Several months before Germany’s reunification in 1990, the then-Chancellor Helmut Kohl predicted that the historic event would transform east Germany, held back economically by 40 years of Communism, into “blooming landscapes”. Reunification, Mr Kohl believed, would make east Germany a dynamic market for goods and investment, since there was plenty of pent-up demand for Western-made goods as well as an educated, well-trained workforce.

Still underdeveloped

Nearly 14 years later, the former chancellor’s prediction has become a bittersweet memory for many east Germans, particularly those living in Brandenburg. While the state’s infrastructure – like those of the other four eastern German states – has improved immeasurably due to hundreds of billions of euros in government transfers, Brandenburg remains economically underdeveloped compared with western states. At around 18%, its unemployment rate is one of the highest in Germany, and economic growth has remained sluggish since the end of a reunification-inspired construction boom in the early 1990s.

Brandenburg has also been hit by a spate of failed private-sector ventures that would have energised its economy. In just the past few years, it has seen the collapse of projects worth hundreds of millions of euros to build the world’s first airborne ship, as well as a new racing track. But what was most unfortunate for Brandenburg was the demise last December of an ambitious venture to build a $1.5bn computer chip plant in Frankfurt an der Oder, a city near the Polish border.

Launched in May 2001, the venture, called Communicant Semiconductor Technologies AG, originally gave the state’s politicians and citizens plenty to cheer about. Not only did the state’s first high-tech venture plan to create around 1000 jobs, it also boasted a high-profile investor: US chipmaking giant Intel.

According to Communicant’s business plan, Intel was to license its special complementary metal-oxide semiconductor (CMOS) technology to the start-up from 2003 for the manufacture of chips for mobile handsets. Intel also agreed to invest $40m in Communicant and to train personnel in Berlin before sending them to Frankfurt an der Oder. Other major investors in Communicant included the emirate of Dubai, which pledged $250m, and the government of Brandenburg itself, which invested $38m.

Since total investment for the venture was put at $1.5bn, there was still a considerable funding gap. Communicant’s shareholders intended to close this by obtaining a loan and finding additional investors. A consortium led by Dutch bank ABN Amro agreed to provide a $650m loan, more than half of which was to be guaranteed by the federal government in Berlin and Brandenburg’s government in Potsdam. The state guarantees were, moreover, approved by the European Commission in Brussels.

Feasibility criticised

However, as the overall German economy flirted with recession in 2001 and 2002, Communicant’s shareholders were unable to achieve their main objective of finding additional investors. Their cause was not helped by a critical study of the plant’s feasibility commissioned by the German government. By 2003, Communicant, which had begun hiring several dozen personnel and building the chip factory, faced a liquidity crisis.

Hans-Jürgen Werner, spokesman for Intel Germany, says: “I would blame the failure of the project on timing. When the project was first announced in 2001, economic times were a lot better. Our intention from the start was to find two more investors, but times turned against us.”

In November 2003, Communicant’s shareholders made one last bid to save the company by altering its business plan. Under the new plan, total investment was pared down to $1bn and, beyond producing chips, Communicant was to specialise in IT-related services. The shareholders demanded, however, that Berlin and Potsdam guarantee up to 80% of the $650m loan. Dubai even made clear that it was holding back a $105m payment to Communicant until the guarantee was made, thereby intensifying the company’s liquidity crisis.

Reapproval needed

When Berlin informed Communicant’s shareholders that the guarantee had to be reapproved by the European Commission, and that this could take between six to nine months, the shareholders gave up and put their company into insolvency.

Now all that remains of Brandenburg’s most prestigious high-tech project is a concrete factory without windows – as well as plenty of bitterness in Frankfurt an der Oder. Following the project’s collapse, several city politicians including mayor Martin Patzelt, unveiled a banner at the factory building site that read: “Here is where east Germany’s recovery ends. Thank you, Mr Chancellor.”

Sources with inside knowledge of the project say that since Chancellor Gerhard Schröder’s government was prepared to guarantee a huge portion of Communicant’s loan, it can hardly be blamed for the venture’s failure. They say its demise was, as Intel indicated, a result of the inability to find additional investors. However, this doesn’t let Intel off the hook completely and sources maintain that, had it really wanted to, Intel could have raised its investment in the venture to sustain it.

Indeed, investing a great deal more in east Germany is precisely what Advanced Micro Devices (AMD), Intel’s chief US-based competitor, is doing. In 1996, AMD built its first overseas computer chip plant in the city of Dresden, the capital of the east German state Saxony. Then last November, the company began construction of a second plant in the city that will manufacture 300mm high-performance chips for PCs and laptops. Total investment for both plants is put at a whopping E4.4bn, though both Berlin and the state government of Saxony are financing a huge portion of this via loan guarantees and subsidies. The second Dresden plant will, in any event, give the Saxon economy another enormous boost, since it will add 2300 people to the 2000 AMD already employs there.

‘No impact’

Although the Berlin government acknowledges that the Communicant failure was a unfortunate blow to Brandenburg, it dismisses the notion that this will have an impact on its chances of capturing future investment.

“Its failure was unfortunate for the investors and for Brandenburg. However, Brandenburg’s attractiveness as a place of investment is reflected by the fact that there are currently 47 projects under way, many of which are financed by both domestic and foreign investors,” said Michael Zirpel, spokesman for Manfred Stolpe, who is the minister responsible for east German rebuilding.

Backing Brandenburg

Steffen Kammradt, spokesman for Brandenburg’s economics ministry, was even more adamant that the failure of Communicant and others had no bearing on the state’s prospects.

“Communicant’s liquidation was a business decision of its major shareholders and had nothing to do with [the state’s] quality as a place of investment,” he says. “The fact is, Brandenburg has a highly trained workforce, wages that are one-third below those of west German states and among the lowest local corporate taxes of any state. Our infrastructure, which includes a fully digitalised telecoms network and the best roadways, also is one of the best in Germany.”

Considering the number of domestic and foreign investors that have come to the state since reunification, it seems that Brandenburg has effectively communicated these strengths to the private sector. Among the German companies currently manufacturing in the state are chemical company BASF, auto giant DaimlerChrysler and engineering companies Bosch and Siemens. There is also a turbine plant operated by Rolls-Royce of the UK and a joint venture involving Korea’s Samsung and Corning of the US.

Should Brandenburg succeed in shrugging off the Communicant failure and luring more investors of this stripe, the “blooming landscapes” envisioned by ex-Chancellor Kohl may not be far off.