Advanced Semiconductors: European Focus

In recent years, the semiconductor industry has faced severe turbulence. The global shortage, and the subsequent price increases spurred on by COVID-19-induced supply chain breaks were followed quickly by geopolitical developments, namely the invasion of Ukraine. The strategic importance of semiconductors is well-documented, with the industry expected to be valued at around USD 700 billion by 2025 and USD 1 trillion by 2030. Accordingly, the semiconductor industry finds itself at the forefront of strategic priorities for competing states, increasing focus on the need to address bottlenecks permanently through localising manufacturing. 

European Response - European Chips Act (ECA) 

The European Union (EU) has responded to the challenge through its announcement of the ECA, creating the ambition to capture a 20% share of the semiconductor industry by 2030. The current European share is at around 8%, down from 44% during the 90s. The ECA will operate on a three-pillar structure: “pillar 1 to bolster large-scale technological capacity building and innovation in the EU chips ecosystem; pillar 2 to improve the EU’s security of supply; and pillar 3 to step up monitoring and crisis response mechanisms.” In particular, the EU would look to address notable weaknesses in design automation tools, with all vendors of design software being based in the US; whilst, assembly, packaging, and testing segments are based in Asia. 

To achieve 20x2030, analysts argue that the EU should look to bolster its production of intermediate, and trailing edge chips. Intermediate and trailing edge chips usually refer to chips that feature a 10 - 85 nanometer (nm) node process, with these chips being integral to core European Industries. Currently, the EU split for capacity by node is 33% intermediate and 67% trailing, with no capacity for advanced nodes (3 - 7 nm). Considering the capital intensive nature of semiconductor R&D, and established players such as US’ Intel and UAE’s GlobalFoundries failing to produce 7 nm at a large scale, the EU semiconductor industry should focus their efforts on increasing their intermediate and trailing node capacity. This priority is further emphasised by the fact that EU car manufacturers currently lack trailing nodes.  

Challenges 

1. Quasi-localisation 

   Taiwan, South Korea, and Japan maintain their competitive edge in advanced semiconductor manufacturing. The gap would be increasingly difficult to bridge, and only further compounded by the complex nature of semiconductor supply chains. Established manufacturers boast supply chains of over 16,000 different entities, as key materials for semiconductors are region dependent. For example, production-grade neon gas was largely produced in Ukraine as a by-product of old steel mills. Therefore, it will be important for the EU to leverage its warm ties with states to ensure that there remains open access to advanced semiconductors. Consequently, the threat of future bottlenecks caused by a potential invasion of Taiwan or North Korea launching missile strikes on South Korea and/or Japan will remain.

2. Corporate Sustainability Due Diligence Directive (CS3D)

   EU efforts to achieve net-zero by 2050 will require a stronger disclosure regime, namely the CS3D. Under the CS3D, entities will be required to carry out due diligence on their value chains, identifying and addressing material impact. Considering the vast and complex nature of semiconductor supply chains, with supply chains crossing borders several times, upstream and downstream due diligence could increase market fragmentation in the European Union.

3. Antitrust

   In order to achieve 20x2030, the EU may require greater collaboration between industry participants. This would be beneficial as it would lead to cost- and intellectual property (IP) - sharing, accelerating the semiconductor industry in the EU. However, given the strategic importance of semiconductors, collaboration between entities will likely face regulatory scrutiny, namely antitrust. For example, Nvidia was blocked from acquiring UK- based ARM. However, antitrust matters are dealt with on a case-by-case basis, therefore it remains to be seen the extent to which antitrust may come into play within the EU. 

Opportunities 

1. Quantum Computing 

The rate at which semiconductors have developed has given rise to achieving Quantum Computing (QC). QC is the logical step from traditional computers, harnessing the “laws of quantum mechanics to solve problems too complex for classical computers.” QC has been used to advance battery tech, solve energy challenges, and explain cosmic mysteries. For the EU to maximise the value extracted from their semiconductor industry, they must also focus on its role in QC. QC is estimated to be valued at $850bn globally, however, Europe is set to not capture the economic benefit. The EU risks falling behind both the US and China, with analysts suggesting that the private investment environment is not fit for purpose, as European investors choose to invest abroad. Reform and scaling up of private investment, coupled with greater coordination between national and regional initiatives would help jump-start Europe’s development in this space.   

Disclaimer: All views are my own and not those of my employer