A German Semiconductor Debacle
in February 2001 the German state of Brandenburg announced a semiconductor project the 1.3 billion dollar project would have employed 5 000 people and brought semiconductor manufacturing back to the struggling East German city of Frankfurt oder it didn't work and it cost the taxpayers millions of dollars in this video we look at an ill-fated attempt to build a European Foundry out of the remains of the East German semiconductor industry but first let me talk about the Asian Armory patreon Early Access members get to see new videos and selected references for those videos before their release of the public to help support the videos and I appreciate every pledge I'll buy you a coffee in person thanks and on with the show in 1983 East Germany's veb hfo founded a research institute ihp the name literally means the institute for Semiconductor physics in English not going to even try saying the German words because I don't want to embarrass myself anyway hfo had once been the German Democratic Republic or east Germany's largest semiconductor manufacturer there were not quite as prestigious as veb Carl Zeiss or veb Karl Marx irfert which worked on the 32-bit microprocessor during East Germany's final semiconductor push I talked about that whole thing in a previous video go check it out but nevertheless at its peak v e b hfo produce hundreds of millions of integrated circuits each year and their Factory in the city of Frankfurt Odair once employed 8 000 workers is not the same as the other larger German City also named Frankfurt why are there two cities named Frankfurt in Germany as the Franks after German reunification hfo lost their biggest customers out in the Soviet Union the company shriveled throughout the 1990s shedding jobs this was hard for Frankfurt Odair part of the German state of Brandenburg the unemployment rate reached the high teens and stayed there the population shrank has people decamped for jobs elsewhere when the company finally vanished it left behind a few shriveled subsidiaries and ihp the research institute ihp had managed to stay afloat thanks to government funding for specific semiconductor Technologies then in 1995 an iranian-born American citizen named Abbas or mazad joined has ihp's director from Lucent the successor entity to Bell labs he floated an ambitious scheme to revitalize the city with a new special semiconductor technology ihp had created a special variant of a rising semiconductor technology carbon doped silicon germanium if you recall we used to make transistors from germanium before silicon took over today germanium is largely used for infrared systems opto Electronics plastic bottles and the such but there are some still Niche applications in semiconductors roughly speaking charge carriers like electrons and electron holes can move far faster in Silicon germanium than in Silicon this means they can perform at higher frequencies and temperatures while using less power at the time there was a lot of interest in using this flavor of silicon germanium technology for portable radio frequency applications battery powered cell phones and the like and since silicon germanium is somewhat a fusion of silicon and germanium technology there are good synergies with traditional silicon manufacturing a silicon seamless Foundry can integrate it relatively easily such an interesting technology what if you were to use it as a launch pad towards a semiconductor Foundry there was a lot of desire to see something replace hfo in Frankfurt Odair the company's closure left a great deal of experienced talents looking for work unemployment in the city was 20 percent they can easily staff a factory furthermore the communication semiconductor industry was growing very rapidly at the time in 2001 the market grew 86 percent year over year from 2000 there was potentially a lot of money to be made Dr or mazad advocated the idea of starting a Foundry in 1999 he became a technology advisor for the Brandenburg state government from there his approach began to gain traction thus in February 2001 emerged a new startup named communicant semiconductor Technologies AG terrible name communicant would be an independent semiconductor Foundry producing ics for the wireless broadband and high performance Computing markets they license ihp silicon germanium technology and announced a 1.5 billion dollar semiconductor Fab in Frankfurt Odair the company's first CEO was Dr Klaus weemer Dr Weimer had Exquisite semiconductor credentials from 1988 to 1991 he served as CEO and president of tsmc you might have heard of this company on this channel before after that Dr Weimer served as president and CEO of Chartered semiconductor Singapore's National Champion semiconductor manufacturer for two years from 1991 to 1993. I did a video about them a while back he passed away in 2014 after a battle with esophageal cancer rest in power doctor anyway Dr Weimer laid out the startup timeline operations would begin on the third quarter of 2002 high volume wafer production about 30 200 millimeter Wafers per month would commence in the first quarter of 2003 just two years after the announcement aggressive for those concerned about producing wafers in Europe Dr Weimer said the equipment costs the same the chemicals cost the same the only difference is in manufacturing costs which is about 20 percent of total cost but labor cost is about the same as in Taiwan people have been reluctant to invest in Europe because of tax and labor issues we're going to change that myth best of all the project would directly employ 1700 people at the new Fab starting on January 2003. another 1700
or more jobs would come from the Fab suppliers a beautiful relief for the 20 of Frankfurt odair's people without a job over 6 000 people applied for an initial 1 500 job openings communicant was deemed a serious player in part because it received a 40 million dollar Strategic investment from Intel back then the American chip giant was more known for being an integrated design manufacturer but they're not against using foundries for certain special Technologies an Intel VP remarked at the time communicants focus on carbon-doped Silicon germanium technology uniquely positions the new company to serve the growing high performance Communications semiconductor Market segment to get communicant started has a manufacturing Foundry they also license their 180 nanometer silicon CMOS process technology and reserve the right to purchase 20 of communicants output it wasn't all roses Intel's blessing was valuable but it did not mean much financially 40 million dollars won't get you a closet in San Francisco and it is far short of what it takes to build a Fab Intel also made it clear that they would not and I quote become the majority shareholder and also not take over the management of the company furthermore at least some of that headlining 40 million dollar figure came from the value of the 180 nanometer process they license to communicate so in terms of Cold Hard Cash Intel didn't have to give that much for a smooth 25 percent of the company they really used all the leverage they had so we need a lot more Cold Hard Cash where are we going to get it this is where Dubai comes into play the Emirate of Dubai is part of the United Arab Emirates a Federation of seven such Emirates created in 1971. Dubai is the most populous Emirate led by its capital city which is also named Dubai Dubai in the larger UAE were enriched by the discovery of oil and natural gas resources back in the 1950s and the 1960s but the government aware of the fleeting nature of these things wanted to diversify their economy in line with this the Dubai Emirate delivered a letter of intent talking about investing into the communicant Fab build through their Dubai airport free zone initiative but there was a catch in return Dubai officials wanted communicant to build a semiconductor Research Institute and an identical full-size Fab in said airport free trade zone this was a big ask as Dr Weimer would later say you can't just put a factory in the desert without further Ado Dubai has an oil economy with no Heritage in electronics manufacturing how can you simply make that happen so at the time of the February 2001 announcement the Dubai government had not yet actually committed Dr Muhammad al-zaroni director of the Dubai airport free zone project now called the Dubai silicon Oasis said at the time to date there has been no finalization of our involvement in the project our stake or our financial obligations eventually communicant managed to arrange a soft commitment first a Fab in Germany after that the company would build that second Dubai Fab at an undetermined time later but in the foreseeable future upon the Fulfillment of certain conditions and whatnot to kick start the area's future anticipated Talent needs the German government agreed to host 250 UAE Nationals over the next 10 years for Semiconductor production training oh and the Dubai government received a guarantee that if the deal fell through then they would get communicants ihp silicon germanium process patent licenses other technology transfer agreements were put into place as well having the Dubai Emirate and Intel has investors in the same deal spark talk of Intel possibly putting a Fab in the Emirate Intel had to publicly clarify that they were not involved in the talks and then there was another problem at the time the United States had placed export restrictions on the United Arab Emirates Intel licensor silicon CMOS technology to communicant so was Intel indirectly exporting that technology to Dubai via Germany was that okay this question was left unresolved for now it wasn't even the biggest issue overhanging the project at the top of the list was funding where would the money be coming from even with Intel and Dubai on board communicant was Far short of what was necessary so the Gap would have to be made up by the state either through subsidies or guarantees at the time of the February 2001 announcement the financing breakdown for the initial 1.5 billion dollar Frankfurt Odair Fab was like this 40 million from Intel though how much of that is actually cash we are not sure 250 million from Dubai from their free trade zone initiative this financial commitment was dialed down from an original 500 million and even so was far from secured about 38 million from the Investment Bank of Brandenburg so essentially the government of the state of Brandenburg then about 320 million dollars in subsidies from the European Union at the time of the February 2001 announcement the EU had not yet said whether they would issue those subsidies and even with all that we are still short half of the 1.5 billion dollars about 650 to 850 million or so remaining that money would have to be borrowed from a Consortium of private Banks those Banks asked that the German federal and state governments guarantee 80 of the loans clearly they had little faith that the project would work out note that this is all for the first East German Fab nothing yet have been spoken about the future Dubai Fab whenever that might come add that in and this is now how you get to that three billion dollar figure that you might sometimes see referred to in the news the communicant announcement was controversial from the very start as I previously mentioned the funding was far from secure the Dubai folks the eu's 320 million dollars in subsidies and the government guarantee for the hundreds of millions of dollars in loans much of that funding had explicit deadlines artificially pushing the project forward many criticized the Project's economic viability and their lack of transparency one state Parliament member in particular Esther Schroeder was very critical of the project calling it Castles in the Air brandenburg's Finance Minister Dagmar Ziegler sent an urgent letter of protest to the state's economics Minister Wolfgang forness who was leading the project in the letter released by the Der Spiegel newspaper Ziegler protested the Project's premature announcement its aggressive timeline its uncertain financing the potential issues of guaranteeing the bank consortium's loans and the lack of consultation with other departments in the government but other than that she was totally cool with it and indeed other than the sheer amount of Leverage there were some significant business risks with the Venture that may have been lost in the fine print first silicon germanium technology has been around for a while IBM pioneered it in the 1970s and 1980s and they held 80 percent of the market in 2001.
second communicant wasn't the only one with ihp's carbon doped silicon germanium process Motorola and another American Semiconductor maker previously licensed it too this had been a serious roadblock for other third-party investors third scale if you decide to build a semiconductor Fab then that Fab needs to be as huge as possible in order to gain necessary economies of scale this means raising an immense amount of capital that Capital needs a return the communications Market is not small it's a billion dollar business but this was before the iPhone small mobile phones were small compared to the PC and server markets then and lastly East Germany already had some semiconductor manufacturing Dresden nicknamed the Silicon Saxony was also in East Germany they hosted Leading Edge Fabs owned and operated by big companies like AMD and Infineon why would we go and put another Factory just about 200 kilometers away what's more one of those infinian Fabs also produced silicon germanium chips that seems like a problem and indeed Infineon was one of the Project's most formidable opponents while they were wrestling with this the market started to turn if you recall there was a.com Bubble at the end of the 1990s internet startups were going public on the stock market at valuations Way Beyond their inherent value in March 2000 the tech heavy U.S NASDAQ stock index hit a new high by 2001 however those very same technology markets were crashing fast semiconductor companies out in Asia and the United States had built out too much capacity and suffered massive sale declines communicant was already targeting a niche part of the Silicon world without abooming.com industry suddenly the communication silicon Market was no longer growing as fast naturally the rapidly deteriorating market conditions made everyone nervous with that the whole delicate Jenga Tower of financing that communicate relied upon started to Teeter the company held a Fab groundbreaking ceremony back in May 2001 however construction on the 9 000 square meter Foundation did not start until November 2001. Dubai did not send over any money until September 2001 when the state of Brandenburg guaranteed a portion of their loan a subsidiary of genoptic which was one of the descendants of the old East German veb Carl Zeiss company and M plus W Xander facility engineering won the tender to build the Fab things really started going south at the United States and European economies entered into a small recession in the early 2000s by 2002 construction on the fat building shell had started but that was far from enough communicants still needed to build the clean room they still had to buy and bring in the semiconductor manufacturing equipment but with the German economy flirting with a recession communicant could not find any new financing Partners who wants to invest in semiconductors during a tech downturn the financing had not been blocked down communicant needed to start producing chips by 2003 or else they will miss their window time and Technology wise much of the existing financing had deadlines attached to them and the semiconductor industry as always was marching forward Dubai gets antsy and starts making new demands renewing their requests that Community can build that second Dubai Fab and so on finally they made this one final demand credit assurances from the banks for their investment it was a Line in the Sand moment for Dr Weimer and thus in May 2002 he resigned Dr Abbas or mazad becomes interim CEO by now the project should be dead yet like a zombie things still moved forward on August 2002 Brandenburg prime minister Matthias platzik and federal research Minister edelgard Bullman attended a foundation stone laying ceremony for the new Fab a communicant spokesman at the time said that production remained on track delayed a little bit to 2004 but still happening then in November 2002 a political Scandal it came out that Wolfgang furniss the Brandenburg economics Minister have received a million dollar loan from an individual in the United Arab Emirates furnace said that the loan was from a friend to help him pay off the tax liability which did not really convince anyone people suspected that the payment which arrived in February 2002 was connected to the brandenburg's government's March 2002 announcement that it would put in 38 million dollars of its own money into the project furnace resigns his office on November 11th in 2014 he was charged with commercial fraud cheating investors and acquaintances out of 800 000 Euros over the past five years in 2015 he was sentenced to three years a few years later he passed away in 2017 from illness Furness had been the Project's primary driver but even after he was gone the chip project rolled on on October 30th 2002 the EU commission approved their set of subsidies up to 365 million dollars the commission judge communicates technology to still be technologically relevant and would create 1 318 direct jobs in the Brandenburg State furthermore the EU subsidy would make up less than 26 percent of the whole Project's cost which meets EU regulations Fab construction was moving forward communicant was upgrading ihp's research clean room to handle a 180 nanometer process there they had started to do test runs of customer designs things seemed okay however there remain one final piece of the puzzle the 650 to 850 million dollars of loan money let's just say 650 million dollars from the bank Consortium of which at least 80 percent would be guaranteed by the federal government of Germany as the biggest part of the financing this needed to happen or else the project was truly dead in the water in December 2002 construction pauses as people await the federal government's decision the decision would drag on all through the first half of 2003. as usual
with these sort of things there was a great deal of politics Infineon already suffering from the bad economic situation was extremely unhappy that a potential competitor might build so close to their home base in April 2003 they announced the plan to move their headquarters from Germany to Switzerland they said nothing about the communicant subsidies but you don't have to be a genius to get their message to be honest the German federal government was probably very skeptical of the project from the start but brandenburg's unemployment situation was sensitive and squelching Deals like this is bad PR and so it dragged on in April 2003 the Federal Ministry of Economics hired the consulting firm Gartner to evaluate the project after three weeks they deliver a negative and devastating report as reported in the media the Gartner report raised serious concerns about the communicant chip factory saying that the market opportunities were not there the communications Niche was just too small and with a.com crash it was no longer growing while waiting for the federal decision communicant had restarted construction back in July 2003 so the Gartner report takes them by surprise and really puts them on the brink the company is starting to run out of money the Dubai Emirate is refusing to issue the next tranche of funds estimated at about 100 million dollars unless the federal German government issued its guarantee throughout the whole Saga the people of Frankfurt Odair have been extremely sensitive about criticism of the Project's viability in October 2003 the Lord mayor of the city starts collecting thousands of signatures in support of building the chip factory he delivers it to the German Federal chancellor who is then Gerhard Schroeder on November 2003 communicate changes their entire business plan commissioning Gartner for help in a last-ditch effort to save the project all of their efforts would be for naught in December 2003 the officials in Berlin decide that they will not guarantee the Consortium loan communicant does not last much longer after that the project collapses and communicant liquidates various several Frankfurt Odair politicians unveil a banner at the factory building site and it says here is where East Germany's recovery ends thank you Mr Chancellor so how much was lost in the end it is hard to tell considering the complexity of the deal there was the 38 million dollars directly transferred to the project by the state of Brandenburg government the government had also invested another 40 million dollars in infrastructure around the site but some of that was paid for with money coming from a federal infrastructure fund so we can't count all that the New York Times says that the Brandenburg state government had put out 55.5 million dollars of taxpayer money on the project I'm going to go with that communicants failure chilled relations with Dubai Chancellor Schroeder had assured the Emirate back in October 2003 that their investment was in good hands in 2004 the Dubai Emirate demanded that Brandenburg returned the 145 million dollars or so it had cumulatively invested in this German semiconductor debacle so that was awkward Dubai did get to keep the license rights for ihp's carbon-doped silicon germanium technology as far as I know they have done nothing with it which is not surprising it's probably defunct now communicant had hired some Frankfurt Odair people and was putting them through semiconductor training about 54 of them were allowed to complete their training 40 of which were hired by other companies good for them in 2006 a hamburg-based solar company called konergy bought the site and turned it into a solar module Factory but then the German Solar industry went bust in the wake of Chinese competition in 2013 konergy sold the site to a chinese-owned German company called astrology solar module they ran it for a few more years until 2019 when it was again shut down again due to Chinese competition looking back at it now nothing went right after the February 2001 announcement they should not have said anything before the funding was actually locked down the Brandenburg state government and the people of Frankfurt Odair really wanted a special something to bring back the good old days of East German semiconductor manufacturing they wanted it so bad that they overlooked a Litany of red flags the shaky funding the niche technology the weak business case but they went for it anyway and when the project collapsed it costs the taxpayers millions of dollars that could have gone into more productive things a debacle to remember now forgotten all right everyone that's it for tonight thanks for watching subscribe to our Channel Sign up for the newsletter and I'll see you guys next time
2023-10-11 11:42
