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The New Länder: Location With Advantages

Fifteen years after unification, a totally new economic structure has been built in eastern Germany. The far-reaching changes are now seen as an opportunity and people are self-confidently developing new products and solutions for the world of tomorrow.

By Hajo Schumacher

Dresden: Microchip manufacturer AMD is considering opening a third plant in the city.

The man with grey hair and a black leather jacket parks his dark-blue bicycle with the low, senior-friendly crossbar in front of the local branch of Volksbank Bad Bibra. He simply leaves the lock lying in the back, in the white wire basket attached to the carrier. He doesn’t need to lock it up. Everyone here knows the bike and its owner.

Horst Reinke enabled a former GDR enterprise to compete on the world market and saved hundreds of jobs. The large, matt silver factory in the Biberbach valley is his work. There used to be 29 dairy cooperatives in the GDR – only three of them survived into the new era. Molkereigenossenschaft Bad Bibra is the last independent dairy cooperative in eastern Germany.

Immediately after the fall of the Wall, Reinke discovered a gap in the market – in Italy. Dry summers had led to a shortage of mozzarella in southern Europe. At the same time, Reinke’s market research indicated that the soft white cheese was registering steadily increasing sales – not the distinctive original product made from buffalo milk, but its slightly less refined relative sold in plastic packaging.

Reinke has since conquered the world market with the speciality from Saxony-Anhalt. Whether in Italy, China, Russia, Brazil or in the pizzeria next door, it is highly likely that the mozzarella came from Bad Bibra. People in the small town do not talk a lot about the fact that they make products for international markets. However, you cannot help noticing the regular coming and going of trucks from all over Europe.

It’s true. There are firms in eastern Germany that are major players on world markets. Who would have thought it possible 15 years ago? The 4,000 private companies that existed in 1991 have today grown to a quarter of a million. Some 40,000 were founded in 2003 alone. When it comes to entrepreneurial spirit, Leipzig heads the ranking of German cities – it is where the most people set up their own business. Dresden has the world’s most modern microchip factories and its inhabitants are producing the technologies of tomorrow. Jena is where the most innovative researchers work, where scientists register twice as many patents a year as the national average. And one of Europe’s most dynamic tourist regions is booming in Mecklenburg-Western Pomerania, the enormous, diverse area of untouched nature between Müritz and Rügen.

Ideally Equipped for the Future

"Autoland": VW production in Dresden is one reason Saxony has earned this nickname.

Certainly, the reports about the decline of entire industries and high unemployment are true. Undoubtedly, mistakes were also made in the exuberant mood that followed reunification in 1990. Undeniably, the new highly automated factories do not need the levels of staffing that would reduce unemployment on a lasting basis.

Nevertheless, as a result of the far-reaching structural changes, today eastern Germany is in a better position than every other country in central and eastern Europe. Compared with the other countries of the former eastern bloc, the new Länder lead by a considerable margin. Today, the economic strength of the new Länder without Berlin is approximately three times as high as that of Hungary or the Czech Republic. It is very gradually becoming clear that the collapse of the moribund eastern economy offered a great opportunity. As a result of this collapse and the complete reconstruction of economic structures and infrastructure, eastern Germany is ideally equipped for the future.

Where it functions, the east can serve as a model for others. Managers appreciate the friendly and straightforward town hall staff who welcome them with open arms and attempt to read their every wish from their eyes. It only took two years from the decision to build the new BMW plant in Leipzig to the topping-out ceremony. AMD, the American microchip giant, is so taken with the Dresden location that it is already considering the construction of a third plant.

As a result of the rapid transformation during the last 15 years, people in the new Länder have developed new forward-looking skills: many have learned to deal with new situations and to meet constantly changing needs. They now know how to cope with crises – also inside businesses. One third of the companies in eastern Germany use innovative workplace agreements to increase productivity and preserve jobs.

Modern: The "Transparent Factory" is where VW builds the flagship Phaeton.

Furthermore, the workforce is highly qualified. Although economists often point to wage costs as the only competitive disadvantage, it is indeed just one factor of many. In fact, human resources managers can hardly find better employees than in Saxony. They are often better trained than their colleagues in eastern Europe and work longer than their colleagues in the west. That enables greater utilization of production facilities, thereby reducing costs.

Solutions in Manufacturing and Research

Once success takes hold, a mood of optimism takes over. Consider Mifa in Sangerhausen, Saxony-Anhalt, for example. The employees of Mitteldeutsche Fahrradwerke (Mifa) now assemble more than 700,000 bicycles a year, although it was once believed that bike production had been lost for ever to low-wage countries in Asia. In the meantime, Mifa has increased its market share among domestic manufacturers to 25% and since 2004 has been one of the few eastern German companies listed on the stock exchange. Another example is “Autoland Saxony”, as the home of the Audi and the Trabi is now self-confidently known. Volkswagen builds the Phaeton, its flagship model, at the Transparent Factory in the middle of Dresden. The new Golf V stems from Mosel near Zwickau. Porsche produces its Cayenne SUV and Carrera GT sportscar in north Leipzig. Not far away, BMW has built “one of the most modern car factories in the world”.

The automobile boom has also brought the components suppliers. Some 450 plants with 60,000 employees are producing gearboxes, axles and window levers in Saxony. Even Takata, the otherwise publicity-shy Japanese airbag manufacturer that has set up a plant in Elterlein on the edge of the Erzgebirge, is full of praise for the location: “Elterlein is the navel of Europe.” With a turnover share of more than 20% and an export quota of around 40%, components suppliers have now become a key industry. A crucial factor in this success was the fact that technicians were often involved in setting up new factories in the east – and not accountants. They created solutions rather than simply cut costs.

A similar development is also emerging in research. Internationally renowned experts from Finland, Italy and Great Britain work at the Max Planck Institute of Molecular Cell Biology and Genetics in Dresden. These scientists are in great demand worldwide and could work anywhere. However, they have come to Dresden because that is where they find the best working conditions. In May, the Fraunhofer Center for Nanoelectronic Technologies (CNT), an exemplary public-private partnership, also opened in Dresden. Here, for the first time, Fraunhofer experts will be working with semiconductor producers Infineon and Advanced Micro Devices (AMD) on materials and processes for the microchips of the future. It is hoped to significantly accelerate the transfer of new technologies to production by bringing science and industry closer together.

Cluster: AMD and Infineon are part of a new public-private partnership with Fraunhofer.

The most recent study of different business locations by management consultancy Ernst & Young confirms the positive impression. A total of 672 foreign, internationally active companies gave Germany top marks – above all, in the areas of training and research and development. Some 38% of those surveyed believed that high-tech products will play an outstanding role in the German economy over the next three years. “Germany’s future lies in research and development,” says Peter Englisch, partner with Ernst & Young.

Viewed from a distance, German unification occasionally seems rather miraculous. Researchers from South Korea and Cubans from Miami come to Germany at the invitation of the German Marshall Fund, a foundation that promotes interchange between the United States and Europe, in order to study the historically unique fusion of two politically, socially and economically very different systems. They want to know what can be learned from this and how things can perhaps be done even better. Germany is a model. There is no other. Never before has a country had to shoulder such a mammoth task. Those who have a similar challenge ahead of them show respect for the way in which Germany has completed the first 15 years of reunification.

Of course, unity was and remains expensive. More than 1,000 billion euros have already flowed into the new Länder. Despite this, things are still not running perfectly. The Solidarity Pact II that was launched this year secures additional billions of euros in aid for eastern Germany until the year 2019. Naturally, these payments are a burden on the German economy. However, aren’t other countries in western Europe without a costly unification process also caught in an economically difficult transition phase?

It would also be possible to tell the story of the moon landings as a unprecedented series of failures. False calculations, technical errors, high costs. That is certainly all true. Yet, ultimately, the journey to the moon was a historic feat – courageous and brilliant. If people had taken notice of the critics at the time, nothing would have been won, and perhaps a great deal lost. It is a similar situation with German unity. There may have been a series of mistakes made on details, but historically it will be judged a great success story.