Europe's High-Tech Phoenix

Dec. 21, 2004
One of Europe's most elegant cities before a brutal bombing and 40 years of socialism, the German city of Dresden is emerging as a center of high-tech excellence.

Glance across the redrawn map of Europe, and you will see a picture of economic rebirth in the cities at the continent's center. There is one Berlin, not two, and at its heart throbs the Western Hemisphere's largest construction site, the future European headquarters of Daimler-Benz AG and Sony Corp. In Warsaw and Budapest, capital markets have come to life -- shares are bought and sold daily where eight years ago the only markets offered turnips and potatoes. Rebirth goes beyond the major cities, too. In Zeran (Warsaw) and Lublin in Poland, compact cars roll out of factories modernized by Korea's Daewoo Motor Co. Ltd. Litvinov, one of the Czech Republic's most polluted cities, now draws clean power from a $1 billion coal-gasification plant built by General Electric Co. In Srbogrd, Hungary, Philips Electronics NV employs 1,100 people, 10% of the town's population, to assemble 500,000 car radios a year. But no city has literally risen from the ashes to soar to once-unimaginable heights as has Dresden, the capital of the German state of Saxony. Nearly leveled in World War II, then shuttered for 40 years behind the Iron Curtain, Dresden has emerged in the last four years as the new darling of one of the highest of the high-tech industries -- semiconductors. Dresden's story is an intriguing tale of economic development, corporate strategy, and best practices -- and none of its lessons is limited necessarily to a small city in the center of Europe. Past, present and future In 1992, three years after the fall of the Berlin Wall, Dresden persuaded Siemens AG to build a new chip plant in the university town on the river Elbe. That victory led to another: In 1994 Advanced Micro Devices Inc. (AMD) chose Dresden for the plant that will make the K7 chip it will use to compete against Intel Corp. in 1999 and beyond. What's more, Siemens and Motorola Inc. have agreed to set up a research center in Dresden to develop the next generation of chipmaking technology. Together these three facilities are expected to create about 6,000 jobs and add thousands of others indirectly. Saxony's economics ministry estimates the facilities will boost the German state's gross economic output by 5% to 10% a year. "This is a quantum leap for the economy of Germany and Saxony," declares Kajo Schommer, Saxony's minister for the economy and labor. Shaking his head at the thought, Herbert Wagner, the lord mayor of Dresden, smiles. "It's a miracle," he says. "In 1990 we never would have imagined this." In fact, Dresden's transformation has less to do with divine intervention than with the vision and shrewd planning of its political engineers and an industrial heritage that even fire bombs and hard-line communism couldn't wipe out. Before World War II, Dresden was the hub of the German high-tech industries. While the Ruhr region churned out coal and steel, Saxony fashioned precision lenses, the latest electrical devices, and fine porcelain. Its University of Technology and research institutes produced advances in electronics, steam engines, and optics. After the war, Dresden was on the wrong side of the bloc, and the German Democratic Republic's (GDR) planners couldn't afford to build up high-tech centers in multiple locations. To make the most out of limited resources, they decided to concentrate the microelectronics industry in one region, and they chose Dresden. The Zentrum fuer Mikroelektronic (ZDM), a semiconductor combine based in Saxony, trained and employed tens of thousands of engineers who weathered the Cold War by producing circuits for East Bloc television sets, computers, and weapons. When the Soviet system collapsed, Dresden's microelectronics industry fell with it, but the engineers were still there, along with the university, a score of technical schools, and a will to restore its former standing. "We looked at the past and looked at what we could do well," says Wagner, himself an electrical engineer. "We saw electronics. This was our talent. It had to be our future." The Berlin Wall had barely fallen when Dresden's economic-development agency went on the offensive in 1990. It began buying land near the airport from private owners so it would have open spaces to offer. Unsolicited, it made a pitch to Texas Instruments Inc. (TI). A video showed potential sites and described the highways the city would build to link TI or other new residents to the autobahn. TI was impressed enough to begin talks about locating some kind of facility in Dresden. But then Siemens began searching for a location for a much larger investment, a state-of-the-art chip-fabricating facility and a development center. Although it had been considering southeast Asia, in the spirit of German reunification Munich-based Siemens turned its eyes to the former GDR. Dresden took the opportunity and ran with it. Battle of a different kind A teacher trying to explain the end of the Cold War need only hold up a picture of the 2,400-employee Siemens Microelectronics Center (SIMEC) in Dresden. The gleaming facility etches silicon circuits with wires 400 times thinner than human hair. It is Western technology at its highest. And it sits on the site of a former Soviet army base, with ramshackle barracks and rusting equipment still standing nearby. But the battle SIMEC was built for has nothing to do with geopolitics. Rather, it's an aggressive push by Siemens to compete against Asian makers of standard memory chips known as DRAMs (dynamic random access memory). Opening SIMEC was part of an effort to lift Siemens' DRAM capacity to 170 million units in 1998 from the 16 million it manufactured in 1994. With $3.1 billion in sales, Siemens in 1997 ranked No. 12 among the world's chipmakers. And it needs SIMEC's production to reach its goal of ranking among the top five or six. Currently, the plant has two production modules with about 58,000 sq ft of clean-room space in which it starts about 6,000 wafers each week. However, the Dresden site has the space for two more clean rooms, should Siemens need the additional capacity. "It could be a $5 billion to $6.25 billion site," boasts Ulrich Schumacher, president of the Siemens semiconductor group in Munich. This year SIMEC will start making 64-megabit DRAMs in addition to commodity 16-megabit chips. In a few years, it might produce next-generation units -- 256-megabit chips. It also may become the first to use the 12-in. wafer process that Siemens and Motorola Inc. are developing in Dresden. To get state aid for its site, Siemens agreed to locate a development center as well as a production facility in Dresden. Its Center of Development & Investigation (CDI) will be the main center of Siemens chip R&D. Last year CDI began building a pilot production line that would use 12-in. wafers instead of the 8-in. ones used today. Motorola, which already had begun building a chip plant with Siemens in Virginia, added resources in January of this year to make it a joint effort. If successful, they expect the 12-in. process to yield 2.5 times more chips and lower costs by 30%. "Five years from now people will talk about the Dresden experience as the one that got the industry moving toward 12-in. technology," predicts Hector Ruiz, president of Motorola's semiconductor-products sector in Chandler, Ariz. Not the first time In 1999, when AMD is slated to begin producing chips at the Dresden facility known informally as Fab 30, it won't be the first time an AMD chip has been made in Dresden. The city once was home to an East German microchip combine famous for copying computers and chips smuggled in from the West. "One of the former heads of the company gave me a picture of an AMD one-kilobit memory chip that was copied back in the 1970s," says Martin Gillo, director of human resources at AMD Saxony Manufacturing GmbH. "He told me they preferred to copy AMD designs because they were so elegant." Fab 30, of course, won't be copying anyone's chips. After more than a decade of legal battles over rights to Intel's chip designs, AMD finally built a compatible chip from the ground up in 1995 -- the K5. It is now churning out K6 chips in Austin. The Dresden plant will be the main production site for the next chip in line -- the K7. "The K7 project team is on schedule in every facet. We will be ready to go here, too," Gillo states. The fabrication facility he's counting on to be ready is monstrous -- 90,000 sq ft of clean-room space starting 6,000 wafers a week and employing 1,700 people. The K7 chip will be a crucial product for AMD. A grievous delay in K5's launch saddled the company with a series of quarterly losses. K6 arrived, but production yields were lower than expected at first, keeping AMD from winning over some major PC makers. K6 output is booming now, and Compaq Computer Corp. and IBM Corp. are among its customers. AMD anticipates producing 15 million chips this year. If K7 arrives without a hitch, the company may be able to meet its goal of winning 30% of the market for PC processors by 2001. With the world market expected to rise to between 140 million and 160 million chips, that would mean an AMD output of about 45 million processors, most of them K7s built in Dresden. But Fab 30 won't produce only microprocessors. As part of its location deal, AMD agreed to locate some development functions in Dresden. Even as it builds K7s in Dresden, AMD expects to dispatch designs for new communications chips to Austin. Infrastructure for chip-making Saxony never may have won over Siemens and AMD if it hadn't first won over Berlin, the headquarters city for the trust charged with privatizing former-GDR companies. In the breakup of the vast GDR combines, ZDM was split in three, and the Dresden piece was tabbed for liquidation. "Without ZDM there would have been no microelectronics here," explains Rolf Wollgast, Dresden's director of economics. "We went to Berlin and fought for it." Saxony infused ZDM with money to keep it afloat and to keep it buying from Freiberg Elektronik Werkstoffe (FEW) GmbH, a local maker of silicon wafers. The survival of these companies meant that other related supplier companies wouldn't disappear and that the universities in Dresden and Chemnitz would continue programs in microelectronics. That infrastructure, especially the proximity to advanced technical schools, impressed AMD, Gillo relates. "We heard the universities were good, but at first we were suspicious," he says. "Can this be for real? Our hopes were far exceeded." After Siemens began its plant, this infrastructure grew. An Israeli supplier put $50 million into FEW, now called Freiberg Compound Materials. A German chemicals group, Wacker-Chemie GmbH, invested $120 million to start another wafer-making plant in Freiberg, which has a natural supply of silicon. France's Air Liquide put $30 million into a Dresden facility to supply the chip-makers with pure nitrogen. Photronics Inc. bought a Dresden lithography company to get into the Saxon market. "The specific technological infrastructure exists," says Heike Belitz, a researcher at the German Institute for Economic Research in Berlin. "I think Dresden has a chance to become a leading location, if not the leading location, in Europe." In addition, Dresden and Saxony are working to build up their physical infra-structures. The airport has added a new terminal and expanded its freight facility, while rail connections soon will support high-speed trains. And with support from AMD, an American international school for children of expatriates has opened. Dresden's semiconductor base should continue to expand because both Siemens and AMD agreed to locate development centers in their facilities. Siemens has 130 people working on process technology; 450 more will work in the Siemens-Motorola center. AMD plans to hire 200 to develop new communications chips. "Dresden will have the technology for future semiconductor standards," says Saxony's Economics Minister Schommer. "Worldwide know-how will flow to Saxony." No guarantees Dresden has put all the pieces in place to become a world-class community, but its plans are by no means guaranteed. AMD expects to open Fab 30, but should mighty Intel continue to rule the microprocessor world, it may not have the resources to expand the facility. Siemens' plant is making DRAMs, whose plummeting prices slashed the company's chip pretax profit to about $68 million last year from $375 million two years ago. If Siemens and Motorola lose the race to perfect a process using 12-in. wafers, their Dresden project could fail. Moreover, the companies can train Saxony in the latest chipmaking technology, but it will be harder to get them to adapt to a demanding business environment of teamwork, autonomy, and accountability. "Culturally, they have trouble taking responsibility, which is certainly a result of the old system," says Siemens' Schumacher. Then there is the sluggish German economy and Bonn's political paralysis. Foreign investment in Germany has wilted under high corporate-tax rates, and critical reforms were blocked this year by the Social Democrats. Should they win the national elections in September, Germany may not catch up to the U.S. and Britain in streamlining its welfare state for several more years, slowing economic growth. Still, most planners involved in the city's rebirth think it will indeed scale new heights. It certainly has before.

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