Economic revival in Eastern Germany

 
Once a byword for economic decline, the region is being transformed into the centre of Europe’s electric car industry

Ten years ago, the small east German town of Guben was so desperate for new investors it was prepared to give them land for free. “Now I have no free space,” says mayor Fred Mahro.

The turning point came last year when a Canadian clean tech company selected the town to build Europe’s first lithium converter that makes a key component for electric car batteries. Guben won out over 60 other potential sites across the continent.

Rock Tech Lithium’s €500mn investment will make Guben an important link in the battery supply chain and breathe new life into the town. “Guben was like Sleeping Beauty,” says Mahro. “Rock Tech kissed it awake.”

The arrival of the Canadians is emblematic of a massive influx of investment into the former communist east, which has become the home of Europe’s rapidly expanding electric car sector. A region that was once a byword for economic decline is turning into one of the continent’s hottest pieces of industrial real estate.

In the past couple of years, it has been deluged with new projects and investments. Most eye-catching of all was chipmaker Intel’s announcement in March that it would build at least two semiconductor factories worth €17bn in the eastern city of Magdeburg — the largest-ever foreign direct investment in Germany. It came in the same month that Tesla started production at its first European electric car factory in the eastern town of Grünheide. That comes on top of the two electric vehicle plants converted by Volkswagen in the cities of Zwickau and Dresden.

Eastern Germany is now “one of the most attractive economic regions of Europe”, Chancellor Olaf Scholz told a conference earlier this month. “And internationally, word is getting around.”

The investments could be the harbinger of a profound shift in Germany’s industrial geography. For decades, the country’s economic strength has been concentrated in the south and south-west, home to carmakers such as Mercedes and BMW and engineering giants such as Siemens. But that could change as the east re-industrialises.

“Germany’s economic map is being drawn anew,” says Carsten Schneider, the German government’s commissioner for the east.

Indeed, the new investments come at a time when Germany’s traditional car industry, based on the combustion engine, is coming under unprecedented pressure as governments around the world look to a future free of fossil fuels and the transition to electric cars gathers pace. The pressure was exemplified by the European Parliament’s vote earlier this month to ban the sale of new diesel and petrol cars and vans in the EU from 2035.

Across the south and south-west, traditional suppliers to the automotive industry — Bosch, Continental, Mahle, ZF Friedrichshafen — have announced job cuts amid falling demand and an uncertain outlook.

The reverse is true in the east, where Volkswagen opened its first dedicated EV production line in 2019, converting a plant in Zwickau, Saxony that once manufactured the Soviet-era Trabant car and was taken over by VW after Germany’s reunification. “The region and the people are familiar with upheavals, which was certainly no disadvantage,” says Karen Kutzner, chief financial officer of VW Saxony.

The company’s aim is to manufacture 300,000 electric cars a year at the site, and a few thousand more in nearby Dresden, adding roughly 1,000 jobs in the process. The Zwickau region now has almost full employment, thanks in part to companies such as cablemaker Leoni investing about €130mn in the area to supply the VW plants.

BMW is adding hundreds of roles to its plant in Leipzig, which will build battery modules.

Jörg Steinbach, economy minister of Brandenburg, the state surrounding Berlin that is Tesla’s new European home, says it has seen investments of €7bn since 2018 — “that scale is a far cry from previous years”. The regional authorities in eastern Germany are currently dealing with 28 expressions of interest representing €11.5bn in potential new investment.

“For a long time, the east German states were in the bottom half of the economic performance league,” says Steinbach. “I think that league is going to become a lot more skewed towards the east in the next five years.”

Lots of empty space

Take a trip to the Brandenburg countryside and it’s immediately obvious what makes it attractive to investors — the space. It has a lot more freely available land than other parts of Germany, especially the densely populated, highly industrialised south-west. Tesla’s Grünheide factory sits on 300 hectares of land and Intel’s in Magdeburg will take up 450 — the equivalent of 620 football pitches.

“Such space is a rarity in the heart of Europe and highly sought after,” Scholz said at the conference earlier this month. “And in east Germany it exists.”

The east has another key competitive advantage — a plentiful supply of renewable energy. Brandenburg generates more electricity from wind, solar and biomass per head of population than any other German state. Renewables cover 94 per cent of the state’s electricity demand, compared to Germany’s national average of 46 per cent.

“[Investors] say our business is producing batteries for environmentally friendly mobility,” economy minister Robert Habeck told the same conference Scholz spoke at this month. “And we want to produce our batteries in a sustainable way . . . [so] the availability of renewable energy is a crucial factor for energy-intensive companies setting up here.”

Eastern Germany is also benefiting massively from the move to greater European “sovereignty” — the EU’s strategy to boost its self-reliance in critical sectors such as batteries and semiconductors, the data cloud and pharmaceuticals.

Shocked by the disruptions to global trade seen during the Covid-19 pandemic and the war in Ukraine, countries are increasingly focused on ramping up domestic production of crucial components and shortening supply chains to make them less vulnerable to external shocks.

Those trends are particularly marked in the region around Berlin. “The [EV] industry will have everything it needs here, from our lithium processing to battery and cell production to the manufacturing of electric cars,” says Markus Brügmann, Rock Tech Lithium’s chief executive. “And our company is sitting right at the heart of this new value chain.”

State subsidies have played a key role in attracting investors. Berlin is providing €6.8bn in financial support to the Intel project by 2024, €2.7bn of it this year alone. It is also releasing €40bn in funds over the next few years to cushion the economic effects of its plan to phase out coal, and much of that will flow to east Germany, home to a clutch of lignite mines and coal-fired power stations that must be shut down. Roads, railways and research institutions could see a substantial windfall.

However, it is not just the promise of subsidies that is luring big tech companies to the east, it is the region’s long history as a centre of industry. Some of the recent revival is built on foundations laid during the communist GDR: the semiconductor cluster near Dresden in Saxony — Europe’s largest — sprung up on the site of Robotron, the former state-run GDR electronics manufacturer, after the likes of Bosch, Infineon and AMD realised that highly qualified personnel and production facilities could be snapped up at low cost.

That so-called semiconductor “ecosystem” continues to attract cutting-edge companies that are banking on becoming the new auto suppliers, such as Estonian supercapacitor start-up Skeleton Tech, which is investing €36mn in a Dresden site.

“We liked the industrial infrastructure but also the academia,” says co-founder Taavi Madiberk, whose company works closely with technical universities in Dresden and a network of sites run by Germany’s state-sponsored applied research organisation, Fraunhofer. Saxony has the highest concentration of such institutes, many of which were converted from GDR-era science academies.

“When you scale up normal manufacturing, you need competency in a really wide variety of areas, which for a tech company does not make sense to build in-house,” says Madiberk.

Reversing decades of decline

The arrival of companies like Tesla and Intel marks a big turnround for a region whose communist-era industrial base was virtually wiped out after reunification in 1990. Hundreds of factories closed in the ensuing decade, unemployment soared and young people headed westwards in search of work. “Some 70 per cent of East German industry disappeared,” says Steinbach.

The lack of economic prospects spawned frustration and anger that fuelled the rise of the far-right Alternative for Germany and the anti-Muslim movement Pegida, whose mass protests during the 2015-16 refugee crisis made headlines.

Guben typifies the region’s highs and lows. The town gained fame in the 19th century as a centre of German hat production — one local notable, Carl Gottlob Wilke, is still remembered for inventing the weatherproof wool-felt hat, made from sheep’s wool rather than the traditional rabbit fur.

Under communism, the town became a big industrial centre, home to a synthetic fibre plant that employed hundreds. But after reunification much of the former GDR’s chemicals industry collapsed and took Guben with it.

“The cloth mill, the hat factory, the carpet yarn works — they all shut down,” recalls Mahro. “It was a wholesale bloodletting.” The town’s population more than halved, from 36,000 to 16,700 and by the end of the 1990s, unemployment stood at 27 per cent.

In the previous 30 years Guben had been able to attract just one new investor — a mattress maker called Megaflex. More trouble lay on the horizon — a nearby coal-fired power plant employing hundreds of people is among those due to be closed by 2038 under the planned coal phaseout.

It was not much better in other parts of eastern Germany. Though the prosperity gap with the west has narrowed in recent years, GDP per capita in the east was still just 77.9 per cent of the western level in 2020. Wages lag those in the west by 23 per cent.

But Guben fought hard to arrest the decline in its fortunes. The authorities upgraded the town’s now almost empty industrial zone and commissioned a €300,000 development plan that was finalised last year. Fred Mahro said he told Jörg Steinbach, the minister, “if an investor comes he can make a planning application straight away — we’re ready.” Six weeks later, Steinbach sent Rock Tech Lithium to Guben and talks began.

The plant they will build converts spodumene, a mineral containing lithium from its own mine in Canada, into pure lithium hydroxide — a crucial ingredient in electric car batteries. Rock Tech hopes to produce 24,000 tonnes a year, enough for 500,000 cars.

Even that is not nearly enough to meet the expected demand in Europe, says Brügmann. “It’s going to be like this,” he says, etching a hockey stick in the air. Driving the boom are climate policies that will vastly increase demand for electric cars. “The European market for electric mobility is years ahead of all others,” he says.

Meanwhile, other parts of the supply chain in the east are also taking shape. BASF is building a factory in Schwarzheide to make cathode active materials used in lithium-ion batteries, Australia’s Altech will produce anode materials in Schwarze Pumpe in Brandenburg and Microvast and CATL of China are also building factories to make actual batteries, one in Ludwigsfelde south of Berlin and one in Erfurt.

Last year, of the more than 323,000 electric vehicles produced in Germany, 57 per cent were manufactured in VW’s Zwickau and Dresden plants, according to autos analyst Matthias Schmidt. The opening of Tesla’s Brandenburg factory earlier this year has cemented the east of the country’s dominance in the battery vehicle world.

The buzz in eastern Germany contrasts with a much bleaker picture in the traditional carmaking regions, where more than 100,000 job cuts have been announced in the past three years. The lobby group that represents European auto suppliers, Clepa, has suggested that hundreds of thousands of roles will go thanks to the EU’s 2035 mandate.

Return to the past

Economic historians draw parallels between the east’s current revival and earlier phases of prosperity and progress. The area around Leuna in eastern Germany — now the site of a big oil refinery — was one of the “economically strongest regions in Germany before the second world war”, says Oliver Holtemöller, of the Halle Institute for Economic Research.

Meanwhile, Bavaria was then largely an agricultural state that only much later earned its reputation for “laptops and lederhosen”.

Yet there are some who argue that talk of a resurgence in the east can be overstated: most of Germany’s higher-paying jobs will remain in the south, after all. “The investments we’re seeing are in production, but research and development are what matters when it comes to innovation,” says Holtemöller.

The share of R&D spending by private companies, measured as a share of GDP, is two-to-three times higher in southern Germany than it is in the east. “That’s where the innovation is happening, and that’s where the highest salaries are,” he says.

And while the pace of the renewable energy buildout in the east is impressive, Russia’s weaponising of gas supplies could trigger a short-term energy squeeze that will affect new companies and established consumers alike. One semiconductor manufacturer in Dresden told the Financial Times it had already been informed that gas supplies to its plant could be rationed in the event of acute shortages this winter.

While the east is currently not more vulnerable to gas shortages than much of the rest of the country, the mere threat of rationing could dissuade some potential investors.

Politics is also an issue. The AfD remains strong in the east, particularly Saxony, which executives worry will deter foreign nationals from seeking jobs in the region’s new factories. “We are reliant on immigration, and we need to be open to it,” says Holtemöller. “But, particularly in rural areas of the east, xenophobia is a problem.”

Yet in the coming years, the east’s population is due to shrink, even more quickly than that of western Germany, making it increasingly dependent on imported labour. Of the 100 German districts with the worst predicted demographic decline, 55 are in the east, according to the latest government report on the region’s progress since reunification.

The report said that in the next 15 years, 42 per cent of working-age east Germans will retire, much more than the national average. “That will have significant effects on the labour market, companies’ ability to hire enough skilled workers, the pension system and healthcare,” the report said. “By 2032 there will be one person of pensionable age for every two of working age.”

“New jobs can only arise when there are enough people to take them up,” says Holtemöller. “But the east’s population is shrinking.”

It’s an issue that the people of Guben are also acutely aware of. A few days ago, executives from Rock Tech Lithium came to the town to inform locals about their project. The reception was warm, but scepticism was rife.

“I can’t imagine how they’re going to find the workers they need here — this is an ageing town,” says Gaby Hartmann, a pensioner. “My generation dominates and our ship has sailed.”

Lothar Hüfner, who worked for 40 years at Guben’s synthetic fibre plant, is pleased about Rock Tech Lithium’s investment. “If something will happen here again, then that’s great,” he says with a smile.

But he remains cautious — a prudence born of experience. The 87-year-old helped lay the first bricks of the Guben fibre plant in 1960 and then, more than 30 years later, watched as it was torn down. Since then, “We’ve seen plenty of investors come and go”, he says. “But their projects pop like soap bubbles.”

Mayor Fred Mahro, however, is much more optimistic. “We rolled out the red carpet for so many people in the past and suffered so many defeats,” he says. But things are different now. “This is the most wonderful time I’ve ever had in Guben.”

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