EU Chip Sovereignty Ambitions at Risk
It has been nearly a year since the European Commission launched the ambitious proposal for a European Chip Act (ECA) – the EU’s industrial strategy aimed at reshoring regional semiconductor production and doubling its global chip manufacturing market share by 2030. The yet-to-be legislated Act – heralded prematurely as a “success” already in September 2022 by Commission President Ursula von der Leyen – is increasingly running into obstacles.
Brussels’ ambitions to attract cutting-edge semiconductor manufacturing to European soil are not only facing uncertainty with its top manufacturers of choice – Taiwan Semiconductor Manufacturing Company (TSMC) and U.S.-based Intel – but also run the risk of being outcompeted internationally due to a lagging legislative process, rivaling economic priorities, and intra-EU squabbles.
TSMC Remains Unconvinced
There are now clear-cut indications that TSMC is in no hurry to establish cutting-edge chips facilities (fabs) in Europe. The world’s largest and most-advanced contract chip manufacturer and Asia’s most-valuable listed company garnered attention already in mid-2021 after rumors of interest in expanding operations into Europe started spreading. These reports proliferated after the ECA’s announcement, with “intense discussions” between the Commission and TSMC in May last year, albeit soon followed by revelations of diverging priorities.
As negotiations faltered, CEO Mark Liu threw cold water on expectations, stating there were no “concrete plans” for EU expansion, sparking concerns a deal would be entirely off the table. However, after continued delegation visits to Germany and “advanced talks” with key suppliers, TSMC’s fourth-quarter earnings report essentially confirmed what many had suspected. While auto-chip manufacturing may still be in the cards, cutting-edge manufacturing can likely be ruled out for the foreseeable future. CEO Liu said the company was engaging EU “customers and partners to evaluate the possibility of building a specialty fab, focusing on automotive-specific technologies […].”
The Uncertain Global Chip Glut
TSMC’s quarterly report’s gloomy forecasts simultaneously illustrated why there is less optimism about investing in EU cutting-edge manufacturing than a year ago; the economic uncertainty induced by the Ukraine War, China’s prolonged lockdowns, American chip sanctions, and spiraling inflation has hit hard at consumer spending. Even amid booming profits, TSMC cautioned last July about “excessive [client] inventories,” and the wider industry has since been bracing for a downturn in the notorious semiconductor boom-bust cycle.
If 2021 was the year of the great chip shortage, 2022 became the year of the bullwhip effect, with overflowing inventories after past overordering and suddenly falling demand, albeit unevenly distributed across chip types. Global smartphone and PC sales have declined precipitously by 17 and 16 percent, respectively, year-on-year. Even with industry-wide price hikes and recent record profits, such volume losses inevitably drive falling revenue and accordingly adjusted capital expenditure (CapEx) budgets.
TSMC’s 2022 CapEx budget decreased from a projected $44 billion in early 2022 to $36 billion in October, with further cuts projected in 2023. Yet, naturally, the impacts of these savings are not felt uniformly; the U.S. makes up 65 percent of revenue, whereas Europe, Africa, and the Middle East jointly account for a mere six percent. Even as investments have been downscaled throughout 2022, TSMC announced tripled investments in its cutting-edge Arizona chip sites to $40 billion in December. Moreover, while the €43-billion ECA has yet to be enacted, its competing $52.7-billion U.S. counterpart, passed in August 2022, is already estimated to have leveraged $200 billion in private investments.
These economic pressures also apply to Europe’s other main option, Intel. While TSMC’s cost calculus is fundamentally anchored in East Asia’s much cheaper production costs and a desire for proximity to U.S.-based customers, American Intel seeks to leverage both U.S. and EU subsidies to leapfrog its entry into the TSMC-dominated foundry business. Intel jumped on the ECA’s opportunities early on, announcing in March 2022 plans to invest as much as €80 billion over the coming decade, with the site in German Magdeburg becoming the potentially single-largest direct investment in EU history.
Nevertheless, Intel’s expansion plans have run into issues. Like TSMC, Intel expects falling revenues in 2023, having already started laying off thousands of employees, implementing base pay cuts, and canceling a planned R&D Center in Israel. Europe’s soaring construction and production costs have not gone unnoticed.
The preliminary €17-billion Germany fab is expected to now cost €20 billion, and Intel has turned to Berlin to scale up subsidy pledges. However, having already committed to domestic electricity subsidies nearly double the entire ECA, the Federal Ministry of Economics is reluctant, signaling it does not expect additional support. Though negotiations continue, a construction start date for the first half of 2023 is seemingly no longer tenable. While Intel remains committed to the project, these delays could put EU-based production even further behind the competition.
EU Budget Battles Continue
From its inception marred by questions and institutional back-and-forths over budget appropriations, the ECA still faces hurdles at the EU level. It took until December for the EU Council to finally find a joint position on financing the proposal (albeit with an unresolved €400 million shortfall) – since passed on to the EU Parliament with budget negotiations set for February 13-16. The less price-sensitive Committee on Industry, Research and Energy (ITRE) has, in turn, countered with amendments to widen the act’s goals and called for “fresh budgetary resources” instead of tapping other research budgets.
There are also palpable tensions between and within member states. For instance, smaller EU-based chip manufacturers, although far behind the likes of TSMC and Intel, argue more resources should be redirected toward R&D and linkages between already established players. Meanwhile, smaller EU members hold that the distribution of subsidies is unfairly geared towards the larger economies that have the fiscal capacity to match private investments euro-for-euro. The latter groupings’ willingness to unilaterally deploy massive subsidies to prop up domestic industries during the current energy crisis has only added to these complaints, likely to intensify in the weeks ahead with the EU’s latest “Green Deal Industrial Plan.”
Notably, the ECA has many other positive components aside from the hyped cutting-edge chip manufacturing and has facilitated smaller, albeit less advanced, manufacturing projects. For instance, Infineon is planning a new chip factory in Dresden, whereas STMicroelectronics has partnered with GlobalFoundries to build a fab in France.
Yet, without weighing in on the tricky question of regionally distributing costs and benefits, it appears increasingly clear that the Commission and Council need either to swiftly heed calls to boost available resources – as industry analysts, advisory bodies, and EU Parliament rapporteurs have urged for nearly a year now – or soberingly recognize that the overly ambitious goals of February 2022 need thorough reconsideration and review.