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January 31, 2007
My Notes from Davos
I am just returning from the World Economic Forum in Davos. I want to give you my observations on the week, in the hopes that I can add to what you have read in the media. A caveat is important; even a guy with my energy cannot hope to cover anything more than a small part of the intellectual content that is available at the WEF. It's a bit like an all you can eat buffet at the world's fanciest restaurant.
Environment was the most important topic this year. Of course, I was struck by the paucity of snow at the Alpine resort and the cab driver's comment that it was the first time he had ever seen rain in early January. Sir Nicholas Stern, who authored a seminal white paper for the UK Government, warned that with carbon dioxide at 450 parts per million, there is a 50/50 chance of a 2 degree centigrade rise in temperature, at 500 PPM a 3 degree rise in temperature, either of which will cause major flooding of most coastal areas. He said that the world must reduce present CO2 output by 30% to stop the process of global warming, which means that the Western nations will have to cut even more to accommodate growth in Asia. There was a major debate about the best incentive structure. Professor Dan Esty of Yale University contended that voluntary programs are unworkable, given that emissions are up 15% since 1990. He recommends that governments agree to cap the amount of carbon, thereby providing the incentive to cap and trade. Stern suggested an alternative approach, a stiff carbon tax to establish a floor price on carbon so that investors can seek alternatives with confidence. There was also an intense discussion about future energy sources, with Jim Rogers of Duke Energy insisting on nuclear and clean coal, while venture capitalist Vinod Khosla advocated wind, solar and hydrogen. Khosla noted that nuclear facilities take 10 years to build (and are unsafe to boot), adding that "coal is like fast food in America." Rogers' retort was a classic, "We need silver buckshot, not a silver bullet, reliable supply at affordable prices." Tony Blair, UK Prime Minister, echoed Rogers' view, recommending that his country move to nuclear as its natural gas supplies from the North Sea dwindle in the next decade.
The second key topic was the rise of Web 2.0 and the resulting revolution for media companies. I was in the one day session for the Media and Entertainment Governors, with top executives from News Corp., Nike, MTV, Bloomberg, Dow Jones, Forbes, Google, Yahoo, the National Basketball Assn., BBDO, WPP, Ogilvy, Holtzbrinck, Reuters, TIVO and SlingMedia. Michael Wolf of MTV contended that the rise of new media is not inconsistent with the continued viability of mainstream media, citing as evidence the top 1000 purchases on i-Tunes who are all artists owned by major studios or the Saturday Night Live segment "Lazy Sunday" that got 10 million views on YouTube (another great one is the autistic high school basketball player in Rochester, NY, who got into a game for the first time and hit six consecutive three point shots). There is downward pressure on production costs; Shellie Lazarus of Ogilvy said the Dove "Evolution" video, which got five million views on YouTube, cost $50,000 to make (done for a workshop in Canada) but added that it was done by two of her top (and expensive) creative directors. Companies are invading each other's turfs, with WPP buying the rights to Sacha Cohen's (remember BORAT) next film about a gay Austrian Nazi, Bruno or ICM, the talent agents, going to TIVO to establish a virtual channel for client Clint Eastwood (movies he directs or is an actor). Bill Roedy of MTV said that he has two models; one is for stars such as Jon Stewart of the Daily Show on Comedy Central, where you have to "pay up" and may become a loss leader, versus MTV standard video jockeys who have a short shelf life and are not expensive. Tad Smith of Cahners, a large trade media publisher, and Steve Forbes, of Forbes Magazine and Forbes.com, said they were both going outside "of the walled garden, to include content from wire services, blogs and competitors, moving a concept of aggregating around key vertical industries such as financial services.
A very important conclusion; it will be harder to charge for content, so there will be more reliance on advertising as a revenue source (even true for TV over the web, with ad supported to triumph over pay per download). Just as important was the comment by Charlie Denson of Nike, who said we are not trying to sell in our marketing on the Web, we are providing a consumer experience, making a relationship, giving the consumer a change to customize and to interpret, repurpose and share. Eric Schmitt of Google suggested that personal digital agents may begin to replace traditional aggregators, helping people find what they want in a more dispersed world of media. "There will be communications systems that compute systems of influence, to go beyond systems of record, with the growth opportunity to build computing into communications."
The third key theme for Davos 07 was the paradox of political dysfunction and booming global economy. Stephen Roach, chief economist of Morgan Stanley, said that the past four years of economic growth has been the most rapid since the early 1970s. He noted that the global economy had absorbed rising energy costs, terrorism and the structural imbalance (huge US trade deficit and Asian accumulation of dollars) in its stride. Larry Summers, former president of Harvard and former US Treasury Secretary, attributed the prosperity to global trade, suggesting that this is the first time there is large volume of trade between nations with large disparities in income. He even posited that we must reconsider international trade theory, beyond the traditional exchange of goods and services, to add a "trade in tasks" where stages of work are done in different places, with the integration of China and India into the capitalist system as the most important development since the Industrial Revolution.
There was an ominous forecast, however, from two former Democratic economic sages, Summers and Laura Tyson, of the University of California, who see the possibility of protectionism in the US with the 2008 Presidential primaries, reinforcing similar tendencies in Europe. The anxiety of the middle class is caused by the rapidity of change and the sense that they are being hit by forces they cannot control, according to former US Trade Representative Bob Zoellick. He added that the benefits of free trade are long term while the pain of adjustment is in the short run. David Gergen, former Presidential press secretary, suggested that voters will rally to equality of opportunity, a collective approach to economic success, a more inclusive prosperity." None of the economists was very sanguine about the prospects for the Doha Trade Round, in part because the Congressional bill granting authority to President Bush to negotiate such a deal expires this summer. Neville Isdell, CEO of Coca-Cola, said that Western society "may be looking inward, so those of us in business must give strong encouragement to politicians...to tell the story of how people around the world are brought out of poverty through free trade...It is time for business to step up and help to get this done." The most specific immediate risk is that the US Congress, with a Democratic majority, may push for legislation putting tariffs on Chinese imports unless the trade deficit is reduced (China accounts for 29% of total US trade deficit).
The fourth theme of Davos was the shifting power equation. Fareed Zakaria, editor of Newsweek International, suggested that we are back to a period like the 1920s, with economic prosperity and no single global hegemon. "The war in Iraq has delegitimized war in East Asia; note that China and Japan are working out their issues," he said. Angela Merkel, prime minister of Germany, had a wonderful line on the need for cooperation among governments, saying "If you want to go fast, go alone; if you want to go far, go together." She added a quote from Ben Franklin, "He who gives up freedom to win security will lose both." There was a different narrative from Senator John McCain and UK Prime Minister Tony Blair. McCain, whom I saw both at a lunch on Friday and a cocktail party on Saturday, was outspoken in his support for the increase in US troop commitment in Iraq. "We have pursued a failed policy and strategy but the new clear and hold approach, establishing a viable political process in the country is the right way to go. If we lose the war in Iraq, Al Queda will be coming to our shores again." Blair vindicated his Iraq war decision on the basis of the experience in Kosovo; "The definition of the international community is shared common values that give us the right and duty to intervene. The answer to fear is hoe and belief but belief only comes from word turned into deeds."
The fifth theme was the continued shift of economic power to China and India. China remains a much more attractive place for foreign direct investment, particularly in manufacturing. The recent crackdown on corruption in Shanghai, with the party chairman jailed and a few Western companies cited for kickbacks, was a major topic of discussion. Bill Amelio, CEO of Lenovo, a PC manufacturer based in China gave a clear statement of intent to compete in the US consumer segment based on low cost manufacturing and design process from Asia, indicative of the ambition of the new multinational tigers. Sunil Mittal, CEO of Bharti Telecom, the third most valuable company in India (and one of six in the Fortune 500 from India), said that the 1 million people working in IT in India bring in $22 billion of revenue. Both countries face immense challenges in environment, education, equality of opportunity for those in urban and rural settings, building viable internal capital markets and governance. An important change in governmental approach in India was noted by Steve Schwarzman of Blackstone, who said that public private partnerships are now possible to build ports, roads and railroads, helping infrastructure investment to rise from present 4.7% of GNP to a target of 8%. When you consider that China is growing at 10% and India at 8% a year, that the savings rate for Chinese is 50% and India is 30%, the projection is that both will be in top five economies of the world within five to ten years.
To get a broader picture of the global economy for 2007, I attended sessions on Brazil, Japan and Europe. President Lula was very proud of the achievements of his first term, with five million jobs created. He has focused on agriculture, in particular small farmers, who can now use the $1 billion micro credit facility, to finance production. He claims to have settled 380,000 families on newly nationalized land. The country now exports without causing inflation or damaging the domestic economy. Lula has established a family stipend program for those earning under $60 per month, but in return they must put their children into school and have them vaccinated. He suggested that rich countries stop making donations to the Third World, preferring investment in development projects for water to stimulate agriculture. Mr. Katashiro, former finance minister to Prime Minister Koizumi, said that the recently completed Administration had destroyed the road and postal bank lobbies, clearing the way for his successor, Mr. Abe, to lower controls on capital inflows and to stimulate the supply side by investing in IT for the non-IT sector. Japan is the leader in energy efficiency, especially in the auto sector, but lacks a real entrepreneurial sector, which he attributes to an educational system that is not linked to creative thinking. The European panel was cautiously optimistic on economic prospects, noting the European productivity is now equal to the US, having closed the gap since the early 90s. Walter Kielholz, chairman of Credit Suisse, urged European governments to use the present positive economic conditions to make further reforms, lowering corporate and personal taxes, freeing the labor market. Christine Lagarde, trade minister of France, said that Europe lags behind Asia and America in the innovation and information society, lacking the enterprise environment and network industries, with too many state owned companies. "We must be doing something right in France," she added, "as we are #3 in attracting foreign direct investment behind the US and UK.", concluding that the 50th anniversary of the European Union in 2007 would be a good time to commit to further actions to enhance competitiveness, especially in France, Germany and Italy which account for 70% of the EU's GNP.
The sixth important topic was the state of global health. I attended two sessions, one on pandemics and the other on stem cell research. Peter Piot, director of the Global Business Coalition on HIV/AIDS, was somewhat optimistic for the first time, noting that disease prevalence had dropped in the US, Europe and the Caribbean. This buoyancy was offset by his declaration that the disease has now become more female than male, moving "from a gay, white, Western, middle class disease to a poor, African or Asian, female disease." He noted that we must put prevention back on the agenda, because there are 4.5 million new infections each year, overwhelming any effort at disease management through treatment. The picture is improved on treatment, with 2 million people in the developing world on a drug regimen, up from 150,000 a few years ago. The fastest growth of the epidemic is now in the former Soviet Republics and in Asia. Meanwhile, if you want to be frightened, consider the remarks by Richard Feacham, who runs the Global Alliance on Tuberculosis and Malaria. He said that viral pandemics will be the huge issue for the 21st century, with 50% of the MSRAs (Methicillin Resistant Staph infection) now resistant to antibiotics. Dr. Ferguson from the Imperial College in London talked about the new danger of Zoonoses, animal pathogens that can spread to humans from overly close contact (farmers in China living adjacent to poultry). He cited Ebola, Nipah Virus, SARS and monkeypox as examples of Zoonoses. Dr. Julie Gerberding, director of the Centers for Disease Control, said that the world's health organizations are much better coordinated on detection and acknowledgement of the problems, with the Chinese particularly good at rapid quarantine of patients to avoid spread. Hank McKinnell of Pfizer said that there is a serious pandemic every 100 years, most recently the
1918 Influenza outbreak. On stem cells the focus of researchers is on Type I Diabetes and Neurodegeneration, genetic or blood diseases where stem cells can help to rebuild the immune system or to boost the immune system to prevent disease. There has been an important and little known change in the source of stem cells, from embryo to adult stem cells.
As always, it is an exhilarating, exhausting, humbling experience to go to Davos. My world view is inevitably challenged by exposure to the best and brightest, each determined to express his or her opinion in the swirl of plenary sessions, cocktail parties and late night debates at the bar. It is my favorite four days of the year. Here is a final thought that made me proud of what our firm does. In the stem cell session, the scientists made a major point of the need to engage in the public debate. A professor from MIT said, "We have to understand the public's concerns and respond to them. We need a public dialogue, to listen to the people. We must show how stem cells can cut health care costs. We must also recognize that we cannot be too close to government because it is not trusted. We must educate the people and engage in the debate." Hope this is of use and I am glad to respond to any of your questions.
Posted by Edelman at January 31, 2007 9:17 AM
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