How the EU plans to gain a foothold in the microchip race

Once a forefront player, Europe is now struggling to keep pace with the global semiconductor industry. The European Chips Act (ECA) aims to boost and secure the provision of an increasingly critical good.

Joan Villoslada

The European Chips Act (ECA), the EU’s flagship proposal to strengthen the Union’s semiconductor industry, was finally approved by the European Council on July 25, 2023. This policy seeks to address the root issues that caused the latest semiconductor shortage and bolster Europe’s technological and industrial frontrunner position.  

Semiconductors are crucial for every industrialized economy because they are the building block of digital hardware needed for every digital device. Historically, Europe has been at the forefront of semiconductor research and development, as well as the manufacturing of microchip equipment. However, the role of Europe in manufacturing microchips has witnessed a gradual erosion of its dominance over the years. 

At the beginning of the century, the European Union held around a quarter of global semiconductor production; today, it represents less than 10%. The ECA, therefore, represents the Union’s proposal to regain its relevance in the industry and reduce its vulnerabilities to future supply shortages and geopolitical tensions. 

The European weakened landscape 

In stark contrast to Europe’s diminishing presence, East Asian nations, including Taiwan, South Korea, mainland China, and Japan, have emerged as the uncontested leaders in the semiconductor industry. These four nations combined represented 73% of the total chip manufacturing in 2020, and the Taiwanese semiconductor company TSMC alone holds around 50% of the manufacturing market shareand accounts for more than 90% of the entire production of high-end microchips.  

The ECA aims to boost Europe’s semiconductor industry and to enhance its economic sovereignty

On the other side, the European economy has become entirely reliant on the import of semiconductors, mainly from Taiwan, predominantly required for industrial and automotive applications. In fact, one glaring weakness in Europe’s semiconductor capabilities is the absence of its manufacturing capabilities, especially of high-end microchips, focusing instead on developing R&D.  

The effects of the coronavirus pandemic 

Following the crisis generated by the COVID-19 pandemic in 2020, a global microchip shortage ensued, which has had profound repercussions for the international economy. The chip shortage can be traced back to the second quarter of 2020, when surging demand for work-from-home technology coincided with intense competition among automakers for semiconductor capacity in their vehicles. This convergence of factors strained the global supply chain, characterized by high demand and limited supply in Asian factories that were at the time constrained due to COVID-19 quarantines. 

The consequences for the European economy are clear. While the United States and China have experienced robust economic recoveries post-2020, Europe has lagged behind. The region, moreover, has realized the vulnerable position of its economy due to the possible supply limitations stemming from semiconductor shortages and the ramifications of the Russo-Ukrainian conflict. 

The semiconductors shortage costed the European automotive industry €100 bilion in one year

The automotive industry suffered significantly during the pandemic, with global vehicle production decreasing by approximately 18 million units in 2021. Europe’s automotive sector, which represents 7% of the EU’s GDP, felt intensely the impact of the shortages, leading to a decline in new car sales by 11.9% between January and August. This shortage of semiconductors, vital for vehicle production, has cost the European automotive industry nearly €100 billion between 2021 and 2022. 

However, Europe seems to be recovering slowly but steadily this year. In 2023, despite facing multiple crises simultaneously, the continent is poised to regain economic momentum. According to Jose Asumendi, the head of European automotive research at J.P. Morgan, 2023 is expected to be a strong earnings year for the automotive industry, with more stable raw material costs and a more predictable supply chain.  

Signs of improvement are already evident, with a projected year-over-year growth rate of 5%, signaling the end of the microchip shortage in Europe. According to Sandeep Deshpande, head of European technology research at J.P. Morgan, “we’re nearing the end of the supply crunch after more semiconductor capacity comes online in 2022. Looking ahead, we don’t predict any major constraints.” 

The structure of the European Chips Act 

Recognizing the need to address chip supply challenges and enhance domestic competitiveness, the European Commission has introduced the European Chips Act (ECA). This ambitious policy initiative aims to mobilize more than €43 billion in investments by 2030, drawing funds from existing programs rather than increasing the EU’s annual spending. The ECA aims to double Europe’s global manufacturing market share from its current 10% to 20% by 2030. 

The ECA strategy is structured into three core pillars: 

1. Chips for Europe Initiative:  

This pillar focuses on policies that support research, development, and innovation in chips and fabless industries (companies that design chips but outsource their manufacturing). It aims to bridge the gap between research and industrial activities, facilitating knowledge transfer from the lab to the factories. It includes €3.3 billion of EU funding to support this initiative, with contributions from Horizon Europe (€1.725 billion), Digital Europe (€1.575 billion), the Key Digital Technologies Joint Undertaking, and other sources. 

2. Security of Supply and Resilience: 

The second pillar aims to enhance the EU’s security of chip supply by attracting investments and improving production capacities, particularly in mega-fabs (microchip factories) and OSATs (outsourced semiconductor assembly and test) facilities. While the total budget for this pillar is not explicitly mentioned in the proposal, it emphasizes the development of mega-fabs capable of producing high-end chips. 

3. Monitoring and Crises Response: 

The third pillar centers on coordinating Member States and the Commission to monitor and respond to future semiconductor shortages. It establishes mechanisms to anticipate and address future shortages effectively, including joint procurement of chips by the European Commission and the activation of crisis response measures. 

The co-legislators have added new provisions, supported by Parliament, requiring the Commission to carry out a strategic mapping of the EU’s chip sector, supported by the European Semiconductor Board (ESB) and the Alliance on Processors and Semiconductor Technologies.  

Towards a European revitalization 

The introduction of the ECA reflects a broader trend in the global economy. Policymakers worldwide have realized that national economies can no longer rely entirely on the globalized system that has shaped recent decades. Geopolitical tensions and supply chain disruptions have made unpredictability all too evident. Europe particularly wants to reduce the European economies’ dependence on a handful of foreign suppliers, as the Spanish president, Pedro Sánchez, explained during his proposal of the Open Strategic Autonomy vision for Europe. 

Europe particularly wants to reduce its dependence on foreign suppliers

The ECA not only aims to boost Europe’s semiconductor industry but also strives to enhance its economic sovereignty. It fosters public and private investments into chip manufacturing facilities and their suppliers, positioning Europe as a competitive player in semiconductor tech. As the European Union works to double its global market share in semiconductor manufacturing, it also faces the formidable task of quadrupling its current production levels to reach that goal. 

The global semiconductor industry, often viewed as a niche sector, has become a linchpin of the post-2020 world economy. Ambitious policies like the European Chips Act, China’s Made in China 2025, and the US CHIPS and Science Act reflect a growing recognition of the critical role that semiconductors play in shaping modern economies. 

In conclusion, while Europe has faced challenges and setbacks in the semiconductor industry, the ECA represents a significant step towards revitalizing the continent’s presence in this crucial sector and reducing its vulnerable position to outside supply disruptions. 


For more info on this topic, you can read EsadeGeo’s policy note ‘The European Chips Act: Europe’s Quest for Semiconductor Autonomy’ 

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