Daniel Gros
The crucial importance of electronic chips for modern industries has been amply illustrated by the way a shortage of them has held back European automobile production over the last year. The full-scale invasion of Ukraine by Russia has further shown the critical importance of access to this technology.
Although the European Chips Initiative was conceived before the war broke out, it must now be measured both as an instrument of industrial policy and one of geo-strategy. Unfortunately, it has serious shortcomings on both accounts.
The first question one has to ask is why the EU should support the chips industry. Nobody denies its importance. But many other sectors are important as well (software, AI, pharma, etc.) and the state cannot support them all. Public support is justified only if market mechanisms prove inadequate, e.g. in the case of nascent or “infant” industries. However, the chip industry is not an infant industry. The European chip industry is simply too old. It received support in the past and then stopped researching cutting-edge innovations. Why should this time be any different?
Investing public funds into a specific sector can also be justified if it cannot gather support from the market. But there is no sign of this. The leading firms in the sector have no problem funding the huge capital required to build new foundries, to support the intensive research going into the design of the chips and to develop the cutting-edge machinery needed to pack smaller transistors on to a single chip.
The fabrication of a micro-chip involves many steps along a complex value chain. There is no clear reason why it should be more important for Europe to increase the local manufacturing of chips rather than concentrate on chip design, software or the production of the machinery needed by chips producers, where Europe already has a comparative advantage. The target of attracting 20% of global chip production to the EU has little justification. One might as well have aimed at 20 % of the design business or silicon wafer production.
Against this background it is difficult to find a justification for the European Chips Act presented recently by the Commission. Moreover, both the financing and the organisation are misguided.
Insufficient financing
The financial envelope accounts for 3.3 billion euro (about 0.5 billion per annum over 7 years) obtained mainly by reshuffling hundreds of millions from different parts of the EU budget. The Commission did not even attempt to make the case that funding for the Chips Initiative would yield a higher return than funding for general research, including advanced computing and AI, which has suffered from severe cuts.
With only 250 million euro in fresh money out of an envelope of 3.3 billion euro, it appears highly misleading to create the impression that the Chips Act will have a major impact on this capital-intensive sector in which a single foundry can cost billions. The EU funding pales compared to the 50 billion USD budgeted by the US and the equivalent of about 140 billion USD earmarked by China in the context of its 2025 industrial leadership plan.
Horse trading between member states
The Commission also proposes to set up new bodies, including a European Semiconductor Board composed of representatives of Member States. This would mean opening the door to horse trading among member states over the distribution of the funds and a clear loss of efficiency with respect to Horizon Europe, which represents one of the few areas in which only excellence counts, because there are no Committees with Member States involved in the selection of projects. It is also the opposite to the gold standard of the United States DARPA, under which a small, independent body is allowed to disburse independently substantial funds for high-risk research project.
Each Member States will have to create a “single point of contact” to participate in the Semiconductor Board. This is an invitation for Member States to discover that their own national interest lies in retaining at least a tiny part of the supply chain for chips at home.
The Commission enjoins Member States to coordinate their own funding for the chips industry. But this seems a forlorn hope since national funding follows national priorities – as can be seen in the decision of the Spanish government to spend over 10 billion euro to support its domestic industry.
Cooperation better than competition
Achieving the targeted 20% of global production would do little to guarantee the supply of chips for the EU.
Different industries need different types of chips, and even if 20% were manufactured in Europe, it would be highly unlikely that the overall output could cover all current needs. The renewed European production is set to focus on “first of a kind” chips for smartphones and communication devices, but these will not work for the automotive industry. The shortage currently holding back these firms stems from the fact that they need mostly chips of older designs, which are no longer profitable to produce.
Moreover, the European Chips Act was conceived with the pre-war idea that Europe needed to develop its own geostrategic instruments to become independent of the US. The war in Ukraine has shown that this is an illusion. Europe depends more than ever on a US security guarantee. It would be better to accept this fact and try to cooperate, rather than compete with the US in the chips industry.
The good news is that Intel has just announced its intention to invest over 30 billion euros in Europe, and to set up a “state of the art” plant for chip production (a so-called fab).
This announcement was unlikely prompted by the Chips Initiative, but Intel’s investment plan almost equals the whole of European funding.
The European Commission should consider this commitment a clear success and seize the opportunity to cut down subsidies to national “chips champions”, instead using the Transatlantic Trade and Technology Council to coordinate any remaining support with the US in order to avoid a wasteful duplication of subsidies.
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