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Can Europe really compete in the global semiconductor market

The global semiconductor shortage is a wakeup call for many industries. It shows how many companies around the globe are dependent on Asian semiconductor production. The top 5 worldwide wafer capacity leaders own 54% of the global semiconductor capacity. Four out of those five are located in Asia and one is in North America. The European Commission has announced in the European Chips Act that one of its top priorities is to bring back semiconductor production to Europe.

As stated on the blog of the European Commission: “We depend on state-of-the-art chips manufactured in Asia. So, this is not just a matter of our competitiveness. This is also a matter of tech sovereignty”. But if you take a look at the semiconductor sales from 2015 to 2020, Europe had a share of 9,39%, whereas China alone had a share of 36,16%. Just this comparison alone shows that it is very ambitious to talk about independence, especially when Europe’s share dropped more than 1% from 2019 to 2020. The goal of the European Commission is to double the share from 9% to 20% and boost investments by €20-30 Billion in the next ten years. Considering the semiconductor industry as a whole will grow in the following decade and South Korea by itself is going to spend $451 billion (€397 billion), the European Commission’s investment seems like peanuts.

Some critics already predict that this European Chips Act will not bear any results, since Europe already lost its foot in this sector. When single countries in Asia have far more shares than the whole continent of Europe and the share of the Americas is also twice as big, this statement is rather obvious. Stefan Mengel, head of division at the German federal ministry of education and research, shares this opinion as he said: “There is no good leverage to get back to a competitive or even leading position”. Does that mean the end for the European semiconductor industry?

Fortunately, that is not the case, because Europe’s value in the global semiconductor supply chain does not lie in its production output, but in its research capacity. According to the aforementioned blogpost by the European Commission every industrial player in semiconductor production is dependent on research from IMEC in Belgium, LETI/CEA in France and Fraunhofer in Germany. While this might get Europe’s foot in the door, it is not enough in an industry where production easily ranks with design in terms of technological advances. Building a state-of-the-art factory is expensive and requires strong government support, as shown by a 1 billion Euros investment by Bosch to expand their existing production capacity. This was also supported by the European Commission’s “Important Project of Common European Interest” (IPCEI) with 200 million Euros.

A trend in the United States is to move away from semiconductor production and focus on chip design, the so-called “fabless” model. This is the model of many tech giants like Apple. Intel was moving in this direction as well, as the company lost ground in production techniques to TSMC. Therefore, Europe should not try to compete with all the big players in the industry and their massive production output but should rather specialize in certain semiconductors and carve a niche on their own. Europe has the know-how to become market leader in specialized semiconductors, but to achieve that goal the funding of the European Chips Act should not be wasted to try to compete with fabs that are many times the size of European ones. To quote Nicolas Poitiers, a researcher at Bruegel economic think-tank in Brussels, “I think we should give up this kind of general dream of autonomy and more think about how we can gain leverage and make sure that our interdependency is not leveraged against us”.
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