Europe wants its semiconductor groove back

Europe is starting to reverse the decline of its once-strong semiconductor industry, a potentially important turn in the escalating tech war pitting the US and its allies against China.

Despite having some of the world’s best technology – and despite the large size of the European economy – Europe’s chip industry has dwindled to just a third of the silicon wafer processing capacity of Japan and less than half of the US.

Both the private sector and EU bureaucracy are now working to reverse the decline, though the hyperbole of some politicians is obscuring the situation. For example, on May 16, EU Commissioner for Internal Market Thierry Breton delivered the keynote address at the IMEC Technology Forum in Antwerp. Among other things, he said:

“We are refusing any attempt of geographical segmentation where Europe would produce mature nodes, while Asia and US would produce advanced nodes.”

“Europe cannot and will not be considered as a mere observer in any ‘underground technological battle’ between blocks.”

“Europe will not be subject to the choices of others. This is why I want a Europe that knows how to lead on semiconductors.”

Apart from rallying the corporate troops, Breton’s remarks are puzzling. For one, no one is conspiring to keep the European semiconductor industry down. On the contrary, Europe is cooperating with US sanctions to confine China to mature chip technology.

Nor is there any known “underground technological battle” between “blocks.” There is a well-publicized and highly-politicized conflict between the US and its allies on the one side and China on the other – a Western bloc and an Eastern bloc in a new semiconductor cold war.

Furthermore, all nations’ semiconductor industries are and will remain subject to the choices of others. And Europe, as home to ASML, Infineon, ST Micro and other first-rate semiconductor device and equipment makers, already knows what it takes to lead the industry.

Practically speaking, the problem in Europe is the same as the problem in the US, only arguably worse: limited production capacity and high dependence on Taiwan, specifically TSMC.

This situation is the result of investment decisions made over the past two decades, not a secret conspiracy. Breton is, of course, aware of this, having been a prominent business executive and French minister of economy, finance and industry.

In 2022, European spending on semiconductor production equipment nearly doubled, but still accounted for only 5.8% of the global total, according to industry association SEMI.

The figure for the US was 9.7%, after an increase of almost 40%. The figures for China, Taiwan and South Korea were 26.3%, 24.9% and 20.0%.

At the end of 2021, Europe’s share of worldwide integrated circuit wafer capacity was only 5%, according to Knometa Research. That was dwarfed by the Americas (11%), Japan (15%), China (16%), Taiwan (21%) and South Korea (23%).

The European Chips Act was enacted to upend that trend. Officially proposed in February 2022, it was approved by the European Parliament in April 2023.

With a 43 billion euro ($46.4 billion) package of public and private investments, it aims to raise Europe’s share of the global semiconductor market to 20% by 2030, bringing the industry back to its 2000 position. Estimates vary but it is now at no greater than 10% of the world market.

The Act also aims to diversify the European semiconductor industry away from its concentration in automotive and industrial-use ICs by developing expertise in chips used in artificial intelligence, 6G mobile telecom, the Internet of Things, quantum computing and other emerging areas, with investments in everything from “innovation” and design to fabrication and packaging.

To ramp up mass production and introduce advanced process technology, the EU is relying on new investments by Infineon and other European companies, joint ventures with foreign companies such as the one announced by STMicroelectronics and GlobalFoundries last year, and direct investment in production facilities by Intel and TSMC.

According to commissioner Breton, “This will allow us to rebalance and secure our supply chains, reducing our collective dependence on Asia.”

That should be possible to a degree, but regaining 20% of the global semiconductor market is likely a stretch. The US CHIPS Act offers more money ($52.7 billion); TSMC, Samsung Electronics and Intel are investing heavily in their home markets; Japan is pursuing a strategy similar to Europe’s; and China appears to be spending an amount of money on chip development that Europe won’t or can’t match.

Last December, it was reported that China was planning to provide its semiconductor industry with more than $140 billion in corporate subsidies and tax credits. In January, however, it was reported that this approach had been abandoned.

The Chinese government and Chinese semiconductor companies are now said to be focused on mature process nodes rather than accelerated miniaturization in order to develop comprehensive expertise step-by-step.

Even so, China’s progress is still impressive. Guangdong province alone has some 40 semiconductor-related projects valued at more than $70 billion either underway or in the planning stage. Investments are also reportedly being ramped up in Shanghai, Suzhou, Beijing and elsewhere.

China’s problem is the opposite of Europe’s: its semiconductor production capacity is already quite substantial – more than 15% of the worldwide total, including foreign-owned facilities – but it must invest heavily to dodge and circumvent US sanctions, which are migrating from leading-edge to mature process nodes.

In particular, China must protect its auto industry from sanctions. Here, as is already the case with ASML and the ban on exporting EUV lithography tools to China, Europe could become an important factor.

Europe’s three top semiconductor makers – Infineon, STMicroelectronics and NXP – all have significant business interests in China. They are also the world’s top three makers of automotive ICs while China is both the world’s largest auto market and biggest producer of electric vehicles.

Breton said, “I am eager to work with the US, Canada, India, Japan, South Korea, Singapore, and, of course, Taiwan.”

That is, everywhere but China, which he refers to as a systemic rival. In Europe as in the US, the semiconductor industry tends to see China as a great market opportunity while politicians increasingly regard it as a strategic risk.

As long as politicians limit themselves to tough rhetoric rather than punitive action, European automotive IC makers should have a bright future doing business in China. But if they decide to impose sanctions on China’s auto industry, those same companies – and European automakers – will pay a high price.

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