Catherine McLean Freelance Writer

The upside of doing business in former East Germany

Published
October 21, 2014
in
The Globe and Mail

When Future Electronics Inc. decided to move its European logistics centre from Britain to the heart of the continent, it chose an empty field in the eastern German city of Leipzig.

The Canadian company is one of many that have expanded to Leipzig in recent years, drawn by its central location, new infrastructure, skilled work force and low salaries.

It’s been a long journey back for Leipzig and the rest of the former East Germany. When the communist regime collapsed 25 years ago, its state-owned firms quickly disappeared. The reunited Germany has since poured some €2-trillion ($2.88-trillion Cdn.) into the area, but mending its economy has been slow going.

In recent years, however, progress has been made. Take Future Electronics’s 15,000-square-metre, automated distribution centre, which serves Europe, the Middle East and Africa. It opened in 2009 and now employs 160 workers. The $56-million investment is a symbol of Leipzig’s transformation from what Mayor Burkhard Jung called a “shrinking city” of the 1990s to a town that is back in business.

“Leipzig is like a beacon of light in eastern Germany,” said Lothar Huether, the IT and technical maintenance manager at the Future Electronics centre, describing the town that he has called home since 1969. “It has changed completely.”

It’s hard for outsiders to imagine what Leipzig looked like in 1989, Mr. Huether says. Today’s new motorways and factories were once farm fields. In the city centre – now an intriguing blend of restored architectural gems, bold modern buildings and quirky Soviet holdovers – historical buildings had fallen into ruin.

In the early 1990s, Leipzig lost as many as 110,000 jobs as communist-era firms disappeared and people left to find work in the western part of the country. Unemployment soared throughout eastern Germany, reaching a high of 20.6 per cent in 2005.

“The initial situation was decidedly difficult,” said Thomas Fabian, senior manager for eastern Germany at Germany Trade & Invest, the country’s economic development agency. “The large firms in the former East Germany were barely competitive. The market for goods, especially in East Europe, almost entirely disappeared.”

The region began to rebuild its economy. The plan was to support the development of small and medium-sized businesses, while persuading large German and international firms to put down roots. Eastern Germany also focused on carving out new niches in renewable energy, biotechnology and nanotechnology.

In some ways, the region has become an attractive place to do business, with its renowned universities, a skilled labour pool, cheaper real estate and lower wages (about 17 per cent less than in Western Germany). The federal government built modern roads, railways and telecommunications infrastructure. Its location in the centre of Europe makes it a natural distribution point.

Among the big domestic names doing business there now are drugmaker Bayer and car manufacturers BMW and Porsche. BMW has invested more than €2-billion in its Leipzig factory since 2003 and expanded its production line. BMW now employs more than 4,000 workers in Leipzig.

International firms, including well-known Canadian companies Bombardier Inc., Magna International Inc. and Linamar Corp., have also found their way to the region.

Future Electronics chose Leipzig over competing countries such as France and the Czech Republic because of its central location, solid infrastructure, 24-hour airport, attractive subsidies and close co-operation between the company and city authorities, Mr. Huether said.

Another Canadian firm, Nuvo Research Inc., set up a research facility in Leipzig for its drug WF10, designed to treat allergic rhinitis, in 2009.

Eastern Germany proved to be a good fit for Nuvo. Salaries for R&D employees are lower than in North America, and the company has ties to the University of Leipzig and the Fraunhofer Institute. The firm has also received more than €6-million in non-repayable grants from the Development Bank of Saxony.

“WF10 is our key development asset, and we have no plans to develop it anywhere else but in Germany and the Leipzig area,” said John London, co-CEO of Nuvo Research.

While such commitments may be promising, eastern Germany still has obstacles to overcome. Wages may be lower, but they’re not as cheap as in Eastern Europe or Asia. The population is declining and aging. As well, the financial transfers from the federal government are scheduled to end in 2020.

Though Leipzig’s population has grown to 530,000, former factories and beautiful apartments still stand empty, waiting for those who left. With space for a population of 730,000, the city is trying to recruit skilled workers from neighbouring countries such as Poland and the Czech Republic.

The mayor, Mr. Jung, would clearly welcome more big firms, but he believes growth will come from the expansion of existing small and mid-tier businesses.

“My main goal is that by 2020, we can stand on our own two feet again,” he said, “without being subsidized by western Germany.”