attention shall be paid to import and export, to the introduction of foreign capital and investment in foreign countries, and ‘bringing in’ and ‘going out’ to facilitate each other. This will bring about great changes in the Chinese market and we must consolidate and develop our advantages in this regard.

As a whole, our internationalisation strategy will accommodate the needs of domestic enterprises and customers, and will be aligned with their globalisation moves. Currently, BOC has sizeable branches in 30 foreign locations, including Hong Kong and Macao. In the future, we hope to further expand our overseas networks through a range of strategic options that include establishing additional branches and considering select merger and acquisition opportunities. Regardless of the approach, though, our objective is to improve the efficiency and profitability of our overseas operations.

While mergers and acquisitions generally provide for more expeditious expansion of operating network, we remain prudent and fully consider the associated benefits and challenges, in terms of specific targets and geographic regions. To be successful, we must be able to integrate the target culturally, enhance the capabilities of management and increase profitability.

We have made some successful mergers and acquisitions. For example, our acquisition of Singapore Aircraft Leasing Enterprise in 2006 brought significant synergies. We retained the firm’s management and also added BOC’s own leadership, renaming it BOC Aviation Pte. Ltd. It is now the world’s No.5 aircraft leasing company with significantly stronger profitability.

In recent years, we have developed our overseas organisation mainly by setting up branches. In addition, we have been developing product and service channels, such as overseas bank cards and e-banking. These solutions deliver good results for a small investment.

PwC: Could you tell us about your development strategies in regions like the US, Europe and Latin America?

LL: The US is a key focus of our business development. BOC’s New York branch is one of the largest clearing banks in the region and the 11th largest in the US, thanks, of course, to the volume of international trade between China and the US. There is an increasingly strong link between American and Chinese enterprises. When China’s Vice-Premier Wang Qishan visited America last, he said exports to China will be expanded in several areas, including wind turbine generators, beef, high-tech products and cultural products. And the future will offer more room for economic exchange and cooperation between China and the US. The most important thing is whether American enterprises have opportunities to expand their exports to China. The export of high and new technologies may help reduce the current trade imbalance.

From the other direction, we hope to be the one to offer clearing and settlement services to enable Chinese commercial banking institutions – particularly small and medium sized ones – to enter the American market.




We also find that countries like Canada have abundant resources, many of which are needed for China’s economic growth. We are also interested in Latin American countries and aim to integrate business operations there and in North America and improve our services for customers in that whole region.

In Europe, we believe the stability of the Euro is very important for the development of the Chinese economy and financial industry. We don’t want to see the Eurozone going backwards.

We are also looking at Eastern Europe, mainly locations with huge potential where BOC does not have a branch. We use existing banking institutions, such as BOC Luxembourg, to extend our presence in Europe and we are planning to increase investments in Russia, which has great potential in technology and resources.

Asia will continue to be a focus of development. There is a high level of interdependency between China and Asian countries, and Asia remains a key region in our overseas expansion.

In addition, we will focus on countries with rich natural resources that offer a strong, complementary relationship with China in terms of economic development. As a bank, our overseas network, services and products must be improved in a synchronous way. In recent years, we have established our own branches in Perth and Brisbane and will possibly set up new Australian locations in the future. We are also very interested in setting up locations in other countries with rich resources such as South Africa.

At the same time, we also work with other foreign banks to provide customer services to meet the needs of Chinese enterprises and individuals outside China.

PwC: We are all concerned about the ‘big risks after big loans’ in the Chinese banking industry. How do you perceive the potential risks from BOC’s strategic adjustment?

LL: Whether there are big risks after big loans depends on two things. First, how commercially feasible were the selected customers and projects at the time of big loans? Second, were these loans properly managed after origination?

As far as BOC was concerned, last year was really a big year of loan origination. RMB loans increased by RMB 1.1 trillion and foreign currency loans also increased considerably. We began to look closely at these loans in July last year, and later implemented a comprehensive review of loans to local government financing platforms, real estate loans and loans to industries with excess production capacity, as required by new regulations from the China Banking Regulatory Commission (CBRC) and the People’s Bank of China (PBOC). So far, we are very satisfied with our risk management and credit quality control. From 2009 to the end of this year, both the balance and ratio of bad loans continued to decline, while the provision coverage continued to increase.

That doesn’t mean we are free of potential risks, though. The lengthy terms of some projects means that potential risks may not become apparent for some time. So from this year, we are intensifying post-lending management and setting higher requirements in procedures and processes. Through these efforts, we hope to identify and address risks in a timely manner. A bank without risks is no bank at all. Recently, our credit cost has been controlled at about 0.36%, a very good performance even against international standards.




PwC: Has BOC finalised the plan for the total new loans in the next year?

LL: At this Economic Working Conference, it was decided that the growth of M2 (broad money) will be roughly 16% or so in 2011. Broad money and credit growth are not the same thing. I expect the credit growth of next year will certainly be lower than that of this year, but it’s hard to tell whether the total amount will reach the level of this year.

We are still working on our lending plan for next year, consistent with the state’s credit control plan. We hope to improve our management and streamline our credit, customer and business structures in the next year. In terms of customer structure, we may reduce the loan concentration where appropriate. Currently, credit supply is focused on big enterprises and big projects. Customers with a high credit rating represent a large portion of our credit portfolio. The positive thing is credit risk is very low and customers are easy to manage, but the negative side is that it affects the optimum allocation of resources.

PwC: What China has lent out is all medium-term and long-term credit; is it going to be difficult to take back liquidity?

LL: For mid- and long-term credit, we will have to look at the projects and the cash flows of enterprises. We rely heavily on the analysis of cash flows in our choice of credit projects. There are two key aspects: first, on the micro side, we scrutinise the management ability of the borrower and the structure of the project; then we focus on whether the overall macro economy of China can continue to grow steadily at a relatively

fast pace. Steady growth of 8%-10% will not produce any problems for enterprises to which we have given loans in recent years. However, a decrease of growth to below 5% may give them serious problems.

PwC: In what areas of innovation is BOC going to increase investment?

LL: In the nearly 100 year history of Bank of China, innovation has been an integral part of our corporate culture. Chairman Xiao Gang has clarified our direction as: innovation, transformation and cross-border expansion. To deliver innovation, you must break away from accepted norms, but you must do so within the confines of law and on the basis of compliance. We emphasise the spirit of innovation and the unrelenting pursuit of excellence, and the need for fortitude in addressing difficulties and problems. We are fully aware of the significance of innovation to Bank of China’s future development as an engine for growth and a core value. Pursuing excellence is our ultimate goal and we will increase our investment in innovation to deliver it.

It is also necessary to build a solid technological foundation for innovation technology. In recent years we have invested heavily in the “IT Blueprint” and have made good progress. By the end of the year a new system will have been put into operation in 23 branches. For the rest – more than 10 banks – the core banking system is expected to go live in 2011. It will be a critical foundation for us, and when completed, will enable us to achieve data concentration and one unified customer-centred system. We may also make adjustments to the existing IT Blueprint core system and use it to meet the needs of our overseas operations.


PwC: After the completion of the Blueprint, do you think BOC can achieve or exceed the level of ICBC?

LL: It is hard to say, but at least we are in a relatively leading position in the market. The key members of the Blueprint project team are all our own people, so we have sufficient ability and resources to address any improvements to the system. We had some difficulties during the roll-out of the core banking system, but we were able to solve the problems in a few hours.

This core banking system is our production system. We are also reforming our management information system. Business process reengineering is also part of this, and includes customer service, internal management and control processes. For customers, we hope to be able to respond more promptly and offer more convenient services, while internally, we’d like to see better efficiency and more effective management and control. All these are key targets in our innovation efforts for the next year.

The innovation of our core products, channels and technologies are particularly important. The development of our new core banking system, expansion of our bank card business and increased emphasis on e-banking, are the current areas of our innovation focus. We are also studying the evolving needs of our customers, as China’s economic development and transformation continues, to enable us to better improve our products and services.

PwC: What kind of measures do you think will help stabilise the international financial market and prevent a recession?

LL: Western countries are very practical. The Basel III that people are discussing now provides a good framework for maintaining financial stability and preventing future systemic risks. However, its implementation has been delayed because it may hinder the on-going economic recovery.

We focus on risk management in a holistic sense and proactive manner. For instance, we have been emphasising the importance of a rigorous post-origination loan management process, through strict policies and procedures mandated to branches by the Head Office. Where appropriate, we have also committed to additional resources. Through efforts such as these, we expect to effectively identify and manage the risks facing Bank of China. We believe it is very important to adopt stricter risk control standards and maintain a monitoring system that is prudent on a macro scale and can give early warnings regarding potential problems. Of course the implementation of such a policy needs to be adjusted for countries at different stages of development.

Besides, some adjustments are necessary for Western financial market to be closer to the real economy. Derivative products are necessary but cannot be too complicated.. Considering the stage of economic development as it is, it is obviously necessary to develop the capital market. Without the capital market, there would be no way to


optimally allocate financial capital and no instruments would be available to hedge against risks. This arrangement will definitely involve some speculation, which needs to be properly controlled and restricted. And our goal is to prevent global and systemic risks like those in 2008 and 2009.

PwC: CBRC is considering imposing restrictions on debt instruments and the possibility of mandatory conversion of debt to equity in certain conditions. What impact will this have on China’s banking sector?

LL: China must do things based on its own needs and circumstances to gradually improve its financial regulation. China’s banking sector safely navigated this global financial crisis, thanks to the three important factors: first, China maintained strong economic growth; second, Chinese commercial banks have made great progress in their banking and risk management; third, financial regulation in China has been significantly improved.

PwC: Another question is about the expanded scope of risk-weighted assets. Strictly qualifying commitments and credit card overdraft limits will be included as risk-weighted assets. What impact will this have on banks?

LL: It won’t have much influence. The inclusion of the credit card overdraft limits we set in the risk-weighted assets will not really impact the overall adequacy of capital. We include commitments in our calculations, but only those over a year, and the result is still good. In my opinion, financial instruments should be structurally sound, and this would help improve the financing efficiency of the whole society.

This Economic Working Conference raised an important concept, namely that the total financing amount should accommodate the needs of economic development, and it will include, in addition to bank loans, direct financing, debts in the capital markets and various credit instruments, such as commitments, performance guarantees, letters of credit and acceptance bills. If these instruments are properly employed, they will help reduce financing costs for enterprises.

PwC: As the president of one of the biggest banks in China, what’s your opinion on the regulation of systemically significant and ‘too-big-to-fail’ institutions? Will capital regulation alone do the trick?

LL: The ‘too-big-to-fail’ problem mainly lies in the overall risk control, such as risk preference, application of general lending standards, overall development quality and business and asset structure, and it depends on whether the bank invested in high-risk or low-risk areas. Another important issue is the management and judgment of the leadership. The failure of Lehman Brothers, while precipitated by an inability to re-finance its liabilities, is widely reported to have been caused by an excessive amount of leverage that was not focused by the public and regulators in many countries. Certainly, the regulatory lapses around such failure, and others like it, were real blunders. Currently, in some countries, regulators are developing means to address deficiencies in the regulatory framework as a result. Certainly, mis-aligned incentives played a part in this.


PwC: BOC has just announced the successful completion of its hundred-billion financing programme. What is your future financing strategy?

LL: First, based on our understanding of Basel III, we expect that BOC will not have any financing need until 2012. Second, we need to make sure we are using capital efficiently by improving business practices and overhauling business operations. As part of our strategy transformation we want to save on resources generally and capital in particular. Third, we will adjust our whole profit distribution structure.

We also feel it is important to control our business growth, keeping it steady and with a good rhythm. At the same time, we will work to increase the efficiency of our capital and our loans, expand intermediary services and improve business diversification so as to obtain higher profit from the same capital base. Credit expansion like that in 2009 is not normal; it was just a growth opportunity in a special period, and will not repeat itself in the future.

PwC: Will the change of financing channels have any impact on strategic planning?

LL: Our strategic vision remains the same: to grow into a large multinational banking group that centres on commercial banking, offers diversified services and pursues integrated growth both at home and abroad. We aim to become a world-class commercial bank, and it will still take many years of hard work to reach that goal.

PwC: What is your view on the position of BOCHK in BOC?

LL: BOCHK is a bridgehead for us and will be the centre of our overseas RMB business operations in the future. The Central Economic Working Conference also proposed the development of an overseas offshore RMB market, in which BOCHK will play a critical role. BOCHK is the most important bank in terms of settlement for overseas cross-border trade and also the note-issuing bank in Hong Kong, and holds a very important position in the development of the group. Furthermore, it is a listed company. We will focus on increasing the business synergies and integration between the parent and BOCHK and work together to deliver better customer services.

PwC: Will BOC’s HR strategy be subject to the impact of changes in its external operating environment?

LL: I don’t think it will. First, we remain committed to market-oriented reform of HR strategy and the establishment of more effective, market-oriented, incentive mechanisms. Second, we will promote specialisation, and design positions to better support the specialised management in the bank. We will also offer professional career paths other than management positions to promote career advancement for individuals, so as to better serve the needs of bank development. Third, a top priority in our HR strategy is to develop more financial management talent, enhanced with international experience to the extent possible, to support the Bank’s future global development.


We aim to improve the proficiency of our people and the efficient use of our human resources, on top of general control of our headcount. However, our headcount of 277,000 is likely to increase as we have the lowest number of people in comparison with other large banks. We will expand our workforce to meet our strategic needs, but improving the efficiency of our people is still the best solution and our top priority.

PwC: What changes will there be in corporate governance?

LL: There will not be any significant change as our existing governance structure is doing extremely well. Temasek is still our major shareholder. The structure of the board of directors depends mainly on the directors’ experience and ability. Our board structure is very satisfactory and the sub-committees are chaired by independent directors who are expert in accounting, law, and risk control. I am not saying that we have no good Chinese candidates: the chairman of our Institution Committee is a good example, as he as good as any foreigner.








Louis Camilleri Chairman and CEO, Philip Morris International


PwC: What indicators are you watching to understand how the global economy will develop?

LC: The principal benchmark we look at is unemployment. At the end of the day, that’s one of the key dynamics of consumer products markets. The demographics of unemployment are particularly important. For example, it’s always a worry when youth unemployment is much higher than total unemployment. The poster child for that right now is probably Spain, but other countries also share the same predicament.

Regretfully, nobody seems to have found the solution to the persistent high levels of unemployment yet. In the Western world right now, companies face too much uncertainty about what steps governments are going to take. I think our leaders, certainly in the West, have not done a great job of communicating what it is they’re trying to achieve and most importantly how it will be achieved, which adds to the uncertainty for both companies and consumers. All that adds up to a built-in restraint on spending.

PwC: Speaking of demographics, are you optimistic about the demographics of emerging middle classes around the world?

LC: Absolutely. Long-term future growth will definitely come from emerging markets as the demographic profile of any country is also linked to its economic prospects. Take the fact that in the West we’re witnessing an ageing population. But that also applies to a number of emerging markets, such as Eastern Europe, Russia, Ukraine. So one can’t just say that OECD countries have ageing populations or flat or decreasing populations, and that all non-OECD – or emerging – markets have great age profiles, because that’s not the case.

In Asia and parts of Latin America, growth demographics look good. But if you look at the Greater Europe, all the way to Russia, that’s not the case.

PwC: In what areas has your strategy been the most resilient through this economic crisis?

LC: I don’t think we’ve actually made significant strategic changes. There may have been tactical changes, but I wouldn’t consider them to be fundamental strategic changes. We have the luxury of being in an industry in which you don’t generally see major strategy shifts. Then there is the general strength of our company itself. I do think, though, that our strategy recognises that long-term growth is going to come from emerging markets. But these nascent markets come with various uncertainties. One is the regulatory environment; another is talent-related. Finding the appropriate talent to take advantage of the growth prospects of emerging markets is one of the biggest challenges we face.

PwC: In terms of finding local talent or relocating expatriates?

LC: Both. Ultimately, you can’t rely on expatriates to run a local business forever. They certainly have an important role to bring our affiliates in given countries up to certain standards, but they also have the critical role of transferring knowledge and expertise so that those businesses can stand on their own. The goal is that those affiliates are eventually run by country nationals. Turkey’s a great example. We’ve been in Turkey for two decades now, and our local team has been running the operations for years.

Interview with Louis Camilleri Chairman and CEO, Philip Morris International


PwC: If one can talk about a “global talent pool,” are there any places where you’ve been really surprised by the level of local talent?

LC: The good thing is that the talent is out there. Education levels are generally very high in a lot of emerging markets. But there’s a big leap to make in meeting the standards of a multinational company with its governance requirements, its compliance and integrity requirements, and its regulatory standards. I think there is a high level of education, there’s a lot of enthusiasm, but there’s a pretty steep learning curve, as well. It’s just a process, and it will take some time in some markets. But as I said, the big two pieces of the puzzle – talent and education – are solid.

PwC: Just pursuing this a little more, how much latitude would PMI’s country affiliates have in fostering their own corporate culture and strategic initiatives?

LC: There are a number of things that have to be centralised, especially when you have global brands. But when it comes to execution, clearly there has been a shift to decentralisation, both in terms of authority and responsibility. And it’s not just down to the market level. It’s down to the sales force and, ultimately, the individual who faces the consumer. I think that’s an inexorable trend. It’s going to happen and will continue to happen, I think, across most consumer products companies. The world moves at a much faster pace every year, and you can’t have corporate headquarters thousands of miles away dictating everything – it’s just too slow. You’ve got to be nimble. The key is finding that appropriate balance between centralised controls versus local execution.

PwC: Do you think of PMI as a company of a particular country? Why or why not?

LC: No. I think the word “multinational” sort of describes it, as opposed to “international.” Companies initially were viewed as home country companies, and then they became international, and now finally multinational.

We view ourselves as a multinational company with a clear global culture that is a very important contributor to each economy in which we participate. Our Indonesian affiliate is first and foremost an Indonesian company that happens to be part of a multinational company. PMFTC in The Philippines is the same thing. It’s the same case in Argentina and so on. I think IBM employs more people in France than any other technology company. Look at the amount of people Toyota employs in the U.S. Is Toyota really Japanese? So I think it’s a mistake to look at companies solely as “belonging” to one country. We’ve gone way beyond that.

There is this misnomer that people look at the country of incorporation as the nationality of the company. Just look at us; our home country of incorporation is the U.S. We have zero business in the U.S. We’re the first ever S&P 500 entity that has absolutely no business in the U.S. And therefore I think we stand as a very interesting example of what a multinational really is.

PwC: If you had to describe your biggest strategic opportunity right now, what would that be?

LC: The biggest opportunity and paradigm shift is the advent of low-risk products specific to our industry. I should add that in this regard, it’s very likely that our competitors will not be those whom we genuinely see as our current competitors.



PwC: The barrier to entry for researching and producing low-risk cigarettes would not be too high for new competitors?

LC: I’ll give you a simple example. There are nicotine-replacement therapies today. Patches, inhalers, you name it. Is that a competitor, or isn’t it? Effectively, it is. The makers of these products – essentially pharmaceutical companies – can be considered our competitors. You can imagine that they, too, are looking at developing low-risk cigarettes or the like. Not to mention that, like in all cases, there could be somebody working in a garage somewhere that’s going to come up with The Product.

You can also think of it this way: I don’t think Sony ever viewed Apple as a potential competitor. And suddenly, BOOM! For that matter, Nokia probably didn’t view Apple as a competitor, either. So when it comes to how to view competition, the world is shifting and it’s shifting fast. One must take a much broader view than just looking at one’s classical competitors. As the world gets smaller, that competitive profile tends to shift.

PwC: Last year, a majority of CEOs told us they plan to increase innovation spending despite the economic conditions. What is PMI’s approach to innovation?

LC: In times of uncertainty and recession, all consumer products companies basically face two fundamental issues. One trend is trading down to cheaper products. The other is consumer fragmentation. In terms of fighting these trends, the answer is innovation. So we’re doing quite a lot of product innovation. But I think it’s a mistake to restrict innovation to product innovation. We have the ambition to innovate across everything we do, to become more effective and to enhance

our execution abilities and to get better at speed to market. Innovation goes way beyond just the products. It’s the way you market the product, the way you sell the product, the whole aspect of consumer engagement.

For example, innovation extends to consumer engagement. Traditional media is slowly but surely losing its relevance. So you must innovate your ability to communicate with your consumers, and engage them in a manner that will generate loyalty. For better or for worse, our industry is at the avant garde of that, because of the strict restrictions in how we market our products.

PwC: This is more of a public policy question. What one thing should be done to stabilise the financial sector and minimise the risk of another recession?

LC: My own sense is that you need predictability and certainty. Regretfully, we don’t have that. In fact, I think some of the emerging markets currently have more predictability than the West. If you think about it, a lot of emerging markets have actually been through this cycle a few times. Go back to 1998. Eastern Europe, Asia, and Latin America got clobbered. They learned from that painful lesson, and I think they came out stronger in this crisis because of what they learned the last time.

Conversely, there’s just too much uncertainty and too much confusing communication coming out of Western governments. When you have difficulty predicting the future, you clearly become somewhat risk-averse. So, I think if there was more predictability on tax, regulation, and currency, I think that would be an improvement. There’s just too much volatility and too many imbalances that, frankly, haven’t been addressed.



PwC: Can you be a little more specific?

LC: Take our industry, for example. Battered from the recession and trying to reign in deficits, governments increase excise taxes, sometimes in a rather irrational manner. In so doing, not only do they not meet their revenue objectives, but they also trigger a surge in contraband and counterfeit products, which makes the matter ten times worse. In our industry, illicit trade has become a scourge, in both the developed and emerging markets alike. When this illegal market develops, it’s very hard to curtail. This is just one of the unintended consequences I’m talking about. There are always unintended consequences to even the most well-thought-through action. But, I think, our leaders too often ignore them, to their peril.

PwC: One of the themes of the survey this year is public/private partnerships. How might the private sector do more to contribute to social well-being in areas that were once considered the government’s responsibility?

LC: The private sector’s major contribution is through investment, employment and all the accompanying benefits. But if the private sector takes over the role of government, I think that’s pushing things a bit too far. I think, rather, it should be the other way around, where the government shouldn’t be intruding on things that should be the realm of the private sector.

The concern I have is that governments are getting more and more involved, either directly or through regulation, in the private sector. And they’re doing

that in a manner that inhibits the private sector’s contribution to the economy. Having said that, the private sector can contribute to the communities in which it operates, and most of them do. And that always makes sense. But I don’t think the private sector can step in the shoes of a government. More importantly, the government should not step in the shoes of the private sector.

PwC: Is there a difference in how emerging market governments and developed governments are approaching regulation of the tobacco industry, specifically in their efforts to mandate generic packaging for all cigarettes?

LC: No. Basically it’s driven by the WHO and the Framework Convention on Tobacco Control. There’s no evidence to suggest that generic packaging will do anything to affect actual consumption of cigarettes. The reason we’re combating this idea very strongly is that these measures penalise the legitimate tobacco industry in the absence of any public health benefit . And the huge unintended consequence is a surge in contraband and counterfeit. Taking away your ability to provide brand equity essentially commoditises an entire industry, which inevitably leads to lower prices. The supply/demand equation is pretty clear when prices drop.

PwC: Have any other industries come to tobacco companies’ defence in this issue?

LC: It is a concern to a lot of other companies and a lot of other industries because you’re going down a slippery road. If it’s tobacco today, what will it be tomorrow?



PwC: Governance is an area of interest for you. What is the most interesting corporate governance issue out there right now?

LC: Too much regulation that doesn’t genuinely address the relevant issue. There have been rulebooks out there for quite some time, and people find ways to get around them. The concern I have is that more and more time is spent on ticking off the box on all these government regulations and rules, while that time would be much more wisely spent on creating value within a company and value to shareholders. As I said, the world’s getting smaller. You need focus and you need speed. And anything that inhibits that is generally not a good thing.

PwC: Do you have any take on the stress of the job? Not yours in particular, but in the CEO role?

LC: Society generally tends to look at CEOs with an overriding focus on compensation. Compensation is 95 percent of the discussion. Society just doesn’t really give much weight to the permanent pressures that jobs of this nature entail, and the sacrifices that go along with it. But I think anyone in this kind of position has to find the appropriate balance.

People look at hierarchies as a pyramid, with the CEOs on top. Actually, quite often it’s the other way around. The CEO is at the bottom of an inverted pyramid. Hence the pressures. All in all, the vilification of CEOs or companies in any industry is not a good thing. As imperfect as companies may be, nobody else has created an entity that generates as much employment and wealth.








Marcelo Odebrecht CEO, Odebrecht



MO: We are watching indicators like commodities and GDP growth Asia, Latin America and Africa. Any growth or weakeness in the developing world has a much larger impact in the economic activity wordwide, since it diretly means more volume of products and services, than in the developed world.. We are also watching closely the exchange rates, and the relatively devaluation of the US Dollar.


MO: We are quite optimistic about what lies ahead of us. We do believe that most of the countries in Latin America, Africa and Asia will continue to grow steadily for the next feel years. Specially those that has done their internal homework and or has plenty of natural resources. The US for their part, has always proved to be able to reinvented themselves, and they do have the flexibility and pragmatism to keep doing that. My doubts are with regard to Europe, and their capability and even their willingness no change and do what has to be done, for returning to the growth path.

With regard to the risks, the main one is a downturn in de China economy, what I do not expect, what will have a major impact in the volumes and prices of products and services wordwide. The order risk is that the Developed world tried to hold to their status, not allowing more influence and participation of the developing countries in politics, trade and the overall economy.

PwC: In what areas has your strategy been most resilient through the economic crisis, and what strategic changes have you had to make?

MO: Anchored originally in construction and petrochemical business, the group’s strategy has proven to be successful in diversifying and increasing the investments in logistics, urban mobility, road concessions, , ports, airports, oil and gas, sanitation, real estate, sugar, renewable energy (mainy hydro and sugar cane etanol) and sustainable products such the green polyethylene we have started producing this year in commercial scale. Odebrecht has either consolidated its business by acquiring or merging with important players or has been able to spin off the business from its holding company to give each new business even more focus and flexibility and to which helped including to attract strategic partners and new capital for the investments thghoutout the Organization, that will amount over US$ 30 between 2010 and 2013.


MO: The biggest strategic opportunity today is to develop the several businesses which have been spun off from the holding company, have received investments from third parties, and are now in their growing process, with interesting forecasts ahead.

As the group has diligently prepared itself to reach the current and forthcoming levels of operations, risks have been cautiously measured in order to provide enough confidence for now and the next steps ahead. Preparing the

Interview with Marcelo Odebrecht CEO, Odebrecht



right people to lead these businesses has been an important measure as well. Said that with the large growth that we have been facing to identify and integrate the right people has been our major concern. In 2010 alone we have to hire more than 30k new people, totalling now 120k worldwide

PwC: How are you changing your approach to raising capital, in terms of the sources of capital that are most attractive today [e.g., countries/markets, sources such as banks v. capital markets, or capital structure]?

MO: Our group has been adequately mixing debt and equity capital, domestic and international markets, private investors and public transactions, and has reinforced sources of capital which count on flows of receivables as their main way out for repayment – i.e., mostly non-recourse project finance as opposed to corporate guarantees. This strategy not only reinforces the company’s main credit ratings, but also contributes to our investment choices, as financial and strategic partners will conduct their own due diligence of the prospective businesses and, once they volunteer to join us in such ventures, they end up by validating our own choices of investment.


MO: For projects within Brazil, BNDES [Brazilian Development Bank] has become a major source and perhaps one of the only existing possibilities for long-term affordable funding. No entanto, a alta demanda de investimentos no Brasil irá requerer capacidade de acesso a fontes alternativas de financiamento de longo prazo, em complemento às fontes de

origem pública. O Governo Brasileiro recentemente determinou uma série de incentivos para atrair capital privado nacional e internacional para o financiamento de longo prazo. A eficácia dessas medidas, ainda a ser comprovada, será relevante para o sucesso da implementação do nosso plano de investimento no Brasil. Outras medidas ainda precisam ser avaliadas, como a disponibilidade de proteção cambial de longo prazo, para permitir que as empresas do nosso grupo que têm operações eminentemente em moeda local possam acessar fontes de capital internacional em moeda estrangeira, sem colocar em risco a saúde financeira.. Aside from Brazil, our presence in other countries has provided us with active capital markets and willingness from investors to come up with adequate funding for both debt and equity, in size and under conditions which have satisfied our general needs.


MO: Na nossa cultura empresarial, denominamos “Pequena Empresa” a unidade em que desenvolvemos nossa atividade empresarial, como um contrato de prestação de serviço, uma planta industrial, uma concessionária de serviço público, ou um pólo agro-industrial. Cada Pequena Empresa é liderada por um integrante com plena aderência a nossa cultura e com plena capacidade empreendedora – a quem denominamos “Empresário-Parceiro”.

Uma parte central da nossa estratégia de mitigação de riscos e de sucesso no empreendedorismo em um ambiente de alta volatilidade é assegurar que as decisões sejam tomadas sempre no nível da Pequena Empresa pelo seu respectivo Empresário-Parceiro. É este quem




sempre terá as melhores condições para avaliar os desafios e oportunidades que emergem das relações com Clientes, Fornecedores, Sociedade e Parceiros, bem como assegurar a agilidade necessária para tomar a decisão certa e no tempo, assim como a flexibilidade para definir quaisquer ajustes de rumo que a ambiente volátil possa sugerir.

PwC: How might the private sector do more to contribute to social well-being in areas that were once considered the government’s responsibility [e.g., reducing poverty or addressing climate change]?

MO: Cada vez mais a classe empresarial tem percebido que responsabilidade social passa a ser uma condição necessária para o crescimento e perpetuidade do negócio. Nenhuma grande Organização pode ou deve ignorar isto.

Sem dúvida, a principal responsabilidade de qualquer empresário é gerar riquezas maiores e melhores para seus clientes, integrantes, acionistas e comunidade de atuação, oferecendo produtos e serviços sustentáveis do ponto de vista social, econômico e ambiental.

No entanto, nossa Organização, assim como outras, tem ido muito além: temos investido enormes somas e energia na formação de pessoas para o trabalho, apoiado a preservação das culturas locais onde atuamos, e investindo em programas junto às comunidades no sentido de garantir seu auto-desenvolvimento de modo sustentável.

Um exemplo dessa atuação da Odebrecht é o programa de formação de mão-de-obra “Acreditar”, cujo objetivo é capacitar integrantes das comunidades em torno dos projetos que estamos

implantando para atuação em grandes obras de engenharia. Esse programa assegura que as comunidades locais tenham uma oportunidade de crescimento profissional e de renda, e ao mesmo tempo evita fluxos migratórios desordenados, que historicamente trouxeram impactos negativos na sustentabilidade dessas regiões.

Em todo o Brasil, no ano de 2010 treinamos 35.000 trabalhadores, dos quais 15.000 foram contratados para atuar em nossas obras. No ano de 2009, as empresas da Organização Odebrecht investiram R$ 84,5 milhões em 417 programas sociais, sendo 262 no Brasil e 155 em outros países. Estes programas ocorreram em 688 comunidades, beneficiando diretamente 446.879 pessoas. Foram mobilizadas, para operacionalização dos programas, 430 organizações parceiras.

PwC: How also should the private sector contribute to national competitiveness, in areas that were once considered the government’s responsibility [such as building infrastructure and contributing to the skill base in the workforce]?

MO: Entendemos que o setor privado pode contribuir com agilidade na tomada de decisão, eficiência na implantação e operação, e apetite para alocação de capital em ativos de infra-estrutura. Essa atuação privada proporciona uma melhor prestação de serviços públicos, o aumento de competitividade das economias e contribui com melhores indicadores sócio-ambientais. Através das parcerias público-privadas, o setor privado também pode viabilizar determinados investimentos com equações criativas de alocação ótima de riscos e responsabilidades.Com isto o governo pode concentrar seus recursos e energia




em investimentos em áreas sociais críticas como educação básica e saúde, na melhor capacitação e remuneração de todo o funcionalismo público, e nas áreas típicas de Estado como segurança, defesa e agencias reguladoras.

Odebrecht, through construction and concession management, has engaged in several areas which have been predominantly under the government’s responsibility, such as toll road concessions, ports, sports arenas, urban transportation (underground, urban trains and the like), water and sewage treatment, among others. We see this initiative as part of the private sector’s contribution to taking on more responsibility, in line with the government’s strategy, but adding to it whenever this proves to be an interesting approach from an entrepreneurial viewpoint.

Examples of our participation in infrastructure sectors can be seen in projects like IIRSA’s in Peru (multi-modal roads, integrating countries in Latin America), Santo Antônio Hydroelectric Power Plant (largest of its kind under construction, showing the lowest ratio between the reservoir area and the total energy generation in its peer group in Brazil) and Rio de Janeiro Metropolitan Area Urban Train.

PwC: In what ways have you been affected by the government becoming more active in the private sector, for example, as an owner or investor, other than regulation?

MO: We have seen an adequate sharing of roles whenever Public-Private Partnerships (PPPs) are applicable. The government commits a certain amount of periodic resources which will allow the private sector to be interested in combining efforts in a certain project.

In turn, the private sector is encouraged to develop other business in the surroundings of that project in order to generate additional revenues, which will be split with the government all through the time of the operation of the main asset – be it a road, a port, a sports arena or other businesses. This combination of roles is seen as an interesting opportunity for the government to develop the adequate infrastructure in sectors where it would otherwise be unable to do so, due to lack of funding. Likewise, it allows the private sector to play a long-term role in such projects, with the possibility of creating a steady flow of receivables after the completion of each project is assured.

PwC: What is the one thing that governments can do to improve the environment in which you operate, other than reduce the overall burden of regulation?

MO: Create specific incentives for investors to drive their money towards the financing of long-term projects, at attractive costs to entrepreneurs, through mechanisms like project bonds, which hold a specific characteristic of getting their payment back from the flow of receivables, rather than relying on corporate guarantees for their repayment.

PwC: In what ways do rising levels of government debt, either n your home country or in your key markets concern you?

MO: As long as there is fiscal responsibility in terms of the debt management, not much burden in the short-term and taking for granted that the increase in debt is mostly due to investments in basic sectors of the economy (infrastructure, education, sanitation, security, bioenergy,




alternative energy, real estate and similar segments), there is little concern about the impacts of the growth in the Brazilian government debt – especially because our country has been practising good financial discipline long before the 2008 crisis. As for the rising level of debt elsewhere in the world, we are concerned about how the US and the EU will manage their current problems, but believe that many experts are holding responsibility for this challenge and, hopefully, it will cause no more impact hereafter. In the other countries where our group has a presence, it looks as if there are sound policies in place and good perspectives ahead. Nós acreditamos e incentivamos que Governos e Empresas devem seguir como regra investir com eficiência para criação de riquezas para as próximas gerações, gerando renda inclusive para servir eventual dívida contraída, em oposição a um modelo insustentável de se gastar no presente, acumulando-se dívida, sem gerar riqueza equivalente, e deixando para futuras gerações a responsabilidade de saneamento financeiro.








Marcos Marcelo Mindlin, Chairman, Pampa Energía S.A.



MM: On an international level, the two main indicators we follow are trends in interest rates and economic growth in the principal developing countries that consume Argentine commodities – countries like China, India, and Brazil. Right now, both indicators reflect the economic downturn that began in 2008. One of the legacies of that downturn, we believe, will be a long period of low interest rates, worldwide. A world with low interest rates creates an appetite for investing in emerging markets. That is clearly to our benefit.

PwC: What are your projections beyond 2011 and what related risks do you see?

MM: My basic premise is that the world is emerging from the downturn. However, this does not mean that all problems have been resolved and that the global economy will soon start growing again vigorously. The world may have weathered this crisis but many developed countries have been left with significant debt burdens. In these countries, the combination of considerable public debt and weak national economies leads me to expect very low interest rates and high levels of liquidity will continue across the US and Europe. How can countries that have high levels of public debt and tax deficits raise interest rates? That’s next to impossible. The American private sector fell into debt as a result of subprime mortgages, which were made widely available to the public. And although it’s not the end of the world, many American families still carry large debt loads. Under these conditions, the combination of low interest rates and high liquidity seems to be good corrective measure.

PwC: What is the situation now with respect to Latin American countries?

MM: A world of low interest rates and high liquidity is ideal for countries in Latin America because these conditions help us access the capital markets. Today, the prices of Argentine commodities are competitive and on an upward trend. Unless there is a significant slowdown in the Chinese or Indian economies, the demand for Argentine commodities will continue to grow. For us, cheap access to credit is highly beneficial. And China seems to keep growing and able to absorb all the raw materials we produce.

PwC: Are foreign investors interested in Argentina?

MM: Definitely. Investors are especially interested in industry sectors that can thrive in the current economic climate. There are a lot of investors looking at Argentine real estate, for example.

PwC: To what extent did the economic downturn affect your industry?

MM: The downturn has not had a great impact on our industry. Generally speaking, the energy sector is not particularly sensitive to economic recessions. Only during a deep recession does demand for electricity fall. And even under extreme conditions, the reduction in demand is minimal. Consequently, the downturn has not had an impact on our sales volume.

PwC: Has the global economic contraction caused you to modify your strategic thinking?

MM: Despite the panic that occurred in the wake of the downturn, we found ourselves to be very well positioned. So, we took the opportunity to purchase, at a discount, a substantial percent of our subsidiaries’ debt – around US$ 370

Interview with Marcos Marcelo Mindlin Chairman, Pampa Energía S.A.



million in all. That represents about 30-40 percent of the total debt of our various subsidiaries: Electricidad Argentina, Edenor, Transener, Central Térmica Güemes, and Central Térmica Loma de la Lata. Our debt purchase was possible because we had plenty of liquidity when the crisis erupted – we were prepared. The key to our business strategy is to always have liquidity to take advantage of opportunities as they arise. A crisis like the current one does not occur frequently. But we were able to move quickly to take advantage of the situation because we had high liquidity levels and a financially solid business.

PwC: In your view, where do the most significant strategic opportunities for your company lie?

MM: Our main strategic opportunities fall into two categories. In the electricity generation category, the Argentine government has implemented a programme called, Energía Plus, whereby energy companies that invest in new power generation infrastructure are allowed to sell electricity directly to private sector companies at market prices. Pampa Energía represents 10 percent of Argentina’s installed electricital capacity; however, we generate 45 percent of the electricity sold under the Energía Plus programme. We achieved that marketshare by adding 178 MW of capacity at our Loma de la Lata plant. This is a very important strategic opportunity for us. Our other opportunity lies in natural gas, a business that Pampa Energía has only recently entered. We were prompted to do so because our Loma de la Lata plant annually consumes approximately 2.5 percent of all the natural gas produced in Argentina. So, our initial idea was to have an equity interest in the natural gas supplies we require for our own operations. But, we also expect to eventually become a major player in the country’s Gas Plus programme, which is modelled along the lines of Energía Plus.

PwC: So, these “Plus” programmes operate without any pricing regulation?

MM: Yes. The aim is to establish a market in which private power companies can trade freely according to fluctuating supply and demand. To give you an idea, under the Energía Plus rate, our electricity pricing is around US$ 65 per MW/hour versus the regulated price of US$ 30 per MW/hour. Similarly, prices under the Gas Plus contracts are typically priced between US$ 4 -5 per million BTU (British thermal units), while regulated gas is priced between US$ 2 - 2.5 per million BTU. With these programmes, the Government is trying to encourage investment in electricity generation plants and gas fields.

PwC: How does innovation factor into your long-term plans?

MM: Innovation is very important to us and we regularly invest in state-of-the-art technology. For example, two years ago, under the Energía Plus programme, we installed an aero-derivative gas turbine in our plant in the Province of Salta. There are only fifteen turbines of this type in the world; it incorporates the very latest advances in turbine technology. We also used the most efficient technology available when expanding our Loma de la Lata plant. That plant now generates 178 MW more electricity while consuming the same amount of fuel as it did previously. We’re registering this project with the United Nations in order to obtain carbon credits under the Kyoto Protocol agreements. Our Loma de la Lata upgrade was the largest Argentine project and one of the three largest Latin American projects to qualify for Kyoto carbon credits. We estimate that once the upgrade is completed, we will be able to reduce carbon emissions from our Loma de la Lata plant by approximately 600,000 tons per year – which equates to about US$ 10 million in annual carbon credits.

Marcos Marcelo Mindlin Chairman, Pampa Energía S.A.



PwC: What is your strategy with regards to sourcing supplies for your operations?

MM: Our suppliers are located in many different countries. We don’t choose them based on their location. Rather, we choose them based on our technology needs. The aero-derivative gas turbine I just mentioned was purchased from General Electric. Our Loma de la Lata plant has a turbine manufactured by Siemens. In general, the large transformers in our plants are supplied by Edenor. We bid out our equipment needs and award projects to suppliers that offer us the best technology at the most reasonable price.

PwC: Do you keep an eye on energy markets in other countries?

MM: Yes, we analyse them to learn about other regulatory frameworks and compare them with Argentine regulations. However, we are not planning any expansion outside Argentina.

PwC: In your view, have the actions taken by governments in response to the financial contraction been useful?

MM: The most significant action that governments took to stem the crisis was to recapitalise banks and thereby rebuild confidence. Of course, the downside to that was a rise in public debt. Now, I am quite sceptical regarding the capacity of governments to prevent another crisis of this magnitude in the future. I believe a crisis like the one we just experienced is likely to occur every 30 or 40 years, whenever levels of public indebtedness reach a breaking point. With regards to the present downturn, the economic situation in Argentina is different than

in the US or Europe. Argentina had already gone through its own financial crisis in 2001 and so economic inefficiencies had already been squeezed out of its system. Also, Argentina has never had a very large financial sector and its government debt-to-GDP ratio is small compared with the world’s major economies. Indebtedness across the Argentine private sector is also very low. As a result, our country did not feel the shock waves generated by the global economic contraction.

PwC: Is the way your company raises capital changing?

MM: No. We have the same strategy as always with regard to accessing the capital markets and obtaining financing. We have built and fostered good relationships with local and international capital markets. Pampa Energía’s corporate governance is the equal of the world’s best-run companies and that gives our lenders confidence. Similarly, we have a conservative indebtedness policy. That provides our bondholders with peace of mind. In October, with the help of international banks and investors, we floated a new bond issue bearing a 12-year maturity. And we did fine. The bond placement raised the equivalent of US$ 230 million dollars. We used those funds to improve our liquidity levels, which had dropped following the purchase of our debt. The overseas equity market is one source of financing that we have not yet tapped, but we would eventually like to. It’s been more than a year since we took steps to comply with the accounting and governance standards for listing on the New York Stock Exchange. While we haven’t had a share offering yet on that exchange, we’ll be ready when the time is right. When we see an appetite for Argentine assets, we will seize the opportunity.




PwC: Is your conservative financial strategy shared by other Argentine companies?

MM: It is, although I don’t know if there is another company that purchased as large amount of its own debt as Pampa Energía did. Having gone through its own crisis a decade ago, the Argentine business community is generally conservative when it comes to debt.

PwC: Is there an appetite today for Argentine assets?

MM: In general, there has been a greater appetite for Brazilian, Peruvian and Colombian assets than for Argentine assets. However, we’ve seen increasing interest in Argentina in the past few months. If we compare the price of Argentine assets with Brazilian assets, ours are much less expensive. When we talk to investors who are familiar with both countries, they say that most Brazilian assets are already valued at market prices – so there are few attractive deals left there. Whereas Argentine assets are still relatively inexpensive.

PwC: In your view, can the private sector contribute to the larger society?

MM: Yes. Pampa Energía, for example, is involved in a range of projects that benefit local communities. Let me mention one: The “Power Bar” project, which provides support for school workshops that teach children how to grow high-protein food, most of which is contributed to charitable organisations. The programme not only teaches children about agriculture and nutrition, but it also instils values related to teamwork and entrepreneurial spirit in that 30 percent of the food grown is sold for profit. Over 130 schools in the provinces of Buenos Aires, Salta, Mendoza, Neuquén, Bahía Blanca and

Santa Fe take part in this project; and more than 4,500 children have participated in it. We’ve also undertaken another initiative in cooperation with the technology institution, ITBA – one the finest universities in Argentina. With support from Pampa Energía, the university re-started an electrical engineering programme that had been previously dropped from the curriculum. Not only do we fund the programme, but we also offer full programme scholarships to ITBA students whose parents work for Pampa Energía. This is our way of helping to train more local electrical engineers, which Argentina badly needs. We take great pleasure and pride in sponsoring this programme. However, notwithstanding our many ongoing community projects, we believe that our major contribution to society is in providing people with reliable sources of energy while running our business in a sustainable and environmentally conscious way.

PwC: How competitive are Argentine companies?

MM: It’s difficult for me to say. I can tell you that Pampa Energía is one of the most efficient companies in the Latin American energy sector. Our pricing is about 80 percent less than in neighbouring countries like Brazil, Uruguay and Chile. And that’s after having met a 50 percent growth in demand over the last eight years

PwC: What action can the Argentine government take to improve national competitiveness?

MM: Considering the problems of countries like Greece, Portugal, Spain, and Ireland – where national indebtedness levels might be 100 percent of their GDP – the fact that the Argentine government has a debt reduction policy is very positive.




Argentina’s public debt is about 30 percent of the country’s GDP. Because it maintains relatively low levels of debt, the government isn’t crowding the Argentine private sector out of the debt markets.

PwC: What sort of regulatory framework does your company operate within?

MM: In Argentina, the private sector has a major role in the generation, transport and distribution of electricity. Five years ago, Pampa Energía entered into an agreement with the government that will eventually result in the normalisation of our rates relative to market pricing. That’s the path we’re on and it goes without saying that, as a private sector company, I would like to move down that path faster. But, we are making progress.

PwC: What sorts of non-financial value is important to Pampa Energía?

MM: We value the fact that the world outside Argentina now recognises Pampa Energía as a credible player. This recognition is reflected in our successful bond flotation and in having met the listing requirements for the New York Stock Exchange. We also place great value on the fact that the people who work for Pampa Energía find satisfaction in their jobs. We were recently ranked 17th on a widely-respected survey of the best places to work in Argentina. We make every effort to link these two values: to be a credible player in the global business community; and to create a work environment where our people can feel fulfilled.








Nicholas Moore CEO, Macquarie Group Limited


PwC: Can you describe for us the operations of the Macquarie Group?

NM: The Macquarie Group comprises six different business units, and the way we run Macquarie is very much driven by those businesses. In each of the units, we try to get decision-making as close to the client as possible. Of our six businesses, three generate revenue on more of an annuity stream basis. One is a funds management business with over $300 billion of funds under management. That makes Macquarie Australia’s largest fund manager and a top-40 fund manager, globally. Our second annuity-type business is our corporate asset and finance operation, which lends money to corporate customers around the world. Among other activities, that business engages in a lot of leasing activity. We have, for example, over 130 aircraft leased to airlines around the world, as well as portfolio of other leased assets including motor vehicles, telecommunications components, and electronic manufacturing equipment. Our third annuity-type business is a banking operation that specialises in servicing Australia firms as well as servicing retail clients through activities such as financial advice and stockbroking. We also have a mortgage business that relies on securitisation and a deposit-taking function that supports not just that area’s customers, but the broader Macquarie Group as well.

Now, we also have three other businesses where the activity levels move in tandem with the broader marketplace. So, for example, we have a securities business, which, by the way, is ranked number nine in the world in terms of the amount of research we produce. About 2,400 stocks are covered every day by our analysts. Our securities business is the largest stockbroker in Australia, among the top five in Asia, and is also growing in Europe and in North America. We also have a fixed

income currencies and commodities business – 75 percent of which is located outside of Australia – that has a range of specialties, but is particularly strong in the metals and mining and energy sectors. Our final business – which, again, is more market-dependent, is an advisory business called Macquarie Capital. That business has a strong global franchise in terms of advising companies on infrastructure; and a well respected position in the TMET [Telecommunications Media Entertainment & Technology] and real estate sectors. So those are our six businesses. Over the years, all of them have been growing in terms of the coverage they provide clients and in the number of staff they employ.

PwC: How do you see the global economy fairing in 2011?

NM: We think that the emerging market story is very much intact and that China’s growth is strong. Indeed, governments in the emerging markets may lean on the brakes a bit in order to ensure that their national economies don’t over-heat. But, at this stage, we don’t see anything that’s likely to trigger a major step back in those markets. The major focus, obviously, is the health of the US economy. Frankly, we’re surprised that the recovery underway there is as weak as it is. If you look at historical precedent, you’d expect US growth to be a lot stronger. So one of the key indicators we’ll be looking at this year is US growth and, in particular, US employment growth. If US employment begins growing in 2011, that will trigger a series of positive economic outcomes around the world. From an investor and a corporate viewpoint, we’ll start to see confidence returning and more activity flow. We’ll see more allocations in terms of the equity markets, and everyone will start to feel like the world is getting back to a more normal condition. In Europe, the story is Germany. We think the

Interview with Nicholas Moore CEO, Macquarie Group Limited



German economy will continue to be strong in 2011. In terms of the economic fears that are emanating from some of the smaller European economies, we think that nervousness will be offset by the continued success of Germany and the other strong European economies.

PwC: You appear positive about the Asian economies. Can you comment further?

NM: As a result of the export surplus and the savings rate, there is no shortage of capital in Asia. Everybody understands the amount of capital that’s being built up there. If anything, what we’re seeing from Asian governments now are moves to cool down their economies. So the key point about Asia is that there is no real need for capital to come into that market. Rather, the emphasis is on what sorts of technology enhancements are needed there. How can Asian labour work smarter and more efficiently? How can Asian operations deliver added value to a global marketplace that is already well served? I think that’s what the CEOs of the world are thinking about. Being in Asia for its own sake is entirely pointless – and a great way to destroy value.

PwC: What elements of your strategy helped Macquarie weather the global economic downturn?

NM: Going into the crisis we had a very strong balance sheet. Historically, Macquarie has always positioned its balance sheet on the assumption that we’re going to have a worst-case scenario tomorrow. So we’re always looking at our books, looking at our balance sheet, and running scenarios assuming that something terrible will happen. Because of that, we were well prepared for the crisis when it hit. We lost money during the crisis, as did everyone. But our losses were such that we could actually absorb them and

remain profitable. In fact, we saw the crisis as an opportunity to wade deeper into some markets as competitors stepped away. As a result, we were able to grow our businesses. In the past 12 months alone, we increased our staff by 3,000 – half through acquisitions and half through organic growth. A big area of growth for us was in North America. We saw a number of rare opportunities arise in the funds management area, the securities area, and the energy trading area. At the same time, we were organically growing a whole range of our businesses in North America, the Asia-Pacific region, and in Europe.

PwC: Can you describe what is sometimes referred to as the “Macquarie model” of doing business?

NM: The Macquarie model is about maintaining a medium- to long-term focus, discovering gaps in the marketplace, and filling those gaps with innovative products and services. We try to look at the marketplace not through the lens of the head office, but from the perspective of our people on the ground. They’re the ones who are close to the action and can see first-hand what sorts of value can be added to the market. And they’re the ones who have the skills to develop specialisations that will satisfy new market needs. Now, that’s an approach that’s continued right through the economic downturn and it’s given us the opportunity to add steadily to our marketplace offerings. So, for example, in the securities business, we’ve become more useful to clients by steadily increasing the volume of high quality research that we offer them. Likewise, we’ve been able to make it easier for our clients to access the securities market by providing them with electronic trading platforms. We’ve also been able to extend access to a whole range of derivative products and fixed income




instruments. So, as far as the Macquarie model is concerned, it continues to be driven not so much by a single industry focus or a single product focus, but by a culture of always trying to find something that the market is missing and providing that on a medium- to long-term basis. I emphasise medium- to long-term because financial markets change all the time. If you’re trying to chase last year’s product, you will inevitably be disappointed. It takes three or four years before you can actually deliver something worthwhile to a client – so you have to take the medium-term view. But at the same time, you must remain flexible enough to switch gears if the needs of the marketplace change.

PwC: Is it difficult to maintain that spirit of entrepreneurialism as the Macquarie Group expands?

NM: The people who join our firm – whether they’re American, European, or Asian – do so because they like the idea of having virtual ownership of a business area and the ability to operate like a small business – albeit with the support of a larger business. That way of working is very attractive to some people. Now, it’s not attractive to all people. But we’re not an organisation that feels the need to be attractive to all people. We want to attract people who have a real entrepreneurial orientation, whose reference point is profitability rather than just revenue or ranking in the league tables.

PwC: What does that approach imply in terms of remuneration?

NM: Our remuneration approach has always been focused on profitability and, indeed, we’ve always made the point that we don’t have a bonus structure – we have a profit share system. So both from the perspective of the organisation and the individual, what everybody is focused on is profits. That’s the fundamental thinking in

terms of how we remunerate ourselves and reward our shareholders. Secondly, remuneration at Macquarie takes into account a combination of short- and long-term results. The more senior executives accumulate, the more their remuneration is geared towards the long term. Finally, remuneration is awarded through employee share ownership in the organisation to ensure that our people are not taking risks that may provide short-term gain at a long-term cost.

PwC: In your view, where do the most significant strategic opportunities for your company lie in 2011 and beyond?

NM: Many corporations and investors had their confidence shaken badly by the downturn. Now, it will take time for healing to occur and confidence to return. But we’re hopeful that that confidence will be coming back in 2011.

We expect to see it in the corporate sector where we anticipate record profitability across many countries and industries. And that profitability will be combined with very strong balance sheets because, over the past few years, many organisations have taken the opportunity to recapitalise. As a result, they now have access to substantial cash and debt facilities – along with very low borrowing costs. So we expect to see the corporate sector stepping up in 2011 and making investments for the medium and the long term and that should have quite a positive impact in terms of the rest of the economy. We think that investors, pension funds, superannuation funds, and insurance companies will become more confident and start shifting some of their money that’s currently in defensive asset categories such as cash and fixed income and begin allocating those funds to listed and unlisted equity. And, finally, we hope that the retail investors – who were badly impacted by




the downturn, but have recently seen their investments recover somewhat – will once again become active participants in the financial markets. So our expectation is that we’ll see confidence return in 2011.

PwC: Do you see any lingering problems on the horizon?

NM: European debt is an issue. Nevertheless, there is a great strength in the European economy – a fact that is too often overlooked by commentators. The largest European economy by some margin is Germany; and the smallest is Ireland. I think juxtaposing where economic strength lies and where economic concern lies, puts the question of European debt in greater perspective. One area that we have some concerns about involves a radical re-pricing of the bond market, an event which would result in substantial losses to the fixed income sector. At the moment, the fixed income market is about $94 trillion. It’s by far the largest market in the world and rates have obviously climbed substantially in recent times. It’s probably an exaggeration to call it a bubble, but certainly, bond rates are well ahead of the mean for interest rates. So, what we’re seeing at the moment is a gradual unwinding of the bond market. Now, that’s fine. What we’re nervous about, obviously, is if the bond market unwinds too quickly because when markets quickly unwind it’s usually called a “crisis” – and we wouldn’t like to see that. That’s a small possibility. But it’s a possibility that we’re watching. Another area we’re watching is emerging markets. The fear there is that asset prices are being artificially pushed up by the volume of capital flowing into those markets. So, we’re looking at asset prices in the emerging markets with a degree of nervousness and hoping that

when growth restarts in the US, we’ll see interest rates move up to normal levels. And that should help relieve asset price pressure in emerging markets.

PwC: What future role do you see for the private sector in terms of building public infrastructure?

NM: Right now, particularly as a result of falling tax revenues and increasing welfare and health and education expenditure, governments in many developed countries suffer from fiscal deficits. At times like this, we’ve historically seen governments look to the private sector to provide capital for the provision of necessary infrastructure. This can occur through the privatisation processes or through “greenfield” investment by the private sector. In the years to come, we expect to see more of both – although these arrangements always take a long time because in any dealings with government a very full review process is compulsory. We also expect that governments will not only be looking to the private sector for the provision of capital, but increasingly for the delivery of a whole range of social services. For example, in the UK the government is looking at different ways to procure services from the private sector in terms of meeting the governments’ objectives. This is a model in which the government contracts with companies to deliver outcomes rather than inputs. So, we’re seeing some very interesting thinking in terms of ways that the government can pay the private sector to do things like keep people out of jail rather than keeping them in jail; or finding way to keep people healthy rather than treating them after they become ill. We expect governments to turn increasingly to the private sector to devise innovative approaches to social issues.




PwC: How does corporate responsibility fit into the operations of the Macquarie Group?

NM: We’ve had a charitable foundation in the Macquarie Group for more than 25 years. Last year, we made contributions to a range of community projects here and around the world totalling $24 million – that amount being a combination of the foundation’s money together with direct contributions from our staff. We support many different organisations and particularly like to help those that our staff feel passionate about and have a leadership role in. We’ve been able to maintain our historical amount of giving throughout the crisis. We’re very pleased by that because our profits did fall and the original allocation of money for the foundation came out of the staff profit share pool. So what we’ve effectively done is increased the relative amount of money that we’re giving to the community. In terms of broader social responsibility, we’ve looked at our carbon footprint and been able to reduce it over the past 12 months by 11 percent on a per capita basis, which is quite a substantial step-down in terms of carbon usage. That number, by the way, has been audited by PwC so you can rest assured it’s absolutely correct. We’ve also made a commitment to carbon neutrality through a combination of ongoing carbon footprint reduction and buying carbon offsets from a range of community organisations. Most people in our organisation are actively involved in their local community in some way. We think that’s invaluable in helping them to get a broader understanding of society’s needs and becoming more complete, well-rounded individuals.

PwC: What strengths helped Australia weather the global downturn relative to other developed economies?

NM: The starting point was our fiscal position. Like a number of other countries, Australia suffered a recession in the early 1990s. In response, the government began a programme of fundamental economic reform that, among other actions, removed a lot of artificial support for industry, floated the currency, and encouraged fiscal responsibility. In combination, all these moves promoted a very flexible domestic economy. A floating currency was particularly beneficial to us because it meant that when the global economy started to stumble, our dollar could rapidly fall even as the domestic economy continued along, notwithstanding a fall in export earnings. So having a flexible economy with a floating dollar along with a strong fiscal position has meant that, for Australia, the most recent crisis was no different than the other crises we’ve faced. The Asian economic crisis in 1998 impacted all our major trading partners, but it had very little impact on Australia. Our currency fell, but our economy continued to move forward. In 2000, when the technology bubble burst, our dollar fell but we were able to move through the crisis. The recent crisis played out for us in a similar way. We saw the Australian dollar fall, but the domestic economy was able to step through it. We were also very fortunate in that the emerging markets that we trade with – particularly China – recovered relatively quickly. Additionally, we have a well regulated banking sector in this country and, as a







consequence, our banks went into the crisis from a very strong position. When confidence in the global financial sector was at its ebb, Macquarie was still able to lend – as were all the major Australian banks.

PwC: How do you account for Macquarie’s considerable success over the years?

NM: The strength of our organisation over the past 40 years has flowed from the ambition and the vision of all the people within our organisation. Today, we have 15,000 people working at Macquarie. It’s a sizable business, but it’s still driven by people who are highly-motivated and have an entrepreneurial mindset. In that way our corporate culture resembles that of a small business. We stay close to the marketplace and plugged in to the needs of our clients.





Paul Polman CEO, Unilever


PwC: What indicators are you watching to understand how the global economy will develop and what trends do you see?

PP: For consumer goods, we look at consumer confidence data and employment levels. In managing our business model, we look at broader societal trends. With regard to social attitudes and behaviour, I would observe that the economic contraction has not only resulted in a financial crisis, but also an ethical crisis for the private sector, which now must examine the way it does business. But every crisis brings with it the opportunity to do things differently, and in that regard, the economic contraction may change attitudes and behaviours in a positive way. The crisis has certainly underlined the importance of international institutions like the IMF, the World Bank, and the G20. People are taking these institutions seriously now. At the same time, the crisis has prompted the economies of the East to assume a level of economic and political maturity much faster than they might otherwise have – and that’s going to have a major impact on business. The economic crisis has also brought attention to the level of over-consumption by the wealthy. That realisation will have repercussions regarding how we build a more equitable society in the future. In many cases – you can take Greece or Ireland, but many others countries, too – society has been living beyond its means. Corrective measures will be painful: Economists calculate for every one percent of government deficit that’s cut across European countries, one percent of GDP will also be lost. So we clearly need a business model that will help us return to growth – but growth that is equitable and sustainable for all of society. This will take political will. But, in reaction to a crisis, most politicians focus on the

short-term and let long-term issues fall by the wayside. That is very dangerous for business – just consider the currency wars now being waged. Likewise, the crisis has caused some countries to turn towards trade protectionism. Right now, there are 350 cases before the WTO, the bulk of which concern various forms of protectionism by OECD countries. So we have to make sure that we don’t turn our backs on globalisation, which is still the world’s greatest wealth creator. An additional development that you see coming out of this crisis is a new seriousness regarding sustainability. People now realise that the ways we currently consume resources is unsustainable. The world’s population is expected to grow by two billion over the next 40 years and that growth will be concentrated in the emerging economies whose people have rising expectations with regard to their standard of living. To meet those expectations we’ll have to look at things differently and find solutions that can lift people out of poverty. Businesses that understand how to do that that will be successful. So you put all these trends together and what you’re dealing with is increased pressure and incentive for business to take greater responsibility for society as a whole – and an expectation by consumers that business will accept that responsibility. Unfortunately, the political environment, by its sheer design, makes it difficult to implement far-reaching solutions. And, right now, confidence in business is low.

PwC: Can you comment further about the public’s lack of trust right now in business?

PP: Some studies have shown that confidence in business has fallen as low as 14 percent. Right now, people look inward – to friends, family, relatives – for guidance and advice. So consumer

Interview with Paul Polman CEO, Unilever



scepticism has increased because people don’t trust business. And they don’t see politicians solving the issues that need to be solved. They’re terribly frustrated with the way the world has been run. If you view the world through the eyes of the consumer, which I do every day, it looks as if the world has been run so that the benefits of risk have accrued to a few individuals, while the cost of risk has been shared by society at large. No one would ever run a business like that, but somehow, we let the world operate in that way. But the consumer is discovering that they have ways to make their displeasure known. I like to say that Facebook – with 550 million members – is the world’s third largest country. You have China, you have India, and you have Facebook. Likewise, with Twitter. We recently launched Unilever’s, ‘Sustainable Living Plan’ and within hours of the launch, two million people had commented on the Plan using Twitter. So consumers are using the Internet to make their expectations known. And if you can fulfil those consumer expectations – which is what we’re trying to do with our Sustainable Living Plan – there’s tremendous opportunity for business. Businesses that fail to tap into the expectations of their customer base will very quickly go the way of the dinosaur.

PwC: Where do Unilever’s most significant strategic opportunities lie?

PP: Well, it’s very important to understand where consumer trends are headed and to position your company as a leader of those trends. I always say it’s better to make dust than eat it. If you understand what consumers want and have products that meet their needs, you can grow – regardless of macro-economic conditions. At the same time, we are also aware that within ten years,

70 percent of our business will come from the Far East. That shift eastward has tremendous implications for our company’s structure and culture. The values at the heart of our company certainly won’t change, but our culture and business model will need to evolve to reflect a changing customer demographic. The conventional Western way of running a business – which historically has not been very advantageous for women, for example – is not necessarily going to work in the Far East. Unilever already has far more women in management in our Far Eastern operations than in the West. As we shift eastward, we have to make sure that our corporate culture and operating model reflect the markets there. Trying to get that right is where I spend most of my time.

PwC: How does one go about preparing a well-established organisation like Unilever for growth in new markets?

PP: We do that by maintaining our growth potential ahead of our actual business numbers. We aspire to become a US$ 80 billion company versus a US$ 40 billion company today. And in order to become a US$ 80 billion company at some future date, I need to start building a US$ 80 billion organisation right now. If my capabilities are not ahead of my actual turnover, I will never achieve my objectives. So I concentrate on expanding Unilever’s capabilities ahead of its numbers. Analysts focus on turnover, but I focus building internal capabilities. For example, it took us a year to put our Unilever Sustainability Plan in place because I felt it was absolutely necessary that everyone in our organisation understood and embraced it fully before the Plan was announced externally. It was clear to me that if I didn’t, for example, have




Unilever’s R&D function geared towards driving sustainable innovations – which is a central principle of the Plan – I would not be able to deliver results to the marketplace. And that would create a credibility gap with our customers. So you always have to galvanise the organisation around the way forward before you start communicating your plan to external audiences. Internally, we talk a lot about the values of running a business for the long term. Externally, we speak more about the concrete things we’re doing to advance our long-term goals. So my communication to the outside world is more about what we’re doing, while inside the company we talk more about the capabilities we need to create now in order to reach our ambitions.

PwC: What is Unilever’s approach with regard to product innovation?

PP: People tend to see innovation strictly in terms of revolutionary, breakthrough products – technologies to sequester carbon emissions or microchips that can process data many times faster. That’s fine. But most innovations are the result of steady, continuous improvement. Progress is achieved when you’re able to connect what’s needed with what’s possible. And that connection needs to be implemented across the entire supply chain. So at Unilever, we’ve begun to change the relationships between our company and our suppliers. What’s important to us is not only negotiating the best cost with suppliers, but understanding what they can and cannot bring to our growth plans. We’re also working with our retailers in order to build new product categories and improve the customer’s shopping experience. So to drive innovation, you need to change the relationship with

everybody in the supply chain. Tesco is going to be around for another hundred years or more – and so is Unilever. It only makes sense to work in concert to meet consumers’ needs. By working together towards a common goal there is much more value to be gained than there is in haggling over costs.

PwC: Describe Unilever’s approach to managing its brands.

PP: Every one of our brands must have a “product mission” grounded in consumer needs. But along with a product mission, each brand must also have a social mission. That social mission engages the consumer in a relationship with the brand. Take any of our brands – Ben & Jerry’s Ice Cream, for example. Ben & Jerry’s social mission is to make the world a better place. To achieve that, for example, it uses fair trade practices in procuring the ingredients that go into its ice cream and operates a carbon-neutral model. But it’s important to remember that the consumer creates the social mission that the brand attaches itself to. People who buy Ben & Jerry’s Ice Cream support fair trade practices and buy Ben & Jerry’s with fair trade in mind. Likewise, consider Lipton tea. Consumers buy Lipton tea because it delivers good value in terms of price and taste. But then on top of that, Lipton is committed to sourcing all of its tea from sustainably-managed farms. Now, by drinking Lipton Tea, a lone consumer can become part of a movement of millions of other people around the world that supports a socially responsible product. People want to be part of a movement like that. In my opinion every brand must have a social mission and the consumer must have an integral part in defining that mission.




PwC: Are brands with a social mission equally relevant to emerging markets?

PP: I believe they are. In fact, brands that support a sustainability agenda may actually be more pertinent to developing countries because of the immediate pressures those countries face with regard to climate change, food shortages, population growth, and other problems. So for example, a billion people who live in developing or under-developed economies have no access to clean drinking water. In response, we’ve introduced the Pureit brand of water purifiers, which we now have in about 15 million homes. We’ve made a commitment to get Pureit products into 500 million more homes around the world so that people even t the lowest economic strata can have access to clean water. We might not always be able to find an economically viable model to support that target, so we’ll work with local communities and NGOs to make Pureit products affordable for everyone. Now, that’s not an economic model that the Western world would necessarily feel comfortable with. But in the process of familiarising the world with our Pureit products, we’re developing relationships with millions of people and tying Pureit to our other brands. If consumers don’t have clean water they can’t cook with Knorr bouillon cubes.

PwC: You’ve talked about responding to consumers’ expectations. To what extent are you also trying to change consumer behaviour?

PP: Well, you try to do both. So for example, in order to get people to eat healthier, you reduce their intake of trans-fatty acids. Unilever is the world’s leading manufacturer of margarine

and by switching to margarine about three kilos of trans-fatty acids can be cut from the average diet during the course of a year. That would improve health statistics significantly. In schools, we work on hand washing. In the developing world, one and a half million children die every year from diarrhoea. You can cut that number 30-40 percent just by introducing simple hygiene practices like hand-washing. Even in the developing world, many people only brush their teeth once a day, if at all. So advertising for our Signal brand toothpaste is geared towards demonstrating how brushing together twice a day can be a bonding experience for a father and his son. Our intent is to sell responsible products that leave the world a little better off. But market growth for those products must be part of the equation.

PwC: Tell us about Unilever’s Sustainable Living Plan and the risks associated with it?

PP: The Plan is Unilever’s commitment to improve the health of one billion people; buy 100 percent of its agricultural raw materials from sustainable sources; and reduce the environmental impact of everything it sells by one-half, while doubling our revenues. In other words, decoupling growth from environmental impact. Now, in any calculation there is a risk. But in the case of the Sustainable Living Plan, I think the upside far outweighs the downside risk. Of course, whenever you go public with a big, ambitious plan, there is a risk that you’ll miss one of your objectives, in which case you become a target for criticism. But I’ll accept that risk as the price to pay for making the discontinuous progress we need. The alternative is not pretty, nor is this a spectator sport.




PwC: What about the macro-economic risks you might face?

PP: In business, there are always risks that one has to deal with. In the present environment, we see increased risk with regard to the viability of input costs. There’s also the possibility that government protectionism may slow the pace of globalisation. In any case, we are living increasingly in a world that is more volatile. I describe the world using the acronym, VUCA: volatile, uncertain, complex and ambiguous. I work a lot with charities for the blind. And one reason I like to work with the blind is that blind people must deal with uncertainty every day. Close your eyes and try to walk around – it’s a very uncomfortable feeling. Blind people, actually, are ideal people to learn from because they experience many situations as uncertain and complex. And many of the skills they use to cope with those situations are exactly the skills that managers now need to run their businesses.

PwC: What are your expectations with regard to government oversight of business?

PP: In response to the economic crisis, we can expect to see more re-regulation and an increased role of government in business over the next few years. t the same time, governments now understand more than ever that business is their partner in finding solutions to economic and social problems. Governments have seen that business can bring important capabilities to the table. Take the issue of deforestation. Paper and lumber manufacturers are ready to switch to sustainable forestry practices, which will help mitigate the presence of greenhouse gases in the world’s

atmosphere. But these companies need the support of government – in the form of loan guarantees, say –while they transition to a more sustainable business model. Governments have come to their own realisation that they need a thriving and successful private sector because only business can create wealth. Government can re-distribute wealth. NGOs can advocate for specific allocations of wealth. But at the end of the day, only business can create wealth.

PwC: And yet, the public’s trust in business is at very low levels right now.

PP: That’s true not only of business – trust in the political system is equally low. So, yes, you have to build trust in business and there’s no better moment to try to do that than now. One has to cherish this time as a unique opportunity. We’ve arrived at a point at which the level of trust in business has bottomed out and can only go up from here. If we rally together we have a tremendous opportunity to re-build trust in the private sector. But it is also clear that trust can be regained only over the long term with consistent, responsible behaviour. Trust is built over time but can be lost overnight. So, one must be continuously vigilant. When Victor Frankl wrote his book, Man’s Search for Meaning, he wrote that the Statue of Liberty erected on the East Coast of the US should have been accompanied by a Statue of Responsibility on the West Coast. The crisis we’re experiencing now is a crisis of responsibility. And so we need to re-instil in organisations of every kind a renewed sense of responsibility. If we can do that, it will be a tremendous force for building trust. And, ultimately, trust is the basis for prosperity – there’s no doubt about that.


PwC: How is your perception of value changing in terms of the benefits you deliver to consumers?

PP: The concept of value is continuously evolving. In the past, value was about delivering a basic commodity like sugar or salt to the consumer at an attractive price. Later on, the goal was to create a brand – like Persil or Dove – which was a guarantee of quality. Then, value became synonymous with the experience a product delivered. Starbucks isn’t just about coffee – it’s about a warm, inviting place where you can relax and check your email. It’s an entire experience. Today, the concept of value is increasingly associated with products that demonstrate social responsibility. A successful product must provide utility, but it must also exhibit a social consciousness, if you will.








Philip Dilley Group Chairman, Arup Group Ltd


PwC: Arup is a global firm of designers, engineers and other professionals. Tell us a little about how your company is organised.

PD: Arup is quite different from most other companies. We are owned in trust, with the original partners having relinquished their ownership and placed their equity into a trust for the benefit of our current and past employees. We operate seamlessly as a global organisation through 90 offices in 37 countries. Arup Group Ltd. is the holding company for all of our regional operating subsidiaries.

There are several consequences of this kind of structure. One is that we don’t have any human shareholders – as Chairman I report to the directors of the Trustee companies owning the shares in Arup Group; my predecessor, Terry Hill, is the current Chairman of the Trustees. Another consequence of having no external shareholders is that all our profit is available for distribution to our people in the form of profit share, or to invest in the firm. We also forego shareholder capital, so that our growth is largely organic. So in that sense too, we’re an unusual organisation.

PwC: Is there intent to consolidate some of those entities?

PD: We are looking at opportunities to bring greater efficiency to our structure, but in some cases this may result in more companies rather than less.

PwC: What sort of indicators do you look at to give you a sense of the global economy and your priority markets?

PD: We operate globally but we have a structure that is operationally-focused through five Regions: the Americas, Australasia, East Asia, Europe, and the UK Middle East and Africa. So, what we

look for as economic indicators varies from region to region. We also operate across two broad areas within the built environment: the buildings and property world; and the infrastructure world. So, for example, in the UK and parts of Asia, we have a very strong property-related business, and so we closely follow the plans and aspirations of property developers. In infrastructure, our work is normally related to long-term projects. For example a new high-speed rail project is planned over many, many years. We have a global rail leader and rail business leaders in each of the regions and their remit is to scan their markets for new opportunities. They’re not responsible for profit and loss. Instead they look outwards to the marketplace. Similarly, for aviation, we have a global leader and regional leaders who at any given time will know about the next four or five major airport opportunities. And if they’re doing their job well, they’ll know which ones that we’re best-suited to bid on and then go after them.

PwC: In that case, your regional leaders may not necessarily be looking at the current environment, but the ones that might emerge by 2015 or 2020?

PD: From the perspective of building infrastructure, that is correct. For example, if you consider sport infrastructure, it is always known where the next World Cup is going to be, and we know which countries are bidding for the one after that, we will have offices in some of those places and not in others. In this case, we would be looking at events that will occur ten years ahead of when the business decisions must be made. Other projects may have a much shorter timeline and we must be ready to work with variable time horizons, but most of our big projects are carefully nurtured over time.

Interview with Philip Dilley Group Chairman, Arup Group Ltd



PwC: For many companies, the economic contraction has revealed weaknesses in business models or corporate strategies. How well has Arup’s business model and strategy weathered the recession?

PD: As we’ve grown larger – and in our industry Arup is at the larger end of consulting practices – it’s natural to take on the usual trappings of a traditional corporate enterprise. In general that’s something I try to resist because the model that has made our firm so successful over the years is to take on good people and give them space and freedom to do what they’re good at. Provided our leaders are pursuing something that’s a natural extension of our core business, and they’re gaining us reputation and not losing it – and they’re not losing us money – then they will attract substantial autonomy. Based on that model, the firm has grown organically.

Our steady expansion across different sectors and various geographies has been a natural result of someone in our firm pursuing and winning a project opportunity. So typically, and historically, we might be engaged to work with an architect in a new location, and then some of our team would stay on there and explore local market opportunities. And suddenly we have a new business. Perhaps the best example of this was delivering the Sydney Opera House that led to our business in Australia. Today, we’ve become more strategic about what we do and where we endeavour to avoid becoming too reliant on any one market. If I look at some of the architectural firms we collaborate with – ones that are now suffering in the current economic climate – often this is because they have been too focused on a single market, such as commercial property. So, diversification across sectors and geographies has been very important for us.

Also, we try to operate at the higher levels of the marketplace and don’t target commoditised design work. Our business model doesn’t require turnover targets. Instead we rely on winning quality work, on having a talented workforce, and generating healthy returns. So, in times like this, we can perhaps afford some diminishment in those returns, however painful that might be.

PwC: Talk a bit more about some of how you rebalance your business to reflect differing economic conditions in various sectors and geographies.

PD: Historically, rebalancing has meant shifting our focus more towards infrastructure from buildings. And this matches today’s economic cycle where infrastructure opportunities are growing, and building opportunities are reducing. Geographically, rebalancing means greater activity outside of Western Europe and into the rest of the world, especially Asia.

PwC: Where do you see some of your biggest strategic opportunities?

PD: Arup has various practices, skill sets, and capabilities. And where we really score is where we can combine them in ways that our competitors, in many cases, cannot. Our strength lies in our ability to cope with the complexity that’s innate to large projects. Add to that the growing interest in energy conservation, carbon reduction, and sustainability, which has made building and infrastructure projects more complicated, and we see more opportunity because of our understanding of those issues. Looking further ahead, there is the emerging concept of Building Information Management – BIM, for short. It’s a concept that uses three-dimensional, real-time, dynamic modeling software




to increase productivity in building design and construction. It’s a way to plan a development’s entire life cycle, from conception, to the construction process, to day-to-day facility operation. So, BIM gives us a virtual model of a development’s every aspect. And Arup is one of the firms at the fore of this approach. BIM is likely to become a factor in segmenting our industry because there will be firms that have the capacity to take a BIM approach and firms that don’t. BIM is something that a ten-person practice might struggle to do well.

PwC: How do you see public-private partnerships projects affecting your firm?

PD: The UK has led the world in these sorts of public-private procurement processes. And as a result, other countries around the world see us as people who are able to advise them on how to do it. A recent example is in Spain, where we were approached by a hospital client for design advice, and we ended up being their advisor on the whole procurement process using a public-private partnership model. The British are widely seen as being the experts on PPP, and in the current economic climate, they are being seen as a viable way to shrink the public sector without switching off valuable infrastructure projects.

PwC: So can we expect public / private partnerships to be embraced by many other countries?

PD: PPPs will take root in other countries because most countries don’t have lots of spare cash right now. We see substantial PPP activity already in the European countries. I was recently in India and they’re talking about it there. Today, India is already building new infrastructure using its own money,

but their ambitions are such that they won’t be able to finance all of it through government expenditures. They will need additional private money, and to raise those funds they’ll need to make their partnership models more appealing to external investors. These will surely be PPP-style relationships.

PwC: How has the downturn affected Arup’s spending on innovation?

PD: I think one of the reasons Arup has thrived is because innovation is intrinsic to our business – it is in our genes. Our natural orientation is to be thoughtful and inventive about the appropriate solution to any complex problem.

One of my personal initiatives is to encourage all our people to view themselves as designers – not just structural engineers or building engineers and so on – but designers of the entire built environment. In fact, these days, we’ve got lots of people who aren’t engineers at all. We have project managers who ‘design’ inventive ways of monitoring things properly. We have transaction advisors who help us ‘design’ inventive deals. So I like to think of our people as designers who are always innovating, always pushing the design envelope. In one sense, Arup has one leg in professional services, and one in the creative industries.

PwC: Arup is known for being able to attract and retain very skilled people. How is your people strategy evolving?

PD: Geographic mobility is becoming more important to us. But with mobility comes a host of issues –lifestyle change, pension questions, matters having to do with children and schooling. We have 10,000 people around the world and unless they get to know one another and




work with one another, the collective capability of our firm would suffer in the long term. And, for example, we may need to send our specialist railway-signalling expert to Hong Kong for six months because there is a temporary important need there. So, despite the obstacles, mobility is important for us.

PwC: As Arup becomes increasingly global in scope, how do you maintain a sense of cohesion and unity in your workforce?

PD: We are starting from a good place, because Arup has a very strong culture, based upon a set of well-understood company values. And even when we worry that these values may become diluted in times of high recruitment, it doesn’t seem to happen. These values just become further reinforced. After that, it’s all down to communication. We maintain regular communication channels at different organisational levels and regions of the firm, and we have a regular bulletin that goes around the world, which I write an introduction to. And we are using more and more audio and video podcasts, such as when we introduced our most recent structure; I did a video podcast on that. But it’s also about getting alignment across all your communications – having a clear and consistent story to tell.

PwC: What sectors are you focusing on at the moment?

PD: Principally, we work in four markets: social infrastructure; property; transport; and energy, resources and industry. We’re very strong in retail and commercial property everywhere – although it’s a shrinking marketplace right now. We do very well in social infrastructure and frequently get

involved in engineering many of the world’s best arts projects. In transport we’re very strong and there’s a robust marketplace. But the best opportunities are in energy, resources and industry where we are a relatively small player in a growing marketplace, so that’s a big opportunity for us.

PwC: How has the growing interest in sustainability affected your business and your strategy?

PD: The impact on us has been enormous because sustainability is of interest to our clients everywhere. All of them want to make sure that they are seen to have taken the principles of sustainability into account. China, for example, takes sustainability very seriously. Now, it is true that China is responsible for an increasing portion of the world’s carbon emissions, but at the same time, they’re putting much more effort into creating sustainable solutions than anyone else. They are serious about research into these areas and there’s a lot going on there. And I am delighted that our business in China is thriving as a consequence.

PwC: What does the interest in sustainability imply for your business?

PD: The strategy we’ve adopted is not to establish a standalone ‘sustainability department’, which many people have – but to recognise that sustainability is everywhere in the organisation – it’s business as usual. And one of the aspects of that is that we have conversations with our clients to understand their goals around sustainability on every project under discussion.




PwC: Taking the topic of sustainability a bit further, how do you see your company’s role in society?

PD: Without shareholders, we exist for the benefit of our staff, our clients, and the societies in which we operate. A lot of our work results in something that’s going to be part of a community’s built environment for hundreds of years or more – quite a responsibility! And I am proud that I can cite some examples of Arup turning projects down because of the detrimental social impact they might have.

I suspect that going forward we may be turning down an increasing number of such projects. And why do I think that? Because it’s important to us, to our staff, that we actively pursue sustainability and projects that improve the environment. Our strap line is ‘we shape a better world.’

Our people ask, “Is that sustainable? Is participating in this good for our reputation?” In our firm, we encourage debate on sensitive projects. Ultimately, of course, the board is responsible for the decision. But part of our process is to get input from whoever wants to express an opinion within the firm.

PwC: How does Arup define the concept of value?

PD: Value is an issue of great interest to us at the moment because I believe we tend to bring more value to our clients than a time-related fee would reward. And so value-based contracting is something which we are pursuing more often and with some success. Value-based contracting is usually structured around success fees or some performance-based bonus arrangements.

Within the firm, value has a much more subtle and intangible meaning because it has a lot to do with the pride we take in our culture and brand. We value the fact that we’re admired as a strong firm, a technically accomplished firm, and a firm that cares about the built environment. Our people are proud of the projects they’ve done, they like talking about them, and they like writing about them for professional journals. In fact within Arup, it’s seen as a greater sin to get something technically wrong than to make a loss! We want to succeed by being the best, the most creative, the most visually-stimulating firm in our industry.

PwC: Do you see the need to do anything differently in the future to be as successful as you’ve been in the past?

PD: I think we need to be more open to collaboration with others. We tend to want to do it all, because most of the time we can. But I think in the future we’ll see a lot more partnering, a lot more sharing, a lot more acknowledgement of the specialised skills of other firms. And that’s partly because there is going to be greater stratification in our industry. Looking ahead, there are going to be very large players that can do huge projects, and then there are going to be the boutiques. The firms that are stranded in the middle are going to struggle. At the moment we’re big enough, so I’m not worried about the next several years, or perhaps the next decade. But we will need to ensure that we remain large enough to be significant on a global scale. Partnering on projects with other firms is one way ahead.




PwC: Do you have any views regarding the issue of branding?

PD: Branding is an issue that we explore from time to time, but our brand is largely as a result of our achievements rather than something we have actively managed. As you would expect, Arup’s brand is stronger in some countries than in others. It’s much stronger here in the UK than, say, in America. Today, it’s also incredibly strong in China.

We do question whether we should actively manage our brand and try to develop it, or whether we should just do good work and let our brand develop by itself. For a firm like ours, those issues are quite complex. In the end, the issue of branding is inextricably linked with a firm’s corporate culture. It’s important that we don’t lose sight of the fact that our success is an outcome of our style and culture, and the quality of our people, all of which we must do our utmost to protect.








Prof. Dr. Peter Gomez Chairman of the board, SIX Group AG


PwC: As the economist, not just the leader of the SIX Group, what’s your outlook on the economy for 2011? Are we heading for a double dip or are things going to continue to move upwards?

PG: It’s probably going to be something in between. We have some encouraging signals from economies in the Asian part of the world but, on the other hand, we have all those troubled states in Europe that might trigger a domino effect. So it’s probably a very difficult year to make a forecast of what’s going to happen. I would say it’s going to be a slow upward movement, but nothing spectacular.

PwC: And as for SIX Group itself, you’ve got a third in payment transactions, 25% or so in financial information. Another 15% or so in security services and then at the back end 25% in security trading with Swiss Exchange and the Eurex. Is it a back office company with security trading bolted on?

PG: No, you have to look at the history of the company. In 2006, we had to make a decision with SWX, to stay autonomous or merge with some other exchanges. We decided to stay autonomous, but wanted to get critical mass through integrating over the whole value chain. That integration of three companies generated innovative offerings also in totally different fields and produced something that’s becoming a role model for other exchanges. The London Stock Exchange and New York Stock Exchange/Euronext are doing the same thing; they want to strengthen their clearing and settlement as well as their derivatives businesses.

PwC: And what about the payment transaction side. How does that fit?

PG: At first sight it’s not a core business. But in a small country as Switzerland it makes sense to have it under our roof. In the US or England or Germany, it wouldn’t work that way. It is an important part for us because if you have cyclical developments in your businesses, you need a balanced portfolio. If one gets weaker you have something that can be substituted. A year or so ago, the stock exchanges and related activities had a dip. But the payment systems did very well, so we had some kind of a stabilising effect.

PwC: And you say other exchanges are beginning to follow this idea of the entire value chain?

PG: Yes, as MiFID’s regulatory effects in the EU did not turn out as tight as expected, other companies are starting to get into it. It is a similar model to that of the Deutsche Börse. They have had it for more years than us, we just added some more components to the value chain. And we always lived up to the code of conduct in clearing and settlement.

PwC: So that you don’t have a monopoly?

PG: Yes. But I think the most important thing is that if you can really integrate the whole value chain of the business, instead of having separate companies for certain chunks, it’s much better.

Interview with Prof. Dr. Peter Gomez Chairman of the board, SIX Group AG



PwC: And what about critical mass for that? Is Switzerland’s relatively small size a disadvantage when you’re up against competitors in the UK or France or Germany?

PG: Well, first of all, I think you have to look at the purpose of our company. We’re not a listed company but we belong to 160 banks, so our owners are banks that are, at the same time, our customers. And although they are, of course, looking for dividends, they are more interested in the fact that we are enabling a strong infrastructure for the Swiss Financial Centre. That’s a very important point. If you want to be one of the leading financial centres of the world, you have to have a sound infrastructure that can really sustain the businesses of those banks. And that’s the main purpose of our company.

PwC: Public service?

PG: Yes, public service. Of course, we are also profit-orientated and look at shareholder value, as any other company does. But the main goal is to serve our Swiss Financial Centre. And I think we are strong enough to do this. Obviously, there are a lot of dynamics in the whole situation, so that it’s not so easy at the moment – the whole landscape has changed a lot.

PwC: What would you see as the one or two major changes in the past couple of years, from that perspective?

PG: Well, I think there are three or four main things. One is, of course, that regulatory activities have increased considerably. The second is technology. We have today this phenomenon of algorithmic trading, trades are done in nanoseconds. And that requires a lot of technological know-how and very

expensive infrastructure. It can be a dangerous thing as we saw about a year ago when the New York Stock Exchange really fell down because there were no circuit breakers built in. The third thing is that we have much more competition and while the incumbents, the existing exchanges, have become more and more regulated, new exchanges are popping out of the ground without much regulation. So fragmentation is going on and that’s very dangerous for the whole system.

PwC: What are some examples of unregulated competitors?

PG: In London Chi-X, Turquoise and other MTFs are attracting quite some business. And they can do it because they can cherry pick as they don’t have the regulation of incumbents, like London Stock Exchange. What they are doing is setting up a new business model that does not generate profits right know but might be worth a lot of money the day they divest.

PwC: Are regulators making any moves to control these new ones?

PG: The problem is that the big investment banks own those MTFs. And they did quite some lobbying with the regulators and convinced them that more competition would be useful for the whole exchange landscape. Regulators probably overlooked what kind of businesses they are and that they’re not really in the interest of what we at the established exchanges are aiming at. But we can’t do much about it, so we have to adapt. That means we have to be more cost-effective and price-sensitive. I think this is fine. I’m in favour of competition, but competition should be fair.




PwC: Where you see the stock exchange landscape and SIX Group being in five to ten years?

PG: If I had the opportunity to shape the future stock exchange landscape, I would do it the way it presents itself right now. Then SIX we would have a good place in it. Some regulators have other ideas: in Target – 2 – Securities, for example, the European Central Bank wants to centralise all clearing activities in the middle of Europe and make the present clearing and settlement structures obsolete. That might be an advantage for some banks. But I think centralised structures are always weaker than decentralised ones. The idea is to make the world safer but I think if we had competition among clearers in every country, it would be much better for customers.

PwC: And the idea is that by 2013 it’s supposed to be all centralised?

PG: Yes, even sooner, maybe in 2012. And, for SIX Group, it very much depends how Switzerland is going to react. Because, on the one hand, we’re not part of the EU, on the other hand, we have the Swiss Franc. So the question of how we integrate or not it into this new structure is going to have quite an influence on our company.

PwC: Will this be a winner takes all kind of thing for the clearing? Does Euroclear walk in and get the whole thing or can you share it with them? How does it work?

PG: I would think that present clearers are still going to exist. They will do their business in the same way but there will be a, kind of, netting mechanism in the centre. And what should be happening is that prices should be lower. But I’d rather bet on competition for that.

PwC: You add bureaucracy, I guess.

PG: Yes, of course.

PwC: How do you tell if an organisation is too complex? And is this too complex?

PG: The best way to organise any company is by a federalistic approach according to the subsidiarity principle. It means you have to give the smallest possible unit autonomy. And this autonomy must only be limited if the purpose of the whole is in danger. A good example is the political system of Switzerland where you start with communities, then cantons and then federation. And I think you should organise all companies that way, otherwise, in the long term, they are not going to be viable. But you have to establish mechanisms to ensure that the whole is more than the sum of its parts. Coming back to our problem, by centralising and regulating even more than before the crisis, you’re not giving autonomy. You should leave people alone in a way. Give them guidelines and then let them organise themselves. Too much regulation was never good guidance for better solutions.

PwC: What is your take on innovation within the SIX Group?

PG: When we formed SIX Group by merging three companies, everybody asked me what are the cost-saving synergies? But that was not the issue: I wanted a blueprint of a successful and valuable company in the service of the Swiss financial market centre. That meant offering things that the single companies by themselves weren’t able to offer and being open to totally new areas. And, of course, we are going to generate synergies and reduce costs, but that’s not the main objective. If you




are too much focused on synergies, it’s not going to be successful. And we actually entered into totally new fields. For instance, we are building an integrated system for administrating mortgages in the whole of Switzerland. Today, this is dispersed all over the country. Securitising and the whole operating mechanism are still with the banks and with the federal or cantonal offices.

PwC: How do you both foster innovation and manage to harvest it as well?

PG: You have to make a distinction between invention and innovation. The Swiss, for instance, are very good at inventing things, but they’re not very good at turning them into innovations. An innovation is an invention that is accepted by the customer. To make it better n the future, Switzerland is building an innovation park in Dübendorf , and old airfield for military planes near Zürich, to bring together companies from all over the world with the leading Swiss universities to bridge the gap between invention and innovation.

PwC: Moving on to the payment transaction business, are the low interest rates that we’re experiencing today hammering that business or helping it?

PG: I think in Switzerland interest rates don’t have too much influence because the Swiss only buy things if they have enough money at hand. Switzerland is the only country during the crisis that reduced its debt. And people are very cautious: they use their credit cards in a way that isn’t going to be influenced as to higher or lower interest rates. In Switzerland it is more a question of how business is doing. Retail sales weren’t that bad this year, so we had a good business year.

PwC: Does that play a major role in growth in that sector? If you get everybody to use their credit card twice instead of once, does that give a big boost for the transaction business?

PG: Of course it would. But what we’re actually doing is going into other countries in Europe. We are doing practically all the credit card business in Austria and also in Luxembourg. And we are looking at others. I think this is a faster growth path for us.

PwC: What about the whole crisis of the Euro? Does that affect this business particularly here or is it, again, not a critical issue for you?

PG: No, it doesn’t have too much influence. It would have an influence, for instance, if the Euro market fell apart and even more money moved into Switzerland as a safe haven and the Swiss Franc suddenly got so strong that we had to take precautionary measures. But, at the moment, it’s not an issue, especially not for our company.

PwC: Do you think that the Euro could explode or evaporate?

PG: No, I don’t think so because the Euro was a political decision not an economic decision. And if they got rid of the Euro, Europe as an idea would be dead. So they’ll do everything to save the Euro. What might happen is that you have two different areas, the southern part of the EU and the northern part of the EU but we won’t go back to the Deutsche Mark etc.




PwC: What about the idea of kicking out a few of the bad performers, Greece or Portugal or something like that? Would that even be an option?

PG: No, I don’t think so because they’re so integrated and there are so many relationships, also debts, that exist between Greece and German or French banks; it would be a disaster for the banks.

PwC: Do you see Switzerland staying outside the EU for the foreseeable future?

PG: Well, first we have to have a national vote. And within the next 10 to 15 years, it’s always going to be no. But Switzerland will remain to have strong ties to the EU: it is the number two export partner of the whole of the EU after the US. And we are so much involved in all kinds of ventures. We have 150 contracts with the EU on a bilateral basis. I think it wouldn’t be good for Switzerland or the EU if we joined.

PwC: Do you see PayPal and all these new internet ideas, different ways to pay as a threat or an opportunity?

PG: I think it’s definitely an opportunity, but it hasn’t picked up as fast as we thought. But one day it could really become big business. We would be ready to move into these fields, we would be prepared for that.

PwC: But it seems that, particularly for small transactions, cash works quite well, doesn’t it?

PG: Sure. In Switzerland, particularly.

PwC: Turning to one of your other divisions, financial information. Do you see outfits like Thomson Reuters and Bloomberg as your competitors or are they in a different sector of the business?

PG: They are competitors but only in one area: financial information. In Europe, at least, we are number three after Thomson Reuters and Bloomberg. And we are growing because quite a few banks and other customers don’t want to be too dependent on the big ones. So we are confident that we can get more market share in the financial information business. It has some synergies because when you are in the exchange business you generate that data automatically rather than have to pay for it. So this is an advantage: we have very specific financial data that we can sell. But I don’t think Thomson Reuters or Bloomberg will move into the exchange business. Financial information is such a profitable business, why should they move into another one with higher risks?

PwC: And is there growth there or is it primarily about increasing market share where you already are? Or is it trying to move more to new regions?

PG: Maybe to new regions, but it’s also within existing markets; you can increase your share by your specific experiences or just being an alternative to the big players. There are quite a few banks that would rather have a partner who is a smaller company.




PwC: To turn your attention to the exchange business, the last few years have been turbulent. Do you see that changing?

PG: I was hoping for smoother times after the merger, but, unfortunately, there is a lot of dynamism in the exchange environment. It’s really developing at a very fast pace and I’m not so sure if it’s always in the interest of the customer. For instance, the machines have taken over with this algorithmic trading: the traders make money by going in and out into any stocks or derivatives at an incredible pace and they make a tiny, tiny fraction of profit. But if they do it millions and billions of times, they generate some money. And the problem here is that the danger of something going wrong with the technology is considerable. That’s why regulators now are really focusing on the issue and trying to reduce the risks by prohibiting certain things at a certain speed.

PwC: What about the idea of a pan European exchange. Is that still the dream?

PG: No. Virt-x was to be a pan-European platform for exchanges for blue chips. But it didn’t succeed. The technical means were available but the countries and the companies in certain countries wanted to trade where they were. The problem that we have today is a little bit different. It’s the automatic order routing, which means 30% to 40% of our Swiss blue chips are traded on one of those MTFs, mainly Chi-X, in London, because they are identified by machines as cheaper. By the way, the biggest trader of those at these exchanges is my biggest shareholder, Credit Suisse. On the one hand, they’re my owner; on the other hand, they’re my competitor. So that makes the whole thing very

difficult. Before, when people were doing the trades, then you could say okay, I’m only trading in Zürich. But now machines take the decisions on where would be the best execution and they have no feelings. Also in London, a lot of business has gone away from London Stock Exchange because of those new ventures that are attracting tariffs that are 10 times lower than theirs.

PwC: Is it a cost thing?

PG: It’s about cost and speed. And, of course, it has to do with liquidity. If you can generate more and more business on those platforms, you’re becoming more and more attractive.

PwC: Again, with that international idea, I notice the New York Stock Exchange, for instance, has bought some of Tokyo, some of Mumbai. Is that a way to go for SIX?

PG: No, because I think if you have a minority interest in one of those exchanges, that probably wouldn’t help you much. You can do a double listing without a minority interest. We are thinking about a double listing with Singapore Stock Exchange, so certain titles are listed there and in Switzerland. I don’t think a minority interest is a big thing. It might help a little bit, but it’s not an alternative to being autonomous, in a sense.

PwC: And this deal with Singapore, for instance, how does that work? They will list Swiss blue chips in Singapore?

PG: Yes, or the other way around. For instance, a company here in Switzerland who is doing a lot of business in Asia would not only be listed in our stock exchange, but also in Singapore. That provides liquidity in those markets.


PwC: Looking at some of the activity over the past decade within the Swiss exchange, one figure that really jumped out at me was the tenfold growth in the ETFs and investment funds. Why has that grown so much?

PG: I think we have learned over the last 10 years that it’s very difficult to outperform the market. So why not just invest in the index of a stock exchange? That’s ETFs. And it’s less risky anyway than just putting your money into two or three other shares.

PwC: Let’s turn to education. Obviously, you’re a professor, you were President of the University of St Gallen, one of the distinguished Business Schools. Looking at the system here and that in Germany or the UK or the US or France, do you feel there are too many university students in those other countries?

PG: Yes, that’s what I think. OECD told Switzerland that we should pick up our student numbers. Only 20% of our young people every year are students the university. They said we should have at least 40% or 50%. And we said no because we do not want to have an “academic proletariat”. We have our dual education system with apprenticeships on the one hand and university studies on the other. I think it’s a perfect model. It’s something that other countries don’t have.

PwC: Should students pay more do you think?

PG: This is a question about the way a democracy works. We think that education should be free, literally. So they don’t pay much at the university here maybe we will have to increase it a bit. The question is do you assume that students, or especially their parents,

generate the money to give them a good start in their life or should it be society at large that does it? Switzerland and most European countries, with the exception of England, say it’s an obligation of society.

PwC: Why do you think the other European countries don’t have the dual education system?

PG: Well, I think it’s quite a burden for companies to build this up because it’s not very profitable to offer places for apprentices. You have to teach them on the job and sacrifice quite a lot of your potential profits. It’s an attitude thing. It’s a Swiss attitude that you offer those possibilities to the young.

PwC: Switzerland is an attractive place to live but are there any areas where it could be improved?

PG: I think we should be more open to the world, to other cultures and other ideas from outside,.Unfortunately there is even more political pressure arising to close our borders. But much of our wealth has derived from incomers: for example, the founders of Nestlé and Brown Boveri were foreigners who became integrated into our society. So I think we should be more open.

PwC: Probably one of the biggest victims of the financial crisis has been the reputation of people in the financial business. Does that matter?

PG: I think it really matters. The confidence and the trust between society at large, between citizens and the economy, has suffered a lot. In the long run, if we don’t have an agreement on value creation required of companies with respect to society, we are going to have a huge problem. People are disappointed about the managers who just serve themselves and get all that





money. We have re-establish that trust that the economy is in the service of society and not the other way around. And it’s not only the financial sector, it also happens in other parts of the economy. So we really have to work on this.

PwC: Do you have a sense of what can do this? What would bring it about?

PG: I am working on this in my academic work; how to re-establish trust and what it means that a company generates value for society. How do you measure it, for instance? We have measures like shareholder value, stakeholder value and social responsibility. I think what we have to develop is what I could call public value. When does a company generate value for society at large? With others, I have also set up a blog on these questions because I believe we need to talk to citizens about this. We offer them our opinions and we expect them to judge them and to tell us if what we are doing is improving the relationship.

The blog is called www.schweizerdialog.ch.

PwC: You can’t do it in 140 characters.

PG: Visitors to the website stay on average more than 10 minutes, so this is not bad. They’re really interested in the content so we have to work on this. It boils down to getting back to what we call in German, Stammtisch, people working together, talking together.

PwC: We talked earlier about regulation and the financial crisis. Can we avoid further crashes or are they inevitable?

PG: Unfortunately not. You cannot manage complexity by simple measures, by regulation. The clever guys who are hired by the investments banks of this world will always find a way around it.

PwC: So the regulators are fighting the last war, so to speak.

PG: Of course. I think it’s important that you shouldn’t aim at regulating the details. You should have clever guidelines. Like the Ten Commandments, it’s not about regulating every detail. But it is difficult to find these basic rules and then let self regulatory forces take over. If you have a crisis, you are afraid of a domino effect, then you’re going to regulate more and more. So it has a lot to do with complexity theory – how to handle complexity in a fruitful way.





Richard K. Davis Chairman, President and CEO, U.S. Bancorp


Q: Can you give a sense of how US Bank’s strategy has changed as a result of the recession?

RD: Sure, but here’s a warning. This is completely unique to our company. I’m not going to be speaking on behalf of the industry because we’re completely different. So being pretty bold, we didn’t do a lot of the things a few years ago that we would’ve made a lot of money doing, and therefore we don’t have the consequence today of either trying to replace it and not being able to, or having to pay for it because we made mistakes.

Q: Are you talking primarily about subprime lending?

RD: That’s not all: Foreclosure activity, subprime lending, deposit gathering at uniquely high positions, making loans with asset-based lending to customers who were counting on property value rising, not on cash flow. It could be any one of 10 things that could be a proxy for it.

My point isn’t: “look how smart we were”. We were luckier than we were smart. The fact is, it was the hand we were dealt. But since the recession started, we actually have been spending and investing and acquiring and growing through this whole three-year period. We’ve been able to reset our foundation and reset our trajectory coming out of the recession. Instead of locking down, we said “Let’s actually go do something when it seems least likely to do it”. I liken the recession to a headwind. It’s hard to walk into a headwind but if you’re going to fly, you actually look for the headwind because you intend to use it. So, we’re kind of turning the company from a walker into a flyer. We’re not afraid to talk about it or leverage it, because our shareholders deserve it. They were with us three or four years ago when people

were asking “Why aren’t you growing like everyone else, why aren’t you making all these loans?” We just said, “We don’t know how they’re doing this, we’re just doing it our own old-fashioned way”. So we’ve actually become more aggressive in a period of time when others aren’t. And I think that should serve us quite well, but that wouldn’t be the story for the industry – for some it might be, but for others it would be the opposite story, where they’re trying to claw their way back.

Q: What indicators are you watching to tell you about the future economic situation and how it’s going to develop over 2011?

RD: The issue for us is the age and the duration of this recession. It’s what happens now that it’s this old. We are looking at things that we didn’t look at before, because we’re looking at situations we’ve never seen before. A year ago we would have looked at the unemployment rate as a proxy for credit card losses. Now it has nothing to do with it because the unemployment rate is at 9.6%. The majority of people whose debt we wrote-off in the early part of the recession are long gone. None of them have a new credit card so they’re not in the numbers anymore. Now we look at the five-week newly-unemployed as a proxy, which I didn’t know existed until six months ago. As a bank, we have an insight based on people’s willingness to borrow and willingness to save. And we’re seeing unprecedented savings levels, where people are holding onto money. I think it’s because they are afraid not to have the money in case they need it – it’s a defensive posture. Mohamed El-Erian from PIMCO calls it ‘self-insurance’. His perspective is that it will force us into a double dip – he’s quite negative about it. The point is that it’s a significant measure – we’ve never seen such levels of cash before.

Interview with Richard K. Davis Chairman, President and CEO, U.S. Bancorp



Q: So people are staying more liquid?

RD: People and companies are keeping cash on hand, which is something to measure. For example, two years ago, 37% of customers didn’t use their credit lines; currently that figure is 42%. So fewer are using the lines they have. This could become costly for them in the near future because right now it’s not very expensive to hold cash at our site, but our capital levels will have to go up. We can also see that two years ago 15% of customers used 100% of their credit line; that figure is now 18%.

And then we can break that down by the kind of company: corporate banking is flattish, commercial real estate almost the same, commercial banking similar, and then community banking – which is smaller – is really where this barbell is happening. If we already have your credit line, you’ve gone through all of the work to get it approved, you’ve paid to have the line available, and you’re not using it – that’s the best proxy we have of what’s happening to the economy. And these numbers have been coming down to record low levels, month by month. So people who have access to credit choose not to use it; the corollary to that is they are putting more cash on the balance sheet and they’re not stretching it or trying to do anything they haven’t done before. They’re simply hoarding cash.

So this informs my last point, which is things like unemployment arithmetically won’t come down for a long, long time, because what’s happened is that businesses, small and large, have started to test themselves on just how productive and efficient they can be, how far can they go without adding one more person, one more plant, or one more PC.

They realised about a year ago: “Wow, we’re still thriving and we’re amazingly more efficient”, and now they’re banking on it and putting it into their new operating models. We are just starting to see the first glimmer of that but, for the most part, people will take as long to get out of this as it took to get into it, which is many, many months. And I think we all believe that they won’t come back to their original position because they’ll save longer, they’ll incur less debt and they’ll be more efficient. In the meantime you’ll see this blip in M&A, where some companies find they can’t hold on much longer independently, and others can’t resist buying somebody. You’ll see M&A in the next year or so, and it will look like a proxy for business growth and a renewal of interest. It’s simply a kind of resetting but after it’s all done, they’ll go right back to being efficient, they’ll hoard cash and they’ll be extremely prudent for a while. We’re seeing the behaviour across the board.

I was raised by parents who were Depression-era children: we didn’t use anything that we didn’t need and we saved everything we had, and my parents were victims of that moment in time that says “I’m just never going to be caught unaware again”. In the same way, for the younger people who went through this current recession, it will forever have an impact on the way they behave, the way they incur debt, the way they spend, the way they save. It will be a permanent change. And generally things are going to be painfully slow. Some folks are still counting on the big pickup, but I’m not sure we see any lever that can cause a resurgence of energy for many years.




Q: Is awareness of sustainability and environmental protection another influence on behaviour?

RD: I believe sustainability is a negative force. I’ll put it in context. To get out of past economic difficulties, the Industrial Revolution pulled us out, two wars pulled us out, and the technology boom pulled us out. But there’s nothing out there this time to do that. Some have argued that the green initiative, sustainability will be that “thing”, but smarter people think that it will actually preclude and slow the recovery potential because it’s an expensive proposition. It’s not a lever to jobs, a lever to growth or a lever to innovation. It’s an expensive step to reverse things we did and make it take longer to do things that we would otherwise like to do. I do think it’s going to play into it, but I think sustainability actually becomes a drag on recovery across the globe. I also think austerity programmes around the world are going to be a major factor. I’m not talking about Ireland and Spain. I’m talking about all of us: I think we will end up having an austerity decade, where around the globe we all reset what we do, how much we spend, how much we use and what we expect. And it’s going to slow everything down. I’m not doom-and-gloom, by the way: probably 85% of the world will be largely unaffected by what happens, they’ll just slow things a little bit and there will be small iterations. But those on the edges will be affected greatly.

Q: What do you mean by the edges, the extremely rich and extremely poor?

RD: Well, for instance, in my business, we’re going to make it very, very difficult for people on the marginal financial edges to get banking services. That’s not a threat, it’s an absolute fact. Credit cards and checking accounts will all be less available. So if you’re in the

mainstream, you’ll feel a little difference, and the slowing economy will be troublesome, but you aren’t out of a job and you’re not without viability. But if you are on the edges, it’s like bobbing your head above the water. If you’re well above the water, you can handle a wave. But if you’re gasping for your last breath and a big wave comes by, you are pretty much gone. So I think it’s going to move the margin line way up, and have a lot of people unbanked and unemployed. And that’s the point I’m trying to make. The impending need for austerity programmes, dampens my optimism considerably.

Q: With these austerity programmes there will presumably be less provision of government-provided services. Will the private sector step in?

RD: Private companies might, but public companies won’t. As a collection, these are companies that are only in existence because somebody decided to invest their money in them for a better return, and unless it’s the mandate of that company to be a socialist-focused organisation – to give up shareholder value for the good of the world – unless that’s their mission, they haven’t got that right. I think there would have to be a change in the covenant of for-profit companies – which is possible, but not overnight – to expect the business community in general to step in where the government is going to step out.

Q: You’ve talked mainly about the US economy. Are there any global indicators that you’re looking at, or countries of particular interest?

RD: This is primarily a domestic company but we do international business in the payment space. When you swipe the card and the back of the card is read – the magnetic strip – that’s what we do. We do that in




Western Europe substantially, in Canada, in Mexico; we’re about to do it in Brazil, and eventually in India. This is a big business for us because it’s not making loans or taking deposits. There’s no foreign currency risk here. We’re only moving other people’s money around in a more efficient way in their own currency, but it gives me an insight to volumes and to changes in tenor. In our particular case, we have a pretty good sense what the global community is doing – developed countries like Europe look a lot like us in terms of same-store sales, consumer behaviour, and savings versus spending. Now we’re getting into Brazil and India which will give us an insight into the emerging markets. So we have a little start and a huge up-side, or we can get in a little start and just have a bit of a loss-leader. But we expect them to grow substantially more than the developed nations, at smaller margins and higher volume.

We also gain insight through our customers, who typically are moving jobs overseas for efficiency purposes. This isn’t the “go to India for better call-shop” of five or seven years ago. It’s effectively a much cheaper way to run your company in places where developing nations have trained, skilled, ready people. And it costs substantially less than here. So a domestic agenda concern is that we end up losing a lot of our jobs that we need for this recovery because the cost of doing business is still higher here.

Q: Other than emerging markets, what is your biggest strategic opportunity today?

RD: It would be what I’d call, ‘flight-to-quality’. As this recession gets older, and every time there’s a story written about a few of the good banks that did well and are going to do well – we keep showing up, locking in our position in

the eyes of consumers and businesses as a safer place to either put your money or to get your money. In the very beginning when things started to fall apart in fall of 2008, I expected the flight-to-quality to be completely in deposit-gathering. I thought it would be all the CFOs and treasurers of large companies who would be the first to say “Let’s put our money in there, because we have way more than the insurance will cover, so we better know that the company is safe”. That happened, but at the same time those same business leaders invited us into their credit line as the banks they had changed the rules, making it more expensive, making it harder. So the lending side was surprisingly quick to welcome us in under flight-to-quality. They’re both now present. So for us, the longer this goes, on a relative basis we get advantaged. On an absolute basis we don’t get hurt.

Q: How do you view innovation, and what does that mean in your industry?

RD: This industry isn’t that innovative, by definition: it’s been around hundreds of years, and it hasn’t particularly changed what it does. It’s a gatherer of deposits for safekeeping and a lender of monies to those who look like they could pay it back. We make leverage of 1-to-7 on that deal – end of story. All the other stuff is just making it noisy. In the last couple of years, though, the channels have changed so it’s not just about traditional branches anymore. It’s about branches in grocery stores, in airports or in universities. We have the largest number of non-traditional branches of any bank in America – around 840. We’ll see if that pays off or not. We thought years ago that a branch in the corner next to the mall was no longer as appropriate as having a branch where you work or where you’re going to be all the time. We’ll see.




The next step though is mobile banking and the advent of transaction-based activities, including banking on the more viral options, and so we have been investing heavily in that. But five years ago we would not have been investing but waiting for others to do it and then being a quick follower. So I’ve actually changed the company, taking it into the first group of adopters – not bleeding-edge, but no longer waiting for others. We’re spending some money that could well be disposable, or making investments that aren’t 100% positive, and we’re with the first round as opposed to the second or third, where the price usually comes down, but the potential visibility to your customers – the early adopters – would be lost if we waited. So we’re more involved now in that, but innovation isn’t going to save banking, it’s going to be a defensive act every step of the way. It’s not going to change – I’m not going to get 20 million more customers because I’m the first with something, but I MIGHT lose customers if I’m third or fourth.

Q: Will there be a new group out there that’s unbankable, based on behaviour? Or will it be possible to price the risk appropriately to be able to serve that group?

RD: There’s a group that’s totally unbankable.

Q: So you can’t look to serve them through innovation?

RD: Sadly, less of that group will graduate to becoming viable bank customers. To give you an idea: in the last year before the financial regulatory reform was approved in July this company made US$ 17 billion in revenue a year, and about a billion of it was taken away by the Card Act, overdraft protection and things like that. So we

just went to US$ 16 billion. If I wasn’t making money at all, that would put me under water. The new kind of cost of doing business means I can’t afford to have a marginal customer who will either create a fraud loss or a charge-off loss for me if I can’t find a way to create an insurance policy against having a charge for that. So I just won’t. My shareholders didn’t ask me to subsidise anybody and so that will be part of the exaggeration of the divide between the haves and have-nots. How can that be fixed? Well, that can be fixed if we can get some balance in some of the regulatory and legislative actions that were recently taken, where somebody has enough confidence to say, wait a minute – let’s not bite the hand that feeds us, the banks aren’t bad people. They’re the only place anywhere in America where you can actually put a dollar in and get seven for it, and so let’s find a way to make them stronger and safer, but still encourage them to take those actions – get paid for it – and let’s help them help us as a recovering economy.

Whichever country does the best at keeping their banks safe and sound and yet engaged in helping with the recovery will be the strongest economy. The next year or two will probably set the course on that. But the people are less qualified at the end of the recession than they were before, the banks are expected to be more highly capitalised than they were before, and those are typically in conflict with each other. But, we could sit down right now and work with the Small Business Administration (SBA) to create new programmes that don’t exist today. SBA is one of many government agencies that have a long runway to enjoin with, say, a banking community, to take on additional risk over a longer period of time than maybe I have, but


we’ll work together on this and I’ll make loans to people that I wouldn’t have before, because together we’ll share that risk. It’s still out there, we can still do that. We’re working on those solutions now, but they’re not there yet. The actions that have been taken the last year or two will undoubtedly hurt the wrong people. On tax breaks, for example, rich people have the voice and the microphone, and they’re the ones who are holding this whole tax issue at bay because they have the power. But if they were the folks that were losing their banking services, it wouldn’t happen. So sadly the margin gets bigger and those without a voice get heard less.

Q: So, through your core competencies, you could help those unbankable customers, but only with better business-government cooperation?

RD: Right. We’ll do what we do, which is risk management with appropriate support, to give people what they need at a time they need it the most. But we won’t do it as a philanthropic event, and we won’t do it as a subsidy. We shouldn’t.

Q: Which countries work best with their banks right now?

RD: I don’t know enough to know. Based on what I do know, I think the countries that did better in this recession – Australia and Canada to name two – have less concerns and worries. Sometimes that actually puts you behind because you’re not worried about staying ahead. That’s one of the worries I have about this company. But I don’t think there’s a particular model out there that’s going to avoid the austerity programmes or that is so independent that it is unaffected by the global recession that we’re all feeling. So no, I don’t see a distinction at all.

I think the G20 is about to distinguish which countries work best with their banks. I do think that’s worth watching. And the G20 leaders agreed on some broad concepts in Seoul – but the timetables are uncertain and the exact actions are left to individual countries. Each G20 team will be saying: “So how do we want to play this? There are alternatives – if we are aggressive and first among few to create the most safe, sound banking environment and economy in the world – so that we can look to our constituency and say ‘We will not let it happen here again’, that could be so dead right that we have no growth. If we let growth occur unchecked and we let this happen twice under our watch, our constituents will be angry – or something in between. And, by the way, no matter what I pick, I had better see what my neighbours are picking because it could change the balance of power as it relates to the recovering economies.”

It is interesting this time that there are two parallel paths for the developed and the developing economies – no one knows how those two affect each other. But when you’re in one, you better also decide your position in the other one. So India cares about China and Brazil – as they are emerging – but we care about Germany and Canada and Japan, as we’re developed. And I think that creates an extremely complicated circumstance. So it isn’t about one or two countries really pulling us up or out. We’re all in this together, and if we let the developing develop too fast, that’ll be bad, and if the developed nations don’t celebrate growth in developing nations, that will be bad.


Q: When you think about your company, is your definition of value changing, and if so, how?

RD: We have four constituencies: employees, customers, shareholders, communities. I come to work every day to make sure that whoever invests in this company gets their return, and a better one than they could anywhere else. That’s what I live for – the shareholder. We never were an employee-focused company, but in this recession we decided to invest in that. Now the shareholder becomes the beneficiary if we do these other things right. I start everything now with the employees to ensure that they are engaged, feel positive about what they do, quality work comes through, and their pride comes through. Five years ago our lenders would have said “I don’t know why the hell I’m here. I keep saying ‘No’ to the customer across the street, and the bank down the street keeps saying ‘Yes’, and I get paid on whether I make that loan.” And they would’ve been sort of right. But a lot of them didn’t leave, perhaps because they actually knew that the more stringent provisos were actually a smart way to do business.

Now I think the employees are here because they decided on it intentionally. They want to be part of this company, doing this mission, doing it this way. My value proposition for the employees is no longer “It’s not better somewhere else,” it’s “This is the place you want to be part of”. So our value proposition h as changed: it is not about shareholders at all costs. It’s employees who will affect customers, which will change the community view, all of which will feed the shareholder. So for me, all of the constituencies are the same, but the

order of things has changed, and, while I would have done it anyway, the recession created a beautiful template for us, a wonderful canvas, and we just started painting on it. Our value proposition to our shareholders – safe and sound, good return. Employees – safe place to work, good mission. Customers – great service, somewhere you can go, somewhere else to get it.

And communities – this is that last piece. My value proposition is starting to adjust a little bit because I’m running the United Way campaign, and I’ve become more passionate than I thought I would be. I’ve met with 41 companies in this city and seen probably 35 CEOs. Each of us works for some form of shareholder, but the differences among our views of community responsibility are intensely varied. And I do think a quality of those companies that comes through is to do more than they were asked to do originally. So I think it extends itself into becoming more engaged. If we get in and actually serve more meals and help people find homes and build communities, not just buildings – our constituencies love that; they’re inspired by it. If we do well, they’ll make more money because it’s a higher-quality company.

So I’m prepared to move my value proposition, not because of the recession, but along with it, to make this company a little more engaged. Every January we have an all-employee meeting which is telecast across the country. The theme this year is going to be community service, and it’s going to be under the guise of “We have always been a community partner”. That’s what banks do – the only place you go to get things done. Let’s take that





responsibility – as we have so well as a financial institution – and spend all our energy on community service. I’m prepared to make this the centre for a while because we are all doing well. If we were fighting for our survival, we wouldn’t even get to “community”, we wouldn’t even be in the category. So I think each company will find its place. It might be a little bit more expensive, but it’s still the right thing. So we are all going to have to find those trade-offs, but it’s becoming more and more clear that we’ll have responsibilities as CEOs to shareholders always, but if we can get there by being good community stewards – I’ll call it social partners – I think there’s room for it. A bank is a safe haven, for safekeeping when you don’t have a place to put your money, a place to go when you have a dream you need to accomplish and you can prove you’ve got the wherewithal to do it, and a collection of people who independently have a mission greater than funding and collecting deposits because they’re changing the world a little bit. So that for me – the value proposition – didn’t change, it got crystallised by this downturn.





Sajjan Jindal Vice Chairman and Managing Director, JSW Steel


PwC: Has the economic contraction cause you to modify your business strategy?

SJ: The economic downturn has made us become more India-focused. Before the downturn, we would export 50 to 60 percent of our steel products and sell the remaining in the Indian domestic market. Post-2008, there was virtually no overseas market for steel. Consequently, we had to shut down some of our manufacturing capacity. On the other hand, the domestic market for steel has been relatively less affected by the downturn. Indeed, we found India could be a very good market for us. We began, for the first time, focusing on the semi-urban and rural markets of India, which was a bold step for us. We also got into the retail sale of steel products through JSW Shoppe outlets. That’s really helped to build our brand – not many of our competitors have attempted to enter the retail market for steel products. But overall, the steel industry was hit pretty hard by the downturn. Just before the crisis, steel prices were hovering around US$ 1,200. When the crisis hit, priced dipped to US$ 500. In order to deal with the situation, we had to take some cost-cutting measures. Fortunately, those measures have been very effective. In fact, we are now reviewing our cost-cutting measures every three months in order to see what additional steps we might take.

PwC: What indicators are you watching to understand how the global economy, or specific local economies, will develop in 2011?

SJ: Generally speaking, the outlook for the global steel industry is still uncertain. Clearly, we are not in normal times and some observers believe that there’s a possibility that the global economy slips into a double-dip recession. Governments are doing what they can to prevent that from happening, but one cannot know for

sure how the global economy might avert another slide. Still, the Indian economy remains resilient and is doing extremely well. Slow growth in other countries may even have some benefit for India in that it will help to reduce the cost of certain imported commodities. Lower commodity costs will speed India’s progress.

PwC: Where are the most significant opportunities for the JSW Group today?

SJ: We are betting big on India. With 9 to10 percent growth in the Indian economy, every sector looks attractive: power, infrastructure, steel, logistics. And we operate in all those sectors.

PwC: Do you foresee any risks associated with a domestically focussed strategy?

SJ: I have tremendous faith in the potential of India. So, to my mind, there is little risk associated with our strategy. After the economic contraction began, we became more cautious. We have reconfigured the debt profile of each company in the JSW Group and are taking a more conservative approach. Previously, we were taking on larger risks and our debt-equity ratios would go as high as two-to-one. Now, we are keeping debt-equity ratios at one-to-one – particularly in the steel sector. The downturn also taught us another lesson about the risks associated with large overseas investments. For instance, prior to the downturn, we bought a US steel company for US$ 1 billion. Today, with one exception, we are looking only at India. In the case of minerals – iron ore and coking coal – which are used in steel fabrication, we continue to look for overseas mines we might acquire. But we are not looking at buying overseas steel plants. On the other hand, we are open to taking part in overseas infrastructure projects like building ports, power plants, or roads.

Interview with Sajjan Jindal Vice Chairman and Managing Director, JSW Steel

PwC 14th Annual Global CEO SurveyInterview Transcripts 2010

Infrastructure is a different ballgame because the return on investment is fixed. However, when it comes to steel, India is the country to be in.

PwC: Has the downturn affected your spending on innovation?

SJ: As a group, our strength lies in the fact that we are an R&D-driven company. Let me explain this with an example. In India, a large part of the domestically-mined high-grade iron ore used for steel manufacturing tends to get exported. Consequently, in India, we are left with only low-grade iron ore. Now, JSW Steel requires significant quantities of high-quality iron ore, which we have to buy at very high prices. So, we took it upon ourselves to develop a technology by which we could re-process low-grade iron and use it to manufacture high-grade steel. That innovation has saved us a lot of money. So, even in my position, I spend a lot of time on R&D issues.

PwC: In what ways has the attractiveness of different countries or regions changed over the past year or two?

SJ: Earlier, Europe and the US were our major export markets. Today, they are minor markets for us and the Latin American and African markets have become more important. That has been a huge change for us. Even in the acquisition of overseas mines, we are looking mostly in the southern hemisphere: Australia, Africa, and Latin America. Finding a good mining acquisition is a tedious process that involves extensive due diligence. So, we haven’t completely ruled out mine acquisitions in the US. And we are also looking at Russia and Canada. Since we acquire mines to feed our internal requirements for minerals, our mine acquisition strategy is largely driven by demand for steel and energy.

PwC: Do you see changing purchasing behaviours on the part of your customers?

SJ: Everyone wants to hold less inventory. Consequently, many of our customers – such as the car manufacturers – ask us to hold inventory for them. In turn, our own suppliers hold inventory for us. So now, raw and finished materials are delivered on a just-in-time schedule. This has made the supply chain a lot smarter and efficient. Prior to 2008, our profits were high and, as a result, we accumulated a lot of fat. After the crisis, we had to tighten our belts. Today, there is much more focus within the JSW Group on cost-control. That helped us a great deal, particularly after the Indian market and the emerging economies started to come back.

PwC: In your view, what can be done to stabilise the financial sector?

SJ: That is a complex question and I am no expert. But I do believe that the financial sector should be tightly controlled. I think we must follow a conservative approach to finance, as the Reserve Bank of India has done, because human greed is ever-present. If you don’t have tight controls, things will always go wrong. In our organisation, we don’t do treasury management very effectively. The head of our own treasury department wanted us to play in the foreign exchange market. But I told him that I don’t understand foreign exchange and I follow what my father taught me: never enter a business that you do not understand. Therefore, I refrain from getting into things like playing in foreign exchange or investing in a business sector I have no knowledge of.



PwC: Can you elaborate on your expansion plans?

SJ: We have a deleveraging strategy in place. Recently, JSW Steel entered into a technology partnership with the Japanese steel manufacturer, JFE, to source high-end technology for sophisticated steel. Originally, we wanted only a technical collaboration. However, they wanted to hold some equity in our company. By selling a 15 percent stake in JSW Steel to JFE, we raised US$ 1.28 billion. We are using that money to reduce our debt and deleverage our balance sheet. Over the next 10 years, we plan to invest US$ 16.9 billion in order to increase our total steel production capacity to 32 million tonnes from 6.8 million tonnes today. Though this plan seems very ambitious, it translates into annual growth of about 12.5 percent, which we believe is achievable.

PwC: But the steel industry is cyclical. Is there a downside to this strategy?

SJ: There is a downside risk only if you are over-leveraged. But our strategy is to have less debt. Three things work in our favour: our debt-equity ratio of 1:1; the high-growth Indian market; and the fact that we don’t need to depend on others for raw material.

PwC: What sources of capital are most attractive today?

SJ: In the past, most Indian companies went for very traditional money-raising options such as development finance institutions and banks. Today, more and more Indian companies are looking at international sources of finance such as bonds, export-credit-agency-backed financing, and securitisation of future cash flows. These days, financing has become very sophisticated. Right now, for example, we have a new project in West Bengal in which we will be investing US$ 3.6 billion during the first

phase. Out of this, US$ 1.35 billion will be funded through equity and US$2.25 billion through debt. This debt will largely be export-credit-agency-backed debt. It will also be partly financed by import-export banks in other countries that offer 15-year loans at very low interest rates. We’re finding that capital is more easily available, especially for companies with good credit ratings. Globally, there is a lot of money in the system.


SJ: In a high-growth economy like India, many companies are building capacity rapidly and, as a result, become easy targets for talent-poaching. So, employee retention is a real challenge. In order to maintain our own retention rates, we’ve made our employee stock option scheme more attractive. We believe that our employees should be partners in JSW’s growth.

PwC: How might the private sector contribute to social well-being in areas that were once considered the government’s responsibility?

SJ: I believe that the best model to use is the public-private partnership. India’s administrative capabilities are not like China’s. Therefore, PPPs in healthcare, roads, education, ports, airports, or railways can be a good alternative to the government going it alone. There are cases of government-only programmes that are either left unimplemented or if implemented, are not effective. The government’s mid-day meal plan for school children, for instance, is a good programme that is not being implemented properly. So large, profitable companies must do their bit, too. For example, JSW provides meals to schools in the Bellary district (Karnataka) and Thane district (Maharashtra) that are attended



primarily by children from low-income families. Around 200,000 (Two lakh) students are fed each day. The food is cooked in a clean environment and is sent to schools within a 60-kilometres radius of the district centre. In my view, if you operate in a particular community, you must give back to that community.

PwC: Is there anything that governments can do to improve the environment in which you operate, other than to reduce the overall burden of regulation?

SJ: It would be better for business if there was more transparency in government. For instance, the auction of 2G telecom licences in India was not a transparent process, whereas the auction of 3G licences was quite transparent. And as a result of that transparency, the government raised a lot more money. So transparency is very important. One area I also feel strongly about is the export of raw materials, which India sells abroad without adding any value. It’s been happening for so many years. In a country like India where there is so much potential, there is no reason for us to export raw materials. We must export cars, components, and other value-added products.

PwC: In what ways is the importance of stakeholders – other than corporate shareholders – changing?

SJ: All stakeholders are equally important. As one grows older, one becomes wiser and wants to give back to the society. India has so many underprivileged people. And we try to make positive changes to the lives of these people through our JSW Foundation, which is active in education, health and sports, art, culture and heritage. We want to give back to our society. It makes us feel good about ourselves.








Chairman and Chief Executive Officer, Johnson Controls


20462_CEO Survey_transcripts_Stephen A. Roell_200111DG.indd 1 20/01/2011 15:23

PwC: The economic crisis has had a profound impact on patterns of economic growth, regulation, capital markets and consumer behaviours around the world. What indicators in each of your three core business groups – Automotive Experience, Power Solutions and Building Efficiency – are you watching to tell you how the global economy, or specific local economies in the U.S. and abroad, will develop in 2011?

SR: In two of our businesses, we have forward looking backlogs we use to gauge what’s happening. For example, in Building Efficiency, we monitor what we call a pipeline of bidding activity. We contrast this year’s activity compared to that of previous years’. We review the type of bidding activity we have in our specific vertical markets, such as K-12 educational institutions, higher education, hospitals and government agencies. This gives us an indication of whether or not there’s momentum in our business in terms of quoting activity.

In Automotive Experience, we monitor build rate production schedules provided by our customers, various external organizations, such as JD Power, as well as security analysts. Additionally, we review the stability of housing prices to tell us whether or not consumers are going to be more confident in their automotive buying patterns. There are other general indicators, such as consumer confidence indices, and research from the University of Michigan and The Conference Board, that identify what the buying strength is based on those confidence indicators. In Power Solutions, our automotive battery business, the situation is interesting. Generally, 80 percent of our business is driven from battery replacement,

as opposed to automotive original equipment manufacturers (OEM) build schedules. In that market, there really isn’t good information. For example, weather can be as much of an indicator as some economic factors. But in our case, we look at how our retail customers are stocking their inventories, and going into 2011, we’ve seen some very good stocking patterns.

PwC: As you analyse all of those indicators, what is your outlook for 2011?

SR: Coming into this fiscal year, which began October 1, Building Efficiency had a double-digit increase in global backlogs. In Automotive Experience, we publish a three-year backlog of new business we’ve won, and for the period 2011 through 2013, we have over a $4 billion backlog of new business. By contrast, that three-year backlog was $2.5 billion when we entered fiscal 2010. In Power Solutions, our biggest challenge has been keeping up with market demand.

PwC: What are the major risks you see in those outlooks?

SR: The risks we monitor look well beyond 2011. For example, as we look at our risk portfolio, we’re concerned about commodity costs. At the same time, we’re keeping a long-term focus on supply, and right now I can’t say that’s an issue. We’re seeing copper prices increase, which impacts our Building Efficiency business. But as we look longer term, and as the global economy strengthens and emerging markets get bigger, those commodity concerns get much broader, relative to steel, petrochemical based plastics and other materials. There are some things we need to mitigate near-term, and some other things we need to monitor as we look further out.

Interview with Stephen A. Roell Chairman and Chief Executive Officer, Johnson Controls




PwC: Talk about any strategic changes that you’ve implemented during the recession, in any of the three core groups, and which have been most resilient.

SR: In terms of resiliency, I’ve been surprised to the extent the automotive markets recovered in 2010. We also were surprised at how far they fell the preceding year. The supply base, for the most part, has weathered it much better than I thought it would. Had liquidity and access to capital been prolonged, we would have had a lot more issues in our industry around the supply base.

In Building Efficiency, as we look at the more mature markets in North America and Western Europe, the recovery has been slow, and it’s expected to continue to be slow. What has been impressive, from a global standpoint, is the emerging markets have held up so well. Markets in the Middle East, China and South America either stayed strong or came back much quicker than we anticipated. The Power Solutions business was down only for a short time.

PwC: Did you have to make any substantial changes in your basic business strategies in these areas?

SR: We did, and the one change we were most thoughtful about was in Automotive Experience. Again, we never anticipated the magnitude of the decline in production levels. In North America, for example, we had operated at vehicle production levels of more than 15 million units a year for about 15 years, and then it suddenly dropped to 8 million units. It’s pretty hard to adjust to that.

From a strategic standpoint, we had to decide how to view that business going forward. We set out to de risk the business in the context of minimizing commodity risk, recovering engineering

costs and pricing new programmes. We set forth a plan to have the business generate our cost of capital in a normalised pullback of 15–20 percent. Then, in a more normalised period of time, we would generate returns in the 15 percent after-tax base. That’s not the way we managed the business before, so it’s probably the biggest strategic change we’ve made.

PwC: As the automotive industry has come back, has that strategy helped you respond?

SR: It’s a strategy we’ve held to. We’re not to the point where we can claim build schedules or build rates that get us to that high-end rate, but we can see ourselves in the 2013–2014 timeframe operating within those parameters. The disciplines we’ve put in place to de risk are critical, and gaining confidence that we can achieve those returns allows us to invest in the business. We recently announced two acquisitions in our Automotive Experience business, which this path allowed us to do.

PwC: How important are quality and innovation in all of JCI’s segments?

SR: In all our businesses, we’re always challenged from a margin standpoint, and the only way to improve our margins is to continue to innovate. Innovation is a critical part of our strategy and how we’re going to grow profitability over time. In the Automotive Experience business, quality is a big factor. The standards from the OEMs have been raised over the last couple of years, making quality a differentiator, something they can build their brands around. That has flowed into the supply base, where we look to substantially improve and invest in quality.

Stephen A. Roell Chairman and Chief Executive Officer, Johnson Controls




PwC: What is Johnson Controls’ greatest strategic opportunity today, as well as the risks associated with it?

SR: We have several opportunities, but let me highlight one: the “start/stop” battery. This advanced lead-acid battery helps stop and start vehicle engines at red lights and other intermittent stops as a way to reduce greenhouse gas emissions and fuel consumption. The technology, which is best known in Europe, can lower emissions by 5–12 percent. Our technology, called absorbent glass mat (AGM), fits this marketplace very well. The assumption had been the stop/start battery would be embraced and adopted gradually by 2015, but it’s happened much more quickly, and now the industry is scurrying to meet capacity demands. OEMs have given multiyear commitments of millions of batteries to convert their entire fleets in a shorter timeframe than originally designed. We’ve gone to our Board of Directors to ask for increased capacity. It’s a great opportunity, one that’s going to continue to grow.

PwC: Last year a majority of CEOs said that they planned to increase their innovation spending despite the economy. Do you consider investment in start/ stop battery technology to be innovation spending?

SR: We distinguish between innovation and technology. Innovation spans new ideas, technologies and processes that deliver value, so it includes logistics or how we provide a service to our customers. Specifically in technology spending, I have to admit, we paused in 2009. In 2010, we reinvested, not only in AGM technology, but also in lithium-ion technology for electric vehicles and hybrids. Interestingly, in December we had a day and a half session focusing on

technology road mapping. All three businesses made separate presentations, and then they engaged one another in dialogue and questions, to not only better understand their respective technologies, but also to identify synergies among the technologies they’re developing. We’re trying to leverage each other’s capabilities, expertise and innovations as a team.

PwC: In what ways, if any, has your view of the attractiveness of JCI’s major international markets changed over the past year or two?

SR: In China, we saw record levels of production in the last two years in automotive markets, and the growth rates have been sustained. This also is true in Building Efficiency in China. In fact, Asia in general continues to enjoy strong, double-digit growth. Global Insight continues to project double digit construction growth in Latin America, China and the Middle East for the next five years and beyond, so those markets are going to be strong for us. I don’t think anything that’s occurred over the last three years has diminished the attractiveness of those markets. If anything, our long-term view of international markets has been strengthened.


SR: From the automotive standpoint, there’s more emphasis on component capability and technology, rather than system buying. We’ve had to respond to this change by making a couple of acquisitions. Another change is we’re starting to see global sourcing of platforms. Ford, Honda and other major OEMs now have global platforms. This will continue to evolve; a global presence is critical.





We talked earlier about quality, and there’s major shift among OEMs in that area. The quality of our products is becoming more of an integral part of what we do, in terms of the value proposition for our customers. I haven’t seen a shift towards low-cost products, nor any change relative to low cost country sourcing. It’s more about the quality and technology. Customers are looking for quality products and value.

PwC: Has there been a weeding-out process of suppliers, particularly in emerging markets?

SR: There wasn’t much weeding out in the building or battery businesses around the world. In automotive, there were a lot of proprietary, family owned businesses caught with excess capacity and costs, and therefore they struggled to weather the downturn. There was some consolidation at component levels – plastic components, for example – but we didn’t lose any major suppliers. In fact, during the downturn, Visteon and Delphi came out of bankruptcy healthier because they shed liabilities.

PwC: Generally speaking, what one thing should be done to stabilise the financial sector so as to minimise the risk of another recession?

SR: There isn’t much. Tightening credit controls and evaluating creditworthiness are the key things. There was too much credit granted to organisations and individuals that were overextended and weren’t creditworthy, so the risk-taking was probably the root cause of the recession.

PwC: Has JCI’s approach to raising capital changed during the downturn? And if so, have the changes affected any of your strategic plans?

SR: There are two things. We were much more reliant on commercial paper than we are now. The decade before, we

used commercial paper for large acquisitions and transactions. It was convenient and cost effective. Secondly, from a pension standpoint, with money as cheap as it is, we’re able to fund our under-funded pension plan.

PwC: What, if any, changes have you made in your people strategies, including layoffs, plant closings, hiring and retention, management programmes, etc.?

SR: By virtue of consolidation and plant closings during 2008 and early 2009, we reduced our global workforce by 15,000 people. We also asked our people to step up and do more. How was the morale of the company impacted? Four years ago, we implemented an employee engagement survey globally with all of our people, 125,000 at the time, to determine their level of engagement with our company and the effectiveness of our leadership. We have conducted that survey every year since. What’s striking is each year, our scores have risen consistently. We attributed that to the fact we spend more time talking to our people about the future and giving them a better understanding of our vision for the company and what we’re working to achieve. This engagement allowed us to get through a period of time when people were worried about their jobs. We’re very proud of that.

For example, in 2009, our Automotive Experience business was named as the most preferred large employer in the Detroit area, even at a time when we were cutting back. Again, it was attributed to the fact our leadership communicated effectively with the organisation, and people knew what to expect.

As part of the survey process, once we have the results, our 7,000 leaders review those results, discuss them with their employees and identify the root cause behind any issues and then



respond to them. We have made over 75,000 workplace changes in response to the survey in the past four years. We had 93 percent of our people globally take the most recent survey, and over 70 percent of them thought that taking the survey was going to result in change. We’ve continued to talk about what’s going to take place as we progress out of this downturn, and that has made a difference.

In addition, as we look at growing globally, we recognise we’re going to need a more diverse workforce, including more women and different geographic leaders. We continue to invest in middle- and senior-management leadership development programmes, globally and across our three core businesses. Through these development programmes, people have a chance to experience and gain insight into other businesses and functional groups, and feel more a part of the entire company. We’ve been doing this for eight years. Among our top 200 managers, about 80 percent have been through the development programme and can identify with the entire enterprise, not just a geographic aspect or a specific business.

PwC: Has developing local managers been challenging as you expand globally?

SR: It’s a difficult balance, because at the same time, we’re trying to develop global leaders. We look for people to take ex-pat assignments and manage within some of those local geographies. We transfer people across businesses. We’re still in a first generation of middle management in some of our emerging markets, but we recognise to be successful in five to 10 years, they’re going to have to be part of our global team and senior management.

PwC: Is the issue of work/life balance something you’ve addressed within your people strategy?

SR: It’s interesting and complicated. We understand from our 2009 employee engagement survey that work/life balance is important for many of our employees. It is also influenced by other things such as geographic, cultural and generational factors. Globally we know we cannot solve this simply, but rather, we have to work locally to address the needs of our people, our businesses and also understand different generations within our work force may view work differently. It is not just about work/life balance, but also addressing the entire employer/ employee relationship and how we can best attract, develop and retain our people.

PwC: This seems to go beyond the traditional “generation gap” issue.

SR: Yes, it is beyond that. It’s about how today’s younger generations approach work, what is important to them and how we keep them engaged. They want to be given an assignment and have the freedom to act with greater independence. They don’t want to be constrained by specified schedules or to be on a time clock. They want to have greater flexibility in their work situation and they are motivated by different things than previous generations. Learning and development is even more important to younger generations. You have to listen very carefully to them; they need to believe they are being heard. They want to learn from more experienced senior managers, but they also want more freedom in how and when they do things.



PwC: How might the private sector do more to contribute to social well-being in areas considered the government’s responsibility, such as reducing poverty or addressing climate change?

SR: Johnson Controls has a programme entitled “Blue Sky” which supports our employees’ engagement in environmental projects around the world. Our people have participated in thousands of Blue Sky projects over the years in their local communities. The highest participation of this programme has been in Asia and Eastern Europe.

Here in Milwaukee, where we are headquartered, we recently completed our United Way drive. We’re about the 20th largest employer in the city in terms of employee numbers, but we were the largest contributor to the United Way campaign, with $4.1 million contributed, half of which was donated by employees, and half matched by the Johnson Controls Foundation. We recognise it’s our responsibility to give back to the communities where we operate. There’s such a high need in our own backyard around issues such as poverty and hunger, and we encourage our people to get involved in the community. In Milwaukee, for example, we have leaders from our company represented on 70 different community boards.

PwC: How should the private sector contribute to national competitiveness, in areas as building infrastructure and contributing to the skill base in the workforce?

SR: That’s a tougher one. In some cases, it is the responsibility of private industry to train and develop talent. For example, when we talk about energy engineers, we can work with universities and trade schools relative to their curriculums. In many cases, we have to train people for some of the specific skill sets our businesses require as they are highly specialized.

We think private/public partnerships are great in areas like the national laboratories. There are some things, from a technology standpoint, that private industry can’t fund, because of the scale, but in cooperation with the national labs, it’s amazing what we can do together in terms of thinking through applications and using core technology to commercialise it. We see a major opportunity in linking together the labs, universities, and industry to bring about change and to impact things like climate and energy efficiency.

PwC: That seems to address public/private initiatives in high schools, trade schools and community colleges, where local businesses help educators develop training programmes that fit their job requirements

SR: In our industry, we need a lot of service technicians. Unfortunately, many trade schools are working with electrical engineering students who want to apply their skills to computer science, as opposed to a mechanical application or building automation systems. We work with technical schools on curriculum and fund some of that development. We’re also one of the largest employers of armed services personnel as they come back from active duty. These individuals have great skills in energy efficiency that we can further develop.

PwC: Considering government intervention in the auto industry, the stimulus programme’s impact on energy efficiency in buildings, tax incentives for cleantech investments, proposed regulation of carbon, etc., talk about the current role of government activity in the private sector.

SR: The governments in the U.S. and in several European countries have significantly expanded their role in supporting private enterprise. If you go



back 18 months, the U.S. federal government played a huge role in the survival of the domestic auto industry. I don’t think many people appreciate the problems extended far beyond General Motors and Chrysler. Had those two companies failed, the negative ripple effect through the supply chain and the rest of the OEM world would have been more dramatic. I don’t believe the U.S. federal government has been given the credit it should have for providing financial assistance to the auto industry.

In Europe, incentives supported by the respective governments were significant in spurring demand and provided support to both the domestic and transplant OEMs. Again, the ripple effect would have been far worse had the governments not stepped in.

Secondly, the U.S. federal government was very responsive to concerns about losing our technology edge on hybrids. Funding provided as part of the stimulus package helped to establish lithium-ion battery manufacturing in the U.S. and has advanced our position. Again, governments in the U.S. and other parts of the world were extremely helpful in providing incentives and tax allowances to promote the purchase of fuel-efficient and hybrid vehicles. For example, in the U.S., a $7,500 tax allowance did a lot to promote the purchase of hybrid vehicles. This was needed, but going forward, it’s my belief this industry will have to stand on its own. The OEMs will have to achieve global price points that create demand without government incentives.

Climate change? I don’t expect anything to come out of the U.S. federal government in climate change legislation. It’s just not going to happen right now and I’m not sure it should.

I would hope the concept for energy-saving performance contracting would gain traction globally. It’s my belief there should be enough financial incentives particularly around retrofitting buildings that would make energy efficiency embraced from the private sector. The economics work, so there’s no reason why the U.S. or European governments for that matter need to fund energy efficiency. Individual states in the U.S. and/or member states within the EU can provide policy and legislation that allow for private financing to help drive this industry. There is enough private capital right now available for a variety of scaled projects with the pay back coming from the energy efficiency improvements. That’s what the driver should be.

PwC: While climate change legislation appears to be going nowhere, what about current efforts by the EPA to regulate greenhouse gas emissions?

SR: I’m not sure what’s going to take place with that. If you go back prior to this, companies made commitments to reduce their greenhouse gases, and it was taken seriously, as evidenced by sustainability reports and activity we’ve seen from our clients looking to reduce their energy costs. That’s the right way to go. I don’t think punitive efforts work. Most corporations want to do the right thing. They want to be responsive regarding energy. The people we’re hiring expect us to be. They want to work for a company that has a value system built around sustainability; therefore I don’t think you need a lot of government regulation to drive it.






PwC: Along those lines, more and more companies are making the business case for reducing their emissions and investing in energy efficiency initiatives, which has the potential to benefit your Building Efficiency group.

SR: Energy efficiency is the easiest, simplest thing to do, and generates by far the best payback. We do a lot of renewable work with long-term paybacks. We project-manage that business, and combine it with energy-efficiency projects. The combination makes an attractive payback.

PwC: What is one thing that governments can do to improve the environments in which you operate, beyond increasing or reducing regulations?

SR: The U.S. federal, state and local government have done a great job the last couple of years making their own buildings more efficient, looking inward to improve their energy efficiency. That’s within our industry. On a broader scale, I’m an opponent of protectionism, so making sure that world markets are open to us and that we have a competitive tax structure.

PwC: In what ways do rising levels of government debt in the US and your key international markets concern you?

SR: Long term, the implication of higher government debt is higher interest expense. The question is, how strong is our currency, and what kind of interest costs are we going to have to bear down the road? I want to make sure that our borrowing costs are competitive, which is probably the biggest concern I have if the federal government continues to incur large deficits.

PwC: In conclusion, when thinking about Johnson Controls’ core businesses, how is your definition of value changing? That includes non financial kinds of value that may be important to your full range of stakeholders.

SR: We talked earlier about innovation. The definition of innovation is not just technology. Innovation is the value we provide to our customers. How we bring value, whether in the form of quality or functionality of a product, or the logistics of how we serve that customer and deliver that product, hasn’t changed. We’re trying to find new ways to help our customers differentiate their products and grow in their markets. That’s what value is to them.






Tan Sri Dato’ Azman Hj. Mokhtar Managing Director, Khazanah Nasional Berhad



TSAM: First of all, we need to put 2011 in the context of what has gone on over the past few years. In 2008, the global economy had what can be characterised as a kind of “heart attack”. Now, in 1998, the economies of East and Southeast Asian had their own heart attack – which thankfully was not fatal. And in the decade that followed, that event spurred us to get into better shape – to go the gym and really work out, if you will – in terms of proper governance, risk management, and other corporate best practices. At the same time, this period also saw China and India reclaim their historical position of economic leadership, which they had previously enjoyed for hundreds or even thousands of years. So having gone through an economic upheaval a decade ago, the contraction that began in 2008 was less of an issue for us in East Asia and Southeast Asia because we went into this crisis from a position of strength.

Having said that, for countries like Malaysia, I think there remain structural challenges. Our country is going through an economic reform programme, for example, so I think our ills are not akin – if I may extend the medical analogy – to a heart attack as such, but perhaps more like hypertension and, perhaps, being slightly overweight. As a result, Asia generally, and Malaysia specifically, still has work to do in strengthening its economic health. In terms of the countries at the epicentre of the current crisis – the US and the European countries – we need to see them return to basic economic principles. Pumping more money into the system through ‘quantitative easing’, for example, will

help relieve the pain for the short-term. But longer-term, real medicine is required and that implies some very fundamental economic restructuring. So, across the Western economies, we would like to see greater job creation and fundamental changes in the banking system to eliminate what some have called “casino banking”.

On the other hand, in Asia, we would like to see a more balanced model of trade – greater consumption in Asian economies, instead of just relying on export-driven economies. In some ways, China is well along that path. From a cyclical perspective, Malaysia is doing fine right now; we believe Malaysia can achieve seven percent growth in GDP in 2010. In 2011, we anticipate some slowing of the Malaysian economy in keeping with an expected slowdown of the global economy. But for us, economic progress is primarily measured by how vigorously we continue with the pace of reform. We are lucky in that Khazanah is both a contributor to, and a beneficiary of, those reforms.

PwC: What is the global economic outlook beyond 2011?

TSAM: For me, the long-term global outlook will depend on our ability to strengthen the real economy through a reform agenda that supports economic stability. In the meantime, we should be prepared for a period of volatility as a result of monetary easing, currency fluctuations, and the potential for some asset bubbles appearing. Those are the kinds of risks that I think we have to be careful of. By and large, I think growth in 2011 will probably be moderate. But these sorts of conditions present opportunities for enterprises with sound business models to differentiate themselves from others that rely on speculative financing.

Interview with Tan Sri Dato’ Azman Hj. MokhtarManaging Director, Khazanah Nasional Berhad



PwC: How has the economic contraction affected your investment portfolio?

TSAM: Khazanah’s portfolio, which is fairly broad, can be divided into, I would say, old economy and new economy investments. Our old economy investments have typically been inherited as formally state-owned enterprises in industries such as power utilities, automotive manufacturing, and airlines. These companies are big utility-type companies that, as a result of the five years of reform and restructuring, had the strength and resilience to manage their way through the current downturn. Consequently, these investments were not a burden on our portfolio, notwithstanding a recapitalisation of our airline and mobile telephone companies. Our new economy investments have held up very well – particularly in the healthcare sector, which has really outperformed. So all this is good news.

PwC: Has the economic contraction affected your investment strategy?

TSAM: The crisis did prompt us to go back and look at our strategy, but after an intensive period of soul-searching, if you like, we felt that our strategy was fundamentally sound. So, we continue to stay the course – although we have made what I would refer to as tactical changes. For example, the crisis has encouraged us to consider greater in-country consolidation of related businesses. We also closely monitor our ‘geographic footprint’ – the country markets in which we invest. Starting around 2004-05, we consciously shifted a lot of our geographic focus into our own region. In telecommunications, for example, we consolidated and grew Axiata from having only about six million subscribers in 2005, to about 150 million subscribers across nine Asian countries. I think are in the right regional ‘neighbourhood’ and we intend to maintain that geographic focus.

PwC: In what specific ways are you pursuing greater innovation?

TSAM: Our innovation agenda is embedded in each of our companies’ business models. But from a portfolio-wide perspective, one type of innovation we’re really intrigued by is the potential of using the constituent parts of our portfolio as building blocks to form interesting business combinations that create additional rounds of value. For example, by combining the capabilities of our mobile phone company, Axiata, with our health sector assets we can deliver mobile healthcare services. Those sorts of innovative combinations will promote deep, ongoing customer relationships that cut across multiple service categories and multiple geographies.

PwC: In what ways have your view of the attractiveness of various regions or countries changed?

TSAM: Ultimately, our focus is Southeast Asia and other important regional markets – the Indian sub-continent, China, and to a lesser extent Taiwan and Korea. But on a sectoral basis, we see the benefit of working with like-minded companies from other regions that are looking for a partner so that they can come here and set up operations in our part of the world. For example, we recently made an investment in Small Bone Innovations, a US-based high-tech orthopedics company. This is a company that has done very well in the US and we’re bringing them to Malaysia where they’re establishing a base to service the Asia-Pac region. Malaysia is a very good base for them because of the country’s skills in electronics and precision engineering. Khazanah’s presence in the region’s healthcare sector will also provide Small Bone with a platform to grow their business here. So this is a partnership based on complementary strengths: One partner has an




innovative technology, the other one has a regional presence. But we share the same views in terms of how we want to conduct business.

PwC: What sources of capital are most attractive to Khazanah?

TSAM: Where we need to raise capital, we’ve largely been doing so using Islamic finance structures, a form of finance that views money as a medium of exchange, rather than as a commodity in itself. We’ve been at the forefront in completing many transactions using Islamic finance – particularly sukuk, which are financial certificates that are tradable in secondary markets or exchangeable for real assets. We believe that within the global financial system, there is clearly a role for Islamic finance, which is growing quite rapidly. Another form of financing we find attractive are co-investment structures in which we partner with other institutional funds. It is potentially a very powerful approach to raising capital.

PwC: Has the volatility of the business environment affected your people strategy?

TSAM: What you learn from a financial crisis is that there is really no substitute for making the right choices and doing the right thing. If you take that approach, people will believe in what they are doing, their work will have meaning, and they will make extraordinary contributions. The people who work for Khazanah are a very committed group of professionals who are doing this, not just for profit, but also to contribute to the development of their country and region. To illustrate: Before we make an investment in another country, we begin by discussing not how we’re going to make money, but what the country needs in terms of infrastructure or financing. And then we evaluate our own ability to meet those needs. After all, what is the purpose of a company? Is it merely to create shareholder value?

Or is it to create shareholder value and stakeholder value, concurrently? We are of the view that it is the latter and that approach is at the heart of everything we do. So – relating that back to our people strategy – we believe that people work not only to earn money, but also to find meaning and contribute to society.

PwC: Do you believe that business can play a role regarding issues like poverty and climate change that have historically been the sole responsibility of government?

TSAM: Again, I hope one of the lessons of this crisis is that we must fundamentally re-think how we go about doing business. So what can we do in practical terms? I think first of all, we must create new sorts of objective measures in defining success; and these measures must be clearly understood by shareholders, boards, management and so on. Is success defined primarily in terms of risk-adjusted rate of return? I think some of the conventional templates that we are familiar with in the area of finance – for example, the capital asset pricing model – may be too limiting or too susceptible to manipulation by greedy financial interests. Is there a way to measure societal return and factor that in to a company’s overall performance? How do you measure sustainable return? I think these are quite fundamental philosophical questions that our business schools and other citadels of learning might try to figure out in collaboration with businesses people. On a more practical level, it’s about finding the right balance between shareholder rights and stakeholder rights and embracing a value creation model that works for both. Moving beyond the so-called social enterprise, or social business model, we also need to find ways – through microfinance, for example – to create value for the people at the very bottom of the economic pyramid.




PwC: How do you view the private sector’s role in promoting national competitiveness?

TSAM: I think the private sector has many strengths that can contribute to a nation’s competitiveness. And those strengths are not limited to money but include organisation – the ability to execute and deliver solutions. Let’s take a specific example. Education, as we know, is a very important enabler of economic development and social mobility. There is a very strong correlation between access to education and national development. In Malaysia, we’ve been blessed with strong educational institutions over many years. However, over the past few decades there’s been a gradual decline in public education. In response, Khazanah is undertaking educational reforms in what are now known as ‘trust schools’. These schools are in the public sphere, but are nonetheless adopted and run by the corporate sector. In our case, Khazanah will be taking control of ten schools – gradually ramping up to 50 – that will be funded through public-private partnerships. Public education is a big issue and one where the private sector can fill the gaps that government often has a difficult time addressing. And it’s an issue that links back to how do we define business success, because if

we don’t solve the education issue then the problem will eventually degrade the private sector’s ability to recruit a capable workforce. So this is a good example of how the state can use the strength of the private sector – which, as I said, is not just based on money, but more importantly on organisational skills and the ability to execute – to promote national competitiveness.

PwC: Has the social dimension of your business changed your concept of “value”?

TSAM: Khazanah embarked on the journey of delivering value to the larger society long before it became fashionable to do so. As early as 2004, we were talking about human capital, social capital, knowledge capital, and taking a holistic view of our corporate mission. Ultimately, we focus on total stakeholder return, if you like. Of course, you have to acknowledge the special interests of shareholders. But those interests are contingent upon total stakeholder return. We adopted this approach five or six years ago, and subsequently, have never questioned its validity. In fact, the current financial crisis has strengthened our belief that it is not only the right approach, but the only way forward for us.








Timothy M. Manganello Chairman & CEO, BorgWarner Inc.



PwC: The economic crisis has had a profound impact on patterns of economic growth, regulation, capital markets and consumer behaviours around the world. We’d like to explore how BorgWarner – a multinational business designed for worldwide operations with international supply chains and global talent pools – is changing its approach to global operations and global markets. I’d like to begin by asking what indicators you are watching to tell how the global economy in the US, as well as the many international markets where BorgWarner operates, are going to develop in 2011 and perhaps beyond.

TM: I do a lot of reading about what’s going on economically and politically in all our markets. I read the Financial Times and similar publications, as well as the auto industry trade publications, particularly Automotive News. We also talk to our customers around the world to see what their views of the future are in their markets. I visit various locations, too. For example, I’m in Europe probably five or six times a year, and I take at least three trips to China each year. Also, I’m on the board of directors of the Detroit branch of the Chicago Federal Reserve Bank. We piece together all this various information and look for trends, at least for the next year or so.

PwC: So as you survey all those various global indicators, what’s your outlook for 2011?

TM: In China my outlook is for strong growth. Although they say they’re going to try to reduce growth, I still think the Chinese economy will be strong relative to everybody else – double digits, maybe in the low teens rather than the high teens. The European economy will probably be a little bit better than they expect. They’ve found a way to manage

their debt crises in different countries so far and still keep their economies reasonably strong, and I think they’ll continue to do that. Don’t get me wrong. Their economies aren’t as strong as they used to be, but I think they’re just a little bit stronger than they’re going to predict. The US economy is at slow but stable growth. I don’t think there will be either a double digit recession or runaway economic growth, not until we get the housing market in better shape. The Japanese and the Korean economies seem to be growing slightly.

PwC: In what areas has your overall strategy for weathering the economic crisis, and its impact specifically on the auto industry, been most resilient, and what strategic changes have you had to make?

TM: Our basic strategy is focused on developing technology to improve fuel economy and reduce emissions. Every country in the world is focused on improving fuel economy and reducing CO2 emissions. It’s turned out to be an excellent strategy. It was strong before the recession, it was strong during the recession and it’s strong after the recession. The only issue was that production volumes were reduced tremendously, but the strategy was very resilient. It drove our growth going into the recession and kept us healthy. Year to year, we never lost money. We lost money in two quarters in 2009, but not for the entire year.

Part of our strategy during the downturn was to control or reduce our costs, and keep them reduced as we came out of the recession. And we’ve done that, while still managing our growth strategies. We continued to reinvest in technology, innovation and new product launches, although we did reduce our operating costs in other areas. So now we’re coming out of the recession with a strong balance sheet,

Interview with Timothy M. Manganello Chairman & CEO, BorgWarner Inc.


record profits and record sales. The record sales are from our fuel-economy and emissions-technology strategies. The stronger profits are coming from our strategy to control costs. I’ll give you an example. From our peak employment during 2008–09 to the lowest trough in that same time period, we laid off 5,000 people. Coming out of the recession, we’ve hired back about 3,000 people, though in different parts of the world. In China, we have more people than during our peak, because that’s where our biggest growth curve is.


TM: There are two parts to that answer. The technical opportunity is huge when it comes to improving fuel economy and reducing emissions. So for us the biggest strategic opportunity is downsized engines that are turbocharged, or automatic transmissions that are redesigned to become more fuel efficient. Those are two huge opportunities for us with very little risk, because the trends are going that way and there’s no turning back.

PwC: Because that’s technology you already have and that you can leverage?

TM: We developed that technology for the Europeans first, and now we’re bringing it to the United States and other parts of the world. The Chinese and other emerging markets are slightly out of step with the European and US markets, but the technology is coming.

We also see an opportunity for BorgWarner with hybrid and electric cars, but I just don’t see those markets to be large, particularly pure electrics. We see electric cars to be roughly five percent of the total market share for global automotive production. Now, five

percent of, let’s say 120 million units by 2020, is still a decent number. The challenge, however, is to improve battery technology and the availability of rare earth metals, which are used for making batteries and electric motor magnets. Right now, rare earths are controlled by the Chinese. In fact, China itself represents another strategic opportunity. It is the largest single automotive producing country in the world today, and it’s also the fastest growing country for automotive sales growth in the future. China is like fishing in a bathtub right now. And what’s the strategy for fishing in a bathtub? You need more fishing poles, and you need more lines in the tub.

PwC: What are the risks related to the Chinese auto market, from BorgWarner’s perspective?

TM: As a reputable international manufacturer, we have the risk of employee retention amplified by a market that is becoming very competitive regarding compensation. Also, China does not have a fully developed legal system, especially when it deals with patent infringement and intellectual property protection, so you have the issue of piracy and copycat product technology.

PwC: In last year’s survey, CEOs said that despite the economy, they planned to spend on innovation. You’ve already talked about how much BorgWarner is in many ways a technology company, so what has been your strategy regarding innovation during the downturn?

TM: We continued to support innovation, even though at the same time we were thinking more tactically about how to reduce costs. We stopped working on some programs that were cancelled by our customers, or some technologies we thought were going to

Timothy Manganello Chairman & CEO, BorgWarner


be delayed in the marketplace because of technical or financial issues. But we continued to spend as much percentage-wise, and probably a little bit more, on new technology and innovation. Our focus was to come out of the recession as strong or stronger than our competitors, and, again, I think we’ve done that.

PwC: Were there any new technologies that you explored during that period?

TM: Yes, we have been developing some new technologies that aren’t quite ready for prime time yet. For instance, we’re working with a couple of OEMs (original equipment manufacturers) to co develop a new ignition technology that can replace spark plugs. We also came up with a new transmission for electric vehicles. At the same time, we improved our technology on turbochargers, dual clutch transmissions and variable cam timing. So we basically kept the cadence going on our core strategies – improving fuel economy and reducing emissions, while at the same time giving the customer equal or better performance.

PwC: Besides what you’ve already explained about your international markets, in what ways, if any, has your view of the attractiveness of different countries or regions changed over the past year or two?

TM: What’s changed is that automotive manufacturers have hit a different reset point on their volumes, but our overall strategy and focus in the various countries and markets that we originally had targeted has remained the same. It’s just that some of those markets are growing from a lower level of volume today than in 2007. We’re just as focused on our international markets as we were in 2007. In fact, the opportunity for BorgWarner in today’s smaller market is greater than it was two or three years ago in a larger market.

PwC: With regard to capital markets, generally what do you believe should be done to stabilise the financial sector so as to minimise the risk of another recession?

TM: First, I don’t think we need more financial regulation. We need to live by the regulations we already have. Second, we should increase the availability of capital that tier-two and tier-three suppliers and dealerships in our industry need to stay in business. That would help a lot.

PwC: What about tier-one companies like BorgWarner? Have you had to change any of your approaches regarding access to capital?

TM: There was about a 12 to 18 month period where even successful tier-one auto suppliers struggled to access capital. Now, we’ve found a way to get there. It was a little more costly than we were used to, but we were able to do it. We reduced the size of our revolver [revolving credit agreement] when it came up for renewal. We also issued a convertible bond rather than normally issuing a plain bond. We never had a liquidity problem, and we’re now back to normal in terms of our borrowing power.

PwC: Then how do you manage those lower tier companies, which are suppliers you depend on, that are having a harder time getting access to capital?

TM: We have been evaluating our suppliers for about the past seven years, working internally and with an outside company to identify and categorise our supply base. We’ve used a colour-coding system – red, yellow, green, or blue. Red means a company that has a significant financial risk, and we probably need to replace them as a supplier. Yellow is



somebody on a financial watch list. We can work with them, but also monitor them and hopefully get them off yellow and into green, which are suppliers we don’t have to worry about much. And then we have a couple of blue suppliers that are so financially strong that we never even look at them.

PwC: Is it safe to say that during the recession those colours burned a little brighter?

TM: Yes, more fell into yellow and red, so we monitored them probably quicker and more frequently. It’s hard to replace suppliers, and it takes time, but you’ve got to do it. That’s part of our long-term enterprise risk management strategy.

PwC: Shifting from those external suppliers to your internal employees, talk about BorgWarner’s people strategy and how it was affected during the economic downturn?

TM: Part of our people strategy, in general, is to manufacture our products in the countries where our customers produce vehicles. In China, for example, we like to manufacture our parts there and sell them to Chinese automakers. We utilise the same strategy in Europe and other countries. To tie that into our people strategy, we hire, groom and retain strong local managers to run those companies, and they employ local people all the way down the chain.

We are a lean organisation when it comes to hiring and firing, and we try not to have to lay off people. Now, in 2008 and 2009, all that went out the window. When we lost 25–40 percent of our sales in certain parts of BorgWarner, we had to make the difficult decision to shut down some plants and lay off workers, although we’re now slowly but surely bringing people back as required.

We also shortened work weeks in some plants, and all salaried people around the world took roughly a 10 percent pay cut, while officers took a 15 percent pay cut. We changed the bonus portion of our compensation system. We tightened all expenses that weren’t mandatory and necessary. For instance, I had to approve all international travel, and we reduced the number of people who attended meetings. We did more teleconferencing and phone conferencing. It was part of reinforcing our overall cost-control strategy.

PwC: Turning to the issue of government’s role in the private sector, talk about how BorgWarner was affected by the federal loans to General Motors and Chrysler.

TM: First, whether we like it or not, globally governments are going to be part of the auto industry, if for no other reason than because of regulations on fuel economy, emissions, safety and other areas. Now, when it came to salvaging GM and Chrysler, I’m happy to see that those companies are still alive, for two reasons. One, as an auto supplier, I still have them as customers. Two, I think the US manufacturing sector would have had a major problem if we lost the contributions and capabilities of GM and Chrysler.

Both companies may have downsized without government help, through bankruptcy, but the government help allowed them to go through bankruptcy in a much more humane fashion. The Automotive Task Force did force them to eliminate a good chunk of excess capacity. In Europe, the governments have probably not allowed some of the auto companies to restructure, and the European industry is going to be faced with a lot of difficulties caused by excess capacity. It’s quite possible not all of them will survive.


PwC: With that said, what is one thing the US government can do to improve the environment in which BorgWarner operates, other than regulatory changes?

TM: They need policies that help American companies become more competitive in the global market. Democrats and Republicans, and all of us citizens, want more jobs. Jobs are based on having the right product at a competitive price. We may be able to develop the right product, but if we’re not competitive, that product will be made somewhere else in the world. I don’t know if that means less regulations or more regulations or getting out of the way.

PwC: In conclusion, when considering BorgWarner’s operations, how is your definition of “value” changing, including non financial kinds of value, with regard to stakeholders other than shareholders, such as customers, communities and governments?

TM: We have a set of BorgWarner beliefs that have guided this company for decades, tied to respect for each other, collaboration, excellence, integrity and responsibility to the communities in which we operate and our employees live. We try to be a green company and good corporate citizens. In fact, Harvard Business School did a case study on BorgWarner being one of the first to adopt a set of company values. None of that’s changed. And, at the same time, we want to grow our business and give our shareholders a good return for their investment.








Vineet Nayar Vice Chairman and CEO, HCL Technologies



VN: We’re watching both macro and micro indicators. At the macro level, we look at credit card usage, housing, and employment levels. At the micro level, the key indicator we look to is the overall IT spend.

PwC: How would you describe your economic outlook and what risks might lay ahead?

VN: The risks vary from economy to economy. The risk in the US economy stems from the fact that the macro-economic indicators are not showing positive signs. Right now, the US economy is supported by fiscal stimulus – it’s an economy on ‘steroids’. But at some point, the steroids will have to be withdrawn. And if the US experiences a jobless recovery, there’s a possibility that calls for protectionism will prevail, which would be unfortunate. Protectionism would negatively affect the balance of trade, run counter to the WTO agenda, and do damage to the way the world does business. Additionally, if the US becomes protectionist, there will be a knock-on effect as other economies follow suit. The end result will be the failure of global trade negotiations. In Europe, the risk pertains to liquidity. If the liquidity crisis weakens the Euro, businesses across Europe will have to find a way to reboot themselves. This is a risk we have to watch out for. And then there is the issue of revaluing China’s currency and what that would mean for the world economy. These are some of the risks that will impact our customers’ businesses, which, in turn, will impact our business.

PwC: Has the global economic contraction caused you to modify your strategic thinking?

VN: When the crisis began we were very clear that for HCL, an economic recession represents an opportunity and not a threat. We knew that our competitors would perceive the oncoming recession as a time to retrench – and that by moving forward while others retreated, HCL could gain ground. So we quickly took several steps. For instance, we increased our investments, declared that there would be no downsizing of our workforce, and offered customers the kind of services that addressed their desire to cut costs. In short, we calmed our employees’ fears while focusing on our customers’ needs. That’s how we were able to grow during this recession.

PwC: How does an organisation maintain its employees’ morale in a difficult economy?

VN: History tells us that battles are won by leaders who dare to be different. Challenging times call for counter-intuitive thinking. As the global economy weakened, we anticipated that our competitors would likely shed employees and, to protect their margins, resist dropping their fees – which would bring them into unavoidable conflict with their customers. We knew that our competitors would focus on the price of their stock rather than the needs and expectations of their employees and customers. When you let employees go, you inevitably reduce the energy level within the organisation. Therefore, we told our employees that there would be no lay-offs. And we told our customers that we would work with them on the fees we charge. In effect, this recession has been a test of HCL’s ‘Employee First,

Interview with Vineet Nayar Vice Chairman and CEO, HCL Technologies



Customer Second’ philosophy. The application of this philosophy has helped us maintain a highly motivated workforce and a very loyal customer base. Even more, since the downturn took hold, HCL has acquired new customers and the productivity of our employees has risen.

PwC: What are HCL’s most attractive strategic opportunities and what risks are associated with those opportunities?

VN: Technology is changing very quickly. Traditional forms of computing are fading and online mobility is rising. Even more importantly, most of the population in the emerging economies will soon require access to digital networks. But while there will be tens of millions of new consumers of digital services in the years ahead, the cost of those services must reflect the sorts of prices that the people in the emerging markets are willing to pay. So the way digital products and services are supplied and consumed will have to change. In order to align digital products and services with the needs of the emerging markets, many new breakthrough technologies will be required. Companies that are able to commercialise the necessary innovations will prosper.

PwC: Aren’t HCL’s competitors also talking about innovation?

VN: Yes they are. But the question is, how much are they spending on innovation? That’s the critical difference between success and failure. No company will deny the importance of innovation. But how many companies can say that, over the next five years, they will put seventy dollars out of every one hundred into the future of the company? Companies give innovation a lot of ‘airtime’ but not enough ‘dollar time’. At HCL, we put innovation on our balance sheet. We innovate on behalf of our customers and participate with them in the risk associated with innovation.

When innovation results in a new revenue stream for them, we share in it. We have this arrangement now with several customers. It’s a way of ‘putting your money where your mouth is’. And we do this because innovation is the biggest opportunity before us. Naturally, there are risks associated with taking an aggressive approach to innovation. But we are not in the business of simply supervising technology that is already in place. Rather, we are in the business of finding ways to make things work. This is how we look at leadership at HCL.

PwC: Can you tell us more about HCL’s approach to innovation?

VN: We view innovation as being driven by four mega-developments. The first, of course, has to do with ongoing technological improvements and breakthroughs. The second is the rise of the emerging economies, which will bring entire populations onto digital networks. The third is the new way that digital services are consumed, as exemplified by the preferences of Generation Y. And the fourth is the re-pricing that will be necessary to make digital services ubiquitous around the globe. So you see, innovation is not just technology-led. It is driven by all of these developments. Given that, what the market needs is an integrator that can put these four developments together to drive innovation. By themselves, tech companies, or emerging market companies, or Generation Y companies are not able to drive the kind of innovation that’s necessary. That’s why we have created a new business unit called Ecosystem Business Incubator. This unit is in the business of creating innovation using the ecosystem of companies that, combined, can bring all the capabilities required to drive innovation. The revenue-sharing model of innovation that I previously referred to is an output of the EBI.




PwC: Has the attractiveness of particular countries or regions changed as a result of economic downturn?

VN: At HCL, we don’t look at markets as less attractive or more attractive. Just as everyone requires food and clothing, so everyone everywhere will eventually be a consumer of information technology and digital services. And that lends itself to opportunities. But the question remains, are you ready to align your business with the needs of the marketplace? I see opportunity in continental Europe largely as a result of the pressure on companies to cut costs. I see opportunities in the US around innovation and marketplace transformation. I see opportunity in Asia as the marketplace there expands. Two markets that I find very interesting are Japan and the emerging economies. Japan has suddenly woken up to the fact that it can be competitive globally if it collaborates extensively with India. Emerging markets like Latin America, South Africa, Russia, India and China are interesting markets in that they will help redefine the way IT solutions are implemented. And those solutions will eventually find their way into the developed economies because those implementations are going to be faster and less costly. Over the next five years or so, those new IT implementations are going to transform the way the developed market looks at the delivery of healthcare and public services, among other areas. To my mind, life is full of opportunities. Businesspeople shouldn’t worry so much about macro-indicators. After all, we operate in a market economy. Sometimes it’s a buyer’s market, sometimes it’s a seller’s market. At a given price point, there is always someone to sell to. Why not become the first seller to meet the buyer’s needs?

PwC: Has the economic downturn changed the way you recruit talent from various countries?

VN: The manufacturing industry moved to smaller cities so that it could recruit a captive workforce. That is what our industry is doing now.

PwC: What needs be done to stabilise the financial sector and minimise the risk of another recession?

VN: I think two things need to be done. First, from a regulatory perspective, liquidity and risks around liquidity have to come centre stage. While companies have profit and loss accounts and balance sheets, they do not have statements of liquidity. There is no provision for this under IFRS or US GAAP. But liquidity testing is critical in order to ensure that businesses and governments are not overleveraged. We see liquidity testing with reference to financial institutions. But we need similar types of tests for non-financial institutions, as well. We also need to develop more robust methodologies for stress testing. As we saw with the present downturn, people find inventive ways to claim liquidity where none actually exists. So it’s not just about creating liquidity thresholds, but also creating effective ways to stress test liquidity levels. My second point regarding the stabilisation of the financial sector is a philosophical one. As managers, we tend to look at our respective organisations strictly from an ‘outside-in’ point of view. But what we also require is an ‘inside-out’ perspective; and this involves employee empowerment: giving workers a voice within the organisation and insisting that management be transparent to its employees. I am, however, not advocating for trade unions. Let me




explain with an example. My own performance appraisal is done by 77,000 HCL employees across the world and the results are published online. So – along with my 5,000 managers – I am accountable to HCL’s 77,000 employees as much as they are accountable to me. Similar protocols should be adopted by other companies so that they nurture an ‘inside-out’ as well as an ‘outside-in’ view of the organisation.

PwC: Have there been any changes to the way HCL raises capital?

VN: Raising capital in India is very expensive. But global capital is cheap. We are a global company and so we access capital from countries around the world including the US and UK. Our approach to raising capital at a given time is determined in large part by treasury rates and measures of currency valuation.

PwC: Has the current business environment caused HCL to change its people strategy?

VN: We continue to adhere to our ‘Employee First, Customer Second’ philosophy. In fact, we are going to take that philosophy a bit further. With Generation Y coming into the business, hierarchies have to disappear. Generation Y expects to work in communities of mutual interest and passion – not structured hierarchies. Consequently, people management strategies will have to change so that they look more like Facebook and less like the pyramid structures that we are used to. Another change that’s necessary is that organisations will have to become more adept in tapping the ‘non-included’ workforce. By ‘non-included’ I mean people who, for some reason, have made the decision to stop working. Women sometimes stop working after marriage. Men may stop working following a divorce or a period of depression.

Sometimes, people just take a break. Also, there are a lot of very talented people who are not in the workforce because they live in small towns, or face language barriers, or haven’t gotten a formal education. Talent is becoming very expensive, so it’s important to tap all available sources. That’s the reason we’re looking closely at the non-included workforce.

PwC: Can the private sector do more to contribute to social well-being in areas that were once considered the government’s responsibility?

VN: We certainly need companies that are socially responsible. But at HCL, we are very careful about how we use using that expression. To be ‘responsible’ means that we obey the laws, support our employees and customers, and operate in a way that doesn’t elevate the profit motive above all other goals. Being ‘socially responsible’ means quite something different. We live in a society and it’s important to give back to society. In the absence of societal development, one’s business comes under threat. Therefore, an organisation needs to be an active participant in developing the society in which it is embedded. The private sector’s involvement in areas such as rural education, assistance to the poor, and disease management is, in my view, a very positive step. HCL has chosen primary education as its way of giving back to society. We’re very involved in scholarships for the rural poor, sponsorships of teacher training programmes, and youth leadership development projects.


PwC: What might government do to improve the environment in which HCL operates?

VN: If we had to generate our own electricity, clean our own water, or operate our own transport system, it would be a terrible waste of productivity. Infrastructure and law and order are the bare minimum requirements for doing business. And that’s what government needs to focus on – providing power, building mass transit systems, and ensuring safety and security. The government should either ensure these minimum conditions – for which citizens must pay taxes – or, if government can’t, incentivise private companies to create the necessary infrastructure.

PwC: What about governments in other countries in which you operate?

VN: National competitiveness is a subject that needs to be examined closely. Governments must determine what their countries are good at, how they are going to invest in developing their national capabilities, and how they can be cost-competitive in a global marketplace. I am not sure

many governments are doing this now. If, for instance, the US adopts protectionist policies, it will lose the moral right to demand that the emerging economies open up their markets. The same is true of Europe.

PwC: Is your company’s concept of ‘value’ changing?

VN: Historically, shareholders have occupied a dominant position in businesses across the world. Other stakeholders – customers, employees, and the larger society – have not had an equivalent voice. Therefore, the definition of ‘value’ was typically based on measures such as a business’s market capitalisation or profitability. At HCL, we’re re-defining the traditional concept of value. We’ve said that HCL is in the business of creating value for our employees through our ‘Employee First’ philosophy; creating value for our customers through continuous innovation; and creating value for society by being a socially responsible organisation. So, over the last few years, our definition of value has changed to include the benefit we provide to all our stakeholders.








Zhou Zhongshu, President, China Minmetals Corporation, China


PwC: When you consider the prospects of China’s economic development in 2011, what indicators do you pay special attention to?

ZZ: 2011 is an important year because it is the first year of the 12th Five-Year Plan. China’s Central Economic Work Conference has just closed. I would mention two indicators: GDP and CPI. The objectives of GDP growth have been fulfilled, but the CPI is too high. The objective for this year was to keep it below 3.5% but now it has reached 5.1%. I think that GDP growth will be OK, perhaps slowing a little, to about 8%, but we will face considerable pressure if we want to keep the CPI below 4%.

In 2011, I think that the economic work of the government will be focused on structural adjustment, inflation control, the transformation of economic growth, and expanding domestic demand. Structural adjustment and expanding domestic demand are especially important. I’m cautiously optimistic about economic fundamentals. After all, 2008 and 2009 were the lowest points during the global economic crisis; 2011 cannot be worse. I am cautious in my optimism, however, because there are many complicated factors involved: the economic environment both at home and abroad is quite complicated and both enterprises and the government face great challenges. For China, the first year of the 12th Five-Year Plan will be a cautious year. But in the long run, I think the economy of China will maintain stable and rapid growth in the next few years before growth begins to slow down. Another point is that now what we emphasise is the transformation of economic growth. In the future, we will not be able to depend too much on export and investment. That’s why we will turn to expanding domestic demand. This is an obvious change.

PwC: Can you say something about the strategic adjustment of China Minmetals during the economic crisis? What do you think were the most effective aspects of the strategic adjustment?

ZZ: 2008 and 2009 was a difficult period for us, starting in September 2008. China Minmetals is a corporation operating in the nonferrous and ferrous metals industry. For us, September 2008 was the watershed, from the highest point to the lowest. As a corporation with a 60-year history, we have always been the leading enterprise in the industry so we felt it deeply. We made some preparations for the financial crisis in 2008 and 2009. We took three measures, which I still remember clearly. First, we decided it was essential to keep our management steady and avoid cash flow problems. We had to have enough liquidity to avoid a capital crunch. Second, we planned to strengthen the internal management of the corporation to reduce costs and increase efficiency. Third, a financial crisis can be an opportunity. This was an opportunity for us to expand or invest with low cost. Looking back, we can say that these measures were effective. At that time, I said that as the leading enterprise in the industry, we shall be the last to fall and the first to stand up. Actually we didn’t fall. The financial crisis led to an industry reshuffle, which gave us the opportunity to get what we wanted. For example, we went abroad to get resources, something which might have been quite difficult before the financial crisis. We also successfully acquired the core assets of OZ Minerals, the third largest mining corporation in Australia. One and a half years after the acquisition, we have maintained good cash flow and profit. To implement the Nonferrous Metal Industry Promotion Planning of the State Council, we

Interview with Zhou Zhongshu President, China Minmetals Corporation, China



carried out the strategic restructure of Hunan Nonferrous Metals (HNG). We restructured Changsha Research Institute of Mining and Metallurgy. We also have another mining corporation, Luzhong Metallurgy & Mining Group Corporation. With Hanxing Metallurgical Mine Administration, we now own the two largest single mining plants. These corporations have greatly enhanced our strength and laid the foundation for the building of an internationally competitive metal mining group.

PwC: Why did you think it necessary to carry out strategic adjustments at this time?

ZZ: The government is carrying out strategic adjustments. So are we. As I said earlier, the government is focusing on structural adjustment and the transformation of economic growth. For a large corporation like us, there are both advantages and disadvantages. If we can also adjust our own strategy, tactics and management according to the strategic adjustment of the government, it will be a great opportunity for us. If not, we will face serious risk.

PwC: Last year, most CEOs said that they still planned to increase innovation inputs although the economic environment was not favourable. What measures did China Minmetals take in innovation promotion?

ZZ: We have taken two important measures. First, as we own more than 500 companies, we are carrying out a restructuring covering many aspects. This is not only the requirement of the government, but also necessary for enterprise development. We are accelerating this process and, perhaps in the near future, we will become a joint-stock company. Restructuring requires a lot of human, financial and material resources. It also needs

scientific and technical support so we have restructured two research institutes to provide that.

Through these institutes we can advance our business development in the future, especially in areas such as resource development and smelting and processing. New technology is needed to support and guide our future. Otherwise, development will be hampered especially when we are prospecting in deep places and deep oceans. The two research institutes will support us in this.

PwC: In terms of overseas investment, do you see changes in the potential of different countries and regions, especially after the financial crisis? Have these changes affected China Minmetals’ foreign investment strategies?

ZZ: I share the common view that emerging economies are developing faster than developed economies during this financial crisis. We continue to have two markets and two resource streams. I rely on ‘two’, not ‘one’. Although we are highly dependent on external resources, China has its own resource advantage. Our ‘small’ nonferrous resource is in China and our ‘big’ nonferrous resource is in foreign countries. So we still stick to two lines. I am optimistic about China. And I feel we have opportunities overseas. Our key regions include South America, Africa and Southeast Asia.

PwC: Given the cultural differences across regions, how do you adapt your company to local cultures, in particular regarding human resources? How do you make sure the corporate culture and strategic goals are properly aligned?

ZZ: Human resources pose a really significant challenge. Previously, we were only a trading company, but now we are a corporation with R&D, industrial and trading activities

Zhou Zhongshu President, China Minmetals Corporation, China



spanning all parts of the supply chain, encompassing the upstream, middle stream and the downstream. Thus, our corresponding human resources face a bottleneck on further development. That’s something we need to solve.

Our solution is two-fold. First, we delegate the management of human resources to different levels of our multi-tier management. The corporation level is responsible for tier-2 people or tier-3 people. People below that are all under the management of their relevant tiers. Second, there are two ways to place human resources, especially when pooling people resources for the future. One is open recruitment, recruiting anyone with a real talent from society. The other is developing the people we need in-house. China Minmetals has trained MBAs in Canada twice. Those MBAs now have critical roles in addressing our problems on the ground. Still there are problems to be solved. For instance, we do not have enough managers for mines, plants and for capital operations. Luckily, we have done our preparation early, and given the 60-year experience behind us, we’re doing better than other companies, though some difficulties exist in addressing those issues.

When we acquire foreign companies, we acquire their ownership. Their teams are what we would like to capitalise on. After acquisition, we manage three aspects of the company. One is the board of directors, second is business scope, what it should be engaged in and what it should not, and the third is vision setting: this is something wholly set by us. The successful implementation of those three aspects is ensured by performance review. This management philosophy has generally achieved visible results. We use foreign managers to manage foreign companies because they have the best management team

already; it’s totally impossible for us to go over there and manage them well. We have learnt some lessons in this regard.

PwC: Is there any other area that is important to you? If there is, will you consider making investments in that area?

ZZ: We will, in general. The areas I talked about just now are priorities. We will make other investments if an opportunity exists. We have a foreign management team. We feel it’s an excellent team, especially after the acquisition of two companies. Now once there is a project available, we pass relevant information to it. The team is generally able to make rapid decisions after making a quick study of the project. This has placed us in a favourable position. Several Canadian mines may be handled by similar teams in the future.

PwC: Given the present Chinese conditions, human resources management is facing real wage pressure. Does China Minmetals have some forward-looking views on salaries to prevent the brain drain of your best talents?

ZZ: We have done well in salary management. We have handled the issue well, targeting mainly the professional people and the human resources departments. This is not a big problem for us. On salaries of foreign employees, people may be more worried. They say, well, you said you will retain all the management teams so how will you pay them? I think it’s easy: we just do what the market does. People get paid at the level corresponding to market rates. When we held our recent road-show, we asked some local management teams about their views: they said they feel very good in this big family of China Minmetals and enjoy their work here.




PwC: Do you feel a company should undertake some government functions in eradicating poverty and combating climate change?

ZZ: We don’t talk about government functions; we talk about corporate responsibilities. Because as a central enterprise, we have three responsibilities: economic responsibility, corporate responsibility and political responsibility. China Minmetals has joined the UN Global Compact and I attended the meeting this July at the UN. I also delivered a speech as the only Chinese enterprise. Why did we bother to join such an organisation? Because we feel it’s a platform to make us known and we need to follow up a trend there.

Nowadays, when you make investments abroad, foreign governments don’t care how well you do in operations, they care about how well you do in fulfilling your corporate responsibility. This responsibility is not only important to foreign countries, it is important to China. We have delivered sustainability reports for three consecutive years to the UN. This organisation has 10 binding principles which can be summed up in five strands. For a business, the first principle is making contributions to economic development. The second is making contributions to social progress. The third is making contributions to safety production and environmental protection. The fourth principle is making contributions to philanthropic undertakings. The fifth principle is operating according to the law. Only when you are bound by those five principles can you do well in developing your company and achieve sustainable development.

We have been evolving our understanding of this philosophy and making constant progress. The UN Secretary-General asked for

an exclusive meeting with me on this matter. He made three comments. First, he expressed his appreciation for our participation in this global enterprise organisation. Second, he noted that we had done well in developing mining activities in third world countries. He said we had not only promoted the development of local economies, but had also maintained a harmonious relationship with the local communities there, giving a good example to other businesses. Third, he said he could see that I had diplomatic experience just like him. I said, no, you‘re different, you’re a professional diplomat. I was just seconded by the government to the Commercial Office to be a counsellor. However, he said that this was important experience. And I agreed that it enables me to see things from a long-term perspective and from a different perspective.

PwC: My feeling is that the five aspects you talked about are right things to do, especially given the size of the investment portfolio of China Minmetals.

ZZ: One more comment on this. When I was in Australian mines and mines in Laos, I said, suppose the mine here has 10,000 cows, our company then possesses 5,100 of them. Why? We have a controlling share of 51% of this ‘pasture’. We made investments to help them develop their own pastures. We employed 20% of the local residents, addressing their employment issues. In addition, we developed local healthcare services, and played our part in addressing the drinking water issue and local school development. So now when the local national leaders pay a visit there, in addition to the viewing the operation of the mine, they visit the local community: they are more interested in seeing changes taking place in that community.




PwC: You are still expanding, so are you satisfied with your efforts in developing talents, in particular, high-level managers? What’s your goal?

ZZ: I ask people to think about two points when undertaking an M&A or in restructuring a company. First, business integration should achieve the effect of one plus one being larger than two. Second, corporate culture integration should achieve the effect of one plus one equalling one. If we are unable to achieve the second aspect for a company, we would rather not have that company. Why? If you cannot meet the second requirement, you cannot successfully manage the companies you have acquired. So these two points are our fundamental principles. We have not had any big failures in our M&A and restructurings so far. I would say

that my degree of satisfaction is 70%. We still have challenges to meet; the remaining 30% of satisfaction lies in training to come and culture management. China Minmetals is a company with a brilliant culture. I didn’t create this corporate culture. Its culture comes from the accumulated history of the company. However, while I am the boss, I’m responsible for summing up, crystallising and developing the very best elements in our corporate culture. We have already proposed a new value proposition: we value what we have created and what we have not created. This actually refers to two aspects: material resources and human resources. Only when we can do well in both aspects can we expect to deliver a top international corporation. We hope to do this within five to ten years.





Growth reimaginedProspects in emerging markets drive CEO confi dence


Executive summary


14th Annual Global CEO Survey 2011 – Executive summary 1

1. Are conditions right for growth? ....................................................................................... 2

2. So companies are gearing up for markets to grow? .......................................................... 3

3. Does that mean companies are abandoning developed markets? ...................................... 4

4. Haven’t emerging markets been part of corporate strategies for years? ............................. 5

5. Isn’t all that risky? ............................................................................................................ 6

6. What are some common elements of those new strategies? .............................................. 7

7. What do CEOs expect from innovation? ............................................................................ 8

8. What are their approaches to innovation? ........................................................................ 9

9. How does technology fit in? ............................................................................................ 10

10. Will CEOs have the talent they need as growth returns? ............................................... 11

11. How are CEOs getting the most from their key staffers? ................................................ 12

12. What else can they do to address skills shortages? ........................................................ 13

13. Isn’t workforce development a job for the government? ................................................ 14

14. What about infrastructure? .......................................................................................... 15

15. Are CEOs saying globalisation is back? ......................................................................... 16

Telling the CEO survey storyIn 2011, CEOs face a global business environment still recovering from the worst economic crisis in 75 years.

It’s true that the depths of the crisis are behind us and stability has returned to most of the world. But most major economies are still grappling with the aftermath of the recession and sustainable economic growth is far from certain.

In the 14th Annual Global CEO Survey, we set out to uncover how CEOs are approaching growth in the post-crisis business environment. We surveyed 1,201 business leaders in 69 countries around the globe, in the last quarter of 2010, and conducted further in-depth interviews with 31 CEOs.

We found a surprising renewal of optimism: Chief executives were nearly as confident of growth this coming year as in the boom years before the crisis. And what was really interesting was where they saw growth coming from, and how they were going to achieve it. We identified three strategic focal points among the CEOs’ responses.

This document highlights key findings in the 2011 CEO Survey. Please go to www.pwc.com/ceosurvey to read the full report, the in-depth story (which summarises CEO views in the words of those we spoke to and which graphically illustrates our detailed findings) and explore other online tools.

CEOs prepared for recovery in 2010 and expect growth in 2011





26%

31%

41%

52%

50%

21%

31%

48%

44%42%

34%

50%51%

0

10

20

30

40

50

60%

2011201020092008200720062004 20052003


1. Are conditions right for growth?

CEOs honed their cost discipline during the recession, driving a patient optimism about their prospects when global growth returned. This can be seen in the high confidence CEOs reported last year in their three-year revenue growth outlooks. ‘Things will get better”, they seemed to be telling us a year ago.

Sure enough, things got better. Now, CEOs have set their targets on more immediate growth. That’s what we see this year in the big jump in 12-month revenue growth prospects. Confidence levels are rising virtually across the board, whether we slice by how big they are, what sector they’re in, or where they’re based.

Confidence levels are rising across the board, whether we slice by how big they are, what sector they’re in, or where they’re based.

2 14th Annual Global CEO Survey 2011 – Executive summary


‘From a global perspective, it’s difficult to see where the engines of sustained economic growth will emerge. I expect overall global unemployment will remain high for some time, and this will be the biggest obstacle to economic recovery.’


2. So companies are gearing up for markets to grow?

Selectively, yes. Developed markets – half the world economy – are forecast to grow at half the rate of global growth this year. But big emerging markets like China, India and Indonesia are growing much faster than the world economy. This multi-speed recovery will have a big impact on strategies going forward.

CEOs plan to grow revenues in regions where recoveries are strong and the promise, stronger still. And those regions are not always close to home. CEOs in Western Europe are targeting growth in Asia and elsewhere. And CEOs from Asia-Pacific and Latin America are more likely to rely on their own regions for growth. High expectations are being placed on Latin America and Asia, and most clearly, on China. And CEOs are being very selective in choosing specific markets, rather than adopting a shotgun approach to entering emerging markets all at once.

Growth to come in emerging markets’ operations, regardless of location


0% 100%

Africa

Asia-Pacific

CEE

Latin America

Middle East

North America

Western Europe


EasternEurope

LatinAmerica

MiddleEast

NorthAmerica

WesternEurope

Companyheadquarters


93%

73%

80%

67%

70%

64%

72%

89%

88%

87%

86%

100%

94%

92%

33%

77%

83%

18%

50%

71%

57%

100%

40%

73%

59%

0%

67%

75%

100%

80%

80%

86%

0%

80%

86%

75%

70%

55%

47%

85%

73%

75%

29%

40%

71%

48%

25%

67%

55%

36%

32%

69%

31%

0%

51%

48%


‘The question each energy provider must consider is where it should position itself on this spectrum of differing market requirements. How much focus should be placed on supplying the growing needs of emerging economies using well-understood technologies versus, let us say, joining the race for a superior future? Where energy companies position themselves on this spectrum is going to require them to make decisive strategic choices in the years ahead.’

Johannes Teyssen Chairman and CEO, E.ON AG, Germany

Developed nations have competitive advantages



63%15%

55%

13%

31%

11%

4%

13%

35%18%

10%

6% 6%

7%3%


Cost

Quality

Innovation


3. Does that mean companies are abandoning developed markets?

Absolutely not! Large developed economies still have their attractions. The US was the second most popular choice (after China) for a growth market, with 21% of CEOs naming the nation among the three most important for growth. Another 12% selected Germany.

We also asked CEOs which nations would be most important for their future sourcing needs. China dominates the list, largely for reasons of cost competitiveness. But quality control, risk profiles, innovation capabilities, logistics and existing relationships remain factors to many CEOs. So, the US and Germany joined China, India and Brazil in the ranks of the most important future suppliers.



4. Haven’t emerging markets been part of corporate strategies for years?

To some degree. But change is accelerating because of the multi-speed recovery. The vast majority of CEOs (84%) say they are changing company strategies – and a third of CEOs describe that change as ‘fundamental’. Investments are more disciplined from the cost perspective, and more targeted from the market perspective. To a large extent, these changes are driven by this diverging picture of global growth. It’s a break from the recent past, when consumption in developed markets drove global growth. Now, it’s increasingly, emerging markets.

‘Looking ahead, there are going to be very large players that can do huge projects, and then there are going to be the boutiques. The firms that are stranded in the middle are going to struggle. At the moment we’re big enough, so I’m not worried about the next several years, or perhaps the next decade. But we will need to ensure that we remain large enough to be significant on a global scale. Partnering on projects with other firms is one way ahead.’

Philip Dilley Group Chairman, Arup Group, UK

Strategies are responding to changes in demand

Q: To what degree has your company’s strategy changed over the past two years? Which factor had the biggest impact on your need to change your strategy?

Economic growth forecasts or uncertainty

Customer demand

Industry dynamics

Competitive threats

Regulation




%


CEOs changing strategies Factors behind strategic change

51%

23

22

17

10

8

7

6

5

33%16%


Yes, and CEOs are watching out for macro-economic risks; 71% report being somewhat or extremely concerned about economic uncertainty. Volatility in currency and bond markets greatly complicate strategies geared towards more trade. Rising public sector deficits is their number two concern. There is a clear expectation that governments in mature economies will have to raise taxes and cut spending. Nearly three-quarters of US CEOs, for example, believed their company’s total tax contribution will rise because of their government’s response to a rising public deficit. The sentiment is shared in many emerging economies as well.

The heightened awareness of macro-risks is working its way into the boardroom. Risk management is increasingly high on the agenda for boards and senior management, and incorporated in formal strategic planning processes. CEOs are taking a long view of the evolving risks in a global economy. Senior level attention to this could strengthen the linkage between operational and strategic approaches to risk, and mitigate the impact of another crisis.

‘In the present environment, we see increased risk with regard to the viability of input costs. There’s also the possibility that government protectionism may slow the pace of globalisation. In any case, we are living increasingly in a world that is more volatile.’

Paul Polman CEO, Unilever, UK

5. Isn’t all that risky?Top risks relate to government policies – and talent


Recession/economy

Overregulation



Energy security

Protectionism



Recession/economy

Overregulation

Inflation


Recession/economy

Overregulation




Protectionism

Protectionism

Recession/economy

Public deficit¹

Overregulation



Shift in consumers

2008 2009 2010 2011

¹ New options



Energy costs



Energy costs




Energy costs

1

2

3

4

5

6

7

8

9




Innovation, in the context of new patterns of demand, is a clear strategic focal point for CEOs

CEOs increasingly call for a shared agenda with government in areas deemed critical for business growth

CEOs have three focal points as they change their strategies to address the multi-speed recovery.

• CEOs are responding to a rise of middle-class consumers in emerging economies by developing products and services tailored to those high-growth markets, while also looking to serve the changed needs of more mature markets. So innovation, in the context of new patterns of demand, is a clear strategic focal point for CEOs.

• Then there’s talent. As they look across their organisations, CEOs fear they won’t have the right talent to compete effectively as recoveries take hold. A lot of investment in talent over the past few decades has been made in economies that are now slower growing. Whether that talent can understand and adapt to the realities of faster-growing emerging markets remains to be seen.

• Yet, CEOs don’t necessarily want to go it alone. CEOs increasingly call for a shared agenda with government in areas deemed critical for business growth. Outcomes like improving the skills of the workforce and improving infrastructure are best achieved through sustained collaboration between public and private sectors.

6. What are some common elements of those new strategies?

‘People tend to see innovation strictly in terms of revolutionary, breakthrough products – technologies to sequester carbon emissions or microchips that can process data 600 times faster. That’s fine. But most innovations are the result of steady, continuous improvement.’

Paul Polman CEO, Unilever, UK

CEOs have a new commitment to innovation


0

10

20

30

40%

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23%

31%

37%38%

29%

17%

15%

20%

17%

20%

19%15%

13%

14% 14%13%

10%11%

10%

13%

14%

21%




A lot. The rise in importance for new products and services marks a significant shift for CEOs in where their best avenue for growth lies. Innovation is high on the agenda in virtually all industries, including industrial sectors such as metals, chemicals and manufacturing. Since 2007, business leaders have consistently reported that their single best opportunity for growth lay in better penetration of their existing markets. Now they’re just as likely to focus on the innovation needed for new products and services.

And they’re confident their innovations will succeed: 78% expect their development efforts to generate ‘significant’ new revenue opportunities over the next three years. It won’t be easy. But they are making changes at all levels of their organisations to make sure they can take advantage of incremental innovations, as well as breakthroughs.

7. What do CEOs expect from innovation?



‘Today, nearly every new item we bring out was produced with at least one partner somewhere in the world. For example, we co-locate scientists from partner organisations and from our organisation in the same laboratory. It’s amazing what you can do when you knock down the barriers in an organisation or the barriers between organisations.’

Bob McDonald Chairman of the Board, President and CEO, The Procter & Gamble Company, US

First off, they start with the customer. Many are bringing their innovation activities closer to their customers by giving customers a say in the design of offerings. Some CEOs are literally moving development processes to customer locales, in order to get closer to them. They’re creating products for faster-growing markets, in those markets, and then distributing worldwide.

Beyond that, a lot of ideas link to the idea of ‘open innovation’, involving more employees, more partners and even customers in the development process. A consumer goods’ business, looking to expand in India, for example, is focused not only on shipping the best possible product out of its facilities, but also on where it is best designed, and on how to package, distribute and sell it into a changing marketplace. Innovation can takes place at each stage, with different partners.

8. What are their approaches to innovation?

CEOs expect innovation to involve external partners








5

13

18

24

29 27 18 7

27 19 10

26 26 7

24 30 9

12 41 23

%


‘The best way to compete is to find new and more efficient ways of accepting, processing, and delivering cargo. In that way, innovative technology helps position Globaltrans as a client-focused company – and that provides us with a competitive edge. It is very important that Globaltrans be at least a step ahead of the rest of the industry in offering new railway logistics’ solutions to the marketplace.’

Alexander Eliseev Chairman of the Board of Directors, Globaltrans, Russia

CEOs are looking to gain both efficiencies and differentiation at the same time: 80% of CEOs in the survey believe innovation will drive efficiencies and lead to competitive advantage, to go with the 78% who expect new revenues. Technology is one way of capturing both. Close to 70% are investing in IT to reduce costs and become more efficient, while 54% are also funnelling funds towards growth initiatives, including emerging technologies in mobile devices, social media and data analytics.

Cloud computing, for example, can enable companies to manage business processes more efficiently. But it can also empower entirely new business models, for example ones that connect supply chain partners in a single differentiated offering for customers. In the survey, CEOs told us they are exploring both possibilities for technology, in general, and for cloud computing, in particular.

9. How does technology fit in?

IT investments are ‘ambidextrous’ – made for both cost efficiency and growth


Our IT investments are made primarily to reduce costs and becomemore efficient operationally

Our IT investments are made primarily to support growth initiatives andleverage emerging innovations, such as mobile devices and social media

Our IT investments are frequently the focus of boardroom discussions

Our IT investments are no longer necessary now that innovativesoftware is available as a service on the Internet

%


113 48 21

185 38 16

2610 28 11

4334 8 2




‘These nascent markets come with various uncertainties. One is the regulatory environment; another is talent-related. Finding the appropriate talent to take advantage of the growth prospects of emerging markets is one of the biggest challenges we face.…There is a high level of education, there’s a lot of enthusiasm, but there is a pretty steep learning curve as well. It’s just a process, and it will take some time in some markets.’

Louis Camilleri Chairman and CEO, Philip Morris International, Switzerland/US

More companies expect to add jobs in 2011 than they did in 2010, led by industrial sectors such as chemicals, automotive and manufacturing. (For a detailed look at which regions and industries are adding jobs, go to www.pwc.com/ceosurvey.) As more ready plans to hire, the talent shortage becomes more apparent: two-thirds of CEOs believe they’re facing a limited supply of skilled candidates.

In high growth markets such as China, India and parts of Latin America, talent shortages are as critical as – and in some cases more acute than – the rest of the world. But talent shortages are not isolated to emerging markets. Voluntary turnover declined in mature economies during the recession, but historical trends demonstrate that it will return. As a result, talent is at the top of the agenda for global CEOs.

10. Will CEOs have the talent they need as growth returns?

Talent is now on top of the CEO agenda







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‘We’re building the next generation of leadership to take International Paper to the next level. We don’t believe you can run a global business with expatriates. You’ve got to have local talent. They understand the local culture and how to do business there.’John V. Faraci Chairman and CEO, International Paper, US

Most CEOs say they plan to use more ‘non-financial’ rewards. These approaches can take many forms, but often involve training and mentoring ‘me’: programmes, with a closer focus on career trajectories. Instilling a deeper sense of ownership by spreading employee stock ownership more widely is another important retention tool for CEOs.

Filling skills gaps begins with companies making themselves more attractive to potential and current employees, and looking for better ways to develop and deploy staff globally. Many of today’s multinationals are seeking greater independence for managerial talent locally, to get closer to those markets. Yet, global sourcing of talent isn’t a reality yet: over half of CEOs are planning to send more staff on international assignments in 2011.

11. How are CEOs getting the most from their key staffers?



‘With Generation Y coming into the business, hierarchies have to disappear. Generation Y expects to work in communities of mutual interest and passion – not structured hierarchies. Consequently, people management strategies will have to change so that they look more like Facebook and less like the pyramid structures that we are used to.’

Vineet Nayar Vice Chairman and CEO, HCL Technologies, India

The scale of shortages, CEOs describe, is leading to some new thinking around existing workforces, particularly around tapping underused pools of talent. In virtually all markets, for example, many fewer women than men are active in the labour market. Some companies have already taken note. But there is a lot further to go: only 11% of CEOs globally are planning ‘significant change’ to policies to attract and retain more of their female employees today.

Older workers are another underused pool of talent. Over half of North American CEOs foresee challenges as older workers retire, for example, but only 5% of North American CEOs are planning significant changes to hold on to older workers, and just 10% of CEOs globally are doing so. Similarly, over half of CEOs (54%) foresee challenges in recruiting and retaining younger employees. These three pools of talent are particularly vital in thinner talent markets where skills are scarcer – but they require specific strategies to approach.

12. What else can they do to address skills shortages?

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Only in part. CEOs that told us a skilled workforce is the top item on the shared agenda between public and private sectors. Fifty-four percent of CEOs plan to work with government and the education system to improve the talent pool available.

The role for business is well recognised when it comes to leadership development and on-the-job training. What’s newer is that the training and education systems are becoming much more of an integrated market with companies and governments both looking to meet workforce requirements.

13. Isn’t workforce development a job for the government?

‘Public education is a big issue and one where the private sector can fill the gaps that government often has a difficult time addressing. It’s an issue that links back to how do we define business success, because if we don’t solve the education issue then the problem will eventually degrade the private sector’s ability to recruit a capable workforce.’

Tan Sri Dato’ Azman Hj. Mokhtar Managing Director, Khazanah Nasional Berhad, Malaysia

CEOs see shared commitments with government to achieve public outcomes


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‘India’s administrative capabilities are not like China’s. Therefore, PPPs in healthcare, roads, education, ports, airports or railways can be a good alternative to the government going it alone.’Sajjan Jindal Vice Chairman and Managing Director, JSW Steel Limited, India

Infrastructure is the second highest item on the shared agenda. Constrained budgets are forcing difficult decisions on public sector leaders, and CEOs are keen to protect a shared priority that is critical to business growth. Infrastructure’s importance comes through clearly for CEOs. Those in infrastructure-related sectors such as engineering and construction, and utilities, as well as banks, reported increased commitments of their own to infrastructure development.

While CEOs expect governments to take the lead, the role of private capital in financing infrastructure is unavoidable: an estimated US$3 trillion per year needs to be spent on infrastructure across the globe in the coming decades.1 The scale of this funding requirement means it is unlikely to be met solely through public finance, so there’s a need for governments to engage with the private sector, and tap a range of funding sources, potentially through public–private partnerships (PPPs).

14. What about infrastructure?

1 ‘Paving the Way: Maximising the Value of Private Finance in Infrastructure’, World Economic Forum (2010)

It never really went away. Multinational businesses, designed for worldwide operations with international supply chains and global talent pools, didn’t retreat from globalisation during the crisis.

But CEOs are signalling a potential change in globalisation’s future. That 72% of CEOs support ‘good growth’ that is economically, socially and environmentally sustainable is recognition that they would like to see globalisation evolve in a way that links economic growth and social development.

CEOs’ approaches to the three strategic focal points address business imperatives, but also shift towards this ‘good growth’ stance. Developing talent is a business imperative, but entire communities and countries stand to benefit as companies work with governments to develop workforces, not just their own employees. Innovation is a long-term building block for any company, but reverse innovation in emerging markets will deliver products and services that are better matched to the cultures they are sold to. The shared agenda with government likewise acknowledges how businesses are connecting competitiveness and social well-being: they recognise that equal commitments need to be made by the public and private sectors on issues such as climate change and poverty reduction.

15. Are CEOs saying globalisation is back?

‘Our definition of value has always been characterised by a high level of responsibility towards our stakeholders, besides our shareholders, that goes far beyond financial results and investment returns. The community, the economies of the countries where we operate, our customers and our employees, feature prominently as stakeholders in our definition of value, especially under the adverse economic conditions of recent years.’

Efthimios Bouloutas CEO, Marfin Laiki Bank, Cyprus

For further information, please contact:

Sophie Lambin Director of Global Thought Leadership +44 20 7213 3160 [email protected]


Suzanne Snowden Global Thought Leadership +44 20 7212 5481 [email protected]





Printed on FSC 100% recycled material, supporting responsible use of forest resources. Produced at a mill that is certified to the ISO14001 environmental management. This product has been awarded the NAPM 100% Recycled Mark.

Returning confidence amid sweeping change Communications industry summary


Key industry findings from the 14th Annual Global CEO Survey

2 14th Annual CEO Survey – Sector Summary

The global economy is still recovering from the worst economic crisis in 75 years, with many countries grappling with the aftermath of the recession. So we set out to uncover how CEOs are approaching growth during a time when sustainable economic growth is far from certain. We surveyed 1,201 business leaders in 69 countries around the globe, in the last quarter of 2010, and conducted further in-depth interviews with 31 CEOs.

The PwC 14th Annual Global CEO Survey documents a surprising level of confidence in this environment; chief executives were nearly as confident of growth this coming year as in the boom years before the crisis. The survey also revealed where CEOs saw growth coming in 2011, and how they were going to achieve it. In ‘Growth reimagined: Prospects in emerging markets’, we show how CEO confidence is being driven by targeted investments in particular emerging markets—often far from home.

This is a summary of the findings in the communications industry sector. To explore the full results from the 14th Annual Global CEO Survey, please visit www.pwc.com/ceosurvey

Communications industry summary

CEOs in the communications industry are taking a relatively optimistic view of their companies’ prospects for revenue growth. Well over half—57%—of the communications CEOs we interviewed around the world are ‘very confident’ that their business’ revenues will increase during the next 12 months, compared to only 48% of CEOs overall. This optimism may stem from the industry’s resilient performance during the downturn.

However, other findings confirm the fact that communications CEOs fully recognise the major strategic challenges confronting their businesses, amid profound and irreversible change. With technological innovation and shifts in consumer behaviour advancing apace, operators face an array of issues around customer retention, service and revenue models, operational excellence, regulation and innovation. These themes—which are all reflected in communications CEOs’ survey responses—can be broadly categorized under the four headings of strategy, operations, growth, and risk.

14th Annual CEO Survey – Sector Summary 3

innovations will lead to significant new revenue opportunities, compared to 78% of the total survey population. And the majority of communications CEOs—55% versus 39% of the full sample—expect this pipeline of revenue-generating innovation to be co-developed collaboratively with external partners, rather than originating internally within their own operations.

Not surprisingly, communications compa-nies are focussing their technology invest-ments on reaching and serving customers through new platforms and networks. Eighty-two percent of communications CEOs say their IT investments are made primarily to support growth initiatives and leverage emerging innovations, such as mobile devices and social media—in marked contrast with the overall aver-age of 54%. And 49% of communications CEOs see the development of new prod-ucts or services as the main opportunity to grow their business in the next 12 months, compared to 29% of the total sample.

All these findings underline the radical transformation now under way in the sector, as the traditional telecoms model is replaced by a convergence of network-centric, digital services, providing any-time, anywhere access to digital content. This change requires operators to migrate from focusing on volumes of call minutes and customers to a rigorous focus on value on each side of the customer relationship: the value delivered to each customer via a differentiated and tailored experience, and the valued gleaned from each custom-er for the operator itself. Achieving this radical shift demands constant innova-tion, not just in products and services, but also in underlying operating models.

Strategy: Customer-focused innovation and collaborationAs Figure 1 shows, communications CEOs are more likely than their counterparts in other industries to be ‘very confident’ about revenue growth over the coming year. Yet fewer than the overall global average are ‘somewhat confident’—sug-gesting that the communications industry is more polarized than most between fast-growing high performers and followers who are struggling to keep pace. This un-derlines the contrasting conditions facing different players in the global industry, be they fixed or mobile operators, and active in developing or mature markets.

However, whatever the conditions they face and whichever customer segments they are targeting, communications CEOs are more likely than others to regard ongoing innovation as vital for their future revenue growth. Some 88% ‘agree’ or ‘agree strongly’ that their company’s

Figure 1: Confidence over 12-month revenue growth

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Operations: Pursuing excellence As our survey shows, communications CEOs are fully aware of the absolute need to restructure and reinvent their operations for the new digital world. As well as using innovation to help drive customer revenues, they are actively leveraging technology to enhance their organisations’ effectiveness. The majority of communications CEOs (77%) say that a major objective of their IT investments is to help their business reduce costs and become more efficient operationally, compared to 69% of CEOs across all industries (see Figure 2).

The drive for operational excellence has gathered pace in the past year. Asked about the restructuring activities they have initiated in the past 12 months,

communications industry CEOs are more likely to have outsourced a business process or function (49% versus 37% of the total sample); implemented a cost-reduction initiative (92% versus 84%); and entered into a new strategic alliance or joint venture (57% versus 40%).

Going forward, communications companies aim to maintain the pace of operational transformation. During the coming year, 37% of communications CEOs plan to outsource a business process or function and 63% expect to form a new strategic alliance or joint venture (compared to 31% and 50%, respectively, of all CEOs). It seems that the most intense cost-cutting has now been completed, with 63% of communications CEOs planning a cost-reduction initiative, in line with the overall average.

These findings underline operators’ commitment to tackling the complex, inefficient and product-focused legacy operating models that previously characterised much of the industry. Each of the key operational requirements facing communications companies today – customer centricity and responsiveness, ongoing cost control, integration and monetisation of new services, usage-based pricing, bundled offerings, collaboration, consolidation—demands that they simplify their operations and embed greater organisational agility to seize emerging opportunities.

Figure 2: IT investments to reduce costs

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Growth: Targeting new marketsAs we highlighted above, communications operators are seeing their traditional operating and revenue models replaced by networked digital ecosystems. As this happens, those based in mature economies are experiencing a ‘squeeze’ in their core markets, as near-saturation and intense competition drive down prices and margins, and stimulate further consolidation.

These dynamics are fully reflected in our research findings. Asked to cite the factors that have had the biggest impact on their need to change strategy, 20% of communications CEOs pointed to competitive threats, which is double the overall average of 10%. And on the customer side, communications CEOs are more likely than those in other sectors to expect the squeeze on pricing to continue. When asked about the extent to which businesses’ focus on price will cause them to change their strategy in the next three years, 79% of communications CEOs said they expect ‘some/significant change’, against 55% overall.

These pressures, together with the higher levels of revenue growth available in emerging markets, are encouraging operators to look beyond their traditional geographies for new sources of growth. Asked to name the three foreign countries or regions they consider most important for their business’ growth over the next three years, 25% of communications CEOs listed Africa, 22% China, and 18% Brazil. And some 74% ‘agree’ or ‘agree strongly’ that emerging markets are more important to their company’s future than developed markets, well above the overall average of 58% (see Figure 3).

The extent to which communications CEOs are focusing on Africa is especially strong, reflecting that market’s massive potential. Fifty-seven percent of those communications CEOs who plan to initiate a cross-border merger or acquisition in the coming year are targeting Africa, compared to an overall average of just 10%. More generally, 74% of communications CEOs expect to alter their strategies in the next three years in response to a change where emerging market businesses drive growth for their company. Again, this is higher than the overall average. And communications CEOs are also more likely than CEOs in other sectors to anticipate that their business in Africa and Asia will grow during the next 12 months.


Risks: new entrants and regulatory changeIn recent years, communications operators have seen a succession of new players –device manufacturers, application developers, content suppliers, retailers, and others – enter their core marketplace. The impact of these entrants has been increased by a shift in the focus of customers’ loyalty and brand trust, away from the network on which devices and services operate, and towards the device itself and the online applications accessed through it. This change has been partly engineered by device, content and service providers, who have proved adept at cementing their brands in the public consciousnesses.

Against this background, communications CEOs are extremely wary of the disruptive effect of new players breaking into their markets. When asked to point to the potential business threats that represent the most significant risks they plan to mitigate over the next 12 months, 35% of communications CEOs cited new market

Figure 4: Concern about new market entrants

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entrants – which is well above the overall average of 24%. Equally significantly, 25% of communications CEOs admit they are ‘extremely concerned’ about new market entrants, compared to 11% of all CEOs globally (see Figure 4).

Increasingly, incumbent operators in mature markets face the risk that the new entrants will include not only non-communications players coming in from other sectors, but also emerging markets-based operators seeking exposure in developed countries. This reflects the likelihood that the previous dynamic of developed-market operators moving into emerging markets in search of growth may go into reverse. Emerging market operators from countries such as India are aggressively looking around for assets, and may well target developed markets. These companies have built proven low-cost operating models, and may be able to undercut the incumbents in the mature markets that they choose to target.

As well as scanning the horizon for new entrants, communications CEOs continue to focus on regulatory risks. Asked which economic and policy-related issues represent the most important risks they plan to mitigate over the coming 12 months, 39% of communications CEOs pointed to the threat of over-regulation, compared to 34% of the total survey population. And 44% of communications CEOs say regulation has significantly influenced their need to change their strategy—again, well above the survey average of 34%. Looking across their entire risk portfolio, communications CEOs are also more likely than those in other businesses to be taking steps to improve the management of risks around their new strategy, by increasing the authority of the risk management executive.


Conclusion: reshaping for the new eraPwC’s 14th Annual Global CEO Survey finds communications CEOs battling for positioning and revenues in a fragmenting and increasingly competitive value chain. In doing so, they are facing up to the challenges posed by developments such as consumers’ rapid take-up of smartphones and the resulting exponential rise in data traffic, in an environment where the business model to deliver adequate financial returns on network investments is still elusive.

However, operators can yet turn digital transformation to their advantage. In our view, they have the capacity and capability to re-establish the value of connectivity, build deeper and more lucrative relationships with customers and other participants in the value chain, and open up new revenue streams from innovative services and business models. The strong focus on innovation to drive revenue growth, highlighted by our findings, underlines their commitment to achieving these goals.

In this new environment, three prerequisites will be critical to operators’ success: true customer centricity and understanding; an ability to collaborate effectively to seize new opportunities; and heightened operational efficiency and agility brought by operational simplification. The findings from this survey confirm that communications CEOs are striving to develop all three attributes.

www.pwc.com/ceosurvey PwCfirmsprovideindustry-focusedassurance,taxandadvisoryservicestoenhancevaluefortheirclients.Morethan163,000peoplein151countriesinfirmsacrossthePwCnetworksharetheirthinking,experienceandsolutionstodevelopfreshperspectivesandpracticaladvice.Seewww.pwc.comformoreinformation.

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Colin Brereton Global leader Communications industry London 44 20 7213 3723 [email protected]

Contacts

What future are you focusing on? Entertainment and Media industry summary



2 14th Annual CEO Survey – Entertainment & Media Sector Summary

The global economy is still recovering from the worst economic crisis in 75 years, with many countries grappling with the aftermath of the recession. So we set out to uncover how CEOs are approaching growth during a time when sustainable economic growth is far from certain. We surveyed 1,201 business leaders in 70 countries around the globe, in the last quarter of 2010, and conducted further in-depth interviews with 31 CEOs.

The PricewaterhouseCoopers 14th Annual Global CEO Survey documents a surprising level of confidence in this environment; chief executives were nearly as confident of growth this coming year as in the boom years before the crisis. The survey also revealed where CEOs saw growth coming in 2011, and how they were going to achieve it. In ‘Growth reimagined: Prospects in emerging markets’, we show how CEO confidence is being driven by targeted investments in particular emerging markets – often far from home.

For full results from the 14th Annual Global CEO Survey, please visit www.pwc.com/ceosurvey

Entertainment and Media industry summary

Measured confidence amid sweeping changesPwC’s 14th Annual Global CEO Survey confirms that CEOs in the Entertainment and Media (E&M) industry are taking a measured view of their companies’ prospects over the next 12 months and three years. This circumspect outlook represents a careful balance between the risks and opportunities presented by ongoing and sweeping change affecting every segment of the industry.

E&M CEOs’ view of the future is shaped by the need to address three major issues facing their businesses worldwide. These are, firstly, an intensifying shortage of top talent and industry-relevant skills; secondly, ongoing and permanent shifts in consumer spending and behaviours; and thirdly, the imperative to reshape organisational structures to enable more effective collaboration with external partners.

Chart 1: E&M CEOs’ view on the prospects for revenue growth over the next three years

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Base: All respondents (1,201)Source: PricewaterhouseCoopers 14th Annual Global CEO Survey 2011

14th Annual CEO Survey – Entertainment & Media Sector Summary 3

This relatively cautious attitude reflects the profound changes under way in the industry. More than their counterparts in any other sector, E&M CEOs highlight changes in customer demand and industry dynamics as driving change in their strategies. Competitive threats are a further key factor. In line with these findings, the most significant risks that E&M CEOs plan to mitigate over the next 12 months are a permanent shift in consumer spending and behaviours--cited by 61% of E&M respondents compared to 30% of all CEOs--and the availability of key skills, which is highlighted in by 57% of E&M CEOs versus 38% overall.

This strong focus on risk is underlined by the fact that more CEOs in E&M than any other sector believe that formally incorporating risk scenarios into strategic planning will improve risk management, and 75% of respondents are allocating more senior management attention to risk management. Asked to highlight their main growth opportunity, E&M CEOs are more likely than those in other industries to point to new product or service development, and M&A, joint ventures or strategic alliances. They regard increasing their share in existing markets as a higher priority than entering new geographic markets.

A balanced viewE&M CEOs’ measured outlook is underlined by their expectations on revenue growth. They are more likely than leaders in other sectors to describe themselves as ‘somewhat confident’ about being able to increase their revenues over the next 12 months--a view stated by 57% of the E&M CEOs we surveyed, against only 40% of the full survey population. However, only 27% of E&M respondents say they are ‘very confident’ about the immediate prospects compared to 48% across all industries. A similar picture emerges for revenue growth over the next three years. (See Chart 1).

“The most significant risks that E&M CEOs plan to mitigate over the next 12 months are a permanent shift in consumer spending and behaviours, and the availability of key skills.”

The E&M CEO agenda: Three major issuesAs we highlighted above, E&M CEOs’ measured outlook is influenced by a need to address three major industry-specific issues. Their success in responding effectively to each of these will shape their ability to grow their businesses in the coming years.

1. Talent: tackling the skills conundrum

When asked how concerned they are about the general availability of key skills, 77% of E&M CEOs said they were ‘somewhat’ or ‘extremely’ concerned, compared to 56% of CEOs overall. This high level of concern reflects the challenges of bearing down on headcount costs while simultaneously keeping the pipeline of future talent flowing. Certainly, there is still heavy pressure on headcount: only CEOs in the heavy industrial sectors report higher levels of headcount reduction than those in E&M in the past 12 months. And though E&M CEOs do expect headcount to start to recover during the coming year, they do not expect it to happen as quickly as CEOs in other industries.


The growing focus on international mobility echoes the findings of a recent PwC report, Talent Mobility 2020: The next generation of international assignments. This found that mobility strategies in all industries will need to become more sophisticated and complex as organisations meet growing deployment demands, with the millennial generation viewing overseas assignments as a rite of passage. In our view, this outlook that will change the way workers and organisations approach overseas opportunities in the future--resulting in a further 50% increase in international assignments by 2020.

Chart 2: People strategy: CEOs plan ‘some’ or ‘significant’ change in...


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However, the biggest concern going forward is not the size of the workforce, but its quality, loyalty and mobility. Asked to name their key talent challenges over the next three years, E&M CEOs highlighted the limited supply of candidates with the right skills, followed by competitors recruiting some of their best people, difficulty in deploying experienced talent globally, challenges in recruiting and integrating younger employees, and employees making career changes for personal reasons. They are less concerned than CEOs in other sectors about the retirements of older workers: it’s a young people’s industry. (See Chart 2)

E&M CEOs intend to meet these challenges through a number of strategic changes. Eighty percent are planning ‘some or a significant’ increase in their companies’ commitment to creating and fostering a skilled workforce, and many are looking to improve access to specific skills by using more part-time or contract staff. Other changes being planned to people strategies will be aimed at incentivising younger workers, boosting the focus on non-financial rewards, deploying more staff on international assignments, and attracting and retaining more women. Each of these objectives is highlighted more often by respondents in E&M than those in other sectors.

The biggest concern going forward is not the size of the workforce, but its quality, loyalty and mobility.


2. Consumer spending and behaviours: Targeted innovation

Few industries come close to E&M for the current pace and scope of change in customer needs and habits. According to PwC’s Global Entertainment & Media Outlook 2010-2014, consumer spending on digital content will increase at a compound annual growth rate (CAGR) of 17.1% during the five years to 2014, far outpacing the expansion in non-digital spending, which will grow at only 3.0%.

E&M CEOs are acutely aware of the implications of this rapid migration to digital revenues. Asked how concerned they are generally about a permanent shift in consumer spending and behaviours, 73% said they were ‘somewhat’ or ‘extremely’ concerned, compared to 48% across all industries. And over three-quarters of E&M respondents see a need for ‘some’ or a ‘significant’ change in strategy in the next three years in response to consumers’ increasing focus on price and value for money. (See Chart 3).

This change will also bring with it opportunities, as it will usually involve putting customers and collaboration even more firmly at the heart of innovation. Some 67% of E&M CEOs expect consumers to play a more active role in product and service development, and 78% will look to suppliers for help with product innovation (versus 62% overall).

More generally, an overwhelming 90% of E&M respondents (compared to 67% overall) are planning ‘some’ or a ‘significant’ increase in their commitment to generating innovations and safeguarding intellectual property.

In terms of the focus areas for innovation, it is hardly surprising that E&M CEOs are concentrating more than those in other industries on responding to consumers’ increasing use of mobile devices and social media. Leslie Moonves, President and Chief Executive Officer at CBS Corporation, sums up this widely-held view.

“No question, the younger generation is not as used to a television screen as the older ones. They’re much more used to a computer screen. They are much more impatient. We’ve all heard, ‘I want what I want when I want it.’ And for every new media device, there are more and better ways of getting content. It is a challenge for us, getting content out there, and getting paid for it.”

Underlining the critical importance of technology in achieving this, our E&M respondents are also more likely than those in other sectors to say IT investments are primarily to support growth initiatives and leverage emerging innovations, and that IT investments are frequently discussed at board level.

Chart 3: Mobile devices and social media are driving changes in strategy across industries

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“No question, the younger generation is not as used to a television screen as the older ones. They’re much more used to a computer screen. They are much more impatient. We’ve all heard, ‘I want what I want when I want it.’ And for every new media device, there are more and better ways of getting content. It is a challenge for us, getting content out there, and getting paid for it.”

Leslie Moonves, President and Chief Executive Officer, CBS Corporation


3. Organisational structures: Reshaping for collaboration

To enable and equip their businesses to respond effectively to the challenges facing them, E&M CEOs know they must first reshape and restructure their companies. In a recent PwC thought leadership paper, Phoenix from the flames: the future media organisation, we highlighted the fact that the economics of media are changing radically, and that industry operating models need to catch up quickly. As we pointed out, scale, diversification and agility will distinguish the winners from the losers--and the new media organisation will require fresh talent, organisational structures and commercial arrangements.

This view is helping to fuel a resurgence in M&A deals in the media industry, as highlighted in a recent PwC analysis of M&A deal volumes and values in Europe in 2010. We found that the market low-point for media deals in 2009 had been followed by a 90% rebound in year-on-year deal value in 2010, as greater confidence and activity return to the market. (see Chart 4).

The E&M CEOs we surveyed are increasingly in agreement with this analysis. 50% expect some degree of organisational change, and 37%--more than in any other sector--expect this change to be major, possibly including M&As. An even higher proportion of E&M CEOs--57%, compared to 39% overall--agree or agree strongly that the majority of their innovations will be co-developed with partners outside their organisation. And they are more likely than CEOs in other sectors to regard M&As as a significant source of innovation.

Chart 4: Sources of innovation


0 10 20 30 40 50 60

The majority of innovations will be developed withpartners outside of our organisation

M&A is a significant source of innovation

Q: CEOs agree or agree strongly that...


“...scale, diversification and agility will distinguish the winners from the losers”


Marcel Fenez Global and Asia leader Entertainment & Media +852 2289 2628 [email protected]

Ken Sharkey US leader, Entertainment, Media & Communications +1 646 471 5114 [email protected]

Phil Stokes EMEA leader, Entertainment & Media +44 (0)20 7804 4072 [email protected]

Contacts

The importance of growth-focused innovation as a driver of corporate restructuring mirrors several other findings from our research among E&M CEOs, including the pivotal role of M&As, joint ventures and strategic alliances in growth strategies, and the increasing emphasis on collaborative innovation with suppliers and consumers. Taken together, these findings reinforce the results of last year’s CEO Survey, which showed that collaboration is becoming increasingly vital as new business models demand greater speed, agility and flexibility to get closer to the digital consumer.

In line with this shift, a higher percentage of CEOs in E&M than in any other sector expect to form a new strategic alliance or joint venture in the next 12 months. Again, a comment from CBS Corporation’s Leslie Moonves exemplifies the trend: “In India, we formed a partnership with Reliance Group, which is that country’s largest media company. Initially, we’re using existing CBS content, and we’re going to create original content there. That’s how we’re expanding our brand internationally, and we’d like to do more of that.”

M&A activity is also set to intensify, with 47% of E&M CEOs expecting to complete a cross-border merger or acquisition, compared to just 34% of the total survey population. Significantly, 43% of E&M CEOs anticipate that this activity will be in Asia, reflecting expectations that Asian brands will become increasingly dominant.




Printed on FSC 100% recycled material, supporting responsible use of forest resources. Produced at a mill that is certified to the ISO14001 environmental management.This product has been awarded the NAPM 100% Recycled Mark. .

Growth reimagined Engineering & Construction industry summary



2 14th Annual Global CEO Survey

Engineering & Construction industry summary

The PwC 14th Annual Global CEO Survey documents a surprising level of confidence in this environment; chief executives are nearly as confident of growth this coming year as they were in the boom years before the crisis. The survey also revealed where CEOs see growth coming in 2011, and how they are going to achieve it. In ‘Growth reimagined: Prospects in emerging markets’, we show how CEO confidence is being driven by targeted investments in particular emerging markets – often far from home.

We also identified three strategic focal points to achieve that growth: innovation, talent and a shared agenda with government. These three business imperatives have always had their place on the CEO agenda. But now, with their worst fears about the crisis behind them and an emerging recovery ahead, CEOs are adopting new attitudes and approaches, tailored to dealing with the issues of the multi-speed global recovery that they hope is underway.

This is a summary of the findings in the engineering & construction (E&C) sector, based on interviews with 77 E&C CEOs heading construction and building products companies in 36 countries. To explore the full results of the 14th Annual Global CEO Survey, please visit www.pwc.com/ceosurvey

The global economy is still recovering from the worst economic crisis in 75 years, as many countries grapple with the aftermath of the recession. So we set out to uncover how chief executive officers (CEOs) are approaching growth during a time when sustainable economic growth is far from certain. We surveyed 1,201 business leaders in 69 countries around the globe in the last quarter of 2010, and conducted further in-depth interviews with 31 CEOs.

Engineering & Construction industry summary 3

largest, providing around a tenth of total global GDP. And it’s highly sensitive to general economic conditions, so it’s not surprising that 74% of E&C CEOs are ‘somewhat’ or ‘extremely’ concerned that uncertain or volatile economic growth could derail their plans for expanding.

E&C CEOs are also monitoring a broad range of other macro-economic threats. Substantial public sector deficits are one big concern. Again, this is understandable, given that government projects represent a large proportion of overall construction activity. Concerns about whether highly-leveraged countries can refinance their debt and secure funding for capital programmes could make the business community more cautious about investing in new construction schemes or major renovations.

E&C CEOs are relatively confident this year; indeed, 44% are ‘very’ confident of achieving revenue growth over the next 12 months. That’s slightly less than the overall average of 48%, but it’s a marked contrast with the mood a couple of years ago when only 18% were very confident about the short-term prospects for growth (see Figure 1).

However, the degree of optimism E&C CEOs feel varies significantly, depending on where they’re based. The construction sector typically lags behind the economic cycle, and some regions are still struggling to shake off the recession. It’s no coincidence that, although only a few E&C CEOs are not confident at all, they are all based in Western Europe, reflecting the more subdued outlook there.

E&C CEOs are targeting the most promising opportunities with a discipline honed by the recession. Many are also refining their corporate strategies and keeping a wary eye on the overall economic situation. The construction industry is the world’s

Figure 1: CEOs’ confidence is back up – and E&C CEOs are no exception

Q: How confident are you about your company’s prospects for revenue growth over the next 12 months?

Base: All respondents. 2011 (Total sample, 1,201; E&C, 77), 2010 (Total sample, 1,198; E&C, 75), 2009 (Total sample, 1,124; E&C, 80), 2008 (Total sample, 1,150; E&C, 68)Note: Interviews for each year were conducted in the second half of the previous year, so 2009 interviews represent views from September-November 2008.Source: PwC 14th Annual Global CEO Survey

2008 2009 2010 2011

Total sampleE&C

Very confident about company's prospectsfor revenue growth over 12 months:

48%

31%

21%

50%44%

28%

18%

56%


Partnering will be important

There are a number of signs that E&C CEOs are thinking about restructuring. A substantial 87% say they are anticipating making some changes or major changes to their company’s organizational structure. Thirty-five percent are planning a merger or acquisition over the next 12 months, while 55% are planning to enter into a new joint venture or alliance.

Indeed, 21% – double the overall average – believe that joint ventures and alliances hold the most potential for ensuring future growth. That’s because the sector is changing. Philip Dilley, Chairman of UK-based Arup Group, believes there will be a greater emphasis on collaboration: ‘I think in the future we’ll see a lot more partnering, a lot more sharing, a lot more acknowledgement of the specialised skills of other firms. And that’s partly because there is going to be greater stratification in our industry’, he commented.


The International Monetary Fund predicts that growth rates for 2011 will still be sluggish for developed economies. But emerging markets are booming1 – and plans for massive spending on infrastructure in key countries like China and India translate into major opportunities for E&C companies. Much of the construction growth that takes place over the next 5-10 years is likely to happen in these markets (as well as in Asia Pacific more widely, Brazil and the Middle East), the need for additional investments in ageing infrastructure in developed countries such as the US notwithstanding.

Indeed, most E&C CEOs, like those in other sectors, anticipate that most of their companies’ growth will come primarily from emerging markets. They have high hopes of Asia, particularly China. The divide is striking: 82% of E&C CEOs with operations in Asia expect them to grow, whereas only 47% of those with operations in Western Europe are similarly optimistic.

Marcelo Odebrecht, CEO of Brazil’s Odebrecht, described the situation from his company’s perspective: ‘We are quite optimistic about what lies ahead of us. We do believe that most of the countries in Latin America, Africa and Asia will continue to grow steadily for the next few years, especially those that have done their homework and/or have plenty of natural resources. For its part, the US has always proved able to reinvent itself, and it does have the flexibility and pragmatism to keep doing so. My doubts regard Europe and its capability and even its willingness to change and do what has to be done in order to resume growth.’

Arup Group is also looking beyond Western Europe, ‘Historically, rebalancing has meant shifting our focus more towards infrastructure from buildings. And this matches today’s economic cycle where infrastructure opportunities are growing, and building opportunities are reducing. Geographically, rebalancing means greater activity outside of Western Europe and into the rest of the world, especially Asia’, Philip Dilley explained.

1 IMF World Economic Outlook (October 2010).

‘Today, we’ve become more strategic about what we do and where we operate in order to avoid becoming too reliant on any one market.’



Moving into new markets isn’t always easy, though. In fact, it poses special challenges for the construction industry, which has historically been dominated by national players. Foreign companies may be at a disadvantage in winning government contracts. Informal networks of contacts are also still very important to winning work, particularly in the key emerging markets of China and Russia, and local companies have a distinct edge in this respect. Furthermore, local players have a better understanding of contractual terms, the supply chain and how to engage with local clients.


CEOs in every sector are placing a higher premium on innovation today. For the past few years, they’ve typically concentrated on penetrating existing markets more effectively to generate

growth. Now they’re just as likely to be focusing on the innovation needed for new products and services.

E&C CEOs are no exception in prioritising innovation, although, unlike their peers in other industries, the main draw is process improvements. Sixty-two percent think that innovation will lead to significant new revenue opportunities, but a full 83% hope to gain a competitive edge from the efficiencies innovation can generate (see Figure 2). That’s because new techniques like using more mass production in the construction process, including offsite fabrication, can make construction quicker and cheaper. Seventy-four percent of E&C CEOs are also investing in IT, including Building Information Management (BIM) programmes which use three-dimensional, real-time dynamic modelling to speed up and coordinate design and construction.

Figure 2: E&C CEOs are looking to innovation to boost efficiency and drive revenues


Base: All respondents (E&C, 77)Note: ‘Neither agree nor disagree’ and ‘Don’t know/refused’ excluded.Source: PwC 14th Annual Global CEO Survey

1 60 23

1 53 23

10 43 19

1717 35 10

302612 3

We expect the majority of our innovations to be co-developed withpartners outside our organisation

We use M&As as a significant source of innovation

We expect government assistance (including financing, tax credits and/ortechnology transfer) to boost our innovation output

Our innovations will lead to significant new revenue opportunities

An important part of our innovation strategy is to develop products orservices that are environmentally friendly

Our innovations will lead to operational efficiencies that provide us witha competitive advantage

DisagreeDisagree strongly Agree Agree strongly

18 31 25 8

%

4

6

0


2 ‘New realities for construction: The comprehensive spending review', PwC and PinsentMasons (2010).

The E&C industry doesn’t have as strong a history of innovation as some other sectors. But innovation is absolutely vital to deliver and operate built assets more efficiently. In our recent paper on the impact of the UK Comprehensive Spending Review on the sector, we argued that innovation should go beyond design and technical issues.2 The very way in which projects are commissioned and procured needs to change – and newer, more modern methods and approaches will be required.

Philip Dilley describes one such change: the shift to value-based contracting. ‘Value is an issue of great interest to us at the moment because I believe we tend to bring more value to our clients than a time-related fee would reward. And so value-based contracting is something which we are pursuing more often and with some success. Value-based contracting is usually structured around success fees or some performance-based bonus arrangements’, he explained.

Many CEOs, regardless of the sector in which they operate, are also joining forces with business partners to drive innovation across the whole supply chain. Such efforts could make a particularly big difference to both construction and building products companies, as many E&C CEOs recognise: 45% anticipate that the majority of the innovations their companies produce will be co-developed with partners. However, there are big hurdles to implementing open innovation in the E&C sector, where the supply chain is often fragmented and partners change from project to project, or even midstream. In such circumstances, it’s all too easy for an innovation to get ‘lost’ along the way.

Greening the built environment

Some of the most promising opportunities for innovation in both the construction and building products sectors relate to the increasing drive to build more sustainably, and refit existing buildings to improve their environmental profile. Seventy-six percent of E&C CEOs think that developing environmentally-friendly products or services is an ‘important part’ of their companies’ innovation strategy (see Figure 2). More and more consumers and businesses want to build sustainably. Government is starting to get in on the act, too, with legislation cropping up around the world.

And this trend isn’t confined to developed markets. Philip Dilley explained: ‘The impact on us has been enormous because sustainability is of interest to our clients everywhere. All of them want to make sure that they are seen to have taken the principles of sustainability into account. China, for example, takes sustainability very seriously. Now, it is true that China is responsible for an increasing portion of the world’s carbon emissions, but at the same time, they’re putting much more effort into creating sustainable solutions than anyone else. They are serious about research into these areas and there’s a lot going on there. And I am delighted that our business in China is thriving as a consequence.’



The ‘war on talent’ was declared more than 10 years ago, but few CEOs are prepared to declare victory. More than half of E&C CEOs expect to hire more people in the next 12 months, but they may have trouble filling open spots. Marcelo Odebrecht told us, ‘The large growth we are experiencing means that identifying and integrating the right people has been our major concern. In 2010 alone we have had to hire more than 30,000 new staff, taking our global headcount to 120,000.’

Labour mobility and demand for new skills are two key challenges. The limited supply of skilled candidates is also an issue for more than two-thirds of E&C CEOs. And given widely

varying standards for training and certification across countries, assessing the talent pool can be very complicated – particularly when a contract means it’s necessary to assemble a multinational team.

Cross-border contracts mean more expats on projects

As many E&C companies try to win more cross-border contracts, so it’s becoming more difficult to get the right people on projects. E&C CEOs are therefore stepping up their people strategies to cope: 64% are deploying more staff on international assignments (see Figure 3). But this is often difficult: 51% of E&C CEOs say they’re having trouble deploying experienced people globally.

Figure 3: Retention, skills, deployment figure highly in CEOs’ talent strategies


Base: All respondents (E&C, 77)Note: Points included are where more than 50% of E&C CEOs are planning changes. ‘Don’t know/refused’ excluded.Source: PwC 14th Annual Global CEO Survey

51 23

32 55 13

34 39 25

3644

Deploy more staff on international assignments

Incentivise younger workers (roughly age 16-30 today) differently than others

Increasingly recruit and attempt to retain older workers

Work with governments/education systems to improve skills in the talent pool

Use more non-financial rewards to motivate staff

Some changeNo change Significant change

48 38 14

%

26

19



For E&C companies, governments are often major customers. But many governments with large deficits are now drawing in their horns, so E&C CEOs are understandably pessimistic: 45% believe their revenues from public-sector contracts will decline (see Figure 4). This is more than twice the percentage for the full survey population – and highlights the extent to which the sector needs to find new solutions to fund major projects. It also probably reflects recognition that stimulus initiatives cannot be continued indefinitely, although some E&C CEOs can see a silver lining: 37% think that responses to public debt, such as a reshaped public sector and greater outsourcing, could actually present them with a strategic growth opportunity.

But it’s not just their home countries that E&C CEOs need to consider. As E&C companies expand across national borders, they expose themselves to more risk from other economies, too – a fact of which top management is well aware. Fifty-eight percent of E&C CEOs anticipate that public spending cuts or tax increases in other countries will slow down economic growth in their key overseas markets, compared to just 44% of CEOs in the full sample.

Indeed, international mobility is often an even bigger problem for E&C companies than it is for those in other sectors.3 In most industries, only a few expatriates will be sent to foreign subsidiaries or branch offices, or brought in to headquarters, at any given time. But, with major construction projects, it’s often necessary to mobilise a large team of in-house staff and external contractors – and many such projects are located in developing countries with a relatively weak infrastructure.

Keeping good people on board longer

We’ve argued before that greater sharing of good practices can help the industry cope. And we’ve talked about the need to focus not only on moving talent around, but on keeping it on board afterwards. Out of sight should not mean out of mind when it comes time for performance reviews and pay increases – particularly when the next project may also require an international move.

There are other ways of hanging onto the good people, too. Seventy-four percent of E&C CEOs are increasingly using non-financial incentives. These can take many forms, but often include training and mentoring programmes. And 52% are stepping up their efforts to keep valuable older workers – an especially important strategy in countries with ageing populations.

3 'International Mobility in the Engineering & Construction Industry: Analysis and insight on trends and best practice', PwC (2008).

Figure 4: E&C CEOs expect responses to public debt to stifle sales

Q: How strongly do you agree that your company’s sales to government will decline because of governments’ response to rising public debt?

Base: All respondents (E&C, 77)Note: ‘Neither/Nor’ and ‘Don’t know/refused’ excluded.Source: PwC 14th Annual Global CEO Survey

E&C

Total sample


30 29 16

%

2523 614

13


Building the world’s infrastructure

Most CEOs, irrespective of the industry in which they operate, think that building a more robust infrastructure should be a top priority for governments in every country outside Western Europe and Japan (where the infrastructure is well developed) and China (where the central government has allocated almost US$ 600 billion of stimulus spending for infrastructure projects over the past two years). But private capital is also essential; the World Economic Forum recently estimated that the world needs to spend an estimated US$ 3 trillion per year on infrastructure in the coming decades.4 This is far more than the public purse can cope with, so governments everywhere will have to engage with the private sector and tap a range of funding sources.

Inevitably, E&C companies have a key role to play in making infrastructure investment happen, and many are also actively involved in helping secure the necessary funding. Our survey results suggest they’re taking the issue seriously: 48% of E&C CEOs are significantly increasing their commitment to improve infrastructure. Not surprisingly, that’s significantly more than the 19% of CEOs with such plans in the overall sample.

PPPs, in their varied forms, are one way in which the sector can work with government on infrastructure projects. ‘PPPs will take root in other countries because most countries don’t have a lot of spare cash right now’, Philip Dilley said. ‘We see substantial PPP activity already in European countries.’ He expects similar partnerships to evolve in India in particular – where 88% of CEOs told us the inadequacy of basic infrastructure was a threat to growth. The Indian government aims to increase investment in infrastructure to more than 9% of GDP by 2012.5

4 ‘Paving the Way: Maximising the Value of Private Finance in Infrastructure’, World Economic Forum (2010).5 Eleventh Five-Year Plan, Government of India Planning Commission (2008).

‘Through public-private partnerships, the private sector can also make possible certain investments with optimal allocation of risks and responsibilities. This enables the government to concentrate its investments in key social areas.’




CEOs’ shift towards a targeted strategy signals the advance of globalisation – but it may diverge from how it’s looked in the past. Companies are not only affected by globalisation; the actions they take will shape it. That 82% of E&C CEOs support ‘good growth’ is recognition that they would like to see globalisation evolve in a way that links economic growth and social

development. Good growth is a long-term path towards value creation that creates lasting prosperity for both shareholders and society. The E&C sector will be at the heart of that growth and has a lead role to play in ensuring that construction is cost-effective, makes best use of the world’s scarce resources and builds infrastructure and communities for the 21st century.


Jonathan Hook Global Engineering & Construction Leader +44 (20) 7804 4753 [email protected]

Erica McEvoy Global Industrial Products Business Development & Marketing +61 (3) 8603 4827 [email protected]

Contacts

Our CEO Survey coverage includes a full report, in-depth interviews, and a visual story of the data. Explore the entire story in the full report. Simply download at www.pwc.com/ceosurvey. To view other publications and learn about our Engineering & Construction industry practice, visit www.pwc.com/construction.

Growth reimagined Pharmaceuticals and life sciences industry summary




The global economy is still recovering from the worst economic crisis in 75 years, as many countries grapple with the aftermath of the recession. So we set out to uncover how chief executive officers (CEOs) are approaching growth during a time when sustainable economic growth is far from certain. We surveyed 1,201 business leaders in 69 countries around the globe in the last quarter of 2010, and conducted further in‑depth interviews with 31 CEOs.

Pharmaceuticals and life sciences industry summary

The PwC 14th Annual Global CEO Survey documents a surprising level of confidence in this environment; chief executives are nearly as confident of growth this coming year as they were in the boom years before the crisis. The survey also revealed where CEOs see growth coming in 2011, and how they are going to achieve it. In ‘Growth reimagined: Prospects in emerging markets’, we show how CEO confidence is being driven by targeted investments in particular emerging markets – often far from home.

We also identified three strategic focal points to achieve that growth: innovation, talent and a shared agenda

with government. These three business imperatives have always had their place on the CEO agenda. But now, with their worst fears about the crisis behind them and an emerging recovery ahead, CEOs are adopting new attitudes and approaches, tailored to dealing with the issues of the multi‑speed global recovery that they hope is underway.

This is a summary of the findings in the pharmaceuticals and life sciences (pharma and life sciences) sector, based on interviews with 53 pharma and life sciences CEOs in 25 countries. To explore the full results of the 14th Annual Global CEO Survey, please visit www.pwc.com/ceosurvey

Pharmaceuticals and life sciences industry summary 3

Radical changeLast year pharma and life sciences CEOs were more confident about the future than their peers in most other industries, reflecting the sector’s resilience in the face of the struggling global economy. This year they’re still confident about the potential for both near‑ and medium‑term growth, but they’re no longer outpacing CEOs in other sectors. Indeed, they’re less optimistic about the prospects for revenue growth over the next three years than CEOs in the overall survey sample.

This wariness may reflect the fact that the industry is undergoing radical change, with growing economic pressures and new business models, marketing strategies and research directions re‑shaping the competitive landscape.1 Pharma and life sciences CEOs are changing their strategies in response: 81% told us they’ve altered course over the past two years – and 36% have modified their strategies ‘in fundamental ways’. Their reasons for doing so differ dramatically from those of the sample as whole.

For companies in most industries economic growth forecasts or uncertainty are the primary drivers of changes in strategy. But pharma and life sciences CEOs are more concerned about competitive threats and industry dynamics (see Figure 1). It’s not surprising that they’re focusing on these two factors, with patent expirations and intense competition from generics casting a shadow over future revenues, relatively few safe, effective new

Figure 1: Competitive threats, industry dynamics and regulation are the most important factors driving change for pharma and life sciences CEOs

Q. Of the following 8 factors that may be changing in your business, which have significantly influenced your need to change your strategy?

Base: All respondents who stated ‘changed in fundamental ways’ or ‘somewhat changed’ at Q2a; Total sample 1,009; Pharma and life sciences, 43Source: PwC 14th Annual Global CEO Survey

1 We have discussed these trends in more detail in our Pharma 2020 thought leadership series, which is available for download at www.pwc.com/pharma2020




4 We expect the majority of our innovations to be developed in markets other than the country in which I am based


%


5

13

18

24

29 27 18 7

27 19 10

26 26 7

24 30 9

12 41 23

Total samplePharma and life sciences





Customer demand

Regulation

Industry dynamics

Competitive threats

0 10 20 30 40 50 60 70






Customer demand

Regulation

Industry dynamics

Competitive threats

0 10 20 30 40 50 60 70





Customer demand

Regulation

Industry dynamics

Competitive threats


22 16

36 30

41 30

64 53

62 60

34 65

59 70

49 70

%

Eighty-one percent of pharma and life sciences CEOs are changing their corporate strategies.

medicines coming through the pipeline and payers increasingly demanding proof of value for money. Regulation comes next on their agenda – reflecting the huge role governments play, both in setting research and safety standards and in purchasing medicines. Many pharma and life sciences CEOs also see customer demand as a critical strategic issue. Here, too, fundamental changes in the sector are at work, as patients take greater control of their healthcare and the emphasis shifts from the treatment of disease to its prevention, particularly in more developed markets.


Figure 2a: China tops the list of countries considered important to future growth

Q. Which countries, not including the country in which you are based, do you consider most important for your growth prospects over the next 3 years?

Important to growth: Total sample

Important to growth: Pharma and life sciences

Russia

UK

Germany

India

Brazil

US

China

Important to future sourcing needs: Total sample

Important to future sourcing needs: Pharma and life sciences

%

47

39

38

21

30

19

21

12

11

8

10

7

25

18


Figure 2b: China tops the list of countries considered important to future sourcing needs

Q. Which three countries, not including the country in which you are based, do you consider most important to your future sourcing needs?

Important to future sourcing needs: Total sample

Important to future sourcing needs: Pharma and life sciences

Russia

Brazil

Japan

UK

Germany

US

India

China

%

45

37

38

15

32

22

21

8

9

6

11

6

6

5

26

14


Base: All respondents (Total sample, 1,201; Pharma and life sciences, 53)Note: Respondents could select up to 3 countries (Figure 2b) Source: PwC 14th Annual Global CEO Survey



The pharma and life sciences sector is becoming increasingly globalised, as demand for medicines rises in the emerging markets; a growing share of R&D migrates to Asia; national and regional agencies collaborate to harmonise the regulations governing the development of new treatments; and healthcare payers share data on the clinical and financial performance of medicines. CEOs in the industry are acutely aware of these trends.

BRIC appealTwo‑thirds of the pharma and life sciences CEOs we surveyed anticipate that a substantial amount of their company’s future growth will come from emerging markets. Indeed, just over half think emerging markets will be more important than developed markets in this respect. Pharma and life sciences CEOs are looking to China, Brazil and India, in particular, although they’re not completely counting out developed markets such as the US and Germany (see Figure 2a). However, they’re more likely than their peers in other industries to be changing their corporate strategies to tap the potential of the emerging world.

CEOs in every sector consider China critical to their companies’ future sourcing needs. Pharma and life sciences companies are no exception: 45% rank China as one of the top three countries to which they’ll be turning (see Figure 2b). Shanghai already has lots of pharma offices and some research facilities. We believe it will become the key cluster serving Chinese and wider regional markets by 2040. Investors think so, too; Shanghai has attracted over US$1 billion in pharmaceutical foreign direct investment over the last five years.2

Some 38% of pharma and life sciences CEOs also expect to source much of what they need from India. The Indian

pharma sector is growing fast; we estimate that Indian pharma companies will earn $50 billion in revenues by 2020.3 Global pharma companies are partnering with local players, and improvements in IP protection should help spur growth. But, if India is to realise its potential, the government will need to develop a more robust healthcare system and expand coverage to the poorer populations.

Global health risksAs international commerce and travel increase with globalisation, so does the potential for dangerous strains of viruses to travel around the world. Pandemics and other health crises could also have a major impact on the pharma and life sciences industry. Nearly half of sector CEOs are concerned about how such incidents could affect their companies’ growth prospects over the next three years, which is more than double the overall average. They’re also much more likely to explicitly deal with the issue in their strategic planning and risk management activities. Such events could offer opportunities for the sector as well as risks. So strategic planning may include how companies can help governments cope with, mitigate and even avoid such events.


The pharma and life sciences industry has long been driven by innovation. CEOs in the sector overwhelmingly see new products and services as the main route to growth. And they’re committed to equipping their companies for the task: 83% are increasing their commitment to generating innovations and safeguarding intellectual property, compared to 67% of the overall survey sample.

However, the research landscape is changing dramatically, as we indicated in ‘Pharma 2020: Virtual R&D – Which path will you take?’4 Advances in computer modelling will, for example,

2 ‘See the future: Top industry clusters in 2040 revealed’, PwC (2010).3 ‘Global Pharma looks to India: Prospects for Growth’, PwC (2010).4 ‘Pharma 2020: Virtual R&D – Which path will you take?’, PwC (2008).


Figure 3: Innovation drives revenue opportunities for pharma and life sciences companies

Q. To what extent do you agree or disagree with the following statements about your expectations regarding your company’s innovation over the next 3 years?

Base: All respondents (Total sample, 1,201; Pharma and life sciences, 53) Note: All respondents who stated ‘agree’ or ‘agree strongly’Source: PwC 14th Annual Global CEO Survey

0 10 20 30 40 50 60 70 80 90 100


We expect the majority of our innovationsto be co-developed with partners

outside of our organisation

We expect government assistance (includingfinancing, tax credits and/or technologytransfer) to boost our innovation output

We expect the majority of our innovations to be developedin markets other than the country in which I am based

We use M&A as a significant source of innovation

An important part of our innovation strategy is to developproducts or services that are environmentally friendly

Our innovations will lead to operational efficienciesthat provide us with a competitive advantage

Our innovations will lead to significantnew revenue opportunities


0 10 20 30 40 50 60 70





Customer demand

Regulation

Industry dynamics

Competitive threats


39 42

26 43

29 43

33 45

64 58

79 77

78 89

We expect the majority of our innovations to be co-developedwith partners outside our organisation

We expect government assistance (including financing, tax creditsand/or technology transfer) to boost our innovation output

We expect the majority of our innovations to be developedin markets other than the country in which I am based

We use M&As as a significant source of innovation

An important part of our innovation strategy is to developproducts or services that are environmentally-friendly

Our innovations will lead to operational efficienciesthat provide us with a competitive advantage

Our innovations will lead to significantnew revenue opportunities

89 78

77 79

58 64

45 33

43 29

43 26

42 39


%

markets other than their home country. Emerging economies are already starting to play a bigger role in innovation in the medical devices industry.5 Some of these countries are also catching up in pharma R&D, although only 34% of pharma and life sciences CEOs anticipate that the top new global brands of the next decade will come from emerging markets. Clearly, the view of the regulators regarding innovation and clinical trials conducted in emerging markets will be critical, too – and there have been several recent instances of problems with trial results, but the long‑term outlook is positive.

Open innovation Pharma and life sciences companies are facing bigger research challenges than ever before. If they’re to develop the

next generation of medicines, they will need a comprehensive understanding of how the human body works at the molecular level and a much better grasp of the pathophysiology of disease (i.e., the functional changes associated with, or arising from, disease or injury). They will also need to change the way they work, with greater collaboration between the industry, academia, the regulators, governments and healthcare providers an absolute must. Many pharma and life sciences CEOs recognise this imperative: in fact, 42% expect that the majority of their innovations will be co‑developed with external partners. There are already a number of prominent advocates of the importance of open innovation in the life sciences. University of Toronto biochemist Alec Edwards is one of the most vocal. He argues that industry and academia need

5 ‘Medical Technology Innovation Scorecard: The race for global leadership’, PwC (2011).

enable the development of ‘virtual’ patients who can be used to test the properties of new drugs much sooner in the development process. Building such models will be too large a task for any one organisation to tackle alone, but the results will dramatically accelerate the research process for everyone. Many pharma and life sciences CEOs believe governments can play a valuable role here, primarily by providing tax incentives: 43% expect government assistance to boost their innovation output, which is a significantly higher percentage than in the survey population as a whole (see Figure 3).

The places in which research is conducted are changing, too: hence the fact that 43% of pharma and life sciences CEOs think the majority of innovations will be developed in


to work together – and to post all their findings free on the Internet.6 Dr Edwards practices what he preaches as head of the Structural Genomics Consortium, a not-for-profit organisation which is run out of three leading academic and clinical institutions and funded by GlaxoSmithKline (GSK), Merck and Novartis.

GSK is engaged in other open‑innovation initiatives, too. The consumer healthcare division is actively soliciting ideas for products and innovations from external sources, for example, and has formed an open innovation team to guide prospective partners through the submission process. But GSK is certainly not alone. When, for instance, Johnson & Johnson discovered that an HIV drug it had developed wasn’t proving very effective in patients, it partnered with hospitals and other institutions working with patients to find out why. What it learned about the clinical complexity of HIV led to the development of two new medicines.7

Listening to patientsPatients are already beginning to play a bigger role in determining how they are treated, as the amount of money they spend on medicines rises and the Internet gives them access to more information. Armed with insights gleaned from educational websites,

6 Megan Ogilvie, ‘Secrecy slowing drug research’, The Star (April 4, 2009), http://www.thestar.com/article/6136627 Shirley S. Wang, ‘J&J’s Stoffels Says “Open Innovation” is the R&D Answer’, The Wall Street Journal (January 29, 2009), http://blogs.

wsj.com/health/2009/01/29/jjs‑stoffels‑says‑open‑innovation‑is‑the‑rd‑answer/8 ‘Biotech Reinvented: Where do you go from here?’ PwC (2010).

discussion groups and blogs, they will not only want better, safer medicines, they will also want a range of satellite services they can tailor to their individual needs.

There are important implications here for the pharma and life sciences industry. It will need to take consumer preferences into account, particularly when developing new medicines, medical devices and consumer health products. Fifty‑nine percent of the pharma and life sciences CEOs we surveyed are making strategic changes to encourage consumers to play a more active role in product and service development in the future. And a whopping 70% plan to capitalise on the rise of mobile devices and social networking. Such technologies can be used both to learn what patients think and to help them comply with their medical regimens.

M&As – a major source of innovation

Forty-five percent of pharma and life sciences CEOs say they use M&As as a significant source of innovation. This reflects the increasing number of biotech companies being acquired by pharma concerns. Biotech and pharma are effectively becoming one industry – the biopharmaceutical industry – in the drive to improve R&D productivity.8



The ‘war on talent’ was declared more than ten years ago, but few CEOs are prepared to declare victory. They know talent isn’t just a numbers game. It means finding, retaining and motivating employees whose skills match the company’s strategy, including its geographic fit. Given that 81% of pharma and life sciences CEOs have changed their strategies in the past two years, and that the sector is experiencing far‑reaching shifts, their companies’ talent needs are changing, too.

So talent is one of the top items on the CEO agenda for 2011. This heightened interest reflects plans to expand the workforce at a time when two‑thirds of all CEOs – and nearly three‑quarters of pharma and life sciences CEOs – believe the supply of skilled candidates is limited. It’s resulting in moves to shore up recruitment and retention capabilities.

In pursuit of new peopleJust over half of pharma and life sciences CEOs believe their competitors are out to snatch their best people, and that they’re facing difficulties attracting younger employees into traditional career paths (see Figure 4). Both issues are linked to the importance of intellectual capital for the sector. When competitors lure away experienced scientists, pharma companies risk losing valuable intellectual property. And young researchers bring a fresh perspective that can spark creativity.

Hence the fact that a higher percentage of pharma and life sciences CEOs are introducing new incentives to hire and hang onto younger employees than is the case in the full sample (55% versus 46%). The emerging markets are becoming a core part of many pharma and life science companies’ growth strategies, and talent shortages are just as acute there as in other parts of the world. Pharma and life sciences CEOs haven’t completely mastered the issue yet. They’re more likely than their peers in other industries to see understanding

and forecasting the availability of talent in emerging markets as a hurdle. They’re sending employees to global locations, though: 66% of pharma and life sciences are making some or significant changes to their people strategies to deploy more staff on international assignments. It’s not always easy. Sixty percent also report that they’re having trouble deploying experienced talent globally. That’s just the first step. Many multinationals are also looking to build strong managerial and research capability locally.

Nearly three-quarters of pharma and life sciences CEOs believe there is a limited supply of candidates with the right skills

Figure 4: Finding candidates with the right skills and deploying staff internationally are priorities for pharma and life sciences CEOs

Q: Considering the talent required for the success of your business over the next three years, what are the key challenges you expect to face?

Base: All respondents (Total sample, 1,201; Pharma and life sciences, 53) Source: PwC 14th Annual Global CEO Survey

0 10 20 30 40 50

Japan

Mexico

Russia

UK

Germany

India

Brazil

USA

China

0 10 20 30 40 50 60 70






Customer demand

Regulation

Industry dynamics

Competitive threats

47 39

37

38 21

32 22

30 19

6 11

15

21 12

26 14

11

8 21

8 10

6 6

2 6

0 4

5

3 0

9

7

25

38 18

45


Key employees making careerchanges for personal reasons

Talent with the right technical skillslack flexibility and creativity

Scrutiny of reward structures byregulators and/or investors

Retirements of older workers

Poor retention of female talents

Challenges in recruiting andintegrating younger employees

Providing attractive careerpaths in our industry

Understanding and forecasting talentavailability in emerging markets

Competitors recruiting someof your best people

Difficulty in deploying experiencedtalent globally

Limited supply of candidateswith the right skills


60

6674

45

5352

40

5350

4954

43

53

39

1512

1923

3235

3644

%


Figure 5: Pharma and life sciences CEOs are deeply worried about over-regulation

Q: How concerned are you, if at all, about over-regulation?




4 We expect the majority of our innovations to be developed in markets other than the country in which I am based


%

Extremely concernedSomewhat concernedNot very concernedNot concerned at all

5

13

18

24

29 27 18 7

27 19 10

26 26 7

24 30 9

12 41 23

Extremely concernedSomewhat concernedNot very concernedNot concerned at all

Total

Pharma and life sciences 19

%

2812 33 27

8 28 45

Base: All respondents (Total sample, 1,201; Pharma and life sciences, 53)Note: Don’t know/refused excludedSource: PwC 14th Annual Global CEO Survey


Healthcare has become a major item on the political agenda in countries around the world. The governments of emerging economies like China, India and Brazil want to extend healthcare coverage, but in a way that’s still affordable. Meanwhile, developed economies face demographic changes that are driving up healthcare costs. As retirement ages rise, more people will still be working when chronic diseases kick in – and so the social and economic value of good medicines and medical devices for such conditions will increase. But the pressure on costs will be huge. There will simply not be enough money in the pot to cover the world’s future healthcare needs, unless the pharma and life sciences industry can cut its operating costs and margins on these products.

How governments regulate and price medicines and medical devices, and how they support R&D, will have an enormous impact on the sector. So will healthcare regulation, given that governments account for more than a third of the revenues of 42% of the pharma and life sciences companies we surveyed. But pharma and life sciences CEOs aren’t confident that regulation will have a positive impact on the industry. In fact, they’re more likely to be ‘extremely concerned’ about over‑regulation hurting growth than the survey population as a whole (see Figure 5). Pharma and life sciences CEO are also quite pessimistic about the potential effect of government initiatives to reduce rising public debt. But many of them have already started to adapt. Nearly half of those we surveyed are making strategic changes to deal with potential public spending cuts or tax increases at home or abroad. There’s no denying that the regulatory environment is changing dramatically – and some of these changes will increase

the burden on the industry. For example, new treatments may be subject to pharmacoeconomic evaluations to prove their economic as well as clinical efficiency before government bodies will approve them for reimbursement.

We think some of the changes should actually be positive for the industry, though. One instance is the possible convergence in regulation of medical devices, pharmaceuticals, gene therapies and other treatments (something that’s already happening in the UK). This could help reduce the cost of regulatory compliance.

Another example is live licensing, a staged approach to the approval of new treatments. Live licensing would allow the sponsoring company to market a new therapy on a restricted basis. With each incremental increase in evidence of safety, efficacy and value, the regulator would extend the licence to cover more patients, different indications or different formulations. This approach would mean that many medicines reached the market more rapidly, but it would also pose considerable challenges, including the need for more collaboration between pharma and life sciences companies and the regulators, and greater use of new technologies like electronic health records and pervasive monitoring.


But there’s another dimension to the relations between the industry and government. This year we found that many CEOs believe business has a common social purpose with governments, and that it should share the burden of achieving certain mutual goals. Pharma and life sciences CEOs are no exception. Nearly half of those we surveyed say their companies are putting more effort into addressing poverty and inequality – areas in which the industry can make a huge difference to the world’s wellbeing. For many, collaboration is the name of game, and industry examples abound. Bayer is working with the Global Alliance for TB Drug Development on the clinical development of a new tuberculosis therapy that should reduce the current six‑month treatment regimen by a third. Should the studies prove successful, the new drug will be made available at reduced prices, particularly in developing countries where the disease is more prevalent.9

GSK is also using open innovation to help fight disease in the world’s poorest countries. In January 2010, the company announced a number of initiatives, including the funding of an ‘open lab’ for new research, the free release of information on 13,500 compounds that might be useful in devising new treatments for malaria and several collaborations to pool knowledge that might lead to the development of new medicines for other neglected tropical diseases.10

9 ‘Sustainable Development Report 2009’, Bayer AG (2010).10 ‘GSK announces “open innovation” strategy to help deliver new and better medicines for people living in the world’s poorest countries’ (January 2010), http://www.gsk.com/media/

pressreleases/2010/2010_pressrelease_10009.htm



Such moves are not just evidence of the fact that the industry recognises it shares certain social and humanitarian goals with governments, though; they are evidence of its increasingly global outlook. The vast majority of the CEOs in our survey – regardless of the sector in which they operate – are adopting targeted strategies that signal the advance of globalisation. But companies are not only affected by globalisation; the actions they take will also shape it.

The pharma and life sciences industry has long operated on a more global basis than most. Yet it’s not immune to the forces of globalisation. It will need to develop new products and pricing strategies for emerging economies, as well as getting closer to patients everywhere. It’s clear from the responses of the CEOs who participated in our survey that they are well aware of these challenges and preparing for a future in which the world really is flat.

The forces of globalisation are changing the face of the industry. Pharma and life sciences companies will need to develop new products and pricing strategies for emerging economies, as well as getting closer to patients everywhere

www.pwc.com/pharma PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 163,000 people in 151 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com for more information.



Simon Friend Global Pharmaceuticals and Life Sciences Leader +44 20 7213 4875 [email protected]

Sara Solomon Global Pharmaceuticals and Life Sciences Business Development & Marketing +44 20 7804 1014 [email protected]

Contacts

Our CEO Survey coverage includes a full report, in‑depth interviews and a visual story of the data. Explore the entire story in the full report. Simply download at www.pwc.com/ceosurvey. To view other publications and learn about PwC services visit www.pwc.com/pharma




Main report

Growth reimagined Retail industry summary




The global economy is still recovering from the worst economic crisis in 75 years, as many countries grapple with the aftermath of the recession. In the PwC 14th Annual Global CEO Survey, we set out to uncover how chief executive officers (CEOs) are approaching growth during a time when sustain-able economic growth is far from certain. We surveyed 1,201 business leaders in 69 countries around the globe in the last quarter of 2010, and conducted further in-depth interviews with 31 CEOs.

Retail industry summary

This is a summary of the findings in the retail sector based on interviews with 75 retail CEOs in 30 countries. To explore the full results of the 14th Annual Global CEO Survey, please visit www.pwc.com/ceosurvey.

We found a surprising level of confidence in this environment; chief executives are nearly as confident of growth this coming year as they were in the boom years before the crisis. Our survey also revealed where CEOs see growth coming in 2011, and how they are going to achieve it. In ‘Growth reimagined: Prospects in emerging markets’, we show how CEO confidence is being driven by targeted investments in particular emerging markets —often far from home.

We also identified three strategic focal points to achieve that growth: innova-tion, talent and a shared agenda with government. These three business imperatives have always had their place on the CEO agenda. But now, with their worst fears about the crisis behind them and an emerging recovery ahead, CEOs are adopting new attitudes and approaches, tailored to dealing with the issues of the multi-speed global recovery that they hope is underway.

Retail industry summary 3

Thirty-three percent of retail CEOs are looking to China for growth—and 44% see it as important for their future sourcing needs.

Renewed confidenceCEOs have renewed confidence in their companies’ growth prospects this year, and retail CEOs are no exception. Ninety percent expect to generate higher revenues over the next 12 months, while 93% expect to do so over the next three years. Short-term confidence levels are up strongly in comparison with last year, when only 74% of retail CEOs were somewhat or very confident of being able to increase sales over the next 12 months.

It’s not surprising that confidence is up, with even the worst-hit economies showing signs of improvement and consumer demand on the rise once again. Retail CEOs are particularly optimistic about the outlook in Asia: 93% believe they’ll be able to expand their Asian operations over the next 12 months. But 55% also see promise in the established markets of Western Europe—which is markedly more than the overall average of 45%.

New strategies to meet new expectations Most retail CEOs, like their peers in other industries, are changing course. Eighty-nine percent have altered their corporate strategies in the past two years, and 33% describe the change as

‘fundamental’. Customer demand is by far the most important factor motivating them: 34% of respondents regard it as the key driver of change, while 79% regard it as one of the top three. The recession has seen consumers become more careful with their cash, and retailers are responding to such behav-ioural shifts in many ways—e.g., by increasing their private label offerings, reducing their overall inventory, closing stores and introducing new products at lower price points.

Targeting emerging marketsCEOs in nearly every industry, including retail, have their eyes on emerging markets. That’s partly because of macroeconomic forces. The Inter- national Monetary Fund predicts that developed economies will grow sluggishly this year. But emerging markets are booming.1

Greater affluence is playing a role, too. The rising number of middle- class consumers in China and India is creating new opportunities—and many consumer goods companies are already aggressively targeting these markets. Bob McDonald, Chairman of the Board, President and CEO of US-based The Procter & Gamble Company (P&G), summed up such

ambitions when he told us: ‘This decade for us, I think, will be about getting our categories into every country around the world.’

Where Western consumer goods compa-nies go, retailers are sure to follow, particularly as the regulators in certain emerging markets appear ready to ease restrictions for international retailers. Only single-brand foreign retailers are currently allowed a significant presence in India, for example. But Indian regulators are now considering allowing foreign ‘big box’ retailers to own up to 49% of a joint venture with domestic Indian retailers.2

However, China is still the Holy Grail, primarily because of its huge popula-tion, rapid growth and burgeoning middle class. Many companies began operating in China for sourcing reasons, but its vast domestic market is drawing more and more attention. Thirty-nine percent of CEOs in the full sample already regard China as one of the three foreign countries most critical to their company’s growth, although the number is slightly lower (33%) amongst retail CEOs (see Figure 1). That’s not to say retailers are ignoring developed markets. Germany, the USA and France all make it to the top five countries on retailers’ growth lists.

Figure 1: China tops the list of countries retail CEOs regard as important for growth

Q: Which countries, not including the country in which you are based, do you consider most important for your growth prospects over the next three years?

Base: All respondents (Total sample, 1,201; Retail, 75)Source: PwC 14th Annual Global CEO Survey 2011

France

Poland

Brazil

Total sampleRetail

India

Germany

China

USA

Russia

3339

1712

1310

1221

115

918

74

719

1 IMF World Economic Outlook (October 2010).2 ‘Strategic Issues for Retail CEOs: Perspectives on Operating in India’s Retail Sector’, PwC and Retailers Association of India (RAI) (2010).


Putting customers at the centre of innovationFor the past few years, most business leaders have hunkered down, believing that their best opportunities for growth lay in better penetration of core markets. Today, they are just as likely to be focusing on the development of innovative new products and services.

Retail CEOs differ from their peers in this respect: 41% are still focusing on their existing markets, and only 21% on developing new offerings. That said, retail CEOs are well aware of the need to keep abreast of consumers.

Mobile devices and social networksTechnology has become a key enabler—in terms of both the shopping experience and as a driver of consumer involvement in product development. Fifty-three percent of retail CEOs think they’ll need to make ‘significant’ changes in strategy, as consumers turn to mobile devices and social media to voice their preferences. And 57% told us one of the main reasons they’re investing in IT is to support such emerging innovations.

PwC’s 2010 Retail CFO study sheds further light on trends in mobile and online media in the retail sector. Only 67% of the retailers participating in the study could handle e-commerce transac-tions, for example, even though all of them had websites. Most respondents thought that there was some degree of channel blurring, because customers often use websites to research products and compare prices, and then buy what they want in a store.

Green measuresThe industry is responding to changing consumer expectations in other ways as well. Many retailers are making efforts to sell more sustainable products and reduce their own environmental footprints, for example—although only 52% of retail CEOs see it as their task to develop environmentally-friendly products or services (versus 64% of CEOs in the full sample). That’s probably because retailers generally sell products made by other companies.3

However, the most pioneering retailers are now becoming more involved in the production process, as attention shifts to the carbon emissions in entire supply chains and the environmental impact of products from the point of manufacture to final disposal. These retailers are working with their suppliers to reduce greenhouse gas emissions throughout their supply chains, meeting stakeholder desires for ‘greener’ shelves and achiev-ing critical cost savings.

Open innovation In fact, it’s not uncommon for supply chain partners to work together in the search for innovation—and 41% of retail CEOs think the majority of their innovations will be co-developed with external partners. In some cases this means working with consumer goods companies to understand and address the needs of the consumer.

Collaboration can bring considerable benefits. As Paul Polman, CEO of Unilever, noted: ‘Tesco is going to be around for another hundred years or more—and so is Unilever. It only makes sense to work in concert to meet consumers’ needs. By working together towards a common goal there is much more value to be gained than there is in haggling over costs.’

Fifty-three percent of retail CEOs are changing strategies significantly in response to increased use of mobile devices and social media by consumers.

3 ‘The New Retail Priorities for 2011’, PwC (2011).

Retail industry summary 5

Bridging global skills gaps The ‘war for talent’ has been waged in many places and for many decades, but few CEOs—whether they’re in retail or any other industry—are prepared to declare victory. In fact, over half of all retail CEOs plan to hire more people in the next 12 months. However, it’s not just a question of getting more workers in the aisles; it’s also important to make sure those new employees have the right skills—and finding them isn’t going to be easy. Nearly two-thirds of retail CEOs believe the supply of skilled candidates is limited (see Figure 2).

Achieving shared priorities with governmentAlthough CEOs everywhere are focusing on their own growth plans, many also see a common purpose with govern-ments. But constrained budgets are forcing politicians to make difficult decisions—and sustained collaboration between the public and private sectors doesn’t always come naturally.

Over-regulation has remained among the top three concerns of CEOs in every industry through both good and bad economic times, for example. Many CEOs are also worried that public spending cuts or tax increases in response to rising public debt will slow domestic economic growth in their home countries. Retail CEOs are particularly concerned on this score.

However, they are more optimistic on other counts. They are more convinced than their peers in other industries that the barriers to globalisation will continue to come down, for example. Fifty-nine percent of retail CEOs believe the world will be more open to free international trade and capital flows in the future, compared to 49% of CEOs overall.

Globalisation reimaginedThe favourable macroeconomic environment and increasing affluence of consumers living in emerging markets are both good news for retailers, and the CEOs who head such businesses are reshaping their strategies accordingly. But companies are not only affected by globalisation; the actions they take will influence its direction. Retail CEOs, like CEOs in other industries, believe it’s essential to behave responsibly: 71% are committed to ‘good growth’ that is financially, socially and environmentally sustainable. They recognise that good growth is a long-term path towards value creation that creates lasting prosperity for both shareholders and society.

Figure 2: Retail CEOs face considerable people challenges

Q. Considering the talent required for the success of your business over the next three years, what are the key challenges you expect to face?

Limited supply of candidates with the right skills

Base: All respondents (Total sample, 1,201; Retail, 75)Source: PwC 14th Annual Global CEO Survey

Fifty-nine percent of retail CEOs believe the world will be more open to free international trade and capital flows in the future.

66%

64%Total sample Retail



© 2011 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way. NY 11-0564

John Maxwell Global Retail and Consumer Leader [email protected]

Michael Brewster Director, Global Retail and Consumer Marketing [email protected]

Contacts Our CEO Survey coverage includes a full report, in-depth interviews and a visual story of the data. Explore the entire story in the full report. Simply download at www.pwc.com/ceosurvey. To view other publications and learn about PwC’s retail industry practice visit www.pwc.com/retail.

Growth reimagined Technology industry summary


Key industry findings from 14th Annual Global CEO Survey

2 14th Annual CEO Survey – Technology Summary

The global economy is still recovering from the worst economic crisis in 75 years, as many countries grapple with the aftermath of the recession. So we set out to uncover how chief executive officers (CEOs) are approaching growth during a time when sustainable economic growth is far from certain. We surveyed 1,201 business leaders in 69 countries around the globe in the last quarter of 2010, and conducted further in-depth interviews with 31 CEOs.

Technology industry summary

The PwC 14th Annual Global CEO Survey documents a high level of confidence in this environment; chief executives are nearly as confident of growth this coming year as they were in the boom years before the crisis. The survey also revealed where CEOs see growth coming from in 2011, and how they are going to achieve it. In ‘Growth reimagined: Prospects in emerging markets’, we show how CEO confidence is being driven by targeted investments in particular emerging markets—often far from home.

We also identified three strategic focal points to achieve that growth: innovation, talent and a shared agenda with government. These three business imperatives have always had their place on the CEO agenda. But now, with the worst fears of the crisis behind them and an emerging recovery ahead, CEOs are adopting new attitudes and approaches, tailored to deal with the issues of the global recovery that they hope is underway.

The following pages are a summary of the findings in the technology sector. To explore the full results from the 14th Annual Global CEO Survey, please visit www.pwc.com/ceosurvey.

Sector demographicsIn the technology sector, PwC surveyed 59 CEOs from 20 countries. Revenues ranged from less than US$2 million to more than US$10 billion. See the charts below for further details.

Chart 1: Sector demographics

Subsectors Geography Revenue

46%47%

7%

Computers & Networking

Software & IT

Semiconductors

46%35%

19%

Europe

Americas

Asia

32%20%

10%

12%

12% 14%

1.0-100M

101-250M

251-500M

501-999M

1.4-9B

10B+

14th Annual CEO Survey – Technology Summary 3

past two years, primarily in response to new industry dynamics and shifts in demand (see Figure 1).

Their responses reflect three overarching trends currently affecting every area of the technology industry: the explosion in popularity of mobile devices such as smartphones and tablets; the ‘consumerisation’ of technology; and the adoption of cloud computing. These trends, in combination with the increasing importance of emerging markets, are disrupting everything from business models to talent strategies—and simultaneously creating huge opportunities and challenges.

The new growth picture emergesHaving spent the last two years cutting costs and making their companies as efficient as possible, technology CEOs are now optimistic about the business outlook. A full 91% are either ‘somewhat’ or ‘very’ confident of being able to generate higher revenues over the next 12 months—and that figure increases to 93% when looking at the next three years.

Many technology CEOs have already prepared the ground with significant strategic changes. Seventy-one percent told us that they’d altered course over the

Figure 1: Why technology CEOs have changed their strategies

Q: Of the following factors that may be changing in your business, which have significantly influenced your need to change your strategy?

54 56 58 60 62 64 66 68 70 72


Competitive threats

Industry dynamics

Customer demands

60%

63%

71%

71%

Base: All respondents who stated ‘changed in fundamental ways’ or ‘somewhat changed’ (52 of 59 respondents). Source: PwC 14th Annual Global CEO Survey


Mobile computingThe surge in demand for smartphones and tablets offers one such opportunity for innovation. In the semiconductor industry, for example, it’s boosting the need for cost-effective wireless combination chips that also provide the power management, bandwidth and data transfer process speeds needed for video

Opportunities for innovationMost technology CEOs are looking to innovation as the primary driver for growth. Ninety percent of those we surveyed believe innovation will open up new revenue streams (see Figure 2), and 34% see the development of new products or services as their biggest opportunity for growth over the next 12 months.

streaming, fast data downloads and continuous connectivity. In the software sector, it’s opening up a whole new world of mobile applications and encouraging the shift to the Software-as-a-Service (SaaS) model. And in the hardware sector, tablets are rapidly eclipsing PCs, with ‘app’ stores and elegant user interfaces driving revenues.

Figure 2: Technology CEOs are pinning their hopes for growth on innovation


0 20 40 60 80 100

An important part of our innovation strategy is to develop products or services that are environmentally friendly

Our innovations will lead to operational efficiencies that provide us with a competitive advantage

Our innovations will lead tosignificant new revenueopportunities

We use M&A as a significantsource of innovation

33% All CEOs

Tech CEOs41%

64%

79%

78%

85%

90%

64%

Base: Respondents who stated ‘agree’ or ‘agree strongly’ (59 of 59 respondents). Source: PwC 14th Annual Global CEO Survey


Figure 3: Technology customer segmentation

Q: For each of the following groups of end-customers, do they directly represent more than 33% of your revenues today?

Base: Respondents who stated ‘yes’(1,201 for all CEOs; 59 for Tech CEOs). Source: PwC 14th Annual Global CEO Survey

ConsumerisationThe ‘consumerisation’ of the technology industry offers other opportunities for innovating and generating new revenues. The industry has traditionally developed different products and services for each of its three customer bases: companies, governments and consumers. Businesses and governments demand security and standardisation, while consumers look for convenience, innovation and ease of use. But many companies are now responding to increasingly tech-savvy workers who want to access the same device and apps at work that they use in their personal lives.

While on the surface, supporting personal devices in the enterprise environment may seem like nothing more than a strategy to retain employees—an important objective given today’s scarcity of key talent—looking deeper it provides companies with an innovative way to increase productivity among their workforce. Today’s ‘digital native’ employees rely on personalised access to a cloud of relevant information accessed through their handhelds to innovate, collaborate and produce and companies who provide this access are benefitting. Tech companies, in turn, are seeing growth opportunities in everything from the need for enhanced data security, more sophisticated networking, and the explosion of mobile devices and applications.

Cloud computing Yet another area that’s likely to grow very fast is cloud computing. The main reason why companies in all industries invest in IT is to cut costs and become more

Figure 4: IT investment goals


Base: All respondents who stated ‘agree’ or ‘agree strongly’ (1,201 for all CEOs; 59 for Tech CEOs). Source: PwC 14th Annual Global CEO Survey

All CEOs Tech CEOs

Our IT investments are made primarily to reduce costs and become more efficient operationally 69% 66%

Our IT investments are made primarily to support growth initiatives and leverage emerging innovations, such as mobile devices and social media 54% 54%

Our IT investments are frequently the focus of boardroom discussions 39% 42%

Our IT investments are no longer necessary now that innovative software is available as a service on the Internet 10% 2%

efficient (see Figure 4). Cloud computing does this by allowing companies to scale IT activities up or down without investing in expanded data centres by relying on shared resources outside their IT infrastructure. But given their response to the question about IT investments no longer being necessary, almost none of the CEOs we spoke to expect cloud or SaaS to replace the need to invest in IT. Rather than replacing internal IT, SaaS will be integrated into their overall IT strategy. Cloud is certainly causing a great deal of disruptive change, and it is this very change that is presenting new revenue opportunities and driving innovation for tech companies.

A second key reason for investing in IT is the desire to capitalise on the increasing importance of mobile devices and social networking. The business dialog is now digital, supported by mobile devices providing anytime/anywhere capabilities

for both voice and data. Savvy companies across all industries are utilising social networks as a marketing medium, an intelligence-gathering medium and as an internal collaboration enabler. Whether it’s a Facebook page, a blog or tweets, digital media outlets provide an immense opportunity for unprecedented dialog between companies and their various stakeholders. Companies have access to a wealth of information about their customers while customers have the opportunity to influence and or customise product design and service offerings.

For tech companies, this explosion in digital communication provides a number of opportunities for growth and innovation. Take Apple as an example. By allowing customers to design apps for their products they’ve increased the level of innovation for their products without hiring a single employee. The disruption

All CEOs

Tech CEOs72%

92%

15%

Businesses Governments Consumers

37%45%

15%


Some technology CEOs hope to address the lack of talent in key markets via international assignments: 59% say they plan to deploy more staff globally over the next 12 months, but 51% anticipate problems—recognising that experienced employees may be reluctant to relocate to other countries, especially countries with very different cultures. Clearly, this could impede some CEOs’ plans to expand in emerging markets.

ConclusionOverall, technology CEOs feel confident that their companies and their industry are well positioned to grow in the next few years. New technologies supporting the advancement of mobile devices, social networking and cloud computing are providing a wealth of opportunities to grow revenues through innovation, collaboration and M&As. Many technology companies will also continue to expand globally, particularly in increasingly influential and rapidly expanding markets that offer new revenues as well as suppliers and talent.

in existing sales, marketing and customer service models brought on by this new communication method will require innovations in hardware, software and network connectivity.

Targeting emerging marketsTechnology CEOs also have their eyes firmly fixed on emerging markets—where demand is soaring, thanks to double-digit economic growth and huge consumer populations with increasing disposable incomes. They’re particularly interested in China and India, both for the purposes of growth and as future sourcing locations. Hence the fact that 88% expect their key operations in Asia to grow, and that 36% are looking for acquisition targets in the region.

But technology CEOs aren’t ruling out developed markets. Indeed, the US comes second on the list of countries they regard as most important to their companies’ future growth and sourcing requirements. Eighty-one percent therefore anticipate expanding their operations in North America.

Bridging global skills gapsWhile technology CEOs see a great deal of opportunity for growth over the next few years, they also recognise the existence of threats. Some are uncertain about whether the global economy has really recovered, for example. They’re worried about the prospect of tax increases in countries with high public-sector deficits and the competition from new market entrants, too.

However, one of their biggest concerns —as it is for their counterparts in other industries—is the availability of talent. Eighty-four percent of the technology CEOs participating in our survey plan to maintain or increase their companies’ headcount over the next 12 months. But 66% report that there’s a limited supply of candidates with the right skills, and 64% see the shortage of talent as the most serious threat to their companies’ growth. They point, among other things, to challenges in recruiting and integrating younger employees and poaching by competitors.

‘We view innovation as being driven by four mega-developments. The first, of course, has to do with ongoing technological improvements and breakthroughs. The second is the rise of the emerging economies, which will bring entire populations onto digital networks. The third is the new way that digital services are consumed, as exemplified by the preferences of Generation Y. And the fourth is the re-pricing that will be necessary to make digital services ubiquitous around the globe. So you see, innovation is not just technology-led.’

Vineet Nayar Vice Chairman and CEO, HCL Technologies, India


PwC works with technology companies around the world to help them fulfill the promise of their great ideas. Whether it’s driving innovation to meet the growing consumer opportunity of the global markets, or adopting new ‘digital’ business models, our strong relationships and track record of delivering value have made us the trusted adviser or auditor to the majority of the Global Fortune 500 and Global Financial Times 500 technology companies.

There is an ever-present state of change and evolution in each of the technology sectors which today is impacting everything from the structure of their business models to the delivery of products and services to customers.

Given our significant client base and considerable resources, our technology professionals work from an exceptional base of experience. We’re in touch with your industry—and ready to work with you.

For more information on how PwC’s technology industry practice can help your company, or to get in touch with a technology industry partner in your area, please visit us at www.pwc.com/technology or contact one of the professionals listed below.

About our technology industry practice

Raman Chitkara Global Technology Leader +1 408 817 3746 [email protected]

Rob Gittings US Technology Leader +1 408 817 3730 [email protected]

Xavier Cauchois European Technology Leader +33 01 56 57 1033 [email protected]

Greg Unsworth Asia-Pac Technology Leader +65 6236 3738 [email protected]

Contacts




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