Detroit: on the move again

Steve and I recently attended an auto conference in Detroit. After years of flying high cyclically, stocks in the auto sector have sold off heavily recently. We’ve made a few investments in auto parts suppliers. Attending the conference was a chance to catch up with management teams of those investments and sharpen our knowledge of the sector. We’ll have more to say on those investments in our March quarterly report.

I was also excited about the chance to visit Detroit. Its history has long fascinated me, although I’d never visited before.

When my father was born in the 1940s, Detroit was one of the richest cities on earth. The booming auto sector provided well-paid blue-collar work for hundreds of thousands of people. It promised a better life for emigres, whether from the cotton fields of the South or from war-torn Europe. And those higher up the chain obviously did better again, right up to senior management and family shareholders.

From Henry Ford’s Detroit to 8 Mile Road

By the time I was born in the 1970s, decay was already underway. The next few decades saw an erosion of the market powers of North American autos versus the rest of world. And the auto sector growth that did occur in North America mostly happened outside of Detroit, in the US South and Mexico. Lower taxes and minimal unionisation both played a part.

While other US cities have experienced de-industrialisation, white flight and a population ‘doughnut effect‘, none experienced it as dramatically as Detroit. The inner city population fell from 1.8 million in the 1950s to 950,000 by 2000, to less than 700,000 by 2015.

You’ve all seen the coverage. Homicide rates among the highest in the US, massive tracts of abandoned and derelict houses—available, for the brave, for a few hundred bucks apiece. I have an American friend who says he’ll never set foot in the city again. Last time he visited to catch up with friends, they were at a burger joint when a gunfight erupted.

It got to the point where a decade ago, America was wondering whether Detroit should continue to exist. To this day, the city has a greater metro area population larger than Sydney or Melbourne. Yet ‘left to die’ was considered one of the better town planning options.

Recovery underway

I’ve read stories more recently about the turnaround, but in person its scope surprised. It’s an emphatically and universally-held view by all locals we talked to that the city has had an amazing recovery over the past 3-5 years.

Sure, there’s still enough vacant land around the city core to start a farm on most blocks (urban farming is a thing here). And weird things still happen. But the city is becoming dramatically safer and more vibrant. The population outflow has almost halted. And the city has seen inbound net migration in the much sought younger 18-35 demographic.

Part of that is down to the vision of people like Dan Gilbert, who’s pumped billions of dollar into Detroit’s downtown. There are large scale construction works underway and cranes at work in a city that hasn’t seen them for a long time. To quote one of our Uber drivers – “look at this new building under construction, it’s beautiful. I have no idea what it’s for, but it’s just beautiful”.

It’s also the story of people power. Where industry gave way to abandoned warehouses and urban decay, it’s now giving way to bearded hipster, craft brewers, farmers markets and funky new restaurants. Everyone we talked to was excited about the change over the past few years. Everywhere we went people said “man you should have seen this place five years ago”.

Regeneration was all around our hotel in Corktown. None of the growth was coming from large chains like McDonald’s or Dunkin’ Donuts but rather smaller, unique, sole trader or family run type businesses. We have a thesis that technology is an important enabler here.

SaaS revolution

It’s something our Australian Fund team have been talking about recently regarding Retail Food Group and others. Chains once ruled and franchises were a popular way for small business owners to open a store. While buying into such systems brought valuable brand recognition, an underappreciated part of the appeal was the operating systems required to run a retail outlet. In return for a franchise fee and a percentage of gross receipts, you were given operating systems for your business that were developed by head office at great upfront costs.

The Software as a Service (SaaS) revolution has put that power into the hands of the independent business owner. And at an affordable price, much cheaper than a franchise fee.

When we asked for the “check please” at the Batch Brewing Company we were given an iPad. It was a pretty neat system, allowing us to pay and then email or text receipts anywhere. It was clearly linked in directly with the company’s back-end accounting and likely marketing and social media too.

Opening up a creative new business is much less burdensome than it was even five years ago. It’s great for the unaffiliated small business, it’s a headwind for the chains. It’s an important part of what’s happening at the smaller end of town in places like Detroit.

Auto industry returns to Motor City

My favourite story of rebirth is Michigan Central Station, pictured above. This grand building was opened in 1914 and shuttered in 1988 when Amtrak stopped coming to town. It fell deeper and deeper into disrepair and was a ruin porn hot spot for years.

More recently, Ford purchased the building along with the nearby Roosevelt Warehouse and other buildings. After it spends a bunch of money, this will become Ford’s Corktown campus—the base for the development of its electrified and autonomous vehicles.

If you had have asked anyone around here five years ago where Ford might open its new tech-heavy development centre, their answer would probably have been “Silicon Valley? North Carolina? Anywhere but Detroit.” It’s great to see Detroit’s most synonymous industry playing an important part in its renewal.

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Gareth Brown
Portfolio Manager

Gareth Brown is a Portfolio Manager at Forager Funds Management, with a focus on researching European stocks for the Forager International Shares Fund.

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