Eastern Germany's Jenoptik Rises From The Rubble
When Lothar Spath took the top post at the sprawling eastern German Kombinat VEB Carl Zeiss Jena in 1991, his job looked like mission impossible. The company's antiquated factories turned out a bewildering array of products, from leather telescope cases to computer chips. It was overburdened with 27,000 employees--3,000 of them working in the canteens alone. As the company's formerly captive markets in the East bloc dried up, one of Spath's main tasks was "to get rid of people as quietly as possible," he recalls.
Fast-forward to 1998, and the outlook seems rosier. The Jena-based company, now called Jenoptik, is a profitable maker of electronics, telecom gear, and cleanroom equipment. It earned $38.3 million on sales of $1.4 billion last year, and revenues are growing as Spath pushes into international markets. On June 16, he took Jenoptik public, selling $434 million worth of stock on Frankfurt's Neuer Markt--the largest new issue yet by an eastern German company.
Yet the tale of Jenoptik's rise from the rubble of communism isn't an entirely pretty one. Spath, 60, financed his corporate restructuring through $2 billion in government subsidies, including $492 million from the company's home state of Thuringia. He then bought up western German companies whose products could complement Jenoptik's. As a result, today just 20% of the company's 8,400-strong workforce is based in eastern Germany. The remainder are in western Germany or abroad.
HALFWAY THERE. Jenoptik's struggles show how tough it is for eastern German companies--and the region's economy--to revamp. Indeed, the east is unlikely to stand on its own feet for another decade. According to the Bundesbank, eastern German unemployment in May stood at 18.7%, vs. 9.4% in the west. Germany's federal government has poured $590 billion into the eastern sector since 1991, and the region will continue to need huge social transfers from the west. "At best, we have only the first half of our journey behind us," says Franz Schuster, Thuringia's minister of economics and infrastructure.
From the start, the deck seemed stacked against Jenoptik. Because Zeiss managers fled to Stuttgart in 1945 when the Russians occupied Thuringia, an eastern and a western company manufactured competing precision optical equipment under the same name. After the wall fell, the western Carl Zeiss Group received most of the former Kombinat's traditional optics products--and exclusive rights to the Zeiss trademark. That left Spath with factories full of toxic waste, few marketable products, and a skilled workforce with almost nothing to do. On Dec. 31, 1991, he fired 17,500 people.
The government subsidies disappeared fast. Spath spent $560 million to retire the Kombinat's old debts. A further $500 million covered social costs for laid-off workers. In the end, Spath had about $645 million left for rebuilding the company. The sprawling plants in downtown Jena were in such miserable shape that Spath decided to rip most of them down. In their place he constructed a glass-roofed shopping mall, offices, and the luxury Esplanade Hotel. Between 1992 and 1996, he sank an additional $175 million of precious capital into development projects.
Meanwhile, Jenoptik's technicians were scrambling to design high-technology products that could compete in tough global markets. The Kombinat had been a center for microprocessor manufacturing equipment for the entire East bloc. Using that knowhow, Jenoptik designed equipment to etch tiny circuits on computer chips. But selling it proved a huge challenge. Jenoptik was a complete unknown in the West, and no one wanted to buy crucial equipment from a company with no track record. In 1993 and 1994, Spath laid off 1,200 more workers.
With time running out, Spath knew he needed a drastic strategy shift. The turning point came in 1994. During a fruitless sales trip to Asia, he had a chance encounter with celebrating salesmen for Meissner & Wurst, a Stuttgart supplier of equipment used in chip-factory cleanrooms. Spath realized Jenoptik's only chance at survival was to acquire other companies with solid international reputations in fields related to Jenoptik's products.
The resulting company, he figured, could supply complete chipmaking and other systems, rather than their parts. Spath persuaded Jenoptik's skeptical works council, which can veto takeovers, that the strategy meant survival. He also initiated talks with Meissner & Wurst. In October, 1994, Jenoptik reached an agreement to buy 97.8% of the company.
Spath has been on a buying binge ever since. He snapped up two small laser and optics companies in Hamburg and Munich, respectively. He made KRONE, a Berlin maker of telecom equipment, the core of a second division with $360 million in annual sales. He nabbed a maker of precision electronic controls for such products as aircraft to bolster Jenoptik's third division, which produces high-tech electronic gear. And last year, he agreed to acquire ZANDER Klimatechnik, a Nuremberg designer, builder, and manager of clean factories. This final move made Jenoptik a one-stop shop for chip manufacturers and biotechnology companies.
"CRAFTY FELLOW." Spath says the shopping spree is over. His job is to manage the company he has stitched together. Investors believe he'll do well. They bid up Jenoptik's shares from the offering price of $25 a share to $37 in late June. The company's diversified products and global reach put it in a good position to grow, says Christoph Bruns, fund manager at Frankfurt's Union Investments. "The most important thing at a company is the management," he says, "and Spath is a crafty fellow."
Is Jenoptik's restructuring a success? For Thuringia, the answer is a qualified yes. The state has nearly recouped its original investment. It pocketed $190 million in a 1997 private placement and June's stock offering. Its remaining 19% stake, which it plans to sell after two years, is worth $236 million. Moreover, through real estate development and the spin-off of noncore businesses, Jenoptik replaced several thousand of the jobs lost from the old Kombinat.
For Germany's politicians, however, Jenoptik is an embarrassing reminder of the failure of reunification. Like most of the huge subsidies poured into the east, the federal government's $1.5 billion investment in Jenoptik has evaporated. The next mission impossible lies with Bonn: weaning the east from western giveaways. And until a Jenoptik can thrive without handouts, a true eastern German success story can't be told.
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