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The EU Chips Act Enters its Final Phase of Adoption. What Now,?

March 1st, 2023

1) EU Chips Act: Where it Started

EU institutions kicked off inter-institutional discussions on the Chips Act package, which includes a  proposal for a Regulation and a proposal for amendments to a Council Regulation turning the KDT Joint Undertaking into the Chips Joint Undertaking on February 28th. Released by the European Commission’s Executive Vice-President Margrethe Vestager and Internal Commissioner Thierry Breton a year ago, the Chips Act is a relatively swift response, by EU standards, to a global semiconductor supply crisis convulsed by the COVID-19 pandemic.

In an industry sector that has been very cyclical  these past three decades –  one of the effects of continuous innovation being that semiconductors have a short lifespan  – the current situation could well have gone by unnoticed. But the sudden shutdown of the economy in 2020 shed light on two aspects that Europeans cannot come to grips with easily:

  • The EU’s dependencies on critical chunks of the semiconductor global supply chain located completely outside the EU. The dominance of Taiwanese and South Korean players in the manufacturing of advanced semiconductors will be particularly difficult to overcome. The EU should accordingly play to its strengths, such as access to the world’s largest semiconductor equipment maker, the Dutch ASML, and its leadership in some types of semiconductors. But it will have to secure investments measured in tens of billions of euros to build a minimum level of manufacturing capacity, which will likely involve foreign players;
  • The U.S.’s continued policy of gaining more market share on new parts of the value chain. U.S. players are already leading in one of the most lucrative sides of the semiconductor business, the design of chips. With the U.S. Chips Act adopted in June 2022, the Biden Administration is set to pour in over $52 billion in its own industry. More importantly, the U.S. has increased its control over China’s access to semiconductor technology, as China’s semiconductor assembly, packing, and testing (APT) industry is very strong today and China’s access to advanced semiconductor technologies is seen as a national security threat.

Against this background, the Commission’s declared ambition is to mobilize over €43 billion in public and private investments, thanks to the EU Chips Act, to ensure a stable source of supply of semiconductors for European industries and to support innovation in potentially disruptive fields such as quantum technologies or edge computing.

2) EU Chips Act: Where it Stands

The inter-institutional negotiations (trilogues) will focus on a few, but major sticking points. Among them, securing public investments for the EU chips supply chain is likely to capture most of the efforts.

2.1 The funding question

The Commission had proposed two complimentary set of measures to secure funding, together falling quite short of the estimated €43 billion. The first would pool €3.3 billion from existing resources, namely the Horizon Europe program for research and development, and re-deploy that amount for the Chips Act. The second would entail approval of member states’ exemptions from EU State aid rules, a path dreaded by the Netherlands and Nordic EU countries as it could lead to investments being concentrated in just a few large EU countries (Germany, France, etc.).

Funding remains a major sticking point to this day. In their general approach, the EU member states put forward reducing the proposed funding by €400 million. In contrast, the European Parliament suggests approving new fresh resources in the mid-term review of the Multiannual Financial Framework, the seven-year EU budget. It remains to be seen whether this is a realistic solution, as the Commission plans to carry out the review amid the EU electoral period in 2024.

2.2 First-of-a-kind facilities

The Chips Act defines the conditions for companies to benefit from the Chips Act resources. They would have to be qualified as ‘first-of-a-kind’ facilities, either “integrated production facilities” designing and producing components for their own market or “open EU foundries” manufacturing chips for third parties.

EU lawmakers are likely to broaden the criteria for facilities to qualify as “first-of-a-kind”. For the Parliament, such facilities should contribute to the semiconductor ecosystem’s resilience and deploy new or innovative elements. For the Council, the criteria to be considered first and foremost include the financial sustainability of the business plan, the readiness of the hosting country, and the spillover effects. Ultimately, the final agreement will very likely address concerns that the industry could concentrate in a few EU countries, leaving the others outside the value chain.

2.3 Addressing the shortage crises

The Commission’s text provides for the activation of an emergency mechanism, enabling the Commission and the member states convening in a ‘European Semiconductor Board’, to address crises caused by shortages of semiconductors. Its activation could entail, among other things, requesting highly sensitive information from industry players for crisis assessment purposes. The Commission could then implement emergency measures such as prioritizing the supply of semiconductors by specific sectors or carry out common purchasing for member states.

In its report, Parliament limits the Commission’s powers and lists critical sectors whose representatives can request the Commission to activate the emergency mechanism, after demonstrating that they have put risk mitigation measures in place. In its general approach, the Council is looking for greater leeway to activate the mechanism.

2.4 A chips diplomacy initiative?

With the U.S.-China tech war looming, the European Parliament proposes to establish a “chips diplomacy initiative” tasked with negotiating cooperation with relevant third countries and seeking solutions whenever the EU faces a shortage crisis.

3) The EU Chips Act: Where it’s Going

According to the Swedish Presidency of the Council of the EU, the Chips Act package could be adopted by the end of its presidency in June 2023. However, with the big elephant in the room that is the funding gap, no stakeholder should be surprised if discussions drag on during the Spanish presidency, from July to December 2023.

The EU Chips Act reflects some of the lessons learnt from the Covid-19 period with regard to the EU’s overdependence on third country supply chains. However, it will not be a panacea for either future demand-side shortages or supply-side investment needs. There is a huge gap between the estimated needs (€45 billion) and the first chunk of funding the EU can actually deploy (€3.3 billion). The EU Chips Act should kick off the remaining work to achieve some degree of resilience in some of the links of the value chain.


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