Infineon Heads for Lucrative Pastures

Ulrich Schumacher has it all figured out: the chief executive of Munich-based computer chipmaker Infineon Technologies is moving the headquarters of his automotive chips unit to Villach in Austria.

The partial move to the Alpine republic may be just the beginning of a larger change soon to engulf the loss-making chipmaker. Schumacher has made no secret of his plans to resettle the entire headquarters of his company abroad, while maintaining a significant presence in Germany.

"We have the feeling that there are probably more stable locations than the one we are currently in," Schumacher said at a recent press conference. He said he was considering sites in Asia, the United States and Europe, including Switzerland, as possible headquarters.

Moving to a Swiss tax haven?

The industry rumor mill has it that Infineon is already negotiating with several Swiss cantons about possible locations.

One of them is the canton Zug, which has been the headquarters since the 1960s of German retailing genius Otto Beisheim, who founded the Metro and Mediamarkt chains. Beisheim, whose private wealth is estimated at six billion Swiss francs ($4.47 billion), divides his time between his residences in Lugano, Paris, Rottach-Egern and California. But for tax reasons the Swiss town of Baar in canton Zug has been Beisheim’s permanent residence for more than 30 years.

Schumacher, a vocal critic of Germany’s high taxes and restrictive business environment, may soon follow Beisheim’s example. And he would kill two birds with one stone if he did, paying taxes on a fraction of his estimated €8.6 million($9.6 million) earnings as CEO, at the same time as quadrupling Infineon’s after-tax profits.

With taxation rates in picturesque Zug a modest ten percent of profits, the figures are music to the ears of German businessmen used to a grueling 40 percent corporate tax at home.

Chip industry in doldrums

Ronald Reepel, an analyst at Independent Research in Frankfurt, says it’s not hard to understand Schumacher’s motives. "Particularly in a hyper-cyclical branch like the semi-conductor market, companies are forced to offset losses in times of crisis against future profits," Reepel told DW-WORLD.

German semi-conductor producers are desperate for tax write-offs in the face of the chip industry’s worst downturn ever. Experts are uncertain how long the slump will last. "Even insiders were surprised how quickly things took a turn for the worse and how long the meltdown is continuing," Reepel said.

Infineon, which has been making losses for the past two years, last week posted a net loss of €328 million for the first quarter. The company has also said it would cut up to 900 jobs in the next few months and implement a €500 million savings program.

The chip industry is in the midst of a rough price war. A 256 MB computer memory chip that cost $6 in early 2000, costs just $4.70 today, with the price sliding to below $3 for a while in between. Production costs at Infineon have fallen to $5.40, and Schumacher is reported to want to push them further down to $4.50 by the end of the year.

Another problem plaguing European chipmakers is the lack of state subsidies as compared to their Asian counterparts.

Though Infineon has received state subsidies for its advanced new chip-making plant in Dresden, eastern Germany, it’s just a fraction of what Korean chip-making giants such as Samsung or Hynix receive in terms of state backing and bank breaks. That’s one of the reasons the United States and the European Union have slapped heavy duties on products from both Korean companies.

Better go to Baghdad instead!

But despite Schumacher’s critical views of the rigid German labor market and high taxation policies which are shared by leading economists, trade union representatives have reacted with skepticism towards Schumacher’s threats to move his company abroad.

Wolfgang Müller, a representative for the steel workers union IG Metall and a member of the Infineon supervisory board, says Schumacher should instead consider moving to Baghdad. "There will definitely be special tax breaks there in the context of reconstruction, and they might be higher than in Switzerland," Müller fulminated.