MANAGEMENT

CEO survey

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SA stands to lose out as global CEOs look back to advanced economies for growth opportunities.

SA’s CEOs are less confident about their company’s short-term prospects; worries about exchange rate volatility, over-regulation and fiscal deficits that are higher than ever before.

Twice as many CEOs around the world last year believe the global economy will improve in the next 12 months, and 39% say they are ‘very confident’ their company’s revenues will grow in 2014, according to the 17th Annual Global CEO Survey done by PricewaterhouseCoopers (PwC).

South Africa’s CEOs are more optimistic about global growth than they were a year ago and the proportion that thinks the global economy will improve has increased by 35% since 2011.

While their views on the global economy may be positive, South Africa’s CEOs show less confidence about their company’s short-term prospects, with just one in four saying they are ‘very confident’ and one in five being either ‘not very confident’ or ‘not confident at all’. Confidence levels for the medium-term outlook also tend to lag those in other emerging markets as well as the global average.

Tom Winterboer, PwC Financial Services Leader for Africa, says; “Global CEOs feel more positive about their ability to increase their revenue growth and about prospects for the economy now that they are emerging from the global recession. However, CEOs also acknowledge that sustaining growth in the post-crisis economy remains a challenge.

“Worries also continue to loom for many South Africa CEOs as they continue to contend with concerns such as over-regulation, exchange rate volatility, the slowdown in high-growth markets and inadequate basic infrastructure.” The global survey results, based on interviews with 1,334 CEOs from 68 countries, were released at the World Economic Forum annual meeting held recently in Davos. In South Africa, interviews were held with 105 CEOs from a broad spectrum of listed and privately-owned companies.

CEOs are looking on multiple fronts for growth opportunities. “CEOs are coming out of survival mode but the search for growth is getting increasingly complicated as the global economy gradually rebalances itself,” says Winterboer. The advanced economies are mending, while some emerging economies are slowing down.

Global CEOs are turning back to certain advanced economies for growth opportunities. China and the US top the list of markets most important for overall growth prospects, followed by Germany, Brazil and the UK. Beyond the BRICS (Brazil, Russia, India, China and South Africa), CEOs believe Indonesia, Mexico, Turkey, Thailand and Vietnam offer the best growth prospects in the next three to five years (after the US).

South African CEOs (30%) see growth opportunities coming from an increased share in existing markets, 30% from new geographic markets, and 24% from product/service innovation. Nearly half of CEOs (43%) named other African countries as most important for their prospects for growth in the next 12 months, 29% named China and 23% the US.

In the short term CEOs are more optimistic about prospects for revenue growth for their companies than they are about their industries. However, South African CEOs remain the least confident globally at 64%. By industry, CEOs in the hospitality and leisure sector are the most confident about prospects for the next 12 months (46%), followed by those in banking and capital markets (45%). CEOs in the metals industry are the least confident at 19%.

CEO’s top concerns

As CEOs’ viewpoints on the economy take an upward turn, their major concerns have also changed. The top three potential economic and policy threats highlighted by South African CEOs are: exchange rate volatility 89% (compared to 60% globally); over-regulation at 88% (72% globally); and 82% regarding the Government’s response to the fiscal deficit and debt burden (71% globally). Of business threats, 87% (compared to 63% globally) cited the availability of key skills, the second highest in the world after the ASEAN (Association of Southeast Asian Nations) region, 86% bribery and corruption (52% globally) – second only to Venezuela, and 85% rising labour costs in high growth markets (58% globally) – the highest in the world.

More than half of CEOs are also concerned about labour costs in the emerging economies. By 2030 it is projected that wage levels in the emerging economies will show a significant degree of catch up with those in the developed economies. South Africa and other middle income emerging economies are set to become more attractive as consumer markets, while low cost production could shift to other locations such as the Philippines.

In contrast with global expectations 32% (global 20%) of South African CEO’s plan to cut their work force while 38% (global 45%) plan to increase their headcount. A significant percentage of local CEOs (64%), compared to 41% globally, think it is the priority of the Government to create a skilled workforce – a massive 92%, the highest in the world, believe that the Government has failed to achieve this.

Trends that will transform business

Globally a large number of CEOs identified three mega trends that will transform their businesses in the next three to five years: 81% technological advances (SA 76%); 60% demographic changes (SA  50%); and 50% a shift in global economic power (SA  47%). Local CEOs (60%) also mention urbanisation as a mega trend. “These trends aren’t new. What has changed is the pace at which they are unfolding,” adds Winterboer. Just as technological advances, demographic changes, urbanistion and economic shifts will create new opportunities for innovation and growth, they will also raise many new challenges.

Preparing for the future

When asked what would drive future growth, 60% of South African CEOs recognised the greatest opportunities in growing their market share – whether in existing markets or in new geographies. In terms of ‘product or service innovation’, it is interesting to note that 11% fewer South African CEOs view that as a significant growth opportunity than the global average of 35%. In contrast, 40% of BRICS CEOs view innovation as the most significant opportunity for growth. South African CEOs’ target region for mergers and acquisitions or joint ventures is overwhelmingly for Africa (94%).

Restructuring

This year, 77% of South African CEOs say they have implemented cost cutting measures and 49% expect to do so in the coming year. This appears to be in line with global norms.

Creating value in new ways

The digital revolution has given rise to a new generation of consumers who want ever more accessible, portable, flexible and customised products and services. Globally, CEOs think that technology will be the biggest thing that will revolutionise their business over the next ten years.

CEOs are taking steps to prepare for the future. A significant percentage of CEOs (86%) aim to alter their R&D functions, while 88% are exploring better ways of using and managing big data while 90% are changing their technology investments.

Paying taxes

The international tax system has fallen short in the eyes of CEOs around the world, according to the survey. The majority of South African CEOs (83%) agree that it is important to be seen as paying their ‘fair share’ of tax.  A significant percentage (64%) agree it is appropriate for the tax authorities around the world to share information freely with each other that they have on companies while 53% agree that the current international tax system has not changed to reflect how multinational corporations operate today and is in need of reform.

The need for hybrid leadership

“CEOs know that technological advances, demographic shifts and economic shifts are changing the world. They recognise that they need to plan for the short, medium- and long-term,” says Winterboer. Many are dissatisfied with their current planning horizons. Of the 12% of CEOs with a one-year planning timeframe, 70% would like to plan for three, five or more than five years and of the 51% of CEOs who currently plan three years out, 38% would like to plan for five or more years.

In addition to extending planning horizons businesses are concerned about the total impact of their activities across social, environmental, fiscal and economic dimensions.  CEOs believe it is important to balance the interests of different stakeholders, rather than focusing solely on investors, employees and customers.

Winterboer concludes: “Global trends are challenging companies to have a hybrid set of leadership skills. Today’s CEOs must be hybrid leaders capable of running the business of today while looking into the near and far distance, combining the best of the old with the new, and piloting their organisations through enormous changes to make them fit for the future.”

 

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