Special Report October 20, 2009, 3:25PM EST

Jenoptik: An East German Bright Light

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In 1990, a German government privatization agency took over VEB Carl Zeiss Jena and carved out Jenoptik, divesting other resources into the West German lens maker now known as Carl Zeiss AG and located in the town of Oberkochen. In the process, 50,000 people lost their jobs. But by 1998, Jenoptik was strong enough to list on the Frankfurt stock exchange. It now produces specialized lasers, sensors, and other technology used for everything from semiconductor production to hair removal to space exploration. Sales last year hit €548.3 million ($818.3 million at current rates), up 5.1% from the year before, and profits were €11.8 million ($17.6 million) vs. an €8.2 million ($12.2 million) net loss in 2007.

Cost-Cutting Amid Sales Declines

Originally from Cologne, CEO Mertin joined Jenoptik in 2007. He exudes pride when he talks about the company's development since reunification. Jenoptik now has production facilities elsewhere in Germany as well as in France, Switzerland, and the U.S. It sells to companies around the world including Boeing (BA) and the German government. "This is the future of laser technology," he says, holding what looks like a small gold-colored box. "Diode lasers—the most efficient sources of artificial light. We are the worldwide leaders."

Still, Jenoptik hasn't been immune to the recent recession. Because of reduced demand in the semiconductor and auto industries, its optics and sensor divisions have suffered declines in sales and earnings in the first half of 2009, even as its civil and defense division posted gains. Sales in the first half totaled €231.3 million ($345.2 million), a 12.6% drop from the same time last year. In January, Jenoptik instituted a cost-reduction program that has resulted in 46 job losses along with reductions in temporary personnel, bringing its current global workforce to about 3,350. Another 690 employees were working reduced hours as of June. The company is in talks with employee representatives about further potential staff reductions.

Mertin says he thinks the worst of the crisis is over, however. The company's restructuring helped it generate a positive cash flow for the first half of 2009. "We're focusing on value creation and sustainable growth," he says. "The global megatrends are in our favor." He points out that the movement toward greater fuel efficiency and the development of thin-film photovoltaics will increase demand for Jenoptik's technologies.

Considering Germany's relatively high labor costs, it may be surprising that Jenoptik is able to withstand competition from China or Eastern Europe. But the company develops and produces differentiated, high-value-added products. "Firms in Jena are not going for mass production; they're producing specialized products on a smaller scale," says Uwe Cantner, professor of economics at Friedrich Schiller University in Jena. It is also able to draw upon its institutional knowledge. "Even in DDR [German Democratic Republic] times, Jena was able to produce world-class products," says Cantner. "That foundation helped them survive pitfalls and dramatic changes after unification."

Herbst is a reporter for BusinessWeek.