The European Union (EU) is considering looser state aid rules to fund new chip factories on European soil. The arrival of such factories should reduce the EU's dependence on other countries for chips. State aid should simplify financing.
The European Commission announced last week that it was considering this move given the "exceptional situation" surrounding chips. For instance, large shortages of chips are playing tricks on a variety of sectors. Consider the automotive industry, where several manufacturers have already been forced to temporarily halt production over the past year. But think also of parts for central heating boilers, which could potentially face shortages this winter.
Combination of factors
These shortages arise from a combination of factors. For instance, many industries saw demand decline at the start of the COVID-19 pandemic. Manufacturers reduced orders for components as a result.
However, the economic recovery from the COVID-19 pandemic was faster than expected. Resulting in a rapid rise in demand. This demand was further bolstered by the general growing demand from Asia, among others.
Substantial deficit
This combination is leading to a sharp shortage of chips. Chip manufacturers simply cannot keep up with demand. Analysts expect this shortage to persist for some time. Research firm Gartner, for instance, predicted as recently as July that the chip shortage will persist well into 2022. However, Hakan Samuelsson, CEO of Volvo, did say in October that the peak of chip shortage seems to be over.
Chipmaker Intel, however, expects the chip shortage to persist until 2023. However, the manufacturer does expect chip availability to improve quarterly from 2022 onwards. Reinhard Ploss, top executive of chip maker Infineon, also expects the shortage to persist at least until 2023.
Dependence on foreign countries
EU relies heavily on foreign countries for chip production. Asia, in particular, is a major player in chip production. The European Commission wants to reduce this dependence. Among other things, by encouraging the construction of chip factories on European soil.
The looser state aid rules now under discussion should simplify the financing of chip factories. After all, such factories require billions in investment. An additional problem is the rapid development in chips. As a result, chip factories are current for a relatively short period of time, so the payback period should also be short. Government funding can help lower the required investment for chip manufacturers.
Call for 'unconditional state aid'
Earlier, France and Germany, among others, called on the EU for "unconditional state aid" for the chip sector. EU member states argue that state aid is necessary for European companies to compete with Chinese and US players. However, not all EU member states are in favour of this. The Netherlands, for example, opposes this state aid, which would lead to unfair competition within Europe. Bloomberg reports that the European Commission has so far not acceded to this request.
Author: Wouter Hoeffnagel
