European sovereignty and the semiconductor industry

Despite being a vague and contested definition, in its general understanding, the concept of European Sovereignty aims to provide the European Union’s member states with the ability to rely more autonomously on their own economic and technological strength and thus, without being too dependent on foreign countries, especially the United States and China. This concept has been developed in the last years as a response to the deterioration of the geopolitical landscape which has made the global supply-chain a security liability. The recent Coronavirus pandemic has clearly highlighted this point, as there has been a shortage of medicines and pharmaceutical ingredients in Europe, mainly produced in China and India (Fortuna, 2020). The prospect of being over-reliant and subsequently being marginalized by more powerful countries in an increasingly hostile and unstable international order is what European leaders want to avoid. Hence, they seek to become stronger and more resilient.

Since they are often confused, it is important to note that the concept of European sovereignty differs slightly from that of European strategic autonomy. The latter focuses exclusively on the traditional security and foreign policy dimensions, while the former has a broader meaning and encompasses other civil sectors that are deemed crucial in relation to power and security. One of these important sectors is that of semiconductors, which are materials usually made of silicon that conducts electricity and are used to make chips that power electronics devices. As the economy becomes more digitized, their application has expanded to almost every segment of the society, such as cars, home appliances, medical devices and military systems. Therefore, they constitute a key driver of economic growth and technological primacy. More importantly, due to its wide application, they have become a crucial element of a country’s power and security.

Europe holds some niche markets and technologies, especially in the industrial and automotive sectors. With ASML Holding based in the Netherlands, Europe is also home to the only global producer of extreme ultraviolet lithography machines, which are indispensable instruments to produce the most sophisticated type of chips (Flynn, 2020). However, as the recent shortage of chips for carmakers illustrates, Europe is particularly vulnerable on the manufacturing side of the supply chain (Nienaber, 2021). In particular, European countries are largely dependent on Asian foundries which manufacture the chips and on American Electronic Design Automation companies, since they provide the Intellectual Property and software necessary to the design and production of chips (Kleinhans and Baisakova, 2020). Furthermore, European production capacity is limited only to a narrow set of chips while the fabrication of the most sophisticated types is a prerogative of only two companies, South Korea’s Samsung and Taiwan’s TSMC (Allison; Triolo, 2021). Hence, it is clear how the semiconductor supply-chain is concentrated in few places, which makes it vulnerable to trade disruptions.

Given these considerations and the geopolitical importance of this industry, various European leaders have decided to bolster this vital sector by launching several projects. Most notably, by using part of the Pandemic Recovery and Resilience Fund destined for the digitization of the economy, which amounts to 145 billion euros, 17 EU member states have recently signed a joint declaration to “reinforce the processor and semiconductor ecosystem and to expand industrial presence across the supply chain” (European Union, 2020). Similarly, the EU and its member states are now working to include the chip production within the framework of a new Important Project of Common European Interest, which would allow for a pan-European collaboration and an increase in public and private investments. The German Minister of Economic Affairs hopes that this project could trigger up to 50 billion euros of investments (Nienaber, 2021). Thus, through these and other cross-border initiatives, European leaders hope to harness the ability to design the next generation of chips and to expand the manufacturing capability for a whole range of future applications, such as AI, autonomous driving, industry 4.0, datacenters, supercomputing and quantum computing.

Despite all these initiatives, there is still room for caution since similar projects have failed in the past (eeNews Analog, 2021). Above all, the aforementioned plans do not seem to tackle the main problem, i.e. the lack of fabrication facilities in Europe of the likes of those in Taiwan and South Korea, which can guarantee a steady flow of cutting-edge chips, even when international trade is hampered. Such factories, though, are some of the most expensive to build (between 5 and 20 billion dollars each of initial cost) and take years to set up and start production. So far, no European companies or foreign foundries, like TSMC and Samsung, have expressed interest in doing so. From a pure commercial perspective, a lack of a sizable consumer electronics industry and higher production costs than in Asia do not support and justify such investments (BCG Global, 2020).

However, the current geopolitical situation compels a different rationale by national governments and the EU Commission. An example of this strategic thinking can be found in other nations facing similar problems as Europe, like the United States, which has recently signed agreements with TSMC to set up a foundry in the country on the condition that it receives state subsides (Kharpal, 2020). Financial aid is in fact an essential prerequisite for the development of chip foundries. Recent rumors of a possible deal between the EU and Samsung/TSMC, and plans of re-developing existing foundries in the continent, point to the right direction (Automotive News Europe, 2021). Either way, both strong political will and huge investments from Europe are needed. Finally, the recent acquisitions of key European companies in this industry, such as Siltronic (the only producer of silicon wafers in the continent) and Dialog Semiconductor, by American and Asian companies raise questions about the real possibility of achieving some degree of European digital sovereignty (Taipeh, 2021). Thus, European authorities should better monitor these deals so as not to lose the Europe-based technology and manufacturing. This does not mean Europeans should abandon the principles of free trade, but only that they need to better safeguard their strategic interests and assets.

Bibliography:

• Automotive News Europe. «EU Mulls Deal with Asian Producers for European Microchip Foundry», 11 february 2021. https://europe.autonews.com/suppliers/eu-mulls-deal-asian-producerseuropean-microchip-foundry.

• European Union. «Joint Declaration on Processors and Semiconductor Technologies». Text. Shaping Europe’s digital future – European Commission, 7 december 2020. https://ec.europa.eu/digitalsingle-market/en/news/joint-declaration-processors-and-semiconductor-technologies.

• Flynn, Carrick. «The Chip-Making Machine at the Center of Chinese Dual-Use Concerns». Brookings (blog), 30 june 2020. https://www.brookings.edu/techstream/the-chip-making-machine-atthe-center-of-chinese-dual-use-concerns/.

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• Nienaber, Michael. «Germany Predicts Chip Investments of up to 50 Billion Euros in Europe». Reuters, 3 february 2021. https://www.reuters.com/article/us-europe-germany-chipsidUKKBN2A32KG.

• Nienaber, Michael. «Germany Urges Taiwan to Help Ease Auto Chip Shortage». Reuters, 24 january 2021. https://www.reuters.com/article/us-taiwan-autos-chips-idUSKBN29T04V

• eeNews Analog. «Opinion: Strategy, Tactics of European Chipmaking Are Being Confused», 4 february 2021. https://www.eenewsanalog.com/news/opinion-strategy-tactics-european-chipmakingare-being-confused/page/0/1

• Taipeh, Matthias Sander. «Siltronic, Dialog, ARM: Europa muss den Chip-Ausverkauf stoppen». Neue Zürcher Zeitung. Consulted 15 february 2021. https://www.nzz.ch/meinung/diebundesregierung-sollte-den-siltronic-verkauf-genau-pruefen-ld.1601037.

• Triolo Paul, Allison Kevin. «The Geopolitics of Semiconductors». Consulted 15 february 2021. https://www.eurasiagroup.net/live-post/geopolitics-semiconductors.

• Kleinhans Jan-Peter, Baisakova Nurzat. «The Global Semiconductor Value Chain: A Technology Primer for Policy Makers», 5 october 2020.https://www.stiftung-nv.de/en/publication/globalsemiconductor-value-chain-technology-primer-policy-makers#collapse-newsletter_banner_bottom