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.
I’m glad you got to visit Detroit for the first time, but I really wonder what value these trips around the world add for investors. Was the main insight that the turnaround was more than you had read about it? Did management share an insight with you that couldn’t have been gained through analysing company reports or a teleconference?
It’s a fair question Paul, and one we seek to assess ourselves before each trip, not wanting to waste money or spend unnecessary time away from our families.
There are clearly pros and cons to meeting in person. The cons revolve around the potential to be hoodwinked. But I can also point to our most successful investments over the years and honestly say that we’d either have not owned them, or not owned as much, if we didn’t have the chance to meet management and see company DNA up close.
Regarding this trip, we currently own two auto related positions. One of them is a company I hope to own for at least 5 years, and this conference presented a unique opportunity to meet the founding family/CEO, who doesn’t normally do walk ups. Future capital allocation is a really important part of the puzzle in this stock, and I’m glad we went for that alone.
Regarding the other auto position, it operates in a niche part of auto supply where 4 companies dominate global supply. We got to listen to management of all four companies. Particularly interesting was listening to the CEO of the largest player (not the stock we own), who’s been on the job three months and has already changed the incentive scheme for management away from sales/market share to profit/return on capital. That’s really interesting information that will shape pricing in the industry over the next few years. This was information that could have been gathered elsewhere, but it’s hard to beat the amount we can cover in just two days at a conference like this.
Great article Gareth I thought it very insightful. I think attending conferences like this would usefully broaden knowledge often in ways one would not expect. Even if it doesn’t pay off today, in the future it may help the forager team to act quickly and decisively when a situation presents itself.
There’s a high risk that the CEO / management will tell you what you want to hear – not what you need to hear. That’s why “calling of the Sirens” is a famous statement.
In support of this notion, Warren Buffett is well known for avoiding meetings with the CEO / management about potential investments.
It seems like the CEO of Woolworths (SA) was mesmerized by Miranda Kerr instead of financials at David Jones. I can’t blame him as thousands of investors were memorised by Jennifer Hawkins instead of the financials and sector trends at Myer.
My largest holding is Berkshire Hathaway – by far. I have never been to Omaha and have no intention of using my 1 overseas annual holiday to hear what these old dudes are up.
We’re aware of the risk, but certainly not impervious to it. I feel safest to the threat when I’ve done plenty of research before and have a specific agenda of issues I want to get through, rather than be lead on by management’s agenda. But you’re right, these people don’t usually rise to the top because they’re bad at selling themselves or their company.
You used to really like SYD. Does your fund own any shares in airports at the moment? Any views on how the 2nd airport will affect SYD over the long term? That said, 10 years plus is somewhat hard to forecast.
Thanks for your review/tip on approx’ SYD 10 years ago. I was very concerned about debt levels and financial engineering at head office. Your insight gave me the confidence and insight from a different perspective.
SYD has significantly outperformed the ASX 200 and All Ords Index. In addition to the capital gain, my dividend is approx 15% p.a. based on original investment. No freestanding house investor in Sydney can compete – net of expenses and land tax.
I took your tip one step further and bought airport shares from the Kiwis (AIA).
Brilliant article. I might go to Detroit next time I’m in the US after that review! I went to Chicago in January (before the Polar Vortex) and was surprised at how beautiful and clean it was in comparison to New York City. I thought it would be dirtier than NYC, but it was the opposite. Sometimes you simply have to suspend your prejudice and front up to a place and see for yourself.