Can we eat the new European Chips Act?

The short answer is no: the chips that are referred to are not the delicious slices of fried potato, but minuscule silicon parts known as semiconductors. Over the last years these shiny objects have grown in importance, causing upheaval in both the private and public sectors. On Monday Graphics Processing Unit (GPU) manufacturer NVIDIA saw its acquisition of chip designer Arm fall apart. Yesterday European commissioner Thierry Bretton unveiled the European response. Read on to find out what the hype is about and what our European leaders are going to do about it.

The aforementioned NVIDIA is a good place to start. The US company was founded in 1993 and saw an opportunity in the upcoming industry of video games. Invidia is latin for envy and indeed, the company’s results could inspire envy in any competitor. Although video games do not seem to be the most important thing in the world, the technology behind them is state of the art. NVIDIA has become one of the world’s leading centers of excellence when it comes to machine learning, the practice through which software can improve itself automatically. GPUs have become even more sought after because they are vital to mining bitcoin and other cryptocurrencies. This has led to widespread grumbling in gaming circles as GPUs have become ever more pricey.

In 2020 the shortage became far more serious. As many people were unable to go on vacations or visit pubs and restaurants due to lockdowns, money was burning in their pockets. Many consumers chose to buy a new television, computer or gaming console to have more fun at home. Although this heralded tremendous price rises in consumer electronics, that was not the end of the story. Because in our “internet of things” world everything has become a computer, everything needs chips: from ink cartridges to cars. In an example of old-fashioned vertical integration NVIDIA tried to buy English chip designer Arm limited. The deal has been terminated due to opposition by regulators, afraid of monopolies. Softbank, the Japanese conglomerate, now may take Arm public soon.

Although a greater concentration of private power in the semiconductor industry has been averted, there is one country that has a global market share of 63%. However, country? Some would describe the Republic of China as a rebellious region, while most would know it as Taiwan. Knowing this lends a new perspective to the rise of tensions with (the People’s Republic of) China. Although China has never accepted Taiwan’s independence, the presence of such an important industry has made Taiwan an even more enticing prey than before. Both military and diplomatic pressure will continue to rise with the share price of Taiwan Semiconductor (TSMC).

European commissioner Thierry Breton has taken the lead in drafting the European response. The Parisian started programming in the 1970s and later became known as a “turnaround whiz” in saving troubled technology companies from collapse. Will he be able to turn around Europe to help us catch up with the US and Asia? Well, for starters the situation may not be as bad as it seems. European universities are still leaders when it comes to research on information technology. The problem is far more in the production of semiconductors. Although for instance Dutch ASML is instrumental in providing photolithography systems needed in the production of chips, most of the final products are imported from Asia. Only 10% of the world’s share is produced in the EU, a far cry from the 1990s when the share was 40%.

The new Chips act proposes an investment fund for semiconductor manufacturing to include 11 billion EUR of public money and an additional 32 billion in private investments. The number seems significant but keep in mind that the original 11 billion will come out of programs that are already in place, while the 32 billion has yet to materialize. In that sense the total budget is meager, compared to the recently unveiled 45.5 billion EUR American package, fully consisting of government funds. Far larger still is the 395 billion package put into place by South Korea last year. Given that South Korea is already the largest producer after Taiwan, this package is bound to have more impact than those proposed by its Western competitors.

Perhaps more significantly, the Chips Act includes a relaxation in the strict European rules prohibiting state aid to companies. This entails a clear risk that European member states will compete to attract investment in their own economies, while those states with smaller pockets are left in the dust. Margrethe Vestager, the European commissioner responsible for fostering competition, already warned that “we need to avoid a subsidy race“. I sincerely hope this statement will not turn into a self-fulfilling prophecy.

The idea of the European Union becoming more self-sufficient in semi-conductors, a high-tech sector with serious value added and dual use capabilities, is in essence sound. More production internally also has positive effects on labor markets and could help to increase opportunities in less competitive regions. However, that would require a serious strategy, a lack of one could cause funds to flow to those areas already successful in information technology. Furthermore this new practice of increasing ambitions while using pre-existing funds begs the question of feasibility. It seems unlikely that one euro can be used to ensure employment, foster innovation, save the climate and, since yesterday, also support the European semiconductor industry.