Leading in Asia Pacific’s new reality

Tee
You’re listening to the PwC Thailand Spotlight podcast series, where we make sense of issues and trends shaping Thailand and beyond.

I’m Tee Dherapattana, your host for today.

In our second episode, we’re looking at the major challenges facing the Asia Pacific region today and asking what businesses should be doing to respond to this new reality. 

Today we’re delighted to have Sridharan Nair, PwC Asia Pacific Vice Chairman, Markets, on the show to discuss the business outlook for Asia Pacific and how CEOs and business leaders can better prepare for the key challenges ahead, as identified in the two latest PwC reports, the Asia Pacific study of the ‘26th Annual Global CEO Survey: Leading in the new reality’ and ‘Asia Pacific’s Time: Responding to the new reality’.

In both reports, a similar theme emerges – a new reality burdened with complexities; business leaders must tread carefully and strategically by adopting a holistic approach.

Sri has more than three decades of experience in audit and business advisory services, working with clients across various countries and industries. Moreover, he is a frequent guest speaker at conferences on topics ranging from his areas of expertise to business issues. He’ll cast some light on what these challenges and success factors mean for business and how you can respond as a professional.

Hello Sri. It’s such a pleasure to have you on our podcast today.

Sridharan
Hi Tee. Thank you for inviting me to this podcast series by PwC Thailand. I’m delighted to join you.

Tee
Let’s start with a question about what businesses are doing, as many countries across the Asia Pacific region are starting to emerge from COVID-19. They’re now turning their attention to significant macroeconomic headwinds, such as supply chain disruption, geopolitical conflict and high inflation. What are we seeing in terms of actions that businesses are deploying against these challenges?

Sridharan
The first point that I would like to emphasise in response to your question is ‘the new reality’ that businesses face today – we have referenced that in the title of both publications that you mentioned at the start.

The business world in the past has had to deal with issues such as inflation, economic slowdown, supply chain disruptions and, to some extent, geopolitical-related challenges from economic sanctions, so these are not new issues.

What is different though, and unprecedented in my view, is that these issues are coming together and occurring at the same time. So the new reality for a CEO today is thinking simultaneously about what, for example, US-China relations mean for investments, how supply chains will be affected, what inflation means for the cost of doing business and addressing more recent considerations, such as the hopes and fears of the workforce while also dealing with increasing pressure for action on environmental, social and governance (ESG) issues.

Against this backdrop, PwC conducted our 26th Annual Global CEO Survey late in 2022 and released the results in January 2023. We heard from 4,410 CEOs worldwide, including 1,634 from Asia Pacific.

There were several things that Asia Pacific CEOs told us. Let me summarise that briefly and give some context before I answer your question directly.

One, they are pessimistic about global economic growth – 69% believe global economic growth will decline over the next 12 months versus last year, where 76% felt development would improve. So you see a complete turnaround there in a 12-month period.

Secondly, like their global peers, inflation, macroeconomic volatility and geopolitical conflict are the top three risks that Asia Pacific CEOs say they will focus on in the next 12 months.

Thirdly, CEOs have highlighted the need to transform their business because they believe their current business models will not survive within the next decade.

So then, coming to your question on what actions businesses are deploying, this is what CEOs have told us:

First and foremost, they are prioritising short-term profitability. Their focus is on the ‘here and now’: preserving operating profitability and immediate cash flow generation.

Secondly, what they have indicated, they intend to ‘grow’ out of the crisis in the short term. And how do they intend to do so? By reducing operating costs, raising prices and diversifying their portfolio. Interestingly, most don’t plan to reduce their workforce, but that’s not surprising given the talent shortage we face in the region.

As geopolitical risks rise, Asia Pacific CEOs essentially have said that they are planning to respond accordingly. They will adjust their presence in the current market or expand to new markets, adjust supply chains and diversify their offering to drive short-term profitability. This is slightly different. I think global CEOs have indicated that they will prioritise and take action about cybersecurity and data privacy to manage digital risk. Those don’t feature as high risk as far as the Asia Pacific CEOs are concerned.

And the final point I’ll make concerning your question is how this all relates to the context of Thailand, where you have seen a rebound in the economy, with private consumption and tourism picking up post the opening of our borders.

CEOs in the SME sector which continues to be an underwriter of growth for Thailand, CEOs in this sector could benefit from re-orienting – where profitable – their supply chains, workforce, products and services to leverage the breadth and depth of the SME economy in Thailand and capture their share of the growth.

On the other hand, if you’re a CEO of a large company and large companies continue to be the mainstay of the economy in Thailand, I think they contribute about 60%+ of the manufacturing GDP and 52% of total services. So if you’re a CEO in this sector, the focus should be on growth plans aligned to supporting government policy in defined ‘next-gen’ industries: biofuels, sectors enabled by the digital economy and medical-related devices.

So you’ll see the specific actions CEOs have indicated they will take to manage profitability in the short term.

Tee
From your responses, the actions businesses are taking are more focused on the short term to weather the new reality we’re facing.

The challenges you noted have a direct impact on CEO’s levels of optimism and pessimism. More than half of CEOs surveyed believe their current business models will no longer be viable in ten years’ time unless they transform at a faster pace. What are business leaders doing to balance short-term profitability and long-term transformation?

Sridharan
This is one of the distinct findings from our CEO Survey. The point you just made was one of the highlights of our CEO Survey – that 53% of Asia Pacific CEOs believe their companies will not be economically viable in the next decade if they continue their current path, and this is, in fact, 14% higher than what global CEOs have said. So it’s a major concern as far as Asia Pacific CEOs are concerned. It’s quite staggering if you think about those statistics.

This urgency is even stronger in countries like South Korea, Japan and China, where about three-quarters of the CEOs have said that their businesses will need to be transformed and reinvented for the future.

In the first question, I talked about prioritising short-term profitability. Still, at the same time, Asia Pacific CEOs are recognising the need to reinvent their businesses to remain relevant in today’s landscape. This is what we have called the dual imperative in our report: balancing the execution of short-term profitability and long-term transformation.

While a handful of the larger companies in the Asia Pacific region have been looking at the transformation agenda, most are still focused on their short-term recovery post-pandemic and are only now beginning to think about the long-term reinvention of their businesses. So early days for many companies, but a few exceptions with the larger ones.

It’s not surprising if you think about that because executing this dual imperative is a complex undertaking. On the one hand, you need to focus on delivering short-term efficiency; on the other hand, you need to accelerate innovation, so where do you find the right balance between the two?

In our report, we’ve highlighted five actions we feel CEOs or businesses need to take to address the dual imperative. So let me go through those five points.

Firstly, we’ve said that CEOs need to expand the scale and the scope of insights available to their C-suite really to get a better understanding of the forces that are shaping the business environment. For example, understanding the themes around sector-specific drivers of volatility, looking at geopolitical sensitivities to supply chains or how climate and cyber risks impact customer preferences. So broadening those insights ensures we understand the full landscape and don’t look at these matters in isolation.

Then, the second thing to do is mobilise and empower the executive leadership to take action and make decisions that support the business’s long-term strategic goals. We’re saying that the CEOs and the C-suite will need to leverage the real-time insights they have gleaned and be empowered to make tactical decisions in an agile and quick manner. It could be around products, services and processes. Use those insights and empower people to make decisions quickly.

We also feel businesses need a disciplined approach focused on capabilities to balance profitability, transformation and growth. What this means is looking at a company’s capabilities and strengths. What are the real drivers of growth and deciding where and how to prioritise investment today, for example, diversification of products and supply chains, where not to cut costs or limit capacity, which could put transformation at risk. So, take a considered and disciplined approach in looking at where you can get the greatest growth, leveraging on the existing strengths.

The next point is about leadership. The leadership approach needs to be adapted to address the concerns and aspirations of employees. CEOs need to listen to what employees across the region have said; they need to foster empowerment, inclusion and trust, leveraging the benefits of things like hybrid work.

And finally, it’s embracing a collaborative mindset and what we mean by that is seeking out alliances to achieve desired outcomes. You cannot go at it alone and expect to achieve all these things without leveraging other parties you could work with. So CEOs in Asia Pacific need to broaden the scope of alliances to include technical, financial, talent and technology – and link these to capabilities.

In summary, broaden the insight, mobilise and act in an agile manner, take a disciplined approach to look at where your capabilities lie and what you need to do, adapt your leadership to make sure people feel empowered and included, and look at working with alliances and other collaborations that could further your company’s agenda.

Tee
According to the survey, ESG remains a top agenda for Asia Pacific CEOs for the longer term. However, we must act now as we are still far behind what is needed to limit warming to 1.5°C, the global average temperature threshold we shouldn’t exceed. What can businesses do now? How can applying ESG help businesses differentiate themselves in the market?

Sridharan
Interestingly from the survey, ESG-related risks remained a focus for the longer term and didn’t appear to be on the radar of immediate priorities. Against the current backdrop, CEOs are facing an ESG dilemma. Clearly, a consensus has emerged that ESG issues are crucially important for the corporate world. ESG is also increasingly becoming a premium commodity, with many stakeholders, especially employees, looking for a sense of purpose at work.

However, investors don’t appear ready to accept lower returns to further ESG goals. According to our PwC Global Investor Survey 2022, 81% said they would accept only a 1% point or smaller returns reduction to advance ESG objectives. And in fact, around half of that group would not accept any decline in returns at all. So that’s quite a dilemma here that CEOs face.

Our work in ESG, which, as you know, is a priority for us globally and in the Asia Pacific region, in ESG strategy development suggests that businesses can perform well for investors and pursue a clear ESG strategy at the same time if they find the right balance between short-term performance requirements and the investments needed to meet longer-term ESG goals.

The key is to define a long-term ESG path to create value while working simultaneously within the boundaries of the short-term KPIs that address investors’ performance expectations. At the same time, there is a need also to take stakeholders – and in particular shareholders – along the journey toward that longer-term vision which should help address the disconnect between short-term pressures and longer-term opportunities.

It is difficult because getting the ESG stance right will require a deep and systematic change throughout the business and the environment in which companies operate. And as I mentioned earlier, a business cannot do this alone. They must consider which ecosystems they should be a part of, and by building, joining or creating an ecosystem, they don’t have to provide and scale all the capabilities for ESG on their own. Linking this to their capabilities means businesses must expand the traditional breadth and depth of the potential partners – beyond financial and technological – across the entire value chain, as we’ve just discussed. This could be innovation, supply chain, insights and analytics, front-office matters, etc., so they can look at a whole sphere of things.

The other point I would make is if you take it in the context of the market in Thailand and what our ESG teams have told us, there have been several developments on the regulatory front in Thailand in more recent times. The Thai government has taken steps to enhance its ESG regulatory framework, focused primarily on climate. There are upcoming taxonomy regulations, climate change and biodiversity legislation and a potential carbon tax, so a few things are happening on that front.

If you take a sector-specific focus, you look at the Thai Bankers’ Association (TBA), they’ve launched an ESG declaration supported by the central bank that sets out clear commitments around products, governance, risk management and strategy. As a result, banks in Thailand are increasingly embedding ESG into their strategies and, in particular, their sustainability portfolios as well.

The other point is the ESG ecosystem in Thailand which is evolving. The Securities and Exchange Commission (SEC) is leading the creation of an ecosystem, connecting various players such as fundraisers, investors, etc.

So what that means for CEOs in Thailand who require funding for a climate transformation, they could benefit from a parallel focus in seeking private financing while partnering with other players – data and climate ecosystem – to augment their reporting capability.

These are many things that CEOs in Thailand could consider.

Tee
You’ve shared the directions on how businesses can apply ESG to differentiate themselves by integrating it as part of their strategy, along with a whole network of stakeholders who must get involved to make meaningful differences.

What does that practice look like, having it embedded in the company’s strategy? What are a couple of good examples you could share with us?

Sridharan
When I thought about this, I decided it’ll be good to start with what we’re doing at PwC as a global firm; our net-zero journey. We’ve said that the business community has a key role to play in making that happen, and we’re committed to leading by example. We can be proud of some of the targets we have set and the path we’re taking.

In 2020, PwC announced our global science-based commitment to reach net zero greenhouse gas emissions by 2030. We’re committed to decarbonising our operations and decoupling our business growth from our emissions. We’re committed to the United Nations Race To Zero campaign and Business Ambition for 1.5°C, bringing businesses together to accelerate action to decarbonise the economy. We’re helping our clients and working with suppliers to tackle their climate impact. We’ve made considerable investments in getting ESG specialists to work with our clients to address important business issues. We’re also continuing to offset our emissions through high-quality carbon credits to reduce our climate impact immediately.

And last but not least, the global strategy that we released last year – The New Equation – commits us to increase transparency and develop robust ESG reporting frameworks and standards.

So, several things that PwC have said we will do that I would put as a leading practice. Right now, we have a long way to go in executing all of this, but that’s a great example. We don’t need to look very far away. We should look at what we’re doing internally to answer your question.

As far as external examples are concerned, they’re several out there. One that I would call out is a group in Thailand, CP Group, that’s considered a global leader in annual S&P Sustainability Rankings. The group has integrated core principles of the Sustainable Development Goals under the United Nations through its entire value chain. The group uses its conglomerate footprint and capabilities to deliver community benefits through upskilling and scholarships, food access, waste and water withdrawal and overall emissions reductions. A great example in Thailand is the CP Group.

Beyond that, if you look at the region, Toyota has gone well beyond cars and energy. They have extended into circularity and biodiversity by focusing on water, input materials, waste and wildlife impact throughout the entire value chain.

So you see several leading practices and some of these larger companies taking action in a very considered way, looking at the entire supply chain. A couple of great examples are Standard Chartered and CapitaLand as well. Many companies still have a lot of work to do in the years ahead.

Tee
Those were all great examples for us to understand how ESG is embedded and executed by different companies, including our firm!

Well, thank you so much, Sri, for your time today. We’ve got a lot of insight on what to expect from businesses in the next few months and years ahead as they weather the challenging new reality ahead of them.

Sridharan
Thank you very much for inviting me here today. I enjoyed it.

Tee
As mentioned, these factors are interconnected and mutually reinforcing, so business leaders must take them all into account to drive growth across the region.

For more information, you can check out the Asia Pacific study of the ‘26th Annual Global CEO Survey’ and ‘Asia Pacific’s Time: Responding to the new reality’ on our website. Both reports are available in English and Thai.

There’ll also be continued coverage of these success factors in the next few months, so be sure to check out our social media accounts, including LinkedIn, Facebook and Twitter, to stay up to date.

Stay tuned for the next episode of the PwC Thailand Spotlight podcast.