Germany's DRAM Bailout

7 January 2009—With government subsidies helping to create its wealth of high-tech jobs, Dresden has long been considered a luminous example of what can result from good industrial policy. That reputation is now being challenged as political and business leaders in Germany ponder the wisdom of throwing millions of taxpayer euros at the volatile memory-chip market.

With the help of more than 1.5 billion (US $2.1 billion) in state and federal subsidies over the past two decades, Dresden—the capital of the eastern German state of Saxony—has attracted more than 1200 high-tech companies to settle in and around the city, and it has created more than 44 000 jobs, largely in the semiconductor sector. That’s around 70 percent of all the people employed in Germany’s semiconductor industry.

The region, popularly known as Silicon Saxony, is home to some big chipmakers like DRAM maker Qimonda. But that manufacturer, the single largest private employer in Dresden, with 3200 people on its payroll, is in deep financial trouble because of the sharp drop in price and demand for dynamic random access memory (DRAM) chips. It has sought—and will most likely receive—a good dose of local government help. That prospect, however, has some politicians, business leaders, and other experts in the country worried about the region taking on a new and far less innovative name: Subsidized Saxony.

At the end of December, after weeks of intensive and often heated negotiations, the state of Saxony and Qimonda’s parent company, Infineon Technologies, agreed to a 325 million rescue package. Under the proposed plan, the state government will loan Qimonda 150 million, Infineon will contribute 75 million, and a still unidentified Portuguese bank will provide 100 million. The contribution from Portugal is linked to Qimonda’s production facility in that country.

The tug of war between the state of Saxony and Infineon over money to keep the struggling chipmaker afloat has stirred up a debate on subsidies for fast-changing, highly volatile industries like semiconductors. Proponents of government support for Qimonda argue that the company’s failure would deal a severe blow to Dresden’s image as a high-tech center and would weaken the many local semiconductor suppliers, chip-design companies, and research institutes, including the Technical University of Dresden. More than 5000 students there major in fields related to semiconductors and IT.

”Nothing will happen without the big players” like Qimonda and Advanced Micro Devices, which operates a huge plant in Dresden, Saxon economics minister Thomas Jurk told the local German television station Mitteldeutscher Rundfunk (MDR). ”A Qimonda bankruptcy would be a tremendous blow to the Dresden high-tech center, in particular, and to European efforts to maintain a competitive semiconductor industry, in general.”

Jurk is not alone in his support for government help. The entire semiconductor industry is ”subsidy driven,” says Wigand Cramer, an executive with IG Metall, a 2.4-million-member German labor union, pointing to government aid to Asian chipmakers. Both Cramer and Jurk believe that the European semiconductor sector should receive more subsidies, and not just from local and federal governments but also from the European Union, to be able to compete globally, particularly with Asia.

Critics of a government bailout for Qimonda claim that memory-chip production is a nightmare for anyone who is profit minded. Prices can fluctuate—and nearly always trend downward—by as much as 30 percent a month. In fact, DRAM prices have sunk to historic lows, with manufacturers selling chips for a third of their production costs, or roughly $0.35 to $0.50 per chip. The market is awash in a glut of cheap DRAM, and demand is plummeting as consumers, stung by the global financial crisis, purchase fewer PCs, cellphones, digital cameras, and other consumer electronics, which are big users of memory chips.

”This is a very risky undertaking,” German parliamentarian Heinz Eggert said in a radio interview with MDR 1 Radio Sachsen. ”Politics can’t be a replacement for industry when a company like Infineon decides to retreat from a sector. This is clearly the case with Infineon, which is prepared to contribute only a third to the financial aid package.”

Further complicating the situation, a group of Asian DRAM firms is considering merging. That would put huge competitive pressure on Qimonda, which has failed to align itself with a long-term partner, much less find a strategic investor.

For now, all signs point to a Qimonda bailout. The company is trying to halt critics in their tracks by pointing to, among other things, its new 65-nanometer Buried Wordline DRAM technology. The technology, developed in-house, lowers power consumption by eliminating a source of parasitic capacitance found in other DRAM designs. But demand for the new technology is anything but certain. Nor is the future of Qimonda beyond the first quarter of this year when, even with the bailout, the company could run out of money.