China’s rise in semiconductors and Europe

Executive Summary

Semiconductors are on the mind of many European policy makers, not least because of the intensifying US-China technology rivalry and the chip shortages that forced most European car makers to temporarily stop production from 2020. As a result, the European Commission is working on an EU Chips Act, a draft of which is scheduled to be ready in mid-2022. Europe’s semiconductor industry has not received this level of attention from policy makers in a long time, and the EU has now a window of opportunity to substantially invest in its semiconductor ecosystem and strengthen international partnerships. The only questions are what, how and where? 

In our previous report of June-2021, “Mapping China’s semiconductor ecosystem in global context”, we argued that Europe is already highly dependent on Chinese companies in certain value chain steps and that this dependence will likely grow over the short-term future. As China is now considered from a European viewpoint to be an “economic competitor” and “systemic rival” as well as a “cooperation partner”, these dependencies must be assessed across different dimensions of the national interest: national security, technological competitiveness and supply chain resilience. Based on these assessments, we argue that EU’s forthcoming semiconductor strategy should include three focus areas. 

First, substantially investing in EU’s dwindling chip design ecosystem, focusing on improving conditions for start-ups, small and medium-sized enterprises and spin-offs from research institutions. This should include lowering entry-barriers to chip design, investing in chip design infrastructure and improving access – in terms of speed, level of bureaucracy and amount – to funding, private and public equity. China already has a substantially stronger chip design ecosystem than Europe in several areas and can scale faster due to heavy investment in chip design by China’s hyperscalers, Internet of Things and mobile technology companies. Under these conditions, Europe will increasingly depend on Chinese designed chips. 

Second, Europe needs to strengthen its position in back-end manufacturing (assembly, test and packaging), going beyond existing strengths in research & development. While front-end fabs from leading companies such as Intel, TSMC or Samsung receive much attention from policy makers, the concentration in Asia of back-end capacity has direct national security implications for Europe. Furthermore, back-end manufacturing, especially emerging advanced packaging processes, are increasingly important to the development of high performance and energy-efficient chips. China has significant global market share in back-end manufacturing, exposing Europe to a variety of risks.  

Third, Europe needs to strengthen its collective capacity to continuously map and assess the global semiconductor value chain, to understand interdependencies, evaluate bottlenecks and identify potential shortages over the long-term. Ad hoc assessments are not a sound basis for strategic planning for this highly complex and intertwined industrial value chain. One possibility would be to increase the resources and scope of the newly established Observatory for Critical Technologies but just as important, strengthening partnerships with like-minded partners, notably the US and East Asian economies.