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The European Union has laid out plans to ramp up semiconductor manufacturing across the bloc, as it bids to stave off a future supply crisis and reduce its dependency on imports from Asia.

This week, European Commission President Ursula von der Leyen unveiled the bloc’s new European Chips Act which aims to draw in more than €43bn of public and private investments to the sector.

The proposed legislation – which needs to be  reviewed and approved by the European Parliament and member countries – promises an additional €15bn in public and private investment for the sector by 2030, on top of €30bn in public investment already earmarked through separate EU schemes and national budgets.

The move aims to more than double the EU’s global market share in semiconductors to 20% by the year 2030, which would ultimately require the bloc to quadruple production.

In particular, the EU says it is looking to bolster the bloc’s ability to produce innovative and cutting-edge chips.

For instance, it says it plans to allow a relaxation in state aid rules to incentivise the establishment of “first-of-a-kind” factories in the bloc, such as those capable of making the smaller types of semiconductors.

The EU’s plans follow similar legislation enacted in the US, where President Joe Biden is working to introduce US$52bn in federal subsidies aimed at boosting domestic semiconductor manufacturing.

A global chip shortage over the past 18 months has dogged companies globally and laid bare the vulnerability of such supply chains, in turn triggering concerns in Washington and Brussels over potential geopolitical disruptions in the future.

“Europe has an overall global semiconductors production market share of less than 10% and is heavily dependent on third-country suppliers. In case of severe disruption of the global supply chain, Europe’s chips’ reserves in some industrial sectors (e.g. automotive or healthcare devices) could run out in a few weeks, bringing many European industries to a standstill,” the European Commission says.

According to the Semiconductor Industry Association, a US-based trade body, 75% of all semiconductor manufacturing is now based in East Asia or China, and all of the world’s highly advanced logic semiconductor manufacturing capacity is in Taiwan (92%) and South Korea (8%).

The EU says becoming entirely self-reliant on semiconductors made in the bloc is unrealistic, but the aim is to boost production and work with like-minded partners such as the US and Japan to ensure its supply chains are resilient.

“It is about balanced interdependencies and it is about reliability,” von der Leyen says.

 

Giving into subsidies

Semiconductor factories, or “fabs”, can cost tens of billions of dollars to build and are in many instances based in countries where sizeable government subsidies are on offer.

This has left the EU, which has been reluctant to roll-out generous concessions in the past, at a major disadvantage to countries in Asia that have provided manufacturers with significant incentives.

As detailed in a report from management consultancy Kearney, operating a new leading-edge fab over a 10-year period in Europe is 30% more expensive compared with South Korea and more than 40% when compared with Taiwan.

“The main differences are the regional incentives, co-investments, and subsidies. Unless it changes the status quo, Europe will lose even more of its global position,” it says.

The potential relaxation of European state aid rules could allow governments to cover up to 100% of a project’s proven funding gap with public resources, says European Commission executive vice-president Margrethe Vestager.

Von der Leyen notes that advanced production facilities come “with a huge up-front cost”.

There are concerns among some quarters that a relaxation in state-aid will benefit larger countries in the bloc.

But in a bid to ward off any subsidy race among members, Vestager says that approved projects would have to be unique and to the benefit of Europe as a whole. Aid provided would need to be “targeted and proportionate”, she adds.

 

Industry reservations

Semiconductor industry bodies have widely praised the package of reforms but raise concerns over a lack of details on funding and potentially cumbersome reporting requirements outlined in the document.

DigitalEurope, which represents technology companies, says the EU announcements signals “promising ambition”, but says more clarity is needed on how money will be sourced.

“The EU attracted just 3% of global investment for chip factories in 2020 and a lot of work is needed to push this figure upwards,” says Cecilia Bonefeld-Dahl, director-general of DigitalEurope.

“We caution against excessively broad reporting obligations that add administrative burden on companies and create risks of duplication.”