Commentary: Saxony Wakes From Its Slumber

A blur of Porsche Carrera GTs scream around a racetrack outside Leipzig. In a factory adjacent to the track, engineers craft the superluxury Carrera GT sports cars and powerful Cayenne sport-utility vehicles. The site -- a $151 million investment by Porsche that includes a hilly nature preserve for test-driving SUVs -- is testimony of an industrial revival in a once-bankrupt eastern Germany.

Porsche is one of thousands of European, North American, and Asian companies that have set up shop in the state of Saxony since the collapse of the Berlin Wall. Lured by the combination of government subsidies and an ample pool of skilled workers, companies have poured $47 billion since 1990 into factories that turn out everything from semiconductors to airplane parts. State officials reckon that a total of 220,000 new jobs have been created and another 220,000 have been preserved as a result of this wave of investment. International exports, meanwhile, have grown sixfold, to $15.4 billion.

The latest company to hop aboard the Saxony bandwagon is Japan's Hitachi (HIT ) Ltd. On Oct. 7, its management announced plans to invest $17 million in a facility that will employ 70 workers producing high-pressure fuel pumps.

Saxony's industrial renaissance is no fluke. Behind the surge in investment and jobs is a decade's worth of careful economic engineering. Former Prime Minister Kurt Biedenkopf, who led this state of 4.8 million from 1990 to 2002, sought to leapfrog the western German industrial model instead of copying it. To do that, he doubled outlays on primary and secondary education and sharply ramped up spending on research and development. Today, the number of university graduates per year is up 34%.

To free up funds for these investments, Biedenkopf slashed the bloated government bureaucracy -- a gutsy move for a German politician. "The key was understanding the importance of knowledge and R&D to the economy," says Biedenkopf, now a member of Germany's national Parliament.

The payoff can be seen in Saxony's flourishing automotive and semiconductor industries. Sunnyvale (Calif.)-based chipmaker Advanced Micro Devices (AMD ) Inc., which has invested $2.2 billion in Saxony since 1997, recently boosted its workforce of 1,400 to 2,000 and is concentrating worldwide production of microprocessors in Dresden. Its fab is not only one of the industry's most productive but also has become a center for cutting-edge research. "The motivation and skill level of the people is the biggest asset we have," says Hans Deppe, vice-president and general manager of AMD Saxony.

Mind you, there are some less well-publicized advantages to Saxony's workforce as well. As in much of east Germany, companies investing in Saxony have been able to cut favorable deals with employees on wages and working hours, skirting the rigid agreements that German unions negotiate with employers' associations and which legally apply nationwide.

Bending the rules has until now been an informal company-by-company affair. But Saxony Economics and Labor Minister Martin Gillo, who directed AMD's investment in Dresden before entering politics, is pushing a proposal that would allow enterprises with 80 employees or fewer greater flexibility in hiring and firing. "If we can provide legislative freedoms, we will gather momentum and be able to grow faster than the rest of Germany," says Gillo.

The 58-year-old former executive is the first to acknowledge that there's plenty of work ahead. Unemployment in Saxony hovers at a painful 17%, and income per capita is only 77% of west German levels, both reminders that the influx of new businesses has not fully made up for the collapse of inefficient state-run industries. Manufacturing productivity has climbed to two-thirds of west German levels, but it needs to rise further. "We're halfway there," says Gillo. "We want growth. It's the only sensible way out of our economic problems." For Saxony, which will need to grow much faster than the nation as a whole in order to reach west German levels of prosperity, the race is on.

By Gail Edmondson in Leipzig

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