Already for some time and especially since spring 2021, widespread and abrupt chip shortages have been dragging down industrial output across the EU. Sectors like automotive, consumer electronics, 5G technologies, industrial equipment, and medical devices are severely impacted. The drop comes despite a surge in manufacturers' order books and is seriously hampering the post-COVID economic recovery.
Several factors explain the current bottlenecks in the semiconductor supply chain. Firstly, industrial production was hampered by global supply chain disruptions resulting from the COVID-19 pandemic. The COVID-19 outbreak has also sped up the digitalisation of our societies (the contactless economy, the platform economy, home entertainment, networking devices, products for homework, data centres) resulting in an increased demand for chips. More generally, the post-pandemic recovery has increased the demand for consumer goods containing chips.
The current shortage seems to be not only cyclical but also structural because of the secular growth of new technologies. The (industrial) internet of things, AI, cloud computing, 5G equipment and connected devices like smartphones and connected automated electrical cars will exponentially boost chip demand. This will increase the pressure to step up investments in domestic manufacturing capabilities in order to prevent future supply issues.
Indeed, while the EU's share in the global semiconductor market was more than 40% in the seventies, the current share is only 10% (the main European foundries are Global Foundries, STMicroelectronics, Bosch, Infineon, NXP). Moreover, Europe has no foundries that can manufacture leading-edge semiconductors (with sizes below 22nm). Leading-edge chips are needed not only for scaling up computing performance but also for lowering energy consumption. High-end chip manufacturing is centred in Asia and dominated by the duopoly of TSMC and Samsung (both already manufacture chips of 5nm), while the design of chips is dominated by the US. Only a few companies, such as Intel, both design and manufacture their chips.
However, European industry enjoys global leadership in dedicated processors for embedded systems, sensors, power electronics, silicon wafers and chemicals, and advanced chip-making equipment. It is also strong in basic research thanks to research centres like IMEC (Leuven), and R&D initiatives like the European Processor Initiative and the new Key Digital Technologies Joint Undertaking.
Restoring the supply and demand balance will take time because semiconductor manufacturing is one of the most complex and very capital- and R&D-intensive manufacturing processes and would require immense investments to resolve. EUR 20 billion is needed for setting up a leading-edge fabrication plant (this in contrast to the EUR 3bn raised by Northvolt to set up two giga factories for batteries). These investments can only be made with reference to a long-term horizon.
The semiconductor supply chain has also important geostrategic dimensions:
- China has set itself the ambition of reaching 70% autonomy in chip production. To this end, its "Made in China 2025" plan dedicates USD 170 billion over ten years to build up research and manufacturing capacity;
- the US has presented a USD 50 billion plan over five years to strengthen America's chip-making sector (part of the money will be dedicated to support TSMC in building a 5nm fab in Arizona). TSMC is also planning, at the invitation of the Japanese government, to set up a joint advanced packaging and testing plant in Japan;
- the "tech decoupling" between the US and China should act as a wake-up call regarding the need to act strategically about Europe's position in the semi-conductor supply chain. Indeed, the EU could fall victim to the unfolding US-China "tech cold war".
As the markets for semiconductors will grow significantly in the coming years, the EU needs an industrial strategy for this supply chain that is built on:
- addressing the short-term shortages: stockpiling, diversification of supply, a more cooperative approach of suppliers;
- reinforcing its strengths while addressing its weaknesses in the design and manufacturing of leading-edge chips;
- setting up international partnerships in order to strengthen mutual dependencies;
- establishing business cases for advanced European chip design capabilities and production facilities inside the EU. This can be done through a European chip alliance as well as by subsidising a foreign investor;
- establishing strategic roadmaps and research and investment plans for processor design. Chip design merits particular attention as annual revenues from chips developed for cloud computing and AI are forecast to grow strongly.