Europe is taking a crowbar to its own rules to tackle the global semiconductor chip shortage

Humbled by a dependency on Asia for most of its semiconductor needs and scarred by a protectionist export ban on COVID vaccines by the U.S., Europe is taking a crowbar to its own rules to tackle the global shortage of semiconductor chips.

On Tuesday, the European Commission triggered a clause that neutralizes its strict corset of rules governing state aid to lure companies like Intel and Taiwan Semiconductor Manufacturing Co. (TSMC), the most valuable tech company in Asia, to build more microprocessors in the region.

It’s part of a sweeping package of proposals unveiled under the new EU Chips Act, designed to jump-start the bloc’s moribund semiconductor assembly industry. The aim is to quadruple production over the decade while expanding its footprint into cutting-edge chips it currently imports from abroad. 

Broadly similar draft legislation aimed at ensuring the U.S. economy is more resilient to chip shortages is in its final stages in Washington, after initial bills finally passed both houses of Congress.

“Chips are at the center of the global technological race, they are the bedrock of our modern economies, and they are essential for the goods we use on an everyday basis,” EU Commission President Ursula von der Leyen told reporters on Tuesday. 

Circumvent the rules

Brussels is resurrecting a rarely used mechanism buried deep in the EU’s voluminous treaties that permits subsidies for “first of its kind” projects, arguing they inherently do not distort competition within the EU. Normal state aid rules will continue to apply, however.

This would allow countries to directly offer an Intel or TSMC the kind of taxpayer aid handouts they are used to receiving elsewhere to build a state-of-the-art chip fabrication facility. These so-called megafabs can cost on the order of $20 billion to construct in just their initial stage of investment.

Intel, which recently revealed plans to invest in an all-new site in Ohio, has been scouting for megafab locations specifically in the EU. CEO Pat Gelsinger already met with Commissioner for Competition Margrethe Vestager and Internal Market Commissioner Thierry Breton in April, promising to churn out cutting-edge circuits using technology currently mastered only by TSMC and Samsung in Asia. 

To ensure the 27 member states profit from these possible megafabs, the EU is furthermore mobilizing €43 billion ($49 billion) of public and private investment through 2030—including €11 billion in newly committed taxpayer funds—to ensure a vibrant supply chain across the bloc.  

No ‘budgetary machismo’

While this falls short of the $52 billion in funding under Congress’s planned CHIPS for America Act, EU Commission sources argued Brussels wasn’t aiming to splash the most money around.

“We’re not playing a game of budgetary machismo,” one senior official said. “We are doing only what is necessary, and not more.” 

Europe enjoys a competitive edge in research and is home to key equipment supplierASML Holding, but it is the cold, hard production of actual silicon wafers at scale that remains the problem.

Either by coincidence or design, European chipmakers rarely, if ever, attempt to compete directly with the cavernous factories in Asia. Instead, they typically survive by manufacturing increasingly obsolete processors or have focused on niche chips for specific applications like inverters for electric vehicles.

As a result of this specialization, Europe today encompasses only about 9% of the world’s production of semiconductors. In order to achieve a share of 20% by the end of the decade, it has to quadruple output since underlying demand is forecast to double on its own right. Even then the EU will still be heavily reliant on imports.  

Export control ‘a last resort’

“It’s really important for us that this is not seen as a strategy for Europe to be self-dependent—only producing chips for ourselves,” Vestager told reporters. “The upfront investments to do that would be in an area between €240 and €320 billion.” 

Europe has been here before, however. The EU competition commissioner noted Brussels already attempted a similar ambitious plan in 2013, only to ultimately founder. 

The economic damage from the chip shortage and its detrimental effect on last year’s recovery has concentrated political minds across the continent. Gross domestic product in Germany, Europe’s largest economy, grew at a tepid rate of just 2.7% last year, for example, after a lack of semiconductors led to the lowest year of car production in more than four decades. 

Money won’t come without strings attached, either. Any company that accepts public financing from an EU member state will be subject to potential export restrictions, a consequence taken after a protectionist U.S. government slapped its own controls on vaccines shipped abroad.

“When the U.S. triggered the Defense Production Act during the vaccine rollout, we only managed to open up a dialogue with the administration and keep the supply open when we threatened from our side blocking the exports of vaccine raw materials to the U.S. they needed from us,” a second Commission official explained.

Such an export control, he added, “should serve as a deterrent and is only meant to be used a last resort so we’re prepared in the event of another acute crisis.”