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INVEST IN GERMANY NEWSLETTER As shown on the next page: Sample IPA Newsletter containing FDI trends, investment climate news, investor success stories and sector reports. Source: Invest in Germany

Copyright 2004 Multilateral Investment Guarantee Agency. All rights reserved. No part of this work may be reproduced in any form without written permission from the copyright holder. Requests for permission to reproduce should be sent to the Director, Investment Marketing Services Department, the Multilateral Investment Guarantee Agency (MIGA), World Bank Group at [email protected]

Invest inGermany

August 2004 Volume 1/1

magazine

Major Investment Decisions General Electric, AMD, Dow Spotlight American Investors in Germany Why do Chinese Companies Invest in Germany? Sector Reports Biotech ICT

Welcome to Germany 3

CO N T E N T S

I NTERVI EW

“Germany has a wide range of strengths” Interview with the three commissioners for foreign investment in Germany . . . . . . . . .3

Dow Chemical Expands Operations in Eastern Germany The leading science and technology company is among the“Top 50 BestEmployers” of Germany . . . . . . . . . . . . . . . . . . .15

F O R E I G N D I R E C T I N V E STM E N T

Foreign Direct Investment Trends Germany: Stability in a sea of change . . . . . .4

S P OT L I G H T

U.S. Companies Taking off American investors like Germany . . . . . . . . . .12

W H AT G E R M A N P O L I T I C S D O E S

8 Italian Investor

Reforming the Domestic Economy A compact survey of the German government’s “Agenda 2010” program . . . . . .6 The Innovation Initiative One of the major initiatives of the “Agenda 2010” . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Why Do Chinese Companies Invest in Germany? Germany is the new gateway to Europe for Chinese businesses . . . . . . . . . . . . . . . . . . . .16 Bubbling German Beer Market Foreign breweries buy major German competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

S U CC E S S STO RY

The Right Chemistry for Italian Investor The Italian pharmaceuticals group Menarini has been succesful in Berlin for 12 years . . . .8

18 German Beer Market

Growth for the Biotech Sector Germany’s pipeline is full of promising biotech products . . . . . . . . . . . . . . . . . . . . . . . . .20

M A J O R I N V E STM E N T D E C I S I O N S

Choosing Germany for R&D General Electric opened its Global Research Center Europe in Bavaria . . . . . . . .10 Putting New Ideas to Work Thomas P. Limberger, CEO & national executive of General Electric Germany about Germany as a research location . . . . . .11

22 Biotech Sector

S E C TO R R E P O RT

AMD Invests in Europe’s “Silicon Valley” The world`s second largest chipmaker Advanced Micro Devices (AMD) continues investments in Saxony . . . . . . . . . . . . . . . . . . . .14

Good News in the German ICT-Market The market has not reached its full potential and there is still considerable room to expand . . . . . . . . . . . . . . . . . . . . . . . . . . .22 PIONEERS

“A no brainer and risk-free deal “ US Investor Haim Saban took over the biggest private German broadcasting group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 EQUITY MARKETS

Rebounding Germany Trends in private equity investment . . . . . . .25

On the cover: Chancellor Schröder with the Federal Minister of Economics and Labor on the 4th of July 2003 in the chancellor’s office with the former and new commissioners for foreign investment in Germany. From the left: Wolfgang Clement, federal minister of economics and labor; Dr. Jürgen Weber, commissioner for foreign investment in Germany; German Chancellor Gerhard Schröder; Hilmar Kopper, former commissioner for foreign investment in Germany (in office 1998–2003); Dr. Klaus Mangold, commissioner for foreign investment in Germany; Dr. Heinrich v. Pierer, commissioner for foreign investment in Germany.

M A ST H E A D Publisher: Invest in Germany GmbH Markgrafenstrasse 34, D-10117 Berlin, Germany Phone: +49 30 206 570 Fax: +49 30 206 571 11 E-Mail: [email protected] Internet: www.invest-in-germany.com Managing Directors: Dr. Urda Martens-Jeebe, Gerhart Maier Editor: Eva Forinyak Consultant Editor: Kevin Cote

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Writers: Christopher Cordy, Clive Freeman, Terry Martin, Ed Meza, Ed Ward, Rhea Wessel Design and production: ergo Unternehmenskommunikation GmbH & Co. KG, Hansaring 55, D-50670 Köln Art directors: Bodo Brandes, Michael Kemmerling Art design: Christian Bernauer Cover photo: Bundespressearchiv Litho: Berger Grafikpartner, Cologne Print: Sieprath Druckservice, Aachen

No reprints may be made without the prior consent of the editors. They reserve the right to publish or shorten readers’ letters. The publication is based on information accessible to the public which the editors consider to be reliable. However, they assume no liability for the accuracy of such information. The articles published under names do not necessarily reflect the opinion of the editors.

Invest in Germany magazine August 2004

I NTERVI EW

Dr. Klaus Mangold

Dr. Heinrich v. Pierer

Dr. Jürgen Weber

Last July German Chancellor Gerhard Schröder appointed three new commissioners for foreign investment in Germany: Dr. Klaus Mangold, executive advisor to the Chairman of DaimlerChrysler for Central and Eastern Europe and Central Asia; Dr. Heinrich v. Pierer, CEO of Siemens; and Dr. Jürgen Weber, Chairman of the Supervisory Board of the Lufthansa AG. Invest in Germany Magazine asked them about their motivations, experiences and plans. Why did you volunteer to be Commissioner for Foreign Investment? Dr. Mangold: Germany is a better business location than many people think. Although some criticism is justified, we in Germany tend to see ourselves too negatively. Through my voluntary commitment I hope to assist the government and the country in searching for investors who will help Germany create attractive jobs, cultivate markets and do good business. Dr. v. Pierer: My work focuses on Asia. The continent is developing at an incredible pace and is one of the fastest growing economic regions in the world. I want to help ensure that cooperation between Germany and Asia is successful. For this reason, I have served for over ten years as President of the German-Asia Pacific Business Association. My work for Invest in Germany is a good fit. Dr. Weber: Having served the airline industry for over 36 years I know how important it is for a country to be connected with markets

Invest in Germany magazine August 2004

and partners all over the globe. Business ties are particularly important for Germany whose economy is strongly export oriented. I’m proud to assist in deepening these connections. What do you think are Germany’s most important advantages for foreign investors? Dr. Mangold: Among the important ones: a high level of education in all sectors; close cooperation between universities and industry, which facilitates rapid innovation; excellent location in proximity to the new members of the EU; good infrastructure with top international standards. Dr. v. Pierer: Germany has a wide range of strengths. When I’m outside the country, I am often reminded that stable political and economic conditions cannot be taken for granted everywhere. Germany offers maximum legal security, reliability and transparency. These are the basic prerequisites for entrepreneurial success. In addition, inves-

tors can benefit from an efficient and closeknit infrastructure stretching from Flensburg in the north to Constance in the south. But our greatest advantage is our people. I constantly hear German workers praised for their dependability, their discipline and their efficiency. German specialists have an outstanding reputation. Our dual vocational training system is a model for the entire world. And we have access to excellent research institutes, many of which work closely with business. This is one reason why Germany has a higher concentration of innovative companies than any other European country. We definitely have key advantages that we can capitalize on. We just have to focus our efforts to exploit and expand them. Dr.Weber: Market, people and infrastructure is a favorite threesome that US investors often cite. And they’re right. Germany is at the heart of the enlarged European Union. Twenty-two percent of the total EU population live here, and generate 24 percent of Europe's total GDP. Frankfurt and Munich are two of the continent’s most important air hubs with travel times of 60 to 90 minutes to all major industrial areas in a single market of 25 nations. The road and rail network is dense and fast. But our biggest asset is skilled people. The German workforce is well trained, disciplined and highly flexible. So, these are strong reasons that investors should and do find attractive.
continued on page 26

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Photos: Berlin-Chemie, Gesellschaft für Öffentlichkeitsarbeit der Deutschen Brauwirtschaft e.V, Invest in Germany

“Germany has a wide range of strengths”

F O R E I G N D I R E C T I N V E STM E N T

Foreign Direct Investment Trends in Germany Foreign Direct Investment (FDI) in Germany largely mirrors the ebb and flow of the global economy.

W

hen global business confidence weakens – as it did in 2003 – investment drops. When optimism rises, so does FDI. That pattern is consistent with Germany’s status as a mature, benchmark economy – the world’s third largest and second only to the United States in terms of trading volume. All things being equal, investment patterns repeat themselves. But in the hyper-

competitive world of international business, few things remain equal. Indeed, the German central bank, the Bundesbank, has documented considerable fluctuation in FDI flows to Germany over the past few years. But that fluctuation says more about the dynamic nature of global markets than it does about Germany itself; the factors that make Germany attractive to foreign investors are strikingly constant. Investor interest in Germa-

Foreign Direct Investment in Germany 1991–2003 in E billion 215,20*

ny is being sustained by long-term fundamentals pertaining to location, infrastructure, market access and labor productivity. Perhaps the best-informed observer of foreign investment flows to Germany in recent years is Hilmar Kopper. Appointed by the government in 1998 as Germany’s very first “Foreign Investment Commissioner,” Kopper traveled the globe talking to current and potential investors from the whole industrial spectrum. It was in Kopper’s first year as commissioner that FDI flows to Germany really began to gain momentum, doubling the previous year’s volume to reach an unprecedented level of E22.2 billion.

* incl. Vodafone-Mannesmann-Takeover

The factors that make Germany attractive to foreign investors are strikingly constant

52,63

38,26

23,62

22,19

5,78

3,92

1991

1992

0,30

-1,63

1993

1994

11,40

10,61

8,61 4,94

1995

1996

1997

1998

1999

2000

2001

2002

2003

Source: Deutsche Bundesbank

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Kopper notes that throughout the first half of the 90s foreign investment in Germany was relatively modest. “Back then,” he observes, “investors were thinking about their home markets before they would consider expansion.” In 1993 net FDI inflows into Germany amounted to just E0.3 billion. The year before that the figure was actually in negative territory. (German investors were apparently more outgoing.) But radical change was on the way. Driven by rapid technological progress, investors began pouring billions into foreign markets in the mid-1990s, giving expression

Invest in Germany magazine August 2004

Countries with the Largest Stock of Direct Investment in Germany 2002 Market Volume: E 301 bn

Others E 48,3 bn

USA E 56,2 bn

Japan E 9,9 bn Spain E 10,9 bn Switzerland E 20,3bn

Netherlands E 54,2 bn

United Kingdom E 23,3 bn

France E 28,8bn

Luxembourg E 49,1 bn Source: Deutsche Bundesbank

to the phenomenon we now call globalization. By 1997 the amount of FDI streaming into Germany broke the 10 billion barrier for the first time.

That made Germany the envy of its economic rivals Investment volume would continue leaping forward in staggeringly huge amounts over the next three years. Between 1996 and 1999 the figure more than doubled each year. Then in 2000, inflated by skyrocketing tech stocks, Germany’s inward FDI hit the stratospheric altitude of E215 billion. (Vodafone’s takeover of Mannesmann accounted for the lion’s share of that.) Needless to say, this momentum could not be sustained. The bursting of the new economy bubble brought foreign investment down to earth. Yet, remarkably, Germany survived the crash with little more than a few bruises. And that says a lot about Germany’s fundamental strengths. In the year 2001 Germany posted a very respectable FDI figure of E23.6 billion, its third best result ever. Even more remarkable, however, is

Invest in Germany magazine August 2004

what happened in the following year. In 2002 foreign investment in Germany shot up by more than 60 percent to E38.3 billion. That made Germany the envy of its economic rivals, including the US. For the first time ever, Germany attracted more foreign investment than the United States of America. Referring to global appeal of German firms in the eyes of foreign investors, FocusMoney magazine wrote a feature article about them titled “Beautiful Brides.” Germany’s FDI achievement in 2002 is particularly impressive considering what was happening with foreign investment in the rest of the world. Investment flows into the United States, for example, declined by nearly 80 percent that year. Britain saw a 60 percent decline to $25 billion during the same period. All together, FDI fell in 108 countries. Ranked fourth in Deutsche Bank’s list of most attractive investment locations overall, Germany bucked the worldwide trend in a big way. Unfortunately, that enthusiasm didn’t carry over into 2003. Last year net FDI flows into Germany dropped back to E11.4 billion. As economists at Germany’s Bundesbank

put it in their March report: “Interest in crossborder commitments diminished sharply.” According to the Bundesbank, most of the foreign investment that entered Germany in 2003 came from the US and France. That’s not surprising, given that the two are among Germany’s most important trading partners. The year before it was the Netherlands (another of Germany’s big commercial partners) that topped the list of countries investing in Germany. Before that Belgium headed the list, preceded in 2002 by Luxembourg. France was the big spender in 1999. Of course in this age of transnational corporations a company’s legal address isn’t always an accurate indication of an investor’s national identity. The British telecommunications giant Vodafone, for example, executed its takeover of Mannesmann via Luxembourg. It’s safe to say, however, that American, French and Dutch companies are among the most avid investors in Germany. Asian investors are also gaining prominence, especially the Chinese.

Terry Martin

Largest Foreign Investors in Germany Balances 2003 in E bn France

10,2

Bahamas

7,2

Netherlands

7,2

USA Switzerland Belgium

4,8 4,03 3,2 Source: Deutsche Bundesbank

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W H AT G E R M A N P O L I T I C S D O E S

Inside the German Cabinet: (from left to right) Hans Eichel-Federal Minister of Finance; Wolfgang Clement – Federal Minister of Economics and Labour; Brigitte Zypries – Federal Minister of Justice; Edelgard Bulmahn – Federal Minister of Education and Research; Heidemarie Wieczorek-Zeul – Federal Minister for Economic Cooperation and Development.

Reforming the Domestic Economy Germany recently passed a series of new laws to jump-start its economy. The reform process – called “Agenda 2010” – was the consequence of the country’s critical look at itself in the face of increasing global competition.

will be freed from tax on a gradual basis. Furthermore, the government has allowed the level of pension contributions to the state-funded scheme to be held steady at 19.5 percent of gross income for 2004 in order to stabilize non-wage labor costs.

A

Tax Reform: Germany is the world’s lead-

Labor Market Reform: The key element of the labor market reforms are the so-called Hartz-Laws, which open the door to new employment opportunities and seek to increase flexibility on the labor markets. Personnel Service Agencies and Job Centers have been created to speed up the placement process. The measures provide incentives for older and less qualified people to

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search for regular employment, and they merge the systems of unemployment assistance and welfare assistance. Special grants have been made available for unemployed persons interested in starting their own business. Labor market reforms also include the comprehensive overhaul of the Federal Employment Agency, which is based in Nuremberg and was formerly called the Federal Employment Office. The agency is already transforming itself into a modern service provider designed to assist job seekers in finding work and help businesses in finding suitable staff. It operates its own Internet job sites and helps retrain workers in emerging fields.

Pension Reform: Like many European countries, Germany is experiencing a declining birth rate and increasing life span which threatens its pension system. To meet this challenge, the country has passed several laws to promote private pension schemes that are intended as a supplement to the state-funded retirement system. In 2002, the so-called “Riester Pension” was introduced to encourage private investment in pension schemes. In addition, pension contributions

ing exporter, but domestic demand is lagging. To stimulate the domestic market, the government has lowered taxes for citizens and business alike to the tune of E15 billion. Starting in January 2005, further tax cuts of E6.5 billion will enter into force. The main beneficiaries of the tax relief are employees, families with low and average incomes, and small and medium-sized businesses.

Moving Forward: The government is confident that Agenda 2010 has placed the country on the road to reform. This path will return Germany to leadership in sectors such as research, science and technology. Structural reforms will foster growth and employment. “It is now a question of whether we will be able to utilize the opportunities offered by this renewal,” in the words of Wolfgang Clement, Germany’s Minister of Economics and Labor. “We must and we will concentrate on once again making Germany into one of the world’s most innovative and productive economies.”

Invest in Germany magazine August 2004

Photos: Bundespressearchiv

genda 2010 aims at maintaining Germany’s position as an attractive location for investment and is designed to help Germany stay competitive. It contains fundamental structural reforms to boost employment and economic growth. The reform process is geared to removing barriers to investment, reducing bureaucracy and modernizing labor laws and local employment agencies. Investing in education, research and technology is also part of the Agenda 2010 scheme. Some of the new laws went into effect at the outset of the years 2003 and 2004; others will be phased in gradually in the further course of this year. The following is an outline of the three major areas of reform:

The day of the voting about “Agenda 2010” in the Bundestag, the German Parliament.

The Innovation Initiative As a country with relatively few natural resources, Germany traditionally focuses on innovative products and production processes. And our export rates show that the German economy is still quite sucessfull in this area. Nevertheless, government and business leaders are well aware that further innovation is required for the country to maintain its leading edge.

T

hat’s why one major follow-on elements of the Agenda 2010 bears the title “Innovation Initiative.” Germany’s Innovation Initiative comprises additional investments in universities and research institutes as well as measures to improve the framework conditions for innovation. This includes promoting the development of Germany into a knowledge-based society, where not only a solid education but also a process of lifetime learning becomes commonplace.

Promoting the development of Germany into a knowledgebased society It also includes reviving the public’s interest in technology and technological processes and making people more receptive to change in general. The vision behind the Initiative is to create an innovation-friendly climate, where well-trained and motivated individuals can implement ideas and determine their own personal and professional paths. The federal government cannot do this alone. Cooperation is needed between poli-

Invest in Germany magazine August 2004

tics, business and science. An innovation office has been set up to support and coordinate brainstorming sessions, where highlevel entrepreneurs, scientists and administrators meet to identify the key innovation requirements. The goal is for Germany not only to participate in the markets of tomorrow but also to take its place among the leaders. By mid 2005 the members of the initiative will provide a catalogue of new proposals for enhancing innovation. A first step has already been taken with the federal government’s “High-Tech Master Plan.” The plan makes additional funding available for young technology companies and innovative start-ups. The German government has allotted E500 million for investments in private venture capital funds and for assistance to young companies and start-ups in sectors such as biotechnology, information and communication and nanotechnology. Half of the amount is financed by the European Investment Fund. There will be an additional fund of E250 million for direct investment in these companies in the form of co-investments with

private venture capital funds. Furthermore, since hardly any private venture capital is presently available for seed investment, the federal government and some large private companies intend to create a new seed-capital fund for start-ups. And the German Ministry of Economics and Labor seeks to assist micro-firms in networking their R&D efforts. With these measures the federal government will mobilize venture capital of more than E2 billion in a joint effort with private venture-donors. The money is to be invested in new high-tech companies within the next five years.

Promoting excellence in the educational sector As a further important aspect, the Innovation Initiative aims at promoting excellence in the educational sector. To achieve this objective, universities and research institutes compete for federal funding to establish centers of excellence in their respective areas of expertise. German policymakers hope that worldclass students and scientists from around the globe will be attracted to Germany. The federal government aims at supplying E1.9 billion in extra funds for the winners of this contest in the coming years. These steps taken together should ensure that Germany remains a competitive and innovative business location where knowledge and skills are used to their best advantage.

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S U CC E S S STO RY

The Right Chemistry for Italian Investor

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B

ut it’s a fact. Berlin-Chemie Menarini increased its sales by 25 percent to E503 million in 2003. In the process, it took on 650 new employees, bringing the total number of staff to 3,227 – exceeding the number it had even in the overstaffed years. The year before, turnover rose 24.3 percent to E404 million. This year, turnover is again predicted to increase, this time by more than E100 million. The company is currently enlarging its Adlershof production facilities. “We have to increase our capacity threefold in the coming years,” explains Reinhard Uppenkamp, the company’s chief executive. A sales target of E600 million has been set by the management this year. An additional 600 employees will be hired, a third

Invest in Germany magazine August 2004

Photos: Berlin-Chemie

When Menarini, the giant Italian pharmaceuticals group, bought Berlin-Chemie from Germany’s privatization agency in 1992, there were few who would have dared believe the Adlershof-based concern would, in little more than a decade, become one of the fastest growing companies in Europe.

One of the fastest growing companies in Europe.

of them in Berlin. “We’re growing at a double digit rate,” says Uppenkamp. Among German pharmaceutical concerns, BerlinChemie Menarini ranks 19th in size. But following seven years of rapid growth, Uppenkamp reckons it might soon be in the top ten bracket.

An additional 600 employees will be hired.

pany with a E1.8 billion turnover and a staff of more than 10,000 workers. One of Berlin-Chemie´s biggest assets was the distri-

“We have to increase our capacity threefold in the coming years” Back in the l980s Berlin-Chemie had 3000 workers, and relied on the Soviet Union and the Eastern Bloc countries for most of its sales of pharmaceutical products and pills. But when the Communist world imploded, many of its once “safe” markets were no longer there. Hansjürgen Nelde, who had headed the company for twenty years, was left with no option but to slash his Berlin staff after the company became privatized. Coming to the floundering company’s rescue was the Florence-based Menarini Group, Italy´s largest pharmaceutical com-

Invest in Germany magazine August 2004

Reinhard Uppenkamp, CEO Berlin-Chemie Menarini.

bution network it had built up during years of marketing activity in Eastern Europe. During trying times in the 1990s, it remained patient with customers in Russia. The strategy paid off. Some of these once neglected

regions are today the markets driving the company´s spectacular growth revival. From Albania to Belarus, from Bulgaria to Estonia, the company has restored its customer base. Menarini´s policy of re-investing profits also helped restore stability to Berlin-Chemie. “Not a single euro from Berlin flowed back to Italy, not even in the form of dividends,” claims Uppenkamp, who succeeded Nelde as the company´s chief executive in 2002. Berlin-Chemie´s results are impressive. With a focus on cardiovascular medicines and drugs for diabetics, it also markets products made by other firms. Co-licensing partners include many global players. The bulk of its sales come from Germany, Russia, Poland, Ukraine, the Czech Republic and the Baltics. Business in China and India has already started.

Clive Freeman

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M A J O R I N V E STM E N T D E C I S I O N S

The new GE Global Research Center Europe in Garching, Bavaria.

focus will be on European products and markets. “We are taking advantage of the core areas of competence of each region,” says Thomas Limberger, chairman of General Electric Germany. ”We are bringing top talent from all over Europe to Garching.” “We asked ourselves where the most important technology center s in Europe were,” says GE’s European research director Armin Pfoh, a nuclear physicist who has held a number of Stateside positions with GE and now heads the Garching center. Germany clearly has not one center but several: Berlin, Stuttgart and Aachen also have strong research bases. As Pfoh says, the country is “Europe’s technological motor.” But, in the end, the sheer density of research facilities, including several big names such as the Max Planck and Frauenhofer Institutes, gave Munich the edge.

The opening of General Electric’s $52 million research center in Bavaria is big news. Announcing the decision in October 2002, Jeffrey Immelt, the company’s chairman and CEO said,“Germany is a world class source of intellectual capital, home to over 8,000 GE employees and hundreds of our most valued customers. It is a logical choice to be the site of our first technology center in Europe.”

eneral Electric is a global conglomerate with over 300,000 employees worldwide and a highly diversified range of products and interests. Its German subsidiary, which also has divisions in Switzerland and Austria, is well established and employs several thousand people in 11 production locations. Financial services (which include reinsurance and consumer credit and currently account for around half the company’s turnover), renewable energy sources including wind energy, security systems for everything from private homes to airports, and

G

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medical technology, are all part of GE Germany’s huge product palette. The new 10,000-square-metre research and development center is located at Munich Technical University’s Garching campus, on the outskirts of the city. Some 150 scientists from all over Europe will carry out basic research into medical technology, with an emphasis on diagnostic imaging methods, as well as synthetic materials and renewable energy sources. Garching complements the company’s three other R&D centers in the United States, India and China, but its main

The staff might not be cheap, but they do fantastic work Germany’s high labor costs are often seen as a problem, but this has not affected GE’s attitude. “The staff might not be cheap,” says GE CEO Jeffrey Immelt, “but they do fantastic work.” Pfoh agrees, noting that German researchers aren’t any more expensive than those in the United States. “We want really top people,” he says. “They have to be well-paid anywhere in the world.” The cost of individual projects will be shared between GE and clients from the medical and manufacturing sectors. Thomas Limberger puts the time from the start of basic research to a market-ready product at five years. The center itself, however, will have to expand faster than originally planned: the first researchers started working in temporary premises last October, and the need to increase the facility’s capacity was clear even before it became fully operational. The number of research staff could now double by the end of 2006. “Plans for the second phase are already firming up,” Limberger says. “2004 and 2005 will be important years.” Christopher Cordy

Invest in Germany magazine August 2004

Photos: General Electric

Choosing Germany for R&D

GERMANY AS A RESEARCH LOCATION

Putting new ideas to work

Thomas P. Limberger, CEO & National Executive of General Electric Germany, Austria and Switzerland.

Taken within the context of Europe as a whole, Germany has always been an ideal business location, and that is still the case today. However, with our European research center at Garching near Munich, the first Women’s Health Care Centre in Göttingen, and our heavy involvement in the field of wind energy, we are not only sending out a message of confidence in Germany as location for business but also as a location for research. As far as research and innovation is concerned, the sheer scope and concentration of what Germany can offer potential clients in both domestic and international markets still put it in a leading position worldwide. What generally determines whether a research location is attractive or not? What are Germany’s advantages? A research location has to have an environment that allows creativity to develop. Germany, the “land of poets and thinkers,” has always been a good place for creative work. Every day, millions of inquisitive and innovative people demonstrate how much they know and what they can do. From young university graduates and both locally based and globally active entrepreneurs to the “high potentials” from abroad who have come to Germany for professional reasons, they all contribute to what we - to avoid using terms such as “human capital” or “human resources” – might term a creative “talent pool”. More than 17 million people (out of a total German workforce that currently numbers approximately 38 million) work in an office, which as a rule implies that they are involved in some form of mental activity. Knowledge workers in the narrower sense currently make up 25 percent of the whole workforce; that number is expected to far exceed 50 percent by the year 2020. This is capital that Germany lives off – and not only as far as the service sector is concerned. Although forecasts for the manufacturing sector indicate that in an-

Invest in Germany magazine August 2004

by Thomas Limberger

other 15 years it will only employ 10 percent of the country’s workforce, it is still reliant on highly-qualified knowledge workers. As far as new academic blood is concerned, the latest figures for the winter semester 2003/2004 are very encouraging: for the first time ever, more than 2 million people are in higher education in Germany. But it is not only the figures that are convincing, but also the academic standards. The rapid establishment and expansion of internationally comparable courses of study leading to Bachelor’s or Master’s degrees have made a huge contribution to the quality and efficiency of teaching. Highly motivated students are taking part in 854 Bachelor’s and 1.044 Master’s courses (as of winter semester 2003/2004). Because of their compatibility with international academic qualifications, these will make them of much greater interest to companies that are operating globally. In this respect, Germany is now certainly catching up with its neighbors, where the internationalization of higher education and qualifications started much earlier. When it comes to advanced research, however, it is a different picture entirely. Here, Germany has always been part of the crème de la crème. If you were to measure the international reputation of German researchers by the frequency of their publications, you would clearly see a trend towards expansion at the top end of the scale. During the 1990s, the share of worldwide publications by German researchers grew by one and a half percent to its current level of roughly nine percent, an above-average amount of which appears in periodicals with an international readership. International awards are another indicator of the excellence of German research. Taking the highly prestigious and high profile Nobel Prize alone, 84 Germans have received it for their work in the natural sciences, including 32 for chemistry, 29 for physics and 22 for medicine or physiology. Ideas and people: both are prerequisites for innovation and technological competence and together they provide its driving force. Taken together, too, they determine whether a location is suitable only for research or for research and development as well. Germany doesn’t need to hide behind the big players in this respect, either. Measured by their share of real net output, currently around 30 percent, knowledge- or technology-intensive services have the same significance in Germany as they do in the United States. Worldwide patent registrations provide another good indicator of the transfer of knowledge from pure research to application-oriented development. In this area, Germany has been in the top three since the end of the 1990s. In fact, it has recently not only maintained its position as a net exporter of technology but has even overtaken Japan. Excerpt from “Made in Germany ‘21 - Innovations for a Just Future” published by Hoffmann und Campe Verlag GmbH, Hamburg, 2004

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S P OT L I G H T

U.S. Companies Taking off

G

ermans often have a hard time living down their reputation for pessimism, and Americans are almost automatically expected to be optimistic. Two recent studies have found that these stereotypes may still hold true. Americans are more optimistic about investment opportunities in Germany than Germans themselves. The first, entitled “Benchmarking Germany 2003,” was published by the American Chamber of Commerce in Germany and Droege & Comp. It concludes that acquisitions often lead to the quickest business results for new American entrants. The second, “Germany as an Investment Location from a U.S. Perspective,” also produced by the American Chamber of Commerce in Germany but this time in conjunction with the

Boston Consulting Group, found that Americans doing business in Germany indeed see the glass as half full, not half empty. AmCham’s primary mission is to promote business relations between Germany and America.

Benchmarking Germany The “Benchmarking Germany 2003” report came up with a list of how-tos for American companies eager to do business in Germany. Recommendations include spending six to 12 months planning a market entry, buying a German player (or competitor) to gain a platform, avoiding price competition, focusing on innovation and service and maintaining an American business culture.

Market Entry Strategies Chosen by US Companies in Germany Very successful companies

% of surveyed companies

Greenfield

56 %

Strategic Alliance

6%

Joint Venture

7%

Acquisition

Best Practice

31 % Source: American Chamber of Commerce in Germany (AmCham)

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The study examined 1,800 German subsidiaries of U.S. companies that represent around 800,000 jobs and generate $580 billion in annual revenue in Germany. Most of these companies were in the automotive, high-tech and oil, gas and energy sectors. Some of the biggest U.S. companies with subsidiaries in Germany are Ford, General Motors, and Exxon Mobil Corp. Some of the results of the survey: About 35 percent of German subsidiaries of U.S. companies say they operate “very successfully” in Germany. These firms generate at least 10 percent of their company’s worldwide revenues in Germany, capture a market share of more than 22 percent and have booked earnings before interest and taxes of more than 10.5 percent of sales. Almost half of the companies in this category started by acquiring a competitor. Some 70 percent planned their market entry thoroughly, and the majority of successful firms did so with a lead time of between six and 12 months, the study found. Though German consumers have become highly price sensitive, U.S. companies operating in Germany which have traditionally focused on price have usually met with less success than those which have focused on quality and service. Finally, the study suggests it pays off to maintain some elements of the American business culture, since this culture shows a

Invest in Germany magazine August 2004

Photo: Invest in Germany

American companies have long been a vital part of the German economy, with subsidiaries here making substantial contributions to their parent’s global income. No wonder recent surveys suggest that U.S.-based multinationals continue to be optimistic about their German operations.

strong correlation to success in Germany. The sales force, however, should operate on the same cultural wavelength as its customers. Andreas Back of Droege & Comp. said in a press interview that he was surprised to find that companies which apply their U.S. marketing strategy to the German market without major adaptations say they are highly successful. This finding goes against conventional wisdom which says that an aggressive American strategy has no place in Europe’s cozy business environment. The qualities that help American companies compete in Germany include short management lines, quick decision making, limited bureaucracy and target and profitoriented management styles, said Back.

Executives said Germany was particularly appealing because the location offers access to German customers and employees have high skill levels. In addition, the quality of German innovations and German supply networks make the location attractive. The study acknowledges that Germany has room for improvement, but it found that

For investors wishing to set up a management holding company in Europe, Germany is the best bet, according to the other study by the American Chamber of Commerce in Germany and the Boston Consulting Group. The survey polled executives at Germany’s top 100 subsidiaries of U.S.-owned firms. It concludes that Germany offers better conditions for management holdings than any of its European rivals including the U.K. and Switzerland.

Invest in Germany magazine August 2004

Rhea Wessel

Which location factors played a role in your decision to expand your business in Germany? (1= very important; 6 = not important) Access to Germany's market and the quality of employees are the main reasons for U.S. business activity in Germany. Access to the German Market Quality of Employees

Germany as an Investment Location from a U.S. Perspective

the business outlook is improving. Some 69 percent of American companies in Germany anticipated solid revenue growth and more than a quarter of companies operating in Germany planned to increase their investments this year.

Quality of German Innovation Quality of Germany's Distribution and Supplier Network M&A Possibilities Cost-effective Production Possibilities

1.7 2.4 3.7 3.8

3.9 3.9

(Further factors mentioned: central logistic position; stable legal system; innovation incentives) Source: American Chamber of Commerce in Germany (AmCham) Business Questionnaire 2003

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M A J O R I N V E STM E N T D E C I S I O N S

Main entrance of the AMD premises in Dresden.

AMD Invests in Europe’s “Silicon Valley” Speed plays a role in Dresden. Barely six months after AMD (Advanced Micro Devices) announced plans to invest in another chip plant in the city, builders celebrated the completion of the main part of the premises, at the company's sprawling 120-acre site on the city outskirts. he speed with which the $2.4 billion project has progressed has astonished experts. Signs are the facility will be ready well ahead of schedule in early 2006. Impressed, German Chancellor Gerhard Schröder and Georg Milbradt, Saxony’s prime minister, participated in its “topping” ceremony in May. The world’s second largest chipmaker after Intel, AMD already has one manufacturing plant and a development center in Dresden. It plans state-of-the-art microprocessors at the new premises. The American firm says the first “test” 300 mm wafers will be produced there by the middle of next year. Then in 2006, production of around 20,000 wafers a month will begin. Dr. Martin Gillo, Saxony’s economics minister, spent 20 years in Sunnyvale, California, as a director of AMD earlier in his career. He is the man chiefly credited with persuading his former employer to invest in Dresden. “Of course I know everybody here. I once worked with them,” he says cheerily, when standing at the entrance to AMD’s glossy Dresden premises. “But now I’m a politician!” When asked about AMD investment, Gillo says: “It’s proof to the world that

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an international company, a world company, can be very successful in Saxony. Initially there were a lot of prejudices about a former socialist region, and the work ethic. When people asked, we said, ‘Sure people work hard here!’ So that’s really helped us to sell the attractiveness of Silicon Saxony, as a region for international investment worldwide.”

Saxony is nowadays dubbed “Silicon Valley” Gillo says AMD is not alone. “We have over 70 U.S. firms that manufacture here, employing over 10,000 people. We do very good business with the United States and are proud of it. It demonstrates that Saxony is very open to international labor, international experts, managers, and people from around the world who want to work here.” Dresden’s reputation in the high-tech world was illustrated last year when AMD chose to build another plant there – over East Fishkill in New York State, where IBM is located, and other interested locations in Austin, Texas, and Singapore. AMD was helped in its decision by generous German grants.

A parliamentary budgetary committee had approved a E336 million state guarantee for the financing of the second plant, allowing the American company to take up investment loans up to E700 million. This latest investment confirms the region’s leading position as a center for hightech settlements. Eager to create more jobs for its highly-skilled workers, Saxony has been generous with subsidies ever since 1990. Around 760 companies in the microelectronics, IT and communications technology fields are located in Dresden. In semiconductor production alone, 7,800 people work in the state capital area – at AMD, Infineon, AMTC, ZMD and Photronics. AMD’s latest plant will provide jobs for more than 1,000 people directly, and create another 1,700 jobs indirectly. Two thousand are already employed at the AMD plant in Dresden which was built eight years ago. Hardly surprising, then, that Saxony – the most prosperous of the five states in eastern Germany – is nowadays dubbed “Silicon Saxony.”

Clive Freeman

Invest in Germany magazine August 2004

Photo: AMD

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M A J O R I N V E STM E N T D E C I S I O N S

Dow Chemical Expands Operations in Eastern Germany The Dow Chemical Company of the U.S. continues to expand its operations in the eastern part of Germany.

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onstruction on a Dow Chemical plant in Schkopau in Saxony Anhalt for manufacturing Polyethylene Terephthalate (PET), was begun in June last year. Now the first phase of building is complete. In February 2004 workers at the site assembled for the building's traditional “topping ceremony.” The synthetics production facility is expected to create new jobs once fully operational. Marcel Brobbel, the building foreman, speaks of pipeline installations 30 kilometers long, and cables 250 kilometers long being used in the Schkopau project. Dow Chemical, the only chemical company to gain a place in a recent ‘Top 50’ best-employer poll conducted in Germany, has four production outlets in the eastern states of Saxony and Saxony Anhalt where the U.S. parent company now considers other investments.

In western Germany Dow has been active since 1959. It operates in several towns, among them Stade and Wesseling, near Cologne, Hamburg, Speyer, and Munich, where its agro-science products are marketed for plant protection. But it was the demise of the Berlin Wall and German unification that led to Dow's foothold in eastern Germany. In 1995, after protracted negotiations with the Treuhand, Germany’s privatization agency, Dow bought several plants there, which were soon transformed into modern production sites. Now Dow’s further expansion plans are having a knock-on effect in the region. The Italian film manufacturer Manuli Stretch and the Belgian

plastics maker, RP Compounds - have reacted by boosting their company capacity at the Dow ValuePark in Schkopau. Dow's 5,000 workers in Germany generate sales worth more than E3billion annually - a fact not lost on the company’s executives. Asked about the group's German production facilities, a New York company spokesman replies, that they are “often the global benchmark within Dow.” Dow is a leading science and technology company that provides innovative chemical, plastic and agricultural products and services to many essential consumer markets. With annual sales of $33 billion, Dow serves customers in more than 180 countries.

Clive Freeman

Photo: Dow Chemical

Often the global benchmark within Dow Dow has already invested more than E2.7 billion in the eastern half of Germany since 1995 at plants in Schkopau, Leuna, Boehlen and Teutschenthal. One of the latest investments was the new 390-kilometer olefins pipeline connecting Dow’s sites in central Germany with its Stade site in northern Germany. By again showing confidence, the chemical giant appears to anticipate a sharp rise in demand for plastics products within the European Union following the enlargement in May. Eastern Germany’s proximity to central Europe makes it a strategic location for “growing markets” in Hungary, Poland and the Czech Republic – three crucial new EU members. The Schkopau site is the largest location of Dow in central Germany.

Invest in Germany magazine August 2004

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S P OT L I G H T

Why Do Chinese Companies Invest in Germany? “The Chinese need know-how and market access to make the most of their strengths, and Germany can offer them that in spades.” rade between Germany and China has often seemed a bit of a one way street: high-profile blue chip German companies such as Volkswagen, DaimlerChrysler, Siemens, Bayer, and Infineon are either already investing heavily in the enormous Chinese market or planning to. With a total investment in China of more than E8 billion, Germany is by far China´s largest European trading partner and ranks sixth amongst China´s trading partners overall. The economy of the world’s most populous country (1.3 billion people) has been expanding at some eight percent per year, with growth of 20 percent and more in the industrial sector. This enormous potential is not only attracting foreign investors to China but also radically transforming Sino-German commercial relations as a whole. The volume of trade between the two countries has increased from the equivalent of E225 million in the early 1970s, when they had established new diplomatic ties, to nearly E35 billion last year.

Now major investment is starting to flow in the other direction German exports to China are still showing healthy growth rates, but Germany´s trade deficit with China has been between E6.6 billion and nearly E10 billion for many years. Now major investment is starting to flow in the other direction as Chinese companies seek out for suitable candidates for take-over or joint ventures abroad. Visiting Germany on the first leg of his recent European tour, Chinese Premier Wen Jiabao told members of the Asia-Pacific Com-

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mittee of German Business in Berlin that Germany is Beijing’s most important European trading partner. Wen said that Germany had 3,578 direct investment projects in China at the beginning of 2004, and that nearly 600 Chinese enterprises, just under ten percent of the global total, were investing in Germany. However, the growth in overseas investment is expected to outstrip gross domestic product over the next decade and experts think it could hit E65 billion a year – nine times its present level – by 2015. Around three percent of that would be in Germany.

A Sino-German joint venture doesn’t necessarily have to be based in China A recent survey carried by the global management consultancy Bain and Company showed that access to markets – and, in particular, market size and proximity to customers – was the most important consideration for 75 percent of Chinese companies currently or planning to invest in Europe. Good infrastructure and distribution are also important in this respect. These are all areas where Germany is in the European front rank. Buying up or investing in European companies allows Chinese enterprises to capitalize on low production costs at home while acquiring established local name brands and distribution channels. The new European subsidiary will normally provide a certain, and often limited, “local content” such as final assembly or research and development. When German Chancellor Gerhard Schröder visited China earlier this year, the

Photo: Bundespressearchiv

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Invest in Germany magazine August 2004

No fear of contact – on either sides. Chancellor Schröder in China.

Chairman of the Standing Committee of the National People´s Congress, Wu Bangguo, told him that Germany’s advanced technological and management experience also made it attractive to Chinese investors. Premier Wen also says German partners would also benefit Chinese enterprises through management and technology transfer. The majority of the companies surveyed by Bain also identified management know-how,

“We are looking to buy up brands in Germany, because Germany has fantastic design and progressive management.” Zhao Boya, CEO of Chinatex

especially in marketing and distribution, as an important factor in selecting business locations. Fewer companies saw development of existing product as a priority. The search for this sort of synergy has driven a number of recent high-profile deals in Germany, including the E8.2 million purchase of a German household name, Schneider Electronics, by TCL, China´s second-biggest maker of televisions and cellular phones. Others include Huapeng’s purchase of the insolvent pressurized cylinder manufacturer Welz in Brandenburg. “A Sino-German joint venture doesn’t necessarily have to be based in China,” says Jiang Zhou, who manages Huapeng’s Hamburg-based subsidiary together with Johannes Storz, formerly head of Air Liquide in Germany. Huapeng is the market leader for pressurized cylinders in China. The purchase of Welz gives it access to the German com-

Invest in Germany magazine August 2004

pany’s 30 percent share of the domestic market. Production at Welz’s plants has been stepped-up to minimize excess capacity and do away with long delivery times – around four weeks from China itself. Highly competitive and fragmented domestic markets are another reason for Chinese enterprises to look for ways to capitalize on production strengths. The country’s largest textile company, Chinatex, which has had a European subsidiary in Hamburg since 1987, is using local designers and marketing specialists to develop its own fashion lines using materials brought in from China. “We’re looking to buy up brands in Germany, because Germany has fantastic design and progressive management,” said CEO Zhao Boya. Once again, Zhao also emphasizes the advantages of market proximity and good infrastructure. The Chinese premier pointed to the future when he said a joint mechanism was needed not only to enhance consultations on major international issues but also to strengthen trade and technological exchange. His promise of government help with loans, subsidies, insurance and foreign exchange shows that Beijing is ready to actively promote investment in Germany. The Chinese need know-how and market access to make the most of their strengths, and Germany can offer them that in spades. By 2015, the reward could be an annual E3 billion Euro shot in the arm for the German economy, which would translate into as many as 10,000 new jobs a year. That really is a joint venture in its truest sense. Chris Cordy

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Beer and Germany: what could be more obvious? But like most stereotypes, it’s a far more complicated tale than it seems.

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oing by the image alone, it’s hard to imagine a serious crisis in the German beer industry, let alone that Germans themselves are drinking less and less of the beverage that is so deeply associated with them in the public imagination. Both, however, are part of the recent history of German brewing. The crisis had its roots in more than the slowly declining consumption of beer, a trend which has been manifesting itself for at least five years, and which has left Germans the third-largest percapita consumers of brew in Europe – just below the Czechs and the Irish. The more serious problem lay with the very thing that makes German beer a synonym of quality around the world: tradition. The most famous German beer tradition remains the Reinheitsgebot, or Purity Law, enacted in 1516. But the tradition that made

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the trouble was an old-fashioned inability on the part of the brewing concerns to face contemporary business realities. Breweries were usually owned by families or groups of families, and, just as the Reinheitsgebot dictated that “beer” was defined as a beverage made from water, malt, yeast, and hops and nothing else, the company that made it was usually presided over by the latest descendant of a family that had founded it, sometimes centuries earlier.

Suddenly, traditional German firms were ripe for investment, and the investors came In 1987, the EU Commission broached the Reinheitsgebot: foreign beers containing additional ingredients were no longer illegal, as long as those ingredients were listed. But the new era also meant that the breweries themselves were on a changed playing field, one where they could export their products more easily, but where they were also competing with imports. Brands like Heineken and Carlsberg appeared for the first time, and although they didn’t make a huge hit with consumers whose preferences were also formed by tradition, their more streamlined business practices should have alerted German brewing concerns that times had changed.

Invest in Germany magazine August 2004

Photos: Gesellschaft für Öffentlichkeitsarbeit der Deutschen Brauwirtschaft e.V

Bubbling German Beer Market

S P OT L I G H T

Biggest Breweries in Germany Output 2002 in Thousand Hectoliter Interbrew Deutschland 15,775 Bitburger Gruppe 9,336 Radeberger Group 8,545 Carlsberg Deutschland 8,400 Brau und Brunnen 7,240 Krombacher Brauerei 5,440* * output 2003 Source: Bierreport; Der Tagesspiegel

.....just as the “Reinheitsgebot” dictated....

Suddenly, traditional German firms were ripe for investment, and the investors came. The Belgian concern Interbrew, an aggressive acquirer of brands, snapped up Beck’s and Diebels, and the Dutch Heineken concern bought 50 percent of Munich’s SchörghuberGruppe, owners of Paulaner, Hacker-Schorr, and Kulmbacher, both in 2001. Far from being a tragedy, this meant that suddenly these brands were widely available interna-

....breweries themselves were on a changed playing field...

Invest in Germany magazine August 2004

tionally – including in the United States, where upmarket beers have become quite trendy – and the businesses could be made much more profitable. Naturally, there was resistance on the part of the beer barons, but change was inevitable. The Hamburg brewery Holsten is a case in point. In July, 2002, the firm publicly announced that they were seeking a strong investor, and had engaged in talks

with the American firm Anheuser-Busch. This admission, by Germany’s largest independent brewer, shocked the beer business, but the fact was that its leadership position had already been usurped by Interbrew, and Holsten desperately needed money to invest. One after another suitor called, and finally in January 2004, the Danish Carlsberg group came to the rescue, and the brewery’s stock took a sharp tick upwards. Six months later, it has doubtless come to the attention of the beer barons that the Apocalypse has yet to occur and that Germans are still drinking German beers – but so are new customers in other countries. And although Interbrew, Heineken, Carlsberg and the German food giant Oetker-Gruppe (which owns two brewing groups, Radeberger-Gruppe and Brau & Brunnen) control some of the largest brands in the country, if Germany’s Federal Statistics Office is to be believed, there are still 1,228 breweries these four giants don’t control. It’s probably safe to say that not all of them are making as much money as they’d like to, and that perhaps they’d like a piece of the American niche market or a presence elsewhere in Europe, too.

Ed Ward

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Growth for the Biotech Sector

Photo: Invest in Germany

What do modern medicine and the biotech sector in Germany have in common? Both are full of promise, according to a new report by Ernst & Young.

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Invest in Germany magazine August 2004

S E C TO R R E P O RT

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he outlook in the German biotech sector is looking brighter. That’s according to a report from consultants Ernst & Young entitled, “Per Aspera Ad Astra 2004,” Latin for “The Rocky Path to the Stars.” The number of promising projects in the development pipeline is on the rise, while the number of floundering biotech startups has declined, according to the E&Y report. Perhaps the brightest star in the sector is MediGene AG, a Martinsried-based company. MediGene was the first German biotech company to gain approval for Eligard in Germany. Eligard is a medicine for advanced prostate cancer, and it has become the German poster child for the biotech sector. Together with Japanese partner Yamanouchi, the company developed the drug and gained regulatory approval to sell it. The approval has brought international attention to the German biotech sector. Other positive indicators for the budding sector are no increase in the number of insolvencies in 2003 compared to 2004, and a rise in service revenues for German biotech firms. Some 2,000 1 companies are active in Europe’s biotech industry, about the same number as in North America. More than one quarter of these firms are located in Germany – they employ 11,535 people, have revenues of E960 Mio and spent about E966 Mio on research and development in 2003. The number of companies recorded in Germany last year is double the number recorded just four years ago. And 13 of them are publicly listed. Germany’s biotech sector is characterized by small, flexible companies. More than 80 percent of the firms operating in biotech have less than 50 employees. The industry is also diverse, with companies operating in all major fields including pharmaceuticals (the largest), diagnostics, service suppliers, contact production, DNA analysis, and bio informatics.

Germany as a Biotech Capital The metropolitan areas of Munich and Berlin are home to Germany’s largest biotech clusters, but all of the federal states are beneficiaries of a national program to promote the sector. Under the government’s so-called High-Tech Master Plan, reforms have been implemented to improve access to venture

Invest in Germany magazine August 2004

capital and simplify Germany’s tax system to make it internationally competitive. Already, Germany generates the most venture capital deals for the biotech sector in Europe. The action plan also includes initiatives to create a segment on the stock exchange for young, high-tech firms, to give incentives for spin-offs within universities, to integrate young firms into research networks and to promote management training. Top 10 Reasons to Locate R&D in Germany 1. 2. 3.

4.

5.

6.

7. 8. 9. 10.

Renowned scientific know-how in the life sciences. Largest number of biotech companies in Europe. Leading producer and exporter of pharmaceutical and chemical products. Central location with access to both established and emerging European markets. Well-developed collaboration between universities, institutes and private industry. Over E1.3 billion allocated to support German biotech innovation through 2010. Large, productive, and qualified workforce. Start-up incubators are found in 25 regional bio-clusters. Mature venture capital and seed financing sectors. Strong commitment to maintaining an attractive international business environment.

Germany also offers what are known as Bio-Area Initiatives to support companies in all development phases. These programs coordinate the industry’s development regionally, offer public and private financing and steer companies toward business incubators or clustered office parks. The idea is to transfer biotech know-how into products, processes and services, to exchange information between the scientific and the business communities and to promote parallel fields such as licensing, financing, management and marketing. German universities churn out thousands of chemists and biologist every year. In 2002, some 462,000 2 people were employed in the chemistry sector. An addi-

tional 16,400 had jobs in biotech and biochemistry. In the same year, some 2,400 2 young biologists and 2,600 2 chemists graduated from technical colleges. Another 4,600 2 students of biology and 2,500 2 students of chemistry graduated in the same year. Germany’s research institutes play a large role in preparing the work force through training programs and research opportunities. Scattered in multiple locations across Germany, the main resources are: the Max-Planck Institute, the Frauenhofer Institute, the Helmholtz Institute, the Gottfried Wilhelm Leibniz Institute and federal research projects. Finally, a federal program called BioFuture 3 will invest E75 million by 2010 to fund 50 junior scientists to head their own teams that will provide new impulses for basic research in biosciences. Germany generates a significant number of biotech related patents. In 2003, the number was 1,369, a growth of about 30 percent compared to 2002 4.

Looking Forward As the Ernst & Young report noted, Germany´s pipeline is full of promising biotech products. The largest share of the products in the pipeline, some 34 percent, are small molecule drugs, and some 20 percent are recombinant proteins. This pipeline, ongoing structural reforms, the highly educated workforce and synergies with Germany’s mature pharmaceutical and chemical industries combine to make Germany the ideal place to invest for R&D. According to management consultants AT Kearney, sales and profits for the sector in Germany are set to rise by up to 20 per cent by 2006, promising cancer drugs are in the pipeline, and at least 14 biotech companies are looking to list on the exchange. That’s modern medicine full of promise. Rhea Wessel

Sources: 1. ISB – Biotechnology Information Office 2. Federal Statistical Office Germany 3. Federal Ministry of Education and Research 4. European Patent Office

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S E C TO R R E P O RT

Good News in the German ICT-Market

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ndeed, industry observers are forecasting a sunny and fertile climate for the next two years. The market’s recovery, which began last year, is set to continue in 2004 with a further improvement in 2005, according to the European Information Technology Observatory (EITO). The EITO forecasts growth in Western Europe's ICT market will climb more than 3% to E611 billion this year and considerably more in 2005. It is a dramatic increase from 2003, when the market saw just a minimal

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rise. That was still higher than the United States, which saw zero growth, and Japan, where the ICT sector actually shrank. In 2000, the information technology sector in particular suffered a dramatic drop after highs of nearly 11 percent. From 2001 through 2002, it saw negative growth. Yet by the following year the market began to see signs of recovery and Germany´s ICT sector visibly improved. The future is now looking much brighter for both information technology and tele-

communications. This year, the EITO expects Germany´s ICT market to see a 3.4 per cent increase – that's more than E4 billion – and even greater growth in 2005. Demand for computers, software and IT services is up and as a result, the EITO reports that the European software and IT services market will grow strongly this year. The hardware sector is also recovering, but due to continually falling prices, will see only a slight increase. Other factors, like continuing technological advancements in mobile telecom-

Invest in Germany magazine August 2004

Photo: lnvest in Germany

Germany´s information and communications technology (ICT) sector is seeing a dramatic improvement along with the rest of Western Europe.

munications, are also contributing to greater growth in Europe’s telecommunications sector, which is expecting a solid boost in 2005. The introduction of UMTS technology means broadband services are quickly spreading into the third-generation mobile and wireless communications market, providing yet more opportunities for growth in the dynamic mobile telephone and information services industry. Europe´s information technology market might not see the same level of growth as the telecommunications sector next year, but, at least in Germany, the market has not reached its full potential and there is still considerable room to expand, according to the German Association for Information Technology, Telecommunications and New Media (Bitkom).

The market has not reached its full potential and there is still considerable room to expand Indeed, compared to the United States, the world’s biggest technology market, Germany lags far behind in the number of individual PC owners (36 percent compared to 86 percent in the U.S), Internet users (49 percent compared to 61 percent), household broadband connections (12 percent versus 26 percent) and cable modem connections (0.2 per 100 households compared to 15 per 100 households). That leaves plenty of room for growth. Germany exceeds the U.S. in some areas, namely mobile telephone usage (78 percent versus 54 percent), DSL-equipped households (11 percent compared to 9 percent) and household ISDN connections (31 percent compared to 5 percent). Furthermore, Germany is currently undergoing a digital revolution that will soon make convergence an everyday reality. The country´s aging cable lines are being renovated and upgraded to allow for broadband services like more TV channels, high-speed Internet access, video-on-demand and new telephony services. By 2006 some 38 million households in Germany will have DSL or cable modem connections. The number of broadband connections, currently 4.6 million, is set to double in the next few years. With annual revenues of more than E130 billion and a workforce of some 750,000 employees, the ICT sector is one of

Invest in Germany magazine August 2004

the biggest contributors to Germany´s economy. With an overall market share of 21.2 percent, Germany’s ICT sector is the largest in Europe, followed by the U.K. On a worldwide scale, Germany accounts for a 6 percent market share. Nearly 75 percent of global ICT revenue stems from the U.S. (32 percent), Europe (30 percent) and Japan (12 percent). So Germany's ICT industry is vital to the European Union. The ICT sector underpins the overall competitiveness of the EU economy, and its contribution is crucial to achieving the EU’s objective to become “the most competitive economy in the world by 2010.” At the moment, Western Europe's ICT industry is facing stiff competition from burgeoning technology markets in Asia and Eastern Europe, which have become increasingly dynamic. Yet the recent slowdown in Europe has had some positive affects on the industry: it offered the perfect opportunity for foreign investment firms and software companies to acquire dynamic IT companies in Germany. According to industry observers, a focus on special niche markets for software programs

has helped German firms stand out in the global market. Last year private equity firm General Atlantic Partners bought IT services firm TDS, Ad Astra Erste took over Braeer and Investcorp acquired a major share in IT security specialist Utimaco. American IT group Novell bought Nuremberg-based Linux specialist Suse Linux, while Canadian software maker Open Text purchased Hamburg´s Gauss Interprise. Microsoft has also been lured by German IT companies. The U.S. software giant recently held discussions with Germany´s SAP, the world's third-largest software maker, about buying the company. Microsoft said it broke off the negotiations after deciding the takeover would have been too complex. SAP has a stock market value of more than $50 billion. Nevertheless, Microsoft´s interest not only shows just how eager it is to find new sources of growth, it also underlines the significance of German and European players on the global stage.

Ed Meza

Developments in the German ICT-Market 2004

ICT all Software IT-Services

2001 131,4 15,2 27,2

Turnover (in E bn) 2002 2003 2004 127,9 128,3 131,4 15,1 14,9 15,2 26,3 26,1 26,5

Growth Rates 2005 02/01 03/02 04/03 05/04 136,4 -2,6% 0,3% 2,5% 3,7% 16,0 -0,8 % -1,5% 2,5% 5,0% 27,6 -3,1% -0,7% 1,7% 3,9% Source: BITKOM; Basis:EITO

E-Commerce (B2B and B2C) 2003 in E bn 122,7

Germany

15,7 68

Great Britain

France

Italy

Spain

16,8 57,8 8 46,2 5,9 22 2,9 Source: BITKOM; Basis:EITO

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PIONEERS

“A no-brainer and risk-free deal.” When Haim Saban took over German broadcasting group ProSiebenSat.1 last year, he became the first non-European player to break into the television market in Germany.

Successful in Germany: Haim Saban.

he Israeli-American entrepreneur effectively replaced German television pioneer and media mogul Leo Kirch as one of the two main forces in the world’s second largest television market more than a year after Kirch’s vast media empire collapsed under billions of euros of debt. Saban sought investment in Germany after making his name in Hollywood with the hugely successful children’s series “Power Rangers” and, in 2002, earning $1.5 billion from the sale of his Fox Family Worldwide to Disney. That same year the Kirch Group was crushed under E6.5 billion of debt. The company’s insolvency resulted in the dissolution of the group. Kirch’s core television division, ProSiebenSat.1, as well as the company’s vast film library, was put on the block. Major players and former Kirch partners Rupert Murdoch and Silvio Berlusconi were said to be interested in the assets, as was German publishing giant Heinrich Bauer and Saban, who had been looking to buy into European media companies.

Saban came back two months later with a winning bid In the end, only Saban remained. Although a first attempt to buy ProSiebenSat.1 along with Kirch’s vast film library collapsed in June, Saban came back two months later with a winning bid for just the broadcasting group. Saban, who is backed by equity investors Hellman & Friedman, Bain Capital and Thomas H. Lee, reportedly offered E525 million for a 72 percent stake in ProSiebenSat.1. The company’s stock has nearly doubled since then. Saban says he was perplexed by the fact that German investors did not make a greater effort to take over ProSiebenSat.1 themselves. The decision to acquire ProSiebenSat.1 was an obvious one, he adds, describing it as “a no-brainer” and “a riskfree deal.”

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In recent months ProSiebenSat.1 has opened a E325 million credit line with Deutsche Bank and J.P. Morgan Chase, issued a E150 million bond and completed a E282 million capital increase, all part of a comprehensive refinancing plan to lower the company’s debt and raise cash for necessary investments in television programming.

Saban stresses that he will remain in Germany for the long haul ProSiebenSat.1 has five nation-wide channels, the two main ones being ProSieben and Sat.1, which carry a mix of German and U.S. films and series. Kabel 1 is dedicated to classic TV shows and movies; N24 is a 24-hour news station and Neun Live is an interactive channel co-owned by InterActiveCorp’s Home Shopping Network. While the broadcasting group was hurt by the advertising downturn, the Kirch bankruptcy and sinking TV ratings, Saban and an all new management have improved the company’s overall health. Indeed, under Saban, who has since been appointed ProSiebenSat.1’s supervisory board chairman, the group posted a firstquarter pre-tax profit E43 million, up dramatically from a E29 million loss in the same period last year. In 2003, the group saw annual profits rise 46 percent to E158 million on revenue of E1.8 billion. Saban expresses confidence that the German economy will turn around. “We believe in Germany. We believe in the hardworking German people,” he says. Dismissing initial concerns that he would quickly sell the broadcaster after turning it around, Saban stresses that he will remain in Germany for the long haul: “This opportunity is a marathon, not a sprint.”

Ed Meza

Invest in Germany magazine August 2004

Photos: Argum, Invest in Germany

T

EQUITY MARKETS

Skyline Frankfurt am Main.

Rebounding Germany It has taken some time to fully recover from the collapse of Frankfurt’s once high-flying technology stocks exchange, the Neuer Markt. But local and international investors are finally taking another look at German equities. And they are eager to get back into the game.

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n the first quarter of 2004, Germany’s 39 leading private equity firms invested E127 million in domestic companies, according to equity investment consultancy group Mackewicz & Partner. That’s a far cry from the E56 million invested in the same period last year. European investment group 3i has budgeted E1 billion for worldwide investments over the next three years. One quarter of that sum will go to investments in Germany. Nevertheless, while local investment is up, the domestic equity market is consolidating, and more and more venture capitalists are creating partnerships with international investors. According to Goetz Hoyer of Mackewicz & Partner, 75 percent of all German equity companies depend on foreign partners. In an effort to aid the local industry, the EU´s European Investment Fund and the German Federal Ministry of Economics and Labor recently launched a special E500 mil-

Invest in Germany magazine August 2004

lion fund available to equity investors focusing on high-tech start-ups in Germany. While information and biotechnology remain the hot fields, equity investors from abroad are increasingly jumping on German media companies.

The domestic equity market is consolidating Indeed, in the last two years investors have not only taken advantage of the Neuer Markt’s disintegration, but also of the fall of Leo Kirch´s media empire and the failed bid of U.S. cable giant Liberty Media to take over a majority of Deutsche Telekom’s cable assets. Those events shook the sector to its core and forced stock prices down, paving the way for equity investors. “Germany is one of the biggest media and ad markets worldwide,” says Jan Herbst,

an analyst with Sal Oppenheim in Frankfurt. “It makes sense that investors would want to acquire these companies at relatively cheap prices.” Venture capitalist companies Apax, Goldman Sachs and Providence last year bought up Deutsche Telekom’s six regional cable franchises for the bargain price of E1.7 billion after Liberty Media’s E5.5 billion offer was rejected by German antitrust authorities. The investment resulted in the creation of cable giant Kabel Deutschland, which is expanding and expected to go public in the near future.

Information and biotechnology remain the hot fields Equity investment group Apollo Management currently owns regional cable company Iesy in the state of Hesse but recently agreed to sell it to Kabel Deutschland. Apollo has pursued PrimaCom, another local cable firm. Although it is operationally profitable (before interest and tax), PrimaCom recorded a net loss last year due to continuing liabilities. Apollo, along with JP Morgan Chase, is offering to take over the company in lieu of its debt. In a similar case, investment group Permira last year saved pay TV operator Premiere from insolvency. The company, formerly part of the now bankrupt Kirch Group, has since seen a dramatic recovery and is aiming to go public next year. Israeli-American entertainment entrepreneur Haim Saban managed to take over another Kirch company, TV broadcasting group ProSiebenSat.1, last year with the backing of Hellman & Friedman, Bain Capital and Thomas H. Lee. Last summer Saban and his equity partners obtained ProSiebenSat.1 for E7.50 per share; ProSiebenSat.1’s stock price doubled in less than a year.

Ed Meza

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continued from page 3

Dr. Weber at the CeBIT America in New York, May 2004; Dr. Mangold at a Lunch Discussion in London May 2004; Dr. v. Pierer (on the left) at a Siemens-event with the vicemayor of Shanghai June 2004.

Dr. Mangold: Clarity; honesty with regard to

strengths and weaknesses; demonstrating the advantages of the business location but also acknowledging the disadvantages. The Agenda 2010 reform program and its potential for improving business conditions is playing an increasingly important role. Many investors believe that Agenda 2010 will finally get the reform process rolling. It's important that investors recognize the transformational trend! They also expect, however, that the reforms be implemented quickly. Dr. v. Pierer: In Asia, I benefit from the fact that German entrepreneurs have an excellent reputation as reliable partners who make long-term commitments. And German engineering continues to be highly valued. This is a very important asset because Asian companies are eager to measure themselves against their partners, to expand their knowledge and to test new technologies. Dr.Weber: A famous American president once said: ‘The business of America is business, and the chief ideal of the American people is idealism.’ That is still true and you better observe this. Americans like a frank and open approach when discussing the benefits of Germany as a business location. “Made in Germany” still strikes the right chord. What have been your impressions abroad as Commissioner for Foreign Investment? Dr. Mangold: Our export strength is appreci-

ated more abroad than at home. The same is true for the appealing activities of foreign investment funds, which help build trust.

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Dr. v. Pierer: My experiences have been very good. In many parts of the world, “Made in Germany” carries strong positive associations – particularly in Asia. It stands for values like high quality, longevity and reliability as well as innovative technologies and production processes. These are the values we have to focus on and nurture in the future. Dr.Weber: Americans have a positive view of Germany as a business location. That is refreshing and in positive contrast to the sometimes despondent statements you hear amongst the German intelligentsia. It doesn’t mean that in my discussions we sweep any weak points under the carpet. But my partners accept that Germany is amending existing flaws by tackling many reforms. I’ve found the American Chamber of Commerce in Germany and the Deutsch Amerikanische Handelskammer as well as the commercial services of the US consulates in Germany to be strong strategic partners.

Do you have some specific plans for your time in office? Dr. Mangold: Of course. But we will first deci-

de these matters internally and clear them with the federal government before we begin to talk about them in public Dr. v. Pierer: The job has more than one facet. The most important is to create a positive impression of Germany. This means actively and intensively communicating our strengths to people outside the country. Second, I want to contribute my experience to improving Germany’s attractiveness as a business location. There are two sides to the coin. I want to work on both.

Dr. Weber: It is my aim to contact all important players and opinion leaders that matter in our trans-Atlantic business relations – the community of financial investors, the automotive, biotech and nanotech sectors of industry to cite a few.

What results would satisfy you? Dr. Mangold: If we manage to increase our

attractiveness and thus draw investors to Germany who then tell other investors about their rewarding experience. Dr. v. Pierer: The main task of the commissioner for foreign investment is to help increase foreign investment in Germany. This is naturally my first priority. Above all, I want to tap Asia’s enormous potential to strengthen the engagement of Asian companies in our country. I am convinced that Germany has a lot to offer. Any other assessment would not correctly reflect the situation. We need to underscore our country’s positive aspects more strongly. And we need to strengthen our advantages and advertise them aggressively. Dr. Weber: To see mutual relations between Germany and America getting even stronger and the curves on charts depicting investments, trade figures, employment, profitability and output of US companies in Germany to continue to point upwards. Our mutual friendship is a strong bond that warrants our best efforts.

Invest in Germany magazine August 2004

Photos: Invest in Germany, Siemens AG

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