The Commission draws the future of the European semiconductor industry

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The recent global semiconductor crisis has exposed the extreme dependency of the semiconductor value chains on a limited number of geographically concentrated producers and caused severe repercussions on European industrial output. For instance, due to the worldwide chip crunch, some Member States experienced a one-third collapse in car production. Moreover, some private operators were forced to shut down factories in several sectors, including healthcare tech devices. When running short of supply, such a level of dependence on third-party producers results in economic turbulences for private businesses and limits countries' capacity to steer their economic and industrial policies freely, leading to additional indirect fallouts. Indeed, due to their high-tech content, the twin green and digital transitions that lay at the heart of the European Recovery and Resilience initiative could be put to a halt. Security and geostrategic considerations should be taken into account, as well. Semiconductors have already become a national security issue for the United States, causing geopolitical tensions with China, one of the world-leading chip manufacturers. The US is currently passing the US Chips Act to mitigate these external risks. Similarly to its EU homologous, it will commit USD 52 billion to promote research and reinforce the internal production capacity.

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On February 8th, the European Commission proposed a set of measures to rump up the domestic production of semiconductor technologies and derived applications. The so-called "European Chips Act" aims at transforming Europe from an import-dependent region into a global leader in the industry, strengthening the continent's competitive position, averting future shortages in the sector, and fuelling private investments. With its Chips Act, the EU will mobilize up to €49 billion of investments from both public and private wallets to bring the continent's global market share of chip production from 9% currently to 20% by 2030.

The challenge entails exceptionally high levels of complexity. As the market is projected to double by 2030, Europe will need to quadruple its production to meet its targets. However, the Union's objective is not just a matter of producing higher volumes. The goal is to progressively move into manufacturing advanced chips to accommodate users' needs and enter cutting-edge markets without compromising environmental achievements.

The Chips Act moves from European strengths and weaknesses and embeds a coherent strategy and a detailed implementation program. First and foremost, Europe needs to accelerate the transition "from research to the factory" through targeted investments in extensive domestic production facilities and enhance international partnerships. Indeed, the continent has already gained a strong position regarding research, power electronics, and industrial automation. Still, it remains over-reliant on East Asia for manufacturing, testing, and assembling and the US for designing.

Once approved through the ordinary legislative procedure, the regulation establishing the Chips Act will unfold in three pillars.

The "Chips for Europe Initiative" will support large-scale capacity building through investments in infrastructures across the continent and in cross-border open research. This first pillar builds on and completes the Horizon Europe and the Digital Europe programs. The former focuses on supporting pre-competitive research and piloting, while the latter enhances capacity building in AI, high-performance calculation, cybersecurity, skill formation, education, and training.

The second pillar, "Security of Supply," will attract investments in new domestic production facilities for modernizing various activities ranging from testing to assembly. Indeed, most of the current semiconductor production of the Old Continent concentrates on less advanced items and lags behind world leaders on vital technologies such as chip miniaturization. To deal with these structural weaknesses, the EU will establish "first-of-a-kind facilities," integrated factories that serve their own market, to explore and put to use novel techniques on the European territory. "Open EU Foundries" complete the picture by producing and designing components for other industrial players. Both these typologies of plants should provide beneficial spillovers to the broader economy and, due to the public support they'll receive, will be required to innovate and reinvest continuously.

The third and last pillar, "Preparedness and Monitoring," aims at deploying an early warning system against regional and global supply disruption and bottlenecks. The system will monitor global value chains and demand conditions and trigger crisis management mechanisms when needed. Such measures should include granting the power to EU executives to request information from the industry and mandating European producers to evade priority orders for short-in-supply products.

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Given the EU's lack of expertise in critical processes, Europe will need some key players from Asia and the US to invest heavily in the continent. Indeed, to catch up with foreign semiconductor production, Europe can neither afford outspending global players nor develop its skills from scratch. Therefore, influencing industry leaders to divert their spending from the rest of the world to the EU territory appears the only viable solution.

Here is where the stars (hopefully) align for the Old Continent. Intel, a global leader in microprocessors, is planning to invest a total of 80 billion euros over the next decade on new European production facilities. Some of these facilities would likely specialize in 2 nanometers chip production, which would anticipate the industry's trends and outperform Asian producers currently operating at 3 nanometers. These numbers define the distance between transistors and other components within the CPU. The smaller the number, the more transistors are placed within the same area, allowing faster, more efficient processor designs.

Furthermore, Intel CEO Gelsinger declared that the company is willing to invest in chips for the automotive sector in order to alleviate chip shortages. European firms occupy a significant position in the global automotive industry and could immediately benefit from domestically produced processors. Moreover, semiconductors used in cars are often less sophisticated and do not require the latest manufacturing technology for their production, thus fitting the already installed European production capacity. Hence, car manufacturers could welcome the Intel initiative and contribute to the up-scaling of European chip production with their own financial firepower. These elements suggest that the car industry could effectively kickstart the transformation process of the European semiconductor market.

There has been some speculation on possible locations for these European plants. At the moment, Italy, France, and Germany are leading contenders. However, to date, Intel has not officialized its investment decisions yet.