Data, Innovation and Millennials Take Hold in Detroit

September 22, 2015

Takeaways

Detroit is emerging from bankruptcy as a place where millennials are driving innovation.

 

This essay is part of a series of articles relating to the Internet of Everything project. Read more at uschamberfoundation.org/ioe


By Michael Hendrix

Software is eating Detroit. The city that once drove the hardware economy is coming to terms with the software economy. And, based on a study of its hiring and talent, Detroit’s future is brighter than you may think.

Jobs data from Automation Alley and a unique look at talent from the Manhattan Institute’s Aaron Renn show Detroit beginning to embrace this new economy. The city has more technology industry firms than Pittsburgh and Cleveland combined. Its technology-oriented jobs are also keeping pace, while boasting one of the nation’s highest concentrations of engineers. “We’re at a tipping point,” said Paul Riser of TechTown Detroit. “People are seeing unique things happening in Detroit and want to be on the cusp of the rise.” 

Motor City can still produce world-class hardware. Increasingly, it has the ability to add another layer of value in the form of connected software—what’s otherwise known as the Internet of Everything. Detroit’s central task for the next few decades is to marry its competitive advantage in hard industries, such as automobile manufacturing, with a technology talent capable of securing a foothold in the hardware of the information economy, such as autonomous vehicles and drones.

Watch the above video to see how Detroit is being transformed by the digital age.

The global economy is undergoing a transition as significant as the one it undertook during the Industrial Age. We are entering what MIT professors Erik Brynjolfsson and Andrew McAfee have termed the “Second Machine Age,” as the physical world comes to terms with the digital world. Devices have gone from mindless and helpless infancy to walking, talking, and thinking things. Growth now is not simply evolutionary but revolutionary.

When Henry Ford first opened his plants on the outskirts of Detroit, he could harness a relatively small amount of input by many people to yield production on a large scale. Assembly lines naturally multiplied human labor. Today’s technological advances employ a small amount of input by a few people to even greater effect.

The physical world is hungry for information. It demands sensors to track its movement, algorithms to crunch its data, and talented people capable of creating it all and knowing what to do with the results. This means, as Michael Mandel of the Progressive Policy Institute points out, that we live in a “two-track” economy. On the one hand we have the hardware economy. On the other, the software economy, which is increasingly driving the physically intensive industries.

“Software,” says Marc Andreessen of Andreessen Horowitz, “is also eating much of the value chain of industries that are widely viewed as primarily existing in the physical world.” Automobiles are valued less for their hardware than for the software inside. A Tesla Model S is 30 million lines of code on wheels. “In today's cars, software runs the engines, controls safety features, entertains passengers, guides drivers to destinations and connects each car to mobile, satellite, and GPS networks,” concludes Andreessen. Indeed, the growing number of electric and hybrid vehicles could not function otherwise—and will thus help accelerate the software economy’s ascent. 

Software is like a new layer of value added on to the dumb machines of the past, making both more valuable. As Benedict Evans of Andreessen Horowitz writes, “An entirely new layer is going to be built on top, using software, connected to the Internet, and doing entirely new things.” And these new things have a serious multiplier effect that accelerates economic growth and spills over into other corners of the market.

Critical aspects of the hardware economy will change with the layer of software added on top. Among them will be the new competitors who desire to merge those two worlds. In the auto sector alone, we see the entrance of Silicon Valley firms aiming to create their own cars, including Apple and Google. The titans of one economy will collide with those of the other. The only clear winner will be the consumer.

The question is, are America’s cities keeping up with these changes? Just like companies or careers must change with the needs of the market, so do the places where they gather. And when they do not innovate, they die—it is only a question of time as the forces of creative destruction whittle away their advantage. Which is to say, every city is dying whether it knows it or not.

Cities need to assume that the software economy is coming. Adopting new technologies of production is the very heart of economic growth. Ideas-producing places, such as San Francisco, have a competitive advantage here but perhaps not for long. Other cities are finding their footing, harnessing their best and brightest as agents of change within established firms or through startups. Goods-producing places, such as Detroit, must do the same.

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We think we know Detroit’s story. Long a manufacturing hub and home of consumer-driven innovation, Motor City was the Silicon Valley of its day. Southeastern Michigan gradually attracted competitors across the globe since its early-20th century rise and in recent years fell on particularly hard times.

The reality is that Detroit has been declining for more than six decades. After the Second World War, the major auto firms that called the city home began to leave in search of cheaper workers and lower taxes. And long before today’s worries about robots taking over people’s jobs, automation was carving out assembly line jobs in favor of newer, more skilled roles that Detroit struggled to fill. As early as 1961, Time Magazine was running a story entitled “Decline in Detroit.” 

As Harvard’s Ed Glaeser argues, Detroit compounded its troubles by investing in place over people. “In 1948, the federal government started doling out cash for urban renewal, and by the 1950s it was spending seriously on transportation. In the 1980s, with federal aid, the city built its People Mover, which now glides quietly over essentially empty streets.” When it should have been retooling its workforce and lowering the barriers to everyone advancing, Detroit invested in increasingly lifeless structures.

Detroit is a city built for nearly two million people that houses less than 700,000. Between 2000 and 2010 alone, the city’s population fell by a quarter, and more than a third of its housing sits vacant. No other large city in America has experienced such a dramatic decline in population.

Worse yet, Detroit has faced a costly fiscal legacy after years of mismanagement, corruption, and profligacy. Its $18.5 billion in debt—nearly $27,000 for every man, woman, and child in the city—led to the largest municipal bankruptcy filing in history on July 18, 2013. After more than a year of rancorous negotiation, including threats to hock Detroit’s art collection, a bankruptcy judge approved the city’s plan for slashing its liabilities and reinvesting $1.4 billion in Detroit’s recovery over the next decade.  

Detroit’s 75th mayor, Michael Duggan, held no inaugural ball or celebration. He was sworn in under the tight gaze of a state-appointed emergency manager and went to work delivering on his promise to improve the city’s basic operations. There was little capacity for thinking ahead, only to return Detroit to a level of basic government other cities take for granted. That meant actually plowing streets, turning on streetlights, and making buses run on time.

Bankruptcy shook Detroit from complacency and, except for the city’s pensioners and creditors, opened up a future of possibilities. It was a “Katrina Moment” that, in the words of one startup leader, “disinfected the region” of corrupt influence. Today, it is driving a “slingshot effect” whose impact is only just beginning to be felt.

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There is a block just off of Detroit’s Woodward Avenue where the city’s future is being built. Just a few years ago this cluster of buildings, known as Madison Block, housed squatters. Today, some 300 young people are hard at work on 50 new startups. They are a key driver of Detroit’s shift to a software economy.

Madison Block shouldn’t exist. Miles of urban blight still pockmark Detroit. And yet, for as much as the city looks dead on the outside, it is vibrant inside. Nowhere is this more evident than downtown. “Ten years ago a tech entrepreneur in Motor City was a rare specimen,” noted The Economist recently, “even simply a young professional who lived downtown.” Today, vacancy rates for apartments and commercial space in the city’s core run in the single digits.

Startups are to a city as a coral reef is to the ocean. They grow upon the wrecks of past life, sustaining ecosystems many times larger than themselves. In Detroit, a small but growing community of startups is choosing to make the city home.

Now other corporations are joining the fray. Automation Alley found firms “pioneering new technologies in robotics, advanced materials, life sciences, alternative energy and many other industries.” Creative types are gathering along Detroit’s Woodward Avenue to serve nearby Quicken and the growing cadre of startups along its way. Major corporations such as Google, Microsoft, and Uber now call downtown Detroit home as well.

One such newcomer is Dan Gilbert, the founder of Quicken Loans and the man who’s bankrolling Detroit’s revival. He’s spent some $1.6 billion buying up and converting 12.5 million square feet of downtown real estate, moving 12,000 of his employees into many of those properties and backing hundreds of startups with a support structure around them. Nearly every major economic effort in downtown Detroit can in some way be traced back to Gilbert.

Along with Gilbert, tech companies are now backing incubators to spur yet more startup activity in something like a virtuous cycle. TechTown, operating out of a space once used to design the Corvette, has trained or advised more than 866 startups over the past 6 years, creating 1,155 jobs, and leveraging $103 million in follow-on funding. The Gilbert-backed Bizdom Detroit is now a stalwart of the local startup community. The accelerator offers money, education, mentorship, and physical space to scaleable and innovative young companies. Alongside a total of five Detroit incubators sit 5 venture capital firms investing $88 million in 12 startups. The city’s ranked seventh overall — just behind Pittsburgh — in the degree to which their startup funding has improved thanks to local accelerators. 

State and local governments are becoming more of a startup booster and collaborator than previously thought possible.

The State of Michigan came in for particular praise after Detroit’s bankruptcy. Rather than local government being a constant source of economic woe, startups say they’re eager to find solutions. Even on something simple, such as crime, Detroit’s made big strides—bright lights and blue uniforms now line downtown streets.

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Nearly a quarter of a million Detroiters work for technology firms, while more than 170,000 hold technology jobs. To put Detroit’s talent base in perspective, St. Louis and Pittsburgh’s tech workforce combined still would not total the number working in Motor City. Detroit ranks fourth in the nation for its concentration of tech jobs and fifth according to overall employment. And their ranks continue to grow year after year.

Metro Detroit’s tech sector employment is believed to have grown by 4% from 2013 to 2014 and nearly 2% in the year to early 2015. The career hub Dice found greater Detroit to be one of fastest growing cities in America for tech jobs based on the number of help wanted ads. Today, Detroit is one of the fastest growing tech hubs in the United States (admittedly from a lower base).

Engineers lead Detroit’s tech workforce, holding down 78,740 jobs as of 2013, while computer and mathematical professionals stand a close second with 66,880. Those in the life, physical, and social sciences, as well as technology management, fall much further behind, each with less than 20,000 such roles. 

Looking specifically at the software economy, more than 32,000 professionals are employed in Detroit’s computer systems design sector. “If we filled every opening that’s been posted or recruited just in the Lansing area, we’d be able to hire out all of our graduates three times over,” said Garth Motschenbacher of Michigan State University, who helps place computer science graduates.

Many of these software types work for the automotive industry, which accounts for more than one-third of all advanced industry employment. Simply as vast repositories of talent, local automakers in particular—General Motors, Ford, Chrysler—make a big dent in Detroit’s universe. Many of these companies depend on vast regional supply chains with tributaries running to numerous small- and medium-sized enterprises. In all, there are some 462 advanced automotive establishments in metro Detroit (by comparison, Chicago has about 212 such firms). Southeast Michigan’s total advanced automotive sector is ranked first in the nation in its number of jobs.

Auto firms demand expertise in cloud computing, energy management, advanced robotics, and mobile software design, among other skills, as they re-engineer the car for the future. General Motors is perhaps the most active hirer of software types, particularly as it looks to in-source more of its workforce to the Detroit region. And their employees have been active indeed. General Motors’ software engineers accounted for 15% of the company’s patents over the past five years.

Most Detroit-area automakers are quietly building advanced information technology (IT) centers. General Motors’ Warren Technical Center employed 19,000 people as of 2014. Yet, according to interviews conducted for this research, many of the auto firms are suffering from large turnover in technical talent, especially by millennials. There’s word of a war for talent with ever-increasing sums on the table.

Some Silicon Valley firms have leveraged their workforce to enter into the Detroit market, even on a small scale. Pandora Media, for instance, opened a local office to help automakers develop their in-car entertainment systems. On a much smaller scale, some 1,600 millennials with tech-related backgrounds find their way every year into local fellowship programs, such as Venture for America or Challenge Detroit, or internship opportunities with Quicken Loans or D:hive Residency.

Shifting from a tech-jobs focus to overall employment in tech firms, Detroit is also growing at a healthy clip. Industry-wide employment grew by 4.5% from 2012 to 2013 and 3.6% the year after. IT firms employ a quarter of all of Detroit’s tech industry workers. Advanced manufacturing, even for the impact of the automobile, employs less than half what the IT firms do. 

One reason for this may be the influence of Quicken Loans, which is essentially a tech firm in a lender’s wrapping. Since 2010, the company has added 12,000 employees in downtown Detroit. Blue Cross Blue Shield is also a big employer in the region; roughly 3,400 of their employees are situated downtown. 

Job density remains low where Detroit’s population density is the highest. The city itself has the 5th lowest number of jobs per resident across the country’s 100 largest cities. It just happens that the jobs that are there are increasingly of higher value and employing younger workers. Therein lays the hope for Detroit. 

Detroit is not starved for software talent or the young and educated types that give their city a competitive advantage. Many cities in America struggle to attain and retain a workforce with the skills necessary to compete in the software economy. Yet, Detroit knows business. Its private sector expertise and growing entrepreneurial class will serve the city well in the future. And young, educated people are more prevalent in Detroit than the city gets credit for fostering. 

Detroit’s biggest regional assets are the tens of thousands of IT types that live there. The large corporations draw them in, and suppliers and startups can plunder their ranks. Such talent already flows through the Great Lakes region. Immigrants also bring diversity and an entrepreneurial bent; Middle Easterners are particularly prominent and successful in Detroit.  

Yet, talent, in one sense, was part of Detroit’s problem for far too long. That is, the city’s economy depended on labor intensive, blue collar jobs that were difficult to re-tool into knowledge-intensive, white collar work. But decades of decline have taken their toll, for better or worse. 

Detroit not only has a greater concentration of college degrees than in 2000, but it improved relative to the rest of the country too. Even as Detroit lost 160,000 residents from 2000 to 2013, the city gained more than 150,000 new residents boasting college degrees. The overall number of millennials with college degrees fell over the past decade, but that’s because the overall millennial population fell and not because there was an especially sharp decline among this cohort. 

Detroit’s educational attainment rates are as good as, if not better than, most major cities in America. Regional universities granted 9,428 college degrees in 2012 to 2013, far more than elsewhere in the region. Nearly 19% of those degrees were in science, math, engineering, or technical fields (what’s known as STEM), compared to a national rate of 13.6%. 

STEM is a major component of 33 area colleges and universities. In the software realm, the University of Michigan just announced a $100 million Big Data initiative tackling real-world problems in transportation, medicine, social science, and teaching and learning. UM-Ann Arbor’s new Mobility Transformation Center will collect and analyze data from roughly 3,000 vehicles driving its city’s streets in order to test the future of connected vehicles. 

Yet, only 27% of residents have a college degree, compared to 42% in Pittsburgh and 72% in Philadelphia. It is a long legacy of undereducation with which the city struggles. College education rates plummet dramatically among those aged 25 or older. There’s significant room for improvement in higher education, but the trends are encouraging.

Detroit does not have a “brain drain” problem but a retraining challenge for its legacy workforce. 

According to migration data from the Internal Revenue Service compiled by the Manhattan Institute’s Aaron Renn, the number of people leaving Detroit has fallen dramatically since the peak of the Great Recession. On the flip side, the city is now attracting more residents from other Rust Belt cities (e.g., Chicago, Cleveland, and Pittsburgh) than it loses to them. 

Most of those moving into Detroit have some connection to the region, according to local entrepreneurs. Rare is the resident moving unbidden from elsewhere in the country, just as it has become for other cities that are not yet global hubs. Detroit’s diaspora numbers in the millions and forms the essential talent pool for long-term growth. There are hundreds of thousands of parents in Detroit, and their kids are the city's future, even if many of them have moved away

To be sure, Detroit is still losing people. Some 40% of residents currently say they would like to leave the city, and the population is not expected to stabilize until 2030. New Orleans faced a similar dilemma after being struck by Hurricane Katrina and cementing what amounted to a 7.3% loss in population from 2000 to 2013. Yet, even that city gained 40,000 net new college graduates over the same time period, according to Renn. Detroit has a similar opportunity even amid population decline. 

Detroit’s declining population is also slightly deceptive. Many people (and the firms that employ them) simply moved to the outskirts of the Detroit metro. Meanwhile, downtown began filling with younger, more educated residents. Nearly 3,000 of them ages 25 to 34 live in greater downtown Detroit, with most living in the immediate core, Midtown, and Woodbridge.

“Detroit has largely accomplished its objective of boosting brain power,” says Aaron Renn, “and are making positive strides in terms of college-degree attainment. This brain gain is cause for celebration.” 

Where will this talent be sourced from in the future? Most of it is right on Detroit’s doorstep.

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Many in Detroit worry whether the city will deliver on its promise. To be sure, problems remain in Motor City, but over the long run, those challenges are not necessarily the obvious ones of, say, vacant homes. Crime will remain a great competitive challenge. Rather, Detroit at the dawn of the software economy faces the burdens that many other cities struggle under, just on a greater scale.

The awful state of Detroit’s regulations and governance remains a serious burden on the city’s future. These rules weigh not only on businesses but also on individuals who may one day hope to be entrepreneurs and to every local consumer. The U.S. Chamber of Commerce Foundation’s Regulatory Climate Index found Detroit held a middling ranking compared to America’s major cities, but struggled specifically in dealing with construction permits, registering property, and enforcing basic contracts. Accessing property records is frequently an unpredictable exercise thanks to wildly inaccurate and out-of-date filings. Construction permits are going to consume 1.3% of a commercial project’s budget at a minimum, and that does not include the waiting time or maze-like procedures. Detroit’s biggest advantage was in a relatively light burden of fees and taxes covering basic business procedures.

John Hantz, a local Detroit businessman, proposed in 2009 to turn 15 acres of vacant Detroit land into an urban tree farm. As he told Crain’s Detroit Business, “It took me five years and $1 million to get the right to mow the lawns that hadn’t been mowed in 15 years,” Hantz said. He faced bureaucratic delay and a suspicious community. And that is for someone putting his own money on the line. Today, Hantz is the owner of the self-dubbed “world’s largest urban farm.” When asked if he would have invested again if he wasn’t originally from Detroit, Hantz offered an emphatic no: “There would have been just too many hurdles.”

These legacy problems weigh on entrepreneurship and stifle economic growth, no matter whether you are building a tree farm or software empire. It is not just traditional businesses that struggle with these rules. The U.S. Chamber Foundation’s survey with the DC-based incubator 1776 found some startups struggling with local legal concerns over adopting new technologies. The only problem for city reformers is that these are hardly glamorous problems to take on; regulation is not the new streetcar. 

Another barrier to Detroit’s growth comes in the form of community. While some in our survey with 1776 attested to the collaborative nature of downtown startups and the constellation of bigger players—public and private—that revolved around them, even more wondered just how far that community vibe reached. Contrary to the message of the roundtables, the Chamber Foundation and 1776’s surveys revealed a feeling of little community support. Go outside of downtown, they say, and the startup scene is dead until you reach Ann Arbor.

“One of the challenges we have in Michigan is that our innovation culture is hypercompetitive,” said Jean Redfield of NextEnergy. “It’s not network based.” As we found in our Innovation That Matters report, these sort of bottom-up networks combined with top-down reform—half culture, half economic structure—is part of that secret sauce of software-driven startup hubs. “We have to have network-based ‘coopetition’ and friendly co-investment,” Redfield concluded, “to grow brand new industries here to solve the problems of the world.”

The danger is that insularity will breed a closed community that is not open to newcomers. Ensuring a diverse set of industries and a more complex economy in the city will help on this front. Bridging divides between corporates and startups will help integrate the advances of the software economy into Detroit. TechStars Mobility, part of a network of incubators across the country, aims to do just this for transportation and has enjoyed success in other communities with its mentorship and access. Of its 700 to 800 first-year applicants though, only one was from Michigan. 

To secure a more promising future, Detroit must continue attracting bright, young tech workers who are willing to take risks.

They may come for the low costs and gritty urban vibe, but they’ll stay for the community of like-minded people. Forming dense, open networks of these workers is key to that success. Immigrants are likely to play a large role as well. As the head of one investment firm declared, “We need to be inviting immigration.” Together with Detroit’s “existing workforce of engineers, educators, doctors, and STEM employees, they can help strengthen the city’s nascent civic tech ecosystem,” as the Innovation That Matters report concludes.

Detroit clearly needs more entrepreneurial activity if it is to be prepared for the software economy. For as encouraging as the city’s story is, there still aren’t that many startups. There were roughly 100 as of April 2015. Seattle, a city with roughly the same population, had more than 800 startups. The reality is that Detroit has little startup history and a nascent founder community. In fact, when 1776 and the Chamber Foundation surveyed the civic and social innovation space, there weren’t enough respondents to make the findings statistically significant.

Startup communities take time. As TechStars’ Brad Feld has argued, it can take around 20 years for a healthy startup ecosystem to form. It also takes time for a particular culture to set in, especially one that will help harness big ideas to regional specialties. Detroit is only a few years in—and recent years have hardly been balmy. A thousand little actions taken many years ago are setting the scene for Detroit’s recovery. 

The size of Detroit’s opportunity is best seen in the scale of its failure. The city is cheap, has surprising amounts of talent, and is a veritable blank slate for building an economy and community for the future. Local software engineers talk about how much their community sticks together in the face of the daily difficulties of life. “Everyone thinks you’re crazy to be here, which builds a certain camaraderie,” said one tech entrepreneur.

There is one part of the economy that toasts “the crazy ones”—the software economy. It is restlessly dynamic and endlessly inventive. A new generation of companies will take on old ways of doing business. In so doing, they will change the world. That also means that our current workforce and businesses will confront rising headwinds. Cities such as Detroit that have long stood in the face of change may have an advantage—change is nothing new to them.  

“Policymakers shouldn’t be trying to copy Silicon Valley,” says Marc Andreessen. “Instead, they should be figuring out what domain is (or could be) specific to their region—and then removing the regulatory hurdles for that particular domain.” Detroit’s specialty is in building great hardware and connecting them to the latest and greatest inventions of our age.

Local economies thrive when the bottom-up growth in communities is met with top-down leadership, all of which in turn harness local talent and capital to innovative ends. Removing the barriers to people and companies advancing go a long way, as does creating a vibrant and tightly woven community of well-educated workers. Detroit is starting on this very path. We may already be seeing the makings of a Detroit for the software age.

Michael Hendrix is director of research for the U.S. Chamber of Commerce Foundation.

The views expressed here are those of the author and do not necessarily reflect those of the U.S. Chamber of Commerce Foundation, U.S. Chamber of Commerce, or their affiliates.