AMD has made the east German city of Dresden its manufacturing capital. Except for a small number of chips produced by a Singapore contractor, all of AMD's microprocessors for PCs, laptops, and servers come from two plants there, including one that came on line last year.

In fact, since spinning off a plant in Austin, Tex., last year, AMD no longer mass-produces chips at all in the U.S., though it continues to employ 2,000 people in Austin who work in design, marketing, and other functions. AMD will have invested some $8 billion in Dresden by the end of 2008, making it one of the largest foreign investors in the region and generating an estimated 7,000 jobs directly or indirectly.

For Germans, AMD's Dresden operations provide much-needed affirmation that the nation still projects industrial prowess. Indeed, on Oct. 24, no less than German Chancellor Angela Merkel, an East German herself, came to the famously firebombed city to mark the 10th anniversary of AMD's operations there. "You can all be unbelievably proud of what you've achieved here," she told AMD workers.

Why Dresden? Originally, AMD was attracted by generous subsidies from German and European Union authorities eager to boost employment in the region, which struggled to make the transition to a market economy after the collapse of the Soviet bloc. In addition, Dresden had served as the center of semiconductor technology in the Soviet bloc and offered a large pool of skilled people badly in need of jobs.

After AMD broke ground in 1996, though, it discovered something else: German engineers are unmatched when it comes to mastering the hugely complex and precise task of making semiconductors, which can require 800 manufacturing steps. "Germans are known for engineering aptitude, and we have seen it in action," says Thomas Sonderman, AMD's director of manufacturing systems.

For example, AMD's Dresden team figured out methods to allow new chip designs to go into mass production immediately, rather than first being produced in limited numbers while engineers perfected the manufacturing process. AMD Dresden was also the first to market with so-called dual core chips, which cram more functionality on to a single chip and permit computers to handle more tasks at the same time.

In the semiconductor industry, it's imperative for companies to recoup fast the $3 billion it costs to build a chip plant. "Time to market is the No. 1 priority," says Hans Deppe, general manager of AMD in Dresden. "If I double people's wages but get half the time to market, it pays off." The workers in Dresden also have never organized a worker's council, the usual venue for labor union influence, even though doing so is extremely easy under German labor law.

As AMD grows, Dresden won't remain the only production site. In June the company announced plans to build a $3.2 billion plant in Luther Park in upstate New York. The project, which will receive an estimated $1 billion in grants and other aid from New York State, won't begin production until 2013 at the earliest.

And as AMD builds the New York plant, it plans to send managers and engineers to Dresden for training. Says Sonderman: "The Dresden team will be part of AMD for a long time to come."