A make or break year for Australia business

Every year at Davos, PwC releases its annual survey of over 1000 CEOs from around the world.

The survey is a good yardstick for a number of things - market sentiment, optimism or pessimism and new trends that are keeping the world’s business leaders up at night.

I’m always interested to see how the opinions of Australian CEOs align and diverge from their global peers, and how closely their responses chime with what I hear out in the market and boardrooms across the country.

Unsurprisingly, this year’s survey shows a marked drop in CEO confidence around the prospect for growth, not just in their own business but in the economy as a whole.

The slowing of China’s economy, combined with our ongoing adjustment away from a resources economy, mean that just one third of Australian CEOs are very confident they’ll see revenue growth over the next twelve months, down from nearly half last year.

But what was surprising this year - and I think concerning - was the stark divergence between Australia’s CEOs and their international counterparts when it comes to how they plan to respond to this clouded economic picture.

First, it seems the first instinct of many Australian CEOs is to reduce costs. Forty one per cent plan to reduce the headcount, which is a tremendous increase from just 12 per cent last year, and nearly double the number of their global peers with similar plans.

I understand the impulse to reduce overheads in the face of an uncertain outlook, but the cost-cutting cycle has more or less continued since the financial crisis, so there is a risk organisations are now starting to cut muscle rather than fat.

You can’t cut your way to growth, so companies that want to prosper over the longer term should be looking at where they can make judicious investments.

The other big surprise in the survey for me was the attitude toward investment in research and development (R&D) and innovation.

Australian CEOs overwhelmingly get the importance of technological change - this is obvious from my own experience in the market, and is confirmed in the survey.

They rate technology advances as the number one global trend that will transform customer and stakeholder expectations of business over the next five years.

Every CEO in the survey said they were making changes to the way they use technology to assess and deliver on customer and stakeholder expectations.

But - unlike their global peers - many are not convinced on the value of investing in R&D. More than half of CEOs globally said that R&D and innovation generated the greatest return in terms of engagement with customers and stakeholders, but less than one quarter of Australian CEOs agree.

There is clearly a disconnect between the high priority placed on technology, and our understanding of where it actually comes from.

Why is this?

Is it because we’re used to being the world’s mine, and don’t see ourselves as the source of latest technology and innovation?

Are we too used to waiting for the next wave of disruption to arrive from abroad, rather than trying to set it off ourselves?

Whatever the cause, this attitude must change if we’re going to grow and prosper in the years and decades to come.

The Government laid a good foundation for local R&D with last year’s innovation statement - including many incentives for business.

This must be followed by action from both business and government in areas including tax reform, infrastructure development, investment in science, technology, engineering, and maths education, and deeper engagement, beyond simply trade, with our neighbours in Asia.
If current turmoil in the markets continues, 2016 could be a challenging one for Australian business.

But, like Prime Minister Malcolm Turnbull, I’m optimistic about the future. My hope is that the challenges we face will set of a new surge of investment in innovation and R&D, rather than a batten down the hatches approach that might shield us from damage in the short term, but do nothing to support long term growth.