Brunswick partners and senior advisors who attended Davos discuss takeaways for companies.
View from the United States
By Nikhil Deogun, CEO of the Americas and US Senior Partner
If Davos is a place where people gather to tackle long-term issues with short-term urgency, it was striking that outside the Congress Center, the official hub of the World Economic Forum, there was less discussion of Ukraine and COVID, a noticeable turn of events from the last Davos in May 2022.
Generally, despite the risk of recession, the mood was more optimistic. It is easy to forget how frightening the world felt as recently as last May when the previous Forum gathered. War had broken out in Europe, Chinese politics seemed increasingly fractious, and the economy increasingly weak.
In some ways, it shows that business leaders in particular have learned to navigate two of the biggest crises in recent memory – and the accompanying shocks to supply chains, inflation, and their work forces. The sense of relief on that score was palpable.
Yet, the very idea of Davos is about interconnectedness and globalization – pillars that are definitely under threat in a more fragmented world. There were far fewer powerful heads of state than in years past.
The Davos delegation of the United States, often perceived as a bellwether in terms of policy and global relations, was led by Katherine Tai, the US Trade Representative, not the president or vice president. The most senior leaders from Congress also abstained from attending, although Treasury Secretary Janet Yellen will meet Chinese Vice Premier Liu He in Zurich during his return from Davos. (President Trump surprised many by attending Davos early in his term.)
For business, the biggest change in this multipolar world is the national security lens that is being cast on investments coupled with a more aggressive industrial policy in the United States, best exemplified by the Inflation Reduction Act.
Global fractures tie directly to the dialogue on ESG, a topic that has for many years been on the Davos agenda. The ESG war in the US has not gone unnoticed, but it was clear from this year’s discussions that the world is still looking to the US for guidance on climate. The investment opportunities, based in part on the IRA, are making the US a tempting destination for European and Asian companies.
While US chief executives may be more circumspect about publicly talking about the benefits of ESG for fear of being accused of being “woke,” it’s clear that a focus on sustainability and environmental impact is now deeply embedded in the business strategies of major corporations.
At a private lunch Brunswick hosted for top executives, it was striking how many of the leaders see the business opportunity that exists by making fundamental strategic and investment decisions that also have a positive ESG impact or manage ESG risk.
As a result, the view from Davos was surprisingly optimistic, with a sense that there is a unique opportunity to accelerate change and a hope that the fragmentation won’t stall the progress that has been made.
View from Europe
By Ulrich Deupmann, Senior Partner
If you ask Europeans what their most intense moment was in 2022, nearly all reply: February 24. The invasion of Ukraine that began on that date has changed perspectives dramatically, including at Davos.
At last week’s event, there was no official Russian delegation. Yet, there was an omnipresent and confident Ukrainian delegation and a strong and self-assured showing of politicians and businesspeople from neighboring Poland. Less visible but also present were the delegations from the Baltics and other eastern European countries. Davos 2023 reflected how Ukraine has moved Europe’s focus eastwards.
Chancellor Olaf Scholz’s speech confirmed Germany’s sandwich position – economically speaking, between the US and China, and politically speaking, between military support for Ukraine and fear of being drawn further into the war. While some bankers hailed a once-in-a-lifetime opportunity to rebuild Ukraine, politicians and analysts remain divided on the hope of peace talks given the bloody, enduring war of attrition.
However, discussions of the war and the multipolar global future sometimes distracted from other urgent challenges ahead of Europe, which have enormous political and economic implications.
First and foremost, European leaders will have to escort baby-boomers through their retirement, transform industry, decarbonize the economy and create a European security strategy that depends less on the US. This effort will require an overwhelming amount of capital.
Since public resources will have to finance demographic change to a major extent, Europe will need to increase its productivity dramatically. Amid growing labor shortages, digitization, artificial intelligence and innovation of all kinds will be critical, including as a source of wealth and tax revenue.
In a democratic environment where populists live off and fuel social unrest, the strategy seems clear. Public debt across Europe will drastically increase, if not explode.
What will be the proper balance between investing in climate protection, economic growth, and military and social security? The challenge will be to square away the interests of an elder generation with significant electoral power and a younger generation, energetic and better educated than ever, pushing for a longer-term perspective.
In terms of environmental progress – a key theme at Davos – Europe is leading. However, it still needs to help ensure that China, India and others follow the same path. In tandem with tackling the fallout from the Ukraine invasion, European businesses would do well to focus more on solutions to long-term issues such as climate that reduce pressure on the public purse and support relationships with their stakeholders.
View from Asia
By Tim Payne, Senior Partner and Head of Asia, Sunitha Chalam, Partner and Head of the Singapore Office and Khozem Merchant, Partner and Head of the Mumbai Office
For years, Davos has been engineered to encourage Chinese participation. This year the event is earlier than normal to avoid a very early Chinese Lunar New Year.
With China only just out of its self-imposed zero-COVID lockdown, its delegation remained very light on the ground. That said, China’s reopening, its renewed focus on economic growth, its tech sector’s relief at its apparent removal from a regulatory chill, and a punchy pro-engagement speech from Vice Premier Liu He left delegates much more positive on China. We should expect much stronger Chinese participation next year.
Hong Kong did send a delegation, pushing the idea of its return to the world stage with renewed confidence. However, with China still almost absent, other Asia delegations puffed chests. The likes of India, Indonesia, the UAE and Saudi Arabia had pavilions lining Davos’s Promenade. There was significant focus on either new channels for bilateral cooperation, or on the rising importance of other Asian destinations as part of a more holistic and hedged Asian investment strategy.
India is the most prominent example, experiencing fast economic growth despite global recession anxieties. It holds the G20 presidency until November 2023 and has promoted its strengths extravagantly, most notably digitization and a vibrant start-up culture.
India is promoting incentives for global manufacturers to establish a presence in the country, and to create a “just in case” alternative to China-dominated supply chains. That foreign investment message also drove marketing activities by individual Indian states at Davos, including Maharashtra, Telangana and Tamil Nadu.
Buoyed by its recent successful hosting of the G20 meeting, Indonesia is actively promoting its deft handling of COVID-19 and its ability to recover quickly from the pandemic to register strong economic growth, boosted by domestic consumption, investment and export performance. It is also talking about its net-zero pathway and the opportunities and challenges around climate and deforestation, a reflection of international concerns.
There is recognition that these issues need to be addressed for Indonesia to continue to attract foreign direct investment. Nonetheless, there are also questions around what a “just transition” might look like in Indonesia and other parts of Asia, where there is still heavy reliance on coal to provide electricity for large parts of the population.
At Davos, discussions have centered around what a broader Asia strategy looks like, politically and in commercial terms for corporations. This creates opportunities for companies to explore new opportunities in Asia beyond China, but also complexities around getting a more thoughtful and nuanced understanding of of the different markets that make up this very diverse region.
View on energy and the environment
By Lucy Parker, Senior Partner and Business & Society Global Lead, and Wolfgang Blau, Managing Partner of the Climate Hub
Passionate speeches by climate activists are nothing new in Davos. What is new is the extent to which climate change and the energy transition have become the most visible themes of the Davos agenda and dominated the speeches of many world leaders.
Of the 235 events in the official conference program, 33 focused exclusively on the transition to renewable energy sources, climate change and nature. The realization settled in at this year’s forum that even without the climate crisis as its backdrop, the energy transition on its own would already be reason enough for significant geopolitical uncertainty and a global realignment that is likely to last decades, not years.
The looming trade conflict between the EU and the United States over the US Inflation Reduction Act only highlighted how the energy transition and addressing climate change are becoming the new organizing axes along which a global competition for investments, start-ups and talent is playing out.
The inevitability of an energy transition was no longer controversial in Davos. What remained controversial and is likely to shape next year’s agenda is the question of how quickly it can happen. Companies will need to establish a framework for the speed of their transition and articulate it clearly to their stakeholders.
View on geopolitics
By Paddy McGuinness, Senior Advisor, London
One critical outstanding question for the World Economic Forum is whether China will come back to the event in force.
Among the many geopolitical issues discussed at Davos, business leaders have above all been praying that China’s reopening will have positive global economic effects this year. They also want to understand what aspects of globalization, especially trade, can be retrieved from the frost in US-China relations. At future Davoses, it will be interesting to see if China develops a counter-narrative to the US-dominated lines of the past few years.
How distinct from the US will the EU position on China become? German Chancellor Olaf Scholz, the most powerful world leader in attendance at Davos, has still to manage domestic constituencies as well as international ones in his approach. It would be a mistake to think that silence in response to the US discourse is agreement. An EU “middle way” on China is not likely to emerge any time soon, at Davos or otherwise.
The Ukraine invasion also featured prominently at Davos – deservedly so given the economic shock it engendered and what it teaches us about modern warfare and its impact on business. However, support for Ukraine’s struggle remains limited to most NATO countries, the Five Eyes, and select US allies. Some G20, African and Asian states are still mindful of past ties with Russia, are further from the epicenter of the conflict than NATO and are angered by a lack of comparable engagement with the conflicts in their regions.
At Davos 2023, the high profile of nations like Saudi Arabia, the UAE, India, Indonesia and Korea has lent only the veneer of plurality. The formal agenda was narrower and there was no public process which drew out the differences or bridged gaps. If anywhere, those processes ran in the many planned or spontaneous private meetings between CEOs and with political leaders in the margins.
For companies grappling with geopolitical issues at Davos, forethought and agility in taking these sometimes fleeting opportunities repays the effort many times over.
View on national security
By Kenneth Weinstein, Senior Advisor, Washington DC, and Mike Rogers, Senior Advisor, Washington DC
After COVID-19 and the invasion of Ukraine, business and government leaders who gathered in Davos recognized that that the once unthinkable can become stark reality.
Globalization itself, once the mantra of Davos, is now seen as presenting widespread risk, including through economic dependency on authoritarian regimes, for areas from energy to finance to manufacturing. Authoritarian regimes have shown a willingness to leverage these dependencies for geostrategic ends.
In the face of this danger, democratic nations are aiming to limit systemic risk, especially when dealing with challenges like COVID-19 or the Ukraine war that could lead to a broader global crisis. Even attempts to meet the challenge of global warming and reduce supply-chain dependence can have an unintended cascading influence.
The creation of this globalization construct was largely driven by economics and technology. Governments are now increasingly applying a third set of criteria – national security – to assess the implications of that construct.
That perspective is placing new strains on globalization and identifying fresh concerns with it. It is also putting further pressures on many parts of the business community. Hence there is a growing corporate need to understand this national security prism and Davos’s expanded interest in it as well.
Under Japanese leadership, the G7 seems to have taken stock of the failure of deterrence in Ukraine, and the resulting humanitarian and energy crises that have extended well beyond the areas of Russian attack. The G7 is placing greater focus than ever on secure supply chains, technological leadership, democratic principles and peace and stability in the Taiwan Strait.
The US has focused on reducing supply-chain dependency for electric vehicles through the Inflation Reduction Act. However, this has led to a new trade crisis with America’s European and Asian allies, whom the Biden administration has deemed essential to its dealings with China.
Moreover, that overlooks the broader issue: might measures to enhance deterrence in the Taiwan Strait over the medium to long term lead to a greater possibility of Chinese action in the short term?
Davos is set up to debate such questions, not to provide answers. It cannot match the geopolitical clout of the G7 and G20. In certain government and even corporate circles, there has always been debate over the optics of the gathering.
Additionally, government is increasing its role in many areas of the private sector, partly under a broader definition of national security. This includes technology regulation, industrial policy and investments, and tariff and trade protection measures.
As globalization comes under stress, companies would be advised to deepen their geopolitical understanding, while meeting a range of policymakers as well as clients and other stakeholders to seize the opportunity for the public and private sectors to establish a common understanding.
View on technology and cybersecurity
By Mylene Mangalindan, Partner and Head of the San Francisco Office, and Paddy McGuinness, Senior Advisor, London
Technology has the potential to transform entire societies by introducing new tools that can improve areas like education and healthcare. But Davos attendees probed the risk inherent in technologies such as blockchain and artificial intelligence in an effort to temper the optimism about technology’s promise.
When asked his opinion on blockchain, Microsoft CEO Satya Nadella said he was neutral. Technologies like web3, artificial intelligence and the metaverse will not get broad adoption until there’s a use case or application, he said. “What’s the ChatGPT for blockchain?” he asked.
Consider cryptocurrency, which uses blockchain to secure and record transactions. Recent upheaval has forced the tech industry to consider whether cryptocurrency requires new regulation and whether government and financial institutions should link arms to guide its development, safeguard investments and remove an accelerant to ransomware attacks. Some blockchain providers are emphasizing its security potential as an alternative to the cloud, but this is far from proven.
Cybersecurity was a constant at Davos, and a subtext in the conversation on infrastructure resilience. Tellingly, although CEOs are reluctant to discuss their own cyber incidents, they see cyber as an even greater concern in ten years’ time than it is today.
Preparing for cyber risks is already a regulatory obligation for many businesses. Davos attendees who have asked Ukrainians for lessons learned on cyber defense may not realize the resulting obligation to take organizational and technical measures themselves. Prior to the war, ransomware was the unresolved challenge. Now there is action by states and their hacktivist supporters. The investment and effort of recent years looks to be outmatched by this 2023 threat. Absent compelling preventative options, leaders must build resilience for when their businesses are impacted.
To continue the conversation:
Reach out to Brunswick’s Davos delegation at [email protected].