Chip Production: EU Looks to Ease Dependency on Asia, Announces $48-Billion Plan

The European Union announced a $48 billion (roughly Rs. 3,58,520 crore) plan Tuesday to become a major semiconductor producer, seeking to curb its dependency on Asian markets for the component that powers everything from cars to hospital ventilators and game consoles.

At a time when natural gas shortages and Europe's reliance on Russia for energy shows the political risks of economic dependency, the 27-nation bloc is moving to boost its economic independence in the critical semiconductor sector with its Chips Act.

“Chips are at the center of the global technological race. They are, of course, also the bedrock of our modern economies,” European Commission President Ursula Von der Leyen said. The plan still needs the backing of the EU parliament and the member states.

The EU move mirrors US President Joe Biden's $52 billion (roughly Rs. 3,88,398 crore) push to invest in a national chip-producing sector to make sure more production occurs in the US.

As the economy has bounced back from the COVID-19 pandemic over the past year, there has been a supply chain bottleneck for semiconductors. In Europe, some consumers have had to wait up to almost a year to get a car because of a lack of spare parts.

“The pandemic has also painfully exposed the vulnerability of its supply chains,” von der Leyen said. “We have seen that whole production lines came to a standstill.”

“While the demand was increasing, we could not deliver as needed because of the lack of chips,” she added. As a result, factory belt lines ground to a halt, some factories had to temporarily close and workers were left unemployed because of lack of electronic parts.

Semiconductors are the tiny microchips that act as the brains for everything from smartphones to cars, and an extended shortage has highlighted the importance of chipmakers, most of which are based in Asia, to global supply chains.

Von der Leyen said Europe's Chips Act will link research, design and testing and coordinate EU and national investment. The EUR 43 billion (roughly Rs. 3,66,985 crore) plan pools public and private funds and allows for state aid to get the massive investments off the ground.

The prospect of massive industrial subsidies at first seems like a blast from Europe's past, when overreaching state involvement stifled creativity and kept ambitious newcomers out of the market. The EU itself has been trying to undo this over the past decades with rigorous vetting whether state aid was not impeding competition.

The EU Commission promised that every Chips Act project will be carefully vetted on anticompetitive grounds, but that the sheer size of setting up production facilities demand a push if the bloc is to become a global player.

“Europe needs advanced production facilities, which come, of course, with a huge upfront cost. We are therefore adapting our state aid rules,” said von der Leyen.

Now, EU nations only have 9 percent of the global market share of semiconductors, and von der Leyen wants to increase that to 20 percent by 2030. Because global market production is expected to about double over the same time, “it means basically quadrupling our efforts,” she said.

She said the plan will add EUR 15 billion ($17 billion or roughly Rs. 1,26,985 crore) in public and private investment on top of funds already committed in the EU's budget.

The EU also wants to get involved in chip production for geopolitical reasons and become more resilient in its strategic independence. Still, von der Leyen did hold out her hand for cooperation.

“Europe will build partnerships on chips with like-minded partners, for example, the US or, for example, Japan,” she said.