Securing semiconductor supplies in the EU

The European Parliament is starting negotiations with the European Commission and the Council of the EU member states on the final version of the European Chips Act.

The legislative package focuses on expanding the European Union (EU)'s semiconductor production. Long-term policy goals include doubling the EU's share from 10% of world output to 20% by 2030.

The package aims to mobilize EUR43 billion of public and private investments by 2030. The Chips Act is part of the updated EU industrial strategy, which aims to reduce the bloc's strategic technological and industrial dependencies and diversify its international supply chains.

Skilled labor

The Parliament focused on the development of next-generation semiconductors and quantum chips. It also aimed to address labor skill shortages and retain talent in the EU.

It proposed that EU competence centers provide access to chips tools and libraries and coach people in how to use the infrastructure. The Council has asked for competence centers in all member states to avoid innovation mismatch within the bloc.

Separately, the Commission has announced that it would establish Net-Zero Industry Academies to improve skill levels and retrain workers for strategic industry sectors.

International co-operation

The EU is very likely to focus on expanding cooperation with "like-minded" partners to mitigate semiconductor supply chain disruption, including the supply of raw materials.

Co-operation with the US, Japan, South Korea, and Taiwan would seek to mitigate semiconductor shortage risks. The EU and the US have already signed agreements to address and mitigate semiconductor supply chain disruptions and to reduce the risk of a "subsidy race."

The US and the EU also plan to cooperate on controls regarding the export and re-export of dual-use items and technologies.

Funding policy and gaps

Limited new EU funding will focus on attracting private-sector investment. Given budgetary pressures faced by weaker EU states, the EU's goal to expand investment into semiconductor development is likely to fuel the debate about the need for additional joint EU borrowing to fund strategic policy initiatives.

The Commission has already stated that it would propose a European Sovereignty Fund by mid-2023 to support industrial decarbonization and the uptake of clean technology. Nonetheless, EU funding arrangements appear likely to seek a significant role for the private sector in providing investment.

National funding

State-aid rules are likely to be eased to support semiconductor research and manufacturing. The Commission has stipulated that the sector has "extremely high barriers to entry," requiring substantial public support. It envisages that public resources could be allocated to fill funding gaps in the sector. If necessary, state support could cover up to 100% of the funding gap.

The Commission has already proposed to simplify state-aid rules and to accelerate procedures, including enabling "simple tax-break models." EU member states are largely likely to support faster and simpler regulatory procedures for priority sectors and large-scale "important projects of common European interest".

Increased protectionism

Despite aiming to protect European industry, the European Chips Act is likely to increase compliance costs. This will be due to increased public control over the monitoring and mitigation of risks affecting the semiconductor supply chain.

EU plans are likely to leave room for state intervention, particularly in servicing orders deemed to have strategic priority for critical sectors. In times of supply chain disruption, the Commission would be able to impose mandatory information requests in relation to production capabilities, capacities, and other data, and implement joint procurement on behalf of member states.

During supply disruption, critical sectors, including energy and defense, would be prioritized. Such sectors would likely include energy (such as electricity distribution), transport, banks and financial institutions, healthcare providers, water utilities, digital infrastructure, public administration, and space. Additionally, the defense and security sector would be considered critical under the Chips Act, a position the Council supports.

The requirement to obtain export permits and other controls would be likely in extraordinary situations like the COVID-19 pandemic. Such emergency measures would likely be unusual and would mostly be applicable only on a temporary basis.

Additionally, the EU is likely to use other legislative instruments, covering areas such as competition, trade, and investment, to address perceived unfair trade practices and distortions such as non-EU state subsidies. However, the scope and strength of any such action by the EU or individual EU member states is likely to be substantially narrower than the restrictive measures introduced by the US.

Outlook

The adoption of the European Chips Act legislative package is likely in the next eight months. Any new joint EU fund appears likely to be limited in size and to become operational from mid-2024 or later.

The European Chips Act is linked to other emerging legislation. This includes the European Critical Raw Materials Act, which will focus on supporting the supply of raw materials declared strategically important for the EU, and separate plans for a Net-Zero Industry Act to cover the industrial manufacturing of key technologies in the bloc.

The momentum to support industries such as semiconductor production via regulatory and policy changes, including tax breaks and public investments, is likely to be maintained in the five-year outlook.

The EU is building tools to allow greater public control in situations of severe supply chain disruptions. Institutional measures, including greater cooperation with partner countries, are likely to assist planning under normal circumstances.

High market concentration and the simultaneous but uncoordinated subsidy programs of partner countries like the US, South Korea, and Japan indicate a "global subsidy race" risk in the global semiconductor sector.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.