Eastern Germany's Silicon Dream

Can a chip startup flourish in Frankfurt/Oder?

Wolfgang Wichmann was one of 8,000 workers at the gigantic semiconductor factory in the East German city of Frankfurt/Oder when the Berlin Wall fell. The plant had been a star asset of the communist bloc's electronics industry. Yet over the years, Wichmann, who helped develop new chips, watched one failed attempt after another to adapt the former Semiconductor Factory Frankfurt/Oder to a market economy. Finally, in July, after the workforce had shrunk below 100, he lost his job, too.

Now, the 47-year-old, one of an army of unemployed tech specialists in the area, has staked his hopes on a huge chip plant taking shape on the outskirts of Frankfurt/Oder, a city of 70,000 separated from Poland by the Oder River. So far, the future center of Communicant Semiconductor Technologies consists of little more than a concrete foundation covered with puddles of rusty water. But if the startup, co-founded by a former Lucent Technologies (LU ) executive in conjunction with local government, succeeds, Communicant will employ 1,500 and spark a revival of the city's chip industry. If the project doesn't work, says Wichmann, "you might as well turn out the lights and put up a sign that says: `Here stood the semiconductor capital of the German Democratic Republic."'

The struggle of Frankfurt/Oder to revive its old communist-era industry is emblematic of Germany's national, 12-year struggle to turn around the east. It's not going well. Unemployment in former East Germany is 17.7%, twice the rate of western Germany. Subsidies and other transfers from Berlin still come to $70 billion a year, adding to the government's yawning budget deficit. No wonder recently reelected Chancellor Gerhard Schröder has pledged a new effort to kickstart the region's economy: If some industries really do take hold here, and the region sustains itself, then Germany as a whole will benefit tremendously.

Frankfurt/Oder isn't the only one betting big on the $1.3 billion startup. Intel Corp. is investing $40 million, while the Dubai Airport Free Zone Authority and the Investment Bank of the State of Brandenburg jointly are kicking in $285 million. Government subsidies total $320 million, while government-backed loans will provide the rest. The project, scheduled to begin production in 2004, is a big enough deal that Schröder planned to attend a foundation-laying ceremony in August, before catastrophic floods demanded his attention.

Backers hope that Communicant will do for the Frankfurt/Oder region what chipmakers Infineon and Advanced Micro Devices Inc. (AMD ) have done for Dresden to the south. Yet skeptics fear the Communicant project will only add another name to the list of failed government-backed ventures in the region. The global chip industry, meanwhile, is in deep recession. Moreover, Communicant's plan to become a chip "foundry," producing semiconductors to order, puts it in competition with established producers in Taiwan. "The basic technology is good, but it hasn't been proven yet in the marketplace," says Martin Gillo, a former top manager at the Dresden operation of Advanced Micro Devices who is now economics minister for the state of Saxony.

None of that fazes Abbas Ourmazd, Communicant's unlikely CEO. An Iranian-born U.S. citizen, Ourmazd left a home in New Jersey and a job at Lucent in 1995 to become director of Innovations for High Performance, or IHP, a government-funded chip research center in Frankfurt/Oder. IHP, which has licensed the products of its research to companies such as Motorola Inc., developed the technology that forms the basis for Communicant. Ourmazd, 47, took over as Communicant's CEO in August but has been a driving force from the start.

In his airy office, Ourmazd seems none the worse for wear after a grueling two-year battle to raise money. "I'm going to see this project through to success," Ourmazd says. Communicant also suffered a blow in May with the departure of Klaus Wiemer, a Texas Instruments Inc. veteran who was the company's first CEO. Ourmazd won't discuss the reasons for Wiemer's departure. He prefers to talk about Communicant's technology, which allows chips to perform communications functions as well as compute. That saves money as well as power, Ourmazd says, a key issue with battery-operated mobile phones and personal digital assistants.

The issue is whether numerous delays have eroded Communicant's first-mover advantage. "The technology is interesting, but they are no longer the only ones to have it," says Karsten Iltgen, an industry analyst at WestLB in Dusseldorf. Some in the industry say they'd feel better about the project if it had attracted more private funding. Ourmazd, who has already bought land for future expansion in Frankfurt/Oder, is sick of naysayers. "When you come up with an idea, there are always 2,000 people who tell you why it's not going to work," he says.

And in Frankfurt/Oder, where the project offers about the only hope for an economic boost, people get visibly upset at any suggestion the venture is too risky. "The risk of not giving people here a chance is bigger," says Martin Wilke, an ex-worker at the East German chip plant who directs the East Brandenburg Investor Center, a development agency. Communicant, which got 6,000 applications for 1,500 jobs, may yet succeed simply because no one can afford to let it fail. The same could be said of the old East Germany.

By Jack Ewing in Frankfurt/Oder

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