2024-08-24 23:31:29
Oil may still be the fuel that drives the global economy, but there is something else that is considered even more crucial to its present and future: chips. And on this front Europe is even more dependent than on the energy front.
The undeclared semiconductor war has been going on for years. However, it does not subside as time goes by, on the contrary, it intensifies. Because their semiconductors are found in everything from our mobile phone, computer, home appliances and cars, to artificial intelligence applications, medical equipment and advanced weapons.
They are at the heart of our daily existence, powering the devices and systems that have become essential to work, communication, entertainment, transportation, medicine. It’s the lifeline of countless devices we rely on. Over 100 billion chips are used on a daily basis. So one realizes how costly (but also dangerous) it is for the EU to depend on from imports from Taiwan, the US and elsewhere, in a period of sustained geopolitical tensions and new trade wars.
Although the EU is making progress in expanding semiconductor production capacity, including through a new factory in Dresden, it is still far behind the US and Asia. And it is unlikely to close the gap anytime soon, warns Capital Economics in an analysis by Fransziska Palmas. This practically means that the E.U. will remain dependent on imports in this crucial sector.
The new factory in Dresden and its benefits
The start of construction on a €10 billion semiconductor plant in Dresden, Germany, a few days ago was hailed by European Commission President Ursula von der Leyen as “supporting the EU’s drive to become a global innovation power”.
The project secured €5 billion in state aid from the German government, which was approved under the EU Chips Act, the EU program adopted in 2023 aimed at increasing the EU’s semiconductor manufacturing capacity, incentivizing technological innovation in the sector and limiting the bloc’s dependence on Asia.
The Dresden factory is undoubtedly a positive development for a number of reasons, Capital Economics points out.
- First, it marks a technological development in the European semiconductor industry. The plant will be the first in the E.U. which will produce chips according to customer requirements and not just standard designs.
- In addition, the plant is a joint venture between TSMC, the Taiwanese company and world leader in the industry, and three German companies. This is sure to involve some technology transfer from TSMC, which has already agreed to also train Europeans in Taiwan and give special access to the Dresden facility to EU universities.
- It’s a sign that the EU law, which lifts state aid rules for new semiconductor plants that meet certain technology standards, is bearing fruit. The Dresden project is the third to receive funding under the Chips Act, following factories in France and Italy. And a number of other already announced projects, including Intel’s €30 billion Magdeburg plant, are also expected to apply for funding.
- A mini-semiconductor hub, already dubbed “Silicon Saxony,” may be forming in East Germany. Five of the nine new semiconductor factory projects announced in the EU from 2020 will be built in East Germany. We have two projects in France, and one each in Italy and Poland.
Because it’s not enough at all
However, there are also asterisks,
- It will produce chips mainly used in the automotive sector, rather than the more complex chips used in smartphones and high-performance computers, which would clearly be more useful in reducing European dependence.
- In addition, the Dresden plant is expected to start production in 2027 and operate at full capacity from 2029. At that point, it will produce 480,000 12-inch boards per year, which is about 16% of the average production capacity of one of the giga TSMC factories in Taiwan and 3% of total TSMC capacity in 2023.
- Shares in 2029 will be even lower as global semiconductor manufacturing capacity is expected to grow sharply for the rest of this decade. 7 of the other new semiconductor factories planned in the EU are of a similar or smaller size than the one in Dresden (at least in terms of capital investment), with only Intel’s plant in Magdeburg larger (€30bn vs €10bn). And some projects, including Magdeburg, are facing delays.
The capacity expansion planned in the EU pales in comparison to that in Asia and the US. This is true whether calculated by the number of new plants to be built (27 in the US) or by the size of the capital investment. The Semiconductor Industry Association (SIA) estimates that private capital investment in semiconductors in the EU between 2024 and 2032 will reach $154 billion (7% of global capital), compared to $716 billion in Taiwan (31% of the total) and $646 billion in the US (28% of the total).
Why the E.U. cannot close the scissor
Several factors will still make it difficult for the EU to catch up. For starters, it’s much more difficult for businesses to access government support for semiconductor facilities in the EU than in the US.
In the EU, companies must secure funding from the member state in which they will build the plant, with the EU only deciding ex post facto on a case-by-case basis whether the project is eligible for state aid exemption under the Chips Act . In contrast, the US Chip Act provides a 25% tax credit for all investments in chip manufacturing facilities, as well as loans and loan guarantees.
The scale of government support for the semiconductor industry is also likely to be much smaller in the EU than in the US. Only €3.3 billion (0.02% of EU GDP) from the EU budget.