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Oct 2020

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Mountain Partners

Cornelius Boersch & Thomas Middelhoff discuss why Germany has missed out on digitalisation & what can be done to turn things around

In his last two books, the former star manager Thomas Middelhoff, 67, addressed his personal fate and his time in prison. In his third, he takes on the role of an economic expert: Together with the tech investor Cornelius Boersch, 52, Middelhoff wrote "Zukunft verpasst? Warum Deutschland die Digitalisierung verschlafen hat. Und wie uns die Krise hilft, den Anschluss doch noch zu schaffen." (Adeo-Verlag, 224 pages, 24 euros). Middelhoff and Boersch are among the digital pioneers in Germany, one as head of the Bertelsmann media group (1998 to 2002), the other as founder of the listed digital company ACG and as the head of the investment company Mountain Partners, which has holdings in more than 350 tech companies and start-ups.

WELT: Mr. Boersch, Mr. Middelhoff, soon your jointly written book "Zukunft verpasst?” is coming out. It is a ruthless reckoning with Germany's managers and politicians, who supposedly overslept digitisation with serious consequences for the future competitiveness of our economy. Would you invest in shares of a Deutschland AG today?

CORNELIUS BOERSCH: (laughs) Hard to say. Digitisation and interconnectedness play an increasingly important role in the competitiveness of our economy. And unfortunately we are lagging behind. Compared to the USA, China or some other countries, we have a lost decade (2000 to 2010) behind us. Yet our starting point was not even bad.

 Are you alluding to the Neuer Markt, which in the early 2000s became a playground for tricksters and even cheats?

 BOERSCH: ... which in the 1990s however also produced a number of good and modern business models. I myself was active there with ACG, and Thomas was one of the drivers of digitisation among  the established companies. At that time Bertelsmann had in the digital sector among others AOL, Bertelsmann Online, BOL for short, Be-Ecommerce Group and the German search engine Lycos. Through the sale of the stake in AOL alone, Thomas increased company equity by sixfold.

 Older readers, especially those who lost money, remember when the bubble burst on the stock market.

THOMAS MIDDELHOFF: There were a lot of undesirable developments on the Neuer Markt back then. Unfortunately, when trying to correct them, they did not operate with the necessary sense of proportion. They resorted to clear-cutting or wiping out everything that was suspected to be related to digitalisation and technology.

For example?

MIDDELHOFF: The culture of change that the online euphoria had created was tarnished. Several young talents were taken out of the picture simply because they had been active in the digital field. For many media companies, which live predominantly from human capital, this was a huge loss of know-how.

 That may be true, but many companies on the Neuer Markt were little more than a laughing stock.

 MIDDELHOFF: Of course corrections had to be made. But we Germans always like to do things in a particularly radical way and “throw the baby out with the bath water”.

Honestly, which companies from the era of the Neuer Markt are we missing today?

BOERSCH: This stock market segment produced some very outstanding companies. Just think of United Internet, today one of our few digital showpiece companies. But the worst thing about the failure of the Neuer Markt was that it has been extremely difficult for founders to obtain financing since then.

MIDDELHOFF: Many talented people who had to leave Bertelsmann back then went to the U.S. West Coast. What is worse, however, is that in the early 2000s there was a standstill here in this country, an adherence to old structures. In other countries, there was a much more dynamic development as far as digitisation is concerned.

The German economy has not exactly done badly in recent years.

BOERSCH: But if you look at the list of the 100 most valuable companies, you have to look for a long time before you finally find a German company, SAP. In the 1990s, things were different. Today, a single U.S. company, whether it’s Apple, Amazon or Microsoft, is worth more than all 30 German Dax companies combined. You can hardly find clearer evidence that something went wrong.

Do you think that German companies can still catch up?

MIDDELHOFF: First of all, we have to take a sober look at where things are now. The driving forces on which Germany's supposed strength is based are technical developments dating back to the last century. Compared to companies from Silicon Valley, a dramatic gap has emerged. If Tesla were to increase its capital by ten per cent, this would bring in 28 billion dollars. For Daimler, only an additional four billion dollars would be the case if it were to make a ten per cent capital increase. The starting point for investments is therefore completely different.

BOERSCH: In other sectors the situation does not look any better. Many years ago, I visited Amazon in Silicon Valley, among others, with the owners of Metro AG. At that time, we were considering to invest in the company. The result of the study trip was that we wanted to further observe the firm development for the time being. We could invest later, if the company was really successful... Back then, Amazon was worth much less on the stock exchange than the Metro, but today Amazon is worth about 300 times as much.

MIDDELHOFF: These are no longer hopeful values, but hard figures from the capital market. Today, for example, Tesla is worth more than the entire German automotive industry, even though Tesla makes only a fraction of the turnover. This means that investors trust the Tesla management to be more sustainable than the managers of all German car manufacturers.

 BOERSCH: In Germany we still have a problem with recognizing where we stand. The Corona crisis is a good example of this. The state has mobilised huge budgets, but wherein are they invested? In TUI, Adidas or other broken business models. I don't know of a single hopeful start-up that has benefited from the state money! People like to talk about modernising the economy, but it is too rarely practised.

 Perhaps we are too well off for more radical reforms.

MIDDELHOFF: How our economy copes with the Corona crisis, how many jobs are lost, that remains to be seen. Much more serious is the structural change triggered by digitisation, because this will last. And it will be accelerated by consumer behaviour.

BOERSCH: Think of online trade or the automotive industry, which is facing enormous challenges due to the change to e-mobility. So far, manufacturers have been selling their cars via expensive dealer networks. In the future, people will buy cars in a completely different way. You can order a Tesla with a few clicks on your computer, Tesla no longer needs dealers. Others will follow suit.

In your book you play with the idea that Tesla and Google will jointly take over Daimler.

BOERSCH: I myself drive a Mercedes, it’s a great brand. But it stands for the past - perhaps wrongly so. But more importantly, Tesla and Google could easily afford Daimler. I dare to predict that we will see a real sell-out of German showpiece companies in the next five to ten years.

 Interest does not seem to be that great, otherwise the shares of Daimler and others would be more expensive.

MIDDELHOFF: Without this fantasy, share prices might be even lower. During the research for this book we spoke to many business leaders in America, China and some other countries. The interest in German technology is still great. Some are thinking about which company fits into their portfolio.

The German economy is not doing quite as badly as you are suggesting. After all, it is the world champion when it comes to exports.

MIDDELHOFF: Now only runner-up, China has already overtaken Germany. And our export balance shows structural weaknesses. In the digital sector, for example, we have a trade deficit of 36 billion euros. That should actually be alarming.

How did you arrive at 36 billion?

 BOERSCH: Klaus Hommels, one of Germany's most successful tech investors, and the DIW (German Institute for Economic Research) determined that. Germany successfully exports goods that were developed 20 or 30 years ago. However, we are doing poorly in the case of future-oriented offers, for which a kind of "future dividend" is paid on the stock exchange. This gap has become ever wider in stock market valuations. A while ago, Daimler and Tesla were roughly on a par. Today, with 15 percent of Daimler's turnover, Tesla is worth eight times as much as the Stuttgart company.

However, in the field of Industry 4.0, digitally connected production, Made in Germany is internationally regarded as leading.

MIDDELHOFF: But in the business with end customers (B2C) we lost the digital strategy game to the Americans and the Chinese. In business relations between companies (B2B) we do indeed still see opportunities. This should actually be the core of a new, modern industrial policy. But I fear that the course is being set in the wrong direction.

 In what way?

 MIDDELHOFF: Some in Berlin seem to dream that we would have to create global champions to compete with Google or Facebook. I think this is the wrong path. We have enough champions in the middle class. But they must also be enabled to maintain their leadership positions. But to do so, they need an efficient digital infrastructure and highly qualified staff. Instead, billions are flowing into badly managed companies in old industries. Sometimes one gets the impression that it is conservationists, not market economists, who decide in this respect.

 Is the German economy on the way to becoming an industrial museum?

MIDDELHOFF: To put it bluntly: Yes, that is the case.

 Would you rather see TUI, Adidas or Thyssenkrupp go bankrupt?

 MIDDELHOFF: Adidas produces sportswear, and the majority of the company's shares are in foreign hands. What reason does the German taxpayer have to invest three billion euros to secure advertising contracts for footballers who earn too much money anyway? Nor do I see any particular strategic potential for our economy in products like the Adilettes. The financial support for a number of other companies is no better. We are spending thousands of billions of euros to preserve old structures. The next generations, who have to work to pay back the national debt, will thank us ... It would have made much more sense to support the gastronomy sector or start-ups, especially as many more jobs depend on them.

 You obviously do not trust the government under Angela Merkel to take a progressive course?

BOERSCH: I am a big Merkel fan, and the world envies us for her. She has achieved a lot. But when it comes to the future viability of the German economy, she has unfortunately failed completely. Things will have to change. But we have only gone ten percent of the way in regard to the digital revolution. That is why it is still worthwhile to start a race to catch up. Artificial intelligence, virtual reality, big data and many other digitalisation trends are still in their infancy. Hopefully we can still catch up there. And I am optimistic for German SMEs anyway.

 MIDDELHOFF: If German industry wants to catch up with the international leaders, it must also become more open to lateral thinkers and entrepreneurs like Elon Musk. Elon Musk has his entrepreneurial vision, and he is pursuing it, as you can see from the construction of the Tesla factory in Grünheide. In this country, however, such individuals still have a hard time. Do you think Elon Musk could have had a career in a major German corporation?

A manager who smokes pot wouldn’t have the best shot in Germany.

MIDDELHOFF: It is above all a question of creating a genuine performance culture, of making disruption an opportunity instead of elevating continuity to the highest leadership principle, which amounts to preserving old structures. This is why we also propose in our book that, as a matter of principle, a CEO should no longer be chairman of the supervisory board of the same company.

So far, this is still the most usual scenario.

BOERSCH: In Germany, business and politics happen at very short notice. They think until the next contract extension or the next election. German economic and industrial policy urgently needs to modernise. If the state is spending billions on outdated structures and old industries, this is a mistake. Lufthansa alone received nine billion from the state. This year, a total of just two billion euros will flow into the entire German start-up sector. That is certainly not a healthy balance.

 Jeff Bezos or Elon Musk have not let themselves be pampered with state money. At the end of the day, a good business will pave its own way.

BOERSCH: Sure, we have impressive founders here, too. But good ideas and great will are not enough. We also have to provide our founders with a competitive environment, for example by improving access to venture capital. This German generation unfortunately would rather invest in concrete than in clever minds.

 With the exception of the USA and China, practically all other countries are in the same situation as Germany, and in some cases they are doing much worse.

MIDDELHOFF: We evaluated all available studies and statistics for the book. Scandinavia and the Baltic States are much further ahead than us in digitising their economies. In a European comparison, Germany ranks 12th to 14th on average, depending on the study, and it looks even more dramatic globally.

Germans can’t even seem to get a  reliable anti-corona mobile application off the ground.

BOERSCH: That is another example of the wrong path we are taking. Several start-ups had a ready-made solution. But then the politicians decided that SAP and Deutsche Telekom should take over. Because if something goes wrong there, the ministers in charge will not be fired in case things go south, but they will be if a startup is the cause.

With such learning curves we will not be able to catch up with the digital frontrunners. What does your reform plan look like?

MIDDELHOFF: The decision-makers in business and politics must act now. To this end, the book proposes a ten-point programme to safeguard our digital future. A development fund endowed with 100 billion euros from the solidarity surcharge is to be financed. In addition, however, forces would also have to be pooled. We therefore advocate a Ministry for Digital, Transport, Networks, Science, Education, Research and Technology. We must now prove that we are capable of reform and have an open discussion in society about what we want to do for a living in the future.

 In the final chapter of your book you take a leap forward in time to 2041, when you travel together on a modern high-speed train through Europe before being served French red wine owned by a Chinese investor in a hotel. It remains unclear, however, whether the German economy will manage to turn things around.

MIDDELHOFF: We deliberately leave that open. Of course we hope that we will manage the turn. But I am afraid it will be difficult. We do make a hint in the book though. The train we are travelling on is called the "Polestar Lifter"...

BOERSCH: ... and Polestar is a Chinese brand, not an ICE from Siemens.

You can find the article at this address

https://www.exlibris.ch/de/buecher-buch/deutschsprachige-buecher/thomas-middelhoff/zukunft-verpasst/id/9783863342845