The corona crisis has made painfully clear how dependent the US, the EU and the Netherlands are on Asian chip manufacturers. With more people working from home, online education and increased interest in consumer electronics, demand for semiconductors has risen. Chips are now needed to digitise our lives. To be less dependent, chip production should be brought back to Europe. According to the EU Chip Act, Europe's share of semiconductor production should rise to 20 per cent by 2030. In June 2023, the EU approved funding for some 68 European projects, including Dutch initiatives. But how wise is this approach if the complicated and labour-intensive testing, assembly and packaging of chips is still mainly done in low-wage countries in Asia?
A globalised process
Bringing semiconductor manufacturing back to Europe is challenging because of the highly globalised process. Leading companies such as Apple, Intel and Nvidia outsource their chip production to companies such as TSMC in Taiwan. Production takes place in two main stages: in front-end production, so-called wafers are fitted with circuits and processed in such a way that chips are eventually created. Once these are processed, back-end production begins, where the chips are tested, assembled and packaged (TAP for short).
Many large manufacturers outsource more labour-intensive back-end manufacturing to specialised service providers in Asia, known as OSATs (Outsourced Semiconductor Assembly and Test). Nine of the 10 largest OSAT suppliers are based in the Asia-Pacific region.
Nothing works without chips
The semiconductor manufacturing process is complex and makes global supply chains particularly vulnerable. Geopolitical tensions, especially in Taiwan, natural disasters or global crises such as the COVID pandemic can cut off a large proportion of European companies from their semiconductor supplies. Nine out of 10 industrial companies in Europe depend on semiconductors, and 80 per cent consider them indispensable. This technology is also badly needed for European digitisation efforts and the expansion of cloud, data centre and AI capabilities.
The EU's plan to strengthen European semiconductor manufacturing therefore seems logical. In mid-2023, the EU adopted the so-called Chips Act. This package of measures, worth €43 billion, aims to attract public and private investment, promote research and innovation and prepare Europe for future supply crises. The EU have set themselves an ambitious goal: to increase Europe's share of the global semiconductor market from around 10 per cent to 20 per cent. This is no easy task, especially since the US has already presented its Chips and Science Act in summer 2022 and provided US$52.7 billion in funding.
The challenges of moving manufacturing
The EU's ambitious plan to bring semiconductor manufacturing back to Europe is not so easy. Moving only front-end production does not solve the dependency; OSAT capacity must also be expanded. If this is not done, production will remain inefficient, as chips will still have to go abroad for the final processing steps.
The global distribution of production with different structure widths also makes all-European production more difficult. In December 2020, 49% of European capacity consisted of older semiconductors with structure widths of ≥0.18 micrometres. To meet local demand, production needs to be significantly increased.
In addition, there is a shortage of suitable workers. According to PwC Strategy, there could be a shortage of around 350,000 workers by 2030 to meet the EU's 20% target. There is also a shortage of technical staff in the Netherlands, and companies like ASML depend on international talent.
Another bottleneck is dependence on Chinese silicon production. China produced about 6.6 million tonnes of silicon in 2023, making Europe vulnerable to geopolitical tensions. Europe must not only build production capacity and skilled labour, but also ensure a reliable and independent supply of raw materials.
EU far from autonomous semiconductor manufacturing
The EU's goal of a 20 per cent global market share in semiconductor manufacturing by 2030 is undoubtedly ambitious. Currently, there are just not enough resources and skilled workers to achieve this goal. To address the current challenges, component manufacturing must be approached holistically. Europe needs to diversify and spread its semiconductor supply chains across different regions to become independent.
There should be close cooperation between industry, government and educational institutions to train and attract the needed skilled workforce. At the same time, bureaucratic obstacles must be removed and investment in research, development and infrastructure must be significantly increased. Only through a coordinated and integrative approach can Europe realise its vision of a strong and independent semiconductor industry and compete in the global market.
Source: Reichelt Elektrotechnik GmbH
