The European Union’s (EU) Chips Act was agreed in principle at the end of April 2023 by the EU’s main political bodies. The proposed legislation, described by European Commission President, Ursula von der Leyen, as a “game changer”, commits €43 billion in financial subsidies towards expanding the bloc’s semiconductor industry.
International industrial policy strategies for bolstering chipmakers
At present, the EU accounts for 9% of global chip production. Under the Chips Act this will be boosted up to 20% by 2030. The objective will also be to bolster the EU’s self-sufficiency, resilience and technological leadership in chip production.
During the pandemic key industries, such as the European automotive sector, were short of semiconductors as global supply chains became strained. The pandemic hit the logistics in shipping chips from Asia, especially hard. Taiwan, alone, manufactures 92% of the world’s most advanced chips and two-thirds of global semiconductor output. The EU also has an eye on rising geopolitical tensions between the US and China; resulting in Taiwan being at the centre of this storm.
Numerous economies have already reacted to the increasingly volatile environment by ramping up investments in their domestic chip production. The United States plans to spend US$52 billion in subsidies for this purpose, while China has ploughed in more than US$70 billion with more on the way. India has earmarked US$30 billion for chip manufacturing, Japan has approved US$7 billion for domestic investment, and South Korea has unveiled plans to establish the world’s largest semiconductor supply chain. In short, these dizzying sums amount to what is emerging as a global chip subsidy race.
UK plans or lack thereof for supporting domestic chip production
The British government has thus far not officially announced any intention to follow suit, although media reports say Prime Minister Rishi Sunak is set to reveal about £1 billion in government funding for the industry at the upcoming G7 summit in Japan. UK Chancellor, Jeremy Hunt, has argued it would be counterproductive to raise protectionist measures for critical technologies. Instead, he advocated for seeking greater efficiency in individual nations’ competitive benefits arising from accessing international semiconductor supply chains.
With this in mind, the UK’s semiconductor industry constitutes only 0.5% of global chip output, while as much as 90% of its chips are exported. Altogether there are 25 chip manufacturing or fabrication sites around the UK with production mainly geared for niche markets such as the automotive sector. While their chip output does not match domestic demand which is typically made up from imports, the UK’s production of compound semiconductors, being a type of chip, will itself be worth an estimated US$11 billion in 2024. The UK’s niche expertise in chips also embraces a wide range of world-leading capabilities including compound and advance materials fabrication, packaging design, R&D and intellectual property for semiconductor designs.
Examples of cutting-edge UK-based chip specialists include Arm, a company owned by Japan’s Softbank, which is considered the country’s principal chip designer. Newport Wafer Fab, held by a Chinese corporation through Netherlands-based Nexperia, is one of the UK’s largest chip manufacturers. Both companies have been embroiled in ownership controversies, in recent years, arising out of the British government intervening in transactions based on national security grounds and subject to court challenges in some cases.
Given the chip sector’s evident importance to the UK based on these cases, alone, how will it serve the UK were the foreign owners of such enterprises incentivised to relocate their facilities overseas to access substantial subsidies? To ascertain the potential for such possibility, it may be useful to consider what the EU, as Britain’s largest and neighbouring economic partner, has to offer in attracting the relocation of chipmakers to the Single Market. This could be compared with whatever the UK government may eventually be compelled to offer in response, if anything at all.
Incentives and regulatory risks under the EU Chips Act
The European Commission (the Commission) has proposed three main lines of action, or pillars, to achieve the Chips’ Act objectives.
The “Chips for Europe Initiative”, as the first pillar, will be designed to support large-scale technological capacity building and will be responsible for the selection of the centres of excellence. Under this initiative €3.3 billion in funds will be mobilised within the research framework Horizon Europe. This will be additional to €11 billion in EU public financing, and available by 2030, to reinforce existing research, development and innovation on chips. The funding will be disbursed for the application of advanced semiconductor tools and professional training to develop the semiconductor ecosystem through a network of competence centres based across the EU. There will also be equity and debt financing for SMEs and other ventures such as start-ups and scale-ups in the semiconductor value chain.
A framework to ensure security of supply and resilience by attracting investment, as the second pillar, will widen the scope of the so called ‘First-of-a-kind’ facilities to include those producing equipment used in semiconductor manufacturing. ’First-of-a-kind’ facilities will contribute to the security of supply for the Single Market and will benefit from fast-tracking of permit granting procedures. In addition, design centres that significantly enhance the EU’s capabilities in innovative chip design may receive a European label of ‘design centre of excellence’ which will be granted by the Commission. Member states may apply support measures for design centres that receive this label according to existing legislation.
A Monitoring and Crisis Response system will anticipate supply shortages and provide responses in case of crisis as the third pillar. EU member states will be required to provide regular updates and share their findings within the newly established European Semiconductor Board to be constituted of representatives from member states and the Commission. The board will determine whether any crisis response should be initiated or if any coordinated chips procurement would be necessary in case of shortages. In such case, the Commission can place the onus on that member state to take measures in resolving supply shortages. Specific steps could involve requesting producers to channel output towards critical sectors. The Commission would thereby have a mandate to act as a central purchasing body. It could also launch current export control measures or otherwise restrict producers from export chips made in the EU.
While the Chips Act package will be a major step in addressing Europe’s technological sovereignty and security by attracting European, North American and Asian semiconductor players to invest in the EU, nevertheless there are regulatory hurdles to be considered. In particular, anti-trust risks may arise when industrial competitors collaborate. Existing EU competition law may therefore apply even in cases where collaboration arises as a result of the Commission launching a crisis response or where that collaboration involves one or several member state public bodies.
EU state aid rules may also apply for companies in receipt of subsidies arising from the Chips Act’s public funding measures and that businesses need to comply with such rules unless specific waivers have been provided. Problematic circumstances could also arise where the Commission requires producers to redirect chip production, away from their contractually agreed set of customers, in favour of alternative critical sectors encountering a semiconductor shortfall. In this regard, public funding for semiconductor makers either may be removed or other penalties invoked where those businesses decline to comply with such adjustment; reflecting a case of how private and public interests may diverge.
For now, though, the agreement reached between the EU Council and the European Parliament on the proposed Chips Act is set to be finalised and formally adopted by both institutions in coming weeks.
From pandemics to geopolitics, today’s world of volatile uncertainties is markedly different to the period surrounding the 2016 Brexit referendum. The ideology of free trade and unleashing of economic freedoms which the Brexit political class championed simply has no voracity in a fragmenting globalisation. In the unfolding vacuum, the governments of large and technologically advanced economies are rapidly expanding their financial subsidies and other industry protective policies to secure their relative economic and technological competitiveness.
Government programs boosting domestic semiconductor industries are only the latest in a widening array of measures endorsing state interventionism in the economy which Britain, as a mid-sized economic power, will be hard-pressed to compete against. Only by sharing in the EU’s financial largesse and freely accessing the Single Market, through membership of the EU, can Britain more securely develop critical technologies and play a lead role in setting international technological standards.