Press play to listen to this article
Europe is caught in the middle of an increasingly political showdown over microchips between the U.S. and China and is scrambling to get out of the firing line.
While Europe is a heavyweight at making planes and cars, it is a minnow when it comes to the chips that are vital to swaths of high-end manufacturing.
Europe accounts for only about 10 percent of the world’s chip industry, and the Continent is poorly prepared for supply shocks. In the past few weeks, politicians and businessmen in Brussels, Paris and Berlin were caught off guard by how quickly supply disruptions in the semiconductor industry reduced output at the crucial car industry.
The calculus for Europe on this vulnerability is as much political as it is economic, and has laid bare Europe’s dependence on America’s top-end chipmakers.
The U.S. has already restricted the supply of its premium semiconductor products to Chinese companies such as Huawei, sparking fears among European businesses about how far Washington will go to keep key U.S. chip technology out of China. For EU companies trading with China and manufacturing there, the chief concern is that they could be caught up in this fight and be frozen out of irreplaceable U.S. semiconductor supply markets by export controls.
A separate shock to the car sector’s supply of chips has heightened alarm about Europe’s reliance on foreign players in past weeks, with semiconductor manufacturers, especially in Asia, failing to keep up with demand.
This shortage of chips has caused disruption at Volkswagen’s headquarters in Wolfsburg — one of the largest car plants in the world. It’s also being felt at factories across Europe, and carmaker CEOs expect that the problem will continue through the first half of this year.
“The semiconductor supply bottleneck resulting from the rapid recovery of automotive markets is causing significant disruptions in global vehicle production for various manufacturers,” VW said on Friday.
Semiconductor makers have been racing to satisfy demand from the lucrative consumer electronics industry in the coronavirus pandemic as the auto market sagged, creating a supply crunch.
This week, European policymakers identified the chip shortages as a key strategic concern and presented plans to deal with it.
“There is currently a game underway between the United States and China … and it is likely to continue to get tougher,” the EU’s Internal Market Commissioner Thierry Breton told reporters this week. “We in Europe intend to play our full part in this new geostrategic game of chess.”
“I say it clearly, in the coming years we will see a certain number of tensions … in the field of semiconductors, that can have implications, including geopolitical ones,” Breton added. “In fact, we can already see that … We see it in particular with the large Chinese companies that today suffer from the lack of these components, so let’s not be naïve.”
France’s Economy Minister Bruno Le Maire, speaking alongside Breton, said Europe “wants to be an industry power. We want to be an independent Continent when it comes to technology.” He added Europe’s reliance on foreign suppliers “is excessive and unacceptable. It makes us vulnerable. It weakens our production chains today [since] tens of thousands of cars are not produced for lack of electronic components.”
On Tuesday, Germany and France published a paper calling for “a first set of measures” to “reduce, where relevant, strategic dependencies.” It follows earlier support from Berlin to set up a joint European industrial project, and diplomatic efforts by the European Commission to launch an “alliance” of companies and governments to pour money into the semiconductor industry.
German tech lobby Bitkom said its members feared they were too dependent on foreign suppliers and universally backed initiatives for greater digital sovereignty. Some 94 percent wanted Germany to push for the EU to be on a level with China and the U.S., according to a poll of 1,100 medium and large companies released on Thursday.
The Commission even has dreams of setting up a leading factory for the most sophisticated chips — though industry officials have greeted that idea with skepticism.
All out of chips
The chip supply chain ran into a storm last year.
Under the Trump administration, China hawks in Washington identified the chip sector as an Achilles’ heel in China’s rise. While Beijing has proven successful in its strategies to overtake rivals on technologies like smartphones, solar panels, consumer tech, artificial intelligence technologies and more, the country has struggled to replicate or acquire some of the cutting-edge technologies needed to produce the most advanced microchips.
The Americans moved in on the weak spot. U.S. officials slapped new restrictions on chipmakers doing business with China’s telecoms giant Huawei in May 2020. In December, Washington barred U.S. chip designers from doing business with China’s state-owned manufacturer SMIC.
These measures took place in a world thrown into turmoil by the coronavirus pandemic. Demand for microchips for consumer products like computer screens, headphones, laptops and smartphones soared while car sales collapsed, prompting carmakers to cancel chip orders.
But Europe’s car factories quickly found themselves short of chips with no capacity to produce them.
“Volkswagen has to make sure that wafer and semiconductor manufacturers also know our needs,” the company said.
The car industry’s worries extend beyond the immediate impact of the pandemic on their supply chains. Consumer electronics and telecoms products are expected to boom in coming years and the small, cutting-edge chips that power these devices are more profitable for chip manufacturers to make.
The crisis has pointed to the reliance on U.S. chip designers and Taiwanese manufacturers to keep up with global demand.
Breton’s clash with industry
Buffeted by the U.S. and China trade war more generally, EU countries and officials in Brussels are cooking up wide-reaching plans for EU “strategic autonomy” and to reshore everything from masks and vaccines to lithium batteries.
Now chip factories are also part of those plans, spurred by the supply shortage.
Breton said that both French President Emmanuel Macron and German Chancellor Angela Merkel support his work to set up an “alliance for semiconductors” that would support local chip firms and would also funnel public cash into building up production capacity in Europe. The alliance would be launched as soon as April, officials involved in the work said earlier.
In a presentation given to national diplomats by the Commission earlier this month, and seen by POLITICO, officials promised funding from its Recovery and Resilience Facility to rebuild the economy after the pandemic. It also sought support from national capitals to set up an Important Project of Common European Interest (IPCEI) on microchips, a special funding scheme to allow state aid to critical technologies and industries.
That IPCEI already won support from the German government earlier this month. “We want Germany and Europe to become more sovereign and independent of imports when it comes to microelectronics and communication technologies,” German Economy Minister Peter Altmaier said when announcing the government’s intention to join the scheme.
Europe does have some leaders in niche parts of the supply chain. Dutch chip printing equipment-maker ASML holds a global monopoly on the machines that enable foundries to print the latest generations of microchips. And firms like the Dutch-American NXP and German Infineon lead in designing chips for sectors including automotive.
But for Breton, Europe’s autonomy will depend on having a leading-edge factory too.
“We must give ourselves the means to be autonomous on this chain,” he said, with the ambition to manufacture the tiny chips used in smartphones and other high tech.
But that’s where the European commissioner could lose support of its leading industry players, insiders warn.
Breton’s idea of a foundry that manufactures the most sophisticated generations of chips “is a bridge too far,” said one industry official who is involved in discussions with European governments. “The gap is pretty wide between what Breton has in mind and what the industry can deliver without committing financial suicide.”
Instead of the smallest-scale chips, Europe’s car industry and other key sectors instead could use a factory that produces slightly larger semiconductors, industry experts said.
“The European ambition gets bigger and bigger by the quarter. It started as the project of the decade, now it’s become the project of the century and soon it’ll be the project of the millennium,” the official said. “Meanwhile, we are forgetting to take the first step.”
Mark Scott, Joshua Posaner and Stuart Lau contributed reporting.
Want more analysis from POLITICO? POLITICO Pro is our premium intelligence service for professionals. From financial services to trade, technology, cybersecurity and more, Pro delivers real time intelligence, deep insight and breaking scoops you need to keep one step ahead. Email [email protected] to request a complimentary trial.