Chips are in cars, food processors and cell phones. The semiconductors are getting smaller and more powerful, but at the moment they are in short supply. Because of this shortage, Volkswagen, for example, is considering completely eliminating the night shifts at the main plant in Wolfsburg. The EU Commission now wants to significantly expand chip development and production in Europe so that the supply is more secure in the future. For this purpose, the Brussels authorities and member states are to make eleven billion euros available over the next eight years, in addition to 32 billion euros, which the EU and the 27 governments already want to spend on promoting the industry, according to the Commission. This was announced by the head of the authorities, Ursula von der Leyen, in Brussels on Tuesday.
The Chip Act – that’s what the law is called – become “a game changer for the global competitiveness of the European internal market,” said the German. The decision of her authority to interpret the strict rules for state subsidies more generously in this industrial sector should be more consequential than the eleven billion euros: governments should therefore be allowed to generously support the construction of modern chip factories. The prerequisite is that these plants are technological pioneers in Europe. This allows EU countries to enter a subsidy race with countries such as the USA, China or South Korea. Intel could be one of the first to benefit. The American chip manufacturer wants to set up new plants in Europe – if the governments contribute generously to the costs, and Germany is also vying for the bid.
In return for all the nice help, however, the Commission will subject the chip industry to stricter rules. The authority and the governments want to monitor the supply chains in the future. If semiconductors become scarce again, the Member States can ask the Commission to to impose export restrictions. Then European manufacturers would have to have exports to other continents approved. The export controls for Covid vaccines, which the authority introduced a year ago, are a model.
These export controls and the loosening of the strict subsidy rules are controversial – both in some EU governments and within the Commission. According to reports, Vice President Margrethe Vestager, responsible for competition, did not believe in interpreting the state aid rules more generously. On Tuesday, the Danish Liberal emphasized that the EU will work with its “international partners to prevent future supply problems”.
“The supply bottlenecks are likely to continue well into 2022,” says the Infineon boss
The big driver behind this initiative is French Internal Market Commissioner Thierry Breton. The former top executive said security of supply for the latest semiconductors has “become an economic and geopolitical priority.” For him, the Chips Act is important to strengthen the strategic autonomy of the EU. The term stands for Brussels’ efforts to make Europe less dependent on key technologies from Asia and America. That’s when it’s time to go big instead of making a mess: never before has the Commission launched such a generous support package for a single product.
Specifically, the Commission has set the extremely ambitious goal of increasing the EU’s share of the world market for chips from less than ten to 20 percent by 2030. Since the market is expected to double in these eight years, production in Europe would have to quadruple. It is also important to Breton that the new plants in the EU can also produce the most modern and smallest chips with so-called structure sizes of five nanometers or less. In the case of small semiconductors, a good two-thirds of production has so far been made in Taiwan and South Korea – in Breton’s opinion a dangerously high concentration in a troubled corner of the world.
It will be years before new factories can produce – too late for the current bottlenecks in the auto industry. But these problems still serve as a vivid argument for supporters of the controversial Chip Act. Especially since the difficulties in Europe’s economy will be with us for a long time: “The supply bottlenecks are likely to continue well into 2022,” says Reinhard Ploss, head of the Munich chip manufacturer Infineon. The situation will not return to normal until 2023.
With the Chips Act, Ploss is one of those who warn against promoting the production of the smallest high-end chips in particular. Because they would primarily be used in devices that are hardly ever made in Europe – in smartphones and laptops. Car factories use less sophisticated chips. Thilo Brodtmann, General Manager of the Mechanical Engineering Association VDMA, also demands, “that the focus is not only on factories for two-nanometer chips, but also takes into account the needs of the broad masses of European industry”. Wolfgang Weber, head of the electronics association ZVEI, relies on diversity: “We need to expand production capacity for chips of all structure sizes in line with market dynamics.”
Critics complain about “sleight of hand” by the EU
The model for the EU initiative is US President Joe Biden’s Chips Act. He wants to support the construction of factories with the equivalent of 44 billion euros. He is reacting to China’s plans to massively support semiconductor production in order to become less dependent on imports. And now the EU also wants to get involved in the game for billions in subsidies.
However, CSU MEP Markus Ferber complains that the Commission’s funding package is too small: The authority is “again using the old sleight of hand of putting funds that have already been planned under a new heading in order to come up with halfway impressive figures,” says the economic policy expert Spokesman for the Christian Democrat EPP Group. “However, no more euros are available simply because of redeclarations. What is actually made available in terms of new funds is perhaps enough for half a chip factory.”
Other critics, on the other hand, warn that all the state aid in America, Asia and now Europe could lead to overcapacity in a few years. In addition, the economist Niclas Poitiers from the Brussels think tank Bruegel thereuponthat a subsidy race for high-end chip factories is very expensive, “but offers little benefit for the security of supply for European industry or the geopolitical influence” of the EU. After all, chips with such small structure sizes are not that important for the domestic industry, and the EU’s market share will remain manageable. Governments should focus their aid on research and chip design rather than factories. And they should promote those parts of the chip industry in which the EU is strong, the economist demands. Chip manufacturers around the world depend on systems from the Dutch machine builder ASML.
In turn, Munich is home to Siltronic, the world’s third-largest wafer producer. These are wafer-thin slices of high-purity silicon – the most important starting material for chip production. The Globalwafers group from Taiwan wanted to buy the Munich-based company, but the Federal Ministry of Economics refused approval. In the semiconductor industry, it is not only Europe that is dependent on imports from Asia and America. Asia and America are also dependent on Europe for some technologies.
Should Berlin spend four billion dollars?
The federal government would still like to steer an Intel plant to Germany – and thanks to the new subsidy rules it can be more generous. The American chip manufacturer has fallen behind in terms of technology compared to the competition from the Far East, an omission that the new boss Pat Gelsinger wants to make up for with large investments. Nothing is official yet, but the plan is apparently to create several locations in Europe. Research is to be carried out on one of them, production on one and testing and packaging on a third.
The latter should not be underestimated, because the so-called packaging is much more than packing in boxes for shipping. The chips are supplied on silicon wafers; they have to be cut up, the chips tested. Since there are more and more so-called chiplets, i.e. chips that are assembled from several individual parts, the packaging is technologically demanding and is gaining in importance.
But so that Intel really comes to Europe, the Americans demand financial support – as compensation for the fact that construction costs in the EU are 30 to 40 percent higher than in Asia. It is about a single-digit billion amount, subsidies of four billion dollars per chip factory are under discussion. And the Commission now in fact wants to allow Member States to close the complete financing gap with subsidies.
Germany has good chances when it comes to choosing a location because there is already chip production here, but that also applies to some other European countries such as France, Belgium or Italy. In addition to Intel, its competitor TSMC from Taiwan is also considering building a location in Europe, but the plans are less concrete than Intel’s. The Americans, it is said, could possibly decide in February.