A more resilient European semiconductor supply requires a different approach

The strong focus in the European Chips Act on subsidies for foundries is misguided. Europe should instead leverage and deepen its unique technological capabilities to strengthen the semiconductor value chain
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By Niclas Poitiers

Niclas Poitiers is a research fellow at Bruegel with a focus on international trade, global value chains and semiconductors

28 Nov 2022

“Chips are the new oil.”

This sentiment has been widely voiced since chip shortages have thrown the semiconductor value chain into the spotlight. Were this true, Europe would just need to bring the “wells” home to avoid the kind of vulnerability we just experienced with actual fossil fuels.

And in simple terms, this is what the European Chips Act wants to achieve: bring the manufacturing of chips to European shores using massive industrial subsidies. The aim is to protect European industries from chip shortages and make the European Union less vulnerable to geopolitical shocks in East Asia.

However, the oil analogy is more misleading than helpful. It rightly points to the importance of chips in the digital economy, but it misses fundamental differences between the two. Where oil is a basic commodity, high-end chips are among the most technologically complex products on the market. They are produced using machines that are closer to particle accelerators than to oil pumps. And while a consumer can easily switch one oil supplier for another, chips are produced to customer specifications. One barrel of oil is almost like any other, but every type of chip is different.

Given this complexity, the production of chips requires the global cooperation of many specialised companies. While foundries like TSMC in Taiwan – the “wells” in the above analogy – receive the most attention, they are just one link in the production chain.

At many steps in the process of fabricating a chip, individual companies control technology that is indispensable to the entire supply chain. Access to manufacturing capacity can be curtailed by anyone who controls such a technology and has the political willingness to do so. This is how the United States structured its chips sanctions on China work: it leveraged the technology controlled by US businesses to prohibit the export certain chips from third countries to China as well as blocking China’s access to chipmaking tools to stifle the development of its domestic industry.

Given that the dependency of the EU is less on chips themselves than on the final goods that contain them, the key is controlling technology, not production

And this is where the strong focus in the European Chips Act on subsidies for foundries goes wrong. While it might achieve some diversification away from East Asia, the EU would still be vulnerable to geopolitical shocks. Most of our digital hardware is produced in East Asia, and the European Chips Act will not change that. The EU would also still be vulnerable to economic coercion via supply chain interdependencies. Meanwhile, the way the state-aid program is designed, it runs the risk of Member States competing against one another in a subsidy race.

The solution to a more resilient European semiconductor supply requires a different approach. Europe already has unique technological capabilities: the most advanced production machines come from Europe, and the continent is home to the most important chip research centre. The EU should seek to defend these capacities and deepen them through R&D initiatives.

Given that the dependency of the EU is less on chips themselves than on the final goods that contain them, the key is controlling technology, not production. The Chips Act contains some R&D funding, but on a small scale compared to the industrial subsidies. This should be rebalanced to ensure that the EU maintains its technological edge.

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