© Unsplash/Laura Ockel

Can the European Chips Act deliver on its promises?

Semiconductors are the foundation of the modern world and yet the economy is currently suffering from supply shortages of semiconductors. After China's years of subsidies and the U.S. Chips Act, the European Commission has now also presented a proposal to promote the domestic semiconductor sector. Can the goals set by the Commission be achieved and would the economy really benefit?

Semiconductors are the building blocks of our modern, networked world. That is precisely why it is particularly problematic that these highly complex chips are in short supply at the moment. Companies around the world are suffering from the shortage and complaining about lost sales.  For example, bottlenecks related to semiconductors are costing the auto industry $210 billion in revenue this year. In addition to the economic importance of semiconductors, there is also a political dimension here, because chips are strategically important with their wide range of applications, not least because they play a major role in security as well as in industries such as automotive, industrial, 6G, health, but also smart home. That is why the European Commission has now presented the European Chips Act, which aims to transform the EU into a global player in the worldwide semiconductor market and ensure security of supply.

The European Chips Act - thought big enough?

The Chips Act is not originally a European idea. The United States, for example, already passed a comparable initiative in Congress in June 2021, and China has also been massively promoting its domestic semiconductor industry for years. The U.S. Chips Act comprises an investment volume of around 52 billion U.S. dollars and it is estimated that the Chinese government will already spend 150 billion U.S. dollars on its semiconductor industry by 2025. To remain competitive in this context, the European Commission wants to invest 43 billion euros in the European semiconductor industry, among other things. Is this sum sufficient from the industry's point of view? To answer that, the entire Chips Act package must be considered.

The European Commission's proposal

The European Chips Act consists of a total of four documents, which include the so-called three pillars, a package of immediate measures and the new Chips Joint Undertaking under Horizon Europe and Digital Europe. The first of the three pillars is the Chips for Europe Initiative. It is designed to build capacity in "cutting edge" and next-generation semiconductors, as well as quantum chips, with public funding measures totaling eleven billion euros. Most of the measures are aimed at building competencies and know-how. In principle, the industry believes that the first pillar contains sensible measures and supports them. Nevertheless, funding must be clarified and the focus must not be placed exclusively on small structure sizes (< 2nm), because industry predominantly requires larger chips. In addition, specific chemicals and smart functional materials should not be overlooked as important inputs.

The second pillar is to ensure security of supply of semiconductors to Europe. This will be made possible by funding innovative production sites in the EU, which will strengthen the EU as a semiconductor producer. The two types of Fabs , Open EU Foundries and Integrated Production Facilities, are not limited to specific technologies or structure sizes, which is very welcome. However, there are still uncertainties regarding funding. Urgent care must be taken not to trigger an international subsidy race.

Will the market economy fall by the wayside?

The mechanisms to deal with future supply bottlenecks are to be found in the third pillar, which the industry views critically. Here, the EU Commission, in cooperation with the newly created European Semiconductor Board, is to monitor supply chains and be given the power to intervene in companies' business activities in times of crisis and impose export controls. This is not in line with the market economy principles of the European single market.  Moreover, when a crisis situation exists is not clearly defined, and we doubt that these measures will effectively serve to manage supply bottlenecks.

As the three pillars of the Chips Act are expected to be adopted by the member states in six to twelve months at the earliest, the EU Commission has presented a package of emergency measures in parallel. This package is intended to take effect more quickly so that it can already have its effect in the current semiconductor shortage. The immediate measures are based on the third pillar and can be seen as a precursor to it. Accordingly, the opinion of the business community is rather critical.

The final part of the Chips Act is the Chips Joint Undertaking, which is a realignment of the Key Digital Technologies Joint Undertaking. The focus is now on semiconductors. The purpose of the realignment is to strengthen the exchange of knowledge between the key players in the European semiconductor ecosystem. It is also intended, among other things, to coordinate the various research and innovation strategies in order to maximize their impact. In this way, the EU's strengths in research are to be played out.

Where to go from here

The next step will be for the EU member states to consider the proposal and possibly amend it. In principle, the European Chips Act is a good and necessary initiative by the EU Commission, which is promising in most areas. However, some details cause headaches for the companies the Chips Act is supposed to help. There are still major unresolved issues, such as funding and how deep possible market interventions can become. The EU's answers to these questions will determine how successful the Chips Act will ultimately be.