Editor’s note: Mike Ducker is the director of the Ecosystem Forum, which brings together people to share lessons on developing entrepreneurs in developing countries.
Quick. What do the iconic founders Thomas Edison (hundreds of companies), William Hewlett (HP), William Boeing (Boeing Airlines), Robert Jarvik, (Jarvik Heart), Scott McNealy and Bill Joy (Sun Microsystems), Tony Fadell (Father of the iPod and founder of Nest) and Larry Page (Google) have in common? Give up? They grew up in Michigan.
When you have a state with the highest concentration of engineering degrees in the country, there is a high probability that you’ll have a lot of babies who will want to build products. But why are these job creators moving away to set up their companies somewhere else? Is it the snow? The Detroit Lions, maybe? I believe you can look at the early 1900’s, the start of the automotive industry, to get some answers.
At the dawn of the 20th century, the “crazy ones” were not heading to Northern California but to Southeast Michigan.
At the dawn of the 20th century, the “crazy ones” were not heading to Northern California but to Southeast Michigan. The techies sitting behind their computers today were the hardware tinkers of the 1900s: people working in their machine shops trying to build products and make it rich in Michigan. These entrepreneurs would eventually create one of the biggest industries (and the biggest companies) in the world and drive an economic boom that at one point led to Southeast Michigan having the highest GDP per capita in the nation.
I was interested in how these companies drove unprecedented economic growth and the development of an industry that changed society and why today almost all the new automotive companies are born outside of the Motor City.
There were an estimated 500 automotive startups during the early 1900s, and since there was no venture capital, startup training programs, competitions or incubators, the only way to map out the ecosystem was to look at the people who participated. I decided to look at the founders and the backers of the major automotive companies, referring to their previous industries before they invested in or began an automotive company.
What the map shows is that a dynamic ecosystem leveraged the past knowledge and capital to draw in people from around the world to pursue a unique opportunity. More specifically I identified two factors that drove the automotive ecosystem.
A Dynamic Interaction of Talented People
Smart, talented and passionate people were engaging with each other, learning from each other and supporting, challenging, connecting, and motivating each other. Take Louis Chevrolet, born half a world away in La Chaux-de-Fonds, Switzerland, an engineering town that was the center of the watch-making world.
He learned how to become a mechanic in Paris at a bicycle shop, became a race car driver for Fiat, and then Buick, which is where he learned how to design cars and became friends with GM founder Billy Durant. They founded Chevrolet together, and he later went back to his passion of designing racing cars (one of his cars won the Indianapolis 500).
The Dodge Brothers first started a bicycle shop, then a machine shop, and then made transmissions for Olds. They signed a risky but very lucrative contract to produce parts for Ford and later designed their own brand of automobiles. Of course the stories of their drinking, fighting and gunplay are legendary in Detroit saloons.
One of the best stories is of Henry Leland. He started in the firearms industry, becoming an expert on interchangeable parts, tool-making and manufacturing. Later, he founded a company that supplied engines to the first successful commercial automotive enterprise: the Olds Motor Vehicle Company. He was asked to assess the Henry Ford Company (Henry’s first company) assets, which the investors wanted to get rid of, but instead convinced them to start a new company called Cadillac.
GM bought Cadillac and Leland went to work for Walter Chrysler there. But like many of the original entrepreneurs of GM, he left and started Lincoln, which he later sold to Ford.
The interconnections of these great minds through employment, business or investment allowed people to share a deep and unique knowledge that helped these companies drive through all the engineering and manufacturing challenges and led to the fastest development of an industry in any geographic region of the world.
Inter-Industry Generational Engagement
I found it interesting that many of the investors, suppliers and founders came from some of the earliest original industries in Michigan. The state had a massive mining and timber sector, and many of those entrepreneurs invested in early automotive startups. Edward Sparrow and Samuel L. Smith made money in mining and were the first investors in Olds. Alexander Malcomson, Detroit’s largest coal dealer, was the largest original investor in the Ford Motor Company.
The two greatest icons of the automotive sector, Henry Ford and Alfred Sloan, led part of the destruction of the ecosystem.
In many ways the timber industry leads to the large carriage industry which leads to the automotive industry. In fact many of the early automotive founders and investors came from the carriage industry. Billy Durant created the largest carriage company in the U.S. before he started the largest automotive company, General Motors. James H. Whiting first started Flint Wagon Works and then became one of the early investors and executives in Buick.
GMC and Pontiac were started from carriage companies started by Edward Murphy, Albert North and Harry Hamilton. But much of the real technical genius of the automotive industry came from machine shops that were started all over South East Michigan. People like Benjamin Briscoe, who started his first sheet metal stamping company at the age of 18, became one of the main investors in Buick before trying to start his own automotive company.
Both the Dodge and Grabowsky Brothers (founders of GMC) were involved in metalworking before getting into parts and developing an automotive brand themselves. The new entrepreneurs leveraged the knowledge and financing of the previous generation of business people to develop a gas-powered engine that was reliable to drive on rural dirt roads at prices the new Middle America could afford.
But then it stopped.
There has been a lot of coverage about the fall of the automotive sector in the Midwest and the unparalleled economic destruction that followed. But here is the real question: Why didn’t this incredible ecosystem create a new generation of entrepreneurs who would find the next innovation for the market?
It needs to be said that many of the original automotive founders and investors who made contributions to society are much greater than just the companies they produced. You’ll find their names on universities, hospitals, museums, and foundations all across the Midwest. Philanthropists though they were, they did not “give back” to the next generation of entrepreneurs. The two greatest icons of the automotive sector, Henry Ford and Alfred Sloan, led part of the destruction of the ecosystem.
Sloan, in many ways the father of “corporate management,” purposely buried the entrepreneurial history of GM, and his organizational leadership led to one of the most arrogant, risk-adverse bureaucratic organizations in the world. Ford’s obsession with creating one of the most efficient companies in the world and not evolving with market forces took the brain power out of the company and, with it, the passion out of his employees.
There have been movies made on how the automotive companies killed future entrepreneurs and the ecosystem that created them. One of the most damaging tools was the non-compete contracts for employees, which have proven to prevent the sharing of knowledge and ideas. These interactions are the heart of any ecosystem. If Shockley had similar contracts for his engineers, Silicon Valley might never have happened; Fairchild Semiconductor might have started in a different state.
There have been hundreds of thousands of talented engineers that have come to live and work in Southeast Michigan over the last century, and the old-guard automotive leaders never helped them to build the next great companies.
The story and lessons of the rise and fall of the Michigan automotive ecosystem redirects the focus from institutions and activities to the people in the ecosystem. I currently advise governments and donors on how to develop ecosystems that help to develop job-creating entrepreneurs in developing countries. They want to focus on venture funds, accelerators, competitions and training.
Trying to find ways to leverage the skills, knowledge, and wealth of the current private sector is the best way to developing an ecosystem that will support the job-creating entrepreneurs of the future.
Author’s note: Thanks to the R.E. Olds Transportation Museum for some of the background information.