With all the world talking about how best to deal with the global economic crisis, IESE recently organized a special session titled “Creating the Company of 2020” to explore what effort and initiative are required to build a more stable and prosperous future.
IESE Dean Jordi Canals, economics professors Pedro Videla, Antonio Argandoña and Xavier Vives, and a panel of eminent entrepreneurs led by Prof. Pedro Nueno, offered their reflections on the measures necessary for preventing a recurrence of the current situation and for getting back on the right track of economic growth.
A Crisis of Global Proportions
The current crisis affects all countries, and the economic indicators are rather discouraging on all fronts: Europe, the United States and Japan are already in recession, and China is showing signs of vulnerability. Other emerging economies are suffering from the fallen price of raw materials and the lack of cash flow.
Moreover, the forecasted growth of real world GDP for 2009 will scarcely reach 1 percent. “It's been 60 years since we've seen this happen to the world economy,” said Videla.
Since the beginning of 2007, the U.S. financial system has experienced losses of $836 billion; in Europe, losses are calculated at $312 billion and in Asia, $34 billion. Overall losses to global stock markets are $8-10 trillion: clearly, regional downturns have been synchronized.
Quite rightly, companies and governments are moving quickly to revamp policies. As Videla explained, overcoming the crisis requires carrying out whatever reforms are necessary – not just to see a quick return to positive figures, but to set the right conditions for a future path of stable growth.
Spain’s Growth Model is History
The session looked particularly at the situation of Spain, where unemployment is at record highs, household debt sits at around 130 percent of GDI, and companies are experiencing serious problems in terms of competitiveness, with 8 percent of their productive capacity unused and a debt equal to 700 percent of GOS.
So far in 2009 the stock market has fallen 20 percent, and the real-estate sector – the driving force economically in recent years – is plummeting, with an estimated 1.2 million homes sitting unsold.
In this context, GDP is predicted to drop 2 percent, unemployment could reach 16 percent or higher, and public debt will top 6 percent.
According to Argandoña, the woes of the Spanish economy are marked by the fact that the country’s previously strong growth was made possible by three special factors that no longer apply: the introduction of the euro, an influx of immigration and major cash surpluses that spurred a real-estate boom.
As Videla noted, “Even if the crisis were over tomorrow, Spain would still not register 4 percent growth, because the growth we’ve had hasn’t been based on productivity, but on external factors. What’s currently available is not the same as before: that model of growth is history.”
Spanish society, companies and government must collectively come to terms with the stark reality that, during the boom years, they did not do enough to seize the opportunity to increase productivity. Now everyone needs to start making the necessary adjustments. “Adjustment is painful,” admitted Argandoña, “but putting off the inevitable only means increasing public deficit and, consequently, incurring greater financial costs.”
Reasons for Optimism
With so much bad news, it may seem hard to think positively. But as many participants noted, periods of crisis are also times of major changes, which are ideal for capitalizing on new opportunities. Now is the time to take steps that will put you in a better position for when things start to pick up again; this is the perfect occasion for revamping policies, laws, proposals, social values and points of view that could lead to a better future.
“We realize that we are going through a complex and difficult time,” said Canals, “but we must bear in mind that the construction of modern Spain and Europe has taken place precisely during moments as complex and difficult as the present.”
In his opinion, Spain has some advantages: established companies with an international presence, a good climate and quality of life, a public sector with a lower volume than the European average, and more dynamism and margin for flexibility than France and Germany.
Canals added: “We have something that we didn’t have before: enviable macroeconomic stability and a group of companies that are leaders in a number of sectors, which we probably couldn’t have even dreamed of just 15 years ago.”
The business leaders present seemed to share this upbeat assessment, believing that they could leverage the knowledge developed over the past decade to get out of the crisis.
Salvador Alemany, CEO of the infrastructure management company Abertis, was one of those who said the team know-how acquired from this period of growth was a fundamental element to recovery. “We have learned to play at the major-league level,” he said. “Now it’s about taking advantage of the key components that already work.”
Urgent Recovery Measures
The session took place around the time of the G-20 summit in London, so naturally talk turned to the measures being taken by world governments to reform international financial systems: tighter regulation of risk-assessment agencies, clearer accounting codes, eradicating banking secrecy and tax havens, and stabilizing the banks.
Four measures – reorganizing the financial system so that credit starts to flow again; deciding how to adjust taxation to the new environment without creating excessive public debt; investing in infrastructure to increase productivity; and properly managing sectoral help by choosing which sectors had the most possibilities – were particularly relevant for Spain, said Vives.
Of those, the lack of liquidity in the system was considered the most pressing issue. “Most Spanish financial institutions have serious difficulties issuing debts if they do not have government guarantees,” said Argandoña.
The executives taking part in the panel highlighted the need for rationalizing variable costs while being very careful with the company’s working capital. They stressed the importance of staying in close contact with customers to detect new needs and trends or to scout out new markets if the existing ones were weakened. The capital allocated to innovation and future growth must not be reduced, they warned. Better to engage in mergers or acquisitions if necessary.
Contemplating the Future
In the medium and long terms, Vives saw the crisis as an opportunity for a complete overhaul: to improve Spain’s educational system, at both the secondary and university levels, and offering better incentives for student excellence; to bring the legal system into the 21st century; to see public administrations become paradigms of punctuality, effectiveness and regulatory capacity; to engage in research and innovation that boosts productivity, promoting sectors such as energy, services and tourism; to redefine the labor market by encouraging new types of contracts that offer greater flexibility; and to fix the pension system once and for all.
Apart from these structural actions, Vives called for a profound shift of mindset: “It is imperative for society to recover a culture of effort and hard work.”
Francisco Belil, CEO of Siemens for southwestern Europe, echoed this sentiment: “Our teams must be built around values-based criteria.” More than having technical knowledge, a strong team must have a spirit of commitment, and for this, he said, “you have to convey the idea that we can’t wait for someone else to come along and solve our problems for us: we have to do it ourselves.” Building such wholehearted commitment will require top executives setting an example – by being more transparent, for one thing.
The companies that survive will be those that “bank on innovation and talent, and are capable not only of anticipating but of helping to reinvent the future,” said Belil.
“Industrial companies who take an attitude of starting over with renewed enthusiasm will fare better,” added Alemany.
The End of the Tunnel
Most participants agreed that the United States would likely be the first country to rebound from the crisis, although Belil added that Europe could be a strong contender, if it did its homework.
The executives also made some predictions about the new opportunities that might arise in the coming years. Infrastructure would be the emerging sector in the United States, certain European countries would play key roles in the resurgence of construction, and Mexico held big promise in the tourism sector. In new technology, that sector would shift toward greater ecology and sustainability.
Argandoña ended on a note of “realistic optimism,” a recurring theme of the event. “We’re not going to say that we can stop the global recession, because we are unable to. What we are saying is that we can take advantage of this time to transform the economy, and make ourselves stronger, so that when the world starts growing again, we can move ahead faster than other countries that we compete with.”