By Lena Eisenreich. After her semesters in Strasbourg, Kraków and Udine she is now writing her thesis about Youth Lobbying in Strasbourg. She holds a BA in European Business. Recently she was gathering Sales experience from the automotive industry towards Big Tech. Currently, she is involved in various think-tanks such as European Horizons as a Director of Sponsorships and Fundraiser for Culture Solutions.
This article belongs to our new DEBATE series. These are thought-provoking articles meant to start important conversations. We encourage all readers to write their thoughts to our email. We will then publish responses to this article and create a chain of debate pieces on this website.
“Let’s be bold again, this time with semiconductors,” declared Ursula von der Leyen in her State of the Union Speech to introduce the European Chips Act. In an increasingly interconnected world, global events such as the pandemic and the ongoing (trade) wars have worsened the EU’s supply chain challenges. The race to secure a sustainable and resilient supply chain is hastening with geopolitical risks of tech dependencies increasing. In the backbone of our supply chains lays an indispensable good, which is the “lifeblood of modern society:” microchips or semiconductors. Described as the ”new oil of our economy,” life without these little chips the size of a large grain of rice is unthinkable. They are essential to power smartphones, computers, cars and even medical devices, fridges, and dishwashers won’t function.
The worsening supply shortage of microchips presents us with alarming consequences. The most immediate one is the impossibility of producing essential goods and factories being forced to close, which has smacked carmakers and suppliers especially hard. And modern production processes require more and more microchips. The share of microchips in the total costs of a new car has doubled to 40% of the cost of a new car in the last decade. Although we are aware that the Chip Shortage Keeps Getting Worse, we might wonder why do we not simply start producing (more). Experts remark that the manufacturing process is particularly problematic and refer to microchips as “the most complicated devices ever made by man,” which not only includes high technological costs but ultra-complex know-how. As a result, production remains in the hands of only a few main chipmakers, specifically Asian ones. Severe times for consumers are coming up. The world’s biggest contract chipmaker, Taiwan’s TSMC, announced chip prices will rise by up to 20%.
Unsurprisingly, world powers have relentlessly pushed forward several policies to address the shortage. Beijing called chip independence a top national priority in its latest five-year plan, although experts remain sceptical, claiming the ambitious 2025 target of 70 per cent domestic chip production unfeasible. Chinese chipmaker SMIC has flourished with a record investment of US$5 billion in capacity expansion after profits doubled in 2020. In the light of the Russian-Ukrainian escalation, SMIC is under Washington pressure to cut ties with Russia.
Washington advocates for the revival of domestic manufacturing as “one of the biggest investments in manufacturing in American history namely the CHIPS for America Act which would deliver a $52 billion investment. Equally, the American semiconductor industry has announced nearly $80 billion in new investments through 2025, within those a $17 Billion Samsung Chip Plant in Texas by 2024 and a $20 Billion Intel Facility in Ohio.
Equally, Brussels presents “the only way for Europe” to bear the geopolitics of supply chains at play, with the aforementioned European Chips Act seeking to jointly develop a state-of-the-art European chip ecosystem. €43 billion in public and private funding for the sector are meant to achieve a doubling of the EU’s share of global chip production. This means an increase from 9 percent (2021) to 20 percent by 2030. The aim is to reinforce the semiconductor ecosystem in the EU, ensuring the resilience of supply chains, and reducing external dependencies. The Act consists of three pillars. First comes the Chips for Europe Initiative, which supports large-scale technological capacity building and innovation in cutting-edge chips. Second, a new framework is drawn up to attract large-scale investments in production capacities and ensure the security of supply. Third, a coordination mechanism between the Member States and the Commission aims to monitor market developments and anticipate crises. Thus, existing programmes and actions in Research and Innovations in semiconductors, such as Horizon Europe and the Digital Europe Programme, will be complemented.
The €43 billion might sound like a flashy figure to compete with Washington’s $52 billion plan. But like many such projects coming from Brussels, only a fraction of it constitutes a “new investment.” Typically, Brussels counts expenses that had already been agreed upon years ago in the EU’s budget negotiations as being part of its new “megaprojects” – though that is money that would have been spent anyway, even if there were no megaprojects in the first place. This is once again the case for the European Chips Act. The EU’s €43 billion budget includes €30 billion in previously announced investments, Furthermore, Brussels also includes the expected private investment in its numbers, but these expectations have historically proven overoptimistic; rarely does the private sector investment as much as Brussels wants. New funding coming directly from the EU is estimated to be just 15 percent of the total €43 billion figure. Following the legislative procedure, the Commission’s proposal still needs approval by the European Parliament and the Member States.
Within a month, the Chips Act seems to be bearing fruit. On March 15th, Intel announced an €80 billion investment in Europe to build two advanced chip factories in Germany as well as R&D and manufacturing facilities in France, Italy, Spain, Ireland, and Poland. The factories in Germany would become Europe’s first megafabs, capable of large-scale production of advanced microchips. Ursula von der Leyen claimed it was the first major achievement made possible by the Chips act. However, the reality is more complicated. Intel has only guaranteed investment of €33 billion—the remaining €47 billion are to be financed only if the conditions are right. They may never materialize, or may only be partially disbursed. Moreover, it seems like Intel’s investment was motivated primarily by national, not EU, subsidies, although of course, the EU Chips Act has played a role by relaxing the EU’s subsidies regulations.
But critics of the EU Chip Act have proclaimed it “Industrial policy at its absolute worst” as it diverts valuable research money that could have been invested elsewhere. DigitalEurope believes in the potential to “bring back semiconductor leadership in Europe if we get it right.” But it also urges for clarity on the size and source of funding, especially for research and development, and call for further steps and strong international collaboration to be urgent. Politico outlines 6 key factors harnessing the EU’s ambitious plan, starting with the EU’s lack of experience in industrial policy. In addition, the EU has not even secured a manufacturing site within its borders, which have changed looking at Intel’s investment plans and include not only Intel’s Silicon Junction but further countries such as Ireland, France, Poland, and Spain. Other problems arise from the funding gap and the attempt to imposter incomparable benchmarks by other countries. The EU’s worsening inflation might change the EU’s fiscal rules and thus public investments as such might face harsher political headwinds. Finally, whereas the Eurochips Act is brandished as a brave new initiative little is known about the outcome of its predecessor, a plan called the New Electronics Strategy
Within that plan’s scope, even the same preconditions and target numbers are described: doubling the European share of the global microchip market to 20%. The previous plan allocated an investment budget totaling €100 billion to be delivered between 2013 and 2020. Nevertheless, nine years later, the share remained stubbornly stuck at just under 10%. Thus, for a decade already the EU has been urging strategic investment in the micro-and nano-electronics sector.
What sets both strategies apart? – mainly the vocabulary used. The New Electronics Strategy outlines its key priority as “specialization.” The European Chips Act appears to act as a direct reply to a geopolitical world battle of microchip supply strategies.
The nature of the European Chips Act is more comprehensive and is now being intensively debated. In any case, the Act contributes to the perception of a willingness to become an innovative global player and incentive investment, but it also fosters economic nationalism. How can we tell the difference between digital sovereignty and the latter?
Finally, given the current Russian-Ukrainian crisis, taming the microchip supply chain appears to be an even more difficult endeavour than ever. This goes beyond Washington’s geopolitical urge to pressure Chinese chipmakers.
Experts warn, if Ukraine’s neon exports flag, the chip shortage will get worse. Ukraine is the leading exporter of highly purified neon gas, making up to 70% of global exports. Neon gas is a crucial commodity used for lasers and engraving circuit designs into silicon wafers to create chips.
It will be challenging for the EU to find alternative suppliers. Equally, we will see the impact of the Act on the European microchips industry. Will Europe manage the microchips supply crisis and find its own solutions? Only time will tell, but unveiling Brussels’ arcane bureaucracy may provide us with a glimpse into the future. Once again, I suspect that it looks like Brussels is guilty of grandiose words followed by unimpressive initiatives that are too unflexible to tackle the challenges that lie ahead.
What are your thoughts on the matter? Will the EU Chips Act meet its ambitious goals?
Should European taxpayers subsidize large corporations like Intel in the name of national interests?
Can the EU compete in the microchip industry with other great powers like the US and China?
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Picture credits: tico_24