Five Moments of Truth for the Spanish Corporate World
March 28, 2023
Seldom has it been more difficult to prepare a company’s budget and outline its medium-term goals. As an example, just two months ago, the International Monetary Fund predicted a simultaneous slowdown in the United States, Europe and China, as well as the arrival of a recession for more than a third of the world’s population – a forecast that today it would probably not endorse. Black swan events and analysts’ pessimistic tone have flooded the financial landscape with gloomy forecasts that, fortunately, have not been realised yet, but continue to foster uncertainty and undermine confidence in the data.
Despite this uncertain outlook, we must heed the advice of top economists, who insist that the right way out of a crisis is to focus on the long term. If we do not know where we want to arrive, they say, we will not take the right path. Economic policies must prioritise structural reforms that guarantee the sustainability of the system in the long term.
The European Union has taken a different path during this crisis than it did following the Great Recession by focusing on financing economies through Next Generation funds to boost digitalisation and accelerate the energy transition. However, geopolitical and social tensions, the energy crisis and inflation have hijacked the agenda in lieu of tackling day-to-day issues. Today, leaders seem to be more focused on what seems to be urgent rather than on what is most important.
In the past, companies were accustomed to dealing with a disruptive episode every three or five years, or even more rarely, but now we have entered what has been called ‘polycrisis’ or ‘permacrisis’, defined by the Collins Dictionary as an extended period of instability and insecurity resulting from catastrophic events.
In these turbulent economic times, FTI Consulting experts have identified five moments of truth for the Spanish corporate world. These are not issues to be solved this year, but recurring themes on the agenda. The companies that tackle them with agility and adopt best practices will be able to increase their competitiveness, despite the uncertainty and structural challenges our economy faces.
Embrace and Widely Implement Digitalisation
In 2023, Spain and businesses at large (including small and medium-sized companies) will need to embrace digitalisation to become more competitive. The use of Next Generation funds will be key to this process. This is not just about a timid digital adaptation; companies must do no less than keep pace with the best in each sector, or they will be left behind.
Large companies must focus on implementing a digital strategy that integrates all of their divisions to succeed in the current technological era and manage the immediate challenges, using tools such as emerging data sources, new regulations, artificial intelligence and digital assets.
Some companies are already meeting these challenges. According to the National Observatory of Technology and Society (Observatorio Nacional de Tecnología y Sociedad), 11.8% of companies with more than 10 workers adopted the use of artificial intelligence (“AI”) in 2022, four percentage points more than last year. The use of big data has increased by three percentage points, with 14% of companies in Spain now using widespread data analysis in their day-to-day management, according to the Observatory. Micro-enterprises also improved in these two areas, although more modestly, reaching 4.6% for the use of AI and 3.7% for Big Data.
Integrate ESG criteria into all operations
Regulators, investors and consumers generally are aware of the need to progress toward a more sustainable world from an environmental, social and governance (“ESG”) standpoint, and they are pressuring companies to integrate ESG criteria into their strategies. Since 2020, the Act on Non-Financial Information (Ley de Información no Financiera) has required companies with more than 500 employees or annual profit greater than €40 million to implement ESG measures. Since 2021, the Act has included companies with more than 250 employees.
In other words, a large number of companies must demonstrate their commitment to actively address issues as varied as the impact of climate change, observance of human rights, labour relations and tax compliance. Whereas issues such as waste management, a company’s carbon footprint, anti-corruption systems or management remuneration were not on a company’s radar a few years ago, they now are part of the reports companies regularly issue to their stakeholders. In 2023, companies must prevent the inadequate management of these factors from having serious economic and reputational consequences and seek better ways of addressing these issues.
Deal with Industrial Protectionism
Competing in an environment of greater industrial protectionism – something unimaginable a few years ago – has become a reality. To accommodate their export or import activities, companies must position themselves strategically in a complex international trade market dominated by globalisation concentrated around three main centres of economic power: the United States, Europe and China. They must also cope subsidies that attract industry to one location or another.
The world is intensely focused on Asia, where the largest players from all sectors are starting to position themselves. According to the World Economics report, the continent will account for half of global GDP in 2030 and 50% of consumption growth in the next decade. Asia will stop being a supplier for the West and will become a consumer powerhouse. It is also worth remembering that most cars, including electric cars, are sold in China, the main market for companies such as Volkswagen.
With this and other factors in mind, companies must secure their supply chains and address the problems they have faced since the beginning of the pandemic, some which have been solved and others that have been exacerbated by sanctions on Russia. Companies will need to avoid trade restrictions and reduce the cost of technical barriers to trading in critical raw materials if they are to ensure the smooth operation of value chains. There are still bottlenecks in parts of that value chain today, such as in the processing of raw materials and refining, which may force companies to change their approach to business if they want to be industrial champions in 2023.
Prepare for Effective Conflict Resolution
Economic and political realities will bring about an increase in legal disputes in 2023. The substantial number of financial injection programmes that resulted mostly due to the pandemic will need to be analysed and evaluated. Similarly, inflation and the increased cost of financing will result in the need to review the balancing of considerations between parties. A recent FTI Consulting survey of senior executives from all sectors found that they feel prepared to face greater litigation, but few have confidence that their organisations are ‘very prepared’ in any of the critical categories, especially in the technological field. Thus, 2023 is likely to see an increase in disputes related to technology and digital assets.
Knowing how to navigate uncertainty (e.g., economic, financial, geopolitical, social or labour) and being able to quickly respond to challenges will remain essential this year. Experts agree that inflation will be the main variable setting the macroeconomic agenda and that of the markets.
Even if the invasion of Ukraine were to have a short-term resolution, inflation will have significant effects on corporate strategy, as it is shifting Europe’s industrial policy toward greater self-sufficiency and independence, not only in the energy sector but in other types of raw materials, as well as in health and defence. Undoubtedly, this will require a significant strategic change in the coming years.
Still, more changes are needed. Brussels, through the Capital Markets Union, should foster non-bank financing of companies to a greater degree, especially in Spain, where initial public offerings have fallen. Spanish companies will need a significant investment flow, which in sustainability alone will require an estimated €30 billion more per year this decade, according to the OFISO Annual Report, “Sustainable Financing in Spain in 2022.” For many, the best way to finance this is to go public to achieve a greater balance between capital and bank debt. If this does not happen, Spain’s economic recovery and transformation might slow down.
The data confirms this situation: the stake of retail investors in total IBEX 35 shares traded declined in 2021 (the last year for which figures are known) to 6.1%, a small figure according to the interactive panel on retail investor behavior prepared by the National Securities Market Commission (“CNMV”). Although market activities, especially in Spain, have provided little optimism in recent years, 2023 began with some seemingly encouraging news of what may be an admission of errors by analysts for their low valuations of listed companies in 2021 and 2022.
These tailwinds could be used to identify actions that would make it easier for companies to access the market, such as reducing certain requirements in prospectuses or periodic reporting obligations, without undermining investor protection. The government could even consider offering tax incentives to encourage the participation of private savings in financing growing companies.
Overall, how can companies prepare to succeed in this troubled context? Economists agree that it is necessary to adapt to the uncertainty and accept a world that is changing drastically, for better and for worse. Faced with this situation, consumers, businesses and governments must equip themselves with flexibility, resilience and innovation for a changing world.
March 28, 2023
Senior Managing Director, Head of Spain Strategic Communications
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