Is There A Silicon Valley In The East German Rubble?

During the cold war, East Germany's Carl Zeiss was the mightiest technology conglomerate of the former Soviet empire, pumping out everything from semiconductor chips to laser equipment for tanks and guidance systems for spy satellites. It was as close to a Silicon Valley as the East bloc ever had. But when the Berlin Wall fell in 1989, giant Zeiss imploded. Orders from the Russians evaporated, and the combine, with its 69,000 employees, fell rapidly into bankruptcy.

Today, the ruined Zeiss is in the midst of one of the most ambitious corporate turnarounds in German history. With a massive $2.4 billion government investment, the goal is nothing less than to create a technology region that can challenge the best of the U.S. and Japan. That means advancing past such rich west German giants as Siemens and Daimler-Benz and jumping to next-generation technologies in optoelectronics, micromechanics, and semiconductor equipment. "We're trying to leapfrog the Japanese. We have to forget every product on the market and get into totally new areas," says Ralf Thomas Kersten, a west German manager recruited to head operations at Jenoptik, the 17-month-old company that has risen from the remains of Zeiss.

TEST CASE. If it succeeds, Jenoptik may not only lift up the region around the small city of Jena (map), it would serve as an important test case, demonstrating that globally competitive enterprises can spring from the ruins of east German industry. That would lend new hope to Germany's grueling reunification. It could also carry implications for German industry as a whole. If Jenoptik can succeed in creating smaller, nimbler technology companies, it will be a lesson that many stodgy German industrialists will have to take to heart.

The man powering the renewal is Lothar Spath, the hard-charging former Prime Minister of Baden-Wurttemberg. Credited with turning the Black Forest region into one of Germany's wealthiest, Spath was tapped by German Chancellor Helmut Kohl in 1991 to pull off a repeat performance in Jena. His close ties to Germany Inc. are helping. In just 17 months, he has created 120 new small and midsize companies in Jena, a mix of joint ventures and direct investments from the West. He has also lured top-notch executives, including former Boston Consulting Group Inc. experts, west German managers such as Kersten who were frustrated with traditional German management practices, and other Germans with experience in such fabled high-technology regions as Boston's Route 128.

As a university town and research center dating to 1557, Jena has a shot at duplicating such high-tech growth strategies. It is chock-full of scientists and engineers--as much as 30% of the work force, making it one of the most highly educated regions in Germany. Spath is galvanizing the flow of technology from universities to entrepreneurs in smaller Mittelstand companies, traditionally a weak link in Germany. At Jenoptik itself, orders in October were three times higher than in March, and Spath says sales, forecast at $45 million in 1992, should double each year, starting in 1993.

Spath has narrowed Jenoptik's focus from thousands of product areas to just four: optoelectronics, precision manufacturing, semiconductor equipment, and environmental-analysis equipment. Jenoptik needs powerful partners to help market its new technology. So it's offering all comers a majority stake in joint ventures. Among others, that has attracted Swiss chemical giant Sandoz and Deutsche Aerospace.

Jenoptik is also gunning to get a piece of the action in telecommunications technology. It's part of a consortium led by BMW bidding for a license to build the second private mobile-phone network in Germany using a new technology for pocket-size cellular phones. Another niche Spath is eager to develop is the design of application-specific semiconductor chips (ASICs)--an option Texas Instruments Inc. is exploring in Jena.

SPOILS OF WAR. This isn't the first time Jena's scientists are rebuilding from scratch. Because Zeiss was such a key player in the German war machine, the U.S. Air Force in 1945 corralled 127 top scientists and truckloads of equipment and transplanted them deep into western Germany, at Oberkochen, near Stuttgart. There, a new, western Zeiss was born. Later, the U.S. exchanged the Jena region for West Berlin. That meant Zeiss was raided a second time by the Soviet army. From the remains, Zeiss rose again in Jena, with a red star over its headquarters.

After the East German government collapsed, the two Zeisses came face to face. Since its founding in 1945, Zeiss Oberkochen had built up a $3 billion optics business in the West, concentrating on microscopes, medical and meteorology equipment, and astronomy instruments. The German government was eager to persuade Zeiss west and east to merge.

But Zeiss Jena had grown too big for Zeiss Oberkochen to swallow. After months of negotiations, a deal was struck: Zeiss west took over a slice of Zeiss east, where the product lines overlapped, plus 3,500 employees. Jenoptik, now owned by the state of Thuringen, will be privatized when it becomes financially stable.

When Spath took over as CEO at Jenoptik in 1991, he was left with a bankrupt hull, a bloated staff, acres of decrepit factories--and only $400 million after paying off debts, severance, and environmental-cleanup costs. Although the German Treuhand privatization agency already had whittled the work force to 27,000, down from 69,000 in 1989, the company still needed to shrink drastically. In one brutal cut, Spath slashed 16,000 jobs, throwing one out of five in Jena onto the dole.

A restless manager who abhors sitting behind a desk, Spath commanded his management team to "get things moving, make decisions fast--even if some are wrong," says one Jena manager. To a group of scientists who formerly made laser scanning equipment for the military, Spath gave an ultimatum: Come up with a product that will sell in Western markets within six months, or the division will be shut down. Jena's brain trust rushed to west Germany to find out what semiconductor makers wanted.

By the fall of 1991, they had an idea for a laser machine that would vastly improve the speed and accuracy of making printed-circuit boards. When they ran into trouble getting electronics supplies shipped to Jena, Spath transplanted the entire team of 20 developers to up-to-date Stuttgart labs.

One year from the birth of the idea, Jena's scientists showed the machine at a trade show in San Francisco in September and picked up their first two orders for $1 million from MRS Technology Inc., based in Chelmsford, Mass. Their innovation tripled the accuracy of making circuit boards by using a computer-controlled laser to stamp an image onto the circuit boards, eliminating the need for a layer of film to do the same job. "Their technology is amazing," says Mark F. Lapham, chief financial officer at MRS. "It will revolutionize the manufacturing of prototype PC boards worldwide."

TINY HOLES. A different innovation in laser technology spurred a $6 million joint venture with Lambda Physik, a unit of Palo Alto (Calif.)-based Coherent Inc., called MicroLas Lasersystem. The three-month-old startup specializes in industrial lasers for fine mechanics, such as semiconductor equipment and micromachines. MicroLas' custom-built lasers can remove one-molecule-thick layers of material with pulsing shots of light and can bore holes with a diameter smaller than the width of a hair in tiny machines. The company is marketing the laser as a tool for drilling the holes in ink-jet heads in laser-jet printers. "IBM has the patent on the technology, but we're the first to translate it into a product," says MicroLas President Bernhard Klimt, a Czech who learned high-tech in Boston's Route 128.

Spath is counting on such experience to turn Jenoptik and its region into winners. To be sure, Jena has some advantages that other parts of eastern Germany lack: big government support, a well-known political figure to lead it, and a wealth of technologies. But success in Jena could become a model for revitalizing other cities of eastern Germany, such as Dresden and Leipzig. That kind of development would not only help rebuild the east but would forge German technological strengths into the new century. Buffeted by Germany's tumultuous past, Jenoptik may be helping to show the way toward its future.

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