Chips Act for Europe: the EESC says "lab to fab" is not enough to achieve resilience

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Technology, Semiconductor, Shortage, CPU, Price, Supply chain

In a new opinion package the EESC argues that the whole semiconductor value chain needs to be bolstered, including the final stages of production, where COVID-19 also exposed some very critical gaps.

At its June plenary the EESC adopted a package of opinions on the Chips Act for Europe initiative. Hailing the Commission's proposals as a very good initiative overall to address the shortages experienced during the COVID crisis, the EESC stressed nonetheless that the Commission should go further in specific areas.

First and foremost, the EESC believes that for European industry to achieve strategic resilience, the whole semiconductor sector needs to be taken into account: "The Commission's 'lab to fab' principle does not go far enough because the value chain does not end with manufacturing", stresses Heiko Willems, rapporteur for the EESC opinion on the Chips Act for Europe. "If the back-end segment is not specifically addressed, the risk of natural disasters or interrupted transport routes such as we saw last year remains high, and this makes the international value chains unnecessarily vulnerable."

The dependence on third country suppliers, particularly in the area of design, manufacturing, packaging, testing and assembly, has been recognised in the abstract as being a problem, but the EESC flags up that the later stages of production – the packaging, testing and the assembly of chips – are not really fully covered by the Chips Act. "European production is sometimes shipped to South-East Asia for packaging and then shipped back to Europe: this is not the right approach to strategic autonomy, having seen the dangers we've encountered in recent years", says Dirk Bergrath, rapporteur for the EESC opinion on Europe's semiconductor ecosystem (Chips Act).

At the same time, it is important for Europe to stay open as the chips sector is one of the most globalised value chains in the world. No single country or region controls it all and has all the capacities for all semiconductors. There is a high level of division of labour and interdependence due to the high costs and complexity of production. Establishing a closed value chain would make no economic sense. Striking the right balance between boosting Europe's capacities and strengthening partnerships with like-minded countries is, in the EESC's view, the right path to follow.

However, technology segments that are particularly vulnerable due to geopolitical concerns or strategic relevance should be supported both financially and politically.

Investment: there's the rub

To alleviate the semiconductor shortage, the EU needs to address several issues: access to raw materials, R&D facilities, intellectual property, technological know-how and availability of skilled labour. This requires a great deal of investment and support from the public sector.

The Commission has planned to raise EUR 43 billion in the coming years for actions under this package. However, a large chunk of this budget is already earmarked for other programmes such as Horizon Europe and Digital Europe, and will only be reallocated. "Where is the fresh money for the industry?" asks Stoyan Tchoukanov, rapporteur for the EESC opinion on the Chips Joint Undertaking. "Compare this with the US, which is investing USD 52 billion between 2021 and 2026, and China, looking to mobilise USD 150 billion by 2025. Even a smaller country like Korea is planning to invest USD 450 billion by 2030."

The EU will need to find additional public funds and the EESC is calling on the Commission to flesh out its investment plans. Private investment will also need to be boosted to raise 43 EUR billion.

Do not subsidise unwisely

The Commission is opening the door for state aid up to 100% of the funding gap for first-of-a-kind facilities, i.e. facilities that do not yet exist in Europe.

"We all agree that if we have strong dependencies in Europe and a lack of capacities where we need strength, projects will need to be financed with public money too," say the three rapporteurs, "but 100% state aid rings the alarm bell, because then you can come up with a project which is not really sustainable. We are not saying that we should not do it, but we should be very careful when financing projects with such big amounts of public money". The economic viability of such facilities must be guaranteed, at least in the medium term, with no subsidy race, no creation of overcapacities and no market distortions.

Background

Semiconductor chips are the essential building blocks of a broad range of digital products, from smartphones and cars to applications and infrastructures for healthcare, energy, communications and industry.

The COVID-19 pandemic has exposed a weakness in this sector within both Europe and other regions in the world. According to Goldman Sachs 169 industries around the world experienced shortages and the European automotive industry lost about 90 billion in revenues.

The EU currently accounts for 11% of the market share in the chips industry, but only controls 6% of production as opposed to about 24% of the research. With the European Chips Act package, the Commission aims to raise Europe's share to 20% by 2030.

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