The Rebirth of Dresden

Saxony and its capital city have led a renaissance of industry in East Germany

Two decades ago, Saxony was as beaten down as the rest of East Germany. In Dresden, its capital, fire-bombed Baroque palaces and museums had been partially rebuilt, but raw sewage still poured into the Elbe River. Telephones were rare. Young people longed to move West to escape shortages and censorship. There was some manufacturing: Saxons made East Germany's flimsy Trabant, but the sedan was so unloved, people joked that it doubled in value when filled with gasoline.

Today, Saxony is one of the brightest stars in the East. Saxons build BMWs, Porsches, and Volkswagens, chips, and watches from A. Lange & Söhne that cost up to $500,000 apiece. Gross domestic product has grown 11.2 percent since 2000, a higher rate than any of Germany's other 15 federal states, according to data from the state's Economy Ministry.

Saxony's dramatic gains owe much to pro-business government policies that unleashed the famous Saxon work ethic, inventiveness, and attention to detail. "Our companies have been very good at carving out niches and customizing products," says Saxon Economy Minister Sven Morlok. Two key figures in the transformation were Kurt Biedenkopf, now 80, the Christian Democrat who served as premier from 1990 to 2002, and the late Kajo Schommer, who served as economy minister during the same formative period. Together they developed a "lighthouse principle" in which industries with high potential—especially autos and microelectronics—got most of the state aid.

"The state's political and business leaders boosted the self-confidence of the Saxon people and convinced them their fate was in their own hands," says Joachim Ragnitz, managing director of the Ifo Institute for Economic Research in Dresden. "It was like nation-building, and it worked. They got people to believe that they really had to be best at whatever they were doing."

The Saxon government threw its support behind Volks­wagen, the first big West German company to make a major investment in the region. In 1990 the company decided to produce the VW Polo compact car in Zwickau and since then has built some 3 million cars and 8 million motors at factories in the state. Saxony had three things going for it at the time: Volkswagen's chief executive officer, Carl Hahn, was a Saxon native. It had carmaking experience (in spite of the Trabant). And VW got big subsidies, half from the federal government and half from the state. VW's investment attracted parts suppliers and ultimately other automakers to the state.

The other breakthrough investment, in 1995, was by German manufacturing giant Siemens (SI), which was also drawn to Saxony's pro-business climate and skilled workforce—a legacy of the communist-era, Saxony-based computer-maker VEB Kombinat Robotron. As with VW, Siemens opened the floodgates to other investments in the sector. In the late 1990s, Advanced Micro Devices (AMD) began building computer chip factories in Dresden. The Dresden manufacturing campus, now owned by an AMD-Abu Dhabi joint venture called Globalfoundries, is the largest chipmaking center in Europe and one of the most advanced in the world.

"AMD was set to go to Ireland, and that investment was diverted to Saxony because of Prime Minister Biedenkopf and his team," says Jens Drews, Globalfoundries' director of government relations. "They were visionaries."

With 4.2 million people, Saxony sits in an eastern nook of Germany, with the Czech Republic to the south and Poland to the east. Twenty years after reunification, about 6,000 companies have invested €27 billion ($35 billion) in the state, which is smaller than New Jersey. East Germany's anticommunist mass protests had their genesis in the Saxon city of Leipzig in 1989, paving the way for demonstrations that swept the hard-line state before it imploded that year. As a result, Saxon voters have not elected any former East German communist to power as part of any coalition government.

The local government has taken market-friendly steps that would be unthinkable in other parts of Germany. In 2006, for example, Dresden's municipal government sold 48,000 apartments to U.S. buyout firm Fortress Investment Group (FIG) for €1.75 billion. This was a year after Franz Muentefering, then leader of the Social Democratic Party, compared such investors to the biblical plague of locusts that descended on Egypt.

Dresden, which was the first German city to sell all the housing it owned, used the proceeds to pay back debt of more than €700 million, and it remains debt-free. "The Saxons have been clever business people for centuries," says Carl Graf von Hohenthal, a management adviser at the Brunswick Group in Berlin and former deputy editor-in-chief of Die Welt. "The typical Saxon is constantly thinking about how he can do business. When you drive across the border from Brandenburg into Saxony, you immediately see the difference. The villages are cleaner and more prosperous, the church towers bigger and higher."

Porsche's plant is a symbol of the new Saxony, employing 640 people on the site of a former Soviet military training base. It churns out 250 Cayennes and 100 Panameras a day. The meticulous attention to detail that makes Saxons good at building Porsches is also an asset for producing luxury products such as watches and fine wine. A. Lange & Söhne, the watchmaker established in 1845 in the village of Glashütte near the Czech border, was expropriated by the communists in 1945 and reestablished in December 1990 by Walter Lange, a direct descendant of the founder. Jerzy Schaper, Lange's CEO, says watches made from gold and platinum—which range in price from €13,000 to €390,000—are selling especially well in Asia. Georg Prince zur Lippe, another Saxon who returned after unification, bought back his aristocratic family's manor house and vineyards in Meissen, Weingut Schloss Proschwitz, that had been seized by the communists. The wines are now served on Lufthansa flights.

Despite its progress, the state did experience its own version of the financial crisis, when state-owned Landesbank Sachsen, now known as Sachsen Bank, became a casualty of the U.S. housing meltdown in 2007 and lost €641.6 million. The Saxony Prime Minister at the time, Georg Milbradt, resigned in 2008 after the bank's near failure, saying he wanted "to prevent further damage both to myself and to others." There are also concerns that aging and depopulation of rural areas could lead to worker shortages, and automobile thefts have skyrocketed. Dresden has also been the scene of the largest neo-Nazi marches in Germany since the 1960s. Eight members of the far-right National Democratic Party of Germany won seats in the 2009 election to the state's 132-member assembly.

Despite these challenges, though, Saxony is a success story, especially when compared to where things stood in 1990. "The Saxons are really hardworking," says Christian Schwinner-Strachwitz, 67, who returned to Saxony after reunification. "They never need a kick in the butt."

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