Podcast: Views from World Economic Forum in Davos — David Novak, CD&R

Dave Novak
David Novak, Clayton, Dubilier & Rice

The World Economic Forum held its annual meeting recently in the little Swiss ski town of Davos. There was plenty of snow this year, but no one focused much on hitting the slopes. This was one of the most anticipated Davos gatherings in years.

The reasons are obvious: There’s a lot going on in the world today and plenty of questions:

  • How are businesses and countries balancing long-term globalization trends with the more recent populist pressures?
  • What do new technology impacts – particularly AI – mean for industry, employment, competition, and innovation.
  • And then there are the regional issues, from Europe to Asia to, of course, U.S. President Donald Trump’s highly-publicized visit.

What were the reactions – and more importantly, what should business leaders globally make sure to understand? To find out, we spoke with David Novak, a partner at Clayton, Dubilier & Rice and based in London.

Chris Riback: So lots to discuss following Davos, of course. First, I’m curious, have you been there before or was this your first time at the World Economic Forum there?

David Novak: I actually had been there before, this was … I think I first went in 2009, so I’ve been a number of years.

Chris Riback: More snow this year I understand.

David Novak: Lot more snow, made getting around a lot harder, and those who came in Monday night spent a lot of time in traffic trying to get in.

Chris Riback: So, lots of topics, first one that I wanted to touch on was really one of the main drivers obviously, in business and more, globally, and that’s this tension between globalization and populism. Going into Davos, obviously one of the major questions was how business and political leaders there would balance the long term globalization trends with the more recent populist pressures. I’m curious, what did you see and hear on that front?

David Novak: Well as you suggest, there was a lot of talk about those two topics and the interplay between them. On the one hand, the trend of globalization is an important, and one in which many of the people at Davos obviously subscribe to, and encourage, and believe there are a lot of short, medium, and long term benefits from globalization.

On the other hand, I think because of some of the recent political events over the last couple years, people have realized more than, in truth, they had in prior years that not everyone has benefited from globalization. And that was very up front and on the minds of almost everybody that I talked to. And so there’s a lot of talk now on how do we take the benefits of globalization and make sure one, more people can benefit right away, and two, those who don’t get immediate benefit, what can business leaders, politicians, entrepreneurs, etc. do to help those retrain, get involved, share some of the benefit, etc. in the medium to long term.

Chris Riback: So you did hear, if nothing else, there’s a heightened sensitivity to the tension and it sounds like the conversations began more at a stage of okay, this exists, this tension exists, now what? As opposed to debating the emergence of the tension. Obviously we live in post Brexit vote world — And a post Trump world, so it kind of sounds like the conversation’s gotten advanced on that front.

David Novak: For sure. In fact, there wasn’t one conversation without the other. Where in prior years you would have lots of conversations about globalization that ended at globalization, whereas this year you couldn’t have any conversations about globalization that did not lead toward the conversation around a core group of people that were not benefiting from that, and what needs to be done, or what should we try to do about that.

Chris Riback: And so, obviously one of the key drivers of jobs and current and future tension … one sec … is around technology, and the impact of technology on jobs and innovation, particular AI, or artificial intelligence, that’s obviously been the key topic, what it means for industry employment competition and innovation. What did you find, did you find business leaders excited or apprehensive about AI in particular? And do you find that most businesses already have an AI strategy? What did you hear on that front?

David Novak: Yes, I would probably put business leaders in three buckets. One, the group that are very excited about it, and it won’t surprise you, most of them were in the technology space. Two, you had a group of people who were quite worried about it, because they knew it was going to impact their business, and did not have a strategy for it. Or three, the people who say, “Oh yeah, AI’s interesting, I really need to learn more about it, not really sure what opportunity it is for me, or what risk it is for me.” So that would be the three buckets I kind of would put the business leaders that I talked to about it. That being said, AI and technology driven disruption was absolutely at the forefront of the dialogue. And it really did tie to the same issue around globalization, is lots of opportunity, lots of productivity. However, there will be a core group of people that get displaced as a result of it.

Chris Riback: And there will have to be … it sounds like as that emerges, maybe there’s greater awareness, greater sensitivity around protecting the downside, than perhaps there might have been if this topic had come up 10 years ago, five years ago, is that fair? Or there are always issues that come up and there always has to be sensitivity, and awareness of what it can do for both the top line as well as for jobs, and individuals and this is just the latest one? Anything different about the-

David Novak: No, my sense is that it was far more prevalent this year than even two years ago, frankly, I think for two key reasons. One is some of the business models, such as the Ubers of the world, have progressed so much, and so rapidly over the last couple years, anyone can see how those business models and others like that can lead to job displacement, and related other technologies, robots, etc. that you can see coming.

And the second thing is just the growth of populism and it’s become front and center, and clear from some of the election results, particularly in the UK and the US, that people are more focused on that issue. So this is, from my perspective, also a relatively new phenomenon. And very few conversations about AI and technological disruption that didn’t lead toward the second part of that discussion, which was the displacement that will result from that, and what do we do.

Chris Riback: And you just raised some of the regional impact, so let’s move to the region that … one of the regions that you obviously know extremely well, Europe. What message did the global business leaders there get from Europe? Reading about it, hearing about it was fascinating. You had France president Emmanuel Macron give a really muscular speech on the Wednesday, the New York Times reported that he quote “laid claim to the mantle of leader of the free world”, I don’t know if that’s true, but that’s how they characterized it. In the same day you had a Merkel speech, the Italian Prime Minister also issued their own really forceful speeches toward advancing European integration, and while defending the notion, the New York Times reported, of international cooperation and meanwhile you had from the UK, Prime Minster Theresa May, continue to kind of struggle, it seemed, with Brexit angst. Is the European continent making a direct play to lead on globalization and connected business opportunity? And really maybe I ought to call it more connected business opportunity more than just leading on globalization, but did you see a stronger play from the European continent this year?

David Novak: I think there’s no doubt there was a stronger play from the European continent. But, absent politicians being politicians, I would not describe it as trying to lead on globalization. I think what is really happening, is to a certain extent, it’s a bit of a coming out party for Europe in that Europe is growing again. For the first time probably post crisis, the continental Europe, really across the piece has a lot of positive things to talk about in terms of growth, macro growth, job growth, etc. And that has been aligned with, in France in particular, a new charismatic leader who is optimistic and telling a good story around longer term improvement and growth, not only in France, but France as well and driving more sustained growth in Europe.

So I think that’s the big driver around it. Europe, unfortunately, like everybody suffered after the financial crisis in ’08, ’09, but then had the sovereign crisis thereafter that has put Europe in a bit of a funk absent really Germany and the UK for a long time, after some hard, hard changes in a number of countries, Iberia, Ireland and others, etc. combined with the banks sorting themselves out, and Draghi doing, I think, a very good job at BCB, Europe is growing again. And so I think yes, Europe is flexing its muscles, but also is trying to build a path and a perception toward more sustained growth. If that happens, then I’m sure Europe will try and use that, certainly the politicians, to drive a bigger place in the global scene, but that we’ll have to see.

I think the one country that is more challenged than that, of course, is the UK as it’s trying to sort itself out with Brexit. And still early stages and trying to see whether it has the political might and fortitude to negotiate a sensible deal with Europe. And it’s too early to figure out what that sensible deal could look like. Can Theresa May drive it through her own country, not to mention then make a deal with the EU? And so it’s early days. So as Mark Carney said, for the first time in a while, the UK is at the bottom of the growth ladder and the G7. And that will probably continue for a little while.

Chris Riback: Quite a balancing act, it seems, that Theresa May has. I know you’re based out of Europe, let’s turn to Asia to the extent that you focused on things there. It seems that there were two significant Asia headlines. One from China, where President Xi Jinping didn’t show, but his senior advisor at Davos said that China was primed to de-emphasize debt fueled growth. And meanwhile, from India, where Prime Minister Modi called on nations to embrace globalization, combat climate change, strengthen international institutions, like the World Trade Organization, but meanwhile fail to note countries recent import restrictions, and other broad industrial policy, the New York Times reported, meant to force foreign companies to increase manufacturing operations in the country.

Are the China and India economies, to the extent that you focused on that area, perhaps not as fully open or transparent as purely capitalist markets, but more attractive for investments and business growth because of their structure, and because of their government’s more direct involvement? What did you hear from Asia, and what did you maybe hear business leaders talking about regarding potential opportunities there?

David Novak: That’s a good question. There’s no doubt that they’re not as fully open or transparent as a number of the western markets. And I think there’s a fair amount of debate as to which model is better. I think there’s a strong group of people in the east and the west who understand and appreciate the benefits of certainly how China runs its economy in a very long term and controlled manner, and it has been, obviously, very good for China’s growth. And probably also helps it manage the risks of cycles, and other potential exogenous events that could impact the economy. So, I think, evidence would suggest there are some real benefits to that political and economic model.

Interestingly, I found a lot of the dialogue, at least that I was involved in as it pertains to China, was focused around two areas. One, trade, and what will evolve in discussions, slash negotiations, slash rhetoric with the US, and to North Korea. And what, if any, role that China will ultimately play in helping manage the North Korean issue.

Chris Riback: So the geopolitical aspect of North Korea came into play, that’s an interesting insight. It makes sense, I guess, that could, to say the least, disrupt things should there end up being action on the Korean peninsula. And yes, China’s involvement or lack of involvement, where that turns, surely will be a big deal. Interesting that that came up.

Keeping moving around the globe, I’m sure you didn’t hear about it or notice it because very minor deal, and really not a large personality, but so just FYI, President Trump showed up in Davos, also, just in case-

David Novak: Oh, is that right?

Chris Riback: Yeah, yeah.

David Novak: Was he there?

Chris Riback: Yes, he was there…. he’s easy to miss, but he was there. And kidding aside, I’m curious as to what was the take that you heard, the key … a lot of the analysis seemed to indicate that he was really trying to thread the needle, America first does not mean America alone, was probably one of the key lines of what he said. And really tried to emphasize America is open for business, really emphasizing. And he talked about this again a little bit more a couple days ago in the State of the Union, that America is a place where people really want to do business, and he really tried to emphasize that, I thought, in his conversation to the leaders there in Davos. Did you hear anything, what was the take on President Trump and do people believe that America first does not mean America alone?

David Novak: Well look, I have a couple observations from Davos in the conversations I had. I’d say, first of all, it’s very hard for me to find people from outside of America who like or support Trump’s approach, in any way, shape, or form. Which is interesting. So that’s the first thing.

The second interesting thing was, however, that his attendance at Davos had a massive impact. He, and frankly, his broader contingent, had almost rockstar status in a way that I really don’t remember anyone having in the last 10 years. So whatever people quote say publicly about what they think about Trump, there was a lot of interest in him, in what he was going to say, how he would present himself, what he looked like, who was around him, etc. etc. That was the first thing.

But my second observation would be, business people at least understand the new tax and job act, and thought it could be positive for the US and for US growth. And there’s some talk about will it be interesting to see over time how other countries might respond to this. And while Secretary Mnuchin was very focused on saying we really don’t want this to be a race to the bottom, without a doubt some of the other countries will take note and figure out if they need to respond in some way, shape, or form.

I should also add that people noted the reduction in regulation in the US over the last year. Understand it could be good for America, on the other hand, a European mindset would generally more toward more regulation and not supportive of the regulatory changes and mood that seems to be going on in the US.

I think as it pertains to global impact, I think there is a lot of disappointment on what is the perceived the US backtrack from its global geopolitical leadership role. Because most people feel like the world needs America in that role. And think, however, that Trump is likely to be commercial on a lot of things, particularly as it pertains to trade. However, there’s concern at how Trump’s impulsiveness might lead itself to potential conflicts in North Korea, or the Middle East, etc.

Chris Riback: What about the trade pacts, and not going forward with the Transpacific partnership, it talking about wanting to create bilateral trade agreements with whoever, fair trade agreements. Was there a sense that yes, bilateral trade agreements can work, and if the US doesn’t want to be in multilateral partnerships, that’s no big deal? Or was there a sense that wait, that could get really complicated really quickly?

David Novak: I think there was a little bit of both. But as it pertains to TTP, or NAFTA, or etc. ultimately most people kind of hung on to well, Trump is ultimately a deal guy, and he’s got to have an opening position that is very aggressive, but we’ll be keen to get to the negotiating table and come up with something that is sensible. Maybe it’ll be a bunch of individual trade pacts, or could still be in some sort of multilateral agreement.

Chris Riback: Anything else from your time over in Davos that struck you that I haven’t asked you about?

David Novak: I guess there were probably two things that come to mind. One is in terms of a major risk factor that a lot of people identified, because as people look for risks, and it was cyber security is something that obviously a number of companies and countries have experienced problems with, and that seems to be one that is high on everybody’s list. And the second one, on a more positive sense, was someone described this Davos as blockchain’s coming out party. And so there was lots of talk about it, lots of people involved in it in some way, shape, or form. So it was very present in Davos, for sure.

Chris Riback: Excellent. And you’re up for it again next year? You going back?

David Novak: Absolutely. Looking forward to it.

Chris Riback: Okay, hopefully the snow will cooperate. Dave, thanks very much for your time, I really appreciate it.

David Novak: You’re welcome, and thank you for your time.

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