Europe is preparing a silicon shield. He could tear down an avalanche of inefficient spending

The interests of Intel and the European Union intersect. The American company, which still reigns in the development of chips, has lagged behind its competitors in production in the past and wants to return to prominence. Europe, too, would like to reverse the trend, as its role in the semiconductor sector has been declining for decades. The European Commission has come up with a revitalization project, which will also be addressed by the Czech Presidency of the Council of the EU in the second half of the year.

This year, Intel announced plans to build two plants in Magdeburg and further invest in research and production facilities across Europe worth up to 80 billion euros. European Commission President Ursula von der Leyen called it the first success of a Brussels initiative aimed at adopting new legislation – the so-called The European Chips Act. The United States is preparing a similar law to encourage domestic strategic industries.

Efforts to revitalize the semiconductor industry in Europe and America have three dimensions. The West wants to avoid the further chip outages we have been experiencing since the crisis. Secondly, it needs to strengthen its competitiveness in the economy – chips are the basis of all modern technologies.

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And third, there is the broader security dimension. Democratic countries still maintain technological superiority in this sector. If they lose it, it will have serious security consequences. This is also true in the narrower sense – state-of-the-art chips are also key to the defense industry. When Intel’s investment is brought to a successful conclusion, the transatlantic security link will be further strengthened.

Feet on the ground

On the other hand, great ambitions lead to exaggerated expectations. Europe’s “semiconductor entry” will be successful if it evaluates well what is real and what is not. New large factories such as those planned by Intel in Magdeburg are promising for the future, but will not solve the current chip shortage problem. And the semiconductor industry is not just about making chips; it is just one of a number of important parts of the chain.

The greatest added value arises in companies that deal with chip design. In addition to them, companies focusing on the production of high-tech equipment for the production of chips are gaining ground in the semiconductor field. And it is followed by a less sophisticated, but also an important phase of assembly, testing and packaging.

Intel has decided to break the idea that individual companies throughout the chain should have a narrow specialization. This is fundamentally different from the famous Taiwanese company TSMC, the world leader in the production of state-of-the-art chips. The Taiwanese focus only on the production of chips for other companies.

In recent years, only Samsung has been able to keep up with them in this segment to some extent. It is no coincidence that both Asian companies are investing in production in the United States and that a number of European countries, including the Czech Republic, would be very interested in Taiwanese investments.

Both Europe and America intend to support the semiconductor industry with billions in public investment. The aim of the European Chip Act is, among other things, to relax state aid rules. It will depend on whether individual states can target the flow of funds in the right direction. Any public support risks being spent inefficiently.

Each country should first evaluate whether the companies there throughout the chain can already boast of some significant successes. And then decide whether it makes more sense to strengthen this existing competitive advantage, or rather try to develop another part of the chain.

A study by the British companies Imagination Technologies and Global Counsel, for example, concludes that the United Kingdom should not go the EU or the United States and try to get chip production on its territory at all costs. British companies are strong in research, development and in the protection and enforcement of their intellectual property. That’s what they should stick to, says the study. It is realistic to expect that the production of state-of-the-art chips will remain the domain of the TSMC-Samsung-Intel triumvirate.

It will be important for Europe to strengthen the whole ecosystem, from university research to small and medium-sized enterprises, through investment. Intel’s plans in Magdeburg, the capital of Saxony-Anhalt, are important, but equally important is that the “Silicon Saxony” project was born not far from there in recent years. A number of companies connected to the semiconductor industry have settled in the cluster around Dresden, and last year Bosch started to produce chips for the automotive industry, which invested one billion euros in operations.

Artificial intelligence also helps us to improve our customer experience, says Hrubá from Česká spořitelna

There are more such clusters in Europe, their centers are, for example, Grenoble, Eindhoven, Leuven and now outside the European Union and Cardiff. The Czechia also has its own small semiconductor industry center in Rožnov pod Radhoštěm, which continues the tradition of the former Czechoslovak state Tesla and where, among other things, the multinational company onsemi (formerly ON Semiconductor) manufactures chips. One of the world’s leading players in the industry is the Dutch ASML, a leading supplier of chip manufacturing equipment.

21st century oil

Semiconductor chips are said to be the oil of the current century. The fears of Europeans and Americans that they are increasingly dependent on production in East Asia are logical in this regard. Fortunately, it is clear that with “modern oil”, democratic countries can still do much better than they did with fossil fuels.

Oil and natural gas have in the past been dangerous tools in the hands of many authoritarian regimes, and as the aggression of dictator Vladimir Putin in Ukraine shows, this is still the case today. Most semiconductor chip trumps are held by democracies – including their production in East Asia.

Taiwan, South Korea and Japan account for more than half of world production. The United States has a completely dominant position within the industry. American companies are leaders in the development, design and production of equipment for the production of chips and hold technological know-how. Asian companies TSMC and Samsung have benefited from working with Americans in the past. On the other hand, US restrictions on the supply of technology to Chinese companies mean that the Middle Kingdom is unable to produce the most advanced chips yet.

But it would be a mistake to underestimate the Chinese semiconductor industry in any way. Like Brussels and Washington, Beijing is paying close attention to the further development of the industry. Due to tense trade relations with the United States, it seeks to develop Chinese capabilities in all parts of the supply chain. China has already managed to gain a significant share in the final phase of the chain – in assembly, testing and chip packaging. It is also strong in the production of relatively less advanced chips.

The Economist recently warned that Chinese companies are succeeding in “downloading” a significant portion of chip-making equipment from Western companies. As a result, Chinese companies allegedly manage to disrupt, for example, the supply chain of the Taiwanese company TSMC, which, as a net producer, is also dependent on subcontracting from abroad.

Strings differently

The Covid crisis has shown how vulnerable supply chains are, involving companies from dozens of countries. At the same time, coronavirus was far from the only similar pest in world trade – various natural anomalies, hacker activities or, for example, the blocking of the Suez Canal were added to it.

Putin’s aggression then confirmed that the failure of even a single raw material, such as the rare gas neon, could have far-reaching effects. Its supplies to the semiconductor industry are largely dependent on both sides of the conflict – it was a by-product of the Russian steel industry and its further processing was handled by Ukrainian companies.

Artificial intelligence also helps us to improve our customer experience, says Hrubá from Česká spořitelna

However, developments in recent months have also confirmed that the supply chain crisis does not have a simple solution such as onshoring or reshoring – moving all production to European countries, for example, which want to avoid problems. It does not make sense from either an economic or a security point of view.

Existing chains have proven to be much more resilient than many expected, and were still the surest way to revive production and trade. And a possible reliance on production only in one’s own country would be not only expensive but also dangerous – today it is quite evident that no state is completely resistant to all current threats.

The just-in-time principle certainly deserves a reassessment, ie a system of deliveries for exactly the time that did not take into account the need to create stocks. Chains should be more resilient in the future and can be achieved through diversification. The current situation, where there are only one or two key suppliers in each segment of the chain worldwide, is unacceptable after the experience of recent crises. And Putin’s aggression has shown that it is simply not possible to involve some countries in complex chains.

The shortage of semiconductor chips is one of the biggest problems in the world economy. The good news is that similarly democratic countries have the ability to build diversified and resilient chains together in this field. Fortunately, the European Union, the United States, the United Kingdom and the democracies of the Indo-Pacific have huge knowledge, development and production potential. And there are other potential partners, such as India or the Association of Southeast Asian Nations (ASEAN), which have not been very important players in the industry in the past, but have ambitious plans.

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