Oct 2020

Written by

Mountain Partners

"Missed the Future?": "We will soon see the German economy being on sale"

Investor Cornelius Boersch and ex-manager Thomas Middelhoff talk about mistakes in digitalization - and present reform proposals.

Hamburg - This Tuesday, two German internet pioneers present a radical book: "Future Missed?” Investor Cornelius Boersch, 52, and ex-manager Thomas Middelhoff, 67, use the book to address failures in regard to digitalization.

Boersch was already involved in the Neuer Markt and is now involved in around 200 start-ups. Middelhoff once brought AOL to Europe as head of Bertelsmann and is currently in insolvency proceedings after trial and imprisonment.

German politics, but also the corporations, come off badly in their book. The authors' verdict is that they are too faint-hearted, too conservative, too technology-averse. During the interview in Hamburg, they go into detail about their "Ten-Point Plan", which is designed to lead out of said internet crisis.

Boersch is even financing the international sale of the book, which will be published in English, French, Spanish, Chinese, Japanese and Arabic. Celebrities will write a foreword for each of the country editions. In the USA, for example, AOL founder Steve Case and in France the former head of Vivendi, Jean-Marie Messier.

Mr Boersch, Mr Middelhoff, in your book on digitalization you describe a conversation with the number two in the Huawei Group. He told you that China is now fighting with the US for world leadership and that Europe no longer has a role to play. Do you think so too?

Thomas Middelhoff: There is a high risk that Germany and Europe will only play a minor role. On the one hand, China still has labour cost advantages, but on the other hand, we have lost far too much time in questions of future technologies. The statistics are clear. Special efforts are needed to correct this picture.

Cornelius Boersch: As an entrepreneur, I have been active in China since 1995 and built my first factory there in 1996. For some years now, the Chinese have not really taken us seriously. When delegations travel, it has become difficult to get high-profile appointments, even if the Vice-Chancellor is travelling with them. In China, people are very much oriented towards the USA. We have been warned: Europeans should not decide too soon on which side to take.

Did we underestimate China's innovative power?

Boersch: The development was rapid. When I gave lectures on the Internet in China in the early 2000s, thousands attended because start-ups and the Internet were completely new in the country. Today no one would come because China's learning curve was extremely steep. Back then I looked at Tencent and thought: 60 million euro? Far too expensive for a Chinese website.

Middelhoff: On our previous trips we felt great respect for German technology, punctuality and quality. Today we are asked about unpunctual trains and the breakdowns at Berlin's major airport. Companies like Huawei themselves know how superior they are in 5G mobile technology. In the past, Siemens built the communications network in China, but today we urgently need Huawei to help us.

How could it happen that Germany fell so far behind in digitalization?

Boersch: I am partly to blame for the whole development, since I was an entrepreneur on the Neuer Markt myself. With the collapse of this young stock exchange in the early 2000s, many people no longer dared to invest in start-ups and new technologies. In regard to the Internet, we sweeped things up with German thoroughness. The big developments - see Google, see Facebook - took place between 2000 and 2010, but the effects were not seen until years later. Closer to home, however, the CEO was suddenly replaced by the CFO. Visions were prohibited. Many corporate leaders repeatedly emphasised to me: "I knew that the Internet was only a short interlude.” That is why we call this period in our book the lost decade.

Middelhoff: Industrial patriarchs struck back after 2000 against entrepreneurs of the New Economy, of which they had never thought anything.

In fact, stock market prices were far removed from reality. Perhaps that is the case today with such highly endowed tech stocks.

Boersch: Sure, when my small company was worth almost as much as Porsche back then, I knew something was wrong. But nobody could imagine that the Neuer Markt would be corrected by 98 percent. It was an extreme exaggeration both upwards - and downwards. Today we urgently need a technology stock exchange in Germany or Europe.

Middelhoff: When you ask your question, you are resonating with a typical German sentiment: "all hot air". At board meetings at Bertelsmann 20 years ago, Amazon was seen as a totally overvalued company that would soon be done. But the high stock market price had only anticipated future developments. Amazon has exceeded all expectations. It was like a game of monopoly, in which one person occupied all the important fields. In Germany, even an Amazon would have suffered in 2000. Everything was wiped out. Unfortunately, Bertelsmann and the German economy lost what had always been the top priority: the relationship with the end customer. Now we are dependent on third parties.

Boersch: The Internet tends to leave market dominance to the first or second mover. But this means that the other players in the Monopoly game cannot win. So we are left with only the train stations. The concentration will increase. We should have given the Neuer Markt a few more years. Back then we also used it to reduce venture capital. But that is the driver of the New World. Of the world's top 20 companies, 17 are financed by venture capital. The disregard for the Internet after 2000 is a collective failure of the German economy.

Middelhoff: Why can a South African media company like Naspers build up a portfolio of attractive Internet investments - with around 30 percent of Tencent - and a German group cannot? We always want to control everything and leave too little freedom.

You spoke of a "lost decade". But Chancellor Gerhard Schröder initially thought a lot of start-ups.

Middelhoff: Schröder corrected his opinion, partly out of concern for political survival. Today we are facing shambles. How is it possible that Google makes more profit today than Bertelsmann's turnover? And then they sit in Gütersloh and want to shape the digital future. But how?

Boersch: The danger I currently see is the refinancing power of German corporations. A ten-percent capital increase would mean four or five billion euros for Daimler, but 28 billion for Tesla. If a single US company like Amazon or Apple is worth more than all 30 Dax companies combined, we will soon see the the German economy being on sale.

Your scenario is that Google buys Daimler.

Middelhoff: That is an example to shake people up. Someone will make that acquisition - one of the US giants or Chinese investors who are already shareholders there. The management in Stuttgart was celebrated for having made a slice and a half of a stake in Tesla into cash. But the nine percent would be worth many billions more today.

Is it not more likely that Google or Apple, for example, will bid for Deutsche Bank to offer digital financial services?

Boersch: I would still give my money to Deutsche Bank today - simply because of the idea that this institution would always be saved in case of a crisis. And it also helps our location if we have our own big bank. But if Google or Apple were to arrive fully automated with banking services on mobile phones, this would be the last nail in the coffin of Deutsche Bank. Twenty years ago I once gave a lecture at this bank - and said that in two decades it would no longer exist in this form. Then I got into trouble and was no longer allowed to be their advertising figurehead. I was only half wrong with my prognosis: what still exists today is pretty dilapidated.

Do you see a fundamental management problem in the country?

Boersch: Our main problem is short-term thinking. On average, a CEO has hardly been in office for four years. All he is interested in is his personal bonus and contract renewals - and not so much what the market will look like in ten years. That is why he has no digital strategy. Risk is punished. The main thing is not to make mistakes. And the people on the management boards, but especially on the supervisory boards, are simply too old. In meetings they always say: "conservative" business - this expression used to be a trademark of Germany, but today it stands for doom and gloom. An Elon Musk that thinks "out of the box" would be impossible in Germany.

Middelhoff: Or he would end up in a psychiatric ward. If conservatism means preserving, then it also means preserving the future viability of this country. And that is where politics has failed dramatically. There is no road map for the next few years, no plan for "Germany 2030".

So something like "Made in China 2025", like Beijing's strategic plan to gain market leadership?

Boersch: Yes. A start-up needs eight to ten years, minimum. Nobody has this patience. Bankers and CEOs think of fast money. This is what counts: What will happen in a year or two?

Middelhoff: We need corporate leaders who can pull off a vision against all odds. But then, in reality, the CFO and the head of communications come along and report anxiety among analysts and journalists. At the latest, one of their successors will then break off the initiative.

Boersch: In my opinion, major fault lies with the consultants, McKinsey for example. They have completely misjudged the future. I have financed many start-ups founded by former McKinsey consultants. In most cases I have lost my money completely.

China has a system with state banks and funds and a single party that registers everything. Germany already lacks the most important tools for a grand plan.

Middelhoff: For change one can argue that a centrally managed system is superior. But in Germany we are also capable of acting. If we can get a round table on migration, we can also succeed with digitalization. That is a national task! A ten-point plan and a change of mentality are necessary. If you look at it that way, you will get it right.

Boersch: I am an avowed fan of Angela Merkel. The whole world envies us for her. But, as I said, she leaves shambles when it comes to Germany's future viability. On business delegation trips the heads of Siemens, Daimler or Thyssen-Krupp are always present, but rarely a start-up entrepreneur. Although that would be the future. Completely naive is how Economics Minister Peter Altmaier constantly talks about a "European Facebook" or a "European cloud", possibly "powered by Siemens and Telekom". No customer would accept such an offer!

But without government aid, the digital gap cannot be closed.

Boersch: In the coming years, German politics will play an increasingly important role in this respect. It will only be able to protect us from the American tech giants by intervening to regulate.

Middelhoff: You can't blame Facebook and the others for their success. But German politics only thinks backwards. For example, even in Europe, we are at best in midfield in terms of our networks, coverage and broadband equipment. This is because the state is involved in Deutsche Telekom and supervision everywhere and the networks have not been left to the free market.

In your opinion, do the Germans know what is important when it comes to digital?

Boersch: The drama is still not clear to people today. Many people in companies think: "Oh, I've got to hire one of those digital guys. That is not enough. The transformation must be lived.

Middelhoff: The lockdown has two effects, which could turn into tsunamis. One is the economic damage, and that is the many billions we need. But we are spending the money wrong. How could Adidas have more systemic relevance in the production of adilettes than the catering industry or start-ups? There are significantly more jobs there. And how will the travel company Tui ever be able to repay the many billions borrowed from the state?

Boersch: ... that is a broken business model! Tui has received considerably more money than the entire German start-up landscape. The founders received two billion in emergency aid and now have a vague outlook of it being ten billion. Many internationally highly respected German top start-ups are dying. The wrong priorities are being set here at the expense of the future. Another interesting question is: where do these 1,000 billion suddenly come from?

Middelhoff: The second tsunami is that users suddenly find out that digitalisation is working. This presents companies with major new challenges. Entire sectors of value-add are signing out. It is no coincidence that 4000 people have to leave the Daimler Corporate Center.

What concrete measures do you propose for the interaction between politics and business?

Boersch: If it were up to me, I would completely ban all lobbying. Only subsidies that protect old technologies and structures - or flow into agriculture - are negotiated. If we put the money into Big Data, Virtual Reality or Artificial Intelligence, it would have a lasting effect on our competitiveness.

Middelhoff: We have looked at how the USA and China are leading the way. One answer, for example, would be funds for digital infrastructure. What is crucial is a political commitment that can survive elections.

Boersch: We need a change of mentality. For instance, there is still a fear of contact between corporations and start-ups. And many of our outstanding scientists are researching “for the file”, not for the market. It is an exception for me, too, that two years ago I was able to sell the company Fayteq, which is located in the vicinity of the university in Ilmenau, to Facebook.

Middelhoff: We need to institutionalise the cooperation between research, science and technology. We need better integration of these areas. More incubation centres are needed. We already have role models like the TU Munich or RWTH in Aachen. These beacons need to be multiplied.

What else can the state do in concrete terms?

Middelhoff: The contract for the corona app was awarded to SAP and Telekom. Just wrong! There were functioning offers from German start-ups. In future there must be a minimum quota for government contracts with young companies.

Boersch: In order not to portrait everything as negative: German SMEs are well positioned. The Googles and Facebooks of the world cannot get into these niches.

Middelhoff: Here, the Federal Ministry of Economics and Technology would not have to support any fictitious champions, but would have to make sure that SMEs develop digitally. That is the DNA of the German economy.

Boersch: We have only gone ten per cent of the way in terms of digitalisation. Most things do not even exist yet. Hopefully it is not too late. But the will must be there at all levels, especially in Europe. Lip service is not enough.

You even want to see board members of large companies allowed to remain in office for a maximum of ten years. That is not exactly a free market economy.

Middelhoff: That is not dirigisme, it is reason. We believe that otherwise there are power structures in corporations that prevent innovation. And for this reason, a CEO or board member should generally not be allowed to join the supervisory board of a company - even after a period of decline.

Boersch: Retired managers should use their knowledge to support start-ups rather than hanging around on golf courses or boards.

Mr Boersch, Mr Middelhoff, thank you very much for the interview.

You can find the article here.