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Industrial Policy

Europe has a chips plan — here are 6 things that could kill it

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The EU on Tuesday presented a €43 billion plan to turbocharge its microchips sector by 2030. For it to work it’ll have to overcome a terrible track record on industrial policy.

The Commission’s new European Chips Act is an attempt to shore up the bloc’s capacity to produce semiconductors, tiny pieces of technology that are critical to everything from cars to smartphones.

The plan aims to “make Europe a leader in this market,” Commission President Ursula von der Leyen said Tuesday. “Chips are crucial in almost every device. But the pandemic has also painfully exposed the vulnerability of chips supply chains.”

The bloc wants to reshore the manufacturing of chips and reach 20 percent of global market value by 2030. To meet that goal, it has to quadruple its activity in the sector, which is rapidly expanding across the globe.

In its proposals, the bloc put forward an investment plan for its leading research and innovation institutes, funding schemes to attract large international players to set up new manufacturing sites, and new policies to respond to shortages in the semiconductor industry like the one that has crippled its automotive industry in the last year.

But the plan hinges on a series of bets that are far from guaranteed to pay off. POLITICO walks you through what could go wrong.

1. The EU hasn’t mastered industrial policy (yet)

The European Chips Act is arguably the EU’s most ambitious plan to launch long-term industrial policy to shore up its economic power and compete with rivals like the U.S. and China.

But the policy is untested and the bloc has a bad track record when it comes to making these types of interventionist policies work.

For decades the Commission and its powerful competition department had rebuffed state aid and made free-market competition central to its internal market. With the new Commission and its French juggernaut Internal Market Commissioner Thierry Breton, that’s changing. A new industrial strategy was presented last year and the Commission is coordinating large public funding schemes for chips, the cloud, batteries and other technologies. 

The problem is that the EU so far isn’t very good at it. Its attempts to launch long-term industrial policies have failed to deliver in the past, and are no match for dirigist powerhouse China and the U.S. government’s wielding of its dominant industrial complex.

Case in point: The Commission presented a very similar microchips plan in 2013 when it said it wanted to “double” Europe’s chips production to 20 percent of global production — but completely failed to reach this goal.

The EU is making headway, though: A massive subsidy program aimed at boosting local production of batteries for electric vehicles is beginning to yield results.

The EU’s chips plan is proving to be another big litmus test for this Commission on whether it can actually pull off industrial policy at this level of competition and on this scale — but that’s far from guaranteed.

2. Europe hasn’t (yet) secured a (working) ‘mega fab’

For more than a year, Breton has pushed for one of the semiconductor industry’s big three manufacturers — TSMC, Samsung and Intel — to set up a cutting-edge chips factory, or “mega fab,” that produces the latest generations of chips (of down to 5 nanometers and less). 

TSMC is the big fish. The Taiwanese giant is seen as dominant in the business of manufacturing high-end chips on demand for other companies like Apple, MediaTek, Qualcomm, Nvidia and others — mainly for smartphones. But TSMC hasn’t come out with any announcements for European investments. It said over the summer that it was in preliminary talks to set up shop in Germany, but has in past months mainly announced confirmed investments in Arizona ($12 billion), Japan ($7 billion), and China ($2.8 billion).

Samsung has been lukewarm — to put it lightly — about the idea of investing in a mega fab in Europe.

That leaves Intel. The U.S. giant’s new CEO Pat Gelsinger has been very forthcoming, courting European government leaders and building on his long relationship with Breton to secure state support to set up a new mega fab and conduct other activities across continental Europe.

Intel said in a statement it is “considering a significant increase in our European footprint, and we expect that the EU Chips Act will facilitate these plans.”

But for Intel, manufacturing on demand is a new ball game. The firm has kept its business model closed for decades, producing chips from design to finished product instead of producing on demand for others. Gelsinger announced his strategy to launch “Intel Foundry Services” in March last year, but this new business side of Intel is unproven. Industry experts point out that the U.S. firm could fail to match the success, speed and accuracy of TSMC’s manufacturing — and thus fall behind in this line of business. 

3. The US can easily outspend Europe — and so can others

Despite the pledges of EU and U.S. officials to avoid a “subsidy race” between them, the EU’s chips strategy is a clear answer to Washington’s $52 billion funding package making its way through Congress. Breton has repeated over and over that the EU will match U.S. subsidies. 

But the Commission is comparing apples and oranges.

Its European Chips Act promises “€43 billion up to 2030” but includes “public [EU and national] investment and leveraged equity support” in its count, Tuesday’s strategy said. Much of the EU executive’s own funding in the so-called Chips for Europe initiative is existing research funding that was already earmarked for the semiconductor sector.

The U.S., however, is putting $52 billion on the table just in federal funding. On top of that, U.S. states are already pledging billions more to lure chips firms to their territory, and private capital is investing heavily too. China is on course to have invested $150 billion in chips between 2015-2025, the Commission estimated. South Korea worked with industry players to put together support in kind and unlock $450 billion of private funding by 2030.

There’s a clear funding gap that the EU will sooner or later have to reckon with.

4. EU competition officials need to play ball

The Commission promised to free up public funding to convince foreign giants like TSMC and Intel to set up factories.

But projects that receive billions need to meet specific benchmarks, said Commission Executive Vice President Margrethe Vestager, who oversees competition policy. “It needs to be ‘first of a kind.’ Second, it needs to be targeted and proportionate … And third, it needs to benefit Europe as a whole,” she said.

The EU’s texts provide for flexibility. For example, “first of a kind” could mean it’s new for Europe, even if it isn’t necessarily new globally. And it doesn’t need to be “first-of-a-kind” chips as a whole; the project could also qualify if a “mega fab” helps create “first-of-a-kind” technology in associated activities like packaging or design.

Still, the public funding needed by firms like Intel and TSMC — which runs into the billions — could face roadblocks in Brussels and from the competition officials who have killed many state-aid efforts in past decades.

5. Carmakers want speed

Europe’s car industry has been heavily hit by the chips shortage, with millions of units of production shut down due to the supply bottleneck for a critical component in modern connected cars. Auto industry executives have repeatedly lobbied Breton to propose measures that will reduce dependence on foreign producers in the medium term — helping to stave off such crises in the future.

But they also demand a quick fix that can help to relieve the pressure now.

“Securing the existing global supply chain is of central importance,” said Hildegard Müller, the chief lobbyist for Germany’s Volkswagen, BMW and Mercedes-Benz at the VDA, a German auto industry association. “An additional strategic share of the global market can strengthen the negotiating position in the event of new shortages.”

There’s also a critical question of what kind of chips Europe should make to serve the auto industry. While Breton has targeted cutting-edge units of under 5 nanometers, larger chips of between 14 and 28 nanometers are the type currently widely used in vehicle production. Demand for smaller chips is only set to increase once artificial intelligence technology takes off, BMW’s CEO Oliver Zipse told Breton in a letter seen by POLITICO late last year.

Vestager, meanwhile, poured cold water on the automotive industry’s pleas for speed: “The European Chips Act is not about solving our current shortage,” she said. “We need to anticipate crises that are on the horizon.”

6. The fiscal climate is changing

The Commission tapped into the zeitgeist with its massive industrial funding initiative, building on fears of European shortages that emerged in the early days of the coronavirus pandemic and mobilizing EU recovery and resilience funding to put together a multibillion-euro funding package.

But with rising inflation, the interest in massive public investments is decreasing, including in Germany, a key country whose national spending and political weight are desperately needed to make the chips plan work.

German Finance Minister Christian Lindner started warning of inflation months ago and last month said he wants a “real debate” about the EU’s fiscal rules to start this summer. It’s a sign that large-scale public investments could face political headwinds soon.

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