Catalyzing competitiveness: Where investment happens and why
Catalyzing competitiveness: Where investment happens and why
https://www.mckinsey.com/mgi/our-research/catalyzing-competitiveness-where-investment-happens-and-why
, Olivier Bus, and Camillo Lamanna
Competitiveness has moved to the top of the global agenda, and investment is its indicator and its outcome. In the context of dramatically diverging investment patterns globally, companies and regions can pull seven levers to level up.
At a glance
- Global geopolitical shifts call for a new cartography of competitiveness. In a debate often characterized by vague calls for “cutting red tape” or “structural reforms,” this research makes the case for using productive investment as a proxy for competitiveness and charts a detailed line-by-line map of what investments happen where and why.
- Investment has stalled in Europe, shifted in the United States, and pulled away from the pack in China. This divergence poses different challenges in each region. Europe will need to close its €800 billion annual investment gap, while the challenge in the United States is to increase investment in manufacturing to mitigate risks linked to import dependencies. Meanwhile, China is adding three times more productive assets each year than Europe and the United States combined, but capital returns are roughly 40 percent lower.
- Levelized costs in Europe and the United States are generally at least 50 percent higher than in countries currently attracting the most investment. In manufacturing industries, the gap between advanced economies and China is about 50 percent, driven primarily by higher wages that aren’t matched by higher productivity. In R&D, the gap is closer to 300 percent, and time to market is an important driver. Energy and feedstock price differences further increase costs in Europe, especially in heavy industry. Policy choices factor in these costs, as implicit subsidies differ by as much as eight times between regions while exchange rate effects widen the gap further.
- Rebalancing investment would require a boost in productivity and innovation, specialization in less cost-sensitive industries, and policies to level the playing field. A “what-if” analysis suggests that a 30 percent productivity boost, a convergence of equipment, energy, and materials costs, and an adoption of “China speed” in advanced economies would close 30 to 80 percent of the cost gap. Achieving a new balance would thus also require specialization in future-shaping and other critical industries; a revival of innovation and differentiation in countries with higher costs; and a rethink of industrial policy to address distortions in competition.
A new cartography of competitiveness
In a fracturing world, competitiveness has risen to the top of the agenda. Yet the debate is often muddled. The concept itself is poorly defined—the World Bank’s competitiveness framework, for instance, identifies 1,200 contributing factors, and most economists prefer to focus on productivity, which avoids the fallacy of zero-sum thinking while highlighting what really drives prosperity. As global competition for investment, industrial capacity, and technology leadership intensifies, however, productive investment offers a practical way through: It serves as both a proxy for competitiveness and a gauge of productivity growth, warranting a central role in the debate.
Companies invest where they expect to be most successful, and when they feel confident that the framework conditions are in place to make an investment both possible and worthwhile. That makes investment a good measure of a country’s current competitiveness. The proof of the pudding is in the eating, as the saying goes, and proof of a country’s competitiveness is its ability to unlock domestic and attract global investment.
Investment also bolsters a country’s productivity, prosperity, and future competitiveness—as well as its resilience against geopolitical shocks—by expanding its production and innovation capacity. Previous MGI research has found, for example, that tangible investments, like infrastructure and machinery, and intangible investments, like R&D and software, together account for up to 80 percent of productivity growth. Economies with more productive capital per worker tend to be more productive because better equipment, systems, and technologies enable workers to create more value with their labor. Higher output, in turn, enables more investment to build and renew the productive capital base, creating a virtuous cycle.
Advanced economies have long benefited from this virtuous cycle of rising investment and economic growth that supported their competitiveness. Over the past two decades, however, their investment engine has stalled. The slowdown is most pronounced in Europe, Japan, and South Korea, but outside the AI-related investment boom, it is also clearly visible in the United States.
Recent geopolitical tensions have brought into sharp relief the lack of investment in industries that are now seen as strategic. This includes, for instance, energy infrastructure, semiconductor manufacturing, and, in Europe’s case, also defense industries, digital industries, and AI technology. Rising costs of capital and shifts from asset-light to asset-heavy business models add challenges, while the technological breakthroughs also create opportunities for a new investment revival.
Levers to rebuild competitiveness
In chapter 1 of this report, we analyze the shifting patterns of global investments over recent decades and what that reveals about competitiveness. In chapter 2, we turn to the microeconomics behind this shift, dissecting the line-by-line calculations underpinning virtually all real-world investment decisions for ten industries, including solar and nuclear electricity generation, chemicals and steelmaking, and manufacturing sites for batteries, semiconductors, and pharmaceuticals as well as colocation data centers, R&D projects in automotive, and biotech. Our microscope on business cases, and in particular levelized cost, draws on McKinsey’s proprietary insights about decision-making in industries around the world and helps pinpoint what drives the divergence in investment between countries. In chapter 3, we explore what would be needed to restore investment competitiveness in regions and industries that are struggling to mobilize investment today at the level they are aiming for, bringing policy and business perspectives into full coherence.
Chapter 1
Global investment trajectories have diverged
Investment is tightly linked to productivity and competitiveness. Gross investment, including in intangibles like R&D, measures how much capital an industry in a particular country or region is attracting, which is a good measure of current competitiveness. If investors are willing to bet money on the industry in that location, it means the industry is competing successfully for resources there. Net investment, which adjusts for the maintenance and depreciation of aging assets, indicates whether an economy is adding to its productive and innovative capacity, which is a good measure of the future trajectory of competitiveness (see sidebar “How we measure investment”). Even if not all investments pan out, how much is invested by firms in an industry in a particular country today is a good directional gauge of how much that country will innovate and produce in the future.
Investment has stalled in Europe, pivoted in the United States, and pulled away in China
At market exchange rates, the United States is the world’s largest economy, followed by China and the EU-27. When it comes to investment, however, China is the biggest investor by any measure, followed by the United States. China’s gross investment of $5.9 trillion a year exceeds the $5.1 trillion invested in the United States and is at a rate equal to more than 30 percent of GDP, almost twice that of the United States (Exhibit 1). The European Union, in comparison, invests only $3.1 trillion, a function of lower investment rates and lower GDP alike (see sidebar “How we measure investment”).
Exhibit 1
A horizontal bar chart comparing investment levels across nine economies: China, the United States, India, the EU-27, Germany, France, Japan, South Korea, and the United Kingdom. The chart is divided into two panels. The left panel shows gross productive investment (a proxy for current competitiveness), and the right panel shows net productive investment (a proxy for future growth and competitiveness), both in $ trillion at 2024 or the latest available data. Each bar is segmented into investment at market exchange rates (solid dark blue) and PPP-adjusted (dashed outline), with the percentage of GDP shown at the right. China leads in both measures: $5.9 trillion gross ($11.9 trillion PPP-adjusted, 31 percent of GDP) and $4.4 trillion net ($8.8 trillion PPP-adjusted, 23 percent of GDP), significantly exceeding the United States at $5.1 trillion gross (17 percent of GDP) and $1.1 trillion net (4 percent of GDP).
Accounting for local price differences would increase China’s lead further because every dollar spent there translates into more cement poured or more researchers hired than in advanced economies. Using a typical purchasing power parity (PPP) index as a proxy, its gross productive investments of $5.9 trillion would convert to a whopping $11.9 trillion. Using the same approach, the cost gap between the EU-27 and the United States narrows by half because $3.1 trillion in investment in Europe at market exchange rates increases to $4.5 trillion in PPP-adjusted terms.
The difference between the three regions is yet more pronounced in net terms. A large share of Europe’s investment is required to replace aging and obsolete assets, pushing its productive investment rate from 16 percent of GDP in gross terms to just 2 percent in net terms, or about $400 billion of additions at market exchange rates. The US gross productive investment rate translates into net investments of $1 trillion, or about 4 percent of its GDP—more than twice as much as in Europe.
Since China is an emerging market with much less need to replace and maintain infrastructure and manufacturing equipment, the country’s net productive investment rate is 23 percent of GDP, roughly six times higher than the US rate. That amounts to net investments of about $4.4 trillion at market exchange rates, or $8.8 trillion in PPP-adjusted terms. Thus, China adds between three and five times as much to its productive capital stock each year as the United States and Europe combined.
The new cartography of competitiveness
Some difference in investment rates is to be expected, since China, like other emerging economies such as India, is still building the infrastructure, manufacturing capacity, and intangible capital that underpin urbanization and productivity growth. China’s average productive capital stock per worker remains far below that of advanced economies, at roughly $80,000 compared with about $340,000 in the United States and $150,000 in Europe. Even so, the scale and persistence of China’s net investment remain exceptional. Moreover, averages are irrelevant when it comes to individual factories, which are state-of-the-art regardless of where they are built. Similarly, China’s macroeconomic catch-up journey is of little consolation to, say, Western producers of solar panels or electric cars, given the rapid rise of new competitors investing and operating at a vast scale. The rapid growth in Chinese investment thus affects everyone.
This disparity has emerged over the past three decades. In 1995, net productive investments were roughly equivalent in the three regions. Since then, having wrestled with the fallout of the global financial crisis, the Eurozone sovereign debt crisis, the COVID-19 pandemic, and different fiscal and monetary responses to these and other events, Europe has decreased its investments, the United States has stalled in the aggregate, and China has pulled away.
China: Staggering investment pace bolstered growth, but with diminishing returns
China’s investment boom has bolstered its role in the global economy and is likely to expand it further. Across industries, China constitutes just under a fifth of global gross value added (GVA)—but more than a quarter of global productive investment. Roughly 63 cents of every dollar invested in the global machinery sector ends up in China. In electronics industries such as batteries and semiconductors, China attracted 53 percent of all investment in 2024, while in basic manufacturing industries like steel, it won 41 percent (Exhibit 2). Most of these investments are funded not by the global market but by the internally generated savings pool.
The majority of investment in manufacturing sectors goes into China, and it is now attracting a sizeable share of investment in most other sectors as well.
The United States attracts more than half of all global investment in ICT and financial services, a reflection of its competitiveness in those industries.
Despite its manufacturing prowess, the EU-27 today receives investment in its manufacturing sector roughly equivalent to that in the United States. Europe still attracts a large share of investment in automotive and professional services, but was recently surpassed as the lead investor in these sectors by China in automotive and the United States in professional services.
Exhibit 2
A 100 percent stacked horizontal bar chart displaying each economy's share of global gross productive investment across 14 sectors, using 2024 average data at market exchange rates. The rows are ordered by China's investment share, from highest to lowest. Each bar is segmented by country: China (magenta), USA (dark blue), EU-27 (light blue), Japan and South Korea (cyan), India (marine green), and Rest of world (dark teal). A "Leader" column identifies the top investor per sector, and a "Total, $ trillion" column shows the sector size. China leads in Machinery (62 percent), Electronics (49 percent), Basic manufacturing (44 percent), Agriculture (35 percent), Chemicals, and Automotive. The US leads in Pharma, Other services, Professional services, ICT (53 percent), and Financial services (51 percent). The Rest of the world leads in Utilities (27 percent), Wholesale and retail trade (24 percent), and Mining.
The same 100 percent stacked horizontal bar chart as in the first panel, but with only the US segments in full color (dark blue); other economies are faded. This highlights the US's dominance in services sectors, with over half of global investment in ICT (53 percent) and Financial services (51 percent), and smaller shares in manufacturing sectors.
The same 100 percent stacked horizontal bar chart as in the first panel, but with only the EU-27 segments in full color (light blue); other economies are faded. This shows that Europe's shares are moderate across all sectors, and it does not lead any single industry. Its largest contributions are in Professional services, Wholesale and retail trade, and Other services.
However, China’s exceptional investment boom also has a downside: When capital accumulates faster than demand, low capital productivity and low returns result. Compared to the size of its economy, China now has 1.7 times the productive capital stock seen in the EU-27 or the United States, the result of more than twice as much capital deployed in infrastructure relative to GDP. This means that the value China extracts from its overall productive capital stock is 40 percent lower. This is partly because the country invested heavily in infrastructure and buildings, assets with lower direct returns in general, which has contributed to rising debt and weaker capital productivity. But China also wrestles with excess capacity in many manufacturing sectors. For example, Chinese battery makers complain that they can no longer turn a profit. In China, these diminishing returns on investment have been termed neijuan, or “involution,” and the government has adopted policies to tackle it.
Total productive investment stopped growing in China in 2025. But that headline hides big differences. Notably, China’s investment in energy and utilities grew by almost 10 percent that year. Its investment in high-tech industries, particularly those in which China is directly challenging advanced economies, such as automotive, rail, aerospace, and shipping, grew roughly 15 percent year over year.
Who is investing has shifted, too. From 2017 to 2021, much of China’s investment growth was driven by private enterprises, which expanded investment by 7 percent each year compared to a 4 percent increase for state-owned companies. This pattern reversed from 2021 to 2024, as state-owned companies expanded their investment by 9 percent per year on average compared to only a 1 percent increase among private enterprises. The increasing role of state-owned companies indicates that it may be becoming harder for private companies to find investment cases that add up.
United States: Investment shifted into higher-return asset classes, notably software and the AI value chain
The 2008 financial crisis had a different impact on the United States and other advanced economies than on China and other emerging economies. US net investment, which peaked at about 6 percent in 2000, took a big hit in 2008 and has hovered consistently between 3 and 4 percent since 2010. This decrease is less pronounced than in other advanced economies but has nevertheless dampened growth.
However, the United States today invests much more in intangible assets, such as software and R&D, than it did before the crisis. These assets are thought to produce higher shareholder returns and socioeconomic benefits. Indeed, the US economy has benefited from much stronger productivity growth than most other advanced economies over the past two decades.
Most recently, the race to build AI data centers has attracted a tsunami of investment globally, with the United States at the epicenter. Seven AI-related companies increased their combined capital expenditures and R&D investments 50-fold over two decades, from $15 billion in 2005 to close to $750 billion in 2025. By the end of 2026, total investment among these hyperscalers could approach an eye-catching $1 trillion. The AI boom is sometimes likened to the flood of railroad investments in the 19th century, although at a little less than 2 percent of GDP in 2025, technology-related investment falls well below the peak years of that boom, when investment in railroads exceeded 10 percent of GDP.
A school of thought in Silicon Valley and elsewhere contends that AI and robotics will trigger a broad investment revival by reducing costs across the economy, making traditional manufacturing and services competitive again. This view implies that the gap in broad-based capital investment between advanced economies and China is largely irrelevant because AI computing infrastructure is a uniquely transformative input.
So far, however, the boom in AI investment has not led to a broader investment revival (see sidebar “United States: Investments beyond tech show a mixed picture”). In the United States, investments in data center structures have increased 200 percent in the three years following the launch of ChatGPT at the end of 2022, and broader technology investment increased by 50 percent over the same period. Yet total productive investment as a percentage of GDP in the United States remained flat, because many investments unrelated to technology, software, and R&D declined relative to GDP. Recent MGI research on US manufacturing found that addressing the risks arising from the most critical US import dependencies could require on the order of $2 trillion in total additional manufacturing investment—a figure equivalent to about 6 percent of US GDP, putting the current flat trajectory in stark relief.
These patterns could, of course, change in the future, with additional investments in areas such as energy infrastructure to support AI and semiconductor fabrication plants, or “fabs.” If AI investment leads to the hoped-for productivity gains and acceleration of innovation cycles, it could lead to a broader investment renaissance in the United States and globally.
Other advanced economies: Investment in Japan and many European countries is consistent with GDP growth below 1 percent
Investment in other advanced economies was even more affected by the 2008 financial crisis and the policy responses to it than US investment was. Across five advanced economy regions—the EU-27 and the United Kingdom, Japan and South Korea, and the United States—net investment is now almost $900 billion less annually than it would have been had those regions invested in line with their previous averages.
The 2008 global financial crisis and the 2009-10 eurozone debt crisis affected many countries in the EU-27 strongly. The region’s net productive investment rate declined from just below 4 percent of GDP in the years running up to 2008 to just over 2 percent of GDP in 2024. This 40 percent drop was more material than in the United States and further widened the region’s significant investment gap.
This aggregate figure masks large differences between European countries. In Europe’s largest economy, Germany, where policy responses to recent crises focused on debt consolidation (Schuldenbremse), net productive investment dropped from about 2 percent of GDP before the financial crisis to just 0.2 percent in 2024. Growth in the capital stock available per worker has virtually ground to a halt, a brake on economic growth. The countries most exposed to the eurozone debt crisis in 2009-10 have much higher net investment rates than Germany today: at more than 2 percent in France, Italy, and Spain, and more than 4 percent in Greece and Portugal.26 Countries in Central, Eastern, and Northern Europe have the highest investment pulse on the continent: Denmark and Sweden have net productive investment rates of about 5 to 6 percent of GDP, and the figures for Poland and Romania range from 6 to more than 8 percent.
Perhaps surprisingly, net investment in the United Kingdom, noted for its low investment pulse, has declined less than in other European countries. This is in part because its productive capital stock, with a value equivalent to 0.8 times GDP, is small compared to other advanced economies, where the capital stock is worth 1.0 to 1.1 times GDP—there is less capital consumption to subtract from gross investments.
Previous MGI research identified Europe’s low investment rate as the main reason behind its lagging growth, a diagnosis shared by the European Commission and the influential report led by Mario Draghi, former president of the European Central Bank and former prime minister of Italy. To close the investment gap identified in this report and MGI’s research on European investments, Europe would need to increase its investments, largely private, by €750 billion to €800 billion per year, or approximately 4.5 percentage points of GDP—a bold ambition that it is currently far from achieving.
Advanced Asian economies also saw a drop, albeit from higher levels. In Japan, the net investment rate declined by more than 70 percent to about 1.5 percent of GDP in 2024; in South Korea, it dropped by about half, to just under 4 percent of GDP.
Economies tend to maintain relatively stable ratios of productive capital stock to GDP over long periods, so an economy’s growth rate largely tracks net investment or growth in capital stock. This relationship runs both ways: Weaker growth reduces incentives to invest, while lower investment slows the rate of capital deepening and productivity growth, leading to lower economic growth going forward. By that rough yardstick, the United States is investing in line with GDP growth of about 2 percent, while the EU-27 is building productive capacity consistent with just 1 percent GDP growth—around 0.5 percent in Germany, for example—well below the region’s stated objectives. Japan’s current rate of investment is consistent with no GDP growth at all.
The investment divergence foreshadows a remapping of the global economy
Investment is a leading indicator for changes in production footprints, and investment profiles offer another way to assess comparative advantage and growth trajectories beyond traditional trade metrics. Comparing investment with an industry’s current value added across countries shows which economies are building future capacity fastest relative to the size of their existing base. Because investment precedes production, this is also a forward-looking indicator. Countries that consistently invest more than their current production share tend to gain output share over time. This is illustrated by China’s above-average investment intensity in manufacturing sectors over past two decades, which was followed by sizable gains in its share of global output, and by the equivalent for US investment in the information and communications technology (ICT) industry.
Comparing relative investment intensities against current levels of specialization by country and industry provides a good snapshot of current and future trends in comparative advantage and production footprints (Exhibit 3).
China today is big in all manufacturing sectors, which account for a bigger share of its economy than in the global economy overall—and still is attracting investment at a higher than average rate in each sector. Although it hasn’t traditionally attracted much investment in professional services, that is changing. Today, it invests in services such as legal, R&D, and advertising at a rate 1.5 times the global average.
Investment in the United States continues to flow into ICT and financial services at 1.2 times to 1.5 times the industry rate respectively, building its lead. Investment has also ramped up in automotive, chemicals, and pharmaceuticals, but not in other manufacturing sectors.
Europe has long been a manufacturing powerhouse and continues to attract investment in line with the industry average in pharmaceuticals and automotive. However, investment in other manufacturing sectors ranges between half and three quarter of the global average rate, which puts it at risk of losing its share of output in those sectors.
By investing at this pace, China is likely to increase its lead.
Exhibit 10
A bubble chart comparing investment intensity (y-axis) versus industry weight (x-axis), both indexed to a global average of 1.0, for manufacturing and services sectors. The bubble size represents total investment. The chart is divided into four quadrants, each labeled with a strategic position: "Building strengths," "Extending lead," "Out of focus," and "Lead at risk." In the first panel, large magenta bubbles for Basic manufacturing, Machinery, and Electronics cluster in the "Extending lead" quadrant, indicating that China invests heavily in manufacturing sectors where it already specializes. Services sectors are small and mostly "Out of focus."
The second panel of the bubble chart focuses on the United States. Large dark blue bubbles for Financial services and ICT are in the services "Extending lead" quadrant, showing that the US invests heavily in these sectors. Manufacturing sectors fall below average investment intensity.
The third panel of the bubble chart focuses on Europe. Cyan bubbles show no manufacturing sector firmly in the "Extending lead" quadrant. In services, Professional services lead, while Financial services and ICT sit near the global average.
The last panel of the bubble chart overlays all three regions with shaded clusters. China (magenta) dominates the upper-right manufacturing quadrant, the United States (dark blue) dominates the upper-right services quadrant, and Europe (cyan) is distributed more evenly without a clear dominant quadrant.
A country’s investment intensity is made up of two parts: its share in an industry’s global value added and its share in global investment. When compared, they offer a clear picture of shifting production footprints. China is investing to extend its lead in sectors in which it is currently specialized, namely almost all manufacturing subsectors (increasingly including high-tech industries), an explicit goal of its Made in China 2025 strategy. Additionally, China is investing to grow in other industries such as utilities, pharmaceuticals, and professional services. By contrast, it is underinvesting in financial services and—surprisingly given its emergence as the main AI rival to the United States—in ICT. This underinvestment in ICT speaks to either phenomenal capital efficiency in its technology development approach or mismatches in accounting treatments and modeled approximations provided by economic research institutions in the absence of reliable national sectoral statistics.
The United States is extending its lead in ICT and financial services as well as investing to expand its footprint in automotive, chemicals, and pharmaceuticals. Europe, with an investment intensity that lags behind its current share of global production, risks losing its lead in many historically strongholds, including automotive, pharmaceuticals, and machinery. Measured by investment intensity, the region is investing in a growing footprint in agriculture and professional and financial services.
The shifting investment patterns around the world are changing the global cartography of growth and competitiveness. Layer on global geopolitical shifts, and the need to establish a new balance comes into focus. To understand why investments are being made so readily in some countries and industries and less readily in others, we take a deep dive in the next chapter into the line-by-line economics of ten business projects spanning the industries discussed in this chapter, including utilities (nuclear and solar power generation), basic manufacturing (EAF steel), chemicals (polyethylene), automotive (EV platform development), electronics (batteries and advanced semiconductors), pharmaceuticals and life sciences (biotech R&D and pharma manufacturing), and ICT (colocation data centers).
Hoteliers maximize value of properties through strategic repositionings
Food-and-beverage, spa outlets common targets for revenue growth
Hotel renovations, including preventative maintenance, have been a strategy used by hoteliers to increase rates and occupancy. (Getty Images/iStockphoto)
https://www.costar.com/article/2098991376/hoteliers-maximize-value-of-properties-through-strategic-repositionings?
NEW YORK — Hoteliers are always looking for ways to push revenues and win in the margins. Strategic renovations and artificial intelligence are a few of the sources for extracting incremental value.
Panelists spoke about the strategies they've used during the "Driving alpha in uncertain markets: Maximizing hospitality value" session at the recent 2026 NYU International Hospitality Investment Forum.
Deanne Brand, senior vice president of strategy, enterprise analytics, risk, and treasurer at Host Hotels & Resorts, said the real estate investment trust invested $2 billion in return on investment back into its assets from 2019 to 2025.
"We strongly believe in transformational renovations," such as repositioning spas or food-and-beverage outlets, she said. "The types of resorts and hotels that we own, we want to leverage and really extract value from that fluid consumer."
Of the 21 transformational renovations that have stabilized in Host's portfolio, the hotels have gained 9 points of revenue per available room share index on average, which Brand said is "meaningful growth."
When Host is planning a renovation, the company underwrites and conducts a case study to determine the additional rates it can drive through a repositioning, she said. It also compares its pricing and product to competitors in the market to ensure the changes will stand out and drive business.
Andrea Grigg, senior managing director and global head of hotel asset management at CBRE, said there has to be a certain level of intention behind every hotel renovation. In addition to delivering a new experience to the guests, it also has to drive efficiencies.
CBRE recently led the renovations of two full-service restaurants into bars with live components at two luxury hotels. Grigg said the results have been that food costs are down while profitability is up. One of the restaurants went from losing significant money to breaking even.
"When you look at ROI, you do your homework, and the dollars that you're going to invest have to be driven by very thoughtful exercises of ROI that go beyond just increasing prices or increasing captures," she said.
Lana Yoshii, senior director of investments at Sonesta International Hotels, said the company similarly renovated an on-property restaurant, reducing the seating from 90 to 40 and converting the extra space into retail. The renovation resulted in an average daily rate increase of 10% along with a jump in occupancy.
The renovation "wasn't about the food-and-beverage profit on the front end, it's about, 'Hey, we have a much better overall hotel,'" Yoshii said.
Joseph Bojanowski, president of PM Hotel Group, said coming into the year, its focus was on value enhancement for the guest. This includes preventative maintenance to ensure each room works properly.
"That's a great guest experience that's also really efficient in the environment where electricity and other utility costs are going up significantly. And then charging for that value enhancement when you get it [through] ADR," he said.
In keeping the rooms in good shape from a functionality standpoint, guests will be more likely to contribute ancillary revenues by sticking around the property for a drink or considering a late checkout, Bojanowski said.
"Our objective there being to drive GOP margins primarily through revenue — ADR-enhanced third revenues — to translate that into EBITDA per available room, cash flow, and then ultimately value enhancement there, whether it's a refi, exit or whatever it might be," he said.
Artificial intelligence
Artificial intelligence will play a role in driving additional revenues, the panelists said.
For Host to invest in any technology, not just AI, it has to fit at least one of three components: improve operational efficiencies, drive incremental revenue, or enhance the guest and employee experience. It's important to have test properties that can run trials with new technology to validate the proof of concept before rolling out a widespread adoption, given the investment dollars at play, Brand said.
The shift from search engine optimization to generate operative optimization has already begun, Bojanowski said. PM Hotel Group updated its photos on its website and shifted to bullet-point-style information to increase the chances of its properties showing up in an AI search.
AI is changing how travelers are booking, and CBRE is doing tests on investments in AI platforms to increase recognition of its hotels, Grigg said.
"We are being very proactive on that front, really testing and investing in how we can get that visibility up. It's a very competitive market out there," she said.
Hospitality experts confront 'cognitive offloading,' inauthentic messaging and other negative effects of AI
How new technology is affecting hotels
Hoteliers should consider some of the negative impacts the rise of AI has on their guests and the hospitality industry as a whole. (Getty Images)
https://www.costar.com/article/528659110/hospitality-experts-confront-cognitive-offloading-inauthentic-messaging-and-other-negative-effects-of-ai?
SAN ANTONIO — Most conversations about artificial intelligence use in the hospitality industry skew positive, lauding the technology's immense ability to improve operations, the guest experience and more. However, few look at the cost of this technological evolution.
The scaling of AI infrastructure and its rise in use have already made positive and negative impacts on both the hospitality industry and society as a whole. A panel at Hospitality Financial and Technology Professionals' annual HITEC event discussed the specific negative impacts and qualified each, discussing where and how the damage is being done.
Having a balance in the conversations about AI is key, said Lyle Worthington, European Union operations adviser for HFTP. As great as AI can be for business, the so-called "dark side" should be recognized, he added.
"It is incredibly important that we understand the repercussions of our actions," Worthington said. "It's incredibly important that we understand both sides of every argument, because that's how we think critically, and that's how we solve problems — only through education. We have educators and discussions so we can steer this shift towards abundance."
The environmental effect
Among the most discussed repercussions of AI's advancement is its effect on the environment. The technology requires a tremendous amount of energy use, and the data centers being built around the world require access to water for cooling its hardware.
"By 2030, we're estimating the data centers running AI are going to use more energy than Russia, and really only India, United States and China consume more energy than these data services use," Worthington said. "We can see the trajectory that this is on, and we can see the impact this is potentially going to have."
Hotels have rolled out sustainability policies over the years, centered around increasing the use of reusable or compostable materials and providing information to guests on reusing towels. As hoteliers implement more AI-powered processes, they owe the guests they serve some accountability and disclosure if they are claiming to be an environmentally conscious business.
"How are you, as hoteliers, going to define what is sustainable in an era of AI in these data centers [using] electricity, power and water like crazy? How are you going to disclose that?" asked Carl Winston, founding director of San Diego State University's Payne School. "Consumers are going to demand it."
Deepfakes, hacking and other threats
As AI advances, distinguishing which images and videos are real and which are AI-generated is becoming increasingly harder, said Rik van Leeuwen, vice president of customer operations for Ireckonu, a Dutch IT service provider for the hospitality industry.
"The question if something is real, yes or no, is getting diluted, and that's the risk that we are facing here," he said.
Burcin Turkkan, a doctoral researcher at the University of Central Florida's Rosen College of Hospitality Management, said that AI-generated content has had a negative effect on the hospitality hiring process. She pointed to fake or misleading resumes generated by AI that contribute to questionable hires within an industry that already has high turnover.
"This is a reality, and that's why I know from the human resources perspective, now they're looking into blockchain system to govern all these documentation and authentication, because it's that serious," Turkkan said.
While some look to the governments to put proper practices in place to prevent the rise of deepfakes and other AI-generated threats, every country has a different approach, which can make it hard for hoteliers to keep up.
"Being a global [company], or even if you're working in two different cultures, you've got two different sets of rules, and you've got to keep up," Winston said, adding that ironically hoteliers are "probably going to use AI for [navigating] that."
Authenticity and AI slop
With generative AI's rapid rise in popularity and with only a few tech companies providing the technology, this poses a problem of individuality and authenticity, Turkkan said. The result is homogeneity; if everyone is using the same AI, everyone is going to sound the same. This is particularly bad for hoteliers who must distinguish their hotels from their competition.
"For your brand, you probably worked for years to create a voice, 'you stay with us, this is what you're going to get,'" Winston said. "That AI leverage that you're using in a lot of aspects of your business now is not as authentic and may not reflect your voice."
How a lot of large language models are programmed is mostly a black box, so users should proceed with caution when it comes to relying on these tools, Worthington said.
In some cases, "the programmers of these systems also don't exactly know why they're answering the way that they are," Worthington said.
The downfall of critical thinking
With the rise of any technology, it replaces the process that came before. Winston gave the example of the calculator. Teachers used to be outraged at the suggestion of students being able to use a calculator, and now everyone walks around with one in their pocket. And no one is worse off for having access to that technology.
But the process that came before AI, which the technology replaces, is critical thinking, and some studies point to a decline in critical thinking skills in younger generations relying on AI.
"The cognitive offloading — it does have a negative relational impact on cognitive thinking," Turkkan said.
While it's too soon to tell the impact of cognitive offloading in younger individuals, it is a potential threat to the future workforce, especially if access to AI changes and people can't use it as freely as they can now, Worthington said.
"The people who have grown up in an era where you learn your critical skills, your critical thinking skills, at a young enough age are impacted a whole lot less by this," he said. "But for the kids ... you see that their critical thinking scores are significantly lower than they should be, and their dependence on AI is significantly higher than it should be. Maybe that's OK, we can have two sides to this issue, but what happens when that AI is not available?"
Changes to the workforce
AI replacing jobs or significantly changing the workforce has always been debated, but what does that mean for the hospitality industry, which has a persistent hiring problem? When asked what will happen to people who lose their jobs because of AI, Turkkan suggested they can transition into hospitality because there's still a labor shortage.
However, that's not exactly a perfect solution since the jobs hotels hire for typically have a much lower salary than the mid-level corporate jobs AI is expected to affect. Plus, this change is happening at a faster pace than the workforce can keep up with.
"How are we able to catch all these people that will lose their jobs so rapidly [while] industries are not able to transition that fast? Because let's be honest, people aren't really good for change in general," van Leeuwen said.
Winston, who added he still sees his students able to enter the workforce when they graduate, said the human element is still very much in demand in hospitality.
"I just think the jobs are going to shift, and there's going to be plenty of jobs for those who learn the tools, because humans want to interact with humans sometimes," he said.
Turkkan agreed, especially when it comes to hotel jobs.
"In hospitality, we're a people business, so you know the human component will remain," she said. "We are human, and we would like to interact with humans, and in the hospitality, I think at least this industry will be the last one to have to see the jobs declining."
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