A More Optimistic Davos

World Economic Forum, Davos, January, 26 2011

I have come down from the mountains for the twelfth time, with my head still aching not from excessive partying but from information overload at the World Economic Forum. Imagine being invited to an all you can eat buffet, with the most delectable foods laid before you, but with an unrealistic ten minute time limit imposed on your attendance at the party. I ran as hard as I could for four days, to sessions in the Congress Center, to cocktail parties and informational lunches. I also decided that this year, I would go into depth on fewer subjects, attending multiple sessions on a topic, rather than my usual grazing behavior. Here are my observations:
1) Economy on the Rise–The economic forecast is quite sunny, with BRIC nations expected to grow 7-8%, Germany and the USA around 3-3.5%, while the rest of the EU will struggle to grow 1% as government cutbacks take hold. Fareed Zakaria, Time Magazine made the case for optimism. “Every surprise has been to the upside.” Professor Halberstadt of Leiden University worries about the crisis of the unemployed in the West, noting 50% of the youth in Spain is not working. Major European figures, such as President Sarkozy of France and Prime Minister Merkel of Germany, pledged support for the Euro, whatever the cost, with Sarkozy contending that “it is not simply a money issue, it is a matter of peace.”

Mr. Schauble, minister of Finance of Germany said “there must be consequences if a member state cannot make budget in order to convince the markets that the Euro zone works.”  Tim Geithner, U.S. Treasury Secretary, said that while the U.S. is in a relatively better place to address its fiscal issues, “We must recognize that we cannot grow our way out of the deficit. There will need to be spending cuts and tax hikes.”

2) Geopolitics—Two Areas of Focus–The uprising in Egypt began as we were at the Forum. While world leaders were careful to avoid anything more than bland statements, experts such as former Israeli Ambassador to the United Nations, Daniel Gillerman, said, “Egypt is following Tunisia in a move to democracy. This may well spread to Jordan and Syria.” Many speakers were concerned about the rise of Islamic fundamentalism in newly democratic states. A constant refrain was needed to find common ground between the two largest powers, China and the U.S. Larry Summers, professor at Harvard, said that the issues of currency, Taiwan, IP and protectionism are real, adding that the U.S. business community is now negative on Chinese policy.

Kevin Rudd, foreign affairs minister of Australia (who delivered his panel conclusion in fluent Mandarin) suggested that “the Chinese feel they have reformed their economy, joined the IMF, helped during the global financial crisis by massive stimulus, and now the US is afraid of us.” President Yudhoyono of Indonesia suggested that smaller nations band together in regional groupings to “resolve issues in our back yards, that become the building blocks for collective global governance.” This was his nice way of saying that the G-20 is deadlocked on issues from trade to environment.

3) Bankers Versus Government—Round Ten—The fisticuffs between financiers and the sovereign authorities continues. The banks came in loaded for bear, with Gary Cohn, president and COO of Goldman Sachs, contending that regulation had gone too far, and Bob Diamond of Barclay’s suggesting that the time for remorse had ended. I witnessed a classic face-off between Jamie Dimon, CEO and chairman of JP Morgan Chase, and President Sarkozy, the best WEF street theater. Dimon said, “Good policy is critical but the single objective now must be jobs and that means growth. Don’t do too much on financial regulation; the conversation is now too shrill between the banks and regulators.”

Sarkozy responded, “When the big U.S. banks went under in 2008, the cost of the failure was tens of millions of unemployed who had nothing to do with the crisis. There must be a limit to securitization. Is this a market economy or a madhouse?” By the end of the week, the bankers were much more conciliatory, but Christine Lagarde, finance minister of France, got in one more classic line. “You know what you can do? You can say thank you for the money for the bailout then begin to lend to small and medium sized businesses.”

4) Sustainability—Companies have moved from considering environment as social responsibility to recognizing the need to make dramatic changes, particularly in the supply chain. Paul Polman, CEO of Unilever (disclosure: client), said that his company is committed to doubling its revenue over the next decade but with zero growth in environmental impact. One important strategy is to move consumers from quantity to quality. He also suggested that companies must be involved in changing consumer behavior because “they are responsible for 70% of the consumption versus only 3% in our factories—how long they shower, how they cook and wash.” Product innovation can drive this behavior change; a new Unilever fabric softener means clothes need only one rinse, not two.

Professor Dan Goleman of Rutgers University said that a better educated consumer is now demanding a new level of corporate transparency, quoting Andy Rubin, VP for sustainability at Wal-Mart: “If you are going to be naked, you better get buff.”  The CEO of Best Buy, Brian Dunn, (disclosure: client) said he is thrilled with his company’s decision to take back any electronics product when a consumer upgrades; his Geek Squad then refurbishes the machine and sells it at a very attractive profit.  Ellen Kullman, Chairman and CEO of DuPont, noted the role of government and education as partners, pointing to a cooperative effort at the University of Tennessee to build a demonstration plant for production of ethanol from switch grass, which led to commercialization 18 months faster than if the company had proceeded on its own.

5) Shared Value—Indra Nooyi, CEO of PepsiCo (disclosure: client) said that the future of the enterprise depends on its evolution as a force for good. She has realigned her incentives so that “you can’t deliver performance without purpose.” She traced the history of the joint stock company, which provided limited liability for shareholders “because the enterprise owes the society a duty of care.” Michael Porter, whose seminal article in Harvard Business Review has stimulated discussion of shared value, said that “business is at a watershed moment; it is seen as profiting at the expense of the community. We backed ourselves into a narrow view of value creation that ignored important strategic dimensions. We have to rethink the boundaries of corporations. In fact, corporations used to accept more responsibility for communities until governments took that role.” He argues for a new form of sourcing, beyond fair trade agreements that “simply give farmers a larger share of the same pie. You should teach the farmers how to get better yields and create more value, while the company gets better quality goods and a more reliable supply.”

Paul Bulcke, CEO of Nestle, said that entrepreneurs have historically had long term vision with strong values; management must understand the broader context in which business operates. Nooyi made a particular point about the financial community’s obsession with quarterly earnings, leaning over to Professor Porter to say that “MBA schools have missed the message, teaching students only about short term value. I would like to send all of the financial analysts back to school to learn about long-term approach to business.”

6) Energy—As oil prices climb over $100 a barrel, the energy panel predicted that conventional and unconventional technology will extend production on current wells and create new supply. At present in Saudi oil fields, only 55% of the oil is recovered, but with advanced techniques that should rise to 70% within five years. Despite the BP Gulf of Mexico crisis, it is predicted that deepwater drilling will play an ever greater role, with industry committed to a high safety standard. Natural gas will replace coal in many U.S. factories as the leading energy supply.  The US is now a major source of natural gas reserves given its ability to mine the shale in the Northeast and West. The price of energy is rising due to demand, especially demand in Asia.

John Krenicki, president and CEO, GE Energy (disclosure: client) suggested that nuclear should play an important role in the future energy supply, but that government guarantees will be needed to provide certainty on financing given the scale of projects. He added that several of the nuclear plants in the U.S. and Russia are at the end of their useful lives and will need to be replaced. Solar and wind are not expected to represent more than five percent of supply within the decade. Coal will play an important role in markets with plentiful supply in the U.S. and China, with optimism on prospects for clean coal.

7) India—The panel expressed great pride in the country’s ability to achieve the same growth rate as China, noting that “it is a country based on consent.” But then the criticism came fast and furious, most passionately about the infrastructure which badly lags China. “India is like a bicycle rider; we have pushed hard to get to the top of the hill but now we are gliding.” Another executive said there must be a fundamental realignment of relationship between business and labor so that the country can increase its manufacturing capability. “Let’s get a consensus with labor whereby they get better enforcement of health and worker rights and we get more flexibility in hours and quality.” Government was criticized for corruption in bidding (telecommunications bid scandal) and for the torturous court system. There is demand for better education, especially for the rural areas, where 65% of kids drop out of school. It was suggested that companies become more involved with the schools, providing skill centers so that students are ready for the workplace.

Wipro and McGraw Hill (disclosure: client) also announced a deal to offer educational material on cell phones–a form of distance learning. Sunil Mittal of Bharti, the telecom giant, said that there are only 83,000 banks in India–leaving 600 million outside of the financial system–but by partnering Bharti with the State Bank of India, he is offering banking by cell phone.

8) Future of Media—I spent nearly a day with the Media and Entertainment community. Besides meeting rocker Peter Gabriel and technology revolutionary Sean Parker, I learned that abstract aggregation of social networks such as Twitter and Facebook has moved toward customization of content and become a second level of editing. Media owners are concerned about the tendency to browse their dot com editions versus the act of completion (Robert Thompson, editor of the Wall Street Journal, describes it as finish-ability) on the print edition. Great stories in mainstream media still drive unbelievable traffic to the dot com sites, with the recent Amy Chua story in the Wall Street Journal yielding 4.5 million page views, 13% of which came via Facebook.

Alan Murray, who runs WSJ.com, said that he has 250 friends on his Twitter feed and that he uses his morning train ride to scan for stories that they think are worthwhile to peruse. Jeff Bewkes, CEO of Time Warner, is sticking with his business model that combines subscription only (HBO) with subscription plus advertising, and an open architecture business strategy that delivers content where consumers want it and how they want it (rent, store in cloud, keep on their device). Note that 30% of people who miss a show will watch it within four days. Media owners are concerned that distribution companies like Amazon may try to disintermediate the producer of content. This was the Davos where Google was eclipsed by Facebook (Google still has the best party!), with brands such as Coca-Cola telling how Facebook fans are 40% more likely to recommend the product and that its 22 million friends are growing at the rate of one million every 10 days. Beatriz Perez, CMO of Coca Cola North America said she is more interested in expressions than impressions, pointing to YouTube where there are 146 million videos involving the brand, only 20% from the company.

Sheryl Sandberg, COO of Facebook, said that those with a smart phone spend 48% of their time on social media and that a friend recommendation yields a doubling in sales. Jeff Jarvis, blogger extraordinaire and consultant to several media companies, talked about the value of editing as increasing efficiency, unbundling the audience to sell a higher value product via micro subscription. He cited Glam Media which puts together the best of blogs and brings the most salient content to the top.
As always, I feel inspired by my immersion in the intellectual ferment that is the Forum. You have to be intelligent every waking minute for fear of being left behind. I find this to be my favorite four days of the year. I would appreciate your comments.

Richard Edelman is the presidnet and CEO of Edelman, the world largest independent public relations firm. This article was originally published as a blog post on Edelman’s blog, 6 A.M. Photo Credit: Reuters Pictures

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