Episode 18: Eastern Germany’s “Third Wave” of Business Investments

Intel, TSMC and Tesla are just three of the commercial giants that are increasing their business by expanding to the eastern part of Germany. Unlike former spurts of investment in the regions that used to be Communist East Germany, growth this time around seems more organic and likely to last. Indeed, it’s no exaggeration to say that the economic map of Germany is being redrawn. We speak to an expert on business in the region and one of the companies benefitting from going east.

 

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Our Guests

Martin Ledwon | © Martin Ledwon

Martin Ledwon is Vice President Stakeholder Relations for UPM’s novel biobased fuels and chemicals business. The Finnish bioeconomy champion invests 1.2 bn EUR in the eastern German Leuna chemical park to build the world’s first industrial scale wood-to chemicals refinery. Martin is responsible for ensuring high sustainability standards in this new business from wood to end-product and driving market demand for the innovative renewable chemicals to be made in Leuna.

 

Poppe Silke | © TH & AI - Illing-&-Vossbeck-Fotografie

Silke Poppe is Germany Trade and Invest’s expert on Germany’s eastern regional states and other areas undergoing structural change. She travels around the world promoting investment through GTAI’s Internationalization of Regions in Structural Transformation program, and oversees other business development programs for the east, including Taskforce Transformation.
 

Video link audio credit to NDR 

Transcript of this episode

Voice Over:  
"If we work together, we will soon be able to transform Mecklenburg-Vorpommern, Saxony-Anhalt, Brandenburg, Saxony and Thuringia into blossoming landscapes, in which it pays to live and work."  

Presenter: 
That was former German chancellor Helmut Kohl in July of 1990, when a dilapidated and disheartened East Germany officially became part of the Federal Republic of Germany. He promised that German unity would mean that many people in five Germany's new regional states would soon be living much better lives. What he DIDN’T say was that economics gaps between East and West would persist for decades.  
All the more surprising; that it’s now eastern Germany attracting the attention of major multinational companies. 
Hello and welcome to Into Germany, the German business podcast, brought to you by Germany’s international business promotion agency, Germany Trade & Invest. I’m Kelly O'Brien. 
That’s right. Much maligned eastern Germany is proving very attractive these days. Among the recent expansions: US chipmaker Intel near Magdeburg; the Taiwanese Semiconductor Manufacturing Company in Dresden; Canada's Rock Tech Lithium in Guben; electric carmaker Tesla outside of Berlin; and Finnish biofuel company UPM,  building a one-of-a-kind biochemical mill in Leuna.  
We'll be speaking with Martin Led-won of UPM in a just a bit. And later Germany Trade & Invest's expert for the eastern states, Silke Poppe, will tell us how big FDI projects in the east are re-drawing the economic map of Germany as a whole. But first what do we mean by “eastern Germany?” 
The territory of former Communist East Germany stretches from the Baltic Sea coasts and ports in the north to the ore-rich mountains on the Czech border of Saxony, to the south. It’s dotted with medieval cities and towns but otherwise relatively sparsely populated. The population of Germany's east is only 20 percent of that of the much denser western states. Still, the autobahn network and other infrastructure are pristine, with ten thousand kilometers of new highways built in the last 30 years. 
The recent international business expansions to Germany's east could be described as a third wave of foreign direct investment. The first wave was driven by curiosity and bargain hunting. The second was a veritable gold rush for massive subsidies. This one is more organic... driven by a new generation of business leaders and innovative technologies that will shape the future of all of Germany.  
Martin Ledwon from Finland's UPM Biochemicals company joins us now. The company form which is building a 1.2 billion euro biochemical refinery in Leuna. Martin is vice president for stakeholder relations. So Martin, tell us. Why did U-P-M decide to go east?  

Martin Ledwon, UPM Biochemicals: 
"I think we've looked at a great deal of locations, to build the plant, all across Europe and then focusing in on Germany. And I think we landed in the East, for mainly three reasons. The one was proximity to chemical industry value chains. So the area where we're investing, it's the second largest chemical park in Germany. It has lots of players in the park itself, but also around that somehow work in our value chain. So it's proximity to chemical industry processes. It has good access to qualified labor. The region is rich in chemical industry history. And that's why it is, chemical, chemical industry is something there for people, you know, in schools, people still want to train to work in chemistry and so forth. So that's relevant for us. The third topic was that the government and the region also we're investing in, has very clearly made, shown that they are interested in our investment." 

Presenter: 
UPM is one of the few companies in the world producing advanced biofuels in industrial quantities. A lot of your products in Finland are mixed with regular fuels here in Europe to lower their emissions. But you are originally a paper company, right?  

Martin Ledwon, UPM Biochemicals: 
"UPM history overall, is in the pulp and paper industry. So we are several hundred years old company that is one of the market leaders and, and, you know, pulp production, paper production, specialty papers, but also papers used for printing. And that's the reason why we have moved now towards other businesses, because the printing paper demand is going backwards. So, it's declining ever since the iPhone was invented very rapidly, basically. And to maintain a healthy economic position in the market, the company have started to look into our, full value chain to see whether we have any option to valorize certain side streams or currently unused product streams, which led then, amongst other things, to the investment in Lappeenranta and run to biodiesel or biofuels refinery" 

Presenter:  
Your bio-refinery in Lappeenranta now makes 120 million liters of renewable diesel fuel annually...  
Martin Ledwon, UPM Biochemicals: 
"...We operate a refinery, in Lappeenranta, since 2015 have been run tests in Finland. There, we're producing biodiesel and bio naphtha, made from residues from the pulping process. Crude tall oil would be the feedstock that we're using there. As I said, this is operational. It's catering to the advanced biofuels markets, basically. So, it's second-generation biofuels made from feedstocks that are not land use change, that are deforestation proof and that that are residues. So, bio-based materials from residue streams." 
Presenter: 
But the refinery you are building right now in Leuna in Eastern Germany is doing something truly innovative... turning solid wood crops into bio-based alternatives for fossil-based products used in industrial production. 

Martin Ledwon, UPM Biochemicals: 
"It basically is a continuation of what we've invested in in 2015. And up in, in Finland is the biofuels, refinery I just talked about. So like I said, the company is diversifying its portfolio away from only paper and pulp and to different businesses that, you know, some of them mature, others growing. And one of the strategic focus areas was to sort of look into what can you do from the forest value chain, on a molecular level. Because we are a pulp and paper company with own forests and a very strong experience in the forest value chain. We know wood and we know how to manically mechanically use wood. Now that like the fields part uses inside steam, like I mentioned earlier. So a product that comes out of the pumping process. But we also looked into what you can do with the wood in itself, breaking it down to the molecular level. And that's how we ended up, over 15 years or so, it took us to define a process that actually can take and would crack it up to the molecular level and produce chemicals out of that wood. And that is exactly what led then to the investment in to now. This is the world's first biorefinery where solid wood is basically turned into chemicals. And that's what we're building now in Leuna, in the east of Germany, near Leipzig, in a traditional chemical area. And it's going to be starting up as of the end of 2024.  

Presenter: 
The plant will not be producing fuels then, but chemicals that can be used to replace products normally made with fossil fuels. Like the fleece jackets you are making with German outdoor wear company Vaude, made of bio-polyesters.  

Martin Ledwon, UPM Biochemicals: 
Exactly. So what we what we're doing is actually we're producing materials or the baseline for materials. We're producing chemicals, that are at the beginning of, processes that lead to actual tangible materials. And we use two components of wood, sugars and lignin to produce several product streams from sugar. We make one of the main products, our main product is called mono ethylene glycol. So, we produce a renewable version of it that is the basis for things like polyester, polyethylene, polyurethane. It goes into coolants, both in heat pumps, for instance, or in battery coolant used for electric vehicles. So that's the one product stream, and our product is renewable at replacing, you know, mono ethylene glycol that's currently almost entirely made from either coal and China or crude oil. The second product stream uses lignin, which is basically the glue that keeps the wood together. We make the turn this lignin into a product that is completely novel. It's called renewable functional filler, RF, which is replacing a very toxic CO2 rich product called carbon black, basically burned oil to simplify it. So, anything that's black in terms of rubber, plastic casings and whatever contains currently carbon black, and our renewable functional fillers are made to replace that carbon black. They go into rubber applications from windshield wipers through to black I iPad casings. If you want to sew anything that's black rubber or plastic. Yes. Contains, this and our RF is again a renewable, CO2 neutral or even CO2 negative replacement for that carbon black.  

Presenter:  
Your company is over a century old and has something like 50 plants around the world. There must be a deep knowledge base for launching foreign investments. What was the experience in Germany, particularly eastern Germany, that stands out?  

Martin Ledwon, UPM Biochemicals: 
"I think I mentioned a bit earlier the, the very positive support we, we've received from local government and local administration, and that's been basically consistent, throughout the development project and now building face, very, very clear positive sentiment, zero to none, local criticism or local skepticism. I mean, criticism is always fine if it's rooted. Right? No skepticism. So, there is no you know, it's completely it's completely wanted to have an industrial investment there. In terms of permissioning, obviously the same rules as everywhere. But the way of dealing with it, the way of being approachable, the way of actually following up on certain things, making it happen very clearly. Something that we see standing out compared to other locations in Germany. So this can-do attitude and the clear will to make this investment happen. That was shining and standing out compared to other parts of Germany." 
Presenter: 
Seems to be an experience shared by a lot of third wave investors; dealing with a new generation of regional business leaders anxious to restore eastern Germany's industrial prominence.  
Martin Ledwon, UPM Biochemicals: 
" Well, I think you you've heard about the, the decision and the Intel decision to actually build a factory and. Yeah. And which is the same state of Saxony-Anhalt. Right. I think, and, for sure, I think, in Saxony, you have pockets of, you know, industrial production around, tools, machinery. Dresden has the big chips, like computer chips and then sort of, and wafer production and sort of it related elements. And I think you have a very strong legacy of well-performing technical universities, especially in Magdeburg, Dresden candidates, who still are pretty sought after, I think. That is something to look into. You have now the clusters I mentioned. I think you have Tesla now near Berlin, and then the whole sort of area of Berlin really is growing. So you start seeing bigger clusters of industrial production. And in a in a region that I think for the past centuries has actually been at the forefront of Germany's industrialization. And so, it's not so the East, I think if you look at it, it is, comparably, disadvantaged in terms of, you know, GDP per capita and whatever in the German context. But the simple reason for it is that it had to suffer from a huge disruption around 1990. But the fact of the matter is that this is a region that in its heart has been industrial and economically focused. Thuringia, Saxony, I think 150 years back, where at the forefront of European industrial. And what I'm saying is not advertising the history of Eastern Germany, but I think it's this combination of strong, you know, education, building clusters and that industrial backbone that somehow shapes, I think, the potential of that region." 

Presenter: 
That investor's perspective on eastern Germany's rising importance for the economy of the whole country comes from Martin Ledwon, a vice president for shareholder relations at Finnish biofuel pioneer U-P-M, which is building a bio-chemical plant in Leuna creating 200 jobs.  Thanks Martin. 
The plant will also become the headquarters for the company's biochemicals business as well as a center for research and development. We'll be back in a few minutes for more insight on why eastern Germany is back on the map for sophisticated industrial investors when we speak with Silke Poppe from G-T-A-I.  
But first, let's look at some of the stories making business headlines throughout Germany.  

Breaking Ground 
US pharmaceutical giant Eli Lilly and Company has started construction work on a 2.3 billion euro expansion in Alzey in western Germany. Lilly is building a massive production facility there to make diabetes and obesity medications. At the groundbreaking ceremony, German Chancellor Olaf Scholz called the project an example of the success of Germany’s efforts to become an even most hospitable location for pharma companies. 
New Horizons 
The European Commission has adopted the second strategic plan for the Horizon Europe research and innovation program between now and 2027. The plan includes and has a budget of  95.5 billion euros . At least 35 percent of that money will go toward climate protection measures and 10 percent set aside for biodiversity measures. Some 13 billion euros will be invested in digital technologies to ensure competitiveness and enable the green transformation. 
Under Control 
After three years of dramatic price increases, inflation is back at regular levels in Germany. The rate of inflation in Europe’s largest economy in March 2024 sank to 2.2 percent, the lowest mark in three years. By comparison, in October 2022, inflation peaked at ten percent. And Munich economic think-tank Ifo predicts that German inflation would sink below the recommended European Union target of two percent by the summer. 
Patent Power 
Germany led the way in a record year for European patents. The European Patent Office says that innovative individuals and companies filed a new record of 199,000 patent applications in 2023. Twelve percent of them - or 25,000 in total - came from Germany. The next country on the EPO’s annual index was France with 11,000 patents, followed by Switzerland, the Netherlands and the UK. 
Battery Boost 
The eastern German city of Wittenberg, best known as the cradle of the Protestant Reformation, is going to be the home of a megafab for battery storage systems. The TESVOLT company is investing 30 million euros in the facility, which will be able to make 80,000 storage systems a year. The leader of the regional state of Saxony Anhalt, Reiner Haseloff, called it flagship project for the entire state. 

Presenter: 
So, there’s another example in the latest wave of investment in Germany’s eastern states. The eastern and western parts of Germany may have been politically reunified in 1990 after the end of the Cold War. But it’s taken much longer for the two halves to come together socially and economically. Key differences persist. In those respects, reunified Germany is still a work in progress. 
To get a status report, let's bring in Silke Poppe from Germany Trade and Invest. Silke, you oversee the eastern German states and other areas undergoing structural changes at GTAI. Remind us of how vast the gap once was between east and west. 

Silke Poppe, GTAI:  
"Well, that's hard for us. Of course. You know, 35 years later, to imagine the disparities that arose between western and eastern Germany after all those years of communist rule. But I guess you can say, I guess German infrastructure was a was a mess, and industry there was outmoded, inefficient and largely incapable of competing on a global market. And there was a dramatic lack of hard Western currency. The economy was devastated by a brain drain, as a lot of East Germany's most talented people, you know, as we say, loaded with their feed, fleeing to the West, and per capita income, which had been roughly the same as in the west, had declined to only roughly 30% by 1990, it was pretty dire." 

 Presenter: 
Germans living in the east are currently earning about 85 per cent of salaries in western Germany. That's a dramatic improvement, but can it ever be 100 percent? Is economic parity between east and west even a realistic goal?  
Silke Poppe, GTAI: 

" The German government takes the view that there's no alternative to economic parity between the eastern and western parts of the country. So politically it's simply a must, and the state is devoting massive resources to reach that outcome. Economic competition between regions in Germany is therefore somewhat less cutthroat than elsewhere. There's more of a sense of basic equity and fairness, and international companies looking to gain foothold in Germany and the EU can benefit from the long-term project of parity." 

 Presenter: 
It's not just the salaries. Most economic indices from the east still trail the west. Could you maybe provide us with some context here?  
Silke Poppe, GTAI:   
"You know, on average, the economy overall in eastern Germany still lags behind that in the West. But if you look at the starting point of the two parts of the country when it was reunited in 1990, you could argue that it is surprising that eastern Germany isn't further behind today because the East Germany economy was in such a bad shape. Unprecedented reforms were needed after the demise of communism and the fall of the Berlin Wall. But these extreme changes were necessary, but had for some time, of course, were the negative impact in the short term in the East. But sometimes you have to take one step backward to get two steps forward. That's very much what has been happening in Germany over the past three decades. But progress was being made the whole time. Western German cap. Per capita GDP roughly doubled between 1991 and 2019, but it rose nearly fourfold over the same period in the East. And that's just one statistic." 

Presenter: 
One of the ironies of the decline that befell Eastern Germany after World War Two as a member of the Eastern Bloc is that the region was once an industrial powerhouse, almost forgotten by history...  
Silke Poppe, GTAI 
" There was indeed such a time, you know, before the Second World War, the regions of the country we now think of as Eastern Germany. They enjoyed fine levels of prosperity, for example, Prussia, which is now the regional states of Brandenburg and Mecklenburg. For example, Prussia was the political and geographic center of both. Well, I mean, the enzyme on Germany and another region, Saxony, was a thriving area that specialized with strengths in electronics, chemicals and automotive. Thuringia, another state, had one of the world's leading optics industries and was far more advanced economically than, for example, neighboring Bavaria, which is West Germany, and the capital Berlin was back then an industrial powerhouse. That all changed for the end of World War two and the advent of East German communism." 
Presenter: 
You like to say that as clusters of competence arise in the east and attract important investors, the entire economic map of Germany is being re-drawn. What are the chief reasons for this?  

Silke Poppe GTAI: 
" Let's look at some of the advantages Eastern Germany has thanks to its excellent educational system. It has a highly skilled workforce, yet it also has a attractive cost. And which structure? The quality of life in the East is high, so recruiting employees is generally not a problem. There's also far more available land in the East than in the West, and it offers easy access to the economies of Eastern Europe, and there are abundant supplies of renewable produced energies. Add to that. The many avenues of government support for companies that extend to the regions of Germany undergoing structural change. These also cover some regions from the west, but the entire East is included in that, which makes the area very competitive in terms of attracting foreign direct investment. So-called Silicon Saxony has rebounded and is now very much a hub of electronics. The university town of Jena. Another example is once again known to the world renowned for excellence in optics. The chemical industry and the regional state of Saxony-Anhalt is also on the rise. The list could go on and on. It's no exaggeration to say that the economic map of Germany as a whole is being redrawn." 

Presenter: 
How would you describe GTAI's role in reviving the industrial structure of eastern Germany, particularly in terms of promoting the region to potential foreign investors?  

Silke Poppe, GTAI: 
"Germany Trade and Invest is the first port of call for companies from abroad who want to set up shop in Germany and bring together such firms and places in the east. It is one of our specialties. We have all the information companies need to make informed decisions about potential business locations and together with the regional German investment promotion agencies, make sure businesses find the places that's best for them. We worked intensely on bringing Intel to Magdeburg, and we couldn't do that for other companies, big and small. For example, our program ISW internationalization of regions and structural change, as well as our engagement for the coal regions and GTAI's Task Force Transformation are all joint efforts to support internationalization. In 2022 and 2023, for example, we reached over 120,000 people and established over 3000 new business contacts to assist the regions that are undergoing structural change." 

Presenter: 
Thanks Silke Poppe from GTAI for your insider's view on how the business climate in Eastern Germany is attracting companies in a new wave of foreign investment. Before we say goodbye, here's a look at how Germany works.  
The German government has made the economic recovery of the east a major priority ever since 1991, one year after German reunification.  Germans pay a special tax, the Solidaritätszuschlag or “solidarity surcharge” to fund various measures aimed at improving the situation in the east. To stimulate the economy, businesses from both Germany and abroad that set up shop in the east have been eligible for special state assistance and incentives. Assistance can take many forms, from loans and grants to state guarantees and tax relief. Funds come from regional and local governments, the national German government and the European Union. Recently, aid formerly only available in the east has been extended to all regions considered to be undergoing “structural change.” But the entire east falls under that category. And THAT’S how Germany works 
 
This brings us to the end of another episode of Into Germany. If your company wants to be the next to ride the third wave of international business investors in the country's eastern states, please contact us at Germany Trade & Invest. We can provide expert guidance on opportunities to set up shop here. What's more, as a government agency, GTAI services come free of charge. 

Get in touch at GTAI dot com. We’re also keen on your opinions, suggestions and questions. Please leave a comment in your favorite podcast app or drop us a line. You’ll find all the details in our show notes.       
 
So, till next month, “Auf Wiederhören” and remember: Germany means business.   
 
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