As the global chip shortage enters its second year with no end in sight, the EU is redoubling efforts to improve its standing in the semiconductor industry.

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At the World Economic Forum’s Davos Agenda 2022, European Commission President Ursula von der Leyen announced the European Chips Act, aimed at strengthening the European semiconductor industry on multiple fronts. “The European need for chips will double in the next decade,” von der Leyen said. “This is why we need to radically raise Europe’s game on the development, production and use of this key technology.”

Currently the EU’s share of the global microchip market is only 10%, forcing it to rely on suppliers outside Europe. The Chip Act, adopted by the EU in February, is meant to infuse the industry with more than €43 billion ($49 billion) in public and private investment, primarily in the form of state subsidies. It focuses on five key areas, including research and innovation, the development of leading-edge chip fabrication plants, known as “mega-fabs”, as well as chip-making infrastructure.

The semiconductor industry is uniquely complex and interdependent, being comprised of what The Economist aptly describes as a “global ecosystem of thousands of companies.” Chip designs generally come from highly specialised firms, which use sophisticated software developed by still other firms. The R&D cycle is even longer than in other high-tech industries and costs billions. Once this process is complete, contract manufacturers assemble, test and package (ATP) the chips.

Within this context, the EU has both strengths and weaknesses. For one, it is already a leader in semiconductor R&D and innovation. The Interuniversity Microelectronics Centre (imec), a top international hub of expertise in nanoelectronics and digital technologies, is based in Belgium. The EU is also dominant in some critical links in the semiconductor supply chain. Dutch firm ASML is the world’s only supplier of the lithographic equipment used in fabs. Various other firms specialise in individual components such as silicon wafers or lenses used in lithography.

Half of the EU’s chip capacity is for chips with nodes of 180 nanometres or more, much larger than the most advanced chips. This too appears as a strength when viewed from a different perspective. The nanochips produced by TSMC and Samsung of South Korea, for example, mainly go into consumer electronics. Europe’s larger chips are suited to industrial applications in automotive and other key European sectors. As Jan-Peter Kleinhans of German think-tank SNV says, “European chipmakers focus on their customer base.”

Still, the Chips Act suggests that these strengths will be insufficient. In addition to a dearth of mega-fabs, the continent lacks a home-grown equivalent to firms like Nvidia, which excel in nanochip design. The Act seeks to entice top foreign chip-makers such as Intel and TSMC to build mega-fabs in Europe. This could be problematic, as it entails an easing of state-aid rules to allow subsidies for the fabs. By the time they are completed, there is a chance the shortage will have subsided or become a surplus.

Behind the proposed strategies is a keen sense of urgency to catch up. In a speech at the European Parliament in September, von der Leyen said “Digital is a make-or-break issue.” Considering the extent to which other industries depend on chips—brought into stark relief by the shortage—this goes beyond the technology itself. As Industry Commissioner Thierry Breton wrote in blog post, “The race for the most advanced chips is a race about technological and industrial leadership.”

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