BCG’s Weekly Briefs

In BCG’s Weekly Brief, our most senior executives, including Global Chair Rich Lesser and CEO Christoph Schweizer, share their latest perspectives and ideas, as well as some of the firm’s most compelling thought leadership, in an email to colleagues, clients, and friends around the world. These messages cover a wide range of topics that are top of mind for business leaders today, issues that have become more layered and challenging than ever: from global trade and consumer choice to corporate purpose, climate change, and responsible AI. Here is a selection:

CEO Outlook—Resilience Investments Pay Dividends

MARCH 28, 2023

To BCG’s network around the world,

Over the past few weeks, I have met with many CEOs from around the world—San Francisco, Dubai, Paris, and beyond—and from across industries. Uncertainty, especially regarding the state of the economy, is top of mind for every single one. The latest round of bank failures has only added pressure. While the concern is common, how these CEOs are responding varies a lot. All are looking at cost reduction. The most savvy are keen to invest for growth. And those who had already rolled out new technologies and processes to make their businesses more resilient in the past few years of volatility are in a strong position to do so.

These conversations reinforce the findings of a recent global BCG survey of about 760 C-suite executives. Not surprisingly, nearly 75% cite macroeconomic uncertainty as a key challenge in 2023. Across Asia, Europe, and North America, inflation is the top concern. More than 70% plan to respond by cutting costs, even though a majority admit to lacking capabilities in comprehensive cost management. Only about 40% are confident that their companies will outperform their industry peers.

This picture is far brighter for resilient companies. We asked respondents to rate their companies’ resilience on 19 dimensions, ranging from creating resilient supply chains—assessing risks associated with sourcing or planning and inventory management, for example—to modernizing the tech stack. Only 12% shared strength across all 19. And the work that those 12% put into building resilient businesses is paying off. Over the past year (from January 2022 to January 2023), they outperformed their industry peers by 15 points in total shareholder return on average, and they’re in a better position to withstand future shocks.

These resilient companies are also doing a far better job funneling savings from cost cutting into future long-term growth.

  • More than two-thirds, 68%, are planning technology investments to improve products and services, compared with just 44% of their industry peers.
  • Nearly two-thirds, 65%, are investing in climate and sustainability, compared with 52% of their peers.
  • Nearly half, 46%, are innovating their business model, compared with 30% of their peers.
  • More than half, 53%, are enhancing their employer value proposition and bolstering incentives to improve retention, compared with 38% of their peers.

Cost management will continue to be critical over the next few years. But so will capability building, scenario planning, and continuous learning. As long as uncertainty reigns, the winning strategy remains: take care of the short term but not at the expense of your long-term ambitions. And now more than ever, when it would be easy to wait and see how the global economic picture unfolds, we need to act—and get comfortable with the discomfort of making decisions with imperfect information.
Christoph Schweizer
Chief Executive Officer

Where Do Your Strongest Businesses Really Stand?

MARCH 20, 2023

To BCG’s network around the world,

Thirty-five years ago, I began my career consulting to the consumer products business of a leading telco. Our work on this company’s strategy highlighted that the many hundreds of millions of dollars it earned from leasing telephones to consumers each year was going away much faster than realized, while the mobile phones it had written off as a niche business would be dramatically larger. The division’s COO, who also ran the leased-phoned business, nearly threw us out of the room.

In 2000, as a young partner, I worked on convincing senior leaders of a top pharma company that the small-molecule blockbusters that had driven their enormous success would dramatically underperform their lofty growth expectations. Though it took nearly a decade, the company eventually managed a remarkable pivot to biotech and vaccines and today remains an industry leader.

In both cases, what appeared at the time to be the enormous strength of a “walled fortress”—a strong core business the company depended on—blinded leaders to the threats and opportunities around them.

For the past four months, I have been reminded of these stories and others as the pressures on some of today’s strongest businesses grow. The current examples span a spectrum, including great companies like Tesla, which is now facing stronger competition in the electric vehicle market, and Google, whose $200 billion search business is now under real pressure from the generative AI revolution it helped start. On the flip side, there’s Silicon Valley Bank, which took mere days from being an industry darling with an intensely loyal customer base to a failed bank.

There is no single theme here, no one issue that leadership teams underestimate or forget. But there is a message for all of us, particularly as so many companies use Q2 to update their strategies in advance of operating planning later in the year. Now is the time to force the hard questions about where your strongest businesses really stand.

It is far too easy to take for granted the walled fortresses inside our own enterprises. Businesses that year after year drive profitability, are lauded internally and externally, and are counted on by investors to deliver results like clockwork can quickly lose their luster and their relative strength. It can be a result of technology disruption; management distraction or overconfidence; underinvestment in technology, capital, or people; or not catching on to changes in customer needs and behavior.

Right now, with economic and geopolitical uncertainty all around us, focusing this year’s planning on navigating macro challenges of course makes sense. But I would encourage you to also look deeply, and even skeptically, at the businesses you feel are most secure, reliable, and often at the heart of your current value-creation engine.

The starting point can be framed with these questions:

  • What is the three-to-five-year value creation trajectory for the business, through a customer lens and not just a financial lens?
  • If an outsider took over with a five-year value creation horizon, would that person operate it the way you do? What would they do differently and why?

And then consider these harder ones:

  • Where does technology disruption offer the most potential to shift value creation? What creative ways are there to experiment, partner, and invest to learn and provide options to incorporate these technologies?
  • Is the leadership team devoting sufficient time to these businesses and creating an environment where status quo thinking can be tested and challenged and new opportunities imagined
  • Have you thought about resilience and risk management from multiple angles? Is preparing for risks a delegated task outside the core leadership team or embedded as a core responsibility within it?

Walled fortresses can be staging grounds for future victories: the iPhone, Tide detergent, or the Home Depot stores. They can also be leased phones or supposedly safe long-dated Treasury bonds dragging down a strong company and team. Use this planning season to force the hard questions about where your walled fortresses really stand and how to strengthen them for the years ahead.

Rich Lesser
Global Chair

Perspectives from the Middle East

MARCH 14, 2023

To BCG’s network around the world,

I just returned from a trip to the Middle East, where the region’s growth, dynamism, and investment in talent were on full display. I was blown away by the energy and enthusiasm. The business districts and restaurants were buzzing. While many parts of the world face the threat of recession, the World Bank estimates that Gulf Cooperation Council (GCC) economies will grow by 3.7% this year. Leaders were brimming with optimism about the future, even as they recognized the hard work ahead.

So much is changing so swiftly that conventional wisdom is backward-looking, and international news coverage only tells part of the story. With Pablo Martínez, who leads BCG’s work in the Middle East, I’d like to share four key observations from my week there:

Diversification. The region’s reliance on oil still overshadows broader economic progress. Yet the economies are diversifying into tourism, financial services, export-driven manufacturing, health care, and other areas. Green growth is increasingly a priority and will be highlighted at this year’s United Nations Climate Change Conference, COP 28, in the United Arab Emirates. Electric vehicle manufacturing is an emerging bright spot.

Talent. Talent development was high on the agenda in most of our conversations with leaders. About half of the GCC population is under the age of 30, a sharp contrast with much of the rest of the world. Women are working at record levels in many GCC nations, rivaling participation rates of some European nations, and providing a fresh source of well-trained and highly motivated talent. The region is becoming a business destination for young, ambitious executives, scientists, and engineers. Our own local BCG staff represent more than 80 nationalities, with a waiting list to transfer in.

Infrastructure and Development. Construction and development are reshaping the skylines of the region. Outside Riyadh, the mega-entertainment complex Qiddiya is rising. Its ambition is to be the largest tourism destination in the world, more than double the size of Walt Disney World in Florida. More than 20 other megaprojects are under development in Saudi Arabia. Dubai is already considered the second-most attractive destination globally after Paris, according to Euromonitor’s 2022 city destinations index—and it’s one of the most visited.

Health Care and Education. Governments are investing in education and health care, two enabling forces that foster medium- and long-term economic development across GCC nations. Digital skills are in high demand. And quality health care is increasingly widely available, not just in the biggest cities. Not that long ago, people left for Europe for complex medical procedures. Now they can stay home.

Despite its geopolitical complexities, the Middle East remains a region of amazing promise and massive change.

Christoph Schweizer
Chief Executive Officer

Pablo Martínez
Managing Director & Partner
Middle East System Lead

The CEO's Guide to the Generative AI Revolution

MARCH 07, 2023

To BCG’s network around the world,

The potential of generative AI was mostly off the radar screen for business leaders. And then came ChatGPT in late 2022, putting the topic top of mind for so many of us. But I’m on a steep learning curve when it comes to this new technology, as many of you probably are. That’s why I found BCG’s recent perspective on what CEOs really need to know about generative AI helpful in its clarity.

The article from François Candelon and colleagues from the BCG Henderson Institute offers leaders a roadmap, as well as an overview of the strategic choices they can make that will help get the most out of generative AI while carefully managing the risks. Their recommendations are organized through three lenses: potential, people, and policies.

Potential. The low-code/no-code characteristic of generative AI is a game-changer, making it much easier for companies to adopt at scale, with productivity wins bringing down costs significantly. But every company will have easy access to these advantages, so it’s important to figure out what the article’s authors refer to as a company’s “golden use cases,” which might exist anywhere along the value chain and disproportionately drive business outcomes.

In biopharma, for example, the technology can stimulate the imagination and create new ideas, greatly speeding up the long R&D process involved in innovation. Biotech company Insilico Medicine’s AI-generated anti-fibrotic drug moved from conceptualization to Phase 1 clinical trials in fewer than 30 months for around $2.6 million, much faster and cheaper than traditional drug discovery. This is what distinguishes generative AI from traditional artificial intelligence, which is focused on analyzing data and making decisions based on that data. Generative AI creates new content or data based on existing patterns or structures.

People. Not surprisingly, generative AI calls for specially trained talent, but that’s just the beginning of the people issues that the technology raises. CEOs need to plan for how generative AI will disrupt roles and responsibilities and build people implications and employee feedback fully into their change roadmaps.

Just like other kinds of AI, this technology will augment many roles and allow people to spend more of their time refining content and identifying new solutions. Eventually, it will likely reduce the number of people needed in today’s functions. But at a time when developing and retaining talent is essential, there will be an urgent need to engage colleagues in these journeys and invest in retraining and building new skills as traditional skills are less necessary.

Policies. The primary danger of generative AI as we know it today is that it lacks a reliable truth function, but there are other critical risks, including copyright infringement, unplanned functionality, and leaks of proprietary data. Companies need to create policies that mitigate these risks, so employees use the technology only within well-established guardrails.

Experimentation among employees ought to be encouraged, but there should be a central process for tracking these experiments to avoid exposing sensitive information. Policies should also secure clear data ownership, establish reviews that keep incorrect or harmful content from being published, and protect the company’s and its clients’ and customers’ proprietary data. All of this means that organizations need clear responsible-AI norms, adapted for generative AI. These should include robust documentation and a review board similar to that used in the scientific research processes.

* * * * * * * * *

I’m sure many business leaders, already dealing with so many challenges, might have preferred to have another couple years before faced with an AI revolution that can touch so many parts of their business and so many people. But that timing is not up to us to choose, and deployed well, generative AI offers enormous potential for value creation and new business models. It will be an exciting (and stressful) few years ahead as we all navigate this next discontinuity in technology and society.

Rich Lesser
Global Chair

27,000 Employees Prove the Value of Workplace Inclusion

FEBRUARY 27, 2023

This week, I’m passing the pen to two of my colleagues—Gabrielle Novacek, managing director and partner and a fellow at the BCG Henderson Institute, and Nadjia Yousif, managing director and partner and BCG’s chief diversity officer—so they can share with you their latest groundbreaking work on the topic of diversity, equity, and inclusion.
— Christoph Schweizer, Chief Executive Officer

To BCG’s network around the world,

In recent years, organizations have made big investments in diversity, equity, and inclusion (DEI) programs in an effort to make progress on all three components. But the third piece—inclusion—has remained the least understood and is therefore the least advanced.

To figure out how to define, measure, and influence inclusion in the workplace, we dove into extensive research that pulled data from more than 27,000 employees across industries in 16 countries, all of which is highlighted in a new report.

Defining the “I” in “DEI.” Simply put, an inclusive workplace is one in which the worker both feels valued and is able to contribute value. People gain that sense of value when they feel respected, safe, and supported—when they believe that their physical and mental well-being are a high priority for their employer. They feel it when they know there are others in the room that come from similar backgrounds. And they feel it in environments in which open communication thrives—where it’s ok to take a stand.

The more that people feel valued in this way, the more set up they are to do their best work. Productivity and innovation rise, and the company gains an advantage against competitors.

Measuring Inclusion. To figure out how companies can become more inclusive, we built the BLISS (Bias-Free, Leadership, Inclusion, Safety, and Support) Index, an analytical tool based on this new research that quantifies inclusion and identifies the factors that can enhance its presence for all employees. The work led to a number of fascinating insights. Here are a few:

  • The role of leadership isn’t everything, but it’s almost everything. Companies with more diverse leadership teams have more inclusive workplaces. On top of that, we found that employees’ perceptions of the actions taken by executive leaders and direct managers were responsible for two-thirds of their overall experience of inclusion.
  • Employees who feel included are less likely to quit. Our analysis shows that there’s a powerful statistical connection between feelings of inclusion and retention. In fact, if a company were to increase its BLISS Index score from 10 percentage points below the median score to 10 points above, it would cut its attrition risk in half. That’s a serious advantage in a hot talent market.
  • Inclusion is a big deal for everyone. As our previous research points out, a broad set of drivers—including demographic identities, life context, work context, and attitudes—can influence workplace needs, and sometimes those identities are not addressed. Socioeconomic background, for example, is often overlooked, but it’s an important factor. Employees from financially insecure backgrounds are less likely to feel included in the workplace than any other group, and that holds regardless of other identities and even seniority. Making the workplace more inclusive can have a profound impact on everyone and helps keep people on the job.

Increasing Inclusion. The BLISS Index helps us understand what actions leaders can take to improve their scores and increase inclusivity in their organizations. A handful of no-regret moves:

  • Demonstrating leadership commitment to DEI
  • Building diversity of all kinds at the leadership level
  • Equipping and training direct managers so they can create safe teams and environments
  • Building stringent safeguards against discriminatory and biased behaviors
  • Measuring outcomes focused on DEI

Talent instability has been present and growing over the past couple of years, and now we’re in a period of economic uncertainty. Finding ways to nurture inclusivity will increase the happiness and engagement of employees, help retain talent, and drive competitive advantage for the long term.
Please see below to read the full report and related content, along with a video in which Gabrielle shares her personal connection to a reimagining of DEI.

Gabrielle Novacek
Managing Director & Partner

Nadjia Yousif
Managing Director & Partner, Chief Diversity Officer

Accelerating Decarbonization at Scale

FEBRUARY 21, 2023

To BCG’s network around the world,

Each of us has the responsibility to decarbonize our own operations. But if that’s all we do, then the world almost certainly won’t make fast enough progress. So the question is, what can we do to help others go faster on this journey, too? I’d like to share two examples of organizations that have taken on this challenge of looking at the parts of larger systems that need the most attention—and finding ways to successfully conquer that complexity and spur action.

Clearing Up a Cloudy Value Chain

Leaders at Klöckner, one of the world’s largest independent distributors of steel and metal products and a leading steel service company, understood the potential for itself and its customers in building more sustainable value chains in the steel industry. But without clarity and alignment on how to measure output and define sustainability, it was a difficult goal.

Until very recently, for example, people threw around terms like “green steel” and “green aluminum,” but customers, who increasingly cared about such promises, could have little confidence in what those terms really meant.

Klöckner set about defining “green” products, developing CO2 categorizations for steel, aluminum, and stainless-steel items and launching sales of CO2-reduced products. As part of our broader support, BCG worked with the company to build a product carbon footprint engine (including algorithms) that allows customers to know the complete footprint of almost every one of the 200,000 products in the company’s portfolio—from raw material extraction at the mine to delivery at the customer’s factory door.

The advantages are clear, allowing customers to make purchasing decisions based on transparent, scientific data; comply with regulations; make progress on their net-zero journeys; and share footprint data with customers pursuing their own decarbonization goals.

Uniting a Fragmented Value Chain

Another exciting story involves an effort to reduce emissions in the shipping sector, which today accounts for 3% of global greenhouse gas emissions—comparable to that of Germany, the world’s sixth-biggest emitter.

But shipping is a very fragmented sector, with a long tail of industry participants, and addressing its overall emissions is a difficult task. Increasing sustainability will take the orchestrated collaboration of its many stakeholders, including cargo owners, banks, insurance companies, ports, governments, clean energy producers, and more.

In 2020, the A.P. Møller Foundation founded the independent Mærsk Mc-Kinney Møller Center for Zero Carbon Shipping to accelerate this process, and BCG became one of its knowledge partners soon after. We recently dove into a project with the organization to figure out how to decarbonize the sector, fully addressing sustainability across the value chain.

The result is an ESG Playbook for Shipping, tailored to eight different shipping segments. The playbook highlights that decarbonization of the fleet has to be addressed holistically, with a focus on social and governance issues as well as environmental concerns. This requires fuel producers, port operators, and engine designers to work together, while ship operators and others aim for a just transition by addressing the well-being of the crew affected by change.

The goal of the playbook is to help unlock and support the many players across the value chain that are unsure how to get started on their sustainability journeys. So far, it has been put into action by midsize shipping firm Navigator Gas with great results. As CEO Mads Peter Zacho said, “We were able to reach a major milestone in our ESG journey. This approach has been key in developing a clear roadmap across initiatives and targets. From this joint effort, our organization is equipped to reach our decarbonization and sustainability commitments.”

Both of these examples represent a trend that I hope will continue to take off: companies and organizations addressing sustainability beyond their own boundaries. It’s a necessary shift. We have to tackle decarbonization in a broader sense if we’re going to come close to achieving the targets we’ve set.

Rich Lesser
Global Chair

Soft Landings Can Come with Hard Challenges

FEBRUARY 13, 2023

To BCG’s network around the world,

I checked in with BCG’s Chief Economist Philipp Carlsson-Szlezak the other day. We spent some time looking back over his views on global macroeconomics from the past couple years—occasionally captured here in the Weekly Brief as well as in many articles he published for Fortune and Harvard Business Review with BCG colleague Paul Swartz. Philipp’s opinions in this period have often run contrary to some of the biggest, splashiest, most negative headlines—including his emphasis on the strength of the US economy and particularly his predictions about inflation. But I’m pleased to report that he got much of the fast-changing picture right.

Faith in a Healthy Macroeconomic Regime

In this email back in March 2021, when fears about inflation were beginning to boil, I reported on Philipp’s message that the doomsday headlines were overblown. We were hearing a lot, for example, about our inevitable march toward 1970s-style inflation, a narrative Philipp was happy to contradict, pointing out today’s very different structural context and the unlikeliness of a regime break.

What he consistently said was that the Fed would act decisively so that inflation would not get out of control, raising interest rates to keep the economy in check. A “sustained and orderly tightening,” combined with robust consumer balance sheets and employers highly focused on attracting and retaining talent, meant the clear possibility of a soft landing instead of a forced recession, which many economists had been describing as a done deal.

Of course, what we didn’t foresee was Russia’s attack on Ukraine, with its energy and raw materials disruptions, or the severity of China’s pandemic lockdowns, both of which exacerbated the challenges of navigating inflation and heightened economic uncertainty. This may have delayed a return to a more normal environment. But since Q4 2022 in the US and Europe and the start of 2023 in China, momentum on the economies appears to be moving in the right direction.

This is not an “I told you so” moment. Though inflation has turned into rapid disinflation, it’s not over yet. The disinflation we’ve seen so far is materially driven by energy and durable goods. Core services inflation has not budged much, and we’ll need to see movement there before we’re completely out of the woods and interest rates can fall.

Wage pressures, while easing, are still considerable. There’s less tolerance for pricing moves. And we face the prospect of slower growth overall. Business leaders need to find opportunities for margin expansion and growth in a still uncertain landscape.

How? For most companies, we are talking about three pillars:

First, a focus on resilience and agility. If these last three years have taught us anything, it’s the need to be prepared for shocks—pandemics, weather, macroeconomics, geopolitics. That requires better data, tools, and processes to sense and react more effectively, coupled with productivity to stay stronger in tougher environments.

Second, a massive innovation push. Absent pricing power, growth and margin expansion will often come down to innovation. Advances in digital and AI are leading to new paths toward deeper relationships with customers and more customized offerings. The huge transition underway to a decarbonized economy is revealing new vectors for growth. And deep tech is offering new midterm opportunities. Distractions made it easy to lose sight of a hard-core innovation agenda in 2022, but this will be a critical determinant of value creation in the remainder of this decade

Finally, Talent, Talent, Talent. It’s been so encouraging over the past year to see companies valuing their people and not succumbing to the temptation of preemptive layoffs, despite so much negative news about an impending recession. There have been some cuts in tech, in part to correct for past overhiring, and reactions in parts of finance. But leaders are increasingly appreciating that investing in talent will be fundamental to thriving in the years ahead, even at the cost of some near-term financial pressures. We can’t respond to the first two pillars above without real dedication to this third one.

The bottom line is that we can feel some real optimism about the economy, but even a soft landing will bring plenty of challenges for business: decreased pricing power, slower profit growth, and lingering high wages. And, of course, we can’t predict the shocks to come. But we can stay grounded amid a lot of noise and focus on what matters.

Rich Lesser
Global Chair

Gaining the Upper Hand on Costs

FEBRUARY 07, 2023

To BCG’s network around the world,

Leaders are well aware of the difficult balance they’re facing when it comes to rethinking costs. They need to quickly expand margins, or at least avoid their erosion. And they need to keep pushing strategic ambitions forward, such as digital transformation, climate and sustainability, and talent management. When companies get that balance right, cost reduction is not just about survival. They gain an all-important competitive cost advantage, generating a thriving business on all dimensions. How can they make this happen? Our BCG team working on this challenge has developed a systematic approach integrating a people and an operational lens, offering four potential transformation pathways. The choice of pathway depends on the company’s current financial and operational state, as well as its level of resilience and organizational capabilities. The first two may be best in situations when targeted cost reductions can help a company stabilize its declining or volatile margins. The third and fourth are more holistic, part of a larger plan to make the organization leaner, more resilient, and more efficient overall. Leaders can pursue some of these moves at the same time, or else adopt them in a strategic sequential order, according to their needs and goals.

  1. Optimize procurement spending, reducing external costs and improving procurement processes without making major organization changes. This is particularly important now, as input costs are soaring.
    Example: To do this without sacrificing quality, a global auto equipment manufacturer digitized its procurement process, improving its ability to renegotiate and manage contracts. The impact: a 12% direct-product cost improvement and a boost to margins.
  2. Streamline the organization, enhancing organizational effectiveness to create a slimmer, nimbler workforce.
    Example: One US-based transportation firm took this approach, committing to a top-level realignment and an improved talent strategy focused on sourcing and hiring the scarce talent needed to fill strategically critical growth roles. The impact: a 20% decrease in inefficient work, the reduction of two managerial layers, and more than 5% of team members promoted or restaffed in new functions.
  3. Rewire processes—often using digital and AI—to maintain core functions while growing and succeeding with a lower cost base.
    Example: A global oil and gas company, wanting to address slow and costly decision making, undertook an end-to-end process reorganization, restructuring and upskilling teams. The impact: a vastly improved planning and execution timeline—from eight months to four months for scoping and project definition—and a total cost savings of $1.5 billion per year.
  4. Strategically transform operations, holistically covering all cost dimensions, including direct and indirect costs, and prioritizing longer-term impact. These transformations might involve efforts such as complexity optimization, network redesign, digital supply chain integration, and Industry 4.0 updates. Example: A European beverage company conducted a holistic transformation of its operations, with a focus on production efficiency and footprint optimization along with product portfolio harmonization. The impact: a $500 million estimated impact from the overall program, along with a 10% reduction in supply chain costs.

Again, it’s about more than survival. A competitive cost advantage effectively sets companies up to invest in their own future growth and the satisfaction of their people. With the right pathways—or combination of pathways—the savings potential can be significant and the competitive advantage well worth the effort.

Christoph Schweizer
Chief Executive Officer

Global Trade is Changing Dramatically. Here's How.

JANUARY 30, 2023

To BCG’s network around the world,

For the first time in decades, global trade will grow at a slower rate over the coming ten years than the world’s GDP, according to a new BCG report.

Trade dynamics started shifting in 2017, with the impact of Brexit and changes in US-China trade relations. The pandemic spurred further disruptions starting in 2020, and now increasing geopolitical tensions, the war in Ukraine, and fast-growing ASEAN economies are beginning to reshape familiar patterns.

  • The Russia-West fallout, resulting from the war in Ukraine, will dramatically affect future flows. For example, trade between the EU and Russia is forecast to decline sharply, shrinking by $262 billion through 2031—a result of sweeping sanctions and the future halting of energy exports from Russia to the EU. At the same time, the EU will increase its trade with the US by $338 billion as it replaces Russian pipeline gas with LNG from the US.
  • Trade relations between China and the US have been tense since 2017, leading to a decrease in trade of $63 billion through 2031. Since early 2021, China and the EU have also been experiencing more difficult political and trade relations, as evidenced by the suspension of a breakthrough bilateral investment agreement last year. These challenges will lead to slower-than-average growth—just $72 billion—in the China-EU corridor. Policy shifts in Brussels and Washington will also result in changes in the value chains of sectors such as critical minerals and product categories like electric cars.
  • The clear winners of this emerging map are the ASEAN countries, which will experience $1 trillion in new trade. Of this, trade between ASEAN countries and China is forecast to grow by $438 billion, the largest increase in any trade corridor. This is being driven by GDP growth greater than the global average for each trade partner, the shift away from low technology manufacturing in China, and an increase in “China +1” sourcing in many industries.

How to Create Supply Chain Resilience

This worldwide shift away from tightly knit supply networks means we need a new balance. Organizations must of course keep plugging away at their goals of efficiency and lower costs, but it’s also important to remain acutely aware of—and ready to rapidly mitigate—global risks to steady supply.

Short-term moves:

  • Understand value chain risks—including how changes in supplies of key commodities could affect operations—and build the resilience to withstand them.
  • Reevaluate and optimize inventories of essential commodities, and be prepared to engage alternative suppliers.
  • Make contingency plans—for example, directing R&D toward alternative components or building supplier relationships in new regions.

Long-term moves:

  • Include geopolitical scenario planning in capital allocation and supply chain management.
  • Make use of analytics, such as supply chain control towers and digital twins, to catch emerging shocks and disruptions early and understand contingencies.
  • Incorporate ESG goals and metrics, which will increasingly affect global supply chains.

Like so much else in the current environment, the changing dynamics of global trade will offer challenges and opportunities—and some industries will feel the shifts more powerfully than others. Above all, it’s critical to keep diversifying business networks and taking steps to build resilience, becoming as ready as possible to adapt to our changing world.

Christoph Schweizer
Chief Executive Officer

Davos Takeaways from A to Y

JANUARY 23, 2023

To BCG’s network around the world,

On Friday, Christoph recorded his reflections on Davos in a wonderful short video—key themes, surprises, disappointments, and areas of optimism. I encourage you to take a couple minutes to watch it. As for me, I decided to forego the -15°C mountain air and use my keyboard on the flight home instead. (I’m also ordering Christoph some gloves for next year.) Every year, I try to figure out a shorthand summary of the dozens of conversations and meetings with government, business, and social sector leaders. This time, I realized I could do this using vowels—a simplistic device maybe, but hopefully also a useful one. So here goes:

A is for ACTION. Most Davos meetings are about big concepts: multistakeholder orientation, Industry 4.0, digitization, cyber risk, and AI. I found the tone this year much more geared toward action: how the Alliance of CEO Climate Leaders will help spark supply chain decarbonization and build green markets, how to build demand for new climate tech with the First Movers Coalition, how we can help fund the decarbonization agendas of emerging markets, and how to support Ukraine, navigate food insecurity, and accelerate AI deployment both rapidly and safely. Big concepts are important—how could a longtime BCGer say otherwise?—but at a time of rapid change and urgent needs, I found the focus on action refreshing and appropriate.

E is for ENERGY. We heard a lot this week about solving the energy trilemma of reliability, affordability, and sustainability. At the Davos meeting last May, it would have seemed highly unlikely that Germany would be able to build an offshore LNG facility in 194 days and a second soon after, but that’s what happened. There’s a strong resolve among European leaders to ensure that the region is never in this situation again. There was also a huge focus last week on the energy transition—a topic close to my heart. We’ve seen concerns in the media about a UAE-centered COP, but many leaders are privately optimistic that this opens up opportunity to bring the oil and gas industry to the table to reach bolder commitments and accelerate progress.

I is for INNOVATION and INCLUSION. The progress in new climate technologies is so exciting, from wind to batteries and from carbon capture to agriculture. Of course, new innovations go far beyond climate. You couldn’t be in Davos this week without hearing about ChatGPT and the enormous implications of generative AI. The digital and AI revolution is entering its next phase, with all the uncertainties, opportunities, and challenges that presents. The launch of BCG X made a big splash, and we are eager to help our clients lead the way. Inclusion also continues its forward march. Like other topics, the focus has shifted from concept to action: how to deliver on commitments to diversity, equity, and inclusion and how to help society do the same. For me, a personal highlight was when our new Chief Diversity Officer Nadjia Yousif gave a terrific speech and compellingly asked us to shift our focus from the “so what?” to the “so who?”

O is for OPTIMISM. Reading the headlines at the beginning of Davos could make you want to crawl back into bed. Even so, many CEOs at the meeting were cautiously upbeat. We are not out of the woods. The war in Ukraine, US-China relations, global trade, and the near-term emissions trajectory don’t warrant optimism at this point. But US inflation improvements in Q4, the new Inflation Reduction Act to accelerate climate investments, European resilience, and an expectation of a post-pandemic recovery in China starting in Q2 are creating more confidence in the business community. Even some of last year’s skeptics are acknowledging green shoots of optimism.

U is for UNCERTAINTY. If 2022 taught us one thing, it’s the need for humility in predicting what’s ahead. War in Ukraine, lockdowns in China, disruptions in supply chains, and massive weather events all showed how expectations in January can rapidly go off track. At one CEO lunch, more than half the participants refused to take a view on the outlook for 2023 given the uncertainties they perceived. Those unknowns will put a premium on building resilience and agility into our organizations.

And finally, I will cheat a little on the last one:

Why is about PURPOSE. The World Economic Forum has always had a sense of purpose at its core, but until relatively recently many of the companies attending Davos were not nearly as articulate on this point. That has changed in recent years. Today, most leaders arrive in Davos with a sharper understanding of why their organizations exist and how they will make a distinctive difference in the world. You see evidence of this in billboards and on stage, but you also hear it in private conversations when the cameras and microphones are off. For me, that has been one of the most encouraging parts of an intense five days. So that’s my take. Last week was great for connecting, learning, and creating a spirit of collaboration. But the hard work to translate that into action and impact in 2023 still lies ahead. We’ve come down from the mountain, and now it’s time to get to work.

Rich Lesser
Global Chair

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