The global chip shortage is disrupting a wide range of business sectors and has raised concerns about Europe’s dependency on a few manufacturing sites located outside the EU’s borders, mostly in Asia.

The European Chips Act, unveiled by the European Commission earlier in February, aims to mitigate such geopolitical risk and secure the EU’s technological leadership in semiconductor research, technologies and applications. It intends to mobilise €43 billion between now and 2027, supported by funding from Horizon Europe (HE) and the Digital Europe Programme (DEP), as well as a mix of public and private investment.

Why does it matter?

The EU Chips Act creates both opportunities and risks for business.

• Opportunities: The new Chips for Europe Initiative will administer €11 billion to support large scale capacity building for integrated semiconductors technologies, quantum chips, testing and experimentation facilities. Semiconductor manufacturing facilities designated as Integrated Production Facilities (IPFs) or Open EU Foundries (OEFs) will get targeted support, including fast-track construction and operation permits. The criteria for designating facilities will be a key issue in the Council’s and the Parliament’s responses to the Act, as this will determine which businesses stand to gain the most.

• Risks: The Regulation grants the Commission wide ranging powers to deal with supply chain crises, including the ability to direct semiconductor manufacturers to prioritise critical sectors and, potentially, impose export controls. This is part of a wider story around ‘strategic autonomy’, the drive to secure critical technologies and boost the EU’s influence abroad. But these instruments, if used, could provoke retaliation from other jurisdictions in the event of future shortages. So, the debate about these new powers and how they are going to be used will be key.

What are the wider challenges that could shape the business environment?

Europe still risks being behind the curve when it comes to semiconductor investment. The EU is not the only one focusing on increasing its domestic capacity. President Biden has pledged $52 billion to support the US semiconductor sector as part of his Build Back Better plan, and as part of the bipartisan Chips for America Act and America Competes Act. China is reportedly committing $150 billion.

Semiconductors are complex to design and manufacture, involving many interdependent steps and multiple companies. Boosting cooperation with global partners will be key if Europe is to strengthen its semiconductor ecosystem and the competitiveness of its companies.  But the Chips Act has little to say on this. Cooperation on semiconductors is on the agenda of the US-EU Trade and Technology Council (TTC) but with little concrete to show, so far. And the EU still needs to build cooperation with other key players like Taiwan, South Korea and Japan, who hold important positions in the global semiconductor value chain. Otherwise, there is a risk of plans getting out of kilter, giving rise to new trading frictions.

The EU has a mixed history on industrial policy. Not least because member states can have different national priorities and different views on how far to go, and what measures to use, to favour the EU market. And in this case, the EU will need to balance the push for ‘digital sovereignty’ with the continuing need to attract significant foreign investment, if it is to succeed in developing state of the art chip manufacturing fab in Europe.  

And the EU will need to think about the demand side too. Production of more advanced semiconductors moved to Asia because of economies of scale as well as government subsidies. Large scale investment may improve Europe’s attractiveness, but it will be important also to consider other policies that regulate downstream industries and influence demand – e.g. if AI is regulated in a manner that stifles demand for AI systems, that could well reduce the demand for chips.

The Chips Act announces serious ambitions and it will have significant implications for business. But there remain a number of unresolved issues and wider policy challenges.

Julian King, the European Commissioner for the Security Union until 2020, with input from Flint Director Adriana Capparelli. To find out more about how Flint can help you navigate the risks and opportunities of these developments, please get in touch.