Jenoptik: An East German Bright Light

A top world maker of laser optics emerged from the Communist era and German reunification, helping lift the fortunes of its hometown, Jena

Standing at a window in his office, Michael Mertin, chief executive of the optics firm Jenoptik (JENG.DE), gestures to a hilly landscape in eastern Germany. "Everything just evaporated," he says, referring to the dissolution of the Soviet empire in 1989. "A whole way of life, a whole way of producing had to be reimagined and reordered." The hills are now covered with modern office buildings, houses, and production facilities.

The past 20 years have brought enormous change to the town of Jena—the home of Jenoptik—and to the former East Germany as a whole. The transition hasn't been easy, and the region continues to lag behind its western neighbors economically. But some bright spots have emerged in the economy of the east, and Jena is one of them. Jenoptik dates from the late 19th century, when Jena was already a site of technical and intellectual prowess. More than a century later, it is a thriving optics and laser company and the second-largest employer in the city.

Jenoptik's development—and the revival of its hometown—illustrate perhaps the best of the potential for the economy of the former East Germany. Home to a university and a number of private and public research institutes, Jena feeds intellectual capital and talent into companies such as Jenoptik, and Jenoptik in turn helps the city remain prosperous. Wage levels in Jena are now near what they are in the former West Germany, and the local unemployment rate is unchanged from a year ago at 8.4%.

Post-Communist Transformation

To be sure, the economy of the former East Germany 20 years after reunification is a mixed picture. Many areas, especially rural ones, have suffered depopulation as young people moved to cities in the west to study and work. Unemployment in the former East Germany, now at 12.3%, is significantly higher than the 6.9% rate in the former West Germany. But Jena, along with other pockets of the east including Dresden and Leipzig, has managed to leverage its strengths to produce a healthy economy and vibrant culture.

Jenoptik's success in managing the post-Soviet transition lies in both continuity with the past and openness to change. The company traces its roots to an entity founded in Jena in 1889 called the Carl Zeiss Foundation, which produced precision mechanical and optical equipment. The U.S. and Soviet armies dismantled and divided the Foundation after World War II, and part of the enterprise migrated to West Germany under the name Carl Zeiss. The remainder stayed in Jena as state property; known as Kombinat VEB Carl Zeiss Jena, it was a giant firm with more than 60,000 employees in its 25 plants and subsidiaries.

But when the Berlin Wall fell in 1989, the company—along with the rest of the East German economy—was forced into radical transformation. Large state-owned combines like VEB Carl Zeiss Jena had primarily traded with other communist countries and couldn't compete on the world stage. "There had to be a massive cultural shift," says Oliver Jörk, managing director of the Saxony Economic Development Corporation, a government agency in the former East Germany. "Before, the main point [of a firm] was to offer jobs. Suddenly it was to increase efficiencies."

In 1990, a German government privatization agency took over VEB Carl Zeiss Jena and carved out Jenoptik, divesting other resources into the West German lens maker now known as Carl Zeiss AG and located in the town of Oberkochen. In the process, 50,000 people lost their jobs. But by 1998, Jenoptik was strong enough to list on the Frankfurt stock exchange. It now produces specialized lasers, sensors, and other technology used for everything from semiconductor production to hair removal to space exploration. Sales last year hit €548.3 million ($818.3 million at current rates), up 5.1% from the year before, and profits were €11.8 million ($17.6 million) vs. an €8.2 million ($12.2 million) net loss in 2007.

Cost-Cutting Amid Sales Declines

Originally from Cologne, CEO Mertin joined Jenoptik in 2007. He exudes pride when he talks about the company's development since reunification. Jenoptik now has production facilities elsewhere in Germany as well as in France, Switzerland, and the U.S. It sells to companies around the world including Boeing (BA) and the German government. "This is the future of laser technology," he says, holding what looks like a small gold-colored box. "Diode lasers—the most efficient sources of artificial light. We are the worldwide leaders."

Still, Jenoptik hasn't been immune to the recent recession. Because of reduced demand in the semiconductor and auto industries, its optics and sensor divisions have suffered declines in sales and earnings in the first half of 2009, even as its civil and defense division posted gains. Sales in the first half totaled €231.3 million ($345.2 million), a 12.6% drop from the same time last year. In January, Jenoptik instituted a cost-reduction program that has resulted in 46 job losses along with reductions in temporary personnel, bringing its current global workforce to about 3,350. Another 690 employees were working reduced hours as of June. The company is in talks with employee representatives about further potential staff reductions.

Mertin says he thinks the worst of the crisis is over, however. The company's restructuring helped it generate a positive cash flow for the first half of 2009. "We're focusing on value creation and sustainable growth," he says. "The global megatrends are in our favor." He points out that the movement toward greater fuel efficiency and the development of thin-film photovoltaics will increase demand for Jenoptik's technologies.

Considering Germany's relatively high labor costs, it may be surprising that Jenoptik is able to withstand competition from China or Eastern Europe. But the company develops and produces differentiated, high-value-added products. "Firms in Jena are not going for mass production; they're producing specialized products on a smaller scale," says Uwe Cantner, professor of economics at Friedrich Schiller University in Jena. It is also able to draw upon its institutional knowledge. "Even in DDR [German Democratic Republic] times, Jena was able to produce world-class products," says Cantner. "That foundation helped them survive pitfalls and dramatic changes after unification."

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