Silicon Valley

What’s Wrong with Germany’s Tech Scene?

IBM engineers work with a System 360 mainframe computer using business programs written in an early version of the COBOL language in this undated handout photo
Germans were at the forefront of inventing the computer but IBM turned it into a multi-billion business. Source: Reuters

When a young Swedish entrepreneur took the stage at a recent startup conference in Berlin, he immediately faced a pointed and poignant question.

“How do you feel, Alex? You just fired half the city,” the moderator asked provocatively.

“Terribly sad,” replied Alexander Ljung, the co-founder and chief executive of SoundCloud, an audio streaming platform that was once the pride and joy of Berlin’s start-up scene.

But just six days prior, Mr. Ljung had announced through a blog post that his company would be laying off 173 of its 420 employees and closing its offices in London and San Francisco. The decision had been a difficult one, he said, but it had been necessary to “consolidate our costs.” In 2015, SoundCloud had boasted turnover of €21 million ($24 million) – and a crippling loss of €51 million.

At one stage, people had been predicting a bright future for SoundCloud, calling it the “YouTube for audio.”  But while Google’s video streaming service has continued to rake in considerable profits for its parent company, the Berlin-based audio streaming service has been struggling to keep its head above water.

SoundCloud, it seems, is yet another example of a shooting star from Germany that was quick to burn out. As Mr. Ljung looked down from that Berlin conference stage and expressed his dismay, Silicon Valley must have seemed so far away.

And SoundCloud isn’t the first German startup to falter. Nor will it be the last. But it does raise some important questions. First and foremost: What is Germany doing wrong? Why can’t the country that gave the world the first gasoline-powered automobile manage to incubate even half as many successful technology companies as the US? How is it that all of the titans of the IT industry come from such a small stretch of American coastline?

 

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Anyone who asks these questions is usually confronted with the same answers: Not enough venture capital, a domestic market that’s too small and, above all, a culture that innovates in small steps, rather than through experimental leaps and bounds. Most companies here would rather focus on the gradual improvement of existing products than radical innovations.

To be sure, Germans’ attention to detail is a formidable thing. It’s why the trains run like clockwork. But while the Germans have been busy adhering to the rules, the folks in Silicon Valley have been doing their best to break them.

That willingness to push the envelope has left the likes of Google, Apple, Facebook and Amazon eons ahead of their competition – and many German businesspeople wondering how they can be more like them.

Upon meeting Andreas von Bechtolsheim, it’s easy to forget the 61-year-old German-born entrepreneur is a bona fide legend in the global IT scene. He’s perfected the art of the understatement, preferring jeans and Birkenstocks to suits and expensive shoes. Then again, maybe that is because Mr. von Bechtolsheim has nothing to prove. The internet boom of the ’90s wouldn’t have been possible without his inventions.

“Andy,” as Mr. von Bechtolsheim is known to his peers, was only 30 years old when his first company, Sun Microsystems, had its IPO in 1986. Since then, he has grown his fortune by investing in more than 20 technology companies and founded another publicly-listed firm, Arista, a network supplier. Forbes magazine estimates his wealth at over $5 billion, a big chunk of which he owes to an early investment in Google.

 

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Mr. von Bechtolsheim knows Silicon Valley well; he’s lived there since he graduated. And he also knows Germany. Most importantly, he understands why a country known for its unparalleled engineering skills has yet to beget any real rival to the IT giants on the US west coast.

“In a market as competitive as the technology business, success is only achieved by constantly reinventing oneself. Nowhere in the world is this better understood than in Silicon Valley,” Mr. von Bechtolsheim said.

Germans are naturally risk-averse. Perhaps their best known export, automobiles, are manufactured by companies steeped in tradition, where change comes grudgingly and only after much deliberation. Meanwhile, companies like Apple and Google – known more for their software engineers than their mechanical engineers – are spending billions of dollars developing self-driving cars.

Innovations are always risky, Mr. von Bechtolsheim said, because there can be no guarantee that any innovation will ultimately be successful. But the bigger risk is not to innovate at all, he added. Because if you don’t, your company runs the risk of becoming irrelevant – and fast. “There are plenty of examples of firms or even whole sectors who were doing well just a  couple of years ago but who are not doing well anymore, simply because they missed out on a change or an innovation in their market,” Mr. von Bechtolsheim explained.

The solution? Cannibalization. Companies that have successfully marketed an innovative product run the largest risk of missing out on the next wave of innovation. IBM, for instance, missed the boat when the market shifted from mainframes to personal computers. Microsoft wasn’t quick enough to realize the stationary Internet was giving way to a more mobile version. Blackberry failed to see that smartphones were rapidly becoming fashion accessories and status symbols, as opposed to mere work tools.

The heads of companies like Google and Amazon have learned from these mistakes and have developed a healthy sense of paranoia. As Google CEO, Eric Schmidt, said in Berlin in 2014, it’s important to know that “somewhere, someone is lying in wait in their garage.” Change, Mr. Schmidt was saying, often comes when, and from where, you least expect it. Even big companies can quickly become irrelevant if they’re not careful. That’s why the biggest technology corporations are often the first ones to come up with the new products that make their old ones superfluous. They are willing to cannibalize their own businesses, before a competitor does.

 

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Companies that don’t have this mindset often find it difficult to do this. Just look at German automakers and their pursuit of the perfect diesel engine. For years, they failed to realize hybrid and electric cars were a real threat – and now they’re struggling to catch up with Tesla, a California-based maker of cars, energy storage systems and solar panels.

That’s another thing that American tech giants do better than German companies, Mr. von Bechtolsheim said: Multi-dimensional business models.

“I asked Jeff Bezos many years ago why he started out with books. He said books were the easiest thing to sell online, but that in principle, he had actually always wanted to sell everything,” Mr. von Bechtolsheim said. “From the outset, there had been the idea to expand at will, and the tendency to go everywhere. That idea drives all of the big corporations in the Valley.”

Google, for instance, is investing heavily in areas unrelated to its main business, the search engine. Apple is building self-driving car technology. Facebook is trying to do everything Google does. And Amazon, which just bought the American supermarket chain Whole Foods for $13.7 billion, has made itself incredibly difficult to compete with.

The fact is that as much as the West Coast tech giants are obsessed with their fear of being overtaken by a smaller, more innovative player, German companies tend to fall into another trap: Their endless pursuit of a core competency. That is, the basic idea behind Germany’s tendency for hyper-specialization is that in order to stay competitive, companies must master something particularly well.

“There’s nothing necessarily wrong with the concept of core competency,” said Olaf Plötner, an industrial marketing expert and the dean of executive education at the European School of Management and Technology in Berlin. “One should not, however, interpret this so narrowly that it prevents a company from developing.”

German companies should take note: The big American tech companies have not made this mistake. As Mr. von Bechtolsheim points out, German companies would be well advised to pursue business partnerships that supplement and complement the work they do.

The example he gave was of the German auto industry. The decision by Audi, BMW and Daimler to pool their money and buy the map service, Nokia Here, was a good one, he said, even though they still couldn’t compete with Google Maps.

“The material must be constantly updated. That’s no simple task,” he said, noting that Google has invested a hundreds of millions of dollars to keep its own cartography software up-to-date. “The problem is so tricky that it likely exceeds the capabilities of most typical car makers.”

That’s why Mr. von Bechtolsheim said he expected auto manufacturers to continue to work together with other software providers, whether from Europe or Silicon Valley, to close the gap between their own mapping services and Google’s.

In addition to opening themselves up to new partnerships, he implored German companies not to ignore the development of artificial intelligence. Silicon Valley already has a massive head start, he said, but it’s not too late for the Germans to catch up.

“Everything will work better with artificial intelligence,” Mr. von Bechtolsheim said, adding that, for example, the main problem with self-driving cars – the detection of objects – couldn’t be solved without it.

“There is a race for the best software that will be installed in the vehicle of the future,” he said. “Google has a whole sector of the company working on this problem. So does Apple. Plus, there are a hundred startups working on it as well.”

 

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According to Mr. von Bechtolsheim, the biggest obstacle to German innovation isn’t competition from the United States, the lack of venture capital or even a shortage of capable programmers; “good German programmers go to America,” he says. No, it is the German lawmakers and regulators, who seem determined to maintain the status quo, who make for a major roadblock.

“No company, no market, is safe from these new, extremely aggressive and well financed startups,” Mr. von Bechtolsheim said, referring to the bitter legal battle waged in the German courts between ride sharing service, Uber, and the local taxi industry. Ultimately, the taxi industry got its way, but a disruption in the transportation sector, even in Germany, where special interests still hold sway, is still inevitable.

“This is quantitatively and qualitatively different from 10 years ago, back when companies grew at a much slower pace,” Mr. von Bechtolsheim added.

There is an innate reluctance among European politicians to embrace new technologies, a sentiment that is clearly not shared by their American counterparts. This obviously puts European companies at an automatic disadvantage.

As far as what must be done to level the playing field for companies in Europe in general, and in Germany in particular, Mr. von Bechtolsheim suggests that a genuine cultural shift is necessary, especially when it comes to educating the next generation of software makers and then retaining that talent in the country.

“Germany must signal that it will no longer let itself fall behind when it comes to software development,” he said. “Software engineering, robotics and artificial intelligence must be given the highest priority. A critical majority must understand that software engineering is a good job.”

Alexander Demling is a reporter for Handelsblatt covering technology, startups and financial topics. Christof Kerkmann is an editor for Handelsblatt and writes about the technology sector. Christian Rickens is the head of Agenda, Handelsblatt’s magazine department. Britta Weddeling is a correspondent in the United States writing about the internet and digital economy from Silicon Valley. To contact the authors: demling@handelsblatt.com, kerkmann@handelsblatt.com, rickens@handelsblatt.com, weddeling@handelsblatt.com

 

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