Semiconductor chips are now a vital piece of technology, powering everything from mobile phones, washing machines, to satellites. The ongoing global shortage of chips has exposed how the EU is over-reliant on non-EU supply chains for chips. The European Chips Act aims to reverse this. This Just the Facts looks at what semiconductor chips are, why the EU is focused on them, and the European Chips Act.
What are semiconductor chips?
A semiconductor chip is a tiny electronic device (often smaller than a postage stamp), that contains billions of components, such as transistors, that store, move and process data.
Since technological breakthroughs in the late 1940s, semiconductor chips now underpin what many people do in their everyday lives. They are used in pacemakers, mobile phones, laptops, televisions, washing machines, electric scooters, cars, machinery, wind turbines, aircrafts, satellites, among others. A hybrid electric car can, for example, use as many as 3,500 semiconductor chips.
Chips are also needed for the current and next wave of technology development, including artificial intelligence, cloud computing, 5G, the Internet-of-Things, to supercomputing.
The production of chips is divided into three key areas:
- Design: this includes research and development, intellectual property, and software. Companies who specialise in this are known as fabless.
- Production: companies who produce semiconductor chips are called foundries.
- Assembly and testing: this are to ensure that the chips works before being installed in electronic devices.
Due to the sophistication involved, manufacturing chips requires highly specialised facilities to carry out sensitive processes, that often must be conducted in a sterilised environment to prevent contamination. The machinery is often expensive, for example, a recent new chipmaking tool at Intel’s facility in Leixlip, Co. Kildare cost over €6 billion.
Why is the EU interested in chips?
Initially the US dominated semiconductor production in the 1960s and 1970s, with Japan challenging this position in the 1980s and 1990s, followed by Korea and Taiwan from the 2000s and 2010s. As Table 1 outlines, the global production market today is heavily dominated by companies in Taiwan (63%), Korea (17%) and China (6%).
Table 1: Semiconductor Chip Production Market Share – 2021
|Company Name||Production Market Share||Country|
The current shortage of chips is a result of several factors, including Covid-19. It resulted in increased demand in high-income countries for chip-dependent electronics, such as laptops and gaming equipment, due to increased remote working and learning. Also, many facilities were shut, due to government-ordered lockdowns as part of Covid-19 public health measures in 2020, delaying production.
This experience highlighted how exposed EU Member States are to shortfalls in the global semiconductor supply chains, with an over-reliance on non-EU based companies for vital pieces of technology.
This is a point that European Commission President Ursula von der Leyen highlighted in her 2021 State of the EU address to the European Parliament in September, “digital is the make-or-break issue […] there is no digital without chips.”
“Europe’s share across the entire [chips] value chain, from design to manufacturing capacity has shrunk. We depend on state-of-the-art chips manufactured in Asia. So, this is not just a matter of our competitiveness. This is also a matter of tech sovereignty.”
She stated that the European Commission would shortly present a European Chips Act which aims to “to jointly create a state-of-the-art European chip ecosystem, including production. That ensures our security of supply and will develop new markets for ground-breaking European tech.”
What is the European Chips Act?
Following on from this, on 8 February 2022, the European Commission unveiled the European Chips Act which is “a comprehensive set of measures to ensure the EU’s security of supply, resilience and technological leadership in semiconductor technologies and applications.”
Its core objective is to enable the EU to double its current semiconductor chips market share from 9% to 20% by 2030. By sourcing an initial €11 billion in funding for research, design, and production from EU initiatives such as Horizon Europe and Next Generation EU, the goal is to mobilise more than €43 billion of public and private investments by 2030.
The European Chips Act proposes relaxing state aid rules, but under “strict conditions” to allocate “targeted” and “proportionate” for “first-of-a-kind facilities” that will benefit the entire EU, not just that of the Member State. The European Commission will use EU funding to “leverage private investment into manufacturing capacities that will help produce EU-made chips in EU-based factories.”
The European Chips Act will now undergo the ordinary legislative procedure (OLP), with the European Parliament and the Council of the EU entering into negotiations to propose amendments to the European Commission proposal. The average timeline for adoption under OLP between 2014 – 2019 was just under 18 months at first reading, and 40 months at second reading.
Recently, countries have introduced similar measures to increase domestic semiconductor chips production. In August 2020, China announced that it aims to produce 70% of all chips it uses by 2025. In May 2021, Korea unveiled a €450 billion plan to strengthen its chip sector. In February 2021, days before the European Commission announced the European Chips Act, the US published a €45 billion package to support US chip making production.