Semiconductors play a crucial role in our daily lives; they are intermediary goods used to produce many essential products such as smartphones, computers, cars, and weapon systems. As a result, they have strategic importance in the digital transformation and technological advancement, leading numerous international actors, including European countries, to compete for dominance in this industry.
In this context, the importance of the policy paper prepared by researcher Jan Rock at the University of Tübingen, Germany, on the European semiconductor strategy amidst global competition, published in 2023, comes into focus. The paper discusses the distinctive features of the semiconductor industry and its evolution, the major current international players, and the extent to which Europe is affected by global competition in this field.
Industry Characteristics and Competition:
The semiconductor industry is characterized by features that make it prone to disruption and hinder new competitors from entering the market. The production system is highly specialized and interconnected, with the manufacturing of a single chip requiring approximately 1,500 production steps. This industry goes through fundamental stages: design, manufacturing, testing, and assembly, necessitating a high level of knowledge, long-term planning, significant research and development expenditures, and substantial capital investment—about $20 billion is required to establish a semiconductor plant according to standard specifications.
Globalization plays a key role in semiconductor production, with geographical concentration in specific areas for each production step. This requires long-term cooperation among competing companies in the field to stabilize the industry’s value chain. Generally, competition for semiconductors is fierce among the United States, China, and Europe, though other significant players include Taiwan, South Korea, and Japan.
However, there is variation in the dominance of international players at different stages of semiconductor production. The United States dominates the design stage, followed by Taiwanese, Japanese, and European companies. Taiwanese companies lead in the manufacturing stage, followed by South Korean, American, and Chinese firms. For testing and assembly, Taiwanese companies are predominant, followed by Chinese companies, which have increased their share in recent years.
Regarding the materials used in manufacturing, American companies are at the forefront in developing industry-specific software. When it comes to producing machinery, chemicals, and materials necessary for semiconductor production, there is less geographical concentration, with contributions from European, American, Japanese, and Dutch companies.
Global Competition Evolution:
The policy paper indicates that government intervention is a primary driver for the semiconductor industry, which began in the United States during the 1960s, fueled by government military and space programs. However, many American companies shifted labor-intensive assembly operations to relatively low-cost Asian countries during the 1970s.
In the 1970s, Japanese companies entered the American market with support from the Japanese government to help them catch up technologically, resulting in notable success. This led American manufacturers to pressure the U.S. government to impose restrictions on Japanese companies. As a result, a trade conflict between Washington and Tokyo emerged, peaking in the 1980s when the U.S. government imposed high tariffs on Japanese semiconductor imports. This created an opportunity for new players like South Korean and Taiwanese companies to enter the market. This conflict lasted about two decades and only ended in the mid-2000s.
The end of the trade conflict was less due to an agreement and more due to the decreased importance of American spending in the import market. Between 1995 and 2019, the U.S. share of global semiconductor imports dropped from 27% to 5%. At the same time, the European Union’s share fell from 15% to 6%, and Japan’s share from 8% to 3%. Instead, China became the largest importer of semiconductors by 2005.
Starting in 2012, China accounted for over 50% of global semiconductor imports due to its reliance on chips as intermediary goods for producing a wide range of products. China contributes approximately 90% of global smartphone production, 67% of smart TV production, and 65% of computer production. Recognizing the risks of its heavy reliance on semiconductor imports, China initiated several measures to reduce foreign imports and support domestic companies to rely on local supply.
As Chinese-American competition intensified, the semiconductor industry became a focal point of conflict between the two countries. Washington aims to undermine China’s rise in this industry by pressuring Taiwanese companies not to cooperate with Chinese firms and has imposed various restrictions on semiconductor exports to China. To achieve an edge in this field, the U.S. seeks to bolster domestic companies and reduce reliance on imports in the long term through supportive legislation providing tax incentives and subsidies to American semiconductor producers.
Europe and the Semiconductor War:
The European continent plays a leading role in supporting research and development efforts aimed at enriching and advancing the semiconductor industry. Europe contributes 10% of global semiconductor production; however, its consumption is double this production level. The US-China conflict has impacted the semiconductor market in Europe, with the United States pressuring European companies not to export to China. This has led to the Dutch company ASML, a leader in semiconductor manufacturing, severing its ties with China.
The conflict, coupled with the COVID-19 pandemic, has also adversely affected semiconductor-dependent industries in Europe, such as automotive, technology, healthcare, and space missions. In the automotive sector, COVID-19 lockdowns led to cancellations of semiconductor chip orders from car manufacturers and suppliers in the first two quarters of 2020, resulting in a 34% decline in German car production in 2021 compared to 2019. The healthcare sector was similarly affected, with the inability to manufacture many intensive care units due to a lack of necessary semiconductors, leading to a shortage of tens of thousands of ICU beds in Europe.
European Chips Act:
Given Europe’s reliance on semiconductor imports from Asia and the United States, European initiatives have been launched to reduce dependency and achieve sovereignty in this sector. In July 2023, the European Commission introduced the European Chips Act, which aims to allocate $43 billion for investment in the sector, increasing Europe’s share of global production to 20% by 2030. The Act is based on three main pillars:
- Enhancing European R&D: Promoting research in future-oriented semiconductor technologies, establishing a virtual design platform and a testing institution for product designs, with necessary financial support.
- Mobilizing Investments: Supporting facilities for semiconductor manufacturing, incorporating innovative resources and processes, ensuring environmental protection, and strengthening resilience against cyber attacks.
- Crisis Monitoring and Response: Coordinating among European countries and the European Commission to monitor semiconductor supply and demand. In the event of a potential crisis, such as market shortages due to increased demand, European countries must inform the Commission and provide necessary information. The Commission will then determine which companies should receive the most support and the timeframe for this support, along with imposing export restrictions on materials that could cause crises.
Analyzing the strategies proposed by the European Commission reveals an European approach that emphasizes intervention in semiconductor industrial policies, moving away from market liberalism to serve vital industrial sectors that depend on semiconductors as an intermediate good.
Criticism of the European Strategy:
Policy papers indicate that the European Chips Act has faced criticism regarding its effectiveness in achieving its goals, with concerns including:
- The Act does not address support for the production capabilities needed for mature nodes, a type of semiconductor critical to major European industries like automotive and healthcare, thereby perpetuating Europe’s dependency on China, which continues to expand its capabilities in this area.
- Doubts about the feasibility of the €43 billion funding goal, as this amount may not be sufficient to close the gap between Europe and other competing countries in the semiconductor field.
- The proposed European strategies reflect a departure from liberal market principles, with a firm commitment to industrial intervention policies.
- Concerns about achieving the desired outcomes, as other competing entities like China and the US are continually advancing, requiring Europe to make strenuous efforts not only to catch up but also to surpass its competitors.
- The potential to deepen the transatlantic divide, as European competitive relations with the US will extend to the semiconductor sector.
Source: Universität Tübingen, Die Halbleiter-Strategie der Europäischen Kommission angesichts des Chip-Wars und neuer Rivalitäten, Jan Ruck, 2023.
