EC Proposes Easing State Aid Rules To Encourage Chip Factories

European Commission president Ursula von der Leyen has followed through on her promise to propose the European Chips Act in early February.

On Tuesday the Commission officially “proposes a comprehensive set of measures to ensure the EU’s security of supply, resilience and technological leadership in semiconductor technologies and applications,” as it seeks to reduce its chip dependence on Asia and the United States.

It was back in September 2021, with the global chip shortage showing no sign of easing, that the EC plan was first announced by Ursula von der Leyen.

European Chips Act

The proposal, known as the ‘European Chips Act’, is touted as a way to bolster Europe’s self sufficiency in the semiconductor sector, by easing state aid rules, improving tools to anticipate shortages and crisis, and strengthen research capacity in the bloc.

The move has been some time coming.

In March 2021 the European Union under its 2030 Digital Compass plan announced it wanted to produce at least 20 percent of the world’s cutting-edge semiconductors by the end of the decade.

Now the EC pointed out that “recent global semiconductors shortages forced factory closures in a wide range of sectors from cars to healthcare devices. In the car sector, for example, production in some Member States decreased by one third in 2021.”

“This made more evident the extreme global dependency of the semiconductor value chain on a very limited number of actors in a complex geopolitical context,” it said. “But it also illustrated the importance of semiconductors for the entire European industry and society.”

The European Chips Act will seek to address the EU’s outstanding weaknesses in the chip sector and “will bring about a thriving semiconductor sector from research to production and a resilient supply chain. It will mobilise more than €43 billion euros of public and private investments and set measures to prevent, prepare, anticipate and swiftly respond to any future supply chains disruption, together with Member States and our international partners. It will enable the EU to reach its ambition to double its current market share to 20 percent in 2030.”

The main components of the proposed bill are as follows:

• 11 billion euros will be made available to strengthen existing research, development and innovation
• A new framework to ensure security of supply by attracting investments and enhanced production capacities. In addition, a Chips Fund will facilitate access to finance for start-ups to help them mature their innovations and attract investors.
• A co-ordination mechanism between the Member States and the Commission for monitoring the supply of semiconductors, estimating demand and anticipating the shortages.

“The European Chips Act will be a game changer for the global competitiveness of Europe’s single market,” said Commission President Ursula von der Leyen. “In the short term, it will increase our resilience to future crises, by enabling us to anticipate and avoid supply chain disruptions.”

“And in the mid-term, it will help make Europe an industrial leader in this strategic branch,” said von der Leyen. “With the European Chips Act, we are putting out the investments and the strategy. But the key to our success lies in Europe’s innovators, our world-class researchers, in the people who have made our continent prosper through the decades.”

The European Chips Act will require approval from EU countries and EU lawmakers before it can become law, also includes a toolbox allowing the Commission to demand companies deliver key chips during a crisis.

Challenges ahead

But Europe may face some challenges with its semiconductor ambitions.

For starters the world’s most important chip designer, ARM, is based in the United Kingdom, which has exited the European Union.

The proposed looser rules comes despite smaller EU countries having concerns that it will trigger a subsidy race that will favour the building of chip factories in the larger countries such as France, Germany, the Netherlands and Italy.

It should be remembered that chip companies typically require substantial cash incentives or tax breaks, in return for building an expensive chip factory in a particular location.

Intel CEO Pat Gelsinger in March 2021 for example said the chip giant was looking for 8 billion euros (£7bn) in public subsidies toward its planned semiconductor fabrication plant in Europe.

Then in September last year Gelsinger said Intel could potentially invest as much as 80 billion euros ($95bn or £69bn) to expand chip production in Europe.

France and Germany are currently vying for Intel’s chip manufacturing ‘megafab’ plant (although Germany is said to be the leading contender).

Italy meanwhile is said to be competing with Poland for a new Intel advanced packaging factory.

The advanced packaging plant will reportedly utilise innovative technologies to weave full chips.

Chip packaging plants typically integrate different types of semiconductors onto wafers, and are a key part of the chip manufacturing process.

The US meanwhile has proposed $52 billion in the US Chip Act to ramp up domestic chip production in the United States.

Meanwhile the world’s largest contract chip maker, Taiwan Semiconductor Manufacturing Co. (TSMC) has previously warned that plans by US, EU and others to bring semiconductor production into their own countries could result in a costly, unworkable system.

In July 2021 TSMC also dampened down speculation that it was considering building its first European semiconductor plant in Germany.