According to the European Commission, semiconductor chips are the essential building blocks of digital and digitised products. From smartphones and cars, through critical applications and infrastructures for healthcare, energy, communications and industrial automation, chips are central to the modern digital economy. The COVID-19 pandemic has exposed a weakness in the eco-system within both Europe and other regions in the world experiencing significant shortages of chips. EU industries manufacture many types of high-tech products, of which chips are essential parts.
Europe must reinforce its capabilities in semiconductors to ensure future competitiveness and maintain its technological leadership and security of supply. The sector is both capital and knowledge intensive and chips supply chains are global, complex and currently rely on a few manufacturing sites.
Europe has many strengths and some weaknesses in the semiconductor value chain. The semiconductor sector is characterised by intense R&D activity, with first-class companies reinvesting more than 15% of their revenues into research in next generation technologies. The EU is home to world-leading research and technology organisations and many excellent universities and research institutes spread across the Union. These are pioneering the techniques behind the production of some of the world's most advanced chips.
Moreover, Europe is very well positioned in terms of the materials and equipment needed to run large chip manufacturing plants, with many companies playing essential roles along the supply chain.
Despite these strengths, Europe has an overall global semiconductors production market share of less than 10% and is heavily dependent on third-country suppliers. In case of severe disruption of the global supply chain, Europe's chips' reserves in some industrial sectors (e.g. automotive or healthcare devices) could run out in a few weeks, bringing many European industries to a standstill.
As the digital transformation accelerates and penetrates every part of society, industrial needs for chips are set to increase, opening new market opportunities.
The Chips Act is a unique opportunity for Europe to act jointly across all Member States, to the benefit of the whole of Europe. However, the current chips shortage is a systematic issue with no quick fix.
In the short term, the toolbox set out in the Recommendation will immediately enable the coordination between the Member States and the Commission. This will allow to discuss and decide on timely and proportionate crisis response measures, if considered necessary.
In the medium term, the Chips Act will strengthen manufacturing activities in the Union and support the scale-up and innovation of the whole value chain, addressing security of supply and a more resilient ecosystem.
And, in the long-term, it will maintain Europe's technological leadership while preparing the required technological capabilities that would support transfer of knowledge from the lab to the fab and position Europe as a technology leader in innovative downstream markets.
08 February 2022 - European Chips Act: Communication, Regulation, Joint Undertaking and Recommendation.
Communication from the Commission: A Chips Act for Europe. You can find the document in English, German and French.
08 February 2022 - Proposal for a Regulation establishing a framework of measures for strengthening Europe's semiconductor ecosystem (Chips Act).
Semiconductor chips are central to the digital economy. They make digital products work: from smartphones and cars, to critical applications and infrastructures in health, energy, communications and automation to most other industry sectors.
They are also key to the technologies of the future, including artificial intelligence (AI) and 5G/6G communication. There is no “digital” without chips.
Within the past year, Europe has witnessed disruptions in the supply of chips, causing shortages across multiple economic sectors and potentially serious societal consequences. Many European sectors, including automotive, energy, communication and health as well as strategic sectors such as defence, security, and space are under threat by such supply disruptions. At the same time, fake chips start appearing on the market, compromising the security of electronic devices and systems.
The current crisis has revealed structural vulnerabilities of the European value chains. The global semiconductor shortage has exposed European dependency on supply from a limited number of companies and geographies, and its vulnerability to third country export restrictions and other disruptions in the present geopolitical context. Furthermore, this dependency is exacerbated by the extremely high barriers to entry and capital intensity of the sector. For example, the most computationally powerful chips require manufacturing to a precision of a few nanometres (nm). Building such facilities entails an upfront investment of at least EUR 15 billion and requires three years to achieve production-readiness with adequate yields. The expenditures to design such chips can range from EUR 0.5 billion to well over EUR 1.0 billion. Research and development (R&D) intensity in the sector is high and more than 15%.
Today, European players invest mainly in R&D, but not enough in translating its results into industrial benefits. Such R&D is a key enabler of miniaturisation in semiconductor technologies required for the production of the next generation computationally powerful chips. Europe is home to world-leading research and technology organisations (RTOs). However, many results of European R&D are industrially deployed outside the Union. The Union is strong in the design of semiconductor components for power electronics, radio frequency and analogue devices, sensors and microcontrollers that have a widespread use in the automotive and manufacturing industries today. It is less strong in the design of digital logic (processors and memory), which become essential as data, AI and connectivity become increasingly pervasive.
The European Chips Strategy is articulated around five strategic objectives:
- Europe should strengthen its research and technology leadership;
- Europe should build and reinforce its own capacity to innovate in the design, manufacturing and packaging of advanced chips, and turn them into commercial products;
- Europe should put in place an adequate framework to increase substantially its production capacity by 2030;
- Europe should address the acute skills shortage, attract new talent and support the emergence of a skilled workforce;
- Europe should develop an in-depth understanding of global semiconductor supply chains.
What is a semiconductor?
A semiconductor (or integrated circuit, microelectronic chip, or computer chip) is an electronic device generally smaller than a postage stamp, that is composed of billions of components that store, move, and process data.
All of these functions are based on the unique properties of semiconducting materials, such as silicon and germanium, which allow for the precise control of the flow of electrical current. Semiconductors give data storage and communication capabilities to mobile phones, gaming systems, aircraft avionics, industrial machinery, and military equipment and weapons. Hybrid electric automobiles contain as many as 3,500 semiconductors.
Semiconductor chips are fundamental to emerging technologies such as artificial intelligence, cloud computing, 5G, the Internet-of-Things (IoT), and large-scale data processing and analytics and supercomputing.
Semiconductors can be classified into four major product groups, mainly based on their function:
1. Microprocessors and logic devices are used for the interchange and manipulation of data in computers, communication devices, and consumer electronics. They perform a wide variety of tasks, such as running a word processing program or a video game.
2. Memory devices are used to store information. This segment includes dynamic random access memory (DRAM), a common and inexpensive type of memory used for the temporary storage of information in computers, smartphones, tablets, and flash memory, which retains data even when power is shut off.
3. Analog devices are used to translate analog signals, such as light, touch, and voice, into digital signals. For example, they are used to convert the analog sound of a musical performance into a digital recording stored online or on a compact disc.
4. Optoelectronics, sensors, and discretes (commonly referred to as O-S-D). Optoelectornics and sensors are mainly used for generating or sensing light, for example, in traffic lights or cameras.
Silicon is still the most widely used basic material on which semiconductors are fabricated. Five firms account for 90% of the world’s silicon wafer production; two Japanese firms, Shin-Etsu and Sumco, account for around 60%. Silicon wafers are manufactured in a number of countries around the world, including the United States, Japan, Taiwan, Malaysia, and the United Kingdom.
European-headquartered semiconductor firms
European-headquartered semiconductor firms accounted for about 10% (~$40 billion) of global semiconductor sales in 2019. Three firms based in the European Union — STMicroeletronics, Infineon Technologies, and NXP Semiconductors — ranked among the world’s top 15 semiconductor firms by sales in 2019.
European-headquartered semiconductor companies tend to specialize in niche markets, including the automotive industry, energy applications, and industrial automation; these firms do little production of computer- and consumer-related chips. Some European companies are considered strong in chip architecture, mobile telecommunications and industrial applications, and security chips (e.g., passports, IDs, and smartphones), a market dominated by NXP, Infineon, and STMicroelectronics. Europe’s share of global revenues for fabless firms is small (2%).
In May 2013, the European Commission (EC) announced an initiative aimed at increasing Europe’s share of global semiconductor manufacturing by providing $11.3 billion (€10 billion) in public and private funding for R&D activities in an effort to induce about $113 billion (€100 billion) in industry investment in manufacturing. The initiative called for a multipronged approach that included easing access to capital financing by qualified companies; pooling European Union (EU), national, and regional subsidies to enable larger-scale projects; and improving worker training.
The Commission’s goal was for European firms to account for 20% of global chip manufacturing by 2020. The years-long program may have helped prevent Europe’s market share in wafer fabrication from declining. European-based fabs accounted for 3% of global 300mm wafer fabrication production capacity in 2019, the same share as in 2015. Bosch and Infineon, among the most important suppliers of automotive semiconductors, are each constructing a new 300mm fab in Europe.
The European Commission and European governments continue to seek ways to bolster Europe’s microelectronics sector. A 2018 report, Rebooting Electronics Value Chains in Europe, prepared by Europe’s semiconductor companies for the Commission, recommended that the EU provide additional funds for public-private partnerships in microelectronics manufacturing and other electronics components and systems.
France, Germany, Italy, and the United Kingdom received Commission approval at the end of 2018 for a $2 billion (€1.7 billion) joint microelectronics project aimed at encouraging investments in internet-connected devices and connected car technologies; this effort is scheduled for completion by 2024. The Commission anticipates that this investment will stimulate roughly $6.7 billion (€6 billion) in private investment.
The shortage of semiconductors
The world is short of semiconductors. According to the European Commission, the shortage has very concrete consequences on the EU economy, jobs and even leisure. Carmakers postpone the production of vehicles. Broadband providers run out of Internet routers. Gamers cannot get their hands on next-gen consoles.
The situation might last for a while. Semiconductors are at the core of our world’s digitisation, but global supply is currently struggling to meet the explosion of demand driven by smartphones, Internet of Things and connected cars.
But it is not only about supply and demand. Semiconductors are at the centre of strong geostrategic interests, and at the core of the global technological race.
Superpowers are keen to secure their supply in the most advanced chips as they are well aware that it will condition their capacity to act (militarily, economically, industrially) and drive digital transformation.
Chips are a strategic component of any industrial chain. The race for the most advanced chips is a race about technological and industrial leadership.
The US are now discussing a massive investment under the American Chips Act designed to finance the creation of an American research centre and to help open up advanced production factories. The objective is clear: to increase the resilience of US semiconductor supply chains.
Taiwan is positioning itself to ensure its primacy on semiconductor manufacturing.
China, too, is trying to close the technological gap as it is constrained by export control rules to avoid technological transfers.
On 19 October 2021, the European Commission published its 2022 Work Programme with the key goals for 2022. Here we can read that the European Commission will publish a proposal for a European Chips Act in the first half of 2022.
Alliance on Processors and Semiconductor technologies
The Alliance brings together key actors to design and produce microelectronics chips.
The European Commission launched the European Alliance on Processors and Semiconductor technologies in July 2021. From smartphones to 5G to the Internet of Things and beyond, processors and semiconductor technologies are crucial for a successful Digital Decade.
The overall objective of the Alliance is to identify current gaps in the production of microchips and the technology developments needed for companies and organisations to thrive, no matter their size. This will help the competitiveness of companies, increase Europe’s digital sovereignty and address the demand for the next generation of secure, energy-efficient, powerful chips and processors.
The Alliance will enhance and foster collaboration across existing and future EU initiatives. It will help to provide the EU with the necessary capabilities in semiconductor technologies to power its critical digital infrastructure and communication networks. And, it will support a range of sectors and technologies, including automotive, industrial automation, healthcare and AI-enabled systems.
This translates in 2 main lines of actions, addressing the main gaps Europe is facing:
1. The reinforcement of the European electronics design ecosystem. This includes design at leading-edge nodes and open-source hardware solutions, which will help develop powerful and resource efficient processors.
2. The establishment of the necessary manufacturing capacity. This includes assembly testing and advanced packaging, by a mix of local and global players, to produce the next generation of trusted processors, electronic components and technologies. This will translate into a twin track to be developed in parallel: moving Europe towards producing technologies from 16 nanometres (nm) to 10 nm, as well as from 5 nm to 2 nm and beyond. These most advanced type of semiconductors which, in addition to performance increases, have the potential to cut massively the energy used by everything from phones to data centres.
Any organisation with relevant existing or planned activities in the area of processor and semiconductor technologies, including end-user companies, associations, and research and technology organisations, can join the Alliance. They can do so by signing the Declaration and filling in the application form provided they meet the eligibility criteria set out in the Terms of Reference.
Semiconductors - the situation in the USA
According to the Semiconductor Industry Association (SIA), the U.S. semiconductor industry employs over a quarter of a million workers and company sales totaled $208 billion in 2020. Advances in semiconductor technology have been, and continue to be, a linchpin of U.S. economic prosperity and national security.
But there is currently a global shortage of semiconductors due to several factors, including disruptions related to the COVID-19 pandemic and the increased use of semiconductors in cars. The industry is also facing the technical limits of conventional semiconductor materials. This portends the end of “Moore's Law,” which for more than 50 years has held that, thanks to miniaturization, the number of semiconductor devices called transistors that can be packed on a chip doubles about every two years.
There is also a supply chain problem. Americans invented semiconductors and lead the world in chip technology but provide only 12 percent of global semiconductor manufacturing capacity, according to the SIA. Most chip manufacturing occurs in Asia.
Moves are afoot to boost U.S. semiconductor manufacturing, research innovation and supply chain security. Advances in measurement science, standards, materials, instrumentation, testing, and manufacturing capabilities will be needed to help design, develop and manufacture next-generation microelectronics.
According to the US Congressional Research Service, semiconductors enable nearly all industrial activities, including systems that undergird U.S. technological competitiveness and national security.
Many policymakers see U.S.strength in semiconductor technology and fabrication as vital to U.S. economic and national security interests. The U.S. semiconductor industry dominates many parts of the semiconductor supply chain, such as chip design. Semiconductors are also a top U.S. export. Semiconductor design and manufacturing is a global enterprise with materials, design, fabrication, assembly, testing, and packaging operating across national borders.
Six U.S.-headquartered or foreign-owned semiconductor companies currently operate 20 fabrication facilities, or fabs, in the United States. In 2019, U.S.-based semiconductor manufacturing directly employed 184,600 workers at an average wage of $166,400.
Some U.S.-headquartered semiconductor firms that design and manufacture in the United States also have built fabrication facilities overseas. Similarly, U.S.- headquartered design firms that do not own or operate their own fabrication facilities contract with foreign firms located overseas to manufacture their designs. Much of this overseas capacity is in Taiwan, South Korea, and Japan, and increasingly in China. Some Members of Congress and other policymakers are concerned that only a small share of the world’s most advanced semiconductor fabrication production capacity is in the United States.
Other have become increasingly concerned about the concentration of production in East Asia and related vulnerability of semiconductor supply chains in the event of a trade dispute or military conflict and other risks such as product tampering and intellectual property theft.
Some Members of Congress and other U.S. policymakers have expressed concerns about the economic and military implications of a loss of U.S. leadership in semiconductors. China’s state-led efforts to develop an indigenous vertically integrated semiconductor industry are unprecedented in scope and scale. Many policymakers are concerned that these efforts, if successful, could significantly shift global semiconductor production and related design and research capabilities to China, undermining U.S. and other foreign firms’ leading positions.
In October 2020, Ellen M. Lord, Under Secretary of Defense for Acquisitions and Sustainment, testified:
"Reduced U.S. capability in microelectronics is a particularly troublesome area for the [Defense Industrial Base]. Government incentives and low labor costs in foreign countries have been the main drivers for the migration of microelectronics manufacturing, packaging, and testing to off-shore suppliers. This strains our ability to acquire and sustain microelectronic components embedded in systems critical to national security and national defense. Reliance on non-U.S. suppliers for microelectronics leaves DOD vulnerable. The risks of this reality include: availability of microelectronics in case of embargo; loss of U.S. intellectual property from offshore dependency; and loss of confidence the technology will function as intended due to possible malicious activity by foreign fabricators."
Although China’s current share of the global industry is still relatively small and its companies produce mostly low-end chips, China’s industrial policies aim to establish global dominance in semiconductor design and production by 2030. Moreover, Chinese semiconductor competencies could support a range of technology advancements, including military applications. Another issue for policymakers is how to address competing interests: China is an important market for U.S. semiconductor firms but U.S. and foreign industry are helping to advance China’s capabilities.
China’s government outlays (an estimated $150 billion to date) and its role as a central production point for global consumer electronics are generating strong incentives and pressures on U.S. and foreign firms to focus on China. The Chinese government views access to foreign capabilities in the near term as a key pathway to accelerate China’s indigenous development. Also of concern to many are China’s state-led efforts to acquire companies and access semiconductor technology through both licit and illicit means; targeted intellectual property (IP) theft; and technology-transfer pressures.
Issues before Congress include the appropriate role of government in assisting U.S. industry; how best to focus federal financial assistance; the amount of funding each proposed activity would need to accomplish its goals for sustaining U.S. semiconductor competitiveness; how to coordinate and integrate federal activities internally and with initiatives of the U.S. semiconductor and related industries; and how to address China’s ambitious industrial plans, trade practices of concern, and the role of U.S. firms in China’s emerging semiconductor market.
Legislation has been introduced in the 116th Congress to increase federal funding for semiconductor research and development efforts; collaboration between government, industry, and academic partners; and tax credits, grants, and other incentives to spur U.S. production. Two bills under consideration are the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act (S. 3933/H.R. 7178) and the American Foundries Act (AFA) of 2020 (S. 4130). Some of the provisions of these acts have been included in other bills.
Ursula von der Leyen, European Commission President, 2021 State of the Union address.
Digital is the make-or-break issue. And Member States share that view. Digital spending in NextGenerationEU will even overshoot the 20% target.
That reflects the importance of investing in our European tech sovereignty. We have to double down to shape our digital transformation according to our own rules and values.
Allow me to focus on semi-conductors, those tiny chips that make everything work: from smartphones and electric scooters to trains or entire smart factories.
There is no digital without chips. And while we speak, whole production lines are already working at reduced speed - despite growing demand - because of a shortage of semi-conductors.
But while global demand has exploded, Europe's share across the entire value chain, from design to manufacturing capacity has shrunk. 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. So let's put all of our focus on it.
We will present a new European Chips Act. We need to link together our world-class research, design and testing capacities. We need to coordinate EU and national investment along the value chain.
The aim is to jointly create a state-of-the-art European chip ecosystem, including production. That ensures our security of supply and will develop new markets for ground-breaking European tech.
Yes, this is a daunting task. And I know that some claim it cannot be done.
But they said the same thing about Galileo 20 years ago.
And look what happened. We got our act together. Today European satellites provide the navigation system for more than 2 billion smartphones worldwide. We are world leaders. So let's be bold again, this time with semi-conductors.
The European Chips Act, news and alerts
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