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 step in view of the ‘exceptional situation’ surrounding chips. Severe chip shortages are causing problems across a wide range of sectors. Take the automotive industry, for example, where several manufacturers have already been forced to temporarily halt production over the past year. But consider also parts for central heating boilers, where shortages could potentially arise 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 severe shortage of chips. Chip manufacturers simply cannot keep up with demand. Analysts expect this shortage to persist for the time being. In July, for example, research firm Gartner predicted that the chip shortage would continue well into 2022. However, Hakan Samuelsson, CEO of Volvo, said in October that the peak of the chip shortage appears to be over.
However, chipmaker Intel expects the chip shortage to persist until 2023. The manufacturer does, however, expect the availability of chips to improve quarter-on-quarter from 2022 onwards. Reinhard Ploss, CEO of chip manufacturer 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'
Previously, France and Germany, amongst others, had already called on the EU to provide ‘unconditional state aid’ for the semiconductor sector. The EU Member States argue that state aid is necessary to enable European companies to compete with Chinese and American firms. However, not all EU Member States agree with this. The Netherlands, for example, opposes this state aid, arguing that it would lead to unfair competition within Europe. Bloomberg reports that the European Commission has not yet responded to this request.
Author: Wouter Hoeffnagel
