EU aims to bolster its semiconductor competitiveness in response to US, China and other players

On February 8th 2022, the EU presented the European Chips Act, the bloc’s new industrial plan designed to make supply chains more resilient and bolster its microchip sector by 2030 with public and private money in excess of 43bn Euros.


Assessment

  • In a statement given in the morning of February 8th, EU Commission President Ursula Von der Leyen vowed to “make Europe a leader in this market that is so important”, a vision she had announced the first time in her State of the Union speech in September last year.

  • The plan comes against the backdrop of a painful supply shortage for many industries, above all the automotive industry, amid global production and logistics restrictions imposed on an already highly concentrated industry due to the combat against Covid-19.

  • According to its official communication, however, the EU Commission also recognizes that “semiconductors are at the centre of strong geostrategic interests, and of the global technological race”, and that “leading economies are keen to secure their supply in the most advanced chips as this increasingly conditions their capacity to act (economically, industrially, militarily) and drive digital transformation”.

  • The US is currently trying to finalize a dedicated Chips Act to be endowed with 52bn USD until 2026, while China intends to invest around 150bn USD until 2025 to attain its goal of a 70% domestic market share according to the Commission.

  • The European Chips Act is in line with a larger policy shift in Brussels in recent years towards a stronger embrace of industrial policies – most notably with the New Industrial Strategy for Europe from March 2020 that also highlighted that in a time geopolitical change, “the need for Europe to affirm its voice, uphold its values and fight for a level playing field is more important than ever. This is about Europe’s sovereignty.”

  • So, albeit claiming to already possess advantages in design, component manufacturing and research, the Commission sees a heightened urgency to boost European skills and manufacturing capabilities, in something Brussels calls “from lab to fab”, trying to increase Europe’s share of global chip production from today 10% to 20% by 2030 and reduce the dependence on imported products and components from what today are only a few foreign suppliers.

  • As the EU expects the semiconductor market to double in size by 2030, this would mean a quadrupling of efforts. Public support is justified by a “high capital intensity, high risks, complex technical projects and longer times for return on investment”. The EU therefore seeks to make available additional public and private funding to the tune of at least 13bn Euros available, and it repurposes existing programs like Horizon Europe, adding another 30bn Euros towards strengthening the chips ecosystem.

Implications

  • While leading European business associations (e.g. Germany’s BDI) express support for this initiative, the stronger embrace of industrial policy while making use of state aid to attract market leaders such as TSMC shows how difficult it has become for economic policymakers to balance free market principles with questions of supply chain resilience and industrial competitiveness.

  • The resolve among Brussels policymakers and those in the capitals of EU member states is one further sign that political and security objectives will also be important factors when setting the regulatory framework conditions in an increasingly competitive international environment.

  • Whether or not the EU will be successful in onshoring and developing the relevant technologies and manufacturing capabilities, the semiconductor industry could be a bellwether of what is to come also in other critical industries for the sectors of the 21st century, further driving supply chain diversification or decoupling.

EU Commission: Digital sovereignty: Commission proposes Chips Act to confront semiconductor shortages and strengthen Europe's technological leadership

Ursula Von der Leyen: Statement by President von der Leyen on the European Chips Act