The EU is a global industrial power highly dependent on third countries as regards the raw materials needed for European industrial manufacturing, as in the case of lithium and cobalt imported from Asia and used to produce batteries for electric vehicles. This industrial dependence exposes the bloc to external shocks, as seen in the shortage of masks during the first Covid-19 pandemic wave or, more recently, the shortage of chips, also known as semiconductors. Chips are key components for key industries such as the automotive sector, smartphones and computers, cloud and digital infrastructures, financial services and healthcare technological devices. With the pandemic forcing governments to adopt remote working for its employees and, consequently, the demand for electronic devices (such as laptops) skyrocketing, the chip industry is experiencing its worst shortage in decades. Firstly, chip manufacturers have struggled to keep the pace to satisfy the booming demand from the tech sector, stockpiling orders in advance but setting aside other sectors such as the automotive, since less people were buying cars due to the mobility restrictions in their countries. Secondly, during 2021 there was an unprecedented winter storm in Texas, a fire at a plant in Japan and a water shortage in a plant in Taiwan shut down semiconductor factories causing extended delays at international level. Thirdly, the chip supply chain is highly interdependent among countries due to geographical specialisation (essentially, manufacturing is in Asia, equipment in Europe and commercialisation in the US). Manufacturing a chip involves three steps – design, production and testing – while relying on more than 300 production inputs and 50 classes of high-tech equipment. The whole manufacturing cycle is so complex it involves around 1,000 steps, crossing international borders more than 70 times and a large semiconductor company may rely on as many as 16,000 suppliers across the globe. While the above-mentioned render the chip supply chain vulnerable to external shocks and disruptions, an idea of Europe’s dependency can be seen in the fact that 92% of global manufacturing capacity is based in Taiwan, while only 4 of the world’s top 35 semiconductor firms are located in Europe.
EU (open) strategic autonomy
In order to reduce this vulnerability vis-à-vis external competitors, the Von der Leyen Commission has sought to boost Europe’s independence and create industrial supply chains across the EU. To this end, the notion of “strategic autonomy” has become prominent in Brussels’ jargon. Originally advocated in 2017 by French President Emmanuel Macron when speaking about his ambition to set up a European defense army, the concept has gained renewed energy with the Commissioner for the Internal Market Thierry Breton arguing, since his entry into office, for the importance of developing a European strategic autonomy. Nevertheless, the notion initially sparked off divergences among Member States. This was seen by its two main advocates, Germany and France, as key for a European Industrial Renaissance but with concerns of it falling into an interventionist and protectionist industrial policy for many Northern European countries. Such fears were mitigated by the Commission which underlined that it was pursuing the goal of an “open strategic autonomy” and that this can be pursued without protectionism but with, instead, an open economy, industry and trade preserving the principle of interdependence. A mapping of EU’s key industries and their supply chains, referred to by the Commission as “ecosystems”, constituted a new approach in EU executive industrial policy. Indeed, with demand for leading-edge chips expected to double over the next decade, the Updated Industrial Strategy of March 2021 outlined the Commission’s intention to double its share of semiconductor manufacturing to 20% of worldwide manufacturing by 2030. The Strategy was later followed in July 2021 by the launch of the “Industrial Alliance on Processors and Semiconductor Technologies” to foster cooperation between public and private actors on leading-edge node technologies and manufacturing capacity, with the ultimate goal of strengthening the European electronics design ecosystem. Another EU instrument for pursuing its strategic autonomy are the “Important Projects of Common European Interest“ (IPCEIs), key to implementing its Industrial Strategy. Their mission is to address and overcome important market failures which could not be dealt with otherwise. These European public-private consortia usually involve several Member States, companies, financial institutions and other private bodies bringing together technical knowledge, expertise and financial resources on strategic value chains, by developing R&D, as well as their upscaling and testing phases (First Industrial Development-FID). Last December, Germany notified the Commission about the launch of an IPCEI on Microelectronics and Communication Technologies. The size of the IPCEI is enormous, with 20 Member States, more than 90 beneficiary entities and 32 company projects pooling more than 10 billion euros in investments for transnational microelectronic projects. The objective – to enhance Europe’s supply chain resilience in the field of semiconductors.
The Chips Act
The digital transition and EU’s Digital Decade objectives have made chips key to its long-term industrial competitiveness. While Europe is relatively on track in terms of R&D in semiconductors (with large firms investing around 15% of their revenues), it has an overall global semiconductor production market share of less than 10%, making its supply heavily dependent on third countries and exposing key sectors to deep economic shocks in the case of disruptions. The European Chips Act presented by the Commission on 8 February seeks to address these gaps with the final goal of creating a performant and resilient European semiconductor ecosystem. The “Chips Package” consists of a Communication, two proposals for a Regulation and a Recommendation. The Package aims to cover the key aspects necessary to develop a semiconductor value chain – R&I, manufacturing and production, funding, value chain monitoring and assessment, state aid rules, coordination among Member States and international industrial cooperation. Overall, around 40 billion euros will be mobilised for the semiconductor value chain.
The Commission’s proposal, firstly, sets up a “Chips for Europe Initiative” pooling resources from the EU, Member States, the private sector and third countries currently associated with the Union’s programmes. This will be done through a “Chips Joint Undertaking” whose resources will be reoriented from a previous Joint Undertaking on Key Digital Technologies under the EU’s R&I Horizon Europe Programme (one of the Package’s two Regulations, which will have to be approved by the co-legislators). The initiative will allocate 11 billion euros to foster R&I and the deployment of advanced semiconductor tools and pilot testing lines. Secondly, the EU plans to develop its production capacities through a new framework to attract investments through a Chips Fund facilitating access to finance for start-ups, while a semiconductor equity facility under the InvestEU programme (formerly the Juncker Plan) will support SMEs and scale-ups. Thirdly, the Package introduces a coordination mechanism of Member States to monitor the semiconductor value and supply and map its weaknesses, as well as establishing a common crisis assessment to ensure the relevant coordination. An ‘emergency toolbox’ should be set up by the Member States, which is contained in the Package’s recommendation (non-binding under EU law). Fourthly, state aid rules will be adapted on a case-by-case basis, taking into consideration the size of the investments along with strategic industrial and economic value. This measure is necessary as state aid rules to avoid Internal Market distortions are an exclusive competence of the Commission, making IPCEIs subject to the EU’s executive approval. The planning of a IPCEI is mentioned in the Chips Act Regulation, with an estimate of up to 30 billion euros to be mobilised. Finally, a European Semiconductor Board chaired by the Commission and made up of MS representatives will oversee the Strategy governance and will assist the EU in its cooperation with third countries, given the globalised nature of the semiconductor supply chain. International partnerships would involve cooperation on international standards and export control, information-sharing on potential shocks, and long-term investment strategies.
As provided by the ordinary legislative procedure, the European Parliament and the EU Council of Ministers will start negotiations on the Commissions’ two proposals for a Regulation. The process is likely to take several months, given that both co-legislators will need to agree on the details of the Package. For this reason, during the announcement the Commission invited Member States to follow the Recommendation’s emergency toolbox and take immediate actions, that the latter sets out, to mitigate the current chips’ shortage. Experts affirm that the semiconductor industry will need around 3,000 billion dollars in the next decade. With China expecting to invest a total of 200 billion dollars in the 2015-2025 period and the US planning to provide 52 billion dollars in support to its industry, global competition in semiconductors will be at the core of the EU’s race for digital and tech leadership.