In the past, Europe held a prominent position in the semiconductor industry, accounting for 44% of the global chip market share. However, soon after the turn of this century, manufacturers began to shift their supply chains to East Asia to capitalize on investment opportunities and lower labor costs. This shift marked the beginning of Europe’s decline in semiconductor production. Today, the EU’s global market share in semiconductor production is below 10%. At the same time, producers from Taiwan, South Korea, and Japan have become industry leaders.
In response to this downward trend, the EU member states introduced the European Chips Act, a €45 billion plan designed to increase the production of microprocessors within the bloc. The Act aims to strengthen the EU’s semiconductor research and development capabilities, reduce supply vulnerabilities, and increase the EU’s global market share in semiconductor production from below 10% to 20% by 2030. It also aims to enhance Europe’s competitiveness in semiconductor technologies while reducing dependence on U.S. and Asian manufacturers.
Many in the semiconductor industry and the EU’s political leaders have welcomed the Chips Act. However, the necessity of semiconductor subsidies are far from obvious.
The EU Plan to Revive Europe’s Semiconductor Industry
Europe’s effort to boost its domestic semiconductor industry is not new. In 2013, the European Commission introduced the New European Industrial Strategy for Electronics, aiming at securing €100 billion in fresh private investments for chip production. That initiative failed almost completely, but the flop fell on deaf ears.
In fact, Europe does not need a Chips Act to have some leverage in the semiconductor market because it already wields strategic force, as demonstrated by the Dutch firm ASML, which exclusively supplies lithography equipment crucial for advanced chip production to major players such as TSMC.
Moreover, the proposed Chips Act is ill-suited to avoid shortages. The EU primarily imports products containing chips rather than large quantities of chips themselves. As a result, new production capacity won’t alleviate ongoing shortages. In a similar vein, the EU Chips Act fails to address the scarcity of skilled workers, a pressing concern within the European semiconductor industry. The EU semiconductor sector faces a shortage of over 30,000 skilled workers, a figure that could easily rise in the next decade. The complexities of semiconductor production necessitate a diverse range of talents at each step, and the skill shortage poses a formidable obstacle to the industry’s expansion and development. This deficiency is due to several factors, including demography, the rigidity of labor laws in Europe, the unattractive work environment, low wages, and the fierce competition for talent from enterprises in other regions, notably the U.S. and East Asia.
Finally, shifting substantial manufacturing onshore, especially for cutting-edge chips, involves meeting significant financial challenges. Achieving the ambitious 20% market share target will require a financial commitment far exceeding the €45 billion that the Chips Act put at the producers’ disposal. In fact, some $500 billion in semiconductor infrastructure across Europe will be necessary to reach this target. A noteworthy example of a similar endeavor can be found in China, which spent significant resources to produce 70% of its semiconductor requirements by 2025. Despite investing hundreds of billions of dollars, today China can only fulfill 16% of its needs and continues to rely on imports from the West.
Not surprisingly, the EU Parliamentary Research Service suggests that by 2030, and despite the Act, Europe’s share of global chip production will remain at levels similar to the present due to increased investments in other regions.
The EU Chips Act is a misguided attempt to intervene in the semiconductor market. It is based on the false assumption that government intervention is necessary to ensure a secure and competitive supply of chips. Historically, most attempts to create a competitive advantage through government intervention have failed. Resources often times go to inefficient producers, distort competition, and reward networking, rather than productive entrepreneurship. In a sentence, replicating past mistakes on a larger scale will likely be wasteful, to say the least.
Instead of entering the global subsidy race, the EU should explore new technological niches where it has or can develop lasting competitive advantages or secure a technological edge over other regions. And the best way to ensure that is to let the market operate freely. When companies are free to compete and innovate, they are more likely to develop new technologies and meet the needs of consumers.