Much of East Germany is a tableau of vacant factories, half-occupied apartment blocks, and shiny new shopping malls with few customers. But there is one bright spot on the map: Dresden. The city bisected by the Elbe River has become one of Europe's main centers of semiconductor production, helping to keep unemployment below the East German average and allowing the surrounding state of Saxony to weather the economic downturn better than the rest of the region. "It has definitely been a success story," says Dietmar Edler, an economist at Berlin's German Institute for Economic Research who has studied the region dubbed "Silicon Saxony."
Government subsidies justly have a bad rap. In Dresden, though, public money lured two major manufacturers, Munich-based Infineon Technologies, which began building a factory in 1994; and Sunnyvale (Calif.)-based Advanced Micro Devices Inc., which started building in 1997. They employ more than 6,000 people between them and have attracted dozens of suppliers and related businesses. As a result, high-tech employment has grown at more than double the rate of the nation's. The region's good fortune helps address the major flaw in the German economy: not enough high-tech industry.
The bad news is that Dresden and the surrounding area will probably need government handouts for another decade. Still, subsidies alone don't account for the region's success. Dresden has prospered in part because, in communist times, it was already a center of computer technology. Local workers were several years behind their Western counterparts, but they were easy to train, companies say. Accustomed to constant shortages, the workers knew how to be flexible. Both Infineon and AMD claim that efficiency at their plants in Dresden exceeds or equals other locations, such as Taiwan. And both have increased their investment. AMD will have ponied up $2.5 billion by next year for plant construction and equipment, $600 million more than planned. The workers' "motivation and adaptability helped them come up to the state of the art very quickly," says Johann Harter, managing director of Infineon's Dresden operations.
Can the Dresden model work elsewhere in East Germany? It's questionable. Frankfurt/Oder--home to the fledgling Communicant Semiconductor Technologies operation--was also a high-tech center in the communist era, employing 8,000 chip workers. But in the 12 years since reunification, many of those laborers have found jobs outside the region or in other fields. It may not be so easy to bring them up to date on the latest technologies. In addition, Communicant is a startup that has struggled to raise enough money, whereas AMD and Infineon, formerly a unit of giant Siemens, were established companies with deep pockets.
Even in Dresden, the chip industry isn't a panacea. The economy of Saxony shrank 0.1% in the first half of 2002-- less than neighboring states, but still troubling. Unemployment is 15%. State Economics Minister Martin Gillo, a former AMD executive, says he'd like to attract other kinds of business as well as more chip factories. Compared with the rest of East Germany, though, Dresden has it good, even after August floods caused up to $3 billion in damage to local businesses. (The semiconductor factories were on high ground.) Once in a while, subsidies can be a good thing. By Jack Ewing in Frankfurt