Thu. Jun 30th, 2022

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As semiconductor deficiency carmakers continue to reduce production, EU Internal Market Commissioner Thierry Breton visited Japan and South Korea last week in search of international partnerships for the block’s planned “European Chips Act”. Formally unveiled last month by Commission President Ursula von der Leyen aims to bring the EU up to date with other leading microchip manufacturers. The plan is well motivated – but partly flawed.

Interruptions in the supply chain have drawn attention to microchips as the core of the digital economy – crucial for artificial intelligence, quantum computing and the ‘Internet of Things’. Access to the most sophisticated chips is important not only for industry but also for military security. Yet most production is in the hands of China, Taiwan, South Korea and the USA.

Everyone invests a lot to strengthen their own positions. The dual Chips for America Act envisions billions of dollars in investment in microchip manufacturing and research. China, hampered by export controls that hinder the transfer of American technology, is spending even more trying to catch up. Von der Leyen describes the EU plans as ‘competitiveness and technological sovereignty’.

Semiconductors are the kind of area in which coordinated EU action can deliver results. But one of the key objectives – doubling the EU’s share of global semiconductor manufacturing to 20% by 2030 – is risky and duration. The top producers of today enjoy a lead of decades and countless billions of dollars in investments. They also have large manufacturing sectors, for example in consumer electronics, which offer markets for the production of ‘mega-fabs’ or factories that produce large quantities of advanced chips.

The business cash to invest large sums – including public money – in building a significant EU position in all parts of the semiconductor value chain is unproven. It is unclear whether EU drives, with higher labor costs and lower subsidies, can compete with cheap Asian producers.

There is a more compelling case that the EU can push public and private investment to build parts of the supply chain that are already doing well – including research and development and specialist manufacturing. It should seek to leverage its scientific expertise in high-value areas, especially by revamping its chip design industry. Europe does not have leading “fabulous” technology companies outsourcing chip design and manufacturing, although it does have strong research facilities, such as the Belgian Interuniversity Microelectronics Center, a leader in semiconductor research, including 2-nanometer chips.

The bloc should also strengthen interdependence with other partners, particularly the US. It can utilize its position as a supplier of machinery and other important inputs, such as chemicals, for chip manufacturing. The Dutch ASML, for example, supplies advanced lithography machines to chipmakers. The EU can provide its machinery, inputs and designs in exchange for guaranteed access to microchip production.

Although the EU’s semiconductor initiative received the most attention, a parallel alliance launched in July edge and cloud computing – is no less important, and probably a better case for an activist policy. It aims to bring together businesses, academics and the research world to promote the development of the next generation of public and private sector cloud infrastructure. Success here, rather than making their own chips, will be more decisive in ensuring European competitiveness for the future.

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