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US-China Chip War: Will Europe survive?
EU Wants its Digital Sovereignty
Brussels, 29 May 2023 - 7 MINUTES READ
Increasing pressure from the US is pushing Europe to join the semiconductor war and reconsider all Chinese investments in critical sectors in Europe. The objective is to achieve technological sovereignty over China as soon as possible. It is believed that the United States' efforts to stifle the Chinese chip industry are part of a broader plan to hinder Beijing's preparations for war. Europe, already in a historically weak position, is now forced to take remedial action before the microchip "bomb" explodes on the European economy. The parallel with energy is evident. Does Europe have the means and tools to seek its own sovereignty? Are the American concerns about China seeking semiconductor supremacy because it is preparing for war, or is it an excuse by Washington to regain industrial supremacy?
The semiconductor industry has become a battleground for the United States, China, and, more recently, Europe, with competition and tensions escalating. Semiconductors are vital components used in various technologies, including smartphones, computers, AI systems, and military applications. The global demand for semiconductors has surged, driving intense competition and geopolitical concerns.
The United States has traditionally been a leader in semiconductor innovation and production. However, China's rise as a major player in the industry, coupled with its significant investments and pursuit of self-reliance, has raised national security and economic competitiveness concerns in the US. To address these, the US has imposed export restrictions on certain semiconductor technologies to China, prioritizing national security. It has also implemented policies to support domestic semiconductor manufacturing and research, including substantial funding for fabrication facilities and R&D programs, exemplified by the CHIPS for America Act adopted in 2021.
China, on the other hand, has aggressively aimed to reduce its reliance on foreign semiconductor technologies. The Chinese government has implemented measures to stimulate domestic semiconductor production, such as increased investment in R&D, formulation of industrial policies, talent development initiatives, and market protection measures. China seeks technological advancements, improved competitiveness, and a robust semiconductor industry capable of meeting domestic demand and competing globally.
In Europe, concerns about Chinese control of critical infrastructure have led to hurdles for chip deals involving Chinese ownership. European countries, influenced by US pressure and a growing focus on technological sovereignty, have adopted stricter stances on Chinese investment in critical industries. For insance, last year, the UK government has ordered Nexperia, a Dutch subsidiary of Shanghai-listed semiconductor maker Wingtech, to sell at least 86% of its stake in Newport Wafer Fab, while Germany's economic ministry has barred Elmos Semiconductor from selling its factory in Dortmund to Silex, a Swedish subsidiary of China's Sai Microelectronics. These decisions reflect a shift toward stricter stances on Chinese investment in critical industries in Europe, driven by US pressure and a growing sense of technology sovereignty. NATO Secretary General Jens Stoltenberg has emphasized the importance of avoiding new dependencies on China and safeguarding critical infrastructure and supply chains in the Western world.
Cases involving chip deals in Europe may face legal battles if chipmakers choose to appeal, and the outcomes remain uncertain due to expanded government oversight and evolving investment regulations. Attention has also turned to the Netherlands, where the US has urged the Dutch government to restrict exports to China, particularly from semiconductor equipment manufacturer ASM.
In response to these challenges, the European Union is increasingly focused on achieving semiconductor independence and technological sovereignty. Recognizing its relatively small share of global semiconductor production, Europe acknowledges the need to reduce reliance on external suppliers and enhance its own capabilities in the industry. To facilitate this, the EU is adopting the European Chips Act (check all details here), which aims to stimulate investments, foster innovation, and strengthen research and development efforts in the semiconductor sector. The EU seeks to promote collaboration among industry players, research centers, and institutions with the ultimate goal of increasing European production capacity and enhancing competitiveness in the global chip market.
The United States has traditionally been a leader in semiconductor innovation and production. However, China's rise as a major player in the industry, coupled with its significant investments and pursuit of self-reliance, has raised national security and economic competitiveness concerns in the US. To address these, the US has imposed export restrictions on certain semiconductor technologies to China, prioritizing national security. It has also implemented policies to support domestic semiconductor manufacturing and research, including substantial funding for fabrication facilities and R&D programs, exemplified by the CHIPS for America Act adopted in 2021.
China, on the other hand, has aggressively aimed to reduce its reliance on foreign semiconductor technologies. The Chinese government has implemented measures to stimulate domestic semiconductor production, such as increased investment in R&D, formulation of industrial policies, talent development initiatives, and market protection measures. China seeks technological advancements, improved competitiveness, and a robust semiconductor industry capable of meeting domestic demand and competing globally.
In Europe, concerns about Chinese control of critical infrastructure have led to hurdles for chip deals involving Chinese ownership. European countries, influenced by US pressure and a growing focus on technological sovereignty, have adopted stricter stances on Chinese investment in critical industries. For insance, last year, the UK government has ordered Nexperia, a Dutch subsidiary of Shanghai-listed semiconductor maker Wingtech, to sell at least 86% of its stake in Newport Wafer Fab, while Germany's economic ministry has barred Elmos Semiconductor from selling its factory in Dortmund to Silex, a Swedish subsidiary of China's Sai Microelectronics. These decisions reflect a shift toward stricter stances on Chinese investment in critical industries in Europe, driven by US pressure and a growing sense of technology sovereignty. NATO Secretary General Jens Stoltenberg has emphasized the importance of avoiding new dependencies on China and safeguarding critical infrastructure and supply chains in the Western world.
Cases involving chip deals in Europe may face legal battles if chipmakers choose to appeal, and the outcomes remain uncertain due to expanded government oversight and evolving investment regulations. Attention has also turned to the Netherlands, where the US has urged the Dutch government to restrict exports to China, particularly from semiconductor equipment manufacturer ASM.
In response to these challenges, the European Union is increasingly focused on achieving semiconductor independence and technological sovereignty. Recognizing its relatively small share of global semiconductor production, Europe acknowledges the need to reduce reliance on external suppliers and enhance its own capabilities in the industry. To facilitate this, the EU is adopting the European Chips Act (check all details here), which aims to stimulate investments, foster innovation, and strengthen research and development efforts in the semiconductor sector. The EU seeks to promote collaboration among industry players, research centers, and institutions with the ultimate goal of increasing European production capacity and enhancing competitiveness in the global chip market.
Limited Semiconductor Production in Western Countries
In a rapidly growing global microprocessor market, valued at nearly €600 billion annually, Europe's production contribution is a meager 9%, while the USA leads with 23%. Asia dominates with a staggering 70% production share.
Semiconductors manufacturing is 70% in Asia, while Europe and the USA only account for 30% of production. While this has led to a 45% reduction in production costs from 1985 to the present, it has also made Western countries highly vulnerable due to their increasing tensions with China, primarily concerning Taiwan, the world's largest producer.
In a rapidly growing global microprocessor market, valued at nearly €600 billion annually, Europe's production contribution is a meager 9%, while the USA leads with 23%. Asia dominates with a staggering 70% production share.
Semiconductors manufacturing is 70% in Asia, while Europe and the USA only account for 30% of production. While this has led to a 45% reduction in production costs from 1985 to the present, it has also made Western countries highly vulnerable due to their increasing tensions with China, primarily concerning Taiwan, the world's largest producer.
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U.S. is armed. Europe is trying
Europe is confronted with its own weaknesses and the pressures exerted by the United States, as it prepares to face its own challenges with the European Chips Act, which bears striking resemblance to the CHIPS for America Act enacted in 2021. With the United States investing a substantial $52 billion of public funds, the crucial question arises: can Europe successfully ensure its semiconductor future and pave the way for technological sovereignty, or will it succumb to the obstacles ahead without the financial, technological, and fiscal resources that the USA has mobilized? Will Europe manage to foster technological growth, or will it merely switch suppliers as it previously did in the energy sector?
As said, EU will invest approximately €3 billion to enhance Europe's semiconductor production capabilities and would attract additional private investments of €43 billion.
Furthermore, the USA and China have implemented significant fiscal measures that Europe, divided into 27 states, has not yet implemented.
Let's delve into some details.
U.S. financial and fiscal measures
The CHIPS for America Act includes several financial and fiscal measures:
- Semiconductor Manufacturing Grants: The act authorises substantial funding, amounting to $52 billion, to provide semiconductor manufacturing grants. These grants are aimed at encouraging the construction, expansion, or modernization of semiconductor fabrication facilities in the United States. The funds can be utilized to support various aspects of semiconductor manufacturing, including research, development, workforce training, and facility construction.
- Research and Development Programs: The act allocates a significant portion of the funds to support research and development programs focused on advancing semiconductor technology. These programs aim to drive innovation, improve manufacturing processes, and develop new semiconductor materials and designs. The funds are intended to foster collaboration between industry, academia, and government agencies to accelerate the development of cutting-edge semiconductor technologies.
- Supply Chain Resilience Initiatives: The act includes provisions to address supply chain vulnerabilities in the semiconductor industry. It supports efforts to strengthen the domestic supply chain by providing funding for initiatives such as stockpiling critical components, diversifying sourcing strategies, and enhancing inventory management. These measures aim to reduce dependence on foreign suppliers and ensure a stable supply of semiconductors for critical industries.
- Tax Incentives: The act may also include tax incentives and credits to encourage private sector investments in semiconductor manufacturing and related research and development activities. These incentives can provide financial benefits and tax breaks to companies involved in semiconductor production, fostering increased investment and innovation in the sector. The credit, under Sec. 48D, equals 25% of qualified investment in new buildings, facilities, and other depreciable tangible property integral to the operation of a facility to manufacture semiconductors or semiconductor manufacturing equipment.
EU measures
The pillars of the European Chips Act are:
- Capacity building - The EU framework programme for supporting large-scale technological capacity building and innovation is called "Chips for Europe Initiative". EU wants to strengthen the EU's capabilities in chip design, in manufacturing, and in advanced packaging. The related actions will pool resources from the Union budget, i.e. Horizon Europe and Connecting Europe Facility (CEF), from Member States and third countries associated with the existing Union programmes. The aims is also to stimulate the private sector, through the “European Chips Joint Undertaking”, resulting from the strategic reorientation of the existing Key Digital Technologies Joint Undertaking through a Council Regulation (see detail here).
- Security of supply - This is a framework to ensure security of supply by attracting investments and enhanced production capacities, much needed in order for innovation in advanced nodes, innovative and energy efficient chips to flourish. In addition, a Chips Fund will facilitate access to finance for start-ups to help them mature their innovations and attract investors. It will also include a dedicated semiconductor equity investment facility under InvestEU to support scale-ups and SMEsto ease their market expansion.
- EU coordination - The EU suggests a monitoring system to anticipate possible shortages of microchips and to coordinate joint response actions.. European coordination will therefore monitor the semiconductor value chain, gathering key information from companies to map key weaknesses and bottlenecks. It will carry out a joint assessment of crises if they arise and coordinate actions to be taken with emergency instruments, making full use of national and EU instruments.
Conclusion
In the name of a free and open market that can provide opportunities for development to all inhabitants of our planet, the economy has flourished rapidly and without borders in recent decades. The shifting of production to countries with lower labor costs has also benefited the more developed countries, increasing their profit margins. This trend has affected all sectors of production, except for the military sector.
Semiconductors have indeed followed this trend. Now, West fears that the near-Asian monopoly in microchip production could pose a threat not only to economic security but also to military one. However, China shares similar concerns, as in a world where countries do not trust each other, it is not happy that microchip design is still dominated by USA.
China seeks its own sovereignty on this regard.
The division of labour, which is the foundation of an efficient economy and has been facilitated by globalization, seems no longer a priority, as it is now overshadowed by internal security concerns. The result will be increasingly rising costs for microchips and, more worryingly, an unbridled race towards technological boundaries that, with the unrestricted use of artificial intelligence and other innovations, could become an underestimated threat to global stability..
What game will Europe be able to play? Except for a few exemples, European history is marked by defeats on the economic and industrial fronts when technological innovation is a key to emerge.
This has happened in almost all sectors of consumer electronics and could happen again to make the energy transition (eg. electric vehicles) and for the semiconductor battle.
in Europe there is competition but a lack of synergy.
Semiconductors have indeed followed this trend. Now, West fears that the near-Asian monopoly in microchip production could pose a threat not only to economic security but also to military one. However, China shares similar concerns, as in a world where countries do not trust each other, it is not happy that microchip design is still dominated by USA.
China seeks its own sovereignty on this regard.
The division of labour, which is the foundation of an efficient economy and has been facilitated by globalization, seems no longer a priority, as it is now overshadowed by internal security concerns. The result will be increasingly rising costs for microchips and, more worryingly, an unbridled race towards technological boundaries that, with the unrestricted use of artificial intelligence and other innovations, could become an underestimated threat to global stability..
What game will Europe be able to play? Except for a few exemples, European history is marked by defeats on the economic and industrial fronts when technological innovation is a key to emerge.
This has happened in almost all sectors of consumer electronics and could happen again to make the energy transition (eg. electric vehicles) and for the semiconductor battle.
in Europe there is competition but a lack of synergy.
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Source: © European Union, 1995-2023
Source: © European Union, 1995-2023
