The EU Chips Act may be too little, too late

In a global economy heavily reliant on cutting-edge technology, supercomputers and AI, the semiconductor industry has emerged as a crucial battleground for dominance between major players like the United States and China. To counter their growing influence, the European Union recently passed the EU Chips Act, an ambitious attempt to secure the EU's position in the semiconductor market. However, the EU strategy on semiconductors may be too little in terms of financing, as it draws mainly funding from existing instruments and too late, as both the US and China have already established significant leads in the race for chip supremacy.

The new piece of legislation, formally adopted on July 25, 2023, comes as a response to mounting concerns over the EU's over-reliance on imported chips from overseas markets (mostly Taiwan and South-East Asia for manufacturing of chips, and the United States for their design), leaving the region vulnerable to supply chain disruptions and potential technological dependency. The Act has three main pillars that focus on domestic semiconductor production, investing in research and development, and creating a competitive environment for chip manufacturers within the EU. It also creates an early warning alert system (basically a coordination mechanism between Member States) to counter the effects of potential crisis or shortages in the supply chains.

The first pillar, materialized under the Chips for Europe Initiative will combine investments from the Union, Member States and the private sector and will be supported by €6.2 billion of public funds, of which €3.3 billion from the EU budget agreed today for the period until 2027, the end of the current multi-annual financial frameworki.

The second pillar of the European Chips Act will incentivize public and private investments in manufacturing facilities for chipmakers and their suppliers. This will contribute to the overall public investments in the sector estimated at €43 billion.

By comparison, in 2022, just four months after enactment of the CHIPS and Science Act in the United States, the semiconductor sector announced and initiated dozens of domestic projects totaling $200 billion in private investment.

Even with the latest approved Important Project of Common European Interest (IPCEI) on Microelectronics and Communication Technologiesii, with €8.1 billion of state aid, triggering €13.7 billion of additional private investment and therefore a total investment of around €22 billion in the European semiconductor supply chain, the Union is not matching the magnitude of US and Chinese similar investments. In 2022 alone, the U.S. semiconductor firms invested $58.8 billion in Research&Development only, the highest amount in historyiii.

Despite the Act's promise to double EU`s current global market share to 20% in 2030, the numbers tell a different story. US and China dominate the global semiconductor production with 48% and 26%, respectively. At the same time, global demand for semiconductor manufacturing capacity is projected to increase by 56% by 2030, with largest investments of course in the US (supported by the CHIPS Act) and Chinaiv. As this long-term trend continues in the years ahead and demand for chips rises, semiconductor companies will need to invest in more research, design, and manufacturing. The question is not whether more chip manufacturing facilities, or fabs, will be built, but rather where they will be built.v This discrepancy highlights the immense ground the EU must cover to compete with its rivals to fund its own fabs.

According to the new Regulation, the EU Chips Act will allocate €3,3 billion during this financial exercise (until 2027) to stimulate semiconductor research and innovation (drawing already available funding from Horizon Europe and Digital Europe programmes)vi. By comparison, only one Chinese company, Huawei, battered by US sanctions and under the close monitoring related to CHIPS Act, still remains one of the world’s biggest spenders on research and development, with a budget of about $24 billion last year and a research team of over 100,000 employeesvii.

To understand the context of the EU's efforts to catch up with the US and China, it is crucial to examine the dynamics of the global semiconductor industry. For years, the US has been a dominant force in the semiconductor market, home to major chip giants such as Intel and NVIDIA, which have played a pivotal role in driving technological advancements.

China, on the other hand, has taken an aggressive approach in building its semiconductor industry, investing heavily in research and development and offering substantial incentives to attract top talent. The country has made strides in manufacturing chips and aims to become self-sufficient, reducing its reliance on foreign semiconductor imports.

The geopolitical rivalry between the US and China has intensified the race for semiconductor dominance. The US government's sanctions against Chinese tech companies have further strained the global semiconductor supply chain, with China responding with its own initiatives to strengthen its semiconductor industry.

The EU's attempt to secure its position in the semiconductor market is commendable, however it might not be enough to close the gap with the US and China. One of the key factors contributing to the EU's disadvantage is its historical underinvestment in the semiconductor sector. While the EU has a strong research and development infrastructure, it has not consistently nurtured and supported the growth of semiconductor companies in the same way as the US and China.

The Act's provisions highlight the EU's determination to secure its semiconductor future. The creation of a dedicated EU Semiconductor Fund, along with support for cross-border collaboration between EU member states, is aimed at fostering a more integrated and innovative approach to semiconductor research and development.

Additionally, the Act will prioritize the development of critical semiconductor components used in areas such as automotive, telecommunications, and healthcare. By addressing the shortages in these areas, the EU aims to enhance its technological resilience and reduce its dependence on external suppliers.

In addition to addressing its semiconductor deficit, the EU must also consider the importance of standardization in key industries, particularly in electromobility. More than 27% of EU produced chips are used in automotive industryviii. As electric vehicles (EVs) gain traction and they use a more sustainable mode of transportation, the need for standardized charging ecosystem becomes critical. Currently, various EV manufacturers use different chip technologies, resulting in compatibility issues, inefficiencies, and increased costs.

In conclusion, the EU Chips Act represents a crucial step towards strengthening the EU's position in the semiconductor industry. However, it may have come a little too late to pose an immediate threat to the established dominance of the US and China. The Act's effectiveness will depend on sustained investment, strong public-private partnerships, and a clear vision to bolster the EU's semiconductor capabilities while navigating the complexities of the global market.

Time&Place Consulting is a trusted partner for companies seeking to navigate the ever-changing landscape of the technology industry. As an innovative communication agency in Brussels, with a deep understanding of the semiconductor sector, we are well-equipped to provide strategic counsel, communication solutions, and public affairs expertise to help organizations steer into the complexities of EU regulatory policies.

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