Even in this age of globalization and modern telecommunications, executives are rediscovering timeless truths about the advantages of proximity. In the German city of Wolfsburg, Volkswagen (VW), the local government, and McKinsey are working together to create a regional economic cluster—a concentration of companies and related institutions focused on a specific technological area. The project is designed to attract high-technology start-ups, as well as suppliers and other relevant companies, to VW’s doorstep and thus to cut local unemployment in half (the equivalent of creating 10,000 new jobs) by 2003.

Here, in the home of the world’s largest auto plant, the partners have formed a technology center based on the automotive industry. As well as showing corporate citizenship, VW hopes to benefit by creating a vibrant entrepreneurial community and improving the local supplier base. At the same time, city officials want to combat high unemployment and to revive a dwindling service and retail sector. VW and the local government have so far invested about $12 million and $10 million, respectively, in the project.

Wolfsburg, some 100 miles west of Berlin, lies close to the border with the former East Germany. It is a classic company town: about 50,000 people—more than half the local labor force—work in VW offices and plants (Exhibit 1). Known as the home of Germany’s Wirtschaftswunder and as the birthplace of the Beetle, Wolfsburg had a labor market that was in steady decline for years; by the late 1990s, the unemployment rate had reached 18 percent. To help address the situation, in early 1998 Dr. Ferdinand Piëch, the chairman of VW, initiated the project to stimulate economic growth around VW’s headquarters, and the AutoVision program was born.

Building a cluster

Economic clusters have existed since the artisan quarters of ancient times. More modern examples of spontaneous cluster growth include the toy industry in Nuremberg, the motion picture empire in Hollywood, and, of course, the high-technology industry in Silicon Valley. Companies find that innovation percolates more freely when there is personal contact among suppliers, buyers, employees, and researchers and that proximity lowers transaction costs. Top talent, industry knowledge, trade links, and smart capital are all brought together in a cluster, fueling innovation and growth. As a result, the success of one company in the cluster increases the value added of the entire network.

The key to creating a cluster is to attract new investment by outside firms and to spark start-up activity. AutoVision accomplishes these goals by way of four main elements. The first is an innovation campus where start-up ventures can be nurtured through a process known as tech-farming. By building a local entrepreneurial community, the campus fosters a flow of knowledge and investment opportunities. Meanwhile, an annual nationwide business plan competition, under the brand name Promotion, helps generate business deals and attract start-ups to Wolfsburg.¹

A supplier park, housing a simultaneous-engineering center where suppliers’ engineers work directly with their VW counterparts to develop cars and components, forms the second important element. Finding partners for the supplier park was an important strategic choice that wasn’t left to chance. VW initially looked at 7,000 suppliers, of which 1,000 were considered interesting because of the complexity or frequency of their contacts with VW. By virtue of potential future synergies, 200 companies in this group were given priority, and they were later whittled down to some 50 that already had expansion plans in place. Eventually, 20 companies expressed interest in the idea, and two years after VW initiated the project, 12 had established a presence in Wolfsburg. A similar process was used to find partners for the simultaneous-engineering center.

One major element of AutoVision is a human-resources agency that funnels local labor into positions created through the cluster project

The third element of the project is a human-resources agency, intended to funnel local labor into jobs created by AutoVision. The agency seeks to act as a bridge to put the long-term unemployed back to work, to help overcome the rigidities of the German labor market, and to recruit new talent to the area.

The fourth initiative targets Wolfsburg’s lagging service sector. While this element is usually only an afterthought—if that—in economic-development plans, AutoVision’s leaders knew it would be vital to improving the quality of life in Wolfsburg and to attracting outside talent. Before AutoVision, only 23 percent of the town’s labor force was employed in the service sector, compared with an average of 51 percent elsewhere in Germany. The centerpiece of the initiative is VW’s new Autostadt, the world’s largest brand park, which combines VW showrooms and delivery centers with themed attractions such as an IMAX cinema, an automotive museum, and a five-star hotel. A science center, Aquaworld, and other attractions are planned.

Despite the expected benefits, AutoVision has had to overcome a degree of institutional questioning inside and outside VW. Before the cluster dynamics could be truly ignited, for example, it was necessary to convince VW engineers and purchasing executives that the supplier park would not become a burden and that the business plan competition would generate promising ideas. The city’s officials and various political parties were also wary of ceding control. AutoVision surmounted many of the obstacles by ensuring that all affected groups took part in the project, whether as members of a steering committee or as sources of information or suggestions.

The results so far

By the end of the year 2000, some 2,000 jobs had been created in Wolfsburg, equivalent to about 3 percent of local employment. The posts, some of them relocated from other parts of Germany but almost two-thirds of them new, range from unskilled positions to top-level engineering slots. Although most of these positions have opened up at the 60 start-ups (many in high-tech fields) that emerged from the first business plan competition and at seven manufacturing suppliers, the tally includes 510 manufacturing and engineering jobs at 55 supplier companies drawn to Wolfsburg by the simultaneous-engineering center. Helped by the AutoVision project, local unemployment has dropped to 10 percent, from 18 percent.

Interest in regional economic clusters is now growing throughout Germany, where unemployment stands at about 9 percent. Together with local authorities, ThyssenKrupp (the country’s largest steelmaker) has initiated a program in Dortmund, in western Germany. Other examples can be found in Bavaria, North Rhine–Westphalia, and Saxony. VW itself has begun to expand the AutoVision program to other locations in western Germany, such as Kassel and Emden.

Given the many failed attempts by governments to create economic clusters, it seems that efforts involving local business leaders stand a greater chance of success. A McKinsey study identifying a number of European growth regions found that most of the hot spots resulted from public-private alliances rather than the systematic efforts of national governments alone (Exhibit 2). Corporate executives are more likely than government officials to have the business sense needed to weigh competing proposals in such a program, and they have the strategic interest to ensure that a project doesn’t wither from neglect and the contacts required to find the best partners.

But to spearhead economic-development efforts, executives must be willing to tear down their company walls and to invest in areas that traditionally have been considered part of the public sphere. Doing so, VW has found, creates benefits for everyone involved (Exhibit 3). As Udo-Willi Kögler, VW’s research and development manager, says, it comes out as a real triple win. Start-ups find perfect support in Wolfsburg, from the idea phase onward. For the city, it means sustainable new jobs. And Volkswagen is improving its access to new ideas and technologies.