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Australia’s CEOs are not unique when it comes to economic pessimism for 2020. But while their global counterparts are responding with proactive growth strategies, many local CEOs have narrowed their response to cost cutting and operational efficiencies.
Optimism in the economy is on the wane. Only 11% of Australia’s CEOs anticipate an improvement in 2020, a significant reduction from the 2019 results of 40%. In comparison, 22% of global peers anticipate improvement (down from 42% in 2019).
This stark outlook isn’t isolated to the next 12 months either. Only 38% of local CEOs signalled confidence in revenue growth for the next three years. Optimism for both time horizons has been sliding steadily since 2018.
Our recent Australia Matters campaign explored how Australia’s economic growth remains persistently lower than at any point in the past two decades. Now 80% of Australia’s CEOs are concerned about economic growth in 2020 (up from 68% in 2019). In fact, uncertain economic growth has been identified as the second biggest threat to business growth, begging the question:
Does increased local concern stem only from our slow growth environment or is it also because of a lack of readiness?
When asked about activities to grow revenue in 2020, a large majority (77%) of local CEOs said they would look inward to improve on operational efficiencies. One in four CEOs will seek to decrease headcount (up 20% from last year and, for comparison, three times more likely than global peers).
While Australia is on par with global counterparts (also at 77%) when it comes to improving operational efficiencies, where we fall behind is the lack of investment in market opportunities for growth. That’s evident from the year-on-year decline in local CEOs planning new strategic alliances or joint ventures, to enter a new market, for new mergers and acquisitions, and to collaborate with entrepreneurs or startups.
Only 14% of local CEOs plan to collaborate with entrepreneurs or startups (down from 22% in 2019), which begs another question:
Is Australian business too blinkered in its approach to growth?
In this time of economic uncertainty, an air of complacency may have crept in alongside a reluctance to explore new growth opportunities.
The danger of building business strategies around inward activities is that they run the risk of being too short term. For example, successful organisations are not the ones who focus efforts solely on decreasing headcount but the ones who are increasingly investing in upskilling their workforce in anticipation of future demands.
Further, when considering how companies can make productivity gains, it’s alarming that as a country we are underspending on research and development (R&D). Research in PwC’s Australia Matters report shows that Australia’s total R&D spend to reach OECD top 10 level, an additional $13.7bn on R&D would need to be spent. As they navigate the year ahead, business leaders should be asking: Is innovation at the core of our business planning?
Current geopolitical tensions and resulting disruptions to global supply chains and value chains appear to weigh heavily on the minds of CEOs. Coupled with headwinds in the Australian economy, this is shifting local CEOs’ focus away from outbound growth and investment, with only a quarter planning to enter a new market in 2020.
Amidst economic uncertainty, and rising concerns that trade conflicts threaten organisational growth (up to 66% from 61%), the ‘wait and see’ approach will no longer suffice. Local businesses must steel themselves for a prolonged period of trade conflict, irrespective of the outcomes of the US presidential election later this year.
Proactive CEOs are exploring what can be done differently and taking positive strides to protect against ongoing disruption.
Of the quarter (27%) of local CEOs extremely concerned about trade conflicts as a threat to growth, 25% are adjusting their supply chain and sourcing strategy, (a significant improvement from 0% in 2019).
Organisations will set themselves up for success if they deepen their understanding of their supply chain and vendors - both from a social license and cost visibility perspective. In addition, productivity gains over the next decade will be there for CEOs who look to automate transactions to drive efficiencies.
In 2019 trade tensions between China and the US significantly altered how China’s CEOs saw offshore growth opportunities. This year, Australia has consolidated its position as China’s top market for growth (more than doubling from 21% to 45%).
Meanwhile, the US has sunk to 11% (from 17% last year and 59% in 2018) and is no longer in China’s top five at all. Aside from Australia (45%), China’s remaining top five territories for growth are France (21%), Canada (19%), Germany (15%), Angola (14%) and Argentina (14%).
Having climbed 417 percentage points (9% to 45% from 2018 to 2020) as China’s preferred territory for growth prospects, Australia has moved up to sixth place overall as a market for global CEOs’ growth prospects over the next 12 months.
This upswing has seen 9% of global CEOs name Australia in their top three most attractive markets. This can also be attributed to 25 years of continuous growth, a comparatively stable government and a transparent regulatory framework, which help elevate Australia’s perceived market reliability.
However, it appears that trade tensions between the US and China have prompted Australia’s CEOs to place less emphasis on China. By ranking the US (a long-established destination for Australian investment) as their own most important territory for growth, Australia’s CEOs have gone back to what they know. This reinforces the notion that, in times of volatility, Australian business prefers to play it safe.
For many, this cautious approach may require a rethink – or at least more scrutiny. In these uncertain times, businesses must evaluate whether their strategies are future fit and consider alternative markets where they could create a competitive advantage. Australian businesses who come out on top will be the ones who understand the diversities and complexities of their markets better, including seizing opportunities in the Asia-Pacific region.
Most forecasts suggest that, in 2020, Asia will be home to more than half of the world’s economic output, half of the world's middle class and two thirds of the world's population. In the 1950s the region produced just 20% of global economic output, despite being home to half of the world’s population.
When asked how they enable strategic goals, 31% of Australia’s CEOs feel that their organisation has a clear vision of how they create value.
They are allocating resources strategically to capitalise upon competitive advantages and pursuing only the opportunities they believe they can win.
However, many of their overseas counterparts are taking a broader view, and pursuing differentiation too. Global CEOs who are very confident in their organisations’ prospects for revenue growth over the next 12 months also say that they have a set of differentiating capabilities that set them apart from competitors.
One in four global CEOs believe this difference will enable their strategic goals. Confidence in these uncertain times is coming from CEOs who are able to distinguish their organisations from the rest.
ensure that the organisation has clarity in its strategic priorities
consider how geopolitical and trade tensions might provide opportunities for new markets and/or partnerships
explore outward opportunities to drive revenue growth, ensuring that the benefits of free trade agreements (FTAs) are captured
invest in innovation and R&D
given the low interest rate environment, consider borrowing to invest in growth.
Chief Economist & Partner, PwC Australia
Tel: +61 (2) 8266 4611
Partner, PwC Australia
Tel: +61 (3) 8603 2067
Partner, PwC Australia
Tel: +61 2 8266 0218
Head of Content and Thought Leadership, PwC Australia
Tel: +61 (2) 8266 0252