Semiconductor Shortage: Europe Should Commit to World-Class Production and Design

17 juin 2021

The global semiconductor shortage is shaking up a variety of sectors. The automotive industry is particularly affected, after initially overestimating the contraction due to the pandemic and reducing its orders, while demand from the IT sector was simultaneously soaring, due to work from home. This shortage highlights widening technological imbalances. Asia – with the key role of Taiwan and South Korea in particular – produces the most advanced chips and accounts for nearly 80% of world production. Meanwhile the United States has focused more on design and has fallen behind in production techniques. The country now intends to remain predominant in design and close the gap with Taiwan in production techniques. Europe, on the other hand, has concentrated on chips that are far less advanced in terms of miniaturization, particularly for the automotive industry, and has a small market share overall.

Securing Opportunities for Advanced Production

EU Commissioner Thierry Breton’s announcement of a €145 billion program to upgrade the European semiconductor industry by 2030 has been met with enthusiasm, especially by prospective U.S. partners such as Intel. However, the reception was paradoxically more lukewarm in some parts of Europe. Some companies, like the Franco-Italian STMicroelectronics, have dismissed the prospect of committing to state-of-the-art projects or further incorporating the issue of industrial sovereignty.

Others have rightly emphasized the need to take into account the current lack of prospects for cutting-edge production, as major economic powers seek to secure their own autonomy and require foreign producers to locate their production more locally, as evidenced by the planned factories of Taiwan’s TSMC and Samsung in the United States. Thus, the lack of chip design in Europe risks depriving any advanced semiconductor production of clients. This does not mean that advanced production plans should be abandoned, but rather that an integral redeployment of the supply chain, including design, should be encouraged.

Reconciling Production and Design

This situation reflects the shortcomings of the disjunction between design and production in most sectors. This trend has relied on the notion that design is necessarily more specialized and profitable. While there is obviously some truth in this, the reality is more complex. In the semiconductor industry, production easily ranks with design in terms of technological advances. Semiconductor factories (« fabs ») use extremely advanced techniques to produce integrated circuits that rely on transistors on the scale of a few nanometers.

Taiwan’s leading-edge standing has benefited from an unwavering political commitment to this heavily subsidized industry. Building a state-of-the-art factory easily costs more than $20 billion and obviously requires strong government support. In the United States, there had been a trend in recent years to move away from semiconductor production and focus on chip design, the so-called « fabless » model. This is the model of many tech giants like Apple. Intel, under its previous leadership, was moving in this direction marginally, as the company lost ground in production techniques to TSMC. Its new CEO, Patrick Gelsinger, has instead put the emphasis back on production and upgrading, in order to make up for the lag in 7nm and then 5nm standards in recent years.

Thirty years ago, Europe enjoyed a strong position, with 40% of the world’s semiconductor production. Its current position is limited to a 10% market share, and more importantly to much larger chips than the advanced standards. In this respect, the European situation is less akin to that of the United States than to that of China. Although China produces about a quarter of the world’s processors, it is struggling to move toward more sophisticated production and remains highly dependent on its more advanced Asian neighbors, as well as the United States for design. European production is no longer truly positioned in the race for miniaturization, nor is it massive enough to guarantee the resilience of supply chains in critically-dependent sectors.

Disruption of the Auto Industry: An Opportunity and a Threat

Safety standards in the automotive industry are obviously much more stringent than for mobile devices. It is therefore not surprising that the European industry relies on earlier generation chips. Similarly, miniaturization requirements are not the same for smartphones as for vehicles. Moreover, Europe’s lag in the miniaturization race does not necessarily mean a critical lack of technological competence at this point. The industrial applications of European chips are very diverse, ranging from communications to energy, for example.

However, the current situation is cause for concern. The shortage highlights a dependence on imports, which jeopardizes European industrial production in these times of global polarization. In addition, the gap in miniaturization and advanced production techniques risks upsetting the niche positioning of the three leading European companies, STMicroelectronics, Germany’s Infineon and the Netherlands’ NXP, in the future. The world’s major designers and producers are also increasing their efforts in these same fields because of the soaring role of electronics in the automotive industry, with electric and autonomous vehicles.

The interest of global tech giants like Intel in the European program is, in a way, an illustration of this. The specialization of European companies in the automotive sector cannot simply be used as a pretext to consider them protected from global competition. European centers have the skills to develop design activities on the continent, which would offer opportunities for state-of-the-art production. Apple’s announcement this year of an additional one-billion-euro investment in Munich for communication technologies like 5G somehow testifies to this potential.

Specialization Does Not Insulate from the Technological Race

Europe has not been able to capitalize on its skills. For example, upstream of design, the architectures of the British company ARM are experiencing phenomenal success, as a result of their flexibility for mobile devices, and are now developing well beyond that market, as shown by Apple’s orientations for its computers, but also by Microsoft at the margin. ARM was able to develop thanks to the support of a European program set up in the 1980s, which was however considered an epic failure because it did not help the industry as a whole to structure itself.

Although Europe’s countries face different – sometimes diverging – industrial positions, there is a tendency across the continent to work within existing industrial frameworks, with a lack of projection into new technologies, notably due to a lack of resources for advanced research. In Germany, for example, the still enviable situation of the automotive industry in terms of reputation and exports cannot entirely hide concerns about the country’s integration in the current industrial revolution, and particularly in the development of technologies such as electric and autonomous cars.

While the move up the semiconductor market requires important partnerships with American and Asian groups, these partners are likely to be more interested in industrial applications than in the redeployment of the European semiconductor industry as an integrated sector. The theory of comparative advantage or the lack of concentration of European companies in the sector can hardly be invoked to justify Europe’s lagging and dependence on technologies that are so essential for the whole economy. Europe cannot afford to lag behind the most exciting innovations and the global transformation of the semiconductor industry.
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