Chip Subsidy Vessels – Comparing the EU and the US
EU policymakers cannot brute force their ship to its intended course
How to steer a continent’s industrial policy?
The US and EU have embarked on unprecedented journeys to bolster their domestic semiconductor industries. Leaders in Washington and Brussels have identified key weaknesses in their respective regions’ chip supply chains, and they hope to leverage both central and local government support to plug these holes.
Different ships, however, require different tools to steer.
American policymakers could afford to spend $39 billion in the CHIPS and Science Act of 2022 on a semiconductor manufacturing grant program due to the US federal government’s enormous financial resources. Though state governments have proposed sizable incentive packages that may decide where chipmakers choose to expand, the Commerce Department’s disproportionately larger subsidies will set the agenda on what types of projects receive funding.
On the other side of the Atlantic, EU policymakers cannot brute force their ship to its intended course. Of the €43 billion promised under the EU Chips Act, only about €7 billion would derive from EU-level funding. The remainder is planned to be provided by member states, which may not prioritize solving EU-wide supply chain weaknesses over their own parochial priorities. Expected to pass at the end of April, the EU Chips Act thus takes a different approach than the US CHIPS and Science Act to set a unified agenda and prevent a subsidy “race-to-the-bottom.” —Rather than paying for its priorities, the EU regulates its agenda to existence.
Grant application review, mandatory agreements, state aid rules… The US and EU’s semiconductor incentives both offer central funds, but their regimes differ starkly in how they integrate local chip subsidies. Today’s article will:
Contextualize the industry conditions both countries seek to remedy,
Dive into US and EU chip subsidies, &
Show how semiconductor subsidies reveal the differences between the US’ and EU’s policy capabilities.
Why Fund Chips?
Prior to diving into the US and EU's policy tools, we should reflect on the goals, powers, and constraints of each region’s governments. This section shows how differently situated semiconductor industries and unique political contexts affect the dynamics American and European policymakers face when addressing chip supply chain weaknesses.
Plugging US Supply Chain Holes With Federal Cash
A recent series of crises showed American lawmakers how reliant the US’s most economically critical industries are on foreign supplies of chips. Wanting to target these supply chain weaknesses, as well as boost American competitiveness against China, Congress embarked on industrial policy at a national scale.
a) Supply Chain Challenges
As discussed in previous Chip Capitols articles, events in 2021 and 2022 caused a severe chip shortage. At the onset of the COVID-19 pandemic, automobile manufacturers around the world canceled orders for new chips, while demand for the most advanced chips used in cellphones and 5G infrastructure spiked. After a few months, the demand for cars rapidly recovered, but production lines for auto chips were slow to switch back into gear. Factories could not finish production without semiconductor inputs, leaving consumers without new cars, auto workers furloughed, and the global auto industry at a loss of over $210 billion.
Beyond demand shocks, a slew of natural disasters exacerbated already tight supply for all sorts of chips. The February 2021 winter storm in Texas knocked out power for Texas Instruments’ facilities supplying analog chips for automobiles, as well as Samsung’s facilities in Austin manufacturing processors for 5G infrastructure and mobile devices. A March 2021 fire at a Renesas fab in Japan further strained automotive chip supplies, and, in spring 2021, TSMC cut chip production due to a drought in Taiwan.
Longer term, the US’s global share of chip manufacturing fell from 37% in 1990 to 12% in 2020. Most US memory chip companies exited the market in the 1980s due to rising competition from Japan. Meanwhile, Taiwan and South Korea formed a duopoly on the global supply of the most advanced logic chips at 92% and 8%, respectively. Of greatest concern for US policymakers, Mainland China’s share of global manufacturing has steadily risen from 3% in 2000 to 15% in 2020.
On the design side, the US still leads in developing chip architectures and EDA software tools, accounting for 46% of the global design market in 2020. Though this share has declined slightly from 50% in 2000, the US’s stronger position in this part of the chip industry has made design a lower priority for federal policymakers.
b) Policy Response
In a February 2023 speech at Georgetown University, Secretary of Commerce Gina Raimondo said “the CHIPS and Science Act presents us with an opportunity…[b]ut only if we — as a nation—unite behind a shared objective, generate a similar public-private mobilization and think boldly.”
Sec. Raimondo’s key word was “unite.” Semiconductor supply chain weaknesses and a bipartisan desire to compete with China spurred US lawmakers to abandon their traditional qualms about subsidizing private industry. To ensure the $39 billion in manufacturing grants appropriated in the CHIPS and Science Act effectively address national priorities, Congress armed the Commerce Department with policy tools (discussed later) to steer federal and state chip subsidies on a strategic course.
Critically, the US Commerce Department will be able to steer the national and state chip subsidy agendas in unison because of the federal government’s enormous funding. As we will see, the European Commission does not have the same luxury to buy member states’ compliance. To that end, the EU Chips Act expounds a different set of tools, like exemptions from competition policy, to steer local subsidies in line with the continent’s agenda.
Steering Member States’ Advanced Chip Subsidies With EU Regulations
Like the US, the EU has faced severe supply chain challenges, and recent geopolitical shocks have highlighted the risks and costs associated with relying on distant suppliers for its economy’s chip needs. For example, Europe’s manufacturing-heavy countries bore an outsized impact from the auto industry’s $210 billion in losses from the global chip shortage. Furthermore, European leaders fear economic coercion in light of the increased weaponization of trade around the world.
Though some of the inspirations for it are similar, the EU’s limited budget and strict subsidy rules result in its chip subsidies differing substantially from the US’. These differences thus offer fascinating insights into the two continents’ unique political systems and the future of their industrial policies.
a) Supply Chain Challenges
Europe has notable strengths in certain segments of the semiconductor industry. Chipmakers like STMicroelectronics, Infineon, and NXP are global leaders in the sensors and power electronics needed for heavy industrial applications. The Netherlands’ ASML is the world’s sole provider of cutting edge semiconductor manufacturing equipment, Germany’s BASF is a key input materials provider, and Siemens offers critical chip design software.
Beyond its private sector, Europe’s public-private research centers are among the world’s best. As Chip Capitols has covered in previous articles, institutes like CEA-Leti, Imec, and Fraunhofer have originated key breakthroughs in microelectronics for the global industry.
Europe’s ship has some gaping holes, however.
The continent currently cannot produce cutting-edge chips and plays a minor role in semiconductor design, accounting for only 9% of global semiconductor design. Europe missed out when the design ship set sail in the early 2000s. At the turn of the century, horizontal segmentation separated IC design companies from contract foundries as part of the “fabless-foundry model.” As a result, EU chip companies mainly operate as integrated device manufacturers (IDMs), designing and manufacturing primarily mature-node chips. The continent lacks foundries capable of manufacturing the most advanced nodes like those in East Asia, and it does not have cutting-edge chip designers like the US’ Broadcom, Nvidia, and Qualcomm.
In response to rising chip demand, the leading European IDMs plan to increase their production capacity at current nodes but not to invest in fabs capable of producing cutting-edge semiconductors. Currently, Europe’s most advanced process capacity lies in Intel’s 14-nm Leixlip fab in Ireland. Of all the chipmakers currently operating in Europe, only Intel has plans to build an advanced 7-nm fab, on the condition of significant public contribution through state aid.
Europe faces challenges both in regard to its short-term supply chains and its long-term competitiveness. European companies’ current plans to raise production capacity may address immediate supply crunches, but the larger question for policymakers is how to develop more advanced chip manufacturing and design.
To put it simply, although a Dutch company is the world’s only producer of cutting-edge EUV lithography tools, not a single European chipmaker is yet capable of using them. Brussels wants to solve this problem.
b) Policy Response
EU Commission President Ursula von der Leyen announced last year that with “the European Chips Act, we are putting out the investment and the strategy.” The Commission aims to increase Europe’s share in global chip production to 20% by 2030. Fulfilling this goal would reverse a decades-long decline in Europe’s global share of chipmaking. In 1990, Europe produced 44% of the world’s semiconductors, this fell to 24% in 2000 and just under 10% today.
As part of these goals, the Commission plans both to both expand existing capabilities and develop new cutting-edge fabs on the continent. This offers a much more farsighted plan than the mainly regional policies which have thus far supported chip projects in Europe. These former policies mainly focused on developing disadvantaged regions, without supporting existing technology clusters. Brussels also restricted these plans to a narrow focus on supporting chip R&D but not production (see Articles 21 and 22 of this Commission Communication).
Unlike the US, the EU is a supranational political structure aimed at providing a common economic framework for its member states. While it does set a common regulatory and legal framework, it does not have the same financial capacity as the US federal government. This means the EU must rely primarily on member states to provide the financial resources for its industrial policy, while focusing itself on providing an overall strategy of how funds should be allocated. This strategy prioritizes preventing parochial economic development interests from weakening the EU’s overall growth.
First released in February 2022 and rumored to be passed soon in April 2023, the EU Chips Act aims to enable national funding for semiconductor foundries while maintaining coherence in the bloc’s common market and building a more dynamic European ecosystem. In terms of financing, the EU Chips Act and the pre-existing Important Projects of Common European Interest (IPCEI) mechanism redirect various existing budgetary instruments used by the EU and its Member States – including COVID-19 recovery funds – to support the semiconductor industry.
Chip Programs to Steer Continent-Sized Ships
United States
As mentioned in past Chip Capitols articles, the US CHIPS Act's crown jewel is a $39 billion fund incentivizing companies to expand domestic semiconductor manufacturing capacity. Eligible projects include fab construction, purchases of manufacturing equipment, and factories producing chipmaking tools and materials.
US lawmakers placed a high priority on securing automakers' access to chips. A bipartisan letter by members of Congress and governors from states with significant automotive industries successfully urged lawmakers to set aside $2 billion of the CHIPS Act's funding for fabs producing the older-generation semiconductors used in vehicles. Congress also issued non-binding guidelines saying national security–critical projects should be prioritized.
For the remaining $37 billion, the Secretary of Commerce exercises wide discretion in deciding which firms receive funding. To that end, the Commerce Department has laid out a strategy highlighting the industry segments it will prioritize. Policymakers aim to attract:
Two leading-edge logic fabs to produce processors (CPUs and GPUs),
“Multiple” high-volume advanced packaging facilities to help US fabs to finalize semiconductors for sale to device manufacturers,
An unspecified number of high-volume leading-edge DRAM (memory) fabs to produce chips for PCs and servers, and
Sufficient mature node manufacturing capacity to meet the US’s economic and national security needs.
Critically, the federal CHIPS Act's manufacturing grants require applicants to have also received support from a state or local government. This has the effect of leveraging state funds to amplify the Commerce Department’s centrally administered agenda. States including Texas, Arizona, New Mexico, and Ohio offer tax credits (usually in the hundreds of millions of dollars) to incentivize semiconductor manufacturing in their jurisdictions. Texas and Ohio also use grant tools to attract chip projects.
In the absence of the federal CHIPS Act, state and local governments would likely continue awarding incentives to any chipmaker, regardless of whether a given project resolves national supply chain weaknesses. State policymakers are focused on more parochial economic development concerns than those in Washington, who are focused on nationwide economic and national security needs. Because CHIPS Act grants are orders of magnitude larger than state and local grants, federal policymakers will decide what technologies receive funding, while state incentives will influence where these projects are located.
European Union
The key program meant to tackle the EU's semiconductor problems is the EU Chips Act, which features three key elements to fulfill Brussels' goals:
The "Chips for Europe” program focuses on expanding existing mature node capacity,
A new competition regime relaxes restrictions on state aid for "first-of-a-kind" manufacturing capacities to attract lead-edge fabs, and
Supply chain risk mitigation measures serve to prevent future chip shortages.
The "Chips for Europe" initiative aims to address several gaps in the European chip ecosystem: design, advanced manufacturing, and human capital. The initiative also envisions a new "Chips Fund" to support semiconductor startups' access to finance. This fund would leverage various existing EU institutions and mechanisms, ranging from InvestEU, the European Investment Bank Group, and the European Innovation Council. However, how exactly the Chips Fund will mobilize these various resources and attract investment from private equity funds is not yet clear. A French think tank observes that, beyond its financial contribution, this initiative is a mainly "political intention that will serve as a loose guideline for companies and research centers seeking EU and national grants."
The bill goes on to introduce the concept of a "first-of-a-kind" facility, permitting state-aid to fill possible funding gaps that currently hinder the establishment of first-of-a-kind facilities in the Union, compared to global technological capabilities. The level of public support for such projects is determined by the "funding gap," which allows for up to 100% of funding differentials between Europe and other regions to be covered by public resources if such facilities would otherwise be financially competitive.
Prior to the EU Chips Act, national governments were the primary sources of chip subsidies, but EU state aid rules held them under tight constraints. Most national chip subsidies functioned as Important Projects of Common European Interest(IPCEI). Created in 2014, this regime relaxed rules on state aid for microelectronics under limited circumstances with approval by the European Commission. Permissible IPCEI subsidies are those for projects that contribute to EU objectives and have a significant impact on the Union’s competitiveness. These must be state-of-the-art R&D projects being deployed for the first time at a commercial scale in the EU. Regular upgrades or the development of newer versions of existing products are not eligible. The first IPCEI on microelectronics, supporting a consortium of companies and research centers, was approved in 2018.
In addition to EU-level initiatives, it is important to understand the national programs the EU Chips Act seeks to coordinate and integrate. Many European countries have sought to attract investments by leading chipmakers through extensive subsidies. Overall, this seems to have been successful, with countries like Germany, Ireland, France, Poland, Italy and others attracting investment. Spain, on the other hand, while also announcing billions of Euros in subsidies to attract foreign investment, failed to win a bid by Intel, against the German and US governments. This shows how the EU's member countries may aim to outcompete or outbid each other.
Recently, however, rising costs and lower projected chip demand have stalled the progress of these projects (see, for example, the cases of Germany and Italy). As a French think tank has proclaimed, it remains to be seen whether under worsening circumstances, the EU Chips Act’s “visions have the merit to create political space and mobilize energies.”
Europe & China – Battleships Or Dispersed Armadas?
Seeing the EU scramble to align member state investments behind a continent-wide agenda calls to mind another large society’s often overlapping central and local chip funds.
In one of Chip Capitol’s recent articles, we discussed China’s semiconductor policy which prefers to “let a hundred flowers bloom” 百花弃放. Central government programs like the National Integrated Circuit Industry Investment Fund certainly do steer funding toward the PRC’s most urgent supply chain needs, but local funds are more akin to hundreds of unique flowers, each supporting whatever chip projects bring the most local investment.
As in Brussels, policymakers in Beijing are increasingly concerned that unaligned efforts to fund semiconductor technology across the polity will lead to waste and fail to make China more competitive. To that end, Chip Capitols has discussed calls by a prominent Chinese Communist Party (CCP) member, Xie Shanghua 谢商华, for China to operate on “one chessboard” 全国一盘棋. He says national-level policymakers should align China’s central and local semiconductor development efforts under a single national chip strengthening strategy.
Do the Small Ships Feel… Steered?
Be it in the EU, China, or US, the ship of industrial policy always teeters between central policymakers seeking to address a large region’s strategic needs and parochial local policymakers primarily concerned with promoting economic activity. Though Washington is often hesitant to engage in industrial policy, when it does, the US federal government has the financial resources to align state and local policymakers behind a national agenda. The EU’s challenges are much more akin to China’s, where member state/provincial government’s relatively large budgets make industrial policy more like coordinating an armada than steering a single ship.
Different financial and political conditions call for governments to take different approaches to supporting their semiconductor industries. As most major markets have now passed their own semiconductor incentives, policymakers around the world should learn from each other's experiences and continually evaluate the tools they use at home. Chip Capitols will continue drawing these lessons with future articles examining semiconductor incentive policies in Taiwan, South Korea, Japan, and beyond.
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