CEOs Embrace Generative AI for Competitive Edge Amid Adoption Hurdles and M&A Challenges

CEOs globally recognize the potential of artificial intelligence (AI), but most are encountering significant challenges in formulating and operationalizing related strategies, according to the latest EY CEO Outlook Pulse survey.

The EY quarterly survey of 1,200 global CEOs, which provides insights on AI, capital allocation and investment strategies, reflects the difficulties and the urgency that CEOs find themselves acting under when it comes to the emerging technology. While more than two-thirds (70%) of CEOs see the need to act quickly on generative AI (GenAI) to avoid giving their competitors a strategic advantage, a similar proportion (68%) also report being stymied by uncertainty around this space, which makes it challenging to act quickly.

Conscious of it’s potential to disrupt their own business models, almost all CEOs (99%) are making or planning significant investments in GenAI. To fund these investments, 69% are re-allocating capital from other investment projects or technology budgets and 23% are raising new capital. But investing in an AI-enabled future is easier said than done: more than a quarter (26%) of CEO respondents say the rapid pace of GenAI progress is the biggest challenge to making capital allocation decisions on GenAI initiatives. Two-thirds (66%) also believe a surge in companies claiming to have AI expertise complicates decisions about identifying and implementing credible ecosystem partnerships and acquisition targets.

Despite challenges, CEOs are investing in the future of the workforce to accelerate GenAI initiatives — a majority (87%) have either completed or are in the progress of hiring new talent with relevant GenAI skill sets. Many are also establishing pilots and partnerships with multiple companies.

Bogdan Ion, Country Managing Partner EY Romania & Moldova and Chief Operating Officer for EY South-East & Central Europe and Central Asia (CESA): “CEOs are undoubtedly readily assessing the potential for GenAI to provide a competitive advantage within their industry, organization, products and services, as well as productivity gains. However, investments in this area are likely to remain more cautious, focused on alliances and work force augmentation for proof of concepts, until the dust from the current period of hype begins to settle.”

CEOs double down on organic investments, but M&A appetite declines to 9-year low

As business leaders continue to grapple with macroeconomic headwinds, regulatory changes and geopolitical volatility, many still anticipate high levels of growth in the near term and are doubling down on investments in R&D and capex.

The EY survey reveals that CEOs continue to be on the offense when investing for the future, with a clear majority (89%) planning some kind of transaction in the next 12 months. However, M&A deal intentions dipped to the lowest level since 2014 with only 35% of CEOs planning M&A in the next 12 months. This can be attributed to the current geopolitical and macroeconomic uncertainty and also reflects the confusion on AI targets and the real-world drop-off in AI-focused M&A following a surge earlier this year.

The appetite to pursue M&A is far higher in the Americas region (47%) than in EMEA (29%) or Asia-Pacific (25%), reflecting the strong uptick in dealmaking seen in the region in 3Q23, especially deals involving US companies.

Peter Latos, Strategy and Transactions leader, EY Romania: “In relative terms, Romanian has been less impacted by the slowdown in global and CEE region M&A. However, appetite for deals in the technology sector waned in the first nine months of 2023, when 26 deals were announced compared to 42 in the same period of 2022, representing a 38% decline. As a result, technology fell from first to third place in terms of attractiveness for investors, who preferred opportunities in real estate and consumer sectors instead.”

Half of CEOs (50%) plan to expand operations in the next 12 months outside of their headquartered location. Despite lower-than-expected growth in China, Asia-Pacific has emerged as a prominent destination, with China, Australia, India, Japan and Singapore emerging as they top five destinations when asked where they would look to outside of their headquartered market.

The past four years have seen business leaders reacting quickly to shifting consumer behaviors, a resetting and reconfiguring of supply chains, an upending of the global energy market, and rapid changes in the growth, inflation and interest rate environment. Yet, a significant number of respondents anticipate higher levels of growth (66%) and profitability (65%) in 2024 compared with 2023.

With global economic growth expectations more likely to be revised on the downside in the near-term, CEOs should consider whether their own growth expectations reflect the slower global market projected over the next five years.

Peter Latos: “We expect to see many CEO’s review their business and operating models, as decisions over portfolio mix and capital allocation become more challenging in the months ahead. This will in turn see a greater focus on the core, leading to a number of divestments, spin-offs and carve outs, in order to deliver long-term value for shareholders.”