The European Commission proposed Tuesday a new plan to strengthen European production of microchips, at a time when the supply of these technological components, fundamental to the functioning of all electronic devices, is becoming an industrial priority in many countries around the world. In fact, there are many countries that in recent times have announced huge investment plans to increase production and gain new market share.
The European plan, which for now is still a proposal and is called European Chips Act, provides for total investments for 43 billion euros, divided between public funding and private investment, as well as the establishment of a specific fund for investment and a relaxation of the rules for state aid by member countries. The objective, explained the Commission, is to arrive at 2030 with a 20% share of world production of microchips. Currently, the European Union’s microchip production is about 9 percent of the world’s.
Microchips (or simply chips) are critical components in a great many products, not just electronics: although we often think primarily of those in computers and smartphones, chips are now essential to any device that has at least one electronic part. In a car, for example, there are dozens of them, and they are used to manage the electric windows, the on-board computer, the entertainment system, the airbags, the parking sensors and so on.
For over a year now, partly because of the economic effects of the coronavirus pandemic and partly because of the global trade crisis, there is a severe shortage of microchips worldwide, which has caused production to slow down in many sectors and made it difficult to supply various technology components. In Europe, one of the hardest hit sectors has been the automotive industry: as the Commission explained, production in some countries has declined by one-third due to chip shortages.
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In this context, Europe has found itself in particular difficulty, because it depends almost entirely on foreign countries for the supply of chips. Currently, the global production of microchips, especially of the most sophisticated ones, is dominated by three countries: the United States, South Korea and especially Taiwan, which with its multinational TSMC has 54 percent of the world market share. “Chips are essential in virtually every device. But the pandemic has painfully exposed supply chain vulnerabilities,” said Commission Chair Ursula von der Leyen.
Europe’s plan for microchip production, while ambitious and well-meaning, has been welcomed with some skepticism. First of all, because the funding allocated, although adequate, is still among the smallest among that proposed by other economic powers.
The European Chips Act provides for funding of 43 billion euros, which is comparable to the 52 billion dollars (45 billion euros) recently approved by the U.S. Congress for the microchip industry. But the 52 billion US dollars include only federal aid: the individual US states have advanced their own plans to develop the sector, adding several billions. On the contrary, out of the 43 billion Euros foreseen by the European Union only 11 will be of direct funding to the sector: half of these 11 billion will come from the Union budget, while the other half will have to be allocated by the member states. The remaining funds should come either from private investment or from state aid from member states, which for now is only estimated.
Other countries have put forward much more ambitious plans: South Korea has approved a 10-year $450 billion plan (almost all provided by the private sector), while China, in the decade 2015-2025, has invested and will invest $150 billion.
Like noted Politico, moreover, the European Commission has relatively little experience in managing the Union’s industrial policy, an activity to which it has been dedicated for only a few years: the Commission in recent times has presented several plans for the development of important technological sectors, such as the cloud and artificial intelligence, but so far the results have been poor. Back in 2013, the Commission presented a plan for microchips that had very similar goals to the current ones: to reach 20 percent of the world market share, which evidently did not happen.
The European Union is also struggling to attract international investment in the sector. For months Thierry Breton, the European Commissioner for the Internal Market, has been trying to convince one of the large multinationals that produce microchips (the main ones are three: the Taiwanese TSMC, the South Korean Samsung and the American Intel) to establish in Europe a “mega fab”, that is a large production center. It is a fundamental step to be able to advance, because the production of microchips is a field that requires huge investments and previous knowledge: for this reason, the European industry would be strongly advantaged if one of the multinationals already operating in the field would start to produce locally.
TSMC has recently announced investments in Arizona (US), Japan and China, but not in Europe. Samsung also seems disinclined, while Intel would be thinking about it, but nothing is definite yet.
The European project to develop the microchip industry therefore has major hurdles ahead, but that does not necessarily mean it is doomed to fail. Among the most notable elements of the package of measures is a workout of state aid rules, which will effectively allow member states that want to to fund companies and startups to expand into the microchip sector. This is a key measure, because the microchip industry is very “capital intensive”: setting up a chip factory requires disproportionate investment, which is difficult to achieve without government aid.
As Margrethe Vestager, vice-president of the Commission who is also in charge of competition policies, said, there will however be stakes to state aid: it will have to be “targeted and proportionate”, and “bring benefit to Europe as a whole”.
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