This year’s The Economist CFO Summit brought together a number of finance leaders, looking to drive growth in a challenging climate.
The World in 2013
Alaisdair Ross, Global Product Director at Economist Intelligence Unit, opened the conference by describing the cautious optimism with which many businesses were approaching 2013. “This year I hope to be more cheerful than on previous occasions,” he stated, before adding; “We can see recovery coming but it’s a difficult path to get there.”
In terms of the global economy, he highlighted six countries, Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa, as those to watch this year. This group of nations, referred to as “CIVETS”, each has a young, growing population, a diverse economy and a relatively stable political system.
China and India were underlined has the countries which would see the highest levels of growth. China’s economy in particular, is expected to grow by 8.5 per cent in 2013, which may represent a downturn compared to previous years, but should be viewed as a move towards “long term stability.”
Turning his attention to the Eurozone, Ross explained that the situation was moving from “crisis to chronic [issues]” and that although definite progress has been made, much remains to be done. Speaking about the UK, he suggested that the current austerity programme could continue for another decade.
On a more positive note, increased consumer spending in Asia was singled out as an important opportunity for British companies looking to increase revenue. This point was echoed by Rt Vince Cable MP, Secretary of State, Department for Business Innovation and Skills, who described Britain’s output towards emerging markets, during the past decades as “dire”.
Managing corporate assets during a period of economic stagnation is one of the key challenges currently facing finance leaders. Kenneth Gregor, CFO at Jaguar Land Rover (JLR), explained that despite the economic downturn, JLR had continued to support its investment programme. This strategy ensured the company was ready with new products when the economy began to recover.
Ben Stevens, Finance Director at British American Tobacco, discussed the necessity of a global approach, particularly when some parts of the world were struggling. In terms of business strategy, Stevens advocated the need for FMCG companies to invest in markets characterised by strong population and GDP growth. In addition, British American Tobacco took advantage of the current climate to implement a number of cost transformation initiatives; “We took the opportunity to drive through cost savings and to emerge stronger from the recession.”
When asked if they had also taken advantage of the current climate to invest in cost saving operations, each of the panellists replied affirmatively. Gregor said JLR was in the process of installing an SAP system and Dr Frank Weigand, Chief Financial Director at RWE Generation, explained that although he was involved in cost saving initiatives, they would have been carried out regardless of the economic climate.
Speaking on the recent resurgence of manufacturing in the West, Gregor downplayed the notion that onshoring was the short and medium term future of manufacturing. “In Europe it is the case that growth calls for jobs and governments see the automotive industry as valuable in this respect,” he said. “Wage rates will eventually catch up but that is a long term development, manufacturing will remain cheaper in the East.” Stevens agreed but added that in certain cases onshoring was increasingly attractive.
The CFO’s Great Balancing Act
Modern CFO’s are expected to advise the board on how best to make savings, whilst simultaneously driving company growth. This challenge is particularly relevant in fast moving markets, where businesses have to balance strategic, long term planning with reactive initiatives. This is particularly relevant in the telecommunications industry.
“In the telcoms industry, maybe flat is the new up,” explained Timotheus Höttges, Chief Financial Officer at Deutsche Telekom. “We are in a very, very tough environment and facing different challenges from multiple angles.” He listed high capital lockup, increasingly short product lifecycles, a shrinking core business and asymmetric regulations, as the main concerns for the industry at present.
Speaking more generally, Höttges explained that CFOs of leading organisations also need to tackle the challenge of simultaneously serving the interests of various interest groups. Entrepreneurs, for example, want investments to be made in innovative solutions, M&A, security planning and related areas. On the other hand, the debt market wants assurance that debts are secured. The most important group is the consumers, who demand low prices and high quality.
“I will not [separately discuss] cost management, because in this environment, when you are always managing a decline in your revenue streams, cost management and productivity gains are always a must do.”
Höttges’ second principle is “Be Focused”. This strategy is based on the sound allocation of capital. Here Höttges recommends focusing on the areas you are good at. He cited several telecoms companies which spread their resources too thinly by investing in new markets. The final principle is “Be Reliable”, which again highlights the need to balance the interests of the company with those of multiple stakeholders.
Today’s CFOs find themselves in a position where they have to guard against an increasing number of threats, whilst driving business growth. The challenge for finance leaders is to successfully mitigate threats and ensure that tighter margins do not translate into a lack of preparedness.
Edward Ainsworth, Managing Director at 4C Associates, pointed out that the continued global expansion of many companies was opening them up to new risks. He underlined the need for businesses to call on an external viewpoint, or simply other members of staff, to gain fresh insights into this area. “The key for leading companies is to find a way of optimising cost and risk,” he said. “An important element of this is recognising new threats, such as the risk of new, more agile, low cost entrants, into the market.”
Jean Drouffe, Group Finance, Risk and Strategy Director at AXA UK and Ireland, agreed, and added that as insurance is being increasingly distributed online, new competitors were entering the market. Drouffe, highlighted easily accessible data as the main reason companies such Google, Tesco and car manufacturers, were beginning to move into the insurance sector. Remaining vigilant and learning from the mistakes of others, were seen as key elements for any company wishing to remain successful.
Companies which remain successful despite the economic landscape remain greatly affected by the current climate of austerity. Mark Morris, Finance Director at Rolls Royce explained that although Rolls Royce as a company could benefit from opportunities resulting from the crisis, other partners were not in the same situation. “We have access to cheap funding but many of our own suppliers do not,” he said. Morris also highlighted the sheer complexity of some of the industry’s products as a potential risk. Most recently, Boeing saw its new Dreamliner range grounded after a series of technical issues caused concern.
Leading companies are thinking much more carefully about what risks they are taking and communicating these to investors. This allows for an approach focused on mitigating or eliminating threats. Ainsworth pointed out that by doing this in a structured way, company value can be increased. Julian Metherell, CFO and Executive Director at Genel Energy agreed and explained that at Genel, investors understand their exposure to the Middle Eastern and North African oil markets and consequently demand a high return on equity. On the other hand, investors are not expecting risks to be run with funds secured on the overnight market.
The panel ended with a discussion regarding longer term risks, such as changing demographics and climate change. Jeff van der Eems, Chief Operating Officer and CFO at United Biscuits, employs a “shooting duck strategy” to ensure UB stays on top of consumer trends. This entails predicting future changes in consumer behaviour and reacting to them slightly before they take place. The difficulty lies in ensuring changes are not made too soon or too late. “Snacking has been going on for years and this is an industry in which changes happen slowly,” he said. “We have already removed trans-fat and palm oil from our products and will continue to evolve with our customers.”
Steering the Business
The tone of 2013’s CFO Summit was undoubtedly more hopeful than in previous iterations. Many finance leaders are cautiously optimistic about what their businesses will be able to achieve in the coming years. Although the Eurozone crisis is still very much a cause for concern, Mario Draghi’s pledge to do “whatever it takes” to save the single currency has helped dissipate a number of fears. Many of the speakers also pointed to the rise in purchasing power in emerging nations as a key opportunity for long and short term growth.
On the other hand, none of those present believed the coming years would be easy for any industry. Driving growth, be it through cost transformation, sound investments or risk management, continues to be a key concern for businesses. In this context, many stakeholders will look to finance leaders to carry out the complex balancing act that has come to be seen as the role of the CFO.