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February 9, 2022updated 24 Jun 2022 10:37am

The €43bn European chips act may lack the finance – and focus – to succeed

The Bloc wants to build its semiconductor capabilities via new support for R&D and chip manufacturers, but its plans may lack the scale to succeed.

By Matthew Gooding

The European Union has unveiled its new European Chips Act, a €43bn investment plan which aims to restore the continent’s place as a leading hub of semiconductor innovation and build its chip manufacturing capabilities in the face of the ongoing global chip shortage. The plan is the latest part of the EU’s bid for digital sovereignty, but experts have questioned whether it will have sufficient funding behind it to help Europe compete with the US and Asia, and if this investment will be directed in the right areas.

European Chips Act

Europe hopes to boost its semiconductor capabilities through the European Chips Act. (Photo by Chris Ratcliffe/Bloomberg via Getty Images)

Europe wants to double its share of the global chip manufacturing market from 10% to 20% by 2030, and hopes the act will help achieve this aim. The EU and member states are committing an initial €11bn to fund the plan, with the rest of the money set to come from additional contributions by member states and the private sector.

Unveiling the plan, which has been in the making for two years, European Commission president Ursula von der Leyen said the European Chips Act will be a “game-changer for the global competitiveness” of Europe’s single market. “In the short term, it will increase our resilience to future crises, by enabling us to anticipate and avoid supply chain disruptions,” Von der Leyen said. “And in the mid-term, it will help make Europe an industrial leader in this strategic branch. With the European Chips Act, we are putting out the investments and the strategy.”

But while the strategy is undoubtedly ambitious, whether it will attract the necessary funding is another matter.

What’s in the European Chips Act?

As reported by Tech Monitor, Europe’s share of the global chip market has been declining for 30 years. In 1990 European companies were responsible for 44% of all chip production, but that figure has fallen to 10% and is likely to fall a further 2% over the next decade without significant interventions, according to research from Boston Consulting Group.

The European Chips Act is designed to counter this, as well as combat the effects of any future shortages of chips. The current global chip shortage, which has affected supply for the last 18 months, has left European manufacturers, particularly car companies, struggling to get hold of the components they need. In October, the European Automobile Manufacturers Association called for measures to reduce the continent's reliance on foreign-made chips.

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To help with this in the short term, the act proposes a mechanism for enabling member states and the commission to coordinate semiconductor supply across the continent and anticipate where shortages may occur.

The longer-term prize is to convince one of the leading chip makers – TSMC, Intel and Samsung – to build a chip foundry, or fab, on the continent. Under the proposals, member states will be able to adapt EU state aid rules, which dictate how much support governments can provide to businesses, in order to offer greater subsidies. Intel is looking at spending up to $20bn on a European fab, likely to be located in Germany, but has reportedly demanded $10bn in subsidies to sweeten the deal. TSMC, which is in the midst of a global expansion, is also thought to be looking at building a German fab.

When it comes to domestic expertise, much of the initial €11bn committed by the commission and member states will be dedicated to funding R&D projects through grants and support for start-ups and scale-ups. This follows the announcement earlier this month that the commission is funding three chip-related research projects through the European High Performance Computing initiative.

Will the European Chips Act succeed?

The European Chips Act launch comes days after the US House of Representatives gave its approval to the Chips for America Act, which will provide $52bn to support the US semiconductor industry.

In comparison, the European Chips Act offers relatively little guaranteed funding says Cyrus Mewawalla, head of thematic research at GlobalData. "TSMC, Samsung and Intel spend tens of billions of dollars per fab," he says. "So €43bn is a relatively small amount in the grand scheme of things, and they'll need a lot of private money to bolster it up to that amount." The cost of doing business in Europe could put the likes of TSMC and Intel off, Mewawalla adds. "Cost is always at the forefront of decision-making for companies," he says. "So why would you build in an expensive country?"

He also questions whether the changes to state-aid rules will be permitted under World Trade Organisation rules. The act proposes that companies which receive increased state aid would have to commit to prioritising European customers with the output from their new fabs.

Regardless, attracting Intel or TSMC would not solve Europe's chip supply problem, argues Alan Priestley, VP analyst at Gartner. "New fabs tend to be built on new process nodes," he says. "So if Intel puts a fab in Europe, it will want to make leading-edge chips." But, he adds, "what's creating the issue is the older process nodes. The older fabs are out of capacity, and these make a lot of the smaller chips that are necessary to use the high-performance chips and build the products we want to consume."

Priestley says the commitment to funding R&D is welcome. "€11bn is not a big number when it costs €20bn to build a fab," he says. "So it makes sense to put that into university work and build on the process technology development where Europe leads the way thanks to ASML (the company which is the only global supplier of machines to make advanced chips)."

He adds: "You could see them putting some money into some of the smaller fabs in Europe to help build them out, but a lot is going to depend on whether the politicians want the kudos of landing a mega Intel fab, or if they're interested in boosting the ability of engineers at European companies like ST Micro or Infineon to build the chips which BMW needs for its next electric vehicle."

What does the European Chips Act mean for tech leaders?

With new chip fabs taking three to five years to come online, Priestley says IT buyers shouldn't expect to see any effects of the European Chips Act in the short term. "It won't provide instant gratification, but over the next five-six years it should help with the global supply of chips and, as a commercial buyer, you may be able to specify where you want your chips to be built," he says.

But the global nature of electronics supply chains means this ability is of limited use, he says, as devices are likely to be composed of components from outside the EU. "Even if a chip is made in Europe, you won't know if it's packaged in Europe or integrated in Europe," he says.

GlobalData's Mewawalla takes a slightly different view and says the security threat posed by a potential Chinese invasion of Taiwan, which could see Beijing assume control of TSMC's manufacturing process, means the provenance of chips will become ever-more important. "China has repeatedly stated its ambition to unify Taiwan," he says. "If that happens then security becomes a real issue. As a CIO in that situation, I'm thinking about the security of my servers and other in-house IT. The average AI chip has over two billion transistors, so in reality, it's very hard to check how secure that is."

He adds: "If you're a CTO you don't want to be the person buying technology that makes your company's data less secure, so it makes sense people will want to look at other options."

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