Perspectives, opportunities and challenges in the European semiconductor industry
13 JUN 2023
Advances in forward-looking technologies such as AI and the Internet of Things are unthinkable without semiconductors. As a result, the global economy is increasingly dependent on resilient, reliable supply relationships for semiconductors.
However, the bottlenecks during the Covid-19 pandemic as well as the political upheavals in connection with the war in Ukraine, show how fragile these global economic linkages are – especially when they are based on one-sided dependencies. Read this blog post to find out how Europe can achieve its ambitious objectives within the scope of the European Chips Acts and secure its position in the hotly contested semiconductor market.
Not too long ago, the news headlines about the semiconductor industry centered on topics such as production backlogs and supply bottlenecks. Today, overcapacities are the dominant theme of these news reports. Industry analysts from Gartner forecast a global double-digit market decline for 2023. Other market researchers are also pointing to lower sales in the chips industry for the current year.
Once again, the semiconductor industry is proving to be a highly cyclical business. The reasons for the current decline are obvious: the difficult economic situation in many countries, continuing high inflation rates, ongoing uncertainties due to the war in Ukraine, and the general geopolitical situation. All these factors have led to oversupply in some areas in the short term.
But with a view to the long-term prospects, things look different. “Traditional” application areas such as computers, data centers and smartphones continue to grow. At the same time, developments in the fields of automated systems and artificial intelligence are giving rise to ever more new applications. Forecasts by experts predict that the semiconductor industry can nearly double in size by the end of the decade, with revenues reaching around US$1 trillion.
The sector is thus a major industry in its own right, but also of fundamental importance to the success of other high-tech industries. Advances in forward-looking technologies such as AI, quantum computing, self-driving cars and the Internet of Things would be unthinkable without semiconductors.
Supply chain resilience is becoming more and more significant
As a result, the global economy is increasingly dependent on resilient, reliable supply relationships for semiconductors. However, the bottlenecks during the Covid-19 pandemic as well as the political upheavals in connection with the war in Ukraine show how fragile these global economic linkages are – especially when they are based on one-sided dependencies. The fact that more than three quarters of a strategically important market like semiconductor manufacturing is located in Asia and that the U.S. and Europe each account for only about 10% is not advantageous for the resilience of the supply chains, also from a global perspective. Even with an optimistic scenario excluding political, economic, or health challenges – as during the Covid-19 pandemic – today’s concentration of chip manufacturing capacity gives reasons for concern.
Therefore, the “European Chips Act” presented by the European Commission, which aims to strengthen Europe as a location for production capacities and expertise, is a welcome initiative. However, the goal of doubling Europe's market share in semiconductor manufacturing from 10% to 20% is exceptionally ambitious under the given circumstances. Against the backdrop of the expected market growth, this would mean a quadrupling of current production capacities. And this is happening at a time when subsidy programs worth billions are also being launched in the United States and Asia, with the funds made available exceeding those of the EU.
Europe can build on strengths, but must catch up technologically
The good news is that Europe is building on existing strengths. The European semiconductor industry is already very well positioned in applications for the automotive and aerospace industries and in industrial automation. And in the field of innovation, too, Europe has world-class research facilities, for example Imec in Leuven, Belgium. In addition, the continent is ahead in terms of sustainability, a long-term growth driver. This applies to both resource-saving chip production itself and semiconductor applications that support sustainable technologies.
The specifications in nanometers (nm) denote the spacing of the transistors on a chip. The smaller the spacing, the faster as well as more efficiently information can be exchanged in the form of electrons. The shortening of the line widths from 22 to 3 nm corresponds to an advance in manufacturing technology of five generations. In each generation, a speed improvement of about 20% and a performance increase of about 30% can be assumed. This makes it clear how large the technological gap between Taiwan and Europe now is.
With the announcement of the EU's financially strong investment program, this seems to be changing. Infineon has just laid the cornerstone for a new fab in Dresden, Germany. And according to media reports, TSMC is also interested in a new fab in Dresden – it would be the company's first plant in Europe. Intel is planning to invest billions in a manufacturing facility in Magdeburg, in northeastern Germany. Wolfspeed has decided to build a new chip factory in the German federal state of Saarland. And ST Microelectronics opened a plant in Agrate, Italy at the end of 2022; the company has further investment plans for Catania, Italy and Crolles in France, where the most modern plant for 10 nm chips by a European manufacturer is to be built. However, these investment plans should not obscure the fact that these plants have a smaller capacity than, say, TSMC's most advanced fabs, and therefore can only produce a fraction of the chips used in Europe.
Attracting these factories to these locations succeeds with massive state support. The cost difference, especially with Asia, is too great for chip production to be economical in Europe entirely without public support. However, subsidies should be used where European industry, with its specific strengths, has a real demand for high-end chips and the complete manufacturing chain from research and development through functioning supply chains, chip design and production to acceptance by the customer can be created locally, as is the case in the automotive and industrial sectors. It makes less sense to subsidize a factory that produces chips for smartphones, for example, which are then built in Asia in the next step. However, we should not lose sight of the fact that Europe is not losing out in key technologies such as chips for artificial intelligence.
But even strategically directed subsidies alone will not be enough to achieve the ambitious goals of the European Chips Act. A new chip factory can cost between € 20 billion and € 30 billion, and Samsung alone has announced that it will invest around US$ 230 billion in South Korea by 2042.
In addition to funding, investment projects of this size need above all a simplified regulatory environment, lower bureaucratic hurdles, and faster approval processes in order to steer investments to Europe. At the present time, the phase-out of Russian gas supplies and the acceleration of the expansion of renewables and liquefied natural gas (LNG) are demonstrating in Germany that this is possible. And ultimately, good framework conditions also include competitive energy prices.
Smart regulation and promotion of skilled workers are needed
Yet this will only be possible if all the institutions involved cooperate constructively on the regulatory side and in the political decision-making process. Promoting the semiconductor sector cannot and must not be a task for the Ministry of Economics or a department of the EU Commission alone. The departments for competition, research, education, environment and many others must pull together.
This also means that supposedly conflicting demands must not be played off against each other. Promoting sustainability and European competitiveness, for example, are not mutually exclusive. Numerous legislative proposals in the European Green Deal envisage a paradigm shift in chemicals policy that would ban the use of specific chemicals in chip production. Certain substances, such as etching gases, cannot be replaced in the short term. A ban would jeopardize Europe as a semiconductor manufacturing location. At Merck KGaA, Darmstadt, Germany, we are already working hard to develop gases with a lower carbon footprint and are cooperating to this end closely with Micron, a leading provider of innovative memory solutions. In addition, industry has focused on the recycling and environmentally sound disposal of such substances, which are not adequately addressed in the current draft regulations.
The massive shortage of qualified specialists is another essential prerequisite for the success of the European semiconductor initiative that the industry and politicians must jointly address even more strongly: Here, too, in my blog post on the war for talent, I showed what efforts would have to be made to succeed in this globally competitive environment.
Europe has a long way to go and will have to make smart strategic decisions to strengthen its position in the global semiconductor industry. And even if a complete break with global economic interdependencies would be counterproductive – and not even possible without massive economic damage – a bit more resilience in this strategic key industry is good for the continent. At the end of the day, this will also stabilize global supply chains. At the same time, however, cooperation and the cross-border division of labor should be further strengthened where added value is created for all parties involved.
We are investing in in globally balanced manufacturing capacities
EMD Electronics is living out this strategy as part of its Level Up investment program. In October 2022, we completed a new facility in Kaohsiung, Taiwan, for the production of delivery equipment for the safe handling of gases and chemicals in the semiconductor industry. The business unit in charge of this facility, is also expanding its capacities in the United States and just started manufacturing operations in its new production facility in Chandler, Arizona. In addition, we are expanding our production capacities for semiconductor materials at further sites in Asia, the United States and Germany. In this way we are strengthening our local presence in the most important customer markets and benefiting from the global exchange of knowledge and know-how. A strong European semiconductor market is also an important part of this global division of labor.