Germany aims to lead European effort in boosting chip production despite challenges

Germany is aiming to take the lead in boosting chip production in Europe through a series of significant investments. However, there are several challenges that may hinder this drive, including high energy prices, subsidy disputes, and a shortage of skilled workers.

The shortage of semiconductors caused by the pandemic highlighted the vulnerability of Western nations that heavily relied on Asia for cost-effective chip production. In response, the European Union has formulated a plan to double its global chip production share to 20 percent by 2030 and attract substantial investments.

Germany, as an industrial powerhouse, seeks to spearhead this European revival. Several major investments have been announced by companies such as Intel, Infineon, Bosch, and Wolfspeed. Additionally, Taiwanese tech giant TSMC is considering establishing its first European plant in Dresden, Germany.

During the groundbreaking ceremony for a new Infineon chip factory in Dresden, Chancellor Olaf Scholz compared semiconductors to the “petroleum of the 21st century.” He emphasized that chips are a crucial component on which nearly everything else depends, powering devices ranging from smartphones to fighter jets.

Infineon plans to invest approximately five billion euros ($5.4 billion) in the Dresden plant, which is scheduled to open in 2026. This investment is expected to create up to 1,000 jobs in Saxony’s state capital, Dresden, which already hosts a dense network of chip companies.

Soaring costs

However, not all chip projects have been progressing as smoothly as expected. In March of the previous year, Intel made a grand announcement about its plans to construct a massive chip plant in Magdeburg, Germany, as a centerpiece of its investment initiative in Europe. The initial investment for the project was set at 17 billion euros.

Unfortunately, due to the surge in inflation triggered by Russia’s invasion of Ukraine, the project has encountered delays. The construction, originally scheduled to commence in the first half of 2023, has not yet begun. Intel is reportedly seeking increased government subsidies to mitigate the impact of rising costs.

When asked about these reports, Intel acknowledged that significant changes have occurred since the project was initially announced.

A flurry of new investments in chip manufacturing have been announced.

According to Intel, the challenges they are facing in executing their chip plant project include increasing geopolitical challenges, a decline in semiconductor demand, and disruptions in the global economy leading to higher costs for construction materials and energy.

The German government’s economy ministry stated that they are currently engaged in discussions to address the significant increase in costs for the planned project and bridge the cost gap.

In addition to cost and subsidy issues, Germany’s chip industry ecosystem also grapples with a shortage of skilled workers. A study conducted by the German Economic Institute in December revealed a shortage of 62,000 skilled workers in occupations crucial to the chip industry.

To address these challenges and boost chip production in Europe, the European Parliament and EU member states recently agreed on the “Chips Act.” This initiative aims to mobilize over 43 billion euros in public and private investments. Several investments have already been announced in different European countries, including France, where French-Italian chipmaker STMicroelectronics and US-based GlobalFoundries are planning to build a new plant.

‘No self-sufficiency’

Europe has a significant amount of ground to recover in the global chip manufacturing landscape. According to a study conducted by the Semiconductor Industry Association and Boston Consulting Group, Europe’s share of global chip manufacturing capacity dropped from 44 percent in 1990 to just nine percent in 2020.

The European continent faces tough competition from other major players in the chip industry. The United States, for example, is investing substantial sums to promote domestic chip production. Similarly, Japan and South Korea have committed to spending billions of dollars to develop their own chip manufacturing capabilities.

However, there are concerns that investing billions of euros in public funds for chip production may not be the most effective strategy, considering Europe’s ongoing reliance on semiconductors produced elsewhere. Some experts argue that engaging in a subsidy race could lead to significant financial expenditures without necessarily enhancing Europe’s security in the semiconductor sector. Clemens Fuest, the president of Germany’s Ifo Institute, recently expressed this viewpoint on broadcaster ARD.

Industry insiders also believe that the semiconductor supply chain, which involves numerous companies providing various services, will continue to be globalized. Major economies worldwide are striving to strengthen their domestic semiconductor industries within their respective territories. Jochen Hanebeck, the CEO of Infineon, emphasized in a recent earnings call that while dependencies can be reduced, no country or region can achieve complete self-sufficiency in semiconductor production.

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