Over the last few years, semiconductor supply disruption coupled with growing demand have made governments question the highly globalized nature of the semiconductor supply chain. In response to these challenges, the European Union (EU) is looking to support investment through the EU Chips Act. But will this legislation be sufficient to meet the stated goal of 20% of global semiconductor output by 2030? More importantly, is this even an advisable strategy, and should they instead be concentrating resources on building upon their existing strengths in “leading edge” design and equipment?
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Semiconductor Market Support Is Essential from Geopolitical and Macroeconomic Positions
Over the last 30 years, the semiconductor industry has become highly globalized. Each region has specialized to function as one link within the global supply chain. Asia-Pacific has developed into the manufacturing center, with South Korea and Taiwan the only countries capable of “leading edge” manufacturing; Europe and the United States combined supply over 80% of global Semiconductor Manufacturing Equipment (SME); and the United States is the predominant market for Research & Development (R&D). However, over the last couple of years, this global model has suffered from increasing geopolitical tensions, global pandemics, and macroeconomic frictions. These challenges have disrupted numerous industries, including automotive, which is reliant on both “leading” and “trailing” edge semiconductors. For example, Europe’s automotive sector has experienced a 22% decline in sales volume, with these levels unlikely to return to “pre-pandemic” levels for more than 5 years. This severe macroeconomic shock has led the EU to introduce the EU Chips Act—legislation to loosen restrictions on subsidies to encourage private semiconductor investment in the EU.
The goal of the EU Chips Act is to achieve “strategic autonomy” by boosting competitiveness and resilience in the semiconductor industry, with a goal of increasing EU chip production to 20% of global supply by 2030. It will do this by shifting from a long-held opposition to industrial subsidies (enacted as they were seen as detrimental to competition), instead providing a specific framework that reduces restrictions on state aid, enabling governments to subsidize R&D and manufacturing investment in the semiconductor sector. Although this legislation is yet to be adopted, it is expected to mobilize upward of €43 billion in both public and private investment.
The proposed legislation is built on three pillars:
- Chips for Europe Initiative: Intended to support R&D by improving the transition from “lab to fab” through democratizing semiconductor infrastructure and Intellectual Property (IP).
- Security of Supply: Aims to attract investment and enhance productive capacity for “first-of-their-kind” facilities in the EU by creating the legal basis for EU member states to provide subsidies to encourage “leading edge” investment. It allows unrestricted subsidies, which are essential when foundries can cost upward of US$5 billion.
- Monitoring and Crisis Response: A set of early warning indictors will be identified, and a framework will be created with trade measures to intervene in the supply chain in times of emergency for the EU semiconductor supply chain.
How Has the EU Chips Act Already Influenced Decision-Making?
The central feature of this legislation is the transition to unrestricted subsidies to support ecosystem investment in manufacturing capacity. But there are certain other factors to highlight, as they will have a substantial impact on investment decision-making:
- Unrestricted subsidies for foundry investment reduces the barriers to entry, especially at a time when rising interest rates are putting upward pressure on the cost of borrowing.
- Allocation of €3.3 billion into R&D programs to support EU global technology leadership. This program will provide IP and accelerate technology innovation.
- Streamline policies within member states and fast track permits to reduce friction and drive down “time to market” for investment funding.
- Establishing the EU Chips Fund, which will provide €2 billion in support to startups and innovative companies to grow the wider semiconductor ecosystem and address the region’s structural skills shortages.
The proposed legislation has understandably already had a substantial impact on investment in the region. Below, ABI Research explores some of the key investment projects that have been spurred on by the EU Chips Act:
- Intel is building two first-of-their-kind “mega fabs” in Germany, with a phase one investment of €17 billion into a leading edge fab site producing 2 Nanometer (nm) chips. This is part of Intel’s 10-year €80 billion European ecosystem investment plan, which includes R&D, front end, and back end manufacturing capacity across the EU.
- STMicroelectronics and Global Foundries plan to invest €5.7 billion in a “trailing-edge” French semiconductor front end foundry. This investment project is expected to have significant support from the French government, although this has not yet been disclosed, as it is unclear if the EU will also help support the project.
- STMicroelectronics has also planned investment in a Silicon Carbide (SiC) wafer plant in Italy. This is a first-of-a-kind investment and will provide a vital link in the EU supply chain and reduce reliance on the Asia-Pacific market. The EU has approved €292.5 million (40% of total investment spending) to support this investment proposal, and it is expected to be completed in 2026.
What More Do Legislators Need to Do to Drive EU Semiconductor Ambitions?
At first sight, the EU Chips Act proposal seems like an effective solution to the ongoing challenges within the global semiconductor supply chain. However, in its current form, it will not be sufficient to plug all the structural gaps within the ecosystem. Below, ABI Research expands on some key areas that would enhance the effectiveness of this legislation:
- Although it does provide some support to address the skills shortages within the economy, it is highly unlikely that it will draw in enough additional talent to support expected R&D/foundry growth. Following a strategy more closely aligned with the U.S. CHIPS and Science Act may instead be beneficial. The U.S. government is providing a US$10 billion investment into regional hubs to support the creation of Science, Technology, Engineering, and Mathematics (STEM) ecosystems.
- Unlike the U.S. CHIPS and Science Act, this legislation does not overtly provide subsidies for projects, it simply provides a framework for governments to subsidize domestic investment. As this will not provide a “centralized pot of money,” it is likely that national and local government frictions will slow investment time frames.
- The EU Chips Act does not seem to provide support for the SME industry (i.e., ASML). Given the EU’s competitive advantage in this area, legislation should be aimed at maximizing the potential of this market and leveraging it to support a “strong leading edge” semiconductor ecosystem. In addition, providing support for ASML to expand Extreme Ultraviolet Lithography (EUVL) manufacturing would help stimulate EU exports.
- The EU Chips Act does not currently provide any guidance on “friend-shoring.” Given the funding gap that many have highlighted, building semiconductor supply chain sovereignty will be nearly impossible; therefore, it is advisable to instead focus on resiliency by developing smaller international semiconductor supply chains with “friendly” countries, such as the United States. This will reduce geopolitical jeopardy, while not running the risk of building excess capacity into the economy, which could negatively impact Return on Investment (ROI) in this highly cyclical market.
- The EU Chips Act will not provide enough support for R&D. While the US$11 billion of public funding might appear promising, this is likely to be sourced from redirected funding from other projects related to semiconductors. This means net public spending on R&D will remain largely unchanged. To stimulate semiconductor ecosystem growth, R&D cannot be ignored, as this will support the “Silicon Valley effect,” providing the foundation for an influx of talent.
- The EU needs to act faster to approve and officially adopt EU Chips Act legislation to capture investment before key players pivot toward other regions offering (in many cases) more public subsidies and support.
- Lack of alignment between national governments and company activity could constrain ecosystem development. Recently, Elmos Semiconductor SE (as part of its strategic pivot to a fabless model) has begun the process of selling its fab to Chinese owners, although the German government is against this process. This is a clear geopolitical risk and could further limit available semiconductor manufacturing capacity available to EU stakeholders.
It is highly unlikely that, in the medium term, the EU will build a self-sustaining semiconductor ecosystem, especially given the shortcomings of the EU Chips Act and structural factors within the economy. The EU is likely to remain reliant on Asia-Pacific and U.S. manufacturing capacity to support ecosystem demand for semiconductors. A more realistic short- to medium-term strategy would be a two-pronged approach that looks to double-down on the EU’s “leading edge” strengths, while placing increased emphasis on “friend-shoring” strategies. Doubling down on R&D and SME would improve resiliency, cement the EU’s relevance in the global supply chain in the near term, and have a positive impact on the EU’s struggling export market.
The EU Chips Act is a good start, but unless it changes substantially by the time it is adopted, it is unlikely that it will achieve its ambition of increasing its share of global manufacturing output to 20% by 2030. This is especially true given that adoption of the EU Chips Act continues to be pushed back, with even 1Q 2023 reportedly looking doubtful.