Fear of recession is dominant concern among global CEOs.
Wednesday, 30th January 2008
Source : PricewaterhouseCoopers
CEOs' confidence about prospects for business declined for the first time since the 2003 survey and fear of a global recession emerged as the major threat to growth, in PricewaterhouseCoopers 11th Annual Global CEO Survey.

Compared to last year, possible economic downturn is the only risk factor to increase in concern among CEOs. All other risks to growth - including energy supply, global climate change, and terrorism - declined as business threats. Over-regulation and availability of talent were also top CEO concerns.

The percentage of CEOs who said they are "very confident" about revenue growth over the next 12 months fell two percentage points from last year to 50%. CEOs, however, remained nearly twice as confident as they were in 2003. The survey results were released today at the World Economic Forum annual meeting in Davos, Switzerland.

The overall drop in business confidence was most pronounced in North America, where just 35% of CEOs said they were ‘very confident' about growth, compared to 53% last year, a decline of more than a third. Confidence among Western European CEOs also declined to 44%, down by eight percentage points.

In contrast, CEO confidence in the surging economies of Asia Pacific, Latin America, and Central and Eastern Europe, increased, rising to about 55% in each of those regions. This growing confidence is especially strong in China and India – where 73% and 90% of CEOs, respectively, were "very confident" about the prospects for growth in the next 12 months.

This year's results marked the first time since the survey's inception 11 years ago, that CEOs cited a potential economic downturn as the major threat to their business growth prospects. Until now, CEOs had consistently rated over-regulation as the primary risk to their business. Terrorism and the threat of pandemic, once major CEO concerns were cited by only 31% and 28% of respondents, respectively.

"The credit crunch and the slowdown in the Western economies have created a clear split in the confidence levels of CEOs around the world," said Samuel A. DiPiazza, Global CEO of PricewaterhouseCoopers. "The possibility that the downturn could worsen into recession looms large for CEOs in established economies like the U.S. and Western Europe. In the newly-emerged economies CEO confidence remains strong, perhaps because they have experienced nothing but rapid expansion for a decade or more."

Further highlights of the survey results:

Climate Change Threat Requires Government Action

Climate change, despite the highly-visible debate over global warming, was cited as a concern by only 34% of CEOs worldwide (down from 40% last year), while the remainder said they did not feel this was a threat to their business. Only 37% said their organisation was investing significant resources to address the risks and opportunities presented by climate change.

However, in marked contrast to their fear of over-regulation, four-fifths of CEOs, called for an increase in government action to reduce emissions. Support for increased government intervention was highest among CEOs in Asia Pacific, at 90%, and lowest in North America, 64%. CEOs also favoured collaborative efforts to mitigate climate change. Overall 73% of CEOs believed that businesses need to collaborate more effectively with industry peers and business partners in mitigating climate change. This number rose to 82% in Asia Pacific and declined to 58% in North America.

Threat of Over-Regulation Declines

In contrast to previous years, when regulatory issues such as Sarbanes-Oxley dominated CEOs thoughts, the threat of over-regulation declined this year, though it remained among the top three concerns of CEOs. Over-regulation was mentioned by 59% of respondents, down from 73% in the previous survey.

CEOs felt labour laws, tax regimes, and education were the top areas in which governments could make improvements. Just 5% felt improvements were needed in regulation over initial public offerings or listings on stock exchanges. Overall, more than half of CEOs said that governments should drive convergence of tax and regulatory frameworks.

Existing Markets, New Products Keys to Short-Term Growth

Concern about the global economy also impacted CEOs' plans for expansion over the next 12 months. More CEOs now see their main opportunities for short-term growth coming from better penetration of existing markets or developing new products rather than from mergers and acquisitions or geographic expansion.

As they did last year, CEOs said they preferred to finance future growth from within the company, rather than external sources such as the debt or equity markets.

Global M&A Activity Looks Set To Rise in 2008

Globally, 24% of CEOs said their company had completed at least one cross-border merger or acquisition within the past 12 months, while 31% plan to do so within the next 12 months. CEOs in Western Europe were most likely to have participated in cross-border M&A activity. The most popular destinations for M&A activity are Asia, Western Europe, Eastern Europe and North America.

Interest in M&A in 2008 is highest in Asia Pacific, where CEOs are most confident, and where Asia Pacific companies have increasingly become the acquirers rather than the acquired. Asian Pacific CEOs are planning M&A activity both close to home and abroad. Only 23% of Asia Pacific CEOs have completed at least one cross-border deal within the past year, but 34% âˆ' a higher percentage than in any other region – say that they intend to do so within the next 12 months. Of those Asia Pacific CEOs planning M&A in the next 12 months, 25% foresee a transaction in Western Europe, 31% in North America and 73% closer to home in Asia.

Obstacles to M&A activity were headed by cultural issues and financial considerations. However, the issues of political interference or opposition and possible backlash against a foreign presence in local markets have increased as barriers to cross-border M&A.

Collaborative Business Networks Emerging

Overall, more than half the CEOs said that collaborative networks will become a major organisational principle for business, and only 17% ‘think the costs and risks of networks outweigh the benefits'. Nevertheless, 37% still regard the establishment of networks as a secondary activity.

There was marked regional difference in support for business networks. More than 60% of CEOs in Asia Pacific believe that networks will be a defining organisational principle, with the number rising to 83%in India. However, the percentage fell to 44% in Central and Eastern Europe.

"Collaboration across business networks is becoming an increasingly important strategy for successful companies, though it may not be appropriate in every circumstance," Mr. DiPiazza said.

War for Talent Continues to Rage

The war for talent remains a key concern among CEOs. Overall, more than two-thirds of all CEOs -- 85% in North America -- said their time was best spent dealing with people issues. CEOs in Asia Pacific, despite the region's substantial working age populations, were the most concerned over the availability of key skills. Asia Pacific CEOs were most likely to believe that their organisation needs to change the way it develops talent.

CEOs said that combined technical and business experience, global work experience and leadership skills are the most difficult areas for their companies to recruit. Global experience, however, was ranked last among a list of skills that are critical to their organisation.

"Making sure that their companies have the right talent in place remains a core issue for CEOs around the world," Mr. DiPiazza said. "Regardless of the other issues swirling around them, CEOs clearly understand that having people with the right balance of commercial, technical and management skills is the key to success in their organisation."

For more details regarding PricewaterhouseCoopers' 11th Annual Global CEO Survey, go to www.pwc.com/ceosurvey
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