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Viewing cable 09LEIPZIG4, GERMANY: IT SECTOR INSOLVENCY IN DRESDEN LEADS TO CALLS FOR

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Reference ID Created Released Classification Origin
09LEIPZIG4 2009-02-03 08:01 2011-08-24 01:00 UNCLASSIFIED Consulate Leipzig
R 030801Z FEB 09
FM AMCONSUL LEIPZIG
TO SECSTATE WASHDC 0133
INFO FRG COLLECTIVE
AMCONSUL LEIPZIG
UNCLAS LEIPZIG 000004 
 
 
DEPT FOR EUR/CE, S/ES-O, EEB 
 
E.O. 12958: N/A 
TAGS: ECON ETRD ETTC GM
SUBJECT: GERMANY: IT SECTOR INSOLVENCY IN DRESDEN LEADS TO CALLS FOR 
PROTECTIONISM 
 
1. (U) Summary.  Qimonda, a worldwide leading manufacturer of 
dynamic random access memory chips (DRAM) with facilities in 
Dresden (3,200 employees), Munich (1,400) and Richmond, Virginia 
(2,800), filed for insolvency January 23 after a rescue plan 
devised by parent company Infineon, the state of Saxony and a 
Portuguese development bank failed.  The closure of Qimonda 
would be a serious blow for Dresden's image as a high-tech 
center and would affect companies servicing the local 
semiconductor industry, research institutes and university 
programs.  Qimonda managers argue the dramatic fall in DRAM chip 
prices in the second half of 2008 is responsible for the firm's 
bankruptcy while economic analysts blame politicians for failing 
to fight extensive subsidies in Asia.  Industry insiders and 
economists called for engaging the WTO or introducing tariffs 
for chips produced under what critics see as unfair conditions. 
End Summary. 
 
--------------------------------------------- ------------------ 
World's Leading Company for DRAM Products Files for Insolvency 
--------------------------------------------- ------------------ 
 
2. (U) On January 23, 2009 Munich-based dynamic random access 
memory chips (DRAM) producer Qimonda AG, and Qimonda Dresden OHG 
filed an application to initiate insolvency proceedings. 
Qimonda employs 12,200 worldwide, including 1,400 in Munich, 
3,200 in Dresden and 2,800 in Richmond, Virginia.  The company 
was founded in 2006 as a branch of Infineon, which still holds 
77.5 percent of the shares. (Note: In December 2008, Infineon, a 
former subsidiary of German industrial conglomerate Siemens, 
issued a very gloomy report for itself and Qimonda, with a loss 
of 3 billion Euro for its financial year ending September 30. 
End Note.)  Qimonda has struggled to compete against larger 
rivals and stiff competition from Asia, where DRAM chip 
production costs and final product prices are significantly 
lower. 
 
3.  (U) Qimonda introduced a global restructuring and cost 
reduction program last October after a drastic fall in chip 
prices.  A 325 million Euro bailout package was arranged between 
the state of Saxony, a Portuguese development bank and Infineon. 
 Saxony promised 280 million Euro in additional guarantees, but 
the deal failed when Qimonda announced a 300 million Euro 
financing gap on January 22, 2009.  Saxony's Minister President 
Stanislaw Tillich (CDU) said the insolvency could be a "second 
chance" for the company, emphasizing Saxony's portion of the 
previously-announced state assistance package is still on the 
table.  (Note: The insolvency proceeding will allow Qimonda to 
find new investors and to restructure within the context of the 
insolvency regime.) 
 
-------------- 
The Blame Game 
-------------- 
 
4.  (U) Qimonda managers argue that the dramatic fall in DRAM 
chip prices in the half of 2008 is responsible for the firm's 
bankruptcy and claim the company could have lowered production 
costs and remained competitive had it received state subsidies 
earlier.  Industry insiders and union representatives, however, 
blame management for having failed to switch production to more 
efficient technologies earlier.  Economists resurrected an old 
criticism that politicians fail to fight international subsidy 
practices.  DRAM producers in China and Indonesia are reportedly 
heavily subsidized, receiving 70 percent of investment costs as 
a public subsidy while EU regulations permit only 30 percent for 
European companies.  Economists have called for the EU to stop 
this practice through tariffs or the WTO. 
 
-------------------------- 
Setback for Silicon Saxony 
-------------------------- 
 
5. (U) The closure of Qimonda would be a serious blow for 
Dresden's image as a high-tech center and would affect companies 
servicing the local semiconductor industry, research institutes 
and university programs.  There are 1200 IT companies employing 
40,000 in the Dresden region.  More than 5,000 students major in 
fields related to semiconductors or information technology at 
the Technical University of Dresden alone.  Without Qimonda's 
R&D division, the area could lose legitimacy as a cluster of 
semiconductor expertise. 
 
6.  (U) While Qimonda is teetering on the edge, neighboring 
Advance Micro Devices (AMD), a U.S. firm, has escaped pressing 
financial problems by setting up a joint venture with Advanced 
Technology Investment, a vehicle owned by the emirate of Abu 
Dhabi.  The venture, known as the Foundry Co., is investing $2.9 
billion to upgrade one of AMD's two factories in Dresden.  To 
keep its 2,800 strong workforce stable, AMD will work reduced 
hours from February to July. 
 
------- 
Comment 
------- 
 
7. (U) Qimonda's insolvency was no surprise as management, the 
State of Saxony, and Infineon began working on a rescue package 
last fall, but Qimonda's inability to present a convincing 
business plan stalled a decision.  Qimonda's possible demise 
underscores the risks in investing in IT when a company's 
competitiveness depends heavily on the ability and willingness 
of local governments to support it.  The calls for increased 
state support and higher tariffs following Qimonda's insolvency 
are not surprising and demonstrate the growing pressure to 
resort to protectionism in the IT/high tech sector as the 
economic crisis starts to take its toll.  End Comment. 
8. (U) This message was coordinated with Embassy Berlin and 
Consulate General Munich. 
 
 
BRUCKER