Speaker 1: Because you're a subscriber to this Bloomberg podcast, we thought
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Speaker 1: produced by BCG and Bloomberg Media Studios. It analyzes almost
Speaker 1: forty nine hundred earnings calls worldwide to assess what topics
Speaker 1: merit a CEO's time and attention. Here's a recent episode.
Speaker 1: Rich and Michael, Welcome to the CEO Radar podcast.
Speaker 2: It's great to be here with you.
Speaker 3: Thanks for having us.
Speaker 1: During the first quarter. The analysts who are on these calls,
Speaker 1: who function really as a proxy for the market in
Speaker 1: our approach, we're talking about tariff sixty two percent more
Speaker 1: often than we're CEOs. Even though obviously CEOs talk far
Speaker 1: more on these calls than do analysts, the fact that
Speaker 1: they were mentioning tariff so much more surprised me a bit.
Speaker 1: I thought that we would see CEOs talking more about that,
Speaker 1: talking about how they were preparing for what seemed to be,
Speaker 1: at least to a lot of experts and inevitability. Rich,
Speaker 1: what was your take on why they weren't discussing it
Speaker 1: more in first quarter?
Speaker 2: I was thinking the same thing as I read through
Speaker 2: the survey, and as I reflected I think there were
Speaker 2: two totally separate things going on here. One is, if
Speaker 2: you go back to the president's first term in office,
Speaker 2: there was a saying, well, two observations. One is it
Speaker 2: became frequent to say take him very seriously, but not literally.
Speaker 2: And a second was that he will be very responsive
Speaker 2: to how the market dynamics evolve in adjusting the actions
Speaker 2: and announcements. And I think in many CEO's minds, the
Speaker 2: combination of those two statements. They had heard all the
Speaker 2: comments about tariffs. The President was quite good at both
Speaker 2: on the campaign trail and after the campaign ended about that,
Speaker 2: but I think they were still probably underestimating the magnitude
Speaker 2: of what he was prepared to do. And I think
Speaker 2: the second thing is the CEOs that I speak with
Speaker 2: generally have a view that it's best not to be
Speaker 2: too commenting in public about the worries you have or
Speaker 2: what you think the administration maybe doing right or doing wrong,
Speaker 2: and it's much better to engage directly, whether that was
Speaker 2: going to Marrow Lago before the inauguration or going to
Speaker 2: Washington since the inauguration.
Speaker 1: But wouldn't they have been in a safe zone if
Speaker 1: they had talked about we're in case there are tariffs,
Speaker 1: we have prepared in the following ways for that so
Speaker 1: that they could reassure the market that they wouldn't be
Speaker 1: as effected perhaps as other companies are.
Speaker 2: I don't think there's an easy near term response on
Speaker 2: how to do that, and I think the last thing
Speaker 2: CEOs want to talk about. Some of that response will
Speaker 2: be passing price through to their customers or through to consumers,
Speaker 2: or things that you really don't want to be saying
Speaker 2: unless you have to, unless it's there.
Speaker 1: Michael, we saw some regional differences here in the discussion
Speaker 1: of tariffs in the first quarter. Globally, the mentions of
Speaker 1: tariffs by CEOs did increase in the first quarter. Certainly,
Speaker 1: it's not as if they were totally line to the topic.
Speaker 1: It went up five hundred and thirty seven percent around
Speaker 1: the world, but in the US it went up about
Speaker 1: one thousand percent. In Europe, where you're from, about five
Speaker 1: hundred percent increase, and less than a one hundred percent
Speaker 1: of an increase by CEOs in Asia talking about tariffs.
Speaker 1: That last bit surprised me, given that that's where many
Speaker 1: of the global supply chains began and certainly would be
Speaker 1: affected by a US set of tariffs. What should take
Speaker 1: on why those numbers are different around the world.
Speaker 3: I mean, if I look at the European numbers, the
Speaker 3: five time increase to the last quarter, I'd say we
Speaker 3: should not make the conclusion that the numbers are not
Speaker 3: as high as in the US. Therefore the European CEOs
Speaker 3: are less well prepared. I think most CEOs have really
Speaker 3: done their homework, and what we've seen when speaking with
Speaker 3: the CEOs were a couple of things. I mean, they
Speaker 3: were really working on building this geopolitical muscle. We've seen
Speaker 3: a lot of scenarios being played through, and I think
Speaker 3: what we've seen over time rich a bit like to
Speaker 3: your point that this is not happening overnight. I think
Speaker 3: many of the businesses have already started a couple of
Speaker 3: years ago to think through what should my localization strategy
Speaker 3: actually look like. And we've seen that, particularly if we
Speaker 3: look at the automotive manufacturers, the big German OEMs. I mean,
Speaker 3: they have started over time actually to build up international
Speaker 3: footprint and more and more localization strategies. And I think
Speaker 3: what we were going what we are going to see
Speaker 3: over over time. I think that this strategy is going
Speaker 3: to intensify.
Speaker 2: And if I just pick upon the Asia part of
Speaker 2: your question, I also think and again the first term
Speaker 2: of the president, we saw Japan and India, both leaders
Speaker 2: of both countries, Prime Minister Motive, Prime Minister Abbe do
Speaker 2: a really excellent job of building relationships with the White
Speaker 2: House with the President, and I think there was probably
Speaker 2: some optimism, whereas in Europe, obviously, coming out of Dava's
Speaker 2: the Munich Security Conference, it was pretty clear it was
Speaker 2: going to be a quite tense relationship. So the fact
Speaker 2: that Asia or Asian business leaders may have underestimated the
Speaker 2: impacts of tariffs, and I think obviously I think Chinese leadership,
Speaker 2: whether it's companies or political leadership, was really keeping relatively
Speaker 2: quiet about what the US would do. So I'm not
Speaker 2: actually surprised that this didn't get as big a visible
Speaker 2: play in these conversations in Asia as we saw in Europe,
Speaker 2: and then certainly the US was much more front and center.
Speaker 1: As your data suggests, these tariffs were initially announced and
Speaker 1: then were put on hold for a period of time.
Speaker 1: I think that's just indicative of a level of uncertainty
Speaker 1: that the business community is going through at this point.
Speaker 1: Is there any way that people can profit from that
Speaker 1: is there somebody who wins in a climate of uncertainty.
Speaker 2: So I just want to start with your comment around
Speaker 2: uncertainty because it is the comment I hear the most
Speaker 2: right now in the business community. You know, every investment
Speaker 2: is a function of risk and reward and returns associated
Speaker 2: with it. Right now, the level of uncertainty has really
Speaker 2: heightened the risk associated with investments. So I think what
Speaker 2: we're seeing first and foremost is a level of caution
Speaker 2: around investing, certainly in physical assets. I think the second
Speaker 2: thing is in terms of where you can build advantage. Look,
Speaker 2: some people will take bets on where things go, and
Speaker 2: some of those will be right. The challenges we don't
Speaker 2: know which bets will turn out to be right. And
Speaker 2: the second thing is once this settles, and I think
Speaker 2: all business leaders, whatever their views of what the level
Speaker 2: of tariffs they want, I think will hope for clarity
Speaker 2: that at least you know where you stand. And once
Speaker 2: it does settle, there will certainly be competitive advantage to
Speaker 2: some companies relative to others, because even if your cost
Speaker 2: go up to tariffs, if your main competitor faces even
Speaker 2: higher tariffs, you've built some advantage even if you may
Speaker 2: have reduced overall demand, because some price will flow through
Speaker 2: to the end market.
Speaker 1: So in the near term, nobody really wins from uncertainty.
Speaker 1: I think it's get frozen in place.
Speaker 2: Uncertainty. I used to describe it as deer in headlights
Speaker 2: when you looked at the Great Financial Crisis or post
Speaker 2: on it. And I don't think we're at that magnitude,
Speaker 2: to be clear. But I do think that when there's
Speaker 2: massive uncertainty that enters the environment, the first thing people
Speaker 2: do say, Okay, let's hold on, let's see, and that
Speaker 2: means planned investments don't go forward because people don't know
Speaker 2: in this case where to invest. Even if they know
Speaker 2: how they want to invest in how much they want
Speaker 2: to invest. The where question is really tricky right now.
Speaker 3: But even though Rich, even though we have also from
Speaker 3: a European point of view, we have this uncertainty as well.
Speaker 3: I think the clarity what's going to happen now going forward,
Speaker 3: with how obviously the administration is going to interact with
Speaker 3: the different regions, I think brings at least a new
Speaker 3: perspective for CEOs how to think about their business models,
Speaker 3: how to think around Okay, how do I need to
Speaker 3: set up my opera model. And I think from a
Speaker 3: European point of view, this has been probably the final
Speaker 3: wake up call to think through how how can we
Speaker 3: future prove our operating models in order to be competitive
Speaker 3: in this in this new competitive world that is that
Speaker 3: is going to be set up because again, if I
Speaker 3: look at my home market at Germany, the German model
Speaker 3: was based on a full export driven model, fully globalized
Speaker 3: global supply chains right and and and and that model
Speaker 3: was serving the economy the businesses super well. I think
Speaker 3: while we have uncertainty, I think we have clarity that
Speaker 3: this model was not going to work.
Speaker 1: Let's turn now to the topic of costs. One of
Speaker 1: the things we did in this report was we gathered
Speaker 1: together similar topics and sort of combine them to gauge
Speaker 1: sort of how some of these megatopics are playing out
Speaker 1: over time. One of them was costs. So we combined
Speaker 1: things like the topic of write downs or job cuts
Speaker 1: or an economic slowdown and saw, sort of, on average,
Speaker 1: where did those topics rank amongst the most mentioned topics
Speaker 1: both by CEOs globally as well as by analysts. What
Speaker 1: we found on costs was a divergence there that the
Speaker 1: analysts were mentioning those on average about thirty four in
Speaker 1: their rank of topics, whereas for CEOs they were down
Speaker 1: in sixty sixth place, talking about them much less. What's
Speaker 1: your take on why analysts are so focused on this
Speaker 1: and CEOs for whatever reason at least so far or not.
Speaker 2: I think when we repeat it in this upcoming quarter,
Speaker 2: if I were guessing, I think the cost and productivity
Speaker 2: issue is going to come much more to the four.
Speaker 1: Just to give you a little bit more data here,
Speaker 1: in both Europe and the US, discussions of growth outweighed
Speaker 1: discussions of costs, whereas an Asia it was flipped. They
Speaker 1: were talking CEOs were talking more about costs less about
Speaker 1: growth in this first quarter.
Speaker 2: That is right, and so if I come to the
Speaker 2: Asia question, then we'll go to you. Yeah, I think
Speaker 2: that when I go. I've been traveling around Asia a
Speaker 2: lot over the last few months, and I talked to
Speaker 2: my colleagues as well, and the consistent discussion is the
Speaker 2: intensity of competition in Asia. First, in China itself, it's
Speaker 2: massively competitive because there's lots of overcapacity and the battles
Speaker 2: are fierce to be able to once to survive as
Speaker 2: these industries are growing. But second that over capacity is
Speaker 2: also pushing intense cost competition toward Japan, towards Southeast Asia,
Speaker 2: toward India. It's also spilling out to other parts of
Speaker 2: the world, but just given proximity, given the volume of
Speaker 2: trade activity, there is an enormous competitive intensity on cost
Speaker 2: as companies are not just competing locally, but they're often
Speaker 2: competing against really strong Chinese competitors who are playing in
Speaker 2: those markets as well. So it did not surprise me
Speaker 2: at all that when you talk to Asian CEOs that
Speaker 2: intensity of cost competition was very high up in Europe.
Speaker 3: I think while the cost topic was not the top
Speaker 3: concern of the CEOs, I think it always was over
Speaker 3: the last couple of years at least in the top
Speaker 3: three or four topics. I think the cost topic will
Speaker 3: be impacted by technology, and I think what Jenna I
Speaker 3: will do on the productivity and how it will drive
Speaker 3: cost curves down I think will will soon be implemented.
Speaker 3: I think by CEOs.
Speaker 1: Let's go deeper on technology, particularly in Europe. One of
Speaker 1: the things we found this quarter was that mentions of
Speaker 1: AI generative AI automation all increased one hundred percent or
Speaker 1: more in Europe. Among European CEOs, they're still not talking
Speaker 1: about it quite as much as their colleagues are in
Speaker 1: North America and in Asia, but they're it's clearly on
Speaker 1: the rise. It's almost as if they're trying to catch
Speaker 1: up what's behind that trend.
Speaker 3: So if we look at technology and if you look
Speaker 3: at the competitiveness of European companies, we're far behind the US.
Speaker 3: We're also far behind China, and I think we need
Speaker 3: to catch up. An area where we see where Europe
Speaker 3: is starting to catch up and actually holding leadership position
Speaker 3: is everything industrial AI. I've just been to the hanofha
Speaker 3: Messe couple of weeks back. It's one of the biggest
Speaker 3: European trade first on the industrial automation. It's great to
Speaker 3: see how strong European companies are in this field.
Speaker 1: I want to talk about environmental and climate change topics,
Speaker 1: and Rich I'd like you to address what we're seeing
Speaker 1: in the US. The US CEOs are running away from
Speaker 1: that topic as quickly as they can. Hardly anybody has
Speaker 1: mentioned anymore on these earnings calls. Is that because they're
Speaker 1: really trying to simply not discuss stuff that is still
Speaker 1: going on behind the scenes, or have they ratcheted back
Speaker 1: on those climate change initiatives that they had made so
Speaker 1: prominent in their calls and say a year or two ago.
Speaker 2: I think there are three things going on right now.
Speaker 2: I think first, business leaders, and I would say centered
Speaker 2: in North America, but other parts of the world as well,
Speaker 2: are much more focused on making sure that the investment
Speaker 2: that they make in climate and sustainability bring business value
Speaker 2: as well as planetary value, if you put it that way,
Speaker 2: And therefore they are being careful to think about what
Speaker 2: initiatives they are undertaking. Can they defend them as driving
Speaker 2: greater productivity. If you take on a circularity effort, you
Speaker 2: often addressing the environment, but you're actually taking cost out
Speaker 2: of the system. If you're building a new green business,
Speaker 2: you may be helping the planet, but you're also creating
Speaker 2: the next generation of growth in a world even separate
Speaker 2: from what the US will do that will be spending
Speaker 2: trillions of dollars a year on investing to address climate
Speaker 2: change over the coming decades. You need a win win,
Speaker 2: not just do something that feels right for the climate
Speaker 2: but is costly to the business. I think there's a
Speaker 2: second thing that most companies in that context are still
Speaker 2: trying to keep with the commitments that they've made where
Speaker 2: they can make that work. Most companies haven't been walking
Speaker 2: away from their commitments, but they're being much more cautious
Speaker 2: new commitments. There was a time period where every month
Speaker 2: you look and see how many new commitments have come
Speaker 2: out in the US, and that is really quite few
Speaker 2: right now. And then the third point is I do
Speaker 2: think that there's a lot of green hushing going on.
Speaker 2: It's become a very political topic. They don't want to
Speaker 2: be caught in the politics of it, and that's why
Speaker 2: I think the analysts and the US actually gave it
Speaker 2: more attention than business leaders gave it.
Speaker 1: And Michael and Europe, as you know, there is a
Speaker 1: real bastion of discussion of climate change. In fact, the
Speaker 1: discussion of climate change, climate exposure, greenhouse gas emissions all
Speaker 1: rose by one hundred percent or more among European CEOs
Speaker 1: in the last quarter.
Speaker 3: I think the business cases that we're seeing on circularity
Speaker 3: they are starting to work. They will unlock by twenty thirty.
Speaker 3: There are studies out there they will unlock trillions of
Speaker 3: dollars of GDP growth. And I think there is another
Speaker 3: aspect now coming to it. If there is a sovereignty aspect.
Speaker 3: If you look about dramati real circularity and keeping the
Speaker 3: raw material in certain circle of flows within a certain
Speaker 3: region is also a second aspect. I think that is
Speaker 3: driving that dynamic why climate topics stay on the agenda
Speaker 3: in Europe.
Speaker 2: What I think was encouraging on the European side from
Speaker 2: a government point of view is so many business leaders
Speaker 2: have been frustrated at the amount of bureaucracy and overhead
Speaker 2: that comes with the environmental goals in Europe, even if
Speaker 2: they fully agree with the ambition, the way it's done
Speaker 2: has felt so cumbersome, and I do think the recognition
Speaker 2: in the EU that you can keep the ambition, but
Speaker 2: you have to make it easier for companies if they're
Speaker 2: able to if they're going to be able to be
Speaker 2: globally competitive. This model isn't working the way it should.
Speaker 3: But there is progress we're starting to see. Particularly there's
Speaker 3: a beautiful Cherman word, the lever of ket and sock falsk.
Speaker 2: Is it okay? What does that work?
Speaker 3: This is about how you need to report on your
Speaker 3: supply chain that this is actually going to be stopped now,
Speaker 3: so we're starting to see progress on the on the
Speaker 3: bureaucracy side.
Speaker 2: Good for all of us. Yes.
Speaker 1: Indeed, in late twenty twenty four we had all expected
Speaker 1: to see a huge search in murders and acquisitions. We
Speaker 1: haven't seen that yet. Is that really just a function
Speaker 1: of the uncertainty that's in the environment now and could
Speaker 1: self correct by the end of the year, or is
Speaker 1: this something that's going to be a little more long term.
Speaker 3: I think we won't see deals over the next couple
Speaker 3: of months because the problem is you cannot underwrite a
Speaker 3: business case in this environment. Everything that is that is global,
Speaker 3: that has global supply chains. You can't take a bet
Speaker 3: on on these business cases. And hence what we're actually
Speaker 3: seeing is we see quite a dramatic slowdown in the pipeline.
Speaker 2: As one of my colleagues here in New York is
Speaker 2: very involved in that world, said to me, you can't
Speaker 2: do a deal if you can't do a two to
Speaker 2: three year but tough forecast. And right now people don't
Speaker 2: feel confident that they have any but tough forecast they
Speaker 2: can rely on, and so it's hard to do a deal.
Speaker 1: So uncertainty can certainly dampen the m and a environment.
Speaker 1: Is there anything that uncertainty does permits a CEO to
Speaker 1: do that he or she otherwise might not be able
Speaker 1: to accomplish. Does it give you some space to be
Speaker 1: able to focus on something that in a more growth
Speaker 1: oriented period of time you wouldn't be able to.
Speaker 2: Well, you know there's this old especially never let a
Speaker 2: crisis go to waste. I think where that will apply
Speaker 2: is less around the deployment of capital for deals or
Speaker 2: new plants, but absolutely to drive productivity, deeper customer relationships,
Speaker 2: investment of innovation into the business. I think people will
Speaker 2: realize that the world may only get harder.
Speaker 1: Is there anything that this current situation reminds you of historically?
Speaker 2: Okay, so first I want to be careful about trying
Speaker 2: the NUN because there's no health impacts here. But if
Speaker 2: you think about those first few months of COVID, we
Speaker 2: were all living with so much uncertainty. It's only looking
Speaker 2: back that vaccines came along faster that we were able
Speaker 2: to get past that in a less tramatic way. But
Speaker 2: in April of twenty twenty, just five years ago, we
Speaker 2: were sitting with incredible amounts of uncertainty. Companies were really
Speaker 2: anxious about what was going to happen. There were talks
Speaker 2: about traumatic economic impacts. I would say that uncertainty was
Speaker 2: even higher than the uncertainty we're living with, and we
Speaker 2: only don't remember it because it got resolved so quickly.
Speaker 2: To me, it feels more like that, not the same degree,
Speaker 2: and certainly without people losing their lives or anything of
Speaker 2: that nature. But it feels a little bit more in
Speaker 2: that direction than it felt like the challenges of past
Speaker 2: recessions or challenges.
Speaker 3: But I would actually on that point, Rich, I would
Speaker 3: actually say that even though we have a lot of uncertainty,
Speaker 3: I think some things are becoming clear. And again from
Speaker 3: a European perspective for us returning to our old operating model,
Speaker 3: fully globalized world supply chains globally set up, I don't
Speaker 3: think we will return to that world.
Speaker 2: I totally agree. I think you're right. In the longer term,
Speaker 2: I would I think Michael was exactly right that companies
Speaker 2: need to understand we're in a new political reality moving forward,
Speaker 2: even if the tariffs resolve in a more benign way,
Speaker 2: which is not obvious that they will, and being more localized,
Speaker 2: more understanding dynamics in different parts of the world, and
Speaker 2: I would argue this technology topic is the one secular
Speaker 2: trend that's coming. We can do whatever we want around politics, tariffs,
Speaker 2: geopolitical dynamics, AI and a whole set of other related
Speaker 2: technologies are coming fast. And as it relates to innovation, productivity,
Speaker 2: changes to business models, changes to building deeper customer relationships
Speaker 2: like those things are coming. And if you let all
Speaker 2: these short term challenges get in the way of embracing that,
Speaker 2: then I think you're really losing ground competitively, even if
Speaker 2: it seems like you're navigating the short term.
Speaker 1: Okay, I'm going to go out on a limb here
Speaker 1: that if the three of us are around this table
Speaker 1: three months from now, high likelihood we're going to be
Speaker 1: talking about uncertainty in the economy even then, Rich and Michael,
Speaker 1: thanks for your insights today.
Speaker 2: It's great to be with you.
Speaker 1: Thank you, Ed, and great to have you. For those
Speaker 1: of you who'd like to learn more about the CEO Radar,
Speaker 1: you can read the full report at Bloomberg dot com
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