Braking News: What Journalists can Teach Engineers

After-dinner talk on disruption for Fisita Eurobrake, May 3, 2017.

Patrick McGee, Frankfurt Correspondent for the FT.

On Wednesday I was the after-dinner speaker at a conference for 700 auto experts in Dresden. It happened at 10pm, following an-day conference and a four-hour dinner, so approximately two dozen people were listening by the time I started. But boy were those people enthralled.

It's about mobility, disruption, the German mindset, and Tesla.

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What can a journalist teach a roomful of car experts? That’s how I decided to frame this talk, as I figure it would be a little dull for me to just talk about how, guess what, electric cars are the next big thing. Self-driving cars are the next big thing. Car-sharing is the next big thing. I’m going to make a daring assumption that each of you is aware of these trends.

Most of you are experts in braking. That’s a topic where my own expertise could best be described with words like “illiterate,” “ignoramus” or this great German term: Schafskopf — to have the head of a sheep. So I’ll try not to make sweeping assertions about the future of your industry.

But there’s one area where I have some clout. My own industry, media, has already undergone sweeping changes. Whether it’s the decline of newspapers, the rise of blogs and free websites, or the spread of fake news, we’ve been rocked. At the FT, revenue from subscribers is now higher than from advertisers. That was unthinkable before the Internet.

We’ve had to innovate to stay ahead. I’ll highlight just two things here, then link it back to the car industry:

fastFT:

Too many of our subscribers would check out the FT in the morning, love it, but then check in after lunch and be disappointed that the website had hardly changed.

My first job at the FT was to launch fastFT in Asia, which is devoted to breaking news and anything that might be market-moving. All journalists are under more pressure to write today’s news, not yesterday’s. FastFT took that further by writing about news as they happened - fewer phone calls, quicker editing, less oversight but more flexibility and responsibility. It’s similar to a newswire, but more selective and with writing that is more fun.

Consumer engagement:

We have teams now that didn’t exist before. They look at what’s trending on the web and highlight key words that should be headlines. We built our own app so journalists could see how well each of their articles did, not just by page views, but with new ‘engagement measures’. We can tell how far through an article an average reader actually got; at what time do our subscribers actually read? How do they find articles - through LinkedIn, Facebook, Drudge Report?

The lessons that come out of this are obvious:

Look at your own industry and have a game plan in case the bulk of your revenue evaporates. As solid as you think that revenue is, it might not be. Then what?

Really listen to customers, prioritise them.

This sounds obvious but people miss it all the time.

A great example of not doing this in recent years was when Deutsche Post, in 2012, asked all the German carmakers if they could create an electric delivery van, as part of an ambitious environmental plan to go carbon-neutral. None were interested.

But Deutsche Post was impressed by a small electric start-up; they purchased it, and by last year they had produced 2,500 of these vans. Now they are increasing production capacity to 20,000 vans, with the aim of profitably selling them to companies around Europe.

As you can see in this chart: they have the potential to be Germany’s second-largest electric car producer this year. Granted, that won’t last long. But this is a post and parcel company! And they could be outselling both Mercedes and Volkswagen, the world’s largest carmaker. This shouldn’t be happening, and it wouldn’t if their demand was taken seriously.

Mindset.

One thing a journalist can teach engineers is something about mindset. The best journalists I know are endlessly curious, always questioning things that experts tend to ignore or accept as a given. We are, mostly, professional amateurs - ‘jack of all trades, master of none’.

It is often valuable to be an inquisitive amateur: Some of the best articles I’ve written haven’t come from good questions, but from terrible questions.

I used to be a bond reporter in New York, writing about the corporate finance market. The basis for that market is this: US Treasury interest rates are the benchmark; corporate bonds are priced with extra yield, depending on how risky the are.

So if a 10-year Treasury yield is 2%, a safe company like Microsoft might yield 2.12 per cent, and a junk-rated company might offer 5 per cent. I once asked if any corporation yielded less than the US Treasury. On its face, this was a stupid question; it showed such an ignorance of how the entire market worked that I suspect if a junior banker asked it, he would be fired.

And yet, in my attempt to answer it, I found that several companies were yielding just a tiny bit more interest than the US Treasury in the secondary market, where bonds are traded. And based on a few bond-geek measures — thinks like inflows — it was obvious that a few corporate bonds were going to be yielding less than the US government in a matter of days or weeks.

No bond experts I called were aware of this, many disputed that it could actually happen, and when it did happen some had trouble explaining it. Every person quoted in the article was actually ignorant of the issue before I called to tell them about it — then get their ‘expert opinion’.

I think about this experience when I consider Germany and the engineering mindset.

Germany has the world’s largest trade surplus, based on a huge network of export-driven companies focused on precision engineering. But industry is being disrupted by a whole new way of doing things, using software to capture data, automate tasks, or solve problems before they start. Service and software — these aren’t Germany’s strongest skills. Auto companies are following this trend, but they aren’t leading it. And from what I can tell, engineers are rewarded for operational efficiencies, but not so much for being curious.

Last week I spoke to a consultant from AlixPartners about broader industry and the implications of Industry 4.0, and he was particularly concerned about German companies being complacent. “A lot of the German established companies will fail,” he said.

What’s interesting is he thinks the failing would be due to culture. He advocated using “brute force” to change the mindset of companies, so they understand that whatever worked the last 30 years is unlikely to work in the future. Germany’s engineering prowess has served it well. But an iterative approach to hardware is unlikely to compete with revolutions in the software world.

One person that knows this well is Till Reuter, chief executive of Kuka, the robotics company most of you are probably familiar with. The hardest thing about his job, he told me, is firing people that are doing a great job.

That’s a stunning statement, and a very un-European one. Reuter is German, but he has an investment banking background. Safe to say he runs his company less like a German and more like an investment banker. Who fires people that are doing a good job?

What he was referring to is that Kuka, to maintain a competitive edge, is constantly re-evaluating the direction of the company, rather than assuming that works now will continue to work in five years. So even if a particular manager has done a great job on their assigned task, Mr Reuter thinks it’s his job to determine whether that person is up for the next task as Kuka changes direction.

He’s running his company like a sports team, not a family.

That’s a very different mindset than what made Germany the exporting powerhouse it is today. Some of you might be familiar with how Netflix runs its company — they measure output of workers, not effort or loyalty. In a famous set of slides they give to new employees, Netflix declared: Hard Work Is Irrelevant.

These slides went viral. Sheryl Sandberg, COO of Facebook, called them “the most important document to ever come out of [Silicon] Valley.

From what I know of the German mindset, that should be horrifying. And I’m sure some of you are resistant to it - you like the idea of your company being your family. I do too.

And perhaps it would be nice to ignore these trends and stick with what works. But the rise of just two US loss-making companies is already showing that whatever the merits of this mindset were for the 20th century, it won’t cut it in the 21st.

All of you are familiar with how Tesla came out of nowhere a decade ago. It’s worth more than General Motors and Ford. It’s almost worth as much as BMW. The good news for everyone here is…Tesla cars have brakes.

But the big three German carmakers, who collectively sold about 15m cars last year, and who each reported a record year for profit, are having to transform their powertrain units to keep up a company that made fewer than 80,000 cars last year and, in the process, lost $675m. At the same time the German carmakers are shifting into car-sharing services to make sure they keep up with Uber, an even younger company that lost $2.8bn last year. More good news of course: Uber drivers need brakes as well.

I know everyone is aware of these threats. But let’s consider a few things that don’t necessarily get much attention.

Consider, in your mind: what is your favourite Tesla advertisement?

Some of you may know that’s a trick question. Tesla doesn’t have advertisements. Let’s think about insane that is.

In 2015, Volkswagen, BMW and Daimler spent the following on advertising:

* Volkswagen: $6.6bn

* Daimler: $5bn

* BMW: $3.1bn

* Total automotive: $47bn.

Tesla’s budget was zero.

The only advertising I've heard about from Tesla are fan-based ads. Last month Elon Musk said on Twitter he would capitalise on this by launching a competition for fans to make an ad, with the winner's to be printed somewhere. The idea came from 10-year old student in Michigan, via Twitter.

Hundreds, probably thousands, of people, are going to do Tesla’s bidding in the advertising world to be part of this. For free.

Tesla does, of course, spend on marketing. But the results are little different. A 2016 report from Global Equities Research looked at how much car makers spend on ads per car that they sell. For Jaguar the figure was $3,325. For Porsche, $267. Toyota and Honda spent just $250. The estimate for Tesla was $6 - "unheard of in the industry," the authors said.

I bring this up for a simple reason: Tesla’s R&D budget last year was $834m, up from $718m in 2015.

Is it significant that each of the big German carmakers spent more on advertising than Tesla spent on research — not by a fraction, but by multiples? Volkswagen’s advertising budget was nearly 10x Tesla’s R&D budget last year. You guys are the experts, not me, but for me that just screams ‘misallocation of resources.’

In my mind there is too much discussion about Tesla as it relates to electric cars, and not enough to the other sweeping changes it has introduced. Consider these other big changes:

Tesla stores are in malls. They are the size of Apple stores, with one or two vehicles in them. You don’t have to drive out to some ring-road near the airport to take a look.

Tesla sells its cars directly, rendering dealerships obsolete.

Instead of taking your car to be serviced, Teslas download software updates while they sit in your garage. Once autonomous cars are a thing, data will be ever more valuable — when one Tesla learns something on the road, it will upload the data to a cloud; and every other unit in the fleet will download it.

Its Model 3 was revealed as a concept car with the goal of half a million units by 2020. Within a week 400,000 people had offered $1000 deposits. So Tesla accelerated production and pulled its production goal forward to to 2018, giving customers a sense that they have a voice.

To recap: a company about 10 years old is upending how cars are manufactured, marketed, sold, and serviced, all the while upending how carmakers are valued. And Uber, of course, is changing the way drivers interact with vehicles.

I’m bringing up these points to underscore just how much change is rocking the car industry. And if the disruption to media is any guide, everyone here should be thinking about the consequences of those changes and taking steps to learn new skills. Take your company’s biggest source of revenue, and consider how you would stand if it vanished. Listen to your customers.

A survey by car magazine Autobild last year shows that German consumers are excited by Tesla’s more affordable electric car. In an on-line poll of 6.2k readers, 67% of Germans said of the Model 3: “Super, I want to have one”.

Big changes are ahead. This has implications for the students here especially.

Last year I spoke to a professor at the Clemson University International Center for Automotive Research. He told me the graduate’s engineering programme had become a language school — car groups who hire from the programme no longer want mechanical engineers, chemical engineers or computer engineers — they want people who speak all of these languages and can integrate thinking from each.

The jargon he used is “T-shaped” graduates — the vertical line representing depth of expertise, the horizontal representing an ability to communicate across technological or cultural barriers to spur innovation. “Soft skills are what’s important for the future,” said the professor. “I cannot teach that from a textbook.”

These are the skills journalists have.

Now, I’m pretty self conscious that I might not be the best person to give advice about being employed. At University I studied religion and literature - not exactly thriving fields driving today’s economy. So when I was writing this I was reminded of a favourite joke, about three students:

The science graduate asks, “Why does it work?”

The engineering grad asks, “How does it work?”

The humanities graduate asks, “Would you like fries with that?”

But soft skills and hard skills are converging. Journalists need to learn hard skills, engineers need to learn soft skills. If, in 10 years, you’re still only offering hard skills, guess who will be serving the french fries then? Thank you.