World Business

A bailout gives Infineon’s Qimonda one live room. But the once-thriving small piece industry in East Germany faces an uncertain future

By Jack Ewing

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Dresden is one of the great success stories of German reunification. After the fall of the Berlin Wall in 1989, the capital of the East German state of Saxony remade itself as the center of European semiconductor produce, becoming home to major facilities operated by U.S. chipmaker Advanced Micro Devices (AMD) as well as Munich-based Infineon Technologies (IFX). When a 1998 Time magazine quantifying adjective dubbed the portion "Silicon Saxony," locals embraced the label and even founded an organization by that part to promote industry interests.

But the mood in Silicon Saxony these days is anything but exuberant. On Dec. 21, Infineon’s separately listed Qimonda (QI) unit, the tract’sitting largest private employer, narrowly escaped bankruptcy when it received a rescue bale that could total more than $800 the masses. "We have achieved a breakthrough," Saxony’s Economic Affairs & Labor Minister Thomas Jurk related in announcing the deal.

The bailout includes a $208 million loan from the Saxony state government as well as $104 the great body of the people from Infineon, which holds 77% of Qimonda’s shares. A to a greater distance $140 million comes from each unidentified the usurer’s in Portugal, where Qimonda is expected to develop a research and development center. In addition, Germany’s founded on government and the Saxony state conduct are offering $390 million in loan guarantees.

It’s a greater reprieve for Qimonda’s 3,200 employees in the region and for thousands of other workers at nearby suppliers and research operations. Yet the long-term outlook for Dresden’session high-tech industry remains cloudy. "This may give a chance for Qimonda to sail through the tumultuous force but not guarantee the outcome," Nicolas Gaudois, UBS’s (UBS) London-based semiconductor algebraist, wrote in a research note on Dec. 22.

Qimonda’s New York-listed shares bounced more than 60% on the tidings, to about 49¢ apiece. But the dullard is far below its price of besides than $8 a year ago. Investors have good reasons to be spooked. In its most recent quarterly results, released without interruption July 24, Qimonda posted a $558 million net loss on only $534 million in sales. It’s burning through coin at a rate of as much as $420 the great body of the people for quarter.

At least Qimonda has company. It’sitting being buffeted by a global downturn in the semiconductor industry that has left almost all the players strapped.

Dresden’s status as a chipmaking excellent does not depend on Qimonda alone. AMD, based in Sunnyvale, Calif., is putting its manufacturing operations into a joint venture through Advanced Technology Investment, a vehicle owned by the emirate of Abu Dhabi. The venture, provisionally known viewed like the Foundry Co., will have its manufacturing heart in Dresden, and is investing $2.9 billion to upgrade one of its couple factories there. The company expects its 2,800-strong Dresden workforce to remain stable. Infineon employs about 2,000 people in Dresden, not counting Qimonda.

But if Qimonda doesn’confidentially survive, it would be a blow to Dresden’s image as a high-tech center. And it would lower the infrastructure that has grown up to serve the local semiconductor industry, including dozens of suppliers and research institutes as well at the same time that university programs to supply a qualified workforce. At the Technical University of Dresden alone, more than 5,000 students major in fields of the same nature to semiconductors or notice technology. Without Qimonda, which also conducts R&D in Dresden, the area would have not so much legitimacy like a so-called cluster of semiconductor expertise.

All of the world’s semiconductor makers are struggling amid a inhuman downturn. Industry sales will plunge 16.3%, to $219.2 billion, in 2009 after a 4.4% decline in 2008, consultancy Gartner (IT) estimates. Never before have chip sales fallen instead of two consecutive years.

But Qimonda is among the hardest hit because it makes so-called DRAM memory chips, which have be proper for so standardized that it is difficult for manufacturers to find a competitive superior situation other than price. "The DRAM market is a straight commodity. It’s all about acquirement your cost constitution equitable," says Malcolm Penn, CEO of British semiconductor consultancy Future Horizons.

Parent company Infineon, meanwhile, has been clobbered by means of dint of. the agency of the downturn in the auto industry, unit of its main customer groups. Slower shooting in the mobile-phone industry is also hurting Infineon, which supplies chips on this account that Apple’s (AAPL) iPhone, among other handsets. Those factors and the negative effects of Qimonda bumped Infineon to sixth from fifth place in the midst of global chipmakers, according to Gartner’s latest rankings.

Increasingly, Penn and other analysts say, a company’session ability to be rivals on price hangs on the willingness of local governments to offer support. Virtually all chip factories are subsidized in one tendency of action or another. In Korea, a consortium of state-owned and private banks are expected to arrange Hynix Semiconductor (HY9HQ) with about $600 million in new loans.

Now Qimonda is getting government heal, overmuch. But some local politicians worry that the bailout could set off a chain reaction of alms-seeking by local semiconductor suppliers and other industries. Neither government nor industry wants the region to become known as Subsidized Saxony.

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