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Interview: EU Chips Act is yesterday’s answer to tomorrow’s problems

The Russian war in Ukraine, the fallout from the Covid-19 pandemic, and current geopolitical tensions are shining a light on countries’ economic and strategic dependencies, and no more so than on the supply of semiconductors.

In response, the European Commission last year put forward its “Chips Act”, which promises €42 billion in subsidies to make semiconductor production and supplies in Europe supply-chain-shock-proof.

It also aims to double the production volume of semiconductors on EU soil to 20% of global manufacturing by the end of the decade, up from 10% today.

But are the provisions in the chips act fit to meet these objectives?

Iana Dreyer and Robert Francis spoke with Jan-Peter Kleinhans and Julia Hess from the think tank Stiftung Neue Verantwortung which has been active in the space and published several papers on the issue of semiconductors.

The proposed chips act essentially codifies EU market interventions pioneered at the height of the COVID-19 pandemic. In crisis situations it would empower the European Commission to monitor, and EU member states to block, exports of products where shortages have been identified.  It also obliges companies to report on their production levels to the EU executive. Is a copy-paste of the commission’s response to the vaccine shortages the right answer to securing supplies of semiconductors?

In general, it is good that there is policy attention on a supply chain industry.

But we think that the European Commission fell victim to activism.

They saw one supply chain – vaccines – which didn’t go well. Here, the commission had to resort to introducing export authorisation schemes and in some cases force companies to override their contractual obligations to satisfy wishes of governments.

When it comes to chips, the EU executive have come with the same conclusions to a fundamentally different supply chain and adopted the same tools.

In our eyes this doesn’t work.

Even though there are similar challenges, you cannot solve them with the same tools. You need to take into account the characteristics of the semiconductor value chain.

For example, semiconductors have very long manufacturing cycles. Even if you have a priority rated order, it will take around 4 months before the product is finished.

Mapping the supply chain, thinking about long-term actions towards what the EU wants to achieve, and differentiating between where the dependencies are and how to respond are the first steps towards sustainable and long-term policies that will be efficient.

Overall, we are still sceptical of the goals in the chips act.

Is it more targeted towards technological competitiveness?

Is it about gaining a better understanding of the critical production process steps for national security? Or is it about security of supply?

What role should end customers play in preventing chip shortages in Europe?  

Governments cannot increase the resilience of the semiconductor value chain alone. This task must be shared by governments, the supply chain industry, and customers.

Currently, when the chips act talks about resilience, it has a tunnel vision.

It only looks at the semiconductor industry, but it should have a much broader view to take in end customer industries.

We know now that the behaviour of end customer industries played a huge role in how the chip shortages played out.

So this means that end customer industries should also carry some of the responsibilities.

Indeed, there has been a recent shift in those bearing risk from the manufacturers to end-customers, with some customers now reserving dedicated capacity with semiconductor manufacturing plants.

And yet the supply chain will get even more complicated in the future due to technological advances and the threat from natural disasters.

This means that end customer industries should be even better prepared and take even better care of future supplies.

If end customer industries don’t move away from the “just-in-time” supply chain model, we might see chip shortages as happened in 2021.

But I don’t see customer industries doing this yet.

Why have some sectors appeared to suffer more from others when it comes to shortages?

The chip shortages in some markets have been the result of poor purchasing and poor supply chain management.

Generally, the further away your industry is from the semiconductor industry, the more challenges you have from chip shortages.

Automotive stood out because it’s the perfect example of an industry that is furthest away from the semiconductor industry.

In contrast, smartphone manufacturers are extremely closely linked to the semiconductor industry.

This may be a generalisation, but those industries that perceived chips as just another input like steel or rubber, and not as a strategic critical input, have suffered the most.

Are subsidies the way to boost production within Europe?

If we don’t subsidise semiconductor manufacturing, we won’t get more semiconductor manufacturing.

We don’t see that as a problem because Europe has never been a manufacturing hub.

But because of the global supply chain disruption, political leaders today are saying that Europe needs more manufacturing plants.

If you want more plants, you also need to acknowledge the need for more subsidies. It’s not quite clear whether the commission and EU member states are aligned on that.

The US has introduced semiconductor export restrictions towards China and is encouraging other countries to do the same. What’s your view on this trend? 

The US government argues that no matter where the next kinetic war happens, it will be simulated and planned with the help of machine learning.

This explains why Washington does not want the most cutting-edge capabilities to be in China, regardless of whether they are for commercial or military use. In their eyes, China should be several generations behind.

Essentially, the US has weaponised a chokepoint that they and allied countries own.

Mixed in there are economic security considerations which are not to do with national security, and rather aim at keeping Chinese chip manufacturers out of the global market because they could threaten the economic viability of US companies.

It’s a slippery slope, because you can always weaponise interdependencies in the semiconductor value chains because they are so transnational.

Not only that, but because semiconductors are foundational technologies, you can always make a security-related argument to restrict exports.

Jan-Peter Kleinhans
Julia Hess

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